Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 81-102 Investment Funds -- A fund seeks relief from the restrictions on investing in mortgages in sections 2.3(1)(b) and (c) of NI 81-102 in order to invest in mortgages on which certain related entities have an interest as mortgagor -- The mortgages are selected based on a pre-defined set of criteria; the process for selecting mortgages is anonymous; a process screens out mortgages from closely related persons and companies; the fund complies otherwise with NPS 29; the IRC approves the policies and procedures for dealing with related party mortgages; the purchase or sale is consistent with the investment objectives; there is no financial benefit to a mortgagor to have their mortgage held in the fund's portfolio.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds (NI 81-102), s. 19.1.
May 5, 2020
IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF HSBC GLOBAL ASSET MANAGEMENT (CANADA) LIMITED (the Manager) AND HSBC MORTGAGE FUND (the Fund) (the Manager and the Fund are collectively referred to as the Filers)
¶ 1 The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filers for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting the Fund from subsections 2.3(1)(b) and (c) of National Instrument 81-102 Mutual Funds (NI 81-102) subject to certain conditions (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the British Columbia Securities Commission is the principal regulator for this application,
(b) the Filers have 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, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, the Yukon and Nunavut, and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
¶ 2 Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
In this decision, the term Non-Exempt Entities means:
(a) any senior officer, director or trustee of the Fund;
(b) any senior officer, director or trustee of the Fund's management company (for greater certainty, the Fund's management company is currently HSBC Global Asset Management (Canada) Limited);
(c) any senior officer, director or trustee of any distribution company of the Fund that is an affiliate of its management company (for greater certainty, such distribution companies are currently HSBC Investment Fund (Canada) Inc. and HSBC InvestDirect, a division of HSBC Securities (Canada) Inc.);
(d) any person or company who is a substantial security holder of the Fund;
(e) any person or company who is a substantial security holder of the Fund's management company;
(f) any person or company who is a substantial security holder of any distribution company of the Fund that is an affiliate of its management company; and
(g) any associate or affiliate of the persons or institutions mentioned in paragraphs (a), (e) and (f) above that is resident in, or organized, established, formed or otherwise existing under the laws of Canada, except an associate or affiliate that has an interest in a mortgage on a single family dwelling for less than $75,000.
¶ 3 This decision is based on the following facts represented by the Filers:
1. the Manager is a corporation organized under the laws of Canada; the head office of the Manager is located in Vancouver, British Columbia;
2. the Manager is the trustee, manager and portfolio advisor of the Fund;
3. the Fund is an open-end mutual fund established under the laws of the province of British Columbia and is qualified for distribution in each of the provinces and territories of Canada under a simplified prospectus and annual information form dated December 18, 2019; the Fund is a reporting issuer under the securities legislation of each of the provinces and territories of Canada;
4. the Filers are not in default of any requirements of securities legislation in any jurisdiction;
5. the Manager has appointed an independent review committee (IRC) for the Fund under National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107);
6. the Manager is registered as an investment fund manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador; a portfolio manager in British Columbia, Ontario, Quebec, Newfoundland and Labrador, Alberta, Saskatchewan, Manitoba, New Brunswick and Nova Scotia; and as an exempt market dealer in British Columbia, Ontario, Quebec, Newfoundland and Labrador, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and the Northwest Territories;
7. the investment objective of the Fund is to earn as high a level of income as possible that is consistent with the Fund's eligible investments while aiming to protect invested capital by investing primarily in residential first mortgages on property in Canada and other debt obligations; the Fund invests primarily in uninsured Canadian-dollar-denominated mortgages;
8. the Fund currently has relief (In the Matter of HSBC Investment Funds (Canada) Limited, 2008 BCSECCOM 81, February 5, 2008) from section 4.2 of NI 81-102 to permit the Fund to purchase and sell mortgages from and to HSBC Bank Canada, HSBC Mortgage Corporation (Canada) and other affiliates of the Manager (HSBC Affiliates);
