Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from requirement in subsection 5.1(c) on a confidential basis to obtain prior unitholder approval to change the indices of certain mutual funds – change in indices related to changes made by U.S. parent across its global line-up – subject to IRC approval – unitholders provided 60 days’ prior notice of change – unitholders are permitted to freely exchange their units on the Toronto Stock Exchange.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Fund, subsection 5.1(c) and section 19.1.
September 27, 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
Vanguard Investments Canada Inc. (the Filer), Vanguard MSCI Canada Index ETF, Vanguard MSCI U.S. Broad Market Index ETF (CAD-hedged), Vanguard MSCI EAFE Index ETF (CAD-hedged) and Vanguard MSCI Emerging Markets Index ETF (the Vanguard ETFs)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Vanguard ETFs for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Vanguard ETFs from the requirement in subsection 5.1(c) of National Instrument 81-102 Mutual Funds (NI 81-102) requiring each Vanguard ETF to obtain the approval of its unitholders before changing its fundamental investment objective (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 each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).
Furthermore, the principal regulator in the Jurisdiction has received a request from the Filer for a decision that the application and this decision be kept confidential and not be made public until the earlier of the date: (a) on which the Filer publicly announces the change in indices the Vanguard ETFs track, as described below; (b) on which the Filer mails notice of the change to unitholders of each Vanguard ETF; (c) on which the Filer advises the principal regulator that there is no longer any need for the application and this decision to remain confidential; and (d) that is 30 days after the date of this decision.
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 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 is the trustee, investment fund manager and portfolio manager of each Vanguard ETF. The Filer is registered as a portfolio manager in the Province of Ontario and is registered under the Commodity Futures Act (Ontario) in the category of commodity trading manager. The head office of the Filer is in Toronto, Ontario.
The Vanguard Group, Inc. (Vanguard U.S.), an affiliate of the Filer, is the sub-adviser in respect of the Vanguard ETFs.
Each Vanguard ETF is an exchange-traded fund that was created under the laws of the Province of Ontario and is subject to the provisions of NI 81-102.
Neither the Filer nor the Vanguard ETFs are in default of securities legislation in any Jurisdiction.
The units of each Vanguard ETF are qualified for distribution pursuant to a prospectus dated November 8, 2011 that was prepared and filed in accordance with the securities legislation of the Jurisdictions. Accordingly, each Vanguard ETF is a reporting issuer or the equivalent in each of the Jurisdictions.
Each Vanguard ETF currently tracks an index offered by MSCI, Inc., as set out in the table below:
Vanguard ETF
Current Index
Vanguard MSCI Canada Index ETF
MSCI Canada Index
Vanguard MSCI U.S. Broad Market Index ETF (CAD-hedged)
MSCI US Broad Market 100% Hedged to CAD Index
Vanguard MSCI EAFE Index ETF (CAD-hedged)
MSCI EAFE 100% Hedged to CAD Index
Vanguard MSCI Emerging Markets Index ETF
MSCI Emerging Markets Index
A change in the index tracked by the Vanguard ETF is considered to be a change in the fundamental investment objective of that Vanguard ETF.
The Filer and the Vanguard ETFs are part of a global investment fund business operated by Vanguard U.S. The index that each Vanguard ETF seeks to track is licensed by Vanguard U.S. and Vanguard U.S. maintains the overall relationship with each index provider. Vanguard U.S. has indicated to the Filer that the indices that certain U.S.-domiciled Vanguard exchange-traded funds track, including those U.S. ETFs that are held by three of the Vanguard ETFs, will be changed in 2013. As a result, the applicable index of each Vanguard ETF, and the name of each Vanguard ETF, are to be changed in 2013 as follows:
Vanguard ETF
Proposed Index
New Name of Vanguard ETF
Vanguard MSCI Canada Index ETF
FTSE Canada Index
Vanguard FTSE Canada Index ETF
Vanguard MSCI U.S. Broad Market Index ETF (CAD-hedged)
CRSP US Total Market Hedged to CAD Index
Vanguard CRSP US Total Market Index ETF (CAD-hedged)
Vanguard MSCI EAFE Index ETF (CAD-hedged)
FTSE Developed ex North America Index – Hedged CAD
Vanguard FTSE ex North America Index ETF (CAD-hedged)
Vanguard MSCI Emerging Markets Index ETF
FTSE Emerging Index
Vanguard FTSE Emerging Markets Index ETF
The Filer anticipates that the changes will result in cost savings over time for the Vanguard ETFs. To the extent possible, some or all of these cost savings will be passed on directly or indirectly to investors in the Vanguard ETFs.
In each case, the existing index and the proposed index are highly correlated. As at June 29, 2012, other than in the case of Vanguard MSCI Emerging Markets Index ETF, the performance of the existing index and the proposed index were 100% correlated over a ten-year period. In the case of the two indices for Vanguard MSCI Emerging Markets Index ETF, the correlation is 98%.
The fundamental investment objective of each Vanguard ETF is broadly worded to refer to the type of index that the Vanguard ETF seeks to track. Although the objective goes on to state the name of the index that the Vanguard ETF currently tracks, it is clear that this is only a current statement and could change in the future.
The prospectus of the Vanguard ETFs discloses that the index tracked by a Vanguard ETF may be changed to another index in order to provide investors with substantially the same exposure to the asset class to that which the Vanguard ETF is currently exposed.
Notice of the applicable change of index and the resulting change in the fundamental investment objective will be given to all unitholders of each Vanguard ETF at least 60 days before the change is effective. In addition, the prospectus of the Vanguard ETFs will be amended to disclose the change of indices at least 60 days before the changes are effective.
The change of indices for the Vanguard ETFs, the resulting changes in the fundamental investment objectives of the Vanguard ETFs and the Filer’s decision not to proceed with a unitholder vote will be approved by the independent review committee (the IRC) of the Vanguard ETFs.
At all times, investors will continue to be able to buy and sell units of the Vanguard ETFs through the Toronto Stock Exchange.
The Filer believes that the change of index of each Vanguard ETF will not affect the risk profile of that Vanguard ETF or the suitability of that Vanguard ETF for existing unitholders.
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) notice of the applicable change of index and the resulting change in the fundamental investment objective is given to all unitholders of each Vanguard ETF at least 60 days before the change is effective; and
(b) the change of indices for the Vanguard ETFs, the resulting changes in the fundamental investment objectives of the Vanguard ETFs and the Filer’s decision not to proceed with a unitholder vote are approved by the IRC.
“Darren McKall”
Darren McKall
Manager, Investment Funds
Ontario Securities Commission
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from requirement in subsection 5.1(c) on a confidential basis to obtain prior unitholder approval to change the indices of certain mutual funds – change in indices related to changes made by U.S. parent across its global line-up – subject to IRC approval – unitholders provided 60 days’ prior notice of change – unitholders are permitted to freely exchange their units on the Toronto Stock Exchange.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Fund, subsection 5.1(c) and section 19.1.