April 18, 2022
IN THE MATTER OF
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
FRANKLIN TEMPLETON INVESTMENTS CORP.
(the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of pooled funds not subject to the provisions of National Instrument 81-102 Investment Funds (NI 81-102) other than section 2.5.1 of NI 81-102 of which the Filer is, or in the future will be, the manager (collectively, the Pooled Funds), for a decision under the securities legislation of the jurisdiction of the principal regulator (the Legislation) providing an exemption from sections 2.5.1(2)(c), (e), and (i) of NI 81-102 to permit each Pooled Fund to invest in securities of investment funds formed under either Legg Mason Global Funds Plc or Legg Mason Global Solutions Plc, each an Irish collective asset-management vehicle constituted as an umbrella fund with segregated liability between sub-funds and authorized by the Central Bank of Ireland pursuant to the UCITS Regulations (as defined below), (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 the application; and
(b) The Filer has provided notice that Sub-section 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 National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this Application, unless otherwise defined.
Companies Act means the Companies Act 2014 (Ireland) as amended, all enactments which are to be read as one with, or construed or read together with, or as one with, the Companies Act 2014 (Ireland) and every statutory modification and re-enactment thereof for the time being in force.
CSSF means Commission de Surveillance du Secteur Financier of Luxembourg.
EU Directives means EU Council Directive 2009/65/EC of 13 July 2009 on the Coordination of Laws, Regulations and Administrative Provisions relating to UCITS, as amended, including but not limited to, Commission Directive 2010/43/EC, Commission Directive 2010/44/EC, and Commission Directive 2014/91/EC.
KIID means a Key Investor Information Document prepared by the UCITS Corporations for each of the Underlying Funds which contains disclosure similar to that required to be included in a fund facts document prepared under National Instrument 81-101 - Mutual Fund Prospectus Disclosure.
LM Funds means Legg Mason Global Funds Plc, an investment company with variable capital, incorporated in Ireland pursuant to the Companies Act and the UCITS Regulation.
LM Solutions means Legg Mason Global Solutions Plc, an investment company with variable capital, incorporated in Ireland pursuant to the Companies Act and the UCITS Regulation.
UCITS means Undertaking for Collective Investments in Transferable Securities and refers to the investment funds authorized by the European Union as investment funds suitable to be distributed in more than one country in Europe.
UCITS Corporations means LM Funds and LM Solutions.
UCITS Funds means each of the existing sub-funds of the UCITS Corporations and other sub-funds of the UCITS Corporations established in the future under one of the UCITS Corporations.
UCITS Notices means the series of UCITS notices, memorandums, guidelines and letters issued by the Central Bank of Ireland.
UCITS Regulations means the regulations issued by European Union member states that implement the EU Directives.
Underlying Fund means a UCITS Fund.
Underlying Fund Manager means Franklin Templeton International Services S.à.r.l, or any successor affiliate, which serves as the promoter, investment manager and distributor to each sub-fund of the UCITS Corporations. The Underlying Fund Manager is an affiliate of the Filer.
Representations
The Filer and the Pooled Funds
The Filer is a corporation amalgamated under the laws of Ontario, having its head office in Toronto, Ontario.
The Filer is a wholly-owned subsidiary of Templeton International, Inc., a Delaware corporation, which is an indirect wholly-owned subsidiary of Franklin Resources, Inc. (FRI). FRI is a global investment management organization operating as Franklin Templeton. In addition to Canada, FRI and its subsidiaries maintain offices in more than 30 countries.
The Filer is registered as an investment fund manager in each of British Columbia, Alberta, Manitoba, Ontario, Québec, Nova Scotia and Newfoundland & Labrador. The Filer is registered as a portfolio manager, mutual fund dealer and exempt market dealer in each of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland & Labrador and Yukon. The Filer is also registered as a Commodity Trading Manager in Ontario.
The Filer is, or will be, the manager of each of the Pooled Funds.
Each Pooled Fund is, or will be, an investment fund established under the laws of a Jurisdiction of Canada. None of the Pooled Funds are, or will be, a reporting issuer in any Jurisdiction.
None of the Pooled Funds are, or will be, subject to NI 81-102 except for section 2.5.1 of NI 81-102.
