July 27, 2018
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 INVESCO CANADA LTD. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), exempting each of the existing and future mutual funds managed by the Filer that are subject to NI 81-102 and that have investment strategies that allow or will allow exposure to securities of emerging market corporate issuers (the Top Funds, and each individually, a Top Fund) from the requirements in:
a) paragraph 2.5(2)(a) of NI 81-102, which prohibits a mutual fund from investing in another mutual fund unless the other mutual fund is subject to NI 81-102 and offers or has offered securities pursuant to a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101); and
b) paragraph 2.5(2)(c) of NI 81-102, which prohibits a mutual fund from investing in another investment fund unless both are reporting issuers in the local jurisdiction,
in order to permit each of the Top Funds to invest up to 10% of its net assets in the securities of Invesco Emerging Market Corporate Bond Fund (the Underlying Fund) (collectively, the Requested Relief).
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).
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
The Filer is a corporation amalgamated under the laws of Ontario with its head office in Toronto, Ontario.
The Filer is an indirect wholly-owned subsidiary of Invesco, Ltd., a global investment manager.
The Filer is registered as an investment fund manager, portfolio manager, mutual fund dealer, exempt market dealer and commodity trading manager in Ontario and as an investment fund manager, portfolio manager, mutual fund dealer and exempt market dealer in Quebec. The Filer is registered as portfolio manager and exempt market dealer in the rest of the Jurisdictions. Additionally, the Filer is registered as a mutual fund dealer in Alberta, British Columbia, Nova Scotia and Prince Edward Island, and as an investment fund manager in Newfoundland and Labrador.
The Filer is not in default of the securities legislation in any of the Jurisdictions.
The Top Funds
Each Top Fund is, or will be, an open-end mutual fund trust created under the laws of the Province of Ontario or an open-end mutual fund that is a class of share of a mutual fund corporation.
Each Top Fund is, or will be, subject to the provisions of NI 81-102. Each Top Fund is, or will be, a reporting issuer under the laws of the Jurisdictions. The securities of the Top Funds are, or will be, qualified for distribution pursuant to a simplified prospectus, Fund Facts and annual information form that have been, or will be, prepared and filed in accordance with NI 81-101.
The existing Top Funds are not in default of securities legislation in any of the Jurisdictions.
The investment strategies of the Top Funds allow or will allow exposure to fixed-income securities of emerging market corporate issuers. To achieve the investment objectives of the Top Funds, 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 assets in securities of the Underlying Fund.
The Underlying Fund
The Underlying Fund is distributed in certain European countries pursuant to the EU Council Directive 2009/65/EC of 13 July 2009 on the Coordination of Laws, Regulations and Administrative Provisions relating to Undertakings of Collective Investment in Transferable Securities (UCITS), as amended (the EU Directives).
The Underlying Fund is a sub-fund of Invesco Funds, SICAV (as hereinafter defined) (IFS). IFS is an open-ended investment company that qualifies as a Société d'Investissment à Capital Variable (SICAV) governed by the laws of Luxembourg. IFS is registered as a UCITS under the EU Directives.
Invesco Management S.A. (IMSA) is the manager of IFS. IMSA is a wholly-owned indirect subsidiary of Invesco Ltd. and as of May 31, 2018, IMSA managed approximately US $73.2 billion.
The Underlying Fund is subject to investment restrictions and practices under the laws of Luxembourg that are applicable to mutual funds that are sold to the general public and is a regulated investment fund authorized as a UCITS. Thus, the Underlying Fund is subject to investment restrictions and practices that are substantially similar to those applicable to the Top Funds, including NI 81-102.
The Underlying Fund has filed a prospectus with Luxembourg’s financial sector regulator, Commission de Surveillance du Secteur Financier, that contains disclosure regarding the Underlying Fund. The Underlying Fund does not typically invest more than 10% of its net asset value in other investment funds.
The investment objectives of the Underlying Fund are to achieve a high income yield and long-term capital appreciation by investing primarily in debt securities of emerging market corporate issuers. The Underlying Fund’s investment strategy and objective make it a suitable investment for the Top Funds.
The Filer would like to have the ability to invest up to 10% of the net assets of each of the Top Funds in the securities of the Underlying Fund, as it provides unique exposure to the fixed-income securities of emerging market corporate issuers.
Absent the Requested Relief, an investment by a Top Fund in the Underlying Fund would be prohibited by sections 2.5(2)(a) and 2.5(2)(c) of NI 81-102 because the Underlying Fund is not subject to NI 81-102, does not offer its securities under a simplified prospectus in accordance with NI 81-101, and is not a reporting issuer in the local jurisdiction.
While it may be possible for the Filer to invest directly in the securities in which the Underlying Fund invests, the Filer submits that it is not desirable to do so, because, given the Top Fund’s limited proposed investment in the Underlying Fund, it would be more efficient from a trading costs and liquidity perspective to invest in securities of the Underlying Fund rather than directly in the various securities in which the Underlying Fund invests.
Each Top Fund will otherwise comply with section 2.5 of NI 81-102 in its investment in the Underlying Fund and will provide all disclosure mandated for investment funds investing in other investment 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 Requested Relief is granted provided that:
a) The Underlying Fund is subject to investment restrictions and practices under the laws of Luxembourg that are applicable to mutual funds that are sold to the general public and is a regulated investment fund authorized as a UCITS;
b) Each Top Fund will otherwise comply with section 2.5 of NI 81-102 in its investment in the Underlying Fund and will provide all disclosure mandated for investment funds investing in other investment funds. Specifically, the investment by the Top Funds in the Underlying Fund will be disclosed in the simplified prospectus of the Top Funds;
c) Each Top Fund will not purchase securities of the Underlying Fund if, immediately after the purchase, more than 10% of its net assets, in aggregate, taken at market value at the time of the investment, would consist of investments in the Underlying Fund; and
d) If the laws applicable to the Underlying Fund that are, as of the date of this decision, substantially similar to Part 2 of NI 81-102 change in a manner that is materially inconsistent with Part 2 of NI 81-102, each Top Fund shall not acquire any additional securities of the Underlying Fund, and shall dispose of the securities of the Underlying Fund then held in an orderly and prudent manner.
“Neeti Varma”
Neeti Varma
Manager (Acting), Investment Funds and Structured Products Branch
Ontario Securities Commission
File No. 2018/0346
Sedar No. 2786788