October 20, 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 FIDELITY INVESTMENTS CANADA ULC (the Filer)
AND
FIDELITY CANADIAN MONTHLY HIGH INCOME ETF, FIDELITY GLOBAL MONTHLY HIGH INCOME ETF, FIDELITY CANADIAN MONTHLY HIGH INCOME ETF FUND and FIDELITY GLOBAL MONTHLY HIGH INCOME ETF FUND (the Existing Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, which is the trustee and the investment fund manager of the Existing Funds, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption, pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), exempting each Existing Fund and all other current and future mutual funds, including exchange-traded funds, but excluding alternative mutual funds, managed by the Filer or an affiliate of the Filer (the Future Funds and, together with the Existing Funds, the Funds) from the requirement set out in paragraph 2.5(2)(b) of NI 81-102:
(i) to permit each Fund to purchase and hold directly or indirectly securities of one or more other investment funds, excluding alternative mutual funds, each of which is, or will be, subject to NI 81-102 and is, or will be, managed by the Filer or an affiliate of the Filer (each, a Reference Fund), which Reference Fund holds, or will hold, directly or indirectly more than 10% of its net asset value in securities of one or more other mutual funds, including exchange-traded funds, but excluding alternative mutual funds, each of which is, or will be, subject to NI 81-102 and is, or will be, managed by the Filer or an affiliate of the Filer (each, a Third Tier Fund) (the Three-Tier Relief); and
(ii) to permit each Fund that is a:
(a) Currency Neutral Fund (as defined below) to purchase and hold directly or indirectly securities of a Corresponding Reference Fund (as defined below), which Corresponding Reference Fund holds, or will hold directly or indirectly securities of one or more Third Tier Funds, each of which Third Tier Funds may hold, in turn, directly or indirectly more than 10% of its net asset value in securities of one or more other mutual funds, including exchange-traded funds, but excluding alternative mutual funds, each of which is, or will be, subject to NI 81-102, and is, or will be, managed by the Filer or an affiliate of the Filer (each, a Fourth Tier Fund); and
(b) Wrap Fund (as defined below) to purchase and hold directly or indirectly securities of a Corresponding Reference Fund, which Corresponding Reference Fund holds, or will hold, directly or indirectly securities of one or more Third Tier Funds, each of which Third Tier Funds may hold, in turn, directly or indirectly more than 10% of its net asset value in securities of one or more Fourth Tier Funds (collectively, the Four-Tier Relief),
(the Three-Tier Relief and the Four-Tier Relief are, 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 the 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. In addition to the defined terms used in this decision, capitalized terms used in this decision have the following meanings:
Corresponding Reference Fund means, in each Four-Tier Structure, the sole Reference Fund whose securities the Currency Neutral Fund or the Wrap Fund, as the case may be, holds or will hold;
Currency Neutral Fund means, in each Four-Tier Structure, each Fund that holds, or will hold, only currency hedging instruments and the securities of its Corresponding Reference Fund;
Four-Tier Structure refers to the structure where either a Currency Neutral Fund or a Wrap Fund purchases and holds, or will purchase and hold, securities of its Corresponding Reference Fund, which Corresponding Reference Fund holds, or will hold, more than 10% of its net asset value in securities of one or more Third Tier Funds, and one or more of such Third Tier Funds, in turn, holds, or will hold, more than 10% of its net asset value in securities of one or more Fourth Tier Funds. For greater certainty, a Corresponding Reference Fund that is part of a Four-Tier Structure will only invest directly in one or more Third Tier Funds, cash, cash equivalents and specified derivatives used to equitize cash or to hedge risks associated with the portfolio holdings of the Third Tier Funds and/or the Fourth Tier Funds, but will not hold directly any other portfolio securities;
Multi-Tier Structure refers, collectively, to the Three-Tier Structure and the Four-Tier Structure;
NI 81-106 means National Instrument 81-106 Investment Fund Continuous Disclosure;
Policy means the Filer’s retail Fund of Fund Significant Trade Policy dated as of May 18, 2018, as the same may be amended, restated or replaced from time to time;
Three-Tier Structure refers to the structure where a Fund purchases and holds, or will purchase and hold, securities of one or more Reference Funds, and one or more of such Reference Funds, in turn, holds, or will hold, more than 10% of its net asset value in securities of one or more Third Tier Funds. For greater certainty, a Fund that is part of a Three-Tier Structure will only invest directly in one or more Reference Funds, cash, cash equivalents and specified derivatives used to equitize cash or to hedge risks associated with the portfolio holdings of the Reference Funds and/or the Third Tier Funds, but will not hold directly any other portfolio securities;
Wrap Fund means, in each Four-Tier Structure, each Fund that holds, or will hold, all or substantially all of its assets in securities of its Corresponding Reference Fund.