Some of the Pooled Funds prepare an offering memorandum with disclosure about the Pooled Funds for investors, which contains or will contain the disclosures required by section 2.5.1(2)(j) of NI 81-102. For Pooled Funds that do not prepare an offering memorandum, the disclosures required by section 2.5.1(j) will be included in a separate disclosure document or in the subscription or investment management agreement entered into by the client with the Filer in respect of the relevant Pooled Fund (each, a Client Agreement).
Neither the Filer nor any of the Pooled Funds are, or will be, in default of securities legislation in any of the Jurisdictions.
The Underlying Funds
The Underlying Funds are sub-funds of a UCITS Corporation and are subject to the UCITS Regulations. LM Solutions was incorporated on January 29, 2014 under registration number 538674. LM Funds was incorporated on January 13, 1998 under registration number 278601. The objective of each UCITS Corporation is the collective investment in transferable securities and other liquid financial assets of capital raised from the public and which operates on the basis of risk spreading.
The Underlying Funds are conventional mutual funds subject to investment restrictions and practices that are substantially similar to those applicable to mutual funds in Canada that are reporting issuers and subject to NI 81-102 in its entirety (NI 81-102 Funds). The Underlying Funds are available for purchase by the public in Europe and are generally not considered hedge funds. Each of the Underlying Funds is considered to be an "investment fund" and a "mutual fund" within the meaning of applicable Canadian securities legislation.
The Underlying Funds qualify as UCITS and the securities of the Underlying Funds are distributed in accordance with the UCITS Regulations. Each of the Underlying Funds is regulated by the Central Bank of Ireland.
The Underlying Funds are qualified for purchase by way of a prospectus, relating to the UCITS Corporations, and an individual prospectus supplement pertaining to each sub-fund of the UCITS Corporations, including each of the Underlying Funds. In addition to the prospectus and prospectus supplement, the UCITS Corporations prepare a KIID for each of the Underlying Funds.
The Underlying Fund Manager serves as the promoter, investment manager and distributor to each Underlying Fund. The Underlying Fund Manager, subject to the supervision of the directors of the UCITS Corporations is responsible for the investment management, distribution and marketing of the Underlying Funds. The Underlying Fund Manager provides an investment program for the Underlying Funds and manages the investment of the Underlying Funds' assets.
The Underlying Fund Manager, being subject to regulatory oversight by the CSSF, is subject to substantially equivalent regulatory oversight as the Filer, which is principally regulated by the OSC. In discharging its duties, the Underlying Fund Manager must conduct its business with due skill, care and diligence.
The Filer, the Underlying Fund Manager, and other affiliates of the Filer, make up the asset management business of Franklin Templeton. The Underlying Fund Manager is an indirect wholly-owned subsidiary of FRI. The Underlying Fund Manager is authorized by the CSSF and its investment management business includes management of other Irish and Luxembourg authorized collective investment schemes, as well as collective investment schemes in the United Kingdom, Delaware (U.S.), Cayman Islands and Romania.
The following third parties are involved in providing services in respect of the UCITS Corporations:
(a) BNY Mellon Fund Services (Ireland) Designated Activity Company (the Administrator) acts as its administrator, registrar and transfer agent, pursuant to an administration agreement. The Administrator is a designated activity company limited by shares incorporated in Ireland. The Administrator's main business activity is the provision of administrative services to collective investment schemes and other portfolios. The Administrator is a wholly-owned indirect subsidiary of The Bank of New York Mellon Corporation (BNY Mellon).
(b) The Bank of New York Mellon SA/NV, Dublin Branch acts as depositary of the UCITS Corporations. The Bank of New York Mellon SA/NV is a limited liability company established in Belgium. The principal activity of The Bank of New York Mellon SA/NV is asset servicing, which is provided to both third-party and internal clients within The Bank of New York Mellon group. The Bank of New York Mellon SA/NV is regulated and supervised as a significant credit institution by the European Central Bank and the National Bank of Belgium for prudential matters and under the supervision of the Belgian Financial Services and Markets Authority for conduct of business rules. The depositary is also regulated by certain Irish regulators including the Central Bank for conduct of business rules as well as the Belgian supervision discussed above. The Bank of New York Mellon SA/NV is a wholly-owned subsidiary of BNY Mellon.
