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 SUN LIFE GLOBAL INVESTMENTS (CANADA) INC. (the Filer)
November 7, 2016
DECISION
BACKGROUND
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Top Funds (as defined below) for an exemption under the securities legislation of the jurisdiction of the principal regulator (the “Legislation”) from paragraphs 2.5(2)(a) and (c) of National Instrument 81-102 Investment Funds (“NI 81-102”) to permit the Top Funds to purchase and hold a security of another investment fund that is not a mutual fund subject to NI 81-102 and whose securities are not or have not been offered under a simplified prospectus in accordance with National Instrument 81-101 Mutual Funds Prospectus Disclosure (“NI 81-101”) (each a “Closed-End Fund” and collectively, the “Closed-Ends Funds”) and to permit the Top Funds to purchase and hold a security of another investment fund that is not a reporting issuer in the local jurisdiction (each a “Foreign Closed-End Fund” and collectively, the “Foreign Closed-End Funds” and together with the Closed-End Funds, the “Underlying Closed-End Funds”) (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 the applications; 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”).
INTERPRETATION
Terms defined in NI 81-102, National Instrument 14-101 Definitions, MI 11-102 and the Securities Act (Ontario) have the same meaning if used in this decision, unless otherwise defined. Capitalized terms used in this decision have the following meanings:
Existing Top Funds means the existing mutual funds managed by the Filer as set out in Exhibit A that are subject to NI 81-102.
Future Top Funds means the mutual funds that are managed by the Filer in the future and that are or will be subject to NI 81-102.
Investment Company Act means the Investment Company Act of 1940 and the rules and regulations thereunder, as the same may be amended from time to time.
Top Funds means the Existing Top Funds and the Future Top Funds, collectively.
REPRESENTATIONS
This decision is based on the following facts represented by the Filer:
The Filer
1The Filer is a corporation incorporated under the laws of Canada with its head office in Toronto, Ontario.
2The Filer is registered as: (i) an investment fund manager in Ontario, Quebec and Newfoundland and Labrador; (ii) a mutual fund dealer in each of the Jurisdictions; and (iii) a commodity trading manager and portfolio manager in Ontario.
3The Filer acts or will act as the manager and portfolio manager of the Top Funds.
4The Filer does not act and does not intend to act as the manager or portfolio manager of any Underlying Closed-End Fund purchased or held by a Top Fund.
5Neither the Filer nor the Existing Top Funds are in default of securities legislation in any of the Jurisdictions.
The Top Funds
6Each of the Top Funds is or will be an open-ended mutual fund trust established under the laws of Ontario or a province or territory of Canada or a class of a corporation established under the laws of Canada or a province or territory of Canada.
7Each of the Top Funds is or will be a reporting issuer in one or more of the Jurisdictions and subject to NI 81-102, subject to any relief therefrom granted by applicable securities regulatory authorities.
8The securities of the existing Top Funds are qualified for distribution pursuant to a simplified prospectus, annual information form and Fund Facts that were prepared and filed in accordance with NI 81-101.
9The investment objectives of the Top Funds generally permit, or will permit, the Top Funds to invest in Underlying Closed-End Funds.
10The investment strategies of each Top Fund expressly states, or will state, that the Top Fund may invest in Underlying Closed-End Funds.
11Each of the Existing Top Funds that previously invested in Underlying Closed-End Funds filed a prospectus on or before September 22, 2014, permitting them to invest in Underlying Closed-End Funds until March 21, 2016.
12To achieve the Top Funds’ investment objectives, the Filer has determined that it would be in the best interests of each Top Fund to have the ability to invest up to 10% of its net asset value in securities of one or more Underlying Closed-End Funds in order to obtain diversification and exposure from time to time to the assets and sectors represented by the portfolios of such Underlying Closed-End Funds, which are not always readily available through equity investments.
13Investments by a Top Fund in an Underlying Closed-End Fund are limited by the requirements of NI 81-102. The Filer proposes that no more than 10% of the net asset value of a Top Fund be invested in a particular Underlying Closed-End Fund taken at market value at the time of purchase.
14The securities of the Underlying Closed-End Funds will not be “index participation units” within the meaning of NI 81-102 (“IPUs”).
15Each Closed-End Fund is or will be a non-redeemable investment fund that is subject to NI 81-102, that is not managed and/or advised by the Manager or an affiliate or associate of the Manager and whose securities are listed on a stock exchange in Canada.
16Each Foreign Closed-End Fund is or will be a non-redeemable investment fund that is subject to the Investment Company Act, that is not managed and/or advised by the Manager or an affiliate or associate of the Manager and whose securities are listed on a stock exchange in the United States.
17A Top Fund does not, and will not, pay management fees or incentive fees that, to a reasonable person, would duplicate a fee payable by an Underlying Closed-End Fund for the same service.
Change in Fund of Fund Rules under NI 81-102
18Prior to recent amendments to NI 81-102, the fund of fund rules in section 2.5 Investments in Other Mutual Funds, as it was then called, did not prohibit mutual funds from investing in closed-end funds that were not mutual funds.
19The recent amendments to NI 81-102 have broadened the fund of fund rules in section 2.5 Investment in Other Investment Funds to include other types of investment funds, such as closed-end funds.