Further, each of the terms “invests”, “holds”, “investment” and “holding” refers to any investing or investment made in, or holding of, securities either directly or indirectly through specified derivatives, as the context requires.
Representations
This decision is based on the following facts represented by the Filer:
The Filer is a corporation continued under the laws of the Province of Alberta with its head office located in Toronto, Ontario.
The Filer is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, as a portfolio manager in each of the Jurisdictions, as a commodity trading manager in Ontario and as a mutual fund dealer in each of the Jurisdictions.
The Filer is, or will be, the investment fund manager of the Funds and the Filer or an affiliate of the Filer is, or will be, the portfolio manager of the Funds.
The Filer is not in default of securities legislation in any of the Jurisdictions.
Each Fund is, or will be, an open-ended mutual fund or a class of a mutual fund corporation, including an exchange-traded fund, but excluding an alternative mutual fund, organized and governed by the laws of a Jurisdiction or the laws of Canada. Each Reference Fund, Third Tier Fund and Fourth Tier Fund is, or will be, an open-ended mutual fund or a class of a mutual fund corporation, including an exchange-traded fund, but excluding an alternative mutual fund, organized and governed by the laws of a Jurisdiction or the laws of Canada. The securities of each Reference Fund, Third Tier Fund and Fourth Tier Fund may be sold to investors other than the Funds.
Each Fund, Reference Fund, Third Tier Fund and Fourth Tier Fund is, or will be, governed by the provisions of NI 81-102, subject to any exemption therefrom that has been, or may be, granted by the securities regulatory authorities.
Each Reference Fund may invest, among other things, in one or more Third Tier Funds.
Each Third Tier Fund in the Three-Tier Structure primarily invests, or will primarily invest, directly in a portfolio of securities and/or other assets. It may also invest up to 10% of its net asset value in securities of other investment funds.
Each Third Tier Fund in the Four-Tier Structure, may invest, among other things, in one or more Fourth Tier Funds.
Each Fourth Tier Fund in the Four-Tier Structure primarily invests, or will primarily invest, directly in a portfolio of securities and/or other assets. It may also invest up to 10% of its net asset value in securities of other investment funds.
Each fund-of-fund investment in a Multi-Tier Structure is subject to the Policy, last approved by the independent review committee (IRC) of the Funds on September 22, 2020. Any changes to the Policy are subject to IRC approval. The purpose of the Policy is to seek the fair treatment for investors in all investment funds managed by the Filer that are involved in a fund of fund structure by allocating transaction costs fairly between funds. The Policy is designed to isolate the transaction costs associated with significant trades and to prevent the dilution of a fund’s assets when these material transactions occur by taking steps to ensure that the applicable fund or funds bear(s) the appropriate economic impact of such transaction costs.
To manage liquidity risk due to cross-ownership of funds within a Multi-Tier Structure, the Filer will use a combination of risk management tools to address the significant investor risk, including (i) IRC approved governance policies that have been adopted to protect all investors in the Funds, (ii) internal portfolio manager notification requirements of significant cash flows into the Funds, (iii) ongoing liquidity monitoring of each Fund’s portfolio, and (iv) real time cash projection reporting for the Funds. Each fund in a Multi-Tier structure will be managed as a stand-alone investment for purposes of the application of these risk management tools.
No existing Fund, Reference Fund, Third Tier Fund or Fourth Tier Fund is in default of securities legislation in any of the Jurisdictions.
Three-Tier Structure
A Fund that is part of a Three-Tier Structure will only invest directly in one or more Reference Funds, cash, cash equivalents and specified derivatives used to equitize cash or to hedge risks associated with the portfolio holdings of the Reference Funds and/or the Third Tier Funds, but will not hold directly any other portfolio securities.
One or more of the Reference Funds held by the Fund will invest in, among other things, the securities of one or more Third Tier Funds. In some circumstances, these investments in Third Tier Funds will exceed 10% of the Reference Fund’s net asset value.