(c) PricewaterhouseCoopers LLP (PwC) serves as auditor.
- The Underlying Funds are subject to the following regulatory requirements and restrictions pursuant to, and among others, the EU Directives, which are substantially similar to the requirements and restrictions set forth in NI 81-102:
(a) Each Underlying Fund is subject to a robust risk management framework through prescribed rules on governance, risk, regulation of service providers and safekeeping of assets.
(b) Each Underlying Fund is restricted to investing a maximum of 10% of its net assets in a single issuer.
(c) Each Underlying Fund is subject to investment restrictions designed to limit its holdings of illiquid securities to 10% or less of its net asset value (NAV).
(d) Each Underlying Fund holds no more than 10% of its NAV in securities of other investment funds, including other collective investment undertakings.
(e) Each Underlying Fund is subject to investment restrictions designed to limit holdings of transferrable securities which are not listed on a stock exchange or regulated market to 10% or less of the Underlying Fund's NAV.
(f) The rules governing the use of derivatives by the Underlying Funds are comparable to the rules regarding the use of derivatives under NI 81-102 with respect to the types of derivatives allowed to be used, issuer concentration, risk exposure in connection with mark to market value, the disclosure required in offering documents and the monitoring requirements, and with only a slight difference between the two regimes in connection with counterparty credit ratings (A-1 under NI 81-102 versus an effective rating requirement of A-2 for counterparties which are not regulated as credit institutions under the UCITS Regulations).
(g) The rules governing securities lending by the Underlying Funds are comparable to the rules regarding securities lending under NI 81-102 including an overall securities lending limit of 50% of the net assets of the Underlying Fund, the requirement to receive collateral of at least 102%, the inability to sell, reinvest or pledge non-cash collateral, and the right to immediately recall the securities loaned. While collateral received by the Underlying Funds is limited to cash or sovereign debt, the minimum credit rating of the latter is AA-, which is slightly slower than the designated rating under NI 81-102. Furthermore, the borrower under a securities lending transaction involving the Underlying Funds must be subject to prudential supervision rules equivalent to those prescribed under EU law.
(h) Each Underlying Fund makes its NAV available to the public at the close of business each day.
(i) Each Underlying Fund is required to prepare a prospectus and prospectus supplement that discloses material facts pertaining to each Underlying Fund. The prospectus, together with the corresponding prospectus supplement, provide disclosure that is similar to the disclosure required to be included in a simplified prospectus under NI 81-101 or in a prospectus under National Instrument 41-101 – General Prospectus Requirements (NI 41-101).
(j) Each Underlying Fund publishes a KIID which contains disclosure similar to that required to be included in a fund facts document prepared under NI 81-101 or an ETF facts document under NI 41-101.
(k) Each Underlying Fund is subject to continuous disclosure obligations which are similar to the disclosure obligations of NI 81-102 Funds under NI 81-106.
(l) Any change in the investment objective or material change to the investment policy of an Underlying Fund will only be effected following the written approval of all shareholders of the Underlying Fund or a resolution of a majority of the voting shareholders of that Underlying Fund at a general meeting.
(m) The Underlying Fund Manager is subject to approval by the CSSF to permit it to manage and provide portfolio management advice to each Underlying Fund and is subject to an investment management agreement which sets out a duty of care and a standard of care requiring the Underlying Fund Manager to act in the best interest of each Underlying Fund and the shareholders of each Underlying Fund.
(n) All activities of the Underlying Fund Manager must be conducted at all times in accordance with the UCITS Regulations, the UCITS Notices and the investment policy of each Underlying Fund and are at all times subject to the supervision of the board of directors of the UCITS Corporations and FTIF.
(o) PwC, as auditor of each Underlying Fund is required to prepare an audited set of accounts for each Underlying Fund at least annually.
Investment by Pooled Funds in the Underlying Funds
The investment objective and strategies of each Pooled Fund are, or will be, disclosed in each Pooled Fund's offering memorandum or Client Agreement and any Pooled Fund that invests in an Underlying Fund will be permitted to do so in accordance with its investment objective and strategies.
In particular, the investment strategies of each Pooled Fund stipulate, or will stipulate, that the Pooled Fund may invest a portion of its assets in other investment funds, domestic and foreign, which will permit each Pooled Fund to invest in an Underlying Fund.
