Headnote
National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -Top Funds proposing to invest a portion of their assets in index participation units (IPUs) issued by mutual funds managed by a U.S. affiliate - Because investment by top funds in underlying IPUs not made in full compliance with requirements of sections 2.5 of NI 81-102, top funds unable to rely on statutory exemption in subsection 2.5(7) of NI 81-102 providing relief from mutual fund conflict of interest investment restrictions and mutual fund conflict of interest reporting requirements - Top Funds may, either alone or together with other related mutual funds, become substantial security holders of the underlying IPUs - Substantial security holder of manager of top funds may make a seed capital investment in underlying IPUs which would represent a significant interest in those IPUs - Top funds exempted from mutual fund conflict of interest investment restrictions and manager of top funds exempted from mutual fund conflict of interest reporting requirements, subject to compliance with certain conditions - Securities Act (Ontario).
May 9, 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
AIM FUNDS MANAGEMENT INC.
(the Filer)
and
INVESCO TRIMARK RETIREMENT PAYOUT 2023 PORTFOLIO, INVESCO TRIMARK RETIREMENT PAYOUT 2028 PORTFOLIO, INVESCO TRIMARK RETIREMENT PAYOUT 2033 PORTFOLIO and INVESCO TRIMARK RETIREMENT PAYOUT 2038 PORTFOLIO
(the Top Funds)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer on its behalf and on behalf of the Top Funds and any other mutual fund for which the Filer acts as manager (together with the Top Funds, the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting:
- the Funds from:
(a) the investment restriction in paragraph 111(2)(b) of the Securities Act (Ontario) (the Act) which prohibits a mutual fund from knowingly making 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;
(b) the investment restriction in clause 111(2)(c)(ii) of the Act which prohibits a mutual fund from knowingly making an investment in an issuer in which any person or company who is a substantial security holder of the mutual fund, its management company, manager or distribution company, has a significant interest; and
(c) the investment restriction in subsection 111(3) of the Act which prohibits a mutual fund or its management company or its distribution company from knowingly holding an investment described in (a) or (b) above (this paragraph (c) together with paragraphs (a) and (b) above are together referred to in this decision as the Mutual Fund Conflict of Interest Investment Restrictions); and
- the Filer from the management company reporting requirement in paragraphs 117(1)(a) and 117(1)(d) of the Act which require 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 (the Mutual Fund Conflict of Interest Reporting Requirements, and together with the exemption sought from the Mutual Fund Conflict of Interest Investment Restrictions, the Exemption Sought)
in connection with the Funds’ proposed investments in securities of the Underlying ETFs (as defined in this decision).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this 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 British Columbia, Alberta, Saskatchewan, Nova Scotia and New Brunswick.
Interpretation
Terms defined in the Act, in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Invesco means Invesco Ltd.
Invesco PowerShares means Invesco PowerShares Capital Management LLC.
Trusts means PowerShares Exchange-Traded Fund Trust and PowerShares Exchange-Traded Fund Trust II.
Underlying ETFs means exchange traded funds managed by the Filer or an affiliate or associate of the Filer which exist currently or which may be created in the future, and which each meet the definition of an “index participation unit” under NI 81-102.
NI 81-102 means National Instrument 81-102 Mutual Funds.
Representations
This decision is based on the following facts represented by the Filer:
The Filer is a corporation amalgamated under the laws of Ontario with its head office in Toronto, Ontario. The Filer will act as the trustee, manager and portfolio adviser for the Top Funds.
The Top Funds will be open-end mutual fund trusts established pursuant to a Declaration of Trust governed under the laws of Ontario.
A preliminary simplified prospectus in respect of the Top Funds was filed via SEDAR under project #1232843 on March 20, 2008. Once a final prospectus for the Top Funds is filed and a receipt is obtained, the Top Funds will be “reporting issuers” or equivalent in each province and territory of Canada.
Currently, the Underlying ETFs are mutual funds that attempt to replicate the performance of various non-Canadian indices, the securities of which are currently listed and traded on either the American Stock Exchange (AMEX) or the New York Stock Exchange (NYSE) in the United States. As a result, the Underlying ETFs meet the definition of an “index participation unit” under NI 81-102. In the future, the Filer or its associates or affiliates may offer other exchange traded funds that meet the definition of an “index participation unit” under NI 81-102.
Invesco PowerShares is the manager and portfolio advisor of the existing Underlying ETFs.
The Filer and Invesco PowerShares are affiliates as they are both indirect wholly owned subsidiaries of Invesco. Invesco is a publicly listed independent global investment manager with approximately US$475 billion in assets under management as at February 29, 2008.