For purposes of section 2.5 of NI 81-102, each Fund will be considered to be holding securities of each Reference Fund, whether the Fund holds the securities of each Reference Fund directly or indirectly through one or more specified derivatives. Accordingly, each Fund’s investment in one or more of the Reference Funds will result in a Three-Tier Structure. This Three-Tier Structure is contrary to the multi-layering restriction in paragraph 2.5(2)(b) of NI 81-102 and does not fit within the exceptions to paragraph 2.5(2)(b) found in subsection 2.5(4) of NI 81-102. Except for paragraph 2.5(2)(b), a Fund’s use of the Three-Tier Structure will be made in accordance with the provisions of section 2.5 of NI 81-102.
An investment by a Reference Fund in securities of its Third Tier Funds is, and will be, made in accordance with the provisions of section 2.5 of NI 81-102.
The prospectus of each Fund in a Three-Tier Structure will disclose that the Fund invests in securities of one or more Reference Funds, and that each such Reference Fund may invest more than 10% of its net asset value in the securities of Third Tier Funds.
The prospectus of each Fund in a Three-Tier Structure will also disclose that the accountability for portfolio management is (a) at the level of each Reference Fund with respect to the selection of Third Tier Funds to be purchased by that Reference Fund and with respect to the purchase and sale of any other portfolio securities or other assets held by that Reference Fund and (b) at the level of each Third Tier Fund with respect to the purchase and sale of portfolio securities and other assets held by that Third Tier Fund.
There will be no duplication of fees between each tier of the Three-Tier Structure. The prospectus of each Fund and Reference Fund will disclose that fees and expenses will not be duplicated as a result of investments in underlying funds.
Each Fund in a Three-Tier Structure will comply with the requirements under NI 81-106 relating to top 25 positions portfolio holdings disclosure in its management reports of fund performance and the requirements of Form 81-101F3 Contents of Fund Facts Document relating to top 10 position portfolio holdings disclosure in its Fund Facts as if the Fund was investing directly in the Third Tier Funds.
The investment objectives of the Reference Funds held by a Fund in a Three-Tier Structure will generally be independent of each other in order to minimize potential overlap between the securities held by the respective portfolios of the Reference Funds. To address any potential duplication of securities between Reference Funds, the Filer will, through its compliance testing, aggregate the portfolio holdings across all Reference Funds in a Three-Tier Structure for purposes of determining compliance with the concentration, control and other threshold limits under NI 81-102.
Four-Tier Structure
In the Four-Tier Structure, each Fund is, or will be, either a Currency Neutral Fund or a Wrap Fund.
Each Currency Neutral Fund is, or will be, intended to provide a currency neutral version of a Corresponding Reference Fund by attempting to hedge its currency risk. Each Currency Neutral Fund seeks, or will seek, a similar return to that of its Corresponding Reference Fund, except for the impact of different movements in currency, by investing all or substantially all of its assets in its Corresponding Reference Fund that has the same investment objective as the Currency Neutral Fund, except that the Currency Neutral Fund uses, or will use, one or more specified derivatives to hedge its currency risk.
Each Wrap Fund seeks, or will seek, a similar return to that of its Corresponding Reference Fund by investing all or substantially all of its assets in its Corresponding Reference Fund that has the same investment objective as the Wrap Fund.
Certain current mutual funds managed by the Filer have exemptive relief that permit them to invest in a Reference Fund and for that Reference Fund to invest more than 10% of its net asset value in securities of one or more Third Tier Funds. This relief, however, does not permit any of the Third Tier Funds to invest in the securities of one or more Fourth Tier Funds.
The main difference between the Four-Tier Structure and the Three-Tier Structure is that in the Four-Tier Structure either a Currency Neutral Fund or a Wrap Fund is, or will be, a top Fund that invests, or will invest, in a Three-Tier Structure where its Corresponding Reference Fund is the top Fund in that Three-Tier Structure. The Currency Neutral Fund’s or the Wrap Fund’s Corresponding Reference Fund, as the case may be, seeks, or will seek, to achieve its investment objective by investing primarily in securities and/or other assets and/or by investing in one or more Third Tier Funds. One or more of those Third Tier Funds will invest in, among other things, the securities of one or more Fourth Tier Funds. In some circumstances, these investments in Fourth Tier Funds will exceed 10% of the applicable Third Tier Fund’s net asset value.
