CI Investments Inc. (Re), 2020 CanLII 19309

February 28, 2020

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 CI INVESTMENTS INC. (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the investment funds that are subject to National Instrument 81-102 Investment Funds (NI 81-102) for which the Filer or its affiliate acts as manager (the Existing Funds) and the investment funds that are subject to NI 81-102 for which the Filer or its affiliate will act as manager in the future (the Future Funds, and together with the Existing Funds, the Funds, and each, a Fund) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Funds from:

(a) paragraph 2.5(2)(a) of NI 81-102 to permit each Fund that is a mutual fund but not an alternative mutual fund to purchase and/or hold securities of a Dublin iShares ETF (as defined below), even though the Dublin iShares ETF is not subject to NI 81-102;

(b) paragraph 2.5(2)(a.1) of NI 81-102 to permit each Fund that is an alternative mutual fund or a non-redeemable investment fund to purchase and/or hold securities of a Dublin iShares ETF, even though the Dublin iShares ETF is not subject to NI 81-102;

(c) paragraph 2.5(2)(c) of NI 81-102 to permit each Fund to purchase and/or hold securities of a Dublin iShares ETF, even though the Dublin iShares ETF is not a reporting issuer in a Canadian Jurisdiction (as defined below) (together with paragraphs (a) and (b) above, the Two Tier Relief); and

(d) paragraph 2.5(2)(b) of NI 81-102 to permit each Fund to purchase and/or hold a security of another Fund that holds more than 10% of its net asset value (NAV) in securities of one or more Dublin iShares ETFs (a Middle Fund, and collectively, the Middle Funds) (the Three Tier Relief, and together with the Two Tier Relief, the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission (the OSC) 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 all of the provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, the Canadian Jurisdictions).

Interpretation

Terms defined in 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 and the Funds

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

2. The Filer is registered under applicable securities laws as: (a) an investment fund manager in Ontario, Québec, and Newfoundland and Labrador; (b) a portfolio manager in each of the Canadian Jurisdictions; (c) an exempt market dealer in each of the Canadian Jurisdictions; (d) a commodity trading counsel in Ontario; and (e) a commodity trading manager in Ontario.

3. The Filer or its affiliate acts, or will act, as manager of each of the Funds.

4. Each of the Funds is, or will be: (a) an investment fund; (b) structured as a trust or corporation or class thereof that is governed by the laws of the province of Ontario; (c) a reporting issuer in the Canadian Jurisdiction(s) in which its securities are distributed; and (d) governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities of any Canadian Jurisdiction.

5. The securities of each of the Funds are, or will be, qualified for distribution in some or all of the Canadian Jurisdictions under a long form prospectus prepared pursuant to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and Form 41-101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2) or a simplified prospectus prepared pursuant to National Instrument 81-101 Mutual Fund Prospectus Disclosure and Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1), as applicable.

6. Units of each Fund that is an exchange-traded mutual fund (an ETF) are, or will be, listed and traded on the Toronto Stock Exchange and may also be listed on one or more other stock exchanges.

7. Neither the Filer nor any of the existing Funds are in default of securities legislation in any of the Canadian Jurisdictions.

8. In order to achieve its investment objective, each Fund may, from time to time, wish to invest up to 100% of its NAV in:

(a) securities of one or more ETFs which are, or will be, listed and traded on the London Stock Exchange (the LSE) and managed by BlackRock Asset Management Ireland Limited (BlackRock Ireland) or another affiliate of BlackRock Ireland (each, a Dublin iShares ETF, and collectively, the Dublin iShares ETFs); and/or

(b) securities of one or more Middle Funds.

The Dublin iShares ETFs

9. Each Dublin iShares ETF is, or will be, a portfolio with segregated liability of an umbrella open-ended investment company with variable capital and incorporated with limited liability in Ireland.

10. Each Dublin iShares ETF is, or will be, authorized by the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2003, as amended (the UCITS Regulations). Each Dublin iShares ETF therefore is, or will be, a "UCITS" that must comply with all UCITS requirements.

11. The following companies are involved in the management of the Dublin iShares ETFs:

(a) BlackRock Ireland, which is regulated by the Central Bank of Ireland, is the manager, and has responsibility for the management and administration of the Dublin iShares ETFs, as well as oversight of all service providers or other delegates; and

(b) BlackRock Advisors (UK) Limited (BlackRock UK), which is regulated by the Financial Conduct Authority of the United Kingdom (the FCA), is the investment manager, and has responsibility for the investment and re-investment of the assets of the Dublin iShares ETFs.

