Headnote
National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions - Relief granted from requirement in paragraph 2.5(2)(e) of NI 81-102 that no sales fees or redemption fees be payable by a mutual fund in relation to its purchases or redemptions of the securities of a related mutual fund - Top funds needing relief from paragraph 2.5(2)(e) in order to be allowed to pay applicable brokerage fees in connection with trades made through third party brokers in index participation units issued by a mutual fund managed by an affiliate - Relief granted subject to top funds' investment in index participation units complying with the requirements of section 2.5 of NI 81-102, except for paragraph 2.5(2)(e) - National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, paragraph 2.5(2)(e) and section 19.1.
May 8, 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 for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from paragraph 2.5(2)(e) of National Instrument 81-102 Mutual Funds (NI 81-102) in order to permit the Top Funds and any other mutual fund for which the Filer acts as manager (together with the Top Funds, the Funds) to pay brokerage fees associated with trades in securities of the Underlying ETFs (defined herein) (the Exemption Sought).
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, Manitoba, Québec, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, the Yukon Territory and Nunavut Territory, where applicable.
Interpretation
Terms defined in NI 81-102, 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 andPowerShares 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.
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 attempt to replicate permitted indices and are listed and traded on eligible exchanges such that they 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.
All such investments will be made in compliance with section 2.5 of NI 81-102, with the exception of paragraph 2.5(2)(e).
As Invesco PowerShares is an affiliate of the Filer, the Top Funds are prohibited by paragraph 2.5(2)(e) of NI 81-102 from purchasing securities of the existing Underlying ETFs unless no sales or redemption charges are payable in connection with a purchase or redemption of such securities.
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 such as the Underlying ETFs.
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.
Subsection 2.5(5) of NI 81-102 provides that the prohibition against the duplication of sales and redemption fees in paragraph 2.5(2)(f) does not apply to brokerage fees incurred by a mutual fund for the purchase or sale of an index participation unit issued by a mutual fund. The exemption provided in subsection 2.5(5) does not however also extend to the similar prohibition against the payment of sales and redemption fees in paragraph 2.5(2)(e) which applies when a mutual fund purchases or redeems securities of another mutual fund managed by an affiliate or associate of the manager of the mutual fund.
Allowing the Funds to pay applicable brokerage fees to arm’s length third party brokers in connection with trades in securities of the Underlying ETFs will not offend the policy rationale underlying the prohibition in paragraph 2.5(2)(e) and will accordingly not be prejudicial to the interests of investors in 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, except paragraph 2.5(2)(e).
“Darren McKall”
Darren McKall
Assistant Manager, Investment Funds
SEDAR #1239983