November 25, 2014
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 MACKENZIE FINANCIAL CORPORATION (the Filer)
AND IN THE MATTER OF MACKENZIE SOVEREIGN BOND FUND (the Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption (the Requested Relief), pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) from subsection 2.1(1) of NI 81-102 (the Concentration Restriction) to permit the Fund to invest up to:
(a) 20% of the Fund's net asset value at the time of the transaction in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest by governments other than the government of Canada, the government of a jurisdiction in Canada or the government of the United States of America and are rated “AA” by Standard & Poor’s (S&P), or have an equivalent rating by one or more other designated rating organizations; and
(b) 35% of the Fund's net asset value at the time of the transaction in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest by governments other than the government of Canada, the government of a jurisdiction in Canada, or the government of the United States of America and are rated “AAA” by S&P, or have an equivalent rating by one or more other designated rating organizations
(such evidences of indebtedness are collectively referred to as Foreign Government Securities).
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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (the Other Jurisdictions).
Interpretation
Terms defined in NI 81-102, 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 is a corporation amalgamated under the laws of Ontario with its head office in Toronto, Ontario.
The Filer is registered as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager in Ontario. The Filer is also registered as a portfolio manager and exempt market dealer in all other Canadian provinces and territories and as an investment fund manager in Newfoundland and Labrador and Québec.
The Filer will be the manager, trustee and portfolio manager of the Fund.
The Fund will be an open-ended mutual fund trust established under the laws of Ontario.
Securities of the Fund will be offered by simplified prospectus filed in all of the provinces and territories in Canada and, accordingly, the Fund will be a reporting issuer in one or more provinces and territories of Canada. A preliminary simplified prospectus was filed for the Fund via SEDAR in all the provinces and territories on October 20, 2014.
The Filer is not in default of securities legislation in any jurisdiction of Canada.
The Fund’s investment objective is expected to be substantially as follows: “The Fund seeks to achieve a steady flow of income by investing primarily in debt securities of sovereign issuers anywhere in the world.”
To achieve the investment objectives of the Fund, it is expected that the investment team will invest substantially all of its assets in debt securities of sovereign issuers anywhere in the world, while generally maintaining an investment grade portfolio. The weighted average credit quality of the securities in the Fund’s portfolio will generally be “BBB” or higher, as rated by S&P or an equivalent designated rating organization, as such term is defined in National Instrument 25-101 – Designated Rating Organizations. The Fund will not invest in securities which are rated below “BBB” by S&P.
As part of its investment strategies, the Fund’s portfolio managers would like to invest a portion of its assets in Foreign Government Securities.
Section 2.1(1) of NI 81-102 prohibits the Fund from purchasing a security of an issuer, other than a “government security” as defined in NI 81-102, if immediately after the purchase more than 10% of the net asset value of the Fund, taken at market value at the time of the purchase, would be invested in securities of the issuer.
The Foreign Government Securities are not within the meaning of “government securities” as such term is defined in NI 81-102.
In Companion Policy 81-102CP (the Companion Policy), the Canadian Securities Administrators state their views on various matters relating to NI 81-102. Subsection 3.1(4) of the Companion Policy indicates that relief from paragraph 2.04(1)(a) of National Policy 39, which was replaced by the Concentration Restriction, has been provided to mutual funds generally under the following circumstances:
a. the mutual fund has been permitted to invest up to 20% of its net assets, taken at market value at the time of purchase, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction, or the government of the United States of America and are rated “AA” by S&P, or have an equivalent rating by one or more other approved credit rating organizations; and
b. the mutual fund has been permitted to invest up to 35% of its net assets, taken at market value at the time of purchase in evidences of indebtedness of any one issuer, if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction, or the government of the United States of America and are rated “AAA” by S&P, or have an equivalent rating by one or more other approved credit rating organizations.
Any security that may be purchased under the Requested Relief will be traded on a mature and liquid market.
The simplified prospectus for the Fund will disclose the risks associated with the concentration of net assets of the Fund in securities of a limited number of issuers.
The Fund seeks the Requested Relief to enhance its ability to pursue and achieve its investment objectives.
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 Requested Relief is granted provided that:
paragraphs (a) and (b) of the Requested Relief cannot be combined for any one issuer;
any security that may be purchased under the Requested Relief is traded on a mature and liquid market;
the acquisition of the securities purchased pursuant to this Decision is consistent with the fundamental investment objectives of Fund;
the simplified prospectus of the Fund discloses the additional risks associated with the concentration of net asset value of the Fund in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the Fund has so invested and the risks, including foreign exchange risks, of investing in the country in which the issuer is located; and
the simplified prospectus of the Fund will include a summary of the nature and terms of the Requested Relied under the investment strategies section along with the conditions imposed and the type of securities covered by this Decision.
“Vera Nunes”
Vera Nunes, Manager,
Investment Funds and Structured Products Branch,
Ontario Securities Commission