12. The following third parties are involved in the administration of the Dublin iShares ETFs:

(a) State Street Fund Services (Ireland) Limited is the administrator;

(b) Computershare Investor Services (Ireland) Ltd. is the registrar and transfer agent; and

(c) State Street Custodial Services (Ireland) Limited is the custodian.

13. Affiliates of BlackRock UK may be retained by BlackRock UK to act as sub-advisors in respect of certain Dublin iShares ETFs. Blackrock UK's affiliates remain subject to the oversight of BlackRock UK.

14. BlackRock Ireland is subject to substantially equivalent regulatory oversight as the Filer, which is primarily regulated by the OSC.

15. Securities of each Dublin iShares ETF are, or will be, offered in their primary market in a manner similar to the Funds pursuant to a prospectus for each investment company filed with the Central Bank of Ireland.

16. In addition to being listed on the LSE, the securities of a Dublin iShares ETF may also be listed on one or more additional stock exchanges.

17. The LSE is subject to regulatory oversight by the FCA. The LSE is subject to substantially similar regulatory oversight to securities exchanges in Canada, and the requirements to be complied with by the Dublin iShares ETFs in order to be admitted to trading on the LSE are consistent with the listing requirements of the Toronto Stock Exchange.

18. The investment objective of each Dublin iShares ETF is, or will be, to provide investors with a total return, taking into account both capital and income returns, which reflects the returns of the applicable index that it seeks to track.

19. Each Dublin iShares ETF will either: (a) hold securities that are included in a specified widely-quoted market index in substantially the same proportion as those securities are reflected in that index; or (b) invest in a manner that causes the issuer to replicate the performance of that index.

20. Each index tracked by each Dublin iShares ETF is, or will be, transparent, in that the methodology for the selection and weighting of index components is, or will be, publicly available. Details of the components of each index tracked by each Dublin iShares ETF, such as issuer name, ISIN, and weighting of index components, are, or will be, publicly available and updated from time to time.

21. Each index tracked by each Dublin iShares ETF includes sufficient component securities as to be broad-based, and is distributed and referenced sufficiently so as to be broadly utilized.

22. Each Dublin iShares ETF makes, or will make, the NAV of its holdings available to the public through at least one price information system associated with the LSE. In addition, each Dublin iShares ETF makes, or will make, its NAV available to the public on the website of its manager.

23. No Dublin iShares ETF is a "synthetic ETF", meaning that no Dublin iShares ETF will principally rely on an investment strategy that makes use of swaps or other derivatives to gain an indirect financial exposure to the return of an index.

24. Each Dublin iShares ETF is, or will be, an "investment fund" and a "mutual fund" within the meaning of applicable Canadian securities legislation.

25. The Dublin iShares ETFs are, or will be, subject to the following regulatory requirements:

(a) each Dublin iShares ETF is subject to a risk management framework through prescribed rules on governance, risk, regulation of service providers and safekeeping of assets;

(b) each Dublin iShares ETF is restricted to investments permitted by the UCITS Regulations and/or authorized by the Central Bank of Ireland;

(c) each Dublin iShares ETF is subject to investment restrictions limiting its holdings of illiquid securities to no more than 10% of the Dublin iShares ETF's NAV;

(d) each Dublin iShares ETF is subject to investment restrictions limiting its holdings of other investment funds, including other collective investment undertakings, to no more than 10% of the Dublin iShares ETF's NAV;

(e) each Dublin iShares ETF is subject to restrictions concerning the use of derivatives, including the types of derivatives in which it may transact, limits on counterparty risk, and limits on increases to overall market risk resulting from the use of derivatives, which are similar to those contained in NI 81-102, and any use of derivatives is also subject to the oversight of, and requires prior approval from, the Central Bank of Ireland;

(f) each Dublin iShares ETF has procedures in place relating to the use of derivatives and risk modelling of derivative positions;

(g) each Dublin iShares ETF may enter into securities lending, repurchase and/or reverse repurchase agreements for the purposes of efficient portfolio management subject to the conditions and limits set out in the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015, as may be amended or replaced, and in accordance with the requirements of the Central Bank of Ireland;

