Securities Law & Instruments

Headnote

 

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption from section 2.1(1) of National Instrument 81-102 Investment Funds to permit a mutual fund to invest more than 10 percent of net assets in debt securities issued by a foreign government or supranational agency, subject to conditions.

 

Applicable Legislative Provisions

 

National Instrument 81-102 Investment Funds, ss. 2.1(1), 19.1.

 

October 6, 2017

 

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

MACKENZIE FINANCIAL CORPORATION

(the Filer)

 

AND

 

IN THE MATTER OF

MACKENZIE GLOBAL SUSTAINABILITY AND IMPACT BALANCED FUND

(the Fund)

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption (the Requested Relief), pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) from subsection 2.1(1) of NI 81-102 (the Concentration Restriction) to permit the Fund to invest up to:

 

(a)           20% of its net asset value at the time of the transaction in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or fully guaranteed as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction in Canada, or the government of the United States of America, and are rated “AA” by Standard & Poor’s Rating Services (Canada) (S&P) or its DRO affiliate (as defined in NI 81-102), or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates; and

 

(b)           35% of its net asset value at the time of the transaction in evidences of indebtedness of any one issuer if those securities are issued, or fully guaranteed as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction in Canada, or the government of the United States of America, and are rated “AAA” by S&P or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates.

 

(such evidences of indebtedness are collectively referred to as Foreign Government Securities).

 


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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (the Other 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:

 

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

 

2.             The Filer is registered as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager in Ontario. The Filer is also registered as a portfolio manager and exempt market dealer in the Other Jurisdictions and investment fund manager in Newfoundland and Labrador and Québec.

 

3.             The Filer is the manager, trustee and portfolio manager of the Fund.

 

4.             The Fund is an open-ended mutual fund trust established under the laws of Ontario.

 

5.             Securities of the Fund are offered by simplified prospectus dated September 29, 2017, filed in all of the provinces and territories in Canada and, accordingly, the Fund is a reporting issuer in one or more provinces and territories of Canada (the “Prospectus”, and collectively, with all future simplified prospectuses, the “Simplified Prospectus”).

 

6.             Neither the Filer nor the Fund are in default of securities legislation in any jurisdiction of Canada.

 

7.             The investment objective of the Fund is: “The Fund seeks to provide a combination of income and capital appreciation by investing primarily in fixed-income and/or equity securities of issuers anywhere in the world. The Fund follows an approach to investing that focusses on sustainable and responsible issuers.”

 

8.             To achieve its investment objectives, the Fund’s fixed-income portion is expected to invest in all types of fixed-income securities from around the world. Although the Fund aims to invest primarily in a diversified portfolio of fixed-income securities, depending on market conditions, the Fund’s portfolio managers seek the discretion to gain exposure to any one issuer of Foreign Government Securities in excess of the Concentration Restriction.

 

9.             The portfolio managers of the Fund will invest in countries selected by integrating Environmental, Social and Governance (“ESG”) factors into their sovereign and fundamental credit risk analysis process such that the investment strategy maintains a focus on sustainable and responsible issuers. Applying these ESG factors in conjunction with fundamental investment analysis will serve to narrow the Fund’s pool of potential investments, which may require a more concentrated portfolio to most effectively meet the Fund’s objectives. For example there may be periods where the portfolio managers would not invest in US Treasuries due to their policies that do not support responsible investing guidelines. Instead, the portfolio managers would want the Fund to hold foreign government securities that better adhere to responsible investing rules, such as the German or UK Government bonds.

 

10.          Section 2.1(1) of NI 81-102 prohibits the Fund from purchasing a security of an issuer, other than a “government security” as defined in NI 81-102, if immediately after the purchase more than 10% of the net asset value of the Fund, taken at market value at the time of the purchase, would be invested in securities of the issuer.

 

11.          The Foreign Government Securities are not within the meaning of “government securities” as such term is defined in NI 81-102.

 

12.          In Companion Policy 81-102CP (the “Companion Policy”), the Canadian Securities Administrators state their views on various matters relating to NI 81-102. Subsection 3.1(4) of the Companion Policy indicates that relief from paragraph 2.04(1)(a) of National Policy 39, which was replaced by the Concentration Restriction, has been provided to mutual funds generally under the following circumstances:


a.             the mutual fund has been permitted to invest up to 20% of its net asset value in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or fully guaranteed as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction, or the government of the United States of America and are rated “AA” by S&P or its DRO affiliates, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates; and

 

b.             the mutual fund has been permitted to invest up to 35% of its net asset value in evidences of indebtedness of any one issuer, if those securities are issued, or fully guaranteed as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction, or the government of the United States of America and are rated “AAA” by S&P or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates.

 

13.          The Simplified Prospectus for the Fund will disclose the risks associated with concentration of net assets of the Fund in securities of a limited number of issuers.

 

14.          The Fund seeks the Requested Relief to enhance its ability to pursue and achieve its investment objectives.

 

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 Requested Relief is granted provided that:

 

1.             Paragraphs (a) and (b) of the Requested Relief cannot be combined for any one issuer;

 

2.             Any security that may be purchased under the Requested Relief is traded on a mature and liquid market;

 

3.             The acquisition of the securities purchased pursuant to this Decision is consistent with the fundamental investment objectives of the Fund;

 

4.             The Simplified Prospectus of the Fund discloses the additional risks associated with the concentration of net asset value of the Fund in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the Fund has so invested and the risks, including foreign exchange risks, of investing in the country in which the issuer is located; and

 

5.             The Simplified Prospectus of the Fund will include a summary of the nature and terms of the Requested Relied under the investment strategies section along with the conditions imposed and the type of securities covered by this Decision.

 

“Vera Nunes”

Manager

Investment Funds and Structured Products Branch

Ontario Securities Commission