The offering memorandum, separate disclosure document or Client Agreement of each Pooled Fund provides, or will provide, all disclosure mandated for investment funds investing in other investment funds.
There will be no duplication of management fees or incentive fees as a result of an investment by a Pooled Fund in an Underlying Fund.
The amount of loss that could result from an investment by a Pooled Fund in an Underlying Fund will be limited to the amount invested by the Pooled Fund in such Underlying Fund.
No sales charges or redemption fees will be paid by a Pooled Fund relating to a subscription for, or redemption of, securities of an Underlying Fund.
Rationale for Investment in the Underlying Funds
The Filer believes that it is in the best interests of the Pooled Funds that they be permitted to invest in the Underlying Funds, because such investment would provide an efficient and cost-effective way for the Pooled Funds to achieve diversification and obtain unique exposures to the markets in which the Underlying Funds invest.
The investment objectives and/or strategies of the Pooled Funds, which contemplate or will contemplate investment in global or international securities, permit or will permit the allocation of assets to global or international securities. As economic conditions change, the Pooled Funds may reallocate assets, including on the basis of asset class or geographic region. A Pooled Fund will invest in an Underlying Fund to gain exposure to certain unique strategies in global or international markets in circumstances where it would be in the best interests of the Pooled Fund to do so through an investment in an investment fund offered elsewhere rather than through investments in individual securities. For example, a Pooled Fund will invest in the Underlying Funds in circumstances where certain investment strategies preferred by the Pooled Funds are either not available or not cost effective to be implemented through investments in individual securities.
By investing in the Underlying Funds, the Pooled Funds will obtain the benefits of diversification, which would be more expensive and difficult to replicate using individual securities. This will reduce single issuer risk.
Investment by a Pooled Fund in an Underlying Fund meets, or will meet, the investment objective of such Pooled Fund.
An investment by a Pooled Fund in securities of each Underlying Fund will represent the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Pooled Fund.
Absent the Requested Relief, the condition in paragraph 2.5.1(2)(c) of NI 81-102 would prohibit a Pooled Fund that is an investment fund from purchasing or holding securities of an Underlying Fund because the Underlying Fund is not required by the UCITS Regulations to file annual financial statements within 90 days of the end of the financial year but rather within 4 months (approximately 120 days) of the end of the financial year.
Absent the Requested Relief, the condition in paragraph 2.5.1(2)(e) of NI 81-102 would prohibit a Pooled Fund that is an investment fund from purchasing or holding securities of an Underlying Fund because the Underlying Fund prepares its financial statements in accordance with U.K. GAAP, which is not one of the enumerated standards in that condition. U.K. GAAP is based on IFRS for small and medium enterprises, which is a simplified IFRS standard developed by the IASB.
Absent the Requested Relief, the condition in paragraph 2.5.1(2)(i) of NI 81-102 would prohibit a Pooled Fund that is an investment fund from purchasing or holding securities of an Underlying Fund because the Underlying Fund values holdings in other collective investment schemes based on the last published price for the collective investment scheme which, considering the time lags between Europe and Canada, will typically be the prior day's NAV of the collective investment scheme.
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 Underlying Funds qualify as UCITS and are distributed in accordance with the UCITS Regulations, which subject the Underlying Funds to investment restrictions and practices that are substantially similar to those that govern the NI 81-102 Funds;
b. the investment of the Pooled Funds in the Underlying Funds otherwise complies with section 2.5.1 of NI 81-102 when investing in the Underlying Funds, and the Pooled Funds' offering memorandum or Client Agreement will provide all applicable disclosure mandated for pooled funds investing in other investment funds that are not reporting issuers;
c. the Underlying Funds prepare annual financial statements for its most recently completed financial year, and obtain an auditor's report with respect to those statements, within 120 days after the end of that financial year;
d. An investment in an Underlying Fund by a Pooled Fund will be effected at the net asset value per security of the applicable class or series of the applicable Underlying Fund; and
e. a Pooled Fund shall not acquire any additional securities of an Underlying Fund and shall dispose of any securities of an Underlying Fund then held in the event the regulatory regime applicable to the Underlying Funds is changed in any material way.
"Darren McKall"
Darren McKall, Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission
Application No. 2022/0048