Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from sections 2.3(f) and (h), 2.5(2)(a), (b) and (c) of National Instrument 81-102 Mutual Funds to permit mutual funds to invest in gold, silver, and commodity ETFsgold/silver. The Filer does not invest in leveraged ETFs and inverse ETFs, subject to a limit of 10% exposure in gold, silver and commodity ETFs, and certain conditions. Relief granted from section 2.5(e) and (f) of NI 81-102 to permit payment of brokerage commissions associated with investments in commodity ETFs.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, paragraph 2.3(f) and (h), 2.5(2)(a), (b), (c), (e) and (f) and section 19.1.
October 22, 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")
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of Invesco Intactive Diversified Income Portfolio, Invesco Intactive Balanced Income Portfolio, Invesco Intactive Balanced Growth Portfolio, Invesco Intactive Growth Portfolio and Invesco Intactive Maximum Growth Portfolio (the “Invesco Intactive Accumulation Portfolios”) and future mutual funds managed by the Filer that are subject to National Instrument 81-102 – Mutual Funds (“NI 81-102”) and that comply with the representations set out below and which are not money market funds (the “Future Funds” and together with the Invesco Intactive Accumulation Portfolios, the “Funds”) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) exempting the Funds from the restrictions contained in:
(i) 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 each Fund to invest up to 10% of their net asset value taken at market value at the time of purchase in a combination of the following:
(a) gold, permitted gold certificates and specified derivatives of securities of which the underlying interest is gold (collectively, “Gold”);
(b) silver, silver certificates and specified derivatives of which the underlying interest is silver (collectively, “Silver”); and
(c) exchange-traded funds traded on a stock exchange in Canada or the United States that invest, directly or indirectly through derivatives, in commodities, including but not limited to gold and silver on an unlevered basis or seek to invest in a manner that causes it to replicate the performance of an unlevered commodity index (collectively, “Commodity ETFs”) subject to section 11 below,
(ii) sections 2.5(2)(e) and 2.5(2)(f) of NI 81-102 to permit the Funds to pay brokerage commissions incurred for the purchase or sale of securities of certain Commodity ETFs, including Commodity ETFs that are or may in the future be managed by the Filer or an affiliate or associate of the Filer (“Affiliated Commodity ETFs”)
(collectively, 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 all of the other provinces and territories of Canada.
Interpretation
Terms defined 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 Filer:
- The Filer (a) is a corporation amalgamated under the laws of Ontario; (b) is an indirect wholly-owned subsidiary of Invesco Ltd., a global investment manager; (c) is not in default of applicable securities legislation in any jurisdiction; and (d) has a head office located in Toronto, Ontario.
2. The Filer is or will be the manager of the Funds.
3. The Filer is registered as (a) an investment fund manager in Ontario; (b) an adviser in the category of portfolio manager in all provinces of Canada; and (c) a commodity trading manager in Ontario pursuant to the Commodity Futures Act (Ontario).
4. The Global Asset Allocation team of Invesco Advisers, Inc. (the “IAI”), an affiliate of the Filer, is or will be the sub-advisor to the Funds.
5. Each of the Funds 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; (c) governed by the provisions of NI 81-102 (d) qualified for distribution in all provinces and territories of Canada under a simplified prospectus and annual information form or long form prospectus that will be prepared, filed and receipted by the securities regulators in the applicable jurisdictions; and (d) not in default of securities legislation in any province or territory of Canada.
6. The Funds are or will be funds whose investment objectives and strategies provide investors with potential exposure to various asset classes, including equities, bonds and commodities, through investment in mutual funds and exchange traded funds. Each of the Funds is or will be permitted in accordance with its investment objectives and investment strategies to invest in Gold, Silver and Commodity ETFs.
7. Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established by NI 81-102.
8. The Funds will invest in, amongst other things, Gold, Silver and Commodity ETFs from time to time when IAI determines that it is desirable to do so following a valuation of assets, a determination of the effect of monetary policy and economic environment on asset prices and assessing historic price movements on likely future returns. IAI is of the view that by permitting investments in Gold, Silver and/or Commodity ETFs, the Funds will be provided with additional flexibility to increase gains or diversification and will better allow the Funds to fulfill their investment objectives in certain market conditions.
9. No more than (a) 10% of the net asset value, in aggregate, of a Fund taken at market value at the time of purchase shall be invested in a combination of Gold, Silver and/or Commodity ETFs; and (b) 2.5% of the net asset value of a Fund taken at market value at the time of purchase shall be invested in any one commodity sector other than gold and/or silver. A commodity sector is defined as energy, grains, industrial metals, livestock, precious metals (other than gold and silver) and softs (including cocoa, cotton, coffee, soy meal and sugar).
10. The Commodity ETFs and Silver are or will be attractive investments for the Funds as they provide an efficient and cost effective means of achieving diversification among various asset classes.