(h) each Dublin iShares ETF is required to prepare a prospectus that discloses material facts, similar to the disclosure requirements under Form 41-101F2 and Form 81-101F1;

(i) each Dublin iShares ETF is required to prepare a key investor information document, which forms part of the prospectus, and a factsheet, which together contain disclosure that is substantially similar to the disclosure required to be included in the ETF facts document required by Form 41-101F4 Information Required in an ETF Facts Document;

(j) each Dublin iShares ETF is subject to continuous disclosure obligations which are substantially similar to the disclosure obligations under National Instrument 81-106 Investment Fund Continuous Disclosure;

(k) each Dublin iShares ETF is required to update information of material significance in the prospectus, prepare management reports and an unaudited set of financial statements at least semi-annually, and prepare management reports and an audited set of financial statements annually; and

(l) each Dublin iShares ETF has a board of directors and a manager that are subject to a governance framework that sets out the duty of care and standard of care, which require the board of directors of both the manager and the Dublin iShares ETF to act in the best interest of unitholders of the Dublin iShares ETF.

The Two Tier Relief

26. Each Fund may, from time to time, wish to invest up to 100% of its NAV in securities of one or more Dublin iShares ETFs, but will not invest more than, in the case of:

(a) a mutual fund that is not an alternative mutual fund, 10%; and

(b) an alternative mutual fund or a non-redeemable investment fund, 20%;

of its NAV in securities of a single Dublin iShares ETF.

27. The Filer considers that investments in securities of Dublin iShares ETFs provide an efficient and cost-effective way for the Funds to achieve diversification and obtain exposure to the markets and asset classes in which such Dublin iShares ETFs invest. A Fund may also wish to invest in securities of Dublin iShares ETFs in order to gain exposure to certain unique equity and fixed income strategies in global or international markets in circumstances where it would be in the best interests of the Fund to do so through investment in the securities of Dublin iShares ETFs rather than through investments in individual securities, due to costs, difficulty in replicating those strategies or lack of availability of those strategies.

28. In the absence of the Two Tier Relief, the Funds would not be permitted to purchase or hold securities of a Dublin iShares ETF:

(a) since the Dublin iShares ETF is not subject to NI 81-102 as prohibited by paragraphs 2.5(2)(a) and (a.1) of NI 81-102; and

(b) since the Dublin iShares ETF is not a reporting issuer in a Canadian Jurisdiction, as prohibited by paragraph 2.5(2)(c) of NI 81-102.

29. But for the fact that the securities of the Dublin iShares ETFs are traded on a stock exchange in the United Kingdom and not on a stock exchange in Canada or the United States, such securities would otherwise qualify as "index participation units" (IPUs) within the meaning of NI 81-102.

30. If the securities of a Dublin iShares ETF were IPUs within the meaning of NI 81-102, a Fund would be permitted to purchase and/or hold securities of one or more Dublin iShares ETFs up to 100% of its NAV, since the Funds would be able to rely on the exception to the prohibitions in paragraphs 2.5(2)(a), (a.1) and (c) of NI 81-102 for investments in IPUs.

31. The Filer wishes to be able to invest assets of the Funds in securities of Dublin iShares ETFs on the same basis as would be permitted under NI 81-102 if the securities of the Dublin iShares ETFs were traded on a stock exchange in Canada or the United States and were therefore IPUs.

32. Each Fund that is relying on the Two Tier Relief will provide the disclosure required by the securities legislation of the Canadian Jurisdictions for investment funds investing in other investment funds.

33. The prospectus of each Fund that is relying on the Two Tier Relief will, no later than the next time that the prospectus of the Fund is renewed after the date of this decision, disclose the fact that the Fund has obtained the Two Tier Relief to permit investments in one or more Dublin iShares ETFs on the terms described in this decision.

34. There will be no duplication of management fees or incentive fees for the same service as a result of an investment by a Fund in a Dublin iShares ETF.

35. The amount of loss that could result from an investment by a Fund in a Dublin iShares ETF will be limited to the amount invested by the Fund in the Dublin iShares ETF.

36. An investment by a Fund in one or more Dublin iShares ETFs will be made in accordance with the fundamental investment objectives of the Fund.

