March 6, 2023
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. (CI) AND ITS AFFILIATES (collectively, the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from CI, on behalf of existing and future investment funds that are or will be managed by the Filer (the Funds), for a decision under the securities legislation of the principal regulator (the Legislation):
(a) revoking and replacing the Previous Decision (as defined below); and
(b) 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 (ETFs) that are not index participation units (IPUs) and whose securities are, or will be, listed for trading on a stock exchange in the United States (the Underlying ETFs):
(i) paragraph 2.2(1)(a) (the Control Restriction) to permit each Fund to purchase securities of an 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 Underlying ETF, or (ii) the outstanding equity securities of the Underlying ETF (the Control Relief);
(ii) paragraphs 2.5(2)(a) and (a.1) to permit each Fund to purchase and/or hold securities of an Underlying ETF even though the Underlying ETF is not subject to NI 81-102; and
(iii) paragraph 2.5(2)(c) to permit each Fund to purchase and/or hold securities of an Underlying ETF even though the Underlying ETF is not a reporting issuer in any province or territory of Canada.
(collectively, 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 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 each of the other provinces and territories of Canada (together with Ontario, the Canadian Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 have the same meanings if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
CI
CI is a corporation amalgamated under the laws of the Province of Ontario with its head office and registered office located in Toronto, Ontario.
CI is registered as follows:
(a) as an investment fund manager under the securities legislation in Ontario, Québec and Newfoundland and Labrador;
(b) as a portfolio manager and exempt market dealer under the securities legislation of each of the Canadian Jurisdictions; and
(c) as a commodity trading counsel and commodity trading manager under the Commodity Futures Act (Ontario).
CI is not in default of securities legislation in any of the Canadian Jurisdictions.
The Filer acts, or will act, as the investment fund manager of each Fund.
The Previous Decision
- In a previous decision granted to CI on May 29, 2017 (the Previous Decision), CI was granted relief from subsection 2.1(1) and paragraphs 2.2(1)(a) and 2.5(2)(a), (c) and (e) of NI 81-102 to permit the Funds to invest in securities of ETFs that are not IPUs, including Canadian and U.S. underlying ETFs. The Filer is requesting that the Previous Decision be revoked and replaced with this decision for the following reasons:
(a) The Previous Decision did not grant relief from paragraph 2.5(2)(a.1) of NI 81-102 to permit the Funds that are or will be alternative mutual funds to invest in the Underlying ETFs since such paragraph came into effect on January 3, 2019 or to permit the Funds that are or will be non-redeemable investment funds to invest in the Underlying ETFs.
(b) The Previous Decision granted relief to permit non-alternative mutual funds that are managed by the Filer to invest in securities of Canadian ETFs that are not IPUs. This relief is no longer required due to changes to section 2.5(2)(a) of NI 81-102 (effective January 3, 2019), which permit such funds to invest 100% of their assets in non-alternative mutual funds subject to NI 81-102 (including ETFs), regardless of the form of prospectus they file.
(c) The Previous Decision granted relief to permit the Funds to pay sales or redemption fees on the purchase or redemption of securities of the underlying funds (collectively, Brokerage Fees). This relief is no longer required due to changes to section 2.5(5) of NI 81-102 (effective January 3, 2019), which permit payment of Brokerage Fees provided that the affiliated underlying funds are investment funds that are listed for trading on a stock exchange.
The Funds
Each Fund is, or will be, an investment fund organized and governed by the laws of Canada or a Canadian Jurisdiction.
Each Fund 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.
Each Fund is, or will be, a reporting issuer in one or more Canadian Jurisdictions.
Each Fund is, or will be, subject to National Instrument 81-107 Independent Review Committee for Investment Funds.
The Funds may, from time to time, wish to invest in Underlying ETFs.
Each existing Fund is not in default of applicable securities legislation in any Canadian Jurisdiction.
The Underlying ETFs
- The securities of an Underlying ETF will not meet the definition of IPU in NI 81-102 because the only purpose of the Underlying ETF will not be to:
(a) 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
(b) invest in a manner that causes the Underlying ETF to replicate the performance of that index.
The securities of an Underlying ETF are, 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.
An Underlying ETF may be managed by the Filer.
An investment in an Underlying ETF by a Fund will otherwise comply with section 2.5 of NI 81-102, including that:
(a) No Underlying ETF will hold more than 10% of its net asset value (NAV) in securities of another investment fund unless the Underlying ETF (a) is a clone fund, as defined in NI 81-102, or (b) in accordance with NI 81-102, purchases or holds securities (i) of a money market fund, as defined in NI 81-102, or (ii) that are IPUs issued by an investment fund; and
(b) No Fund will pay management or incentive fees which to a reasonable person would duplicate a fee payable by an Underlying ETF for the same service.
Each Underlying ETF is, or will be, a publicly offered mutual fund subject to the United States Investment Company Act of 1940 (the Investment Company Act).
Absent the Exemption Sought, an investment by a Fund in an Underlying ETF would:
(a) be prohibited by paragraphs 2.5(2)(a) or (a.1) of NI 81-102, as applicable, because such Underlying ETF may not be subject to NI 81-102;
(b) be prohibited by paragraph 2.5(2)(c) of NI 81-102 because such Underlying ETF may not be a reporting issuer in any Canadian Jurisdiction; and
(c) not qualify for the exception in paragraph 2.5(3)(a) of NI 81-102 because the securities of the Underlying ETF are not IPUs.
- The key benefits of a Fund investing in the Underlying ETFs are greater choices, improved portfolio diversification and potentially enhanced returns. For example:
(a) an investment in the Underlying ETFs will provide the Funds with access to specialized knowledge, expertise and/or analytical resources of the investment adviser to the Underlying ETFs;
(b) the Underlying ETFs provide a potentially better risk profile, diversification and improved liquidity/tradability than direct holdings of asset classes to which the Underlying ETFs provide exposure; and
(c) the investment strategies of the Underlying ETFs offer significantly broader exposure to asset classes, sectors and markets than those available in the existing Canadian ETF market.
The Filer submits that having the option to allocate a limited portion of each Fund’s assets to Underlying ETFs will increase diversification opportunities and may improve a Fund’s overall risk/reward profile.
An investment in an Underlying ETF by a Fund is an efficient and cost effective alternative to obtaining exposure to securities held by the Underlying ETF rather than purchasing those securities directly by the Fund.
An investment in an Underlying ETF by a Fund should pose limited investment risk to the Fund because each Underlying ETF will be subject to the Investment Company Act, subject to any exemption therefrom that may in the future be granted by the securities regulatory authorities.
Due to the potential size disparity between the Funds and the Underlying ETFs, it is possible that a relatively small investment, on a percentage of NAV basis, by a relatively larger Fund in securities of an 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 an 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 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 an Underlying ETF is in accordance with the investment objectives of the Fund;
(b) a Fund does not purchase securities of an 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 Underlying ETFs;
(c) a Fund does not short sell securities of an Underlying ETF;
(d) securities of each Underlying ETF are listed on a recognized exchange in the United States;
(e) each Underlying ETF is, immediately before the purchase by a Fund of securities of that 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 Underlying ETFs on the terms described in this decision.
“Darren McKall”
Darren McKall, Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission
Application No. 2022/0530
SEDAR Project No.: 3460607, 3460611, 3460613, 3460614, 3460615, 3460616, 3460617,
3460618, 3460619