For purposes of section 2.5 of NI 81-102, each Currency Neutral Fund and each Wrap Fund will be considered to be holding securities of its Corresponding Reference Fund, whether the Currency Neutral Fund or the Wrap Fund, as the case may be, holds the securities of its Corresponding Reference Fund directly or indirectly through one or more specified derivatives. In addition, for purposes of section 2.5 of NI 81-102, each Corresponding Reference Fund will be considered to be holding securities of its Third Tier Funds, whether the Corresponding Reference Fund holds the securities of its Third Tier Fund directly or indirectly through one or more specified derivatives. Accordingly, each Currency Neutral Fund’s or Wrap Fund’s, as the case may be, investment in its Corresponding Reference Fund will result in a Four-Tier Structure. This Four-Tier Structure is contrary to the multi-layering restriction in paragraph 2.5(2)(b) of NI 81-102 and does not fit within the exceptions to paragraph 2.5(2)(b) found in subsection 2.5(4) of NI 81-102. Except for paragraph 2.5(2)(b), a Currency Neutral Fund’s or Wrap Fund’s, as the case may be, use of the Four-Tier Structure will be made in accordance with the provisions of section 2.5 of NI 81-102.
An investment by a Corresponding Reference Fund in securities of its Third Tier Funds is, and will be, made in accordance with the provisions of section 2.5 of NI 81-102 and the Three-Tier Relief.
An investment by a Third Tier Fund in securities of its Fourth Tier Funds is, and will be, made in accordance with the provisions of section 2.5 of NI 81-102.
The prospectus of each Currency Neutral Fund or Wrap Fund, as the case may be, in a Four-Tier Structure will disclose that the Currency Neutral Fund or the Wrap Fund, as applicable, seeks to provide a return that is similar to its Corresponding Reference Fund by investing in the securities of its Corresponding Reference Fund. It will also disclose that the Corresponding Reference Fund invests more than 10% of its net asset value in securities of Third Tier Funds and that each Third Tier Fund may invest more than 10% of its net asset value in securities of Fourth Tier Funds. In accordance with the Three-Tier Relief, the prospectus of each Corresponding Reference Fund will include the disclosure set out in paragraph 18 above.
The prospectus of each Currency Neutral Fund or Wrap Fund, as the case may be, in a Four-Tier Structure will also disclose that the accountability for portfolio management is (a) at the level of the Corresponding Reference Fund with respect to the selection of Third Tier Funds to be purchased by the Corresponding Reference Fund and with respect to the purchase and sale of any other portfolio securities or other assets held by the Corresponding Reference Fund, (b) at the level of each Third Tier Fund with respect to the selection of Fourth Tier Funds to be purchased by that Third Tier Fund and with respect to the purchase and sale of any other portfolio securities or other assets held by that Third Tier Fund, and (c) at the level of each Fourth Tier Fund with respect to the purchase and sale of portfolio securities and other assets held by that Fourth Tier Fund.
There will be no duplication of management fees or administrative fees in the Three-Tier Structure or the Four-Tier Structure. The prospectus of a Fund that is part of a Three-Tier Structure or Four-Tier Structure will disclose the total annual management fees and administrative fees that will be applicable. In the case of an investment made into any Corresponding Reference Fund, Reference Fund, Third Tier Fund or Fourth Tier Fund offered by the Filer, such investment will be made either into series O units of that fund, in respect of which no management or administrative fees are charged, or, if the Corresponding Reference Fund, the Reference Fund, the Third Tier Fund or the Fourth Tier Fund is an exchange-traded fund offered by the Filer, into publicly offered units of that exchange-traded fund in respect of which no administrative fees are charged and the management fees that are charged will be waived by the Filer. In addition, where a Fund invests in another exchange-traded fund or other investment fund managed by the Filer or its affiliates, and such other fund pays a management fee to the Filer or its affiliates in respect of such investment that is higher than the management fee payable by the Fund, the Filer will adjust the management fee payable by the Fund to ensure that the total annual fees paid directly or indirectly to the Filer by the Fund does not exceed the single annual management fee to be paid by the Fund. The prospectus of each Currency Neutral Fund, Wrap Fund, Corresponding Reference Fund and Third Tier Fund will disclose that fees and expenses will not be duplicated as a result of investments in underlying funds.
Each Currency Neutral Fund and Wrap Fund in a Four-Tier Structure will comply with the requirements under NI 81-106 relating to top 25 positions portfolio holdings disclosure in its management reports of fund performance and the requirements of Form 81-101F3 Contents of Fund Facts Document relating to top 10 position portfolio holdings disclosure in its Fund Facts as if the Currency Neutral Fund or the Wrap Fund, as the case may be, was investing directly in the Fourth Tier Funds.
