June 15, 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 CAPITAL INTERNATIONAL ASSET MANAGEMENT (CANADA), INC. (the Filer) and Capital Group International Equity FundTM (Canada) Capital Group U.S. Equity FundTM (Canada) Capital Group Global Equity FundTM (Canada) Capital Group Canadian Focused Equity FundTM (Canada) Capital Group Canadian Core Plus Fixed Income FundTM (Canada) Capital Group World Bond FundTM (Canada) (collectively, the Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Funds for a decision under the securities legislation of the Jurisdiction (the Legislation) that grants exemptive relief (the Exemption Sought) from the requirement in Section 2.17(1)(c) of National Instrument 81-102 Investment Funds (NI 81-102) for an investment fund to provide securityholders with 60 days’ prior notice of the investment fund’s intent to begin engaging in securities lending, repurchase and reverse repurchase transactions (the Transactions).
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 Canadian 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 expressly defined.
Representations
This decision is based on the following facts represented by the Filer on behalf of itself and the Funds:
The Filer and the Funds
The Filer is registered as an investment fund manager in the provinces of Ontario, Newfoundland & Labrador and Quebec, and a portfolio manager and exempt market dealer in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland & Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec and Saskatchewan.
The Filer is the investment fund manager of the Funds and the Filer or an affiliate of the Filer is the portfolio manager of the Funds.
Each Fund is an open-ended mutual fund trust, organized and governed by the laws of Ontario.
Each Fund is 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.
As at the date of this decision, neither the Filer nor any of the Funds is in default of securities legislation in any of the Canadian Jurisdictions.
Requirement to Provide Notice of the Commencement of Securities Lending
- Pursuant to section 2.17(1) of NI 81-102, an investment fund that is a mutual fund must not enter into the Transactions unless:
(a) its prospectus contains the disclosure required for mutual funds entering into such Transactions, and
(b) the investment fund provides written notice to its securityholders at least 60 days before it begins entering into the Transactions that discloses its intent to begin entering into such Transactions and the disclosure contained in the investment fund’s prospectus.
Section 2.17(1) was introduced into NI 81-102 further to amendments which came into force on May 2, 2001, which permitted mutual funds to enter into Transactions in accordance with the requirements of that section (the Securities Lending Amendments).
The Filer introduced the disclosure required under National Instrument 81-101 Mutual Fund Prospectus Disclosure for the Funds to engage in the Transactions into the simplified prospectus beginning in December 2001. This included disclosure of the risks to the Funds of engaging in the Transactions. At that time, the Filer only offered the Capital Group International Equity FundTM (Canada) and Capital Group U.S. Equity FundTM (Canada) under the simplified prospectus.
The Capital Group International Equity FundTM (Canada) and Capital Group U.S. Equity FundTM (Canada) had not commenced entering into such Transactions in December 2001. Therefore, the disclosure also included reference to the obligation in Section 2.17(1)(c) to provide 60 days’ prior notice to securityholders.
On December 31, 2003, further regulatory amendments were made to NI 81-102 to introduce Section 2.17(3) which eliminated the requirement for a mutual fund to give 60 days’ prior written notice to securityholders before entering into Transactions if each prospectus of the mutual fund filed since its inception contains the disclosure referred to in paragraph 6(a) above.
The remaining four Funds, which became reporting issuers following the coming into force of Section 2.17(3) of NI 81-102, retained the same disclosure in their simplified prospectus, including the reference to the obligation to provide 60 days’ prior notice to securityholders.
Specifically, the Funds have historically included the following language in the Part B disclosure of each Funds’ simplified prospectus:
“The Fund may enter into repurchase transactions, reverse repurchase transactions and securities lending agreements to seek enhanced returns but will do so only if there are suitable counterparties available, if the transactions are considered appropriate and after first giving its unitholders 60 days’ prior written notice.”.
Reasons for the Exemption Sought
The rationale for including the reference to the notice requirement of Section 2.17(1) of NI 81-102 in December 2001 was to advise investors of the regulatory requirement as it applied to those Funds which were in existence at the time the Securities Lending Amendments came into effect.
Due to oversights in the prospectus drafting process, the 60 day notice disclosure which was initially in the simplified prospectus of the Capital Group International Equity FundTM (Canada) and Capital Group U.S. Equity FundTM (Canada) was carried over into the simplified prospectus disclosure of the remaining Funds when reliance could, instead, have been placed on Section 2.17(3) of NI 81-102 such that the notice requirement would not be applicable.
In contrast, other mutual funds managed by the Filer that were launched either before or after the Funds, other than the Capital Group International Equity FundTM (Canada) and Capital Group U.S. Equity FundTM (Canada), contained the necessary disclosure required to rely on Section 2.17(3) of NI 81-102 such that the notice requirement is not applicable to those funds. For example, the initial simplified prospectus for Capital Group Emerging Markets Total Opportunities FundTM (Canada) filed in February 2012 and the initial simplified prospectus for Capital Group Global Balanced FundTM (Canada) filed in May 2016, each included this disclosure without the reference to first providing 60 days’ written notice to securityholders.
The cost to the Funds of preparing and mailing the required notices under Section 2.17(1) to securityholders of the Funds is significant and outweighs the potential benefit to the Funds’ securityholders having regard to the fact that:
(a) the Funds’ simplified prospectus has contained disclosure regarding the Transactions and their related risks either since December 2001 in the case of Capital Group International Equity FundTM (Canada) and Capital Group U.S. Equity FundTM (Canada) or, in the case of the remaining Funds, the Fund’s inception, and
(b) the 60-day notice disclosure was included in the Funds’ simplified prospectus in error in the case of the four remaining Funds, when reliance could instead have been placed on subsection 2.17(3) of NI 81-102.
The Exemption Sought is consistent with the Canadian Securities Administrators’ key priority of reducing undue regulatory burden and streamlining regulatory requirements without negatively impacting investor protection or the efficiency of the capital markets.
In place of providing the securityholder notice required by Section 2.17(1) of NI 81-102, the Filer will issue a press release informing the Funds’ securityholders that the Funds will commence entering into the Transactions at least 60 days following the issuance of the press release and direct securityholders to the Funds’ simplified prospectus for additional information regarding the Transactions and related risks. The press release will also be posted on the Funds’ designated website and filed on the System for Electronic Document Analysis and Retrieval (SEDAR).
The Funds’ renewal simplified prospectus dated May 26, 2023 contains updated disclosure that:
(a) names the Funds’ securities lending agent;
(b) states in the Funds’ investment strategies that the Funds may engage in Transactions subject to receipt of the regulatory relief under the Exemption Sought;
(c) states that the Funds have applied for exemptive relief from the requirements under NI 81-102 to provide securityholders in the Funds with 60 days’ notice of the Funds’ intent to engage in the Transactions, and if the relief is granted, the Funds will issue a press release, which will also be posted on the Funds’ designated website, informing securityholders that the Funds will commence entering into the Transactions at least 60 days following the issuance of the press release and direct investors to the simplified prospectus for additional information.
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 the Filer issues a press release, which press release will be posted on the Funds’ designated website and filed on SEDAR, informing investors in the Funds that the Funds will commence entering into the Transactions at least 60 days following the issuance of the press release and direct investors to the Funds’ simplified prospectus for additional information regarding the Transactions and related risks.
“Darren McKall”
Darren McKall Manager, Investment Funds and Structured Products Ontario Securities Commission
Application No. 2023/210; SEDAR #3535304