Headnote NP 11-203 - Process For Exemptive Relief Applications in Multiple Jurisdictions - Top Fund proposing to invest up to 10% of its net assets in securities of underlying mutual fund governed by laws of Luxembourg - Because investment by top fund in underlying Luxembourg fund not made in full compliance with requirements of section 2.5 of NI 81-102, top fund unable to rely on statutory exemption in subsection 2.5(7) of NI 81-102 providing relief from investment restrictions and reporting requirements under the Securities Act - Top fund may, either alone or together with other related mutual funds, become a substantial security holder of underlying Luxembourg fund - Top fund's transactions in underlying Luxembourg fund would have to be reported - Top fund exempted from investment restrictions and top fund manager exempted from reporting requirements, subect to certain conditions - Securities Act (Ontario). Applicable Legislative Provisions Securities Act,R.S.O. 1990, c.S.5, as am., sections 111(2)(b), 111(3), 113, 117(1)(a), 117(1)(d) and 117(2).
April 22, 2008
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
CAPITAL INTERNATIONAL ASSET MANAGEMENT (CANADA), INC. (the Filer or Capital International) and CAPITAL INTERNATIONAL – CANADIAN CORE PLUS FIXED INCOME (the New Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on its behalf and on behalf of the New Fund, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting exemptions from:
(a) the restrictions in paragraph 111(2)(b) and subsection 111(3) of the Securities Act (Ontario) (the Act) prohibiting a mutual fund from knowingly making or holding an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder; and
(b) the requirements in paragraphs 117(1)(a) and 117(1)(d) of the Act that a management company file a report of every transaction of purchase or sale of securities between a mutual fund it manages and any related person or company, and any transaction in which, by arrangement other than an arrangement relating to insider trading in portfolio securities, the mutual fund is a joint participant with one or more of its related persons or companies (this paragraph (b) together with paragraph (a) above constitute the Exemption Sought),
in connection with the New Fund’s proposed investment of up to 10% of its net assets from time to time in Capital International Funds Global High Yield Fund (the Underlying Fund).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filer has provided notice that section 4.7 of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in the following provinces: British Columbia, Alberta, Saskatchewan, Manitoba, Nova Scotia and New Brunswick.
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.
“Capital Group” means The Capital Group Companies, Inc.
“CIF” means Capital International Fund, an umbrella fund with eleven sub-funds, including the Underlying Fund, organized as a SICAV with UCITS status (as defined below) under the laws of Luxembourg and managed by an affiliate of Capital International.
“Funds” means the mutual funds known as the Capital International Funds that are managed by Capital International and governed by NI 81-102.
“NI 81-101” means National Instrument 81-101 Mutual Fund Prospectus Disclosure.
“NI 81-102” means National Instrument 81-102 Mutual Funds.
“New Fund” means Capital International – Canadian Core Plus Fixed Income, an open-ended mutual fund trust established and managed by Capital International and governed under the laws of Ontario.
“SICAV” means Société d’Investissement à Capital Variable, an open-end investment company, governed by the laws of Luxembourg.
“UCITS” means Undertakings for Collective Investment in Transferable Securities and refers to the investment funds authorized by the European Union as investment funds suitable to be distributed in more than one country of Europe.
Representations
This decision is based on the following facts represented by the Filer:
Capital International is registered in Ontario, British Columbia and Québec as an investment counsel and portfolio manager (or equivalent). Its head office is located in Toronto, Ontario.
Capital International is a wholly-owned subsidiary of Capital International Asset Management, Inc., a company based in Los Angeles, California, which is wholly owned by Capital Group. Capital Group is a global investment management firm founded in 1931, which through its affiliated companies manages stock and bond portfolios for institutional and retail clients around the world. Capital Group is one of the largest and oldest investment management organizations in the United States. In addition to Canada, Capital Group and its subsidiaries maintain offices in the United States, Switzerland, England, Hong Kong, Japan and Singapore.
Capital International is the manager and portfolio manager of the Funds, which presently consist of five mutual funds, each complying with NI 81-102 and having a simplified prospectus and annual information form prepared in accordance with NI 81-101. As of January 31, 2008, the Funds had assets under management of $1.267 billion.
Capital International and the Funds are not in default of securities legislation in any Canadian jurisdiction.
The investment objective and strategies of the New Fund are to provide steady income, capital preservation and long-term total return consistent with prudent management by investing in a broad range of Canadian and global fixed-income securities. The New Fund’s fixed-income investment objective focuses on Canadian bonds issued by corporations and governments. The New Fund filed a preliminary simplified prospectus and annual information form dated March 14, 2008 and expects to file a final simplified prospectus and annual information form before the end of April 2008.
