Fidelity Investments Canada ULC (Re), 2018 CanLII 78767

May 18, 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 FIDELITY INVESTMENTS CANADA ULC (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the existing and future mutual funds managed by the Filer that are subject to National Instrument 81-102 Investment Funds (NI 81-102) and that are not money market funds as defined by NI 81-102 (the Funds), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):

(a) revoking and replacing the 2010 Decision (as defined below);

(b) revoking and replacing the Previous Commodity ETF Relief (as defined below) granted in the 2012 Decision (as defined below); and

(c) exempting the Funds from the prohibitions contained in sections 2.3(1)(f), 2.3(1)(h), 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to permit each Fund to invest in the following:

(i) silver, Permitted Silver Certificates (as defined below) and Silver Derivatives (as defined below) (collectively, Silver); and

(ii) exchange-traded funds (ETFs) traded on a stock exchange in Canada or the United States that do not qualify as IPUs that have exposure to one or more physical commodities, including, but not limited to, gold and silver on an unlevered basis (Commodity ETFs).

(collectively, 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 Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec, Saskatchewan and Yukon (together with Ontario, the Jurisdictions).

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. The following terms shall have the following additional meanings:

“Gold Derivative” means a specified derivative the underlying interest of which is gold on an unlevered basis.

“IPU” means an “index participation unit” as defined by NI 81-102.

“Permitted Silver Certificates” means certificates that represent silver that are:

(a) available for delivery in Canada, free of charge, to or to the order of the holder of the certificate;

(b) of a minimum fineness of 999 parts per 1,000;

(c) held in Canada;

(d) in the form of either bars or wafers; and

(e) if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a province or territory of Canada.

“Silver Derivative” means a specified derivative the underlying interest of which is silver on an unlevered basis.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1. The Filer is a corporation amalgamated under the laws of the Province of Alberta, with its head office located in Toronto, Ontario.

2. The Filer is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador. The Filer is also registered as a portfolio manager and mutual fund dealer in each of the Jurisdictions and is registered under the Commodity Futures Act (Ontario) in the category of commodity trading manager.

3. The Filer acts, or will act, as manager and portfolio manager of each of the Funds.

4. The Filer is not in default of securities legislation in any of the Jurisdictions.

The Funds

5. Each Fund is, or will be, a mutual fund governed by the laws of Canada or a Jurisdiction and a reporting issuer under the laws of one or more of the Jurisdictions.

6. Securities of each Fund are, or will be, qualified for distribution in some or all of the Jurisdictions under a simplified prospectus, annual information form and fund facts prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101). Each Fund is, or will be, governed by NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

7. The existing Funds are not in default of securities legislation in any Jurisdiction.

The Previous Decisions

8. Except as described in the Previous Decisions, none of the Funds currently has relief from sections 2.3(1)(f) and 2.3(1)(h) of NI 81-102.

9. The Filer obtained a previous decision dated November 11, 2010 (the 2010 Decision) exempting all existing and future mutual funds managed by the Filer that are subject to NI 81-102 and that are not money market funds, as defined by NI 81-102, from the requirements of (then) sections 2.3(f), 2.3(h), 2.5(2)(a), 2.5(2)(b) and 2.5(2)(c) of NI 81-102 to permit the Funds to purchase and hold or enter into:

(a) securities of ETFs that seek to replicate (i) the performance of gold on an unlevered basis; or (ii) the value of a Gold Derivative (Gold ETFs);

(b) securities of ETFs that seek to replicate (i) the performance of silver on an unlevered basis; or (ii) the value of a Silver Derivative (Silver ETFs);

(c) securities of ETFs that seek to replicate (i) the performance of gold and silver on an unlevered basis; or (ii) the value of specified derivatives the underlying interests of which are gold and silver on an unlevered basis (Unlevered Gold/Silver ETFs); and

(d) Silver.

10. Since the 2010 Decision does not permit the Funds to invest in securities of Commodity ETFs that are not Gold ETFs, Silver ETFs or Unlevered Gold/Silver ETFs, the Filer is requesting that the 2010 Decision be revoked and replaced by the decision in respect of the Exemption Sought in order to permit the Funds to also invest in Commodity ETFs with exposure to physical commodities other than gold and silver.

