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CIBC Asset Management Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from section 2.5(2)(a) of National Instrument 81-102 Investment Funds to allow mutual funds to invest up to 10% of net asset value in an alternative fund – the underlying alternative fund is subject to National Instrument 41-101 General Prospectus Requirements and will comply with the investment restrictions in the Alternative Funds Rule.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(a), 19.1.
October 15, 2018
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
(the Jurisdiction)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
CIBC ASSET MANAGEMENT INC.
(CIBC AM)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from CIBC AM on behalf of the mutual funds subject to National Instrument 81-102 Investment Funds (NI 81-102) that are, or may be, managed by CIBC AM or an affiliate or successor of CIBC AM (the Filer) from time to time (the Top Funds and, individually, a Top Fund) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption (the Exemption Sought), pursuant to section 19.1 of NI 81-102, from the prohibition contained in paragraph 2.5(2)(a) of NI 81-102 against a mutual fund investing in another mutual fund that is not subject to NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) to permit each Top Fund to invest up to 10% of its net asset value, taken at market value at the time of the investment, in units of CIBC Multi-Asset Absolute Return Strategy (the Underlying Alternative Fund).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the application; and
(b) the Filer has provided notice that Section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Quebec, Saskatchewan and Yukon (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Alternative Funds Proposal means the CSA Notice and Request for Comment – Modernization of Investment Fund Product Regulation – Alternative Funds (2016), 39 OSCB 8051 dated September 22, 2016.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. CIBC AM is a corporation with its head office located in Toronto, Ontario.
2. CIBC AM is registered as an investment fund manager, portfolio manager and commodity trading manager in the Province of Ontario, a portfolio manager in each of the other Jurisdictions, a derivatives portfolio manager in Québec and an investment fund manager in each of the Provinces of Québec and Newfoundland and Labrador.
3. The Filer is not in default of securities legislation in any of the Jurisdictions.
4. The Filer is, or will be, the manager of each Top Fund and the Underlying Alternative Fund.
The Top Funds
5. Each Top Fund is, or will be, a “mutual fund”, as such term is defined under the Securities Act (Ontario) (the Act).
6. Each Top Fund has, or will have, a simplified prospectus, annual information form and fund facts document prepared in accordance with NI 81-101, and securities of each Top Fund are, or will be, qualified for distribution in one or more Jurisdictions.
7. Each Top Fund is, or will be, a reporting issuer under the securities legislation of one or more Jurisdictions and is, or will be, subject to NI 81-102.
8. None of the existing Top Funds is in default of securities legislation in any of the Jurisdictions.
9. Subject to being granted the Exemption Sought, an investment by each Top Fund in the Underlying Alternative Fund will be consistent with each Top Fund’s investment objectives and strategies.
The Underlying Alternative Fund
10. The Underlying Alternative Fund will be a mutual fund subject to NI 81-102 and a commodity pool, as such term is defined under National Instrument 81-104 Commodity Pools, in that the Underlying Alternative Fund will adopt fundamental investment objectives that permit the Underlying Alternative Fund to invest, directly or indirectly, in specified derivatives in a manner that is not presently permitted under NI 81-102.
11. A preliminary prospectus, prepared in accordance with National Instrument 41-101 General Prospectus Requirements (NI 41-101), with respect to the proposed offering of Series A, Series F, Series S and Series O units of the Underlying Alternative Fund (the Units) was filed under SEDAR Project No 02786166.
12. Upon the filing of the final prospectus of the Underlying Alternative Fund, prepared in accordance with NI 41-101, and obtaining a receipt therefor, the Units will be qualified for distribution, and the Underlying Alternative Fund will be a reporting issuer in each of the Jurisdictions.
13. The investment objective of the Underlying Alternative Fund is to achieve a positive absolute return that exceeds the return of the Government of Canada 91-day treasury bills over a rolling three-year period, regardless of the prevailing economic conditions, by actively managing a diversified portfolio with direct and indirect exposure to primarily equity securities, fixed income securities, commodities, currencies, and derivatives investments. The investment strategies of the Underlying Alternative Fund provide that it may invest, directly or indirectly, in global equity securities, domestic and foreign fixed income securities, derivatives, exchange-traded funds, commodities, cash in various currencies and cash equivalents and other financial instruments to access alternative investment strategies. The Underlying Alternative Fund will make significant use of derivative instruments for hedging and non-hedging purposes, including to provide leverage in the portfolio.
