Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from multi-layering prohibition in paragraph 2.5(2)(b) of NI 81-102 to permit certain top funds to invest or gain exposure for 100% of their assets in reference funds, which in turn are more than 10% invested in other mutual funds and ETFs – The three-tier fund structure is analogous to the current multi-layering exception in NI 81-102 – Transparent investment portfolio and accountability for portfolio management – National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, paragraph 2.5(2)(b) and section 19.1.
March 30, 2012
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 INVESCO CANADA LTD. (the “Filer”)
and
IN THE MATTER
OF INVESCO INTACTIVE STRATEGIC CAPITAL YIELD PORTFOLIO CLASS
(“Strategic Class”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of Strategic Class for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) exempting Strategic Class and Future Strategic Classes from the restriction contained in section 2.5(2)(b) of National Instrument 81-102 - Mutual Funds (“NI 81-102”) that a fund not invest in another fund if the other fund holds more than 10% of the market value of its net assets in securities of other mutual funds (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(1) of Multilateral Instrument 11-102 - Passport System (“MI 11-102”) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon (the “Other Jurisdictions”).
Interpretation and Definitions
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision unless they are defined in this decision.
“cash” means cash, and cash equivalents.
“Future Strategic Class” means all mutual funds now or in the future managed by the Filer in respect of which the representations relating to Strategic Class set out under “Facts” are applicable save that all references to Strategic Class and Strategic Portfolio shall be replaced with the applicable Future Strategic Class and Future Strategic Portfolio, respectively.
“Future Strategic Portfolios” means all mutual funds now or in the future managed by the Filer in respect of which the representations relating to Strategic Portfolio set out under “Facts” are applicable save that (i) all references to Strategic Portfolio shall be replaced with the applicable Future Strategic Portfolio and (ii) Future Strategic Portfolios’ objectives may differ from Strategic Portfolio’s objectives but each Future Strategic Portfolio will seek to achieve its objective through investment in various asset classes that may be represented by mutual funds.
“gold” means gold, certain permitted gold certificates and specified derivatives the underlying interest of which is gold on an unlevered basis.
“Gold/Silver ETFs” means exchanged traded funds whose securities trade on a stock exchange in Canada or the United States and which seek to replicate the performance of gold and/or silver on an unlevered basis or the value of a specified derivative the underlying interest of which is gold and/or silver on an unlevered basis.
“IFS” means Invesco Funds, SICAV that qualifies as a Société d'Investissment à Capital Variable governed by the laws of Luxembourg. IFS is registered as an undertaking for collective investment in transferable securities under the EU Council Directive 2009/65/EC of 13 July 2009 on the Coordination of Laws, Regulations and Administrative Provisions relating to Undertakings for Collective Investment in Transferable Securities (UCITS), as amended.
“IFS2” means Invesco Funds Series 2, a unit trust organized under the laws of Ireland. IFS2 is registered as an undertaking for collective investment in transferable securities under the EU Council Directive 2009/65/EC of 13 July 2009 on the Coordination of Laws, Regulations and Administrative Provisions relating to Undertakings for Collective Investment in Transferable Securities (UCITS), as amended.
“Index ETFs” means mutual funds that issue securities which qualify as an “index participation unit” as that term is defined in NI 81-102.
“Money Market Funds” means mutual funds that qualify as a “money market fund” as that term is defined in NI 81-102.
“NI 81-102” means National Instrument 81-102 – Mutual Funds.
"UCIT Funds" means Invesco Emerging Market Corporate Bond, a sub-fund of IFS and Invesco Emerging Market Bond Fund, a sub-fund of IFS2.
“silver” means silver, certain permitted silver certificates and specified derivatives the underlying interest of which is silver on an unlevered basis.
“Strategic Portfolio” means Invesco Intactive Strategic Yield Portfolio, a mutual fund to be formed and managed by the Filer.
“Underlying Funds” means mutual funds subject to NI 81-102 in which Strategic Portfolio or Future Strategic Portfolios invest, other than the Gold/Silver ETFs, Index ETFs, and Money Market Funds as defined above.
Representations
This decision is based on the following facts represented by the Corporation:
Facts
1. The head office of the Filer is located in Toronto, Ontario.
2. The Filer is or will be the manager of Strategic Class, Strategic Portfolio and the Underlying Funds.
3. The Filer is not in default of securities legislation in any jurisdiction of Canada.
4. Strategic Class will be a class of shares of Invesco Corporate Class Inc. that seeks to achieve its investment objective of providing tax efficient returns (before fees and expenses) similar to those of the Strategic Portfolio primarily by entering into forward contracts or other derivative instruments. The reference fund invests in primarily in a diversified portfolio of global, fixed income, dividend-paying and other income-oriented mutual funds or securities. It is anticipated that the performance of Strategic Class and Strategic Portfolio will only differ as a result of (a) costs associated with forward contracts; and (b) settlement delay as purchases by Strategic Class’ investors may only be invested in Strategic Portfolio’s securities when those purchases settle which is typically three business days following the trade date.
5. Strategic Portfolio will be a fund-of-funds that may invest in one or more of the following:
(a) Index ETFs;
(b) Underlying Funds;
(c) gold, silver and/or Gold/Silver ETFs;
(d) the UCIT Funds;
(e) securities of issuers that are corporations or a government entity; and
(f) cash;
(g) Money Market Funds
The objective of the Strategic Portfolio is to generate current income with the potential for capital appreciation. It achieves its objective through investment in various asset classes that may be represented by mutual funds.
