Franklin Templeton Investments Corp. (Re), 2024 CanLII 35360

April 24, 2024

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

Franklin Templeton Investments Corp. (the Filer)

and

Franklin S&P 500 Dividend Aristocrats Covered Call Index ETF

Franklin S&P/TSX Canadian Dividend Aristocrats Covered Call Index ETF

(the Covered Call Index ETFs)

Decision

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Covered Call Index ETFs and other existing and future investment funds subject to National Instrument 81-102 Mutual Funds (NI 81-102) managed by the Filer or an affiliate or successor of the Filer (together with the Covered Call Index ETFs, the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (Legislation) exempting the Funds from:

(a) subsection 6.8(1) of NI 81-102, which restricts an investment fund from depositing portfolio assets as margin with a member of a regulated clearing agency or dealer that is a member of a self-regulatory organization that is a participating member of the Canadian Investor Protection Fund (CIPF) for a transaction in Canada involving certain specified derivatives in excess of 10% of the net asset value (NAV) of the investment fund at the time of deposit; and

(b) paragraph 6.8(2)(c) of NI 81-102, which restricts an investment fund from depositing portfolio assets as margin with a member of a regulated clearing agency or dealer for a transaction outside of Canada involving certain specified derivatives in excess of 10% of the NAV of the investment fund as at the time of deposit;

to permit each Fund to deposit as margin portfolio assets of up to 35% of the Fund’s NAV as at the time of deposit with any one futures commission merchant in Canada or the United States (each a Dealer) and up to 70% of each Fund’s NAV at the time of deposit with all Dealers in the aggregate, for transactions involving standardized futures, clearing corporation options, options on futures, or cleared specified derivatives, such as cleared swaps, that are traded or cleared on or through a stock exchange or futures exchange, a recognized clearing agency, or a swap execution facility that is exempted from recognition as an exchange under subsection 21(1) of the Securities Act (Ontario) (together, Exchange Traded Specified Derivatives) (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 this application, and

(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is to be relied upon by the Funds in each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in NI 81-102, National Instrument 14-101 Definitions and MI 11-102 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:

The Filer

1. The Filer is a corporation amalgamated under the laws of the Province of Ontario with its head office and registered office located in Toronto, Ontario.

2. The Filer is registered as follows:

(a) as an investment fund manager under the securities legislation in British Columbia, Alberta, Manitoba, Ontario, Québec, Nova Scotia and Newfoundland and Labrador;

(b) as a mutual fund dealer, portfolio manager and exempt market dealer in each province of Canada and the Yukon; and

(c) as a commodity trading manager in Ontario.

3. The Filer or an affiliate or associate of the Filer acts, or will act, as manager of each Fund.

4. The Filer is not in default of securities legislation in any of the Jurisdictions.

The Funds

5. Each Fund is or will be a mutual fund established under the laws of the Province of Ontario that is governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities. A Fund may be an ‘alternative mutual fund’ within the meaning of NI 81-102.

6. Securities of each Fund are or will be offered pursuant to a simplified prospectus prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure or a long form prospectus prepared in accordance with National Instrument 41-101 General Prospectus Requirements.

7. Each Fund is or will be a reporting issuer in each of the Jurisdictions.

8. The investment objective and strategies of each Fund permit or will permit the Fund to invest in Exchange Traded Specified Derivatives.

9. The investment objective of Franklin S&P 500 Dividend Aristocrats Covered Call Index ETF will be to seek to replicate, to the extent possible, the S&P 500 Dividend Aristocrats Dynamic Coverage Covered Call Index (the S&P 500 Index) by establishing, directly or indirectly, a long or short position in (i) each instrument included in the S&P 500 Index (each an S&P 500 Index Constituent) in proportion to its positive or negative weight in the S&P 500 Index; or (ii) instruments that are not S&P 500 Index Constituents but that have, in the aggregate, investment characteristics similar to the S&P 500 Index or a subset of the S&P 500 Index Constituents;

10. The investment objective of Franklin S&P/TSX Canadian Dividend Aristocrats Covered Call Index ETF will be to seek to replicate, to the extent possible, the performance of the S&P/TSX Canadian Dividend Aristocrats Dynamic Coverage Covered Call Index (the S&P/TSX Index) by establishing, directly or indirectly, a long or short position in (i) each instrument included in the S&P/TSX Index (each an S&P/TSX Index Constituent) in proportion to its positive or negative weight in the S&P/TSX Index; or (ii) instruments that are not S&P/TSX Index Constituents but that have, in the aggregate, investment characteristics similar to the S&P/TSX Index or a subset of the S&P/TSX Index Constituents.