11. The Filer obtained a previous decision dated May 11, 2012 (the 2012 Decision, together with the 2010 Decision, the Previous Decisions) exempting Fidelity Tactical Strategies Fund from the requirements of sections 2.3(1)(f), 2.3(1)(h), 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to permit that Fund to invest in:

(a) Commodity ETFs (the Previous Commodity ETF Relief);

(b) ETFs traded on a stock exchange in Canada or the United States the underlying interest of which is gold or silver based on a multiple of 200% (Leveraged Gold/Silver ETFs); and

(c) ETFs traded on a stock exchange in Canada or the United States that seek to provide daily results that replicate the daily performance of a specified widely-quoted market index by an inverse multiple of 100% or by a multiple of 200% or an inverse multiple of 200% (Inverse or Leveraged ETFs).

12. The 2012 Decision imposes a limit on the exposure of Fidelity Tactical Strategies Fund to any one commodity sector, other than gold and/or silver, of 2.5% of the Fund’s net asset value at the time of a transaction. The Filer is requesting that the portion of the 2012 Decision that permits Fidelity Tactical Strategies Fund to invest in Commodity ETFs be revoked and replaced by the decision in respect of the Exemption Sought, since this portion of the 2012 Decision is more restrictive than the relief in respect of Commodity ETFs obtained in the more recent decisions issued to other issuers, such as in the Recent Decisions (as defined below).

13. The Filer has determined that it would be in the best interests of the Funds to receive the Exemption Sought and to replace the 2010 Decision and the Previous Commodity ETF Relief granted in the 2012 Decision with the decision in respect of the Exemption Sought for the reasons further set out below.

14. As of the date of this decision, the Filer will no longer rely on the 2010 Decision and the Previous Commodity ETF Relief granted in the 2012 Decision that seeks relief to invest in Commodity ETFs.

Silver

15. In addition to having the ability to invest in gold as permitted under NI 81-102, the Filer wishes for the Funds to have the ability to invest in silver and Permitted Silver Certificates directly, and in silver and gold indirectly by investing in Silver Derivatives and Commodity ETFs.

16. NI 81-102 allows mutual funds to invest in gold, permitted gold certificates or Gold Derivatives on the basis that gold is a fairly liquid commodity.

17. The Filer believes that the markets in both gold and silver are highly liquid, and that there are no liquidity concerns with permitting a Fund to invest in silver and Permitted Silver Certificates directly, and in silver and gold indirectly by investing in Silver Derivatives, Gold Derivatives and Commodity ETFs.

18. Permitting a Fund to invest in silver and Permitted Silver Certificates directly, and in silver and gold indirectly by investing in Silver Derivatives, Gold Derivatives and Commodity ETFs, will provide the portfolio manager of a Fund with additional flexibility to increase gains for the Fund in certain market conditions, which may have otherwise caused the Fund to have significant cash positions and therefore prohibit the Fund from achieving its investment objective.

The Commodity ETFs

19. Each Commodity ETF is, or will be, a “mutual fund” as such term is defined under the Securities Act (Ontario).

20. The securities of each Commodity ETF trade, or will trade, on a stock exchange in Canada or the United States.

21. The assets of each Commodity ETF consist or will consist primarily of one or more physical commodities, or derivatives that have an underlying interest in such physical commodity or commodities. These physical commodities may include, without limitation, precious metals commodities (such as gold, silver, platinum, platinum certificates, palladium and palladium certificates), energy commodities (such as crude oil, gasoline, heating oil and natural gas), industrials and/or metals commodities (such as aluminum, copper, nickel and zinc) and agricultural commodities (such as coffee, corn, cotton, lean hogs, live cattle, soybeans, soybean oil, sugar and wheat). The objective of a Commodity ETF is to reflect the price of the applicable commodity or commodities (less such Commodity ETF’s expenses and liabilities) on an unlevered basis, or track the performance of an index which is intended to reflect the changes in the market value of the applicable physical commodity or commodities sector.

Investments in the Commodity ETFs and Silver

22. The Funds propose to have the ability to invest in the Commodity ETFs, whose securities are not IPUs.

23. Each existing Fund is, and each future Fund will be, permitted, in accordance with its investment objectives and investment strategies, to invest in Silver and in securities of Commodity ETFs.