Effect on the Top Funds
14. An investment by the Top Funds in the Underlying Alternative Fund will be consistent with the investment objectives and strategies of those Top Funds that wish to access alternative asset classes and strategies through investments in global equity securities, domestic and foreign fixed income securities, derivatives, exchange-traded funds, commodities, cash in various currencies and cash equivalents and/or other financial instruments. The Filer believes that an investment in the Underlying Alternative Fund will provide an efficient and cost effective way for the Top Funds to achieve diversification and maximize absolute returns.
15. While it may be possible for the Filer to invest in other alternative products, the Filer believes it is in the best interests of the Top Funds to have the ability to invest in the Underlying Alternative Fund because the alternatives available to the Filer are not optimal relative to investing in the Underlying Alternative Fund. The Filer is the portfolio manager of the Underlying Alternative Fund, is comfortable with its portfolio management approach, leverage expertise, research and investment style and prefers it over any peers in the marketplace.
16. Each Top Fund will not purchase securities of the Underlying Alternative Fund if, immediately after the purchase, more than 10% of the net asset value of the Top Fund would consist of securities of the Underlying Alternative Fund.
17. Pursuant to a decision dated October 1, 2010 (the Prior Decision), CIBC AM and Canadian Imperial Bank of Commerce obtained exemptive relief from sections 2.3(h), 2.5(2)(a) and (c) of NI 81-102 that permits each Top Fund to invest up to 10% of its net asset value in securities of Underlying ETFs (as defined in the Prior Decision). The Underlying ETFs meet the definition of “alternative fund” in the Alternative Funds Proposal. Each Top Fund will reduce the maximum permitted exposure to the Underlying Alternative Fund by the amount of any investment in the Underlying ETFs.
18. A Top Fund will not invest in securities of the Underlying Alternative Fund if the Top Fund would be required to pay any management or incentive fees in respect of the investment that duplicate a fee payable by the Top Fund for the same service.
19. Other than the Exemption Sought, the Top Funds will comply fully with section 2.5 of NI 81-102 in their investments in the Underlying Alternative Fund and the prospectus of the Top Funds will provide all applicable disclosure mandated for mutual funds investing in other mutual funds.
20. Where applicable, a Top Fund’s investment in the Underlying Alternative Fund will be disclosed to investors in such Top Fund’s quarterly portfolio holding reports, financial statements and fund facts/ETF Facts documents.
General
21. The Alternative Funds Proposal proposes to permit conventional mutual funds to invest up to 10% of their net assets in securities of alternative funds, provided those alternative funds are subject to NI 81-102 (as it is proposed to be amended by the Alternative Funds Proposal), acknowledging “that some access to these types of products can be beneficial to a mutual fund’s strategies”.
22. The Underlying Alternative Fund will be managed in compliance with the investment restrictions applicable to alternative mutual funds published in the final rule implementing the Alternative Funds Proposal (the Alternative Funds Rule) (2018), 41 OSCB #40 (Supp-2) dated October 4, 2018, for so long as securities of the Underlying Alternative Fund are held by the Top Funds.
23. Securities of the Underlying Alternative Fund will be valued on the same dates as securities of the Top Funds. An investment by a Top Fund in the Underlying Alternative Fund will be effected based on the Underlying Alternative Fund’s net asset value, which is calculated in accordance with Part 14 of NI 81-106. Securities of the Top Funds and the Underlying Alternative Fund are redeemable on each business day.
24. A preliminary long form prospectus, prepared in accordance with NI 41-101, has been filed in respect of the Units of the Underlying Alternative Fund. Once the Alternative Funds Rule comes into effect and following the expiry of any applicable transition period, a simplified prospectus, annual information form and fund facts documents, prepared in accordance with NI 81-101, will be filed in respect of the Units of the Underlying Alternative Fund when the current prospectus is renewed.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
(a) no Top Fund shall purchase or hold securities of the Underlying Alternative Fund unless the Underlying Alternative Fund is managed in compliance with the investment restrictions in the Alternative Funds Rule;
(b) each Top Fund will not purchase securities of the Underlying Alternative Fund if, immediately after the purchase, either:
(i) more than 10% of the net asset value of the Top Fund, taken at market value at the time of the transaction, would consist of securities of the Underlying Alternative Fund; or
(ii) the aggregate value of securities of the Underlying Alternative Fund and Underlying ETFs, taken at market value at the time of the transaction, would exceed 10% of the net asset value of the Top Fund; and
(c) this decision shall expire upon the earlier of: (i) the expiry of any transition period applicable to the Underlying Alternative Fund under the Alternative Funds Rule; and (ii) five years from the date of this decision.
“Darren McKall”
Manager, Investment Funds and Structured Products Branch