Currently, the Underlying ETFs are investment portfolios of the Trusts, both of which are organized as Massachusetts business trusts. Each Trust is an open-end management investment company, registered under the Investment Company Act of 1940, as amended. In the future, the Filer or its associates or affiliates may offer other exchange-traded funds that are structured as trusts or corporations.
The Top Funds seek to achieve a total investment return until specific horizon dates. Total investment return includes interest, dividends and capital gains. The Top Funds use dynamic asset allocation to allocate assets among mutual funds, which may include the Underlying ETFs. These mutual funds invest primarily in fixed-income and/or other debt securities or primarily in equity securities. As each Top Fund approaches its horizon date, an increasing proportion of its assets will be invested in fixed-income funds, money market funds and/or short-term debt securities. As a result, the asset allocation of the Top Funds will become increasingly conservative to focus on capital preservation and income. Each Top Fund seeks to provide a regular distribution stream for its investors.
Securities of the Underlying ETFs may only be directly purchased or redeemed from a fund in large blocks called “creation units” by “authorized participants” that have entered into a contract with its manager to purchase and redeem such securities. Generally, such purchases and redemptions may only be done “in kind” through the deposit or receipt of a portfolio of securities that substantially replicate the securities included in the index that the Underlying ETF attempts to track.
The vast majority of trading in securities of the Underlying ETFs will typically occur in the secondary market.
As is the case with the purchase or sale of any other equity security made on an exchange, brokers are typically paid a commission in connection with trading in securities of exchange-traded funds.
It is proposed that the Funds will purchase and sell securities of the Underlying ETFs on the applicable exchange using third party brokers who are “authorized participants” and that the Funds will pay commissions to these brokers in connection with the purchase and sale of such securities.
As Invesco PowerShares is an affiliate of the Filer, the Funds are prohibited by paragraph 2.5(2)(e) of NI 81-102 from purchasing securities of the existing Underlying ETFs unless no sales fees or redemption fees are payable in connection with a purchase or redemption of such securities. To the extent brokerage fees paid to arm’s length third party brokers by the Funds in connection with trades in securities of the Underlying ETFs may be considered to be “sales fees or redemption fees”, the Funds have sought and obtained relief from compliance with paragraph 2.5(2)(e) of NI 81-102 by way of a decision dated May 8, 2008 (the NI 81-102 Exemption). The NI 81-102 Exemption permits the Funds to invest in securities of the Underlying ETFs, subject to compliance with the requirements pertaining to mutual funds investing in other mutual funds set out in section 2.5 of NI 81-102, except the requirement in paragraph 2.5(2)(e).
The NI 81-102 Exemption maintains the Funds’ requirement to ensure that the Funds’ investments in the Underlying ETFs will not cause the Funds to pay duplicate management fees or incentive fees. In addition, the Filer will not be allowed to vote the securities of an Underlying ETF that are held by a Fund but may, if it so chooses, arrange for all of the securities a Fund holds of an Underlying ETF to be voted by the beneficial holders of securities of the Fund.
If the Funds’ investment in securities of the Underlying ETFs 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 Mutual Fund Conflict of Interest Investment Restrictions and Mutual Fund Conflict of Interest Reporting Requirements 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 the Mutual Fund Conflict of Interest Investment Restrictions, each Fund would be prohibited from knowingly making or holding an investment in an Underlying ETF if the Fund, alone or together with one or more related mutual funds, would be a substantial security holder of the Underlying ETF.
Furthermore, Invesco may at times have a seed capital investment in an Underlying ETF which would represent a significant interest in that fund. As Invesco is a substantial security holder of the Filer, which is the manager of the Funds, the Mutual Fund Conflict of Interest Investment Restrictions would further prohibit a Fund from investing in an Underlying ETF at a time where Invesco would hold a significant interest in that fund.
In the absence of an exemption from the Mutual Fund Conflict of Interest Reporting Requirements, the Filer would be required to file a report of every transaction by a Fund involving securities of an Underlying ETF, as well as a report of every transaction in which, by arrangement, a Fund and an Underlying ETF would be acting as joint participants.
The Funds’ investment in securities of the Underlying ETFs will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the 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 the Funds’ investments in securities of the Underlying ETFs are made in compliance with the requirements of section 2.5 of NI 81-102, as modified by the NI 81-102 Exemption.
"James E. A. Turner" Vice-Chair Ontario Securities Commission
"Suresh Thakrar" Commissioner Ontario Securities Commission