24. Any regulatory concerns, such as undue risk, liquidity concerns or lack of transparency, in connection with investing in the Commodity ETFs are mitigated by the following facts:

(a) The Commodity ETFs trade on a Canadian or U.S. exchange and are generally relatively liquid. The Commodity ETFs will either be “registered” investment companies in the United States or reporting issuers in one or more Jurisdictions, which means that there will be clear disclosure about the Commodity ETFs readily available in the marketplace.

(b) The amount of loss that can result from an investment by a Fund in the Commodity ETFs will be limited to the amount invested by the Fund in securities of the Commodity ETF.

(c) Investments by the Funds in Commodity ETFs will be very limited. In accordance with the investment strategies of the Funds, other than Fidelity Tactical Strategies Fund, no more than 10% of the net asset value of the Fund will be invested in one or a combination of Commodity ETFs. In the case of Fidelity Tactical Strategies Fund, no more than 10% of its net asset value will be invested in Commodity ETFs, Leveraged Gold/Silver ETFs and Inverse or Leveraged ETFs taken at market value at the time of purchase.

(d) The simplified prospectus of each existing Fund discloses, or will disclose the next time it is renewed, and the simplified prospectus of each future Fund will disclose: (i) in the investment strategies section: (I) that the Fund has obtained relief to invest in Silver or in securities of Commodity ETFs; (II) an explanation of what each type of Commodity ETF is; (III) to the extent the Fund may invest in securities of a Commodity ETF, that the Fund may indirectly invest in gold and other physical commodities; and (ii) the risks associated with such investments and strategies.

25. In the absence of the Exemption Sought, the Funds would not be permitted to invest in Silver and/or Commodity ETFs because:

(a) sections 2.3(1)(f) and (h) of NI 81-102 would prohibit the Funds from investing in Silver or in securities of Commodity ETFs;

(b) section 2.5(2)(a) of NI 81-102 would prohibit the Funds from investing in securities of Commodity ETFs because the Commodity ETFs are not subject to NI 81-101 and may not be subject to NI 81-102; and

(c) section 2.5(2)(c) of NI 81-102 would prohibit the Funds from investing in securities of some Commodity ETFs because some Commodity ETFs are not qualified for distribution in the local jurisdiction.

26. An investment by a Fund in Silver or in securities of a Commodity ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

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) the investment by a Fund in Silver and in securities of a Commodity ETF is in accordance with the fundamental investment objectives of the Fund;

(b) the securities of the Commodity ETFs are traded on a stock exchange in Canada or the United States;

(c) a Fund’s market value exposure (whether direct or indirect, including through Commodity ETFs) to all physical commodities (including gold and silver) does not exceed 10% of the net asset value of the Fund, taken at market value at the time of the transaction;

(d) each Fund, other than Fidelity Tactical Strategies Fund, does not purchase securities of a Commodity ETF if, immediately after the transaction, more than 10% of the net asset value of the Fund, taken at market value at the time of the transaction, would consist of securities of Commodity ETFs;

(e) For the Fidelity Tactical Strategies Fund, the Fund does not purchase securities of a Commodity ETF, Leveraged Gold/Silver ETF or Inverse or Leveraged ETF if, immediately after the transaction, more than 10% of the net asset value of the Fund, taken at market value at the time of the transaction, would consist of securities of Commodity ETFs, Leveraged Gold/Silver ETFs and Inverse or Leveraged ETFs; and

(f) the simplified prospectus of each existing Fund discloses, or will disclose the next time it is renewed, and the simplified prospectus of each future Fund will disclose:

i. in the investment strategies section:

I. that the Fund has obtained relief to invest in Silver and in securities of Commodity ETFs;

II. an explanation of what each type of Commodity ETF is;

III. to the extent the Fund may invest in securities of a Commodity ETF, that the Fund may indirectly invest in gold and other physical commodities; and

ii. the risks associated with such investments and strategies.

"Darren McKall"

Darren McKall, Manager

Investment Funds & Structured Products Branch

Ontario Securities Commission

Application #: 2018/0069

Sedar # : 2726526