January 13, 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 CAPITAL INTERNATIONAL ASSET MANAGEMENT (CANADA), INC. (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 Capital Group Monthly Income Portfolio (Canada) (the Capital Fund) from the requirements in:
(a) paragraph 2.5(2)(a) of NI 81-102, which prohibits a mutual fund, other than an alternative mutual fund, from investing in another investment fund unless either of the following applies: (i) the other investment fund is a mutual fund, other than an alternative mutual fund, that is subject to NI 81-102; (ii) the other investment fund is an alternative mutual fund or a non-redeemable investment fund that is subject to NI 81-102 and, at the time of the purchase of that security, the investment fund holds no more than 10% of its net asset value in securities of alternative mutual funds and non-redeemable investment funds; and
(b) paragraph 2.5(2)(c) of NI 81-102, which prohibits a mutual fund from investing in another investment fund unless the other investment fund is a reporting issuer in a jurisdiction,
in order to permit the Capital Fund to invest up to 10 percent of its net assets in Capital Group Global High Income Opportunities (LUX) (the Underlying Fund) (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 subsection 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 a wholly-owned subsidiary of Capital Group International, Inc. (Capital Group), a global investment management firm.
The Filer will be the investment fund manager of the Capital Fund. The Filer is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, as an adviser in the category of portfolio manager in Ontario, and as a dealer in the category of exempt market dealer in Alberta, British Columbia, Nova Scotia, Ontario and Québec.
The Filer will be the portfolio manager of the Capital Fund and Capital Research and Management Company will be appointed as the sub-advisor in respect of the Capital Fund.
The Filer is not in default of securities legislation in any of the Jurisdictions.
The Capital Fund
The Capital Fund will be an open-end mutual fund trust created under the laws of the Province of Ontario.
The Capital Fund will be subject to the provisions of NI 81-102 and will be a reporting issuer under the laws of the Jurisdictions. The securities of the Capital Fund will be qualified for distribution pursuant to a simplified prospectus, Fund Facts and annual information form that will be prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101). The Filer expects to file the preliminary simplified prospectus, Fund Facts and annual information form for the Capital Fund on or about January 31, 2020.
The investment objective of the Capital Fund is to seek to generate income, along with conservation of capital and long-term growth of capital. The investment strategies will allow investment primarily in equity and debt securities issued by companies and governments around the world, primarily through investments in underlying funds. The Filer has determined that it would be in the best interests of the Capital 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 for Collective Investment in Transferable Securities (UCITS), as amended (the EU Directives).
The Underlying Fund is a sub-fund of Capital International Fund SICAV (CIF). CIF is an open-ended investment company that qualifies as a Société d'Investissment à Capital Variable (SICAV) governed by the laws of Luxembourg. The Underlying Fund is registered as a UCITS under the EU Directives.
Capital International Management Company Sàrl (CIMC) is the manager of CIF. CIMC is a wholly-owned indirect subsidiary of Capital Group. and as of October 31, 2019, CIMC managed approximately USD 16.6 billion. As of October 31, 2019, the Underlying Fund had USD 956.8 million of assets under management.
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 Capital Fund, 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 is a conventional mutual fund and would not be considered a hedge fund. The Underlying Fund does not invest more than 10% of its net asset value in other investment funds.
The investment objective of the Underlying Fund is to seek a long-term high level of total return through investment primarily in high yield corporate bonds and emerging market government bonds that are usually listed or traded on other regulated markets and denominated in various national currencies (including emerging markets currencies) or multinational currencies. Unlisted high yield bonds may also be purchased. The Underlying Fund’s investment strategy and objective make it a suitable investment for the Capital Fund.
In order for the Capital Fund to achieve its investment objective on a diversified basis and obtain broad exposure to the sectors it proposes to invest in, including global high yield exposure, it is desirable that it be permitted to allocate up to 10% of net assets to the Underlying Fund.
Absent the Requested Relief, an investment by the Capital 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 and is not a reporting issuer in a jurisdiction.
The Filer submits that it is not desirable to invest directly in the securities in which the Underlying Fund invests, 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.
The Capital Fund will otherwise comply fully with section 2.5 of NI 81-102 in investing in the Underlying Fund and will provide all disclosure mandated for mutual funds investing in other mutual funds.
For the reasons provided above, the Filer submits that it would not be prejudicial to the public interest to grant the Requested Relief to the Capital 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 Requested Relief is granted provided that:
i. 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;
ii. the Capital Fund will otherwise comply fully 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 Capital Fund in the Underlying Fund will be disclosed in the simplified prospectus of the Capital Fund;
iii. the Capital Fund will not purchase securities of the Underlying Fund if, immediately after the purchase, more than 10 percent of its net assets, taken at market value at the time of the investment, would consist of investments in the Underlying Fund; and
iv. if the laws applicable to the Underlying Fund that are, as at 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, the Capital 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,
Investment Funds and Structured Products Branch
Ontario Securities Commission
Application #: 2019/0589
SEDAR PROJECT #: 2993179