March 21, 2016
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 CORE PLUS GLOBAL FIXED INCOME ETF (the ETF)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the ETF 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 ETF to invest up to:
(a) 20% of its 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 supranational agencies or 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 Rating Services (Canada) (S&P) or its DRO affiliate (as defined in NI 81-102), or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates; and
(b) 35% of its net asset value at the time of the transaction in evidences of indebtedness of any one issuer if those securities 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 in Canada, or the government of the United States of America and are rated “AAA” by S&P or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates.
(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 ETF.
The ETF will be an open-ended mutual fund trust established under the laws of Ontario.
The ETF may issue more than one series of units. The ETF may initially offer Series E units and Series R units.
Series E units of the ETF will be offered by a long form prospectus filed in all of the provinces and territories in Canada and, accordingly, the ETF will be a reporting issuer in each of the provinces and territories of Canada. A preliminary prospectus was filed for the Series E units of the ETF via SEDAR in all the provinces and territories on January 25, 2016 (the “Prospectus”).
Series R units of the ETF will be offered only on a private placement basis pursuant to available prospectus exemptions, including the accredited investor exemption, under securities laws.
The Filer is not in default of securities legislation in any jurisdiction of Canada.
The investment objective of the ETF is expected to be substantially as follows: “Mackenzie Core Plus Global Fixed Income ETF seeks to provide a steady flow of income with an emphasis on capital preservation by investing primarily in investment-grade fixed-income securities denominated in Canadian or foreign currencies that are issued by companies or governments.”
To achieve its investment objective, the ETF invests primarily in fixed-income securities of companies or governments of any size, anywhere in the world. The ETF may invest up to 25% of its net assets, taken at market value at the time of purchase, in fixed-income securities of issuers rated below investment grade, as long as the overall weighted average credit rating of its investments is “A-” or higher as established by Standard & Poor’s Corporation (or an equivalent rating from another designated credit rating organization).
As part of its investment strategies, the portfolio manager would like to invest a portion of the ETF’s assets in Foreign Government Securities. Depending on market conditions, the ETF’s portfolio manager seeks the discretion to gain exposure to any one issuer of Foreign Government Securities in excess of the Concentration Restrictions.
Section 2.1(1) of NI 81-102 prohibits the ETF 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 ETF would be invested in securities of the issuer.
The Foreign Government Securities do not meet the definition 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 asset value 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 its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates; and
b. the mutual fund has been permitted to invest up to 35% of its net asset value in evidences of indebtedness of any one issuer, if those securities 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 its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates.
The Prospectus for the ETF will disclose the risks associated with concentration of assets of the ETF in securities of a limited number of issuers.
The ETF seeks the Requested Relief to enhance its ability to pursue and achieve its investment objective.
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 objective of the ETF;
the Prospectus of the ETF discloses the additional risks associated with the concentration of net asset value of the ETF in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the ETF has so invested and the risks, including foreign exchange risks, of investing in the country in which the issuer is located; and
the Prospectus of the ETF will include a summary of the nature and terms of the Requested Relief under the investment strategies section along with the conditions imposed and the type of securities covered by this Decision.
“Darren McKall”
Darren McKall
Investment Funds and Structured Products Branch
Ontario Securities Commission