9. HSBC Bank Canada has agreed to repurchase from the Fund any mortgage purchased from the HSBC Affiliates under circumstances where: (i) the mortgage is in default, (ii) the investment of the mortgage is not in compliance with NPS 29 or with the Fund's investment objectives and strategies, or (iii) the Fund is required to sell the mortgage in order to meet the Fund's redemption requirements (the HSBC Guarantee);
10. subsections 2.3(1)(b) and (c) of NI 81-102 prohibit a mutual fund from purchasing a mortgage, other than a guaranteed mortgage, and from purchasing a guaranteed mortgage if, immediately after the purchase, more than 10 percent of the net assets of the mutual fund, taken at market value at the time of the purchase, would consist of guaranteed mortgages;
11. section 20.4 of NI 81-102 provides an exemption from subsections 2.3(1)(b) and (c) for a mutual fund that has adopted fundamental investment objectives to permit it to invest in mortgages in accordance with NPS 29 if, among other conditions, the mutual fund complies with NPS 29;
12. paragraph III(2.1)(i) of NPS 29 prohibits a mutual fund from investing in mortgages on a property in which:
(a) any senior officer, director or trustee of the mutual fund, its management company or distribution company, or
(b) any person or company who is a substantial security holder of the mutual fund, its management company or its distribution company, or
(c) any associate or affiliate of persons or institutions mentioned in (a) or (b), except in the case of a mortgage on a single family dwelling for less than $75,000,
has an interest as mortgagor (Related Party Mortgages);
13. when the Manager determines which mortgages to include in the Fund, it does so on the basis of identifying a pre-defined set of criteria related to interest rate yield and duration; based on these pre-defined criteria and NPS 29 requirements, the Manager selects mortgages for the Fund from the pool of mortgages made available for purchase by the HSBC Affiliates;
14. the name or employment position of the mortgagor is unknown to the Manager at the time the decision is made to include the mortgage in the Fund's portfolio and accordingly is not a factor in determining whether to include a particular mortgage in the Fund's portfolio;
15. similarly, the mortgagor whose mortgage is selected by the Manager for inclusion in the Fund's portfolio, does not know that the Fund has purchased their mortgage;
16. the Manager has implemented procedures that would allow it to exclude a Related Party Mortgage held by a Non-Exempt Entity from being selected for inclusion in the Fund's portfolio; however, it is not practicable to implement procedures that would allow the Manager to exclude a Related Party Mortgage held by entities other than the Non-Exempt Entities due to the cost and administrative burden of such procedures; accordingly, it is possible that a Related Party Mortgage other than a Related Party Mortgage held by a Non-Exempt Entity could be selected for inclusion in the Fund's portfolio without the knowledge of the Manager or the mortgagor;
17. if such situation were to arise, absent relief, the Fund would be prohibited from purchasing Related Party Mortgages under paragraph III(2.1)(i) of NPS 29;
18. investments by the Fund in Related Party Mortgages would only be made in accordance with the fundamental investment objective and investment strategies of the Fund;
19. the Manager has no role in administering the mortgages purchased for the Fund, and the Fund is not the originator of any mortgages held in its portfolio; accordingly, there is no financial or other benefit to a mortgagor if the Fund's portfolio holds a Related Party Mortgage;
20. the Manager believes that it is in the best interests of the Fund for investments to be made in mortgages that conform to the yield and timeframe requirements of the Fund's investment objectives without consideration of the identity or employment position of the individual mortgagors;
21. the inclusion of Related Party Mortgages in the Fund's portfolio will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund; and
22. the IRC of the Fund will consider the policies and procedures of the Fund and will provide its approval on whether the purchase of any Related Party Mortgage by the Fund achieves a fair and reasonable result for the Fund in accordance with subsection 5.2(2) of NI 81-107.
¶ 4 Each Decision Maker is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:
1. the Fund complies with NPS 29, except for the restrictions in paragraph III (2.1) (i);
2. the Fund does not invest in a mortgage on a property in which a Non-Exempt Entity has an interest as mortgagor;
3. the Fund's fundamental investment objectives permit the Fund to invest in mortgages in accordance with NPS 29;
4. the purchase or sale is consistent with, or is necessary to meet, the investment objectives of the Fund;
5. the IRC of the Fund has approved the transaction in accordance with subsection 5.2(2) of NI 81-107;
6. the Manager, as manager of the Fund, complies with section 5.1 of NI 81-107;
7. the Manager, as manager of the Fund, and the IRC of the Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC receives in connection with the transactions; and
8. the Fund keeps the written records required by paragraph 6.1(2)(g) of NI 81-107.
This decision expires on the date which is 90 days after the date of adoption of a rule that replaces NPS 29.