11. In order to achieve its investment objective, from time to time, each Covered Call Index ETF will invest more than 10% of its NAV, and up to 50% of its NAV, in Exchange Traded Specified Derivatives. Each of these derivative positions will be entered into for hedging purposes and will otherwise comply with the NI 81-102 derivative provisions and restrictions for mutual funds that are not alternative mutual funds.

12. Except to the extent that the Requested Relief is granted and other exemptive relief is applicable, the investment strategies of the Funds are and will be limited to the investment practices permitted by NI 81-102.

13. The Filer is or will be authorized to establish, maintain, change and close brokerage accounts on behalf of the Funds. In order to facilitate transactions in Exchange Traded Specified Derivatives on behalf of the Funds, the Filer will establish one or more accounts (each an Account) with one or more Dealers. The Funds may use Canadian Dealers (as defined below) and/or U.S. Dealers (as defined below) for this purpose.

14. Each Dealer in Canada (each a Canadian Dealer) is a member of the Canadian Investment Regulatory Organization (CIRO) and is registered in the applicable Jurisdictions as a futures commission merchant or equivalent. Each Canadian Dealer is a member of a regulated clearing agency or dealer that is a member of a self-regulatory organization that is a participating member of the CIPF.

15. Each Dealer in the United States (each a U.S. Dealer) is regulated by the Commodity Futures Trading Commission (the CFTC) and the National Futures Association (the NFA) in the United States and is required to segregate all assets held as margin on behalf of clients, including the Funds. Each U.S. Dealer is subject to regulatory audit and must have insurance to guard against employee fraud. Each U.S. Dealer has a net worth, determined from its most recent audited financial statements, in excess of the equivalent of C$50 million. Each U.S. Dealer has an exchange assigned to it as its designated self-regulatory organization (the DSRO). As a member of a DSRO, each U.S. Dealer must meet capital requirements, comply with the conduct rules of the CFTC, NFA and its DSRO, and participate in an arbitration process with a complainant.

16. Each Dealer is a member of the exchanges, clearing agencies or swap execution facility through which the Exchange Traded Specified Derivatives are primarily traded. Each such exchange, clearing agency and swap execution facility is obliged to apply its surplus funds and the security deposits of its members to reimburse clients of failed members.

17. A Dealer will require, for each Account, that portfolio assets of the Fund be deposited with the Dealer as collateral for transactions in Exchange Traded Specified Derivatives (Initial Margin). Initial Margin represents the minimum initial amount of portfolio assets that must be deposited with a Dealer to initiate trading in specified derivatives transactions or to maintain the Dealer’s open position in standardized futures.

18. Levels of Initial Margin are established at a Dealer’s discretion. At no time will more than 70% of the NAV of each Fund be deposited as Initial Margin with one or more Dealers in the aggregate.

19. The records of each Dealer will show that the applicable Fund is the beneficial owner of the Initial Margin, and evidence that, subject to the satisfaction of the Dealer’s applicable margin requirements, the applicable Fund will have the right to the return of the portfolio assets deposited as Initial Margin with the Dealer, such assets being of the same issue as the deposited margin, including the same class and series, if applicable, and having the same current aggregate market value of the deposited margin at the time of such return.

Reasons for the Requested Relief

20. The use of Initial Margin is an essential element of investing in Exchange Traded Specified Derivatives for the Funds.

21. The Requested Relief would allow the Funds to invest in Exchange Traded Specified Derivatives more extensively with any one Dealer, which would allow the Funds to pursue their investment strategies more efficiently and flexibly.

22. Opening Accounts and transacting with multiple Dealers adds complexity and cost to the management of the Funds. Using fewer Dealers will considerably simplify the Funds’ investments and operations and will reduce the cost of implementing each Fund’s strategy. Using fewer Dealers also simplifies compliance and risk management, as monitoring the data, controls and policies of a smaller number of Dealers is less complex.

23. Each of the Decision Makers is satisfied that it would not be prejudicial to the public interest for the Requested Relief to be granted.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that:

(a) each Fund relying on this decision does not invest in derivatives that are not Exchange Traded Specified Derivatives,

(b) each Fund only uses Initial Margin such that the amount of Initial Margin held by any one Dealer on behalf of that Fund does not exceed 35% of the net assets of that Fund, taken at market value as at the time of the deposit, and

(c) each Fund only uses Initial Margin such that the amount of Initial Margin held by Dealers in aggregate on behalf of that Fund does not exceed 70% of the NAV of that Fund as at the time of the deposit.

"Darren McKall"

Darren McKall, Manager

Investment Management Division

Ontario Securities Commission

Application No.: 2023/0517; SEDAR+: 6037281