Headnote National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption from section 2.1(1) of National Instrument 81-102 – Mutual Funds to permit global bond mutual funds to invest more than 10 percent of net assets in debt securities issued by a foreign government or supranational agency subject to conditions
Applicable Legislative Provisions
National Instrument 81-102 – Mutual Funds, sections 2.1(1) and 19.1
November 21, 2011
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
Fidelity Investments Canada ULC (the Filer)
and
Fidelity Emerging Markets Debt Investment Trust (the New Fund) and all future global and/or international bond funds (the Future Funds) managed by the Filer (the New Fund together with the Future Funds, collectively, the Funds, each, a Fund) that are subject to National Instrument 81-102 Mutual Funds (NI 81-102)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Funds from the requirement in section 2.1 of NI 81-102 in order to permit the Funds to invest:
(a) up to 20% of its net assets, taken at market value at the time of purchase, in securities issued or guaranteed as to principal and interest by any government or agency thereof (other than a government or agency of Canada or a province or territory thereof or of the United States, in which investment by all of the Funds is unrestricted) or any permitted supranational agency (as defined in NI 81-102), provided that the securities have a minimum of AA rating by Standard & Poor’s Rating Service or the equivalent rating by any other approved credit rating organization (as defined in NI 81-102);
(b) up to 35% of its net assets, taken at market value at the time of purchase, in securities issued or guaranteed as to principal and interest by any government or agency thereof (other than a government or agency of Canada or a province or territory thereof or of the United States, in which investment by all of the Funds is unrestricted) or by any permitted supranational agency (as defined in NI 81-102), provided that the securities have a minimum AAA rating by Standard & Poor’s Rating Service or the equivalent rating by any other approved credit rating organization (as defined in NI 81-102);
provided that sub-paragraphs (a) and (b) of this paragraph cannot be combined for any one issuer of a Fund;
(the Exemption Sought).
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 respect of the Exemption Sought in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Prince Edward Island, Nova Scotia, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (the Passport Jurisdictions).
Interpretation
Defined terms in the securities legislation of the Jurisdiction or the Passport Jurisdictions, National Instrument 14-101 - Definitions or NI 81-102 have the same meanings in this Decision, unless otherwise defined.
Representations
This Decision is based on the following facts represented by the Filer:
The Filer
The Filer, a corporation continued under the laws of Alberta and having its head office in Toronto, Ontario, will act as manager of the Funds.
The Filer is registered under the Ontario Securities Act as an investment fund manager; a dealer in the category of mutual fund dealer and as an adviser in the category of portfolio manager, and under the Commodities Futures Act (Ontario) as an adviser in the category of commodity trading manager.
The Filer, or an affiliate, will act as portfolio manager to the Funds.
The Filer is not in default of the Legislation or the securities legislation of any Passport Jurisdiction.
The Funds
- Each Fund is or will be:
(a) an open-end mutual fund established under the laws of Ontario or a class of shares of a corporation incorporated under the laws of the Province of Alberta;
(b) a reporting issuer under the securities laws of some or all of the provinces and territories of Canada;
(c) governed by the provisions of NI 81-102; and
(d) qualified for distribution in some or all provinces and territories of Canada under a simplified prospectus and annual information form prepared in accordance with National Instrument 81-101 - Mutual Fund Prospectus Disclosure and filed with and receipted by the securities regulators in the applicable jurisdictions.
The New Fund is currently being established.
The investment objective of the New Fund will be to provide a steady flow of income and the potential for capital gains by investing primarily in fixed income securities of issuers in emerging market countries.
The Fund is currently permitted to use specified derivatives to hedge against losses caused by changes in securities prices or exchange rates. The Fund may also use specified derivatives for non-hedging purposes under its investment strategies in order to invest indirectly in securities or financial markets, provided the use of specified derivatives is consistent with the Fund’s investment objective. When specified derivatives are used for non-hedging purposes, the Fund is subject to the cover requirements of NI 81-102. The Fund may use specified derivatives in accordance with exemptive relief obtained by the Fund.
The concentration restriction under section 2.1 of NI 81-102 (the Concentration Restriction) prevents a fund from purchasing a security of an issuer or entering into a specified derivatives transaction, if immediately after the transaction, more than 10% of the net assets of such 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.
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 and trades can be completed faster in certain markets that are more readily accessible to foreign investment.
It will provide more flexibility and more favourable prospects for the Funds because each Fund will be better able to construct an international fixed-income portfolio that will best achieve its investment objective.
In certain jurisdictions, the securities of supranational agencies or governments may be the only liquid or rated debts available for investment.
Prior to the adoption of the Euro, there were greater diversification opportunities as the European debt markets comprised several currency-denominated issuers (including well developed and liquid markets for Lira, Franc, and Mark issued debt securities), each impacted by national government monetary policies. In contrast, today the European debt markets are dominated by Euro-currency denominated debt which comprises approximately 40% of the world government bond market and the coordinated monetary policy followed by the members of the European Union has effectively reduced diversification opportunities.
For the foregoing reasons, the Filer believes that the Exemption Sought will be in 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:
(a) the securities that are purchased pursuant to the Exemption Sought are traded on a mature and liquid market;
(b) the acquisition of the securities purchased pursuant to the Exemption Sought is consistent with the fundamental investment objective of the Funds;
(c) 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 Funds have so invested and the risks, including foreign exchange risks, of investing in the country in which that issuer is located; and
(d) 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 the Exemption Sought.
“Darren McKall”
Darren McKall, Manager
Investment Funds Branch
Ontario Securities Commission
SEDAR Project No. 1815165
Headnote
National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption from section 2.1(1) of National Instrument 81-102 – Mutual Funds to permit global bond mutual funds to invest more than 10 percent of net assets in debt securities issued by a foreign government or supranational agency subject to conditions
Applicable Legislative Provisions
National Instrument 81-102 – Mutual Funds, sections 2.1(1) and 19.1