37. An investment by a Fund in a Dublin iShares ETF represents, or will represent, the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

The Three-Tier Relief

38. Each Fund may, from time to time, wish to invest up to 100% of its NAV in securities of one or more Middle Funds.

39. The Filer submits that employing a three-tier fund-of-fund structure in this way achieves efficiencies from both an investment diversification and operational perspective. Such a structure will allow a Fund to obtain exposure to one or more Dublin iShares ETFs on a cost-effective basis, including by allowing a Fund to purchase a currency-hedged Fund that employs a fund-of-fund structure.

40. In the absence of the Three Tier Relief, the Funds would not be permitted to purchase or hold a security of a Middle Fund if the Middle Fund holds more than 10% of its NAV in securities of Dublin iShares ETFs, as prohibited by paragraph 2.5(2)(b) of NI 81-102.

41. But for the fact that the securities of the Dublin iShares ETFs are traded on a stock exchange in the United Kingdom and not on a stock exchange in Canada or the United States, such securities would otherwise qualify as IPUs within the meaning of NI 81-102.

42. If the securities of a Dublin iShares ETF were IPUs within the meaning of NI 81-102, a Fund would be permitted to purchase and/or hold securities of one or more Middle Funds up to 100% of its NAV, since the Funds would be able to rely on the exception to the prohibition in subsection 2.5(2)(b) of NI 81-102 for investments in funds that hold IPUs.

43. The Filer wishes to be able to invest assets of the Funds in securities of Middle Funds on the same basis as would be permitted under NI 81-102 if the securities of the Dublin iShares ETFs were traded on a stock exchange in Canada or the United States and were therefore IPUs.

44. Each Fund that is relying on the Three Tier Relief will provide the disclosure required by the securities legislation of the Canadian Jurisdictions, if any, for investment funds investing in other investment funds that themselves invest in other investment funds.

45. The prospectus of each Fund that is relying on the Three Tier Relief will, no later than the next time that the prospectus of the Fund is renewed after the date of this decision, disclose the fact that the Fund has obtained the Three Tier Relief to permit investments in one or more Middle Funds on the terms described in this decision.

46. There will be no duplication of management fees or incentive fees for the same service as a result of an investment by a Fund in a Middle Fund.

47. The amount of loss that could result from an investment by a Fund in a Middle Fund will be limited to the amount invested by the Fund in the Middle Fund.

48. An investment by a Fund in one or more Middle Funds will be made in accordance with the fundamental investment objectives of the Fund.

49. An investment by a Fund in a Middle Fund represents, or will represent, the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Fund.

The Exemption Sought

50. The ETF market continues to develop and evolve in the United Kingdom and Europe, and new Dublin iShares ETFs continue to be launched that provide exposure to different and unique asset classes and markets. The Exemption Sought will enable the Funds to invest directly or indirectly in the expanding suite of Dublin iShares ETFs.

51. In the absence of the Exemption Sought, the Funds would not be permitted to:

(a) purchase and/or hold securities of one or more Dublin iShares ETFs; or

(b) purchase and/or hold securities of one or more Middle 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 provided that:

(a) the investment by a Fund in securities of a Dublin iShares ETF is made in accordance with the fundamental investment objectives of the Fund;

(b) securities of the Dublin iShares ETFs qualify as IPUs within the meaning of NI 81-102 but for the fact that they are traded on a stock exchange in the United Kingdom and not a stock exchange in Canada or the United States;

(c) none of the Dublin iShares ETFs are synthetic ETFs, meaning that they will not principally rely on an investment strategy that makes use of swaps or other derivatives to gain an indirect financial exposure to the return of an index;

(d) investments by a Fund, directly or indirectly, in securities of one or more Dublin iShares ETFs comply with NI 81-102 as if securities of the Dublin iShares ETFs were IPUs within the meaning of NI 81-102; and

(e) in the event that there is a significant change to the regulatory regime applicable to the Dublin iShares ETFs that results in a less restrictive regulatory regime compared to the current regime and that has a material impact on the management or operation of the Dublin iShares ETFs in which the Funds are invested, the Funds do not acquire additional securities of such Dublin iShares ETFs, and dispose of any securities of such Dublin iShares ETFs in an orderly and prudent manner.

The Exemption Sought will terminate six months after the coming into force of any amendments to NI 81-102 that restrict or regulate a Fund's ability to invest in Dublin iShares ETFs or Middle Funds.

"Darren McKall"

_____________________________

Darren McKall

Manager

Investment Funds and Structured Products Branch

Ontario Securities Commission

Application No. 2019/0625