Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from the mutual fund self-dealing restrictions in the Securities Act (Ontario) and the conflicts of interest provisions in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to allow pooled funds to invest in securities of underlying funds under common management – relief subject to certain conditions.
Applicable Legislative Provisions
Securities Act (Ontario) R.S.O. 1990, c. S.5, as amended, paragraphs 111(2)(b), 111(2)(c), subsection 111(3), section 113, paragraphs 117(1)(a) and 117(1)(d) and subsection 117(2). National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations, paragraph 13.5(2)(a) and section 15.1.
November 16, 2012
IN THE MATTER OF
THE SECURITIES LEGISLATION OF ONTARIO
(the Jurisdiction)
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 its behalf and on behalf of Invesco Balanced-Risk Allocation Pool (“IBRA Pool”) and other pooled funds that are currently in existence or may be established and managed by the Filer from time to time (the “Future Pooled Funds”, together with IBRA Pool, the “Pooled Funds”) for a decision under the securities legislation of the principal regulator (the “Legislation”) pursuant to:
a) section 15.1 of National Instrument 31-103 Registration Requirements and Exemptions (“NI 31-103”), exempting the Filer from the prohibitions contained in paragraph 13.5(2)(a) of NI 31-103 that prohibit a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase a security of an issuer in which a responsible person or an associate of a responsible person is a partner, officer or director unless this fact is disclosed to the client and the written consent of the client to the purchase is obtained before the purchase;
b) section 113 of the Securities Act (Ontario) (“Act”) for relief from the following provisions:
(i) paragraph 111(2)(b) of the Act which prohibits a mutual fund in Ontario from knowingly making an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial securityholder; and
(ii) paragraph 111(2)(c) of the Act which prohibits a mutual fund in Ontario against knowingly holding an investment in an issuer in which any:
a. officer or director of the mutual fund, its management company or distribution company or an associate of any of them, or
b. person or company who is a substantial securityholder of the mutual fund, its management company or its distribution company,
has a significant interest;
(iii) subsection 111(3) of the Act which prohibits a mutual fund in Ontario or its management company or its distribution company against knowingly holding an investment described in (i) above;
to permit IBRA Pool or a Future Pooled Fund to invest in one or more Other Funds (as defined below) or ETFs (as defined below) (collectively, the “Fund-of-Fund Relief”); and
c) subsection 117(2) of the Act for relief from the requirement under section 117(1)(a) of the Act to file a report of every transaction of purchase or sale of securities between a mutual fund and any related person or company (the “Reporting Relief”, and together with the Fund-of-Fund Relief, 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;
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.
Interpretation
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. The following additional terms shall have the following meanings:
“ETF” means an investment fund now or in the future managed by the Filer or its affiliates whose securities trade on a stock exchange in Canada or the United States that (i) seeks to replicate the performance of various widely quoted stock or bond indices; (ii) invests, directly or indirectly through derivatives, in commodities; or (iii) seeks to invest in a manner that causes it to replicate the performance of a commodity index.
“Other Fund” means a mutual fund now or in the future managed by the Filer or its affiliates that is subject to National Instrument 81-101 Mutual Fund Prospectus Disclosure and National Instrument 81-102 Mutual Funds (“NI 81-102”).
Representations
- 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; (d) has a head office located in Toronto, Ontario; and (e) is not a reporting issuer in any jurisdiction of Canada.
2. The Filer is or will be the trustee, manager and adviser of the Pooled Funds.
3. The Filer may employ sub-advisors to provide advice on certain Pooled Funds.
4. 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).
Each Pooled Fund is, or will be, (a) a “mutual fund” and a “mutual fund in Ontario” as defined in the Act; and (b) sold solely to investors in Canada pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”).
The Pooled Funds that are currently in existence are not in default of securities legislation in any province or territory of Canada. None of the Pooled Funds that are currently in existence are a “reporting issuer” as defined in the Act but they may in the future become a “reporting issuer”.
Each Other Fund is or will be an open-end investment fund available for purchase in Canada pursuant to a prospectus and will be a “reporting issuer” as defined in the Act.
Each ETF is or will be an investment fund whose securities trade on a stock exchange in Canada or the United States that (a) seek to replicate the performance of various widely quoted stock or bond indices, (b) invest, directly or indirectly through derivatives, in commodities, or (c) seek to invest in a manner that causes it to replicate the performance of a commodity index.
Each Other Fund and ETF (collectively, the “Underlying Funds”) has, or will have, (a) its own investment objectives and investment strategies, (b) will generally have liquid portfolios and (c) will calculate their net asset value daily and are redeemable daily (subject to the conditions relating to redemptions set out in the prospectus in the case of ETFs). A Pooled Fund will generally not invest in an Underlying Fund that is redeemable with less frequency than the Pooled Fund, unless the portfolio adviser of the Pooled Fund believes that the liquidity of the Pooled Fund’s portfolio is adequately managed through other strategies.
