In the Matter of Invesco Canada Ltd., 2021 CanLII 3900

January 26, 2021

(the Jurisdiction)

AND

(Invesco)

Background

The principal regulator in the Jurisdiction has received an application from Invesco, on behalf of existing and future mutual funds (the Funds) managed by Invesco or an affiliate or associate of Invesco (collectively, the Filer) for a decision (the Exemption Sought) under the securities legislation of the principal regulator (the Legislation) exempting each Fund from the following provisions of National Instrument 81-102 Investment Funds (NI 81-102) in order to permit the Funds to invest in securities of existing and future exchange-traded funds that are not index participation units and whose securities are, or will be, listed for trading on a stock exchange in the United States (the U.S. Underlying ETFs):

(a) paragraph 2.2(1)(a) (the Control Restriction) to permit each Fund to purchase securities of a U.S Underlying ETF even though, immediately after the purchase, the Fund would hold securities representing more than 10% of: (i) the votes attaching to the outstanding voting securities of the U.S. Underlying ETF, or (ii) the outstanding equity securities of the U.S. Underlying ETF (the Control Relief);

(b) paragraph 2.5(2)(a) to permit each Fund to invest in securities of a U.S. Underlying ETF even though the U.S. Underlying ETF is not subject to NI 81-102; and

(c) paragraph 2.5(2)(c) to permit each Fund to invest in securities of a U.S. Underlying ETF even though the U.S. Underlying ETF is not a reporting issuer in any province or territory of Canada (a “Jurisdiction”).

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 subsection 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 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.

Representations

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

1. Invesco:

(a) is a corporation amalgamated under the laws of Ontario;

(b) is an indirect wholly-owned subsidiary of Invesco Ltd., a global investment manager;

(c) has its head office in Toronto, Ontario;

(d) is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador; an advisor in the category of portfolio manager in all provinces of Canada; and a commodity trading manager in Ontario;

(e) or an affiliate or associate of Invesco is, or will be, the manager of the Funds; and

(f) is not in default of applicable securities legislation in any Jurisdiction.

Each Fund:

(a) is, or will be, an open-end mutual fund established under the laws of Ontario;

(b) is, or will be, governed by the applicable provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities;

(d) is, or will be, subject to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107);

(e) that is an existing Fund is not in default of applicable securities legislation in any Jurisdiction; and

(f) may, from time to time, wish to invest in U.S. Underlying ETFs in accordance with their investment objectives.

Each:

(a) U.S. Underlying Fund’s securities are not IPUs as it does not:

(i) hold the 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

(ii) invest in a manner that causes the U.S. Underlying ETF to replicate the performance of that index.

(b) U.S. Underlying ETF is, or will be, listed on a recognized exchange in the United States and the market for them is, or will be, liquid because it is, or will be, supported by designated brokers. As a result, the Filer expects a Fund to be able to dispose of such securities through market facilities in order to raise cash, including to fund the redemption requests of its securityholders.

(c) U.S. Underlying ETF will not hold more than 10% of its net asset value (NAV) in securities of another investment fund unless: (i) the U.S. Underlying ETF is a clone fund, as defined in NI 81-102, (ii) the other investment fund is a money market fund, as defined in NI 81-102, or (iii) securities of the other investment fund are IPUs;

(d) U.S. Underlying ETF may be managed by the Filer and sales fees or redemption fees may be payable by a Fund in relation to its purchase or redemption of the securities of the U.S. Underlying ETF; and

(e) U.S. Underlying ETF is, or will be, a publicly offered mutual fund subject to the United States Investment Company Act of 1940 (Investment Company Act).

No Fund will pay management or incentive fees which to a reasonable person would duplicate a fee payable by a U.S. Underlying ETF for the same service.
Absent the Exemption Sought, an investment by a Fund in a U.S. Underlying ETF would:

(a) be prohibited by paragraph 2.5(2)(a)(i) of NI 81-102 because such U.S. Underlying ETF may not be subject to NI 81-102; and

(b) be prohibited by paragraph 2.5(2)(c) of NI 81-102 because such U.S. Underlying ETF may not be a reporting issuer in any Jurisdiction;

(c) not qualify for the exception in paragraph 2.5(3)(a) of NI 81-102 because the securities of the U.S. Underlying ETF are not IPUs.

The Filer has concluded that it could not currently gain exposure to applicable asset classes, sectors and/or markets entirely through existing Canadian mutual funds or exchanged traded funds (the Canadian Funds).
The key benefits of a Fund investing in the U.S. Underlying ETFs are greater choice, improved portfolio diversification and potentially enhanced returns. For example:

(a) an investment in the U.S. Underlying ETFs will provide the Funds with access to specialized knowledge expertise and/or analytical resources of the investment adviser to the U.S. Underlying ETFs;

(b) the U.S. Underlying ETFs provide a potentially better risk profile, diversification and improved liquidity/tradability than direct holdings of asset classes to which the U.S. Underlying ETFs provide exposure; and

(c) the investment strategies of the U.S. Underlying ETFs offer significantly broader exposure to asset classes, sectors and markets than those available in the existing Canadian exchange-traded fund market.

The Filer submits that having the option to allocate a limited portion of each Fund's assets to U.S. Underlying ETFs will increase diversification opportunities and may improve a Fund's overall risk/reward profile.
An investment in a U.S. Underlying ETF by a Fund is an efficient and cost effective alternative to obtaining exposure to securities held by the U.S. Underlying ETF rather than purchasing those securities directly in the Fund.
An investment in a U.S. Underlying ETF by a Fund should pose limited investment risk to the Fund because each U.S. Underlying ETF will be subject to the Investment Company Act, subject to any exemption therefrom that may in the future be granted by the applicable securities regulatory authority.
Due to the potential size disparity between the Funds and the U.S. Underlying ETFs, particularly when U.S. Underlying ETFs are initially launched, it is possible that a relatively small investment, on a percentage of NAV basis, by a relatively larger Fund in securities of a U.S. Underlying ETF could result in such Fund holding securities representing more than 10% of: (i) the votes attaching to the outstanding voting securities of the Underlying ETF, or (ii) the outstanding equity securities of that Underlying ETF, contrary to the Control Restriction.
Absent the Control Relief, an investment by a Fund in securities of a U.S. Underlying ETF will not qualify for the exemption set out in paragraph 2.2(1.1)(b) of NI 81-102 in respect of the Control Restriction because securities of the U.S. Underlying ETFs are not IPUs.

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 U.S. Underlying ETF is in accordance with the investment objectives of the Fund;

(b) a Fund does not purchase securities of a U.S. Underlying ETF if, immediately after the purchase, more than 10% of the NAV of the Fund in aggregate, taken at market value at the time of the purchase, would consist of securities of U.S. Underlying ETFs;

(d) securities of each U.S. Underlying ETF are listed on a recognized exchange in the United States;

(e) each U.S. Underlying ETF is, immediately before the purchase by a Fund of securities of that U.S. Underlying ETF, an investment company subject to the Investment Company Act in good standing with the United States Securities and Exchange Commission; and

(f) the prospectus of each Fund discloses, or will disclose in the next renewal of its prospectus following the date of this decision, in the investment strategy section, the fact that the Fund has obtained the Exemption Sought to permit investments in U.S. Underlying ETFs on the terms described in this decision.

“Darren McKall”

Darren McKall

Manager, Investment Funds & Structured Products Branch

Ontario Securities Commission

Application #2020/0611

Sedar Project No. 3146903