The investment objectives of the Third-Tier Funds held by a Fund in a Four-Tier Structure will generally be independent of each other in order to minimize potential overlap between the securities held by the respective portfolios of the Third-Tier Funds. To address any potential duplication of securities between Third-Tier Funds, the Filer will, through its compliance testing, aggregate the portfolio holdings across all Third-Tier Funds in a Four-Tier Structure for purposes of determining compliance with the concentration, control and other threshold limits under NI 81-102.
It would not be prejudicial to the public interest to grant the Requested Relief to the 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:
(i) the Filer is the investment fund manager and portfolio manager of each Reference Fund, Third Tier Fund and Fourth Tier Fund in a Multi-Tier Structure;
(ii) the investment objective of each Currency Neutral Fund or Wrap Fund in a Four-Tier Structure, as stated in its prospectus, states the name of its Corresponding Reference Fund;
(iii) the investment strategies of each:
(a) Corresponding Reference Fund in a Four-Tier Structure, as stated in its prospectus (which, in the case of an existing Corresponding Reference Fund, means the prospectus next receipted after that Corresponding Reference Fund becomes part of a Four-Tier Structure), states that the Corresponding Reference Fund will invest in one or more Third Tier Funds and that each of these Third Tier Funds may invest more than 10% of its net assets in one or more other investment funds; and
(b) Fund in a Three-Tier Structure, as stated in its prospectus (which, in the case of an existing Fund, means the prospectus next receipted after that Fund becomes part of a Three-Tier Structure), states that the Fund will invest in one or more Reference Funds and that each of these Reference Funds may invest more than 10% of its net assets in one or more other investment funds;
(iv) the proposed investment of each Fund in its Reference Fund in a Multi-Tier Structure is otherwise made in compliance with all other requirements of section 2.5 of NI 81-102, except to the extent that discretionary relief has been granted from any such requirement;
(v) there is no duplication of management fees or administrative fees between each tier of the Three-Tier Structure and Four-Tier Structure;
(vi) the Multi-Tier Structure is implemented in a manner that seeks the fair treatment for investors in all of the investment funds managed by the Filer that are involved in a Multi-Tier Structure by allocating portfolio transaction costs fairly among all of such investment funds;
(vii) the Filer maintains investor protection policies and procedures that address liquidity and redemption risk due to cross-ownership of funds within a Multi-Tier Structure, and each fund in a Multi-Tier Structure is managed as a stand-alone investment for purposes of these policies and procedures;
(viii) a Corresponding Reference Fund that is part of a Four-Tier Structure only invests directly in one or more Third Tier Funds, cash, cash equivalents and specified derivatives used to equitize cash or to hedge risks associated with the portfolio holdings of the Third Tier Funds and/or the Fourth Tier Funds, but does not hold directly any other portfolio securities;
(ix) a Fund that is part of a Three-Tier Structure only invests directly in one or more Reference Funds, cash, cash equivalents and specified derivatives used to equitize cash or to hedge risks associated with the portfolio holdings of the Reference Funds and/or Third Tier Funds, but does not hold directly any other portfolio securities;
(x) each Fund in a Three-Tier Structure complies with the requirements under NI 81-106 relating to top 25 positions portfolio holdings disclosure in its management reports of fund performance and the requirements of Form 81-101F3 Contents of Fund Facts Document relating to top 10 position portfolio holdings disclosure in its Fund Facts as if the Fund was investing directly in the Third Tier Funds;
(xi) each Currency Neutral Fund and Wrap Fund in a Four-Tier Structure complies with the requirements under NI 81-106 relating to top 25 positions portfolio holdings disclosure in its management reports of fund performance and the requirements of Form 81-101F3 Contents of Fund Facts Document relating to top 10 position portfolio holdings disclosure in its Fund Facts as if the Currency Neutral Fund or the Wrap Fund, as the case may be, was investing directly in the Fourth Tier Funds; and
(xii) each Reference Fund, Third Tier Fund and Fourth Tier Fund in a Multi-Tier Structure is not an alternative mutual fund and does not rely on any discretionary relief permitting the fund to exceed the leverage exposure otherwise permitted under NI 81-102 through the use of borrowing, short selling and specified derivatives.
“Stephen Paglia”
Stephen Paglia Manager Investment Funds and Structured Products Branch
ONTARIO SECURITIES COMMISSION
App. No. 2019/0361 SEDAR #3129534