The investment objectives of IBRA Pool are to seek to outperform the DEX 91 Day Treasury Bill Index over a rolling three- to five-year investment horizon. IBRA Pool strives to achieve this objective with a proprietary risk premium capture strategy that seeks to minimize the risk of large drawdowns with a risk-balanced investment process.
In furtherance of its investment objective, IBRA Pool may, in addition to entering into derivatives (including, futures and swaps on futures), exchange traded notes and other Pooled Funds, invest in securities of Other Funds or ETFs, this being a more cost efficient way for IBRA Pool to achieve exposure to money market instruments, commodities, equities or fixed income investments.
The amounts invested from time to time in an Underlying Fund by IBRA Pool, either alone or together with Future Pooled Funds or other mutual funds managed by the Filer, may exceed 20% of the outstanding voting securities of any single Underlying Fund. Accordingly, each Pooled Fund could, either alone or together with the other Pooled Funds or other mutual funds managed by the Filer, become a substantial securityholder of an Underlying Fund. The Pooled Funds, Underlying Funds and other mutual funds managed by the Filer are, or will be, related mutual funds by virtue of the common management of these funds by the Filer.
The vast majority of trading in securities of 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 ETFs.
Securities of the ETFs may only be directly purchased or redeemed from an 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 Pooled Funds will purchase and sell securities of the ETFs on the applicable exchange using third party brokers and that the Pooled Funds will pay commissions to these brokers in connection with the purchase and sale of such securities.
Each Pooled Fund shall not pay any management fees or incentive fees that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service.
Each Pooled Fund shall not pay any sales fees or redemption fees in relation to its purchases or redemptions of securities of an Underlying Fund that, to a reasonable person, would duplicate a fee payable by an investor in the Pooled Fund.
In the absence of the Fund-of-Fund Relief, each Pooled Fund would be precluded from investing in an Underlying Fund due to the investment prohibitions in paragraphs 111(2)(b) and 111(2)(c) and subsection 111(3) of the Act and paragraph 13.5(2)(a) of NI 31-103.
Each investment by a Pooled Fund in an Underlying Fund represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Pooled Fund.
In the absence of the Reporting Relief, the Filer would be required to file a report for every transaction between a Pooled Fund and an Underlying Fund under section 117(1)(a) of the Act.
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 is that the Exemption Sought is granted provided that:
(a) securities of a Pooled Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106;
(b) the investment by a Pooled Fund in an Underlying Fund is compatible with the fundamental investment objectives of a Pooled Fund;
(c) no management fees or incentive fees are payable by a Pooled Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service;
(d) no sales or redemption fees are payable by a Pooled Fund in relation to its purchases or redemptions of units of an Underlying Fund that, to a reasonable person, would duplicate a fee payable by an investor in the Pooled Fund;
(e) the Filer will not vote the securities of an Underlying Fund held by a Pooled Fund at any meeting of holders of such securities;
(f) no Pooled Fund will invest in an Underlying Fund unless the Underlying Fund invests less than 10% of its net assets in other mutual funds other than mutual funds that are “money market funds” (as defined by NI 81-102) or that issue “index participation units” (as defined by NI 81-102);
(g) a Pooled Fund’s declaration of trust, which is provided to all investors immediately prior to purchase of securities of a Pooled Fund, will disclose that:
i. the Pooled Fund may purchase securities of an Underlying Fund;
ii. the Filer or its affiliates is the manager of both the Pooled Funds and the Underlying Funds;
iii. the approximate or maximum percentage of net assets of the Pooled Fund that it is intended be invested in securities of the Underlying Fund; and
iv. the process or criteria used to select Underlying Funds; and
(h) prior to the time of investment, securityholders of a Pooled Fund will be provided with disclosure that certain officers or directors of the Filer or associates of any of them may have a significant interest in the Underlying Funds through investments made in securities of such Underlying Funds and will be advised of the potential conflicts of interest which may arise from such relationships. The foregoing disclosure will be contained in a Pooled Fund’s declaration of trust, subscription agreement or similar document of a Pooled Fund provided to investors in the Pooled Fund.
“Raymond Chan”
Raymond Chan
Manager, Investment Funds Branch
Ontario Securities Commission
“Christopher Portner” “Judith Robertson”
Name: Name:
Title: Commissioner Title: Commissioner
Ontario Securities Commission Ontario Securities Commission
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from the mutual fund self-dealing restrictions in the Securities Act (Ontario) and the conflicts of interest provisions in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to allow pooled funds to invest in securities of underlying funds under common management – relief subject to certain conditions.
Applicable Legislative Provisions
Securities Act (Ontario) R.S.O. 1990, c. S.5, as amended, paragraphs 111(2)(b), 111(2)(c), subsection 111(3), section 113, paragraphs 117(1)(a) and 117(1)(d) and subsection 117(2).
National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations, paragraph 13.5(2)(a) and section 15.1.