Headnote National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -Exemption granted from requirements contained in paragraphs 2.5(2)(a) and 2.5(2)(c) of NI 81-102 - Top mutual fund proposing to invest up to 10% of its net assets in securities of mutual fund governed by the laws of Luxembourg - Underlying Luxembourg mutual fund managed by an affiliate - Relief granted subject to certain conditions, including that the investment in Luxembourg mutual fund be limited to no more than 10% of net assets of the top mutual fund, and that the top mutual fund be required to divest if laws applicable to Luxembourg mutual fund cease to be materially consistent with Part 2 of NI 81-102 - National Instrument 81-102 Mutual Funds. Applicable Legislative Provisions National Instrument 81-102 Mutual Funds, paragraphs 2.5(2)(a) and 2.5(2)(c) and section 19.1.
April 16, 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 behalf of the New Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the New Fund from
(i) the prohibition contained in paragraph 2.5(2)(a) of National Instrument 81-102 Mutual Funds (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), and
(ii) the prohibition contained in paragraph 2.5(2)(c) of NI 81-102 against a mutual fund investing in another mutual fund’s securities where those securities are not qualified for distribution in the local jurisdiction (together with paragraph (i) above, the Exemption Sought),
to enable the New Fund to invest up to 10 percent of its total 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 all of the provinces and territories of Canada (other than Ontario).
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.
“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
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.
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 New Fund
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.
Section 2.5 of NI 81-102 would permit the New Fund to invest in the Underlying Fund but for the fact that the Underlying Fund is a non-Canadian fund that is neither subject to Canadian laws nor distributed in Canada under a simplified prospectus.
The Underlying Fund
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.
The New Fund’s investment in the Underlying Fund is not for the purpose of distributing the Underlying Fund to the Canadian public. The investments by the New Fund in the Underlying Fund are proposed not to allow the Underlying Fund to be indirectly distributed in Canada, but to allow the New Fund to achieve its investment objective by investing, to a very limited extent, in a unique, suitable and professionally managed lower-cost mutual fund, where the investment style and approach is known to the manager of the New Fund.
The New Fund would otherwise comply fully with section 2.5 of NI 81-102 in investing in the Underlying Fund and would provide all disclosure mandated for mutual funds investing in other mutual funds.
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) The Underlying Fund qualifies as UCITS and is distributed in accordance with the UCITS Directives, which subject the Underlying Fund to laws that are substantially similar to those that govern the New Fund;
(B) The investment of the New Fund in the Underlying Fund otherwise complies with section 2.5 of NI 81-102 and the New Fund provides the disclosure contemplated for fund of fund investments in NI 81-101. Specifically, the investment by the New Fund in the Underlying Fund is disclosed in its simplified prospectus;
(C) The New Fund does not invest more than 10 percent of its total net assets taken at market value at the time of acquisition of such assets in the Underlying Fund; and
(D) The New Fund shall not acquire any additional securities of the Underlying Fund and shall dispose of the securities of the Underlying Fund then held in an orderly and prudent manner, after the date that the laws applicable to the Underlying Fund that are at the date of this decision substantially similar to Part 2 of NI 81-102, change to be materially inconsistent with Part 2 of NI 81-102.
“Rhonda Goldberg”
Rhonda Goldberg
Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR# 1237670