11. An investment by a Fund in securities of a Commodity ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.
12. Each Commodity ETF is or will be an “investment fund” as defined under the Securities Act (Ontario).
13. The objective of each Commodity ETF is or will be to:
(a) reflect the price of the applicable physical commodity or commodities (less the Commodity ETF’s expenses and liabilities) on an unlevered basis; or
(b) track the performance of an index which is intended to reflect the changes in the market value of the physical commodity or commodities sector.
14. The securities of each Commodity ETF trade or will trade on stock exchanges in Canada or the United States. As such there are no liquidity concerns that should lead to a conclusion that investments in Commodity ETFs need to be prohibited.
15. The amount of loss that can result from an investment by a Fund in a Commodity ETF will be limited to the amount invested by the Fund in securities of the Commodity ETF.
16. The market for silver is highly liquid, and there are no liquidity concerns that should lead to a conclusion that investments in silver need to be prohibited.
17. In this decision, silver certificates (“Permitted Silver Certificates”) that the Funds invest in will be certificates that represent silver that is:
(a) available for delivery in Canada, free of charge, to or to the order of the holder of the certificate;
(b) of a minimum fineness of 999 parts per 1,000;
(c) held in Canada;
(d) in the form of either bars or wafers; and
(e) if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a province or territory of Canada.
18. Any investment by a Fund in Silver will be made in compliance with the custodian requirements in part 6 of NI 81-102.
19. If the investment in Gold, Silver and/or Commodity ETFs represents a material change to Invesco Intactive Accumulation Portfolios, the Filer will comply with the material change reporting obligations for that fund.
- The simplified prospectus for each of the Funds discloses, or will disclose (i) in the investment strategies section the fact that the Fund has obtained relief to invest in Gold, Silver or Commodity ETFs, and (ii) the risks associated with the Fund’s investment in Gold, Silver or Commodity ETFs.
Brokerage Fees
The Funds are prohibited by sections 2.5(2)(e) and 2.5(2)(f) of NI 81-102 from paying brokerage commissions to brokers in connection with trades in Commodity ETFs, including Affiliated Commodity ETFs.
The vast majority of trading in securities of Commodity 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, including the Commodity ETFs.
Securities of the Commodity ETFs, including Affiliated Commodity ETFs, may only be directly purchased or redeemed from a Commodity ETF in large blocks called “creation units” by “authorized participants” that have entered into a contract with its manager to purchase and redeem such securities.
It is proposed that the Funds will purchase and sell securities of the Commodity ETFs on the applicable exchange using third party brokers 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 sections 2.5(2)(e) and (f) do 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. However, as securities of the Commodity ETFs are not index participation units, the Commodity Pools cannot rely on subsection 2.5(5) of NI 81-102.
27. If the Exemption Sought is granted, the Funds will not rely on the relief the Filer received on their behalf with respect to investments in Gold, Silver and exchange traded funds that invest in or track the performance of Gold, Silver, a derivative the underlying interest of which is Gold or Silver or an index which is intended to reflect the changes in the market value of Gold and/or Silver though other funds managed by the Filer may continue to rely on such relief.
- The Filer has determined that it would be in the best interests of the Fund to receive the Exemption Sought.
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 provided that:
(a) the investment by a Fund in securities of a Commodity ETF, Gold and/or Silver is in accordance with the fundamental investment objectives of the Fund;
(b) a Fund does not short sell securities of a Commodity ETF;
(c) the securities of the Commodity ETFs are traded on a stock exchange in Canada or the United States;
(d) a Fund does not purchase Gold, Silver and or Commodity ETFs if, immediately after the transaction, more than 10% of the net asset value, in aggregate, of the Fund, taken at market value at the time of the transaction, would consist of Gold, Silver and Commodity ETFs;
(e) no more than 2.5% of the net asset value of a Fund may be invested in any one commodity sector, other than gold and/or silver, taken at market value at the time of purchase. For this purpose, the relevant commodity sectors are energy, grains, industrial metals, livestock, precious metals other than gold and silver and softs (ie., cocoa, cotton, coffee and sugar); and
(f) the prospectus of the Fund discloses (i) in the investment strategy section of the Fund the fact that the Fund has obtained relief to invest in Gold, Silver and Commodity ETFs, together with an explanation of what each Commodity ETF is, and (ii) the risks associated with a Fund’s investment in securities of the Commodity ETFs.
“Sonny Randhawa”
________________________
Sonny Randhawa
Manager, Investment Funds
Ontario Securities Commission
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from sections 2.3(f) and (h), 2.5(2)(a), (b) and (c) of National Instrument 81-102 Mutual Funds to permit mutual funds to invest in gold, silver, and commodity ETFsgold/silver. The Filer does not invest in leveraged ETFs and inverse ETFs, subject to a limit of 10% exposure in gold, silver and commodity ETFs, and certain conditions. Relief granted from section 2.5(e) and (f) of NI 81-102 to permit payment of brokerage commissions associated with investments in commodity ETFs.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, paragraph 2.3(f) and (h), 2.5(2)(a), (b), (c), (e) and (f) and section 19.1.