6. An Underlying Fund invests mainly in securities of issuers that are corporations or a government entity.
7. An Index ETF may invest in securities of other Index ETFs or issuers that are corporations or a government entity.
8. On August 10, 2010, the Filer, on behalf of its existing mutual funds and mutual funds that it may in the future manage which are subject to NI 81-102 has obtained relief from the restrictions contained in sections 2.3(f), 2.3(h), 2.5(2)(a), 2.5(2)(b) and 2.5(2)(c) of NI 81-102 to permit such funds to invest up to 10% of their net assets, taken at market value at the time of the transaction, in Gold/Silver ETFs, gold and/or silver ("Gold/Silver Relief").
9. In March 2012, the Filer has, on behalf of the Strategic Portfolio, obtained relief from the restrictions contained in section 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to permit it to invest up to 10% of its net assets, taken at market value at the time of the transaction, in the UCIT Funds (the “UCIT Relief”).
10. Strategic Portfolio’s investment in securities of Index ETFs may result in a multiple tier fund structure which structure is permitted under section 2.5(4)(b)(ii).
11. Strategic Class’ investment in securities of Strategic Portfolio may result in:
(a) Multi-tier structures with respect to Strategic Portfolio’s investment in Index ETFs which structures are permitted under section 2.5(4)(b)(ii);
(b) A multi-tier structure with respect to Strategic Portfolio’s investment in money market funds which structure is permitted under section 2.5(4)(b)(i); and
(c) A multi-tier structure with respect to Strategic Portfolio’s investment in Underlying Funds, Gold/Silver ETFs and UCIT Funds which is contrary to the multi-layering restriction in section 2.5(2)(b) of NI 81-102.
12. A preliminary simplified prospectus and annual information form dated February 23, 2012 for Strategic Class and Strategic Portfolio was filed in all provinces and territories of Canada under SEDAR project #01862627.
13. Strategic Class, Strategic Portfolio and each Underlying Fund is or will be (a) an open-end mutual fund established under the laws of Ontario; (b) a reporting issuer under the securities laws of each of the provinces and territories of Canada; and (c) qualified for distribution in all provinces and territories of Canada.
14. An investment by Strategic Class in securities of Strategic Portfolio will be made in accordance with the provisions of section 2.5 of NI 81-102, except for the requirements in section 2.5(2)(b).
15. An investment by Strategic Portfolio in securities of:
(a) an Underlying Fund and a money market fund will be made in accordance with the provisions of section 2.5 of NI 81-102;
(b) an Index ETF will be made in accordance with the provisions of section 2.5 of NI 81-102, except for the requirement in section 2.5(2)(e) from which the Filer has received exemptive relief on May 8, 2008 to pay arm's length third party brokers brokerage commissions for executing trades in securities of Index ETFs (the "May 8, 2008 Relief");
(c) a Gold/Silver ETF will be made in accordance with the provisions of the Gold/Silver Relief; and
(d) UCIT Funds will be made in accordance with the provisions of the UCIT Relief.
Accordingly, there will be no duplication of fees between each tier of the multi-tier fund structure except as permitted under the May 8, 2008 Relief.
16. The multi-tier fund structure will be akin to, and no more complex than, the three-tier fund structure currently permitted under sections 2.5(4)(a) and 2.5(4)(b)(ii) of NI 81-102.
17. The simplified prospectus of Strategic Class will disclose that it will link its returns to Strategic Portfolio through the use of forward contracts and that it may invest directly in securities of Strategic Portfolio. It will also disclose that Strategic Portfolio may invest in other funds, including Underlying Funds, Index ETFs, Gold/Silver ETFs, the UCIT Funds and money market funds. It will also disclose that the Index ETFs may invest in other Index ETFs. It will therefore be clear to investors that accountability for portfolio management is at the level of the Strategic Portfolio. In addition, the Filer will comply with the requirements under National Instrument 81-106 - Investment Fund Continuous Disclosure relating to top 25 disclosure in the Management Report of Fund Performance as if the Strategic Class were invested directly in the Index ETFs and Underlying Funds. This will provide transparency to investors relating to the investment portfolio.
18. An investment by:
(a) Strategic Class in securities of Strategic Portfolio represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of Strategic Class;
(b) Strategic Portfolio in securities of other investment funds including Underlying Funds, Index ETFs, Gold/Silver ETFs, the UCIT Funds and money market funds represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of Strategic Portfolio; and
(c) An Index ETF in securities of another Index ETF represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of that Index ETF.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make a decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted to allow Strategic Class and the Future Strategic Classes to link their returns to Strategic Portfolio and Future Strategic Portfolios, respectively, provided that:
a) Such investments are made in compliance with all other requirements of section 2.5 of NI 81-102, except to the extent that discretionary relief has been granted from any such requirements.
b) The only mutual funds that the Underlying Funds will invest more than 10% of their net assets in are Money Market Funds.
c) The Strategic Portfolio and Future Strategic Portfolios will not invest directly or indirectly more than 10 percent of its net assets, at the time of investment, in UCIT Funds.
d) No more than 10 percent of the net assets of a UCIT Fund held by the Strategic Portfolio or Future Strategic Porfolios will be invested in other mutual funds.
“Darren McKall”
________________________________
Darren McKall
Manager, Investment Funds Branch
Ontario Securities Commission