A wholly-owned subsidiary of Capital Group, Capital Group International, Inc., is the parent company of the Geneva, Switzerland-based subsidiary, Capital International S.A. (CISA). As of January 31, 2008, CISA managed approximately €11 billion, €4.48 billion of which was invested in eleven investment funds, which are all sub-funds of CIF (as defined above). CIF includes the Underlying Fund. As of January 31, 2008, the Underlying Fund had €297.7 million assets under management.
The Underlying Fund is distributed in several European countries, pursuant to the European Union regulations of collective investment schemes, known as the UCITS Directives which permit the distribution of UCITS in more than one country provided the UCITS Directives are followed. As SICAVs, organized under Part I of the Luxembourg law on collective investment vehicles, CIF and all of its sub-funds including the Underlying Fund, qualify as UCITS.
The Underlying Fund is a sub-fund of CIF, an umbrella SICAV with UCITS status under the laws of Luxembourg. The Underlying Fund has filed a prospectus with Luxembourg’s financial sector regulator, Commission de Surveillance du Secteur Financier, that contains disclosure regarding the Underlying Fund. The Underlying Fund is subject to laws that are substantially similar to those that govern the New Fund. The Underlying Fund is a conventional mutual fund and would not be considered a hedge fund. The Underlying Fund does not invest in mutual funds.
The investment objective of the Underlying Fund is to seek a long-term high level of total return through investing primarily in corporate or government high yield bonds that are usually listed or traded on other regulated markets and denominated in various national currencies (including emerging markets currencies) or multinational currencies. Unlisted high yield bonds may also be purchased.
In order for the New Fund to achieve its investment objective on a diversified basis and obtain broad exposure to the sectors it proposes to invest in, including global high yield exposure, it is critical that it be permitted to allocate up to 10 percent of its net assets to the Underlying Fund.
The Underlying Fund is a low-cost mutual fund whose investment strategy and objective make it a very suitable investment for the New Fund. The Underlying Fund is managed by portfolio managers within the Capital Group, and accordingly, Capital International will benefit from understanding its investments and the management style of its portfolio managers, which understanding will benefit the New Fund.
The Filer believes that it is in the best interests of the New Fund for investments to be made in the Underlying Fund. Investing directly in separate securities to allow direct exposure to the securities invested in by the Underlying Fund is a less desirable option owing to the increased costs and inefficiencies that are associated with such direct investing.
Under NI 81-102, mutual funds may not invest in other mutual funds unless each of the requirements of section 2.5 of NI 81-102 are complied with. The New Fund’s proposed investment in securities of the Underlying Fund does not comply fully with the requirements of section 2.5 of NI 81-102 because the Underlying Fund (i) is not subject to NI 81-101 and NI 81-102 and (ii) its securities are not qualified for distribution in the local jurisdiction. The New Fund has been exempted from compliance with these two requirements of section 2.5 of NI 81-102 by way of a decision dated April 16, 2008, which decision permits an investment of up to 10% of net assets in the Underlying Fund subject to compliance with certain conditions (the NI 81-102 Exemption).
If the proposed investment by the New Fund in the Underlying Fund complied fully with each of the requirements of section 2.5 of NI 81-102, the Exemption Sought would not be required because subsection 2.5(7) of NI 81-102 exempts mutual funds that invest in other mutual funds from the restrictions and requirements of sections 111 and 117 of the Act, provided the investment is made in compliance with each of the requirements of section 2.5 of NI 81-102.
In the absence of an exemption from paragraph 111(2)(b) and subsection 111(3) of the Act, the New Fund would be prohibited from knowingly making or holding an investment in the Underlying Fund if the New Fund, alone or together with one or more related mutual funds, would be a substantial security holder (as defined in the Act) of the Underlying Fund.
In the absence of an exemption from paragraphs 117(1)(a) and 117(1)(d) of the Act, the Filer would be required to file a report for every transaction by the New Fund involving securities of the Underlying Fund and every transaction in which, by arrangement, the New Fund and the Underlying Fund would be acting as joint participants.
The New Fund’s investment in securities of the Underlying Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the New Fund.
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 the investment of the New Fund in the Underlying Fund complies with section 2.5 of NI 81-102, as modified by the NI 81-102 Exemption, and the New Fund provides the disclosure contemplated for fund of fund investments in NI 81-101, including disclosure in the New Fund’s prospectus of its investment in the Underlying Fund.
“David L. Knight”
Commissioner
Ontario Securities Commission
“Margot C. Howard”
Commissioner
Ontario Securities Commission