Investment by the Top Funds in Underlying Closed-End Funds
20Recent amendments to NI 81-102 prohibit a mutual fund from being able to purchase or hold a security of an underlying investment fund, including a non-redeemable investment fund that is not an IPU, unless, among other things:
(a) under paragraph 2.5(2)(a) of NI 81-102, the underlying investment fund is a mutual fund that is subject to NI 81-102 and offers or has offered securities under a simplified prospectus in accordance with NI 81-101 (the “s.2.5(2)(a) Investment Restriction”); and
(b) under paragraph 2.5(2)(c) of NI 81-102, the mutual fund and the underlying investment fund are reporting issuers in the applicable local jurisdiction (the “s.2.5(2)(c) Investment Restriction” and, together with the s.2.5(2)(a) Investment Restriction the “Investment Restrictions”).
21Without the Exemption Sought, the s. 2.5(2)(a) Investment Restriction prohibits a Top Fund from purchasing or holding securities in one or more Underlying Closed-End Funds because such Underlying Closed-End Funds are not mutual funds subject to NI 81-102 and do not offer, or have not offered, securities under a simplified prospectus in accordance with NI 81-101.
22Without the Exemption Sought, the s. 2.5(2)(c) Investment Restriction prohibits a Top Fund from purchasing or holding securities in one or more Foreign Closed-End Funds because such Foreign Closed-End Funds will not be reporting issuers in the local jurisdiction.
23An investment by a Top Fund in securities of an Underlying Closed-End Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund and will be made in accordance with the investment objective of Top Fund.
24Granting the Exemption Sought is in the best interests of the Top Funds and is not prejudicial to the public interest or to securityholders of the Top Funds.
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 on the following conditions:
(a) the securities of each Underlying Closed-End Fund trade on a stock exchange in Canada or the United States;
(b) a Top Fund does not purchase securities of an Underlying Closed-End Fund if, immediately after the purchase, more than 10% of the Top Fund’s net asset value would consist of securities of Underlying Closed-End Funds;
(c) subject to (d) below, other than any exemptive relief granted to an Underlying Closed-End Fund and other than with respect to paragraphs 2.12(1)10, 2.13(1)9 and 2.14(1)8 of NI 81-102, each Underlying Closed-End Fund complies with the investment restrictions of NI 81-102 applicable to mutual funds;
(d) the weighted average leverage exposure of each Top Fund does not exceed 10% of the net asset value of the Top Fund. Each Top Fund’s weighted average leverage exposure is determined by multiplying (i) the leverage employed by each Underlying Closed-End Fund, by (ii) the percentage of the Top Fund’s net asset value to be invested in such Underlying Closed-End Fund; and
(e) the Filer uses pre-trade compliance controls to monitor the restrictions in paragraph (c) and (d) above.
“Darren McKall”
Darren McKall Manager, Investment Funds and Structured Products Branch Ontario Securities Commission
EXHIBIT A
LIST OF EXISTING TOP FUNDS
Sun Life Granite Balanced Growth Portfolio Sun Life Granite Balanced Growth Class Sun Life Granite Balanced Portfolio Sun Life Granite Balanced Class Sun Life Granite Conservative Portfolio Sun Life Granite Conservative Class Sun Life Granite Enhanced Income Portfolio Sun Life Granite Growth Portfolio Sun Life Granite Growth Class Sun Life Granite Income Portfolio Sun Life Granite Moderate Portfolio Sun Life Granite Moderate Class Sun Life Milestone 2020 Fund Sun Life Milestone 2025 Fund Sun Life Milestone 2030 Fund Sun Life Milestone 2035 Fund Sun Life BlackRock Canadian Composite Equity Class Sun Life BlackRock Canadian Equity Fund Sun Life BlackRock Canadian Equity Class Sun Life Franklin Bissett Canadian Equity Class Sun Life MFS Canadian Equity Fund Sun Life MFS Canadian Equity Class Sun Life MFS Canadian Equity Growth Fund Sun Life MFS Canadian Equity Value Fund Sun Life Sentry Value Fund Sun Life Sentry Value Class Sun Life Sionna Canadian Small Cap Equity Class Sun Life Trimark Canadian Class Sun Life Dynamic American Value Fund Sun Life MFS U.S. Equity Fund Sun Life MFS U.S. Growth Fund Sun Life MFS U.S. Growth Class Sun Life MFS U.S. Value Fund Sun Life MFS Global Growth Fund Sun Life MFS Global Growth Class Sun Life MFS Global Value Fund Sun Life MFS Low Volatility Global Equity Fund Sun Life Sentry Global Mid Cap Fund Sun Life Sentry Infrastructure Fund Sun Life MFS International Growth Fund Sun Life MFS International Growth Class Sun Life MFS International Value Fund Sun Life MFS Low Volatility International Equity Fund Sun Life Schroder Emerging Markets Fund Sun Life Dynamic Energy Fund Sun Life BlackRock Canadian Balanced Fund Sun Life BlackRock Canadian Balanced Class Sun Life MFS Balanced Growth Fund Sun Life MFS Balanced Value Fund Sun Life Sentry Conservative Balanced Fund Sun Life MFS Global Total Return Fund Sun Life Multi-Strategy Bond Fund Sun Life MFS Canadian Bond Fund Sun Life Templeton Global Bond Fund Sun Life Dynamic Equity Income Fund Sun Life Dynamic Equity Income Class Sun Life Dynamic Strategic Yield Fund Sun Life Dynamic Strategic Yield Class Sun Life MFS Dividend Income Fund Sun Life MFS Dividend Income Class Sun Life MFS Monthly Income Fund Sun Life NWQ Flexible Income Fund Sun Life Money Market Fund Sun Life Money Market Class