Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted to allow two global bond funds and a global balanced fund to invest more than 10 percent of net assets in debt securities issued by a foreign government or supranational agency, subject to certain condition – National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, sections 2.1(1) and 19.1.
August 12, 2008
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
THE PROVINCE OF ONTARIO
(the Jurisdiction)
AND
IN THE MATTER OF THE
PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
FRANKLIN TEMPLETON INVESTMENTS CORP.
(the Manager), TEMPLETON GLOBAL INCOME FUND, FRANKLIN STRATEGIC INCOME FUND AND FRANKLIN TEMPLETON GLOBAL AGGREGATE BOND FUND (collectively, the Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Manager and the Funds (the Filers) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption pursuant to section 19.1 of National Instrument 81-102 – Mutual Funds (NI 81-102) from subsection 2.1(1) of NI 81-102 (the Concentration Restriction), which prohibits a mutual fund from investing more than 10% of the net assets of the fund, taken at market value at the time of the transaction, in securities of any issuer (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 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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (the Non-Principal Jurisdictions).
Interpretation
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filers:
The Manager is a corporation amalgamated under the laws of Ontario and is registered as an advisor in the categories of investment counsel and portfolio manager or the equivalent in Ontario as well as British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Yukon. The Manager is also registered as a mutual fund dealer in Ontario and Alberta. The Manager is the trustee and manager of the Funds. The Manager’s head office is in Toronto, Ontario.
The Funds are open-end mutual funds established under the laws of Ontario.
The Funds are reporting issuers under the securities laws of Ontario and the Non-Principal Jurisdictions. The Funds are not in default of any requirements of applicable securities legislation.
The Funds are qualified for distribution in Ontario and the Non-Principal Jurisdictions under a simplified prospectus and annual information form dated June 20, 2008, as amended.
Templeton Global Income Fund (TGIF) is a global balanced fund. TGIF’s investment objective is current income while maintaining prospects for capital appreciation by investing primarily in debt and equity securities issued around the world. TGIF looks to achieve its objective through strategies that include, but are not limited to: (i) seeking income by investing in a combination of corporate, agency and government debt securities issued in numerous countries, including developed and developing countries and emerging markets, as well as stocks that offer or could offer attractive dividend yields; and (ii) potentially investing in debt securities that are rated below investment grade. TGIF is not restricted with respect to its mix of equity and fixed income investments and normally expects to invest approximately 50% of its net assets in fixed income securities.
Franklin Strategic Income Fund (FSIF) is an international bond fund. FSIF’s investment objective is high current income and some long-term capital appreciation by investing primarily in fixed income securities issued in the U.S. and throughout the world. Under normal market conditions, FSIF’s investment strategies involve investing at least 65% of its assets in U.S. and global debt securities. Debt securities include all varieties of fixed and floating income securities, including bonds, mortgage securities, corporate loans and loan participations, and other asset-backed securities and convertible securities.
Franklin Templeton Global Aggregate Bond Fund (FTGABF) is an international bond fund. FTGABF’s investment objective is high current income and some long-term capital appreciation by investing primarily in fixed-income securities and preferred shares issued around the world. FTGABF looks to achieve its objective through investment strategies that include, but are not limited to: (i) investing primarily in global fixed income securities including bonds, notes, debentures, collateralized securities, convertible securities and preferred shares issued or guaranteed by governments, agencies, international organizations and corporations with a credit rating of at least investment grade (rated BBB- or better); and (ii) potentially investing up to 10% of Fund assets in below investment grade securities, including high yield corporate, sovereign and emerging market debt.
The Concentration Restriction prevents each Fund from purchasing a security of an issuer or entering into a specified derivatives transaction, if immediately after the transaction, more than 10 percent of the net assets of the Fund would be invested in securities of any issuer.
The Concentration Restriction does not apply to a purchase of a “government security”, which, under NI 81-102, means an evidence of indebtedness issued, or fully and unconditionally guaranteed as to principal and interest, by any of the government of Canada, the government of a jurisdiction or the government of the United States of America.
The Manager believes that the Exemption Sought will be in the best interests of the Funds for the following reasons:
a) it will provide more flexibility and more favourable prospects for the Funds because the Funds will be better able to compose a global fixed income portfolio that will best achieve their respective investment objectives;
b) in certain jurisdictions, the securities of supranational agencies or governments may be the only liquid or rated debts available for investment; and
c) higher concentration limits may allow the Funds to benefit from investment efficiencies and reduced transaction costs as certain foreign government treasury offerings are more readily available for investment (because of large, regular treasury offerings that match the maturity dates the Funds seek) and trades can be completed faster in certain markets that are more readily accessible to foreign investment.
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:
(1) each of FSIF and FTGABF may only invest up to:
(a) 20 percent of its net assets, taken at market value at the time of purchase, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by permitted supranational agencies (as defined in NI 81-102) or governments other than the government of Canada, the government of a province or territory of Canada, or the government of the United States of America and are rated “AA” by Standard & Poor’s, or have an equivalent rating by one or more other approved credit rating organizations; and
(b) 35 percent of its net assets, taken at market value at the time of purchase, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by permitted supranational agencies (as defined in NI 81-102) or governments other than the government of Canada, the government of a province or territory of Canada, or the government of the United States of America and are rated “AAA” by Standard & Poor’s, or have an equivalent rating by one or more other approved credit rating organizations; and
(2) TGIF may only invest up to:
(a) 20 percent of the percentage of its net assets invested in evidences of indebtedness, taken at market value at the time of purchase, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by permitted supranational agencies (as defined in NI 81-102) or governments other than the government of Canada, the government of a province or territory of Canada, or the government of the United States of America and are rated “AA” by Standard & Poor’s, or have an equivalent rating by one or more other approved credit rating organizations; and
(b) 35 percent of the percentage of its net assets invested in evidences of indebtedness, taken at market value at the time of purchase, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by permitted supranational agencies (as defined in NI 81-102) or governments other than the government of Canada, the government of a province or territory of Canada, or the government of the United States of America and are rated “AAA” by Standard & Poor’s, or have an equivalent rating by one or more other approved credit rating organizations
(3) paragraphs (1)(a) and (1)(b), and paragraphs (2)(a) and 2(b), above, cannot be combined for any one issuer;
(4) the securities that are purchased pursuant to this Decision are traded on a mature and liquid market;
(5) the acquisition of the securities purchased pursuant to this Decision is consistent with the fundamental investment objective of each Fund;
(6) the simplified prospectus of the Funds discloses the additional risks associated with the concentration of net assets of the Funds in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the Fund has so invested and the risks, including foreign exchange risks, of investing in the country in which that issuer is located; and
(7) the simplified prospectus of the Funds discloses, in the investment strategy section, the details of the Exemption Sought along with the conditions imposed and the type of securities covered by this Decision.
“Darren McKall”
Darren McKall
Assistant Manager, Investment Funds
Ontario Securities Commission
SEDAR Project No. 1279714