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iUnits S&P/TSX 60 Capped Index Fund et al. - MRRS Decision
Headnote
MRRS exemptive relief granted to exchange traded funds offered in continuous distribution from certain mutual fund requirements and restrictions on: suspension of redemptions, transmission of purchase or redemption orders, issuing units for cash or securities, calculation and payment of redemptions and date of record for payment of distributions.
Rules Cited
National Instrument 81-102 - Mutual Funds, ss. 5.5(1)(d), 9.1, 9.4(2), 10.2, 10.3, 14.1, 19.1.
November 14, 2005
IN THE MATTER OF
NATIONAL INSTRUMENT 81-102 --
MUTUAL FUNDS ("NI 81-102")
AS APPLICABLE IN
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUEBEC, NEW BRUNSWICK,
NOVA SCOTIA, PRINCE EDWARD ISLAND,
NEWFOUNDLAND AND LABRADOR, YUKON,
NORTHWEST TERRITORIES
AND NUNAVUT
(the "Jurisdictions")
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
iUNITS S&P/TSX 60 CAPPED INDEX FUND ("XIC"),
iUNITS GOVERNMENT OF CANADA 5-YEAR BOND FUND ("XGV"),
iUNITS S&P 500 INDEX RSP FUND ("XSP") AND
iUNITS MSCI INTERNATIONAL EQUITY RSP FUND ("XIN")
(collectively, the "Affected iUnits Funds")
AND
BARCLAYS GLOBAL INVESTORS CANADA LIMITED
as trustee of the Affected iUnits Funds
("Barclays Canada", and together with
the Affected iUnits Funds, the "Filers")
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filers for a decision under Sections 5.5(1)(d) and 19.1 of NI 81-102 for:
(a) Permission under Section 5.5(1)(d) for the Affected iUnits Funds to suspend redemptions of units of the Affected iUnits Funds ("Units") during the Transition Period (as defined below);
(b) A decision revoking and replacing waiver letters issued by the Ontario Securities Commission ("OSC") to XIC dated December 8, 2000 and to XGV dated October 4, 2000 that provide exemptive relief from Sections 9.1, 10.2 and 9.4(2);
(c) A decision revoking and replacing waiver letters issued by the OSC to XSP dated April 30, 2001 and to XIN dated August 27, 2001 that provide exemptive relief from Sections 10.3 and 14.1; and
(d) In respect of XSP and XIN, exemptive relief from Sections 9.1, 10.2 and 9.4(2) on the same basis as such relief has been granted to other iUnits Funds (defined below).
Under the Mutual Reliance Review System for Exemptive Relief Applications:
1. the OSC is the principal regulator for this application; and
2. this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
"Basket of Bonds" means, in relation to XGV under its proposed investment objective, a group of bonds in specified principal amounts as Barclays Canada may determine in its discretion from time to time.
"Baskets of iShares" means, in relation to each of XSP and XIN under its proposed investment objective, baskets of shares of the applicable iShares fund or other securities in which XSP and XIN may invest from time to time in the discretion of Barclays Canada in order to obtain exposure to the relevant International Fund Index.
"Baskets of Securities" means, in relation to XIC under its proposed investment objective, a group of securities of each constituent issuer of the S&P/TSX Capped Composite Index which, when multiplied by the constituent issuer's last sale price per security, is approximately equivalent to the constituent issuer's relative weight in the S&P/TSX Capped Composite Index.
"Baskets" means, collectively, Baskets of Securities, Baskets of Bonds and Baskets of iShares, as applicable to each Affected iUnits Fund.
"Circular" means the Notice of Meeting and Information Circular dated October 18, 2005 and delivered by Barclays Canada to Unitholders which sets out the Proposed Changes to be considered at the Meetings.
"Designated Brokers" means registered brokers and dealers who enter into agreements with the iUnits Funds to perform certain duties in relation to the iUnits Funds.
"Effective Date" means the date on which the Proposed Changes, if approved by Unitholders at the Meetings, will be effective, which will be no later than November 21, 2005.
"Existing Decisions" means the waiver letters issued by the OSC set out in items (b), (c) and (d) above as they relate to the Affected iUnits Funds.
"International Fund Indices" means the S&P 500 Index (for XSP) and the MSCI EAFE™ Index (for XIN) and "International Fund Index" means either one of them.
"iUnits Funds" means a family of exchange traded funds of which Barclays Canada is the trustee.
"Legislation" means the securities legislation in force in each jurisdiction.
"Meetings" means special meetings of the Unitholders to be held on November 15, 2005, as described in the Circular.
"Prescribed Number of Units" means, in relation to an iUnits Fund, the number of Units of the iUnits Fund determined by Barclays Canada from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.
"Proposed Changes" means proposed changes to the investment objectives of the Affected iUnits Funds and related changes to the Declarations of Trust of the iUnits Funds to be considered at the Meetings, as set out in the Circular. A summary of the Proposed Changes that are relevant to this Application is provided in Schedule A hereof.
"Transition Period" means, if the Proposed Changes are approved by Unitholders, the period between November 15 and the Effective Date, when each Affected iUnits Fund will be engaged in reconstituting its holdings by disposing of some or all of its existing portfolio of securities and acquiring the initial portfolio of securities that reflects the Affected iUnits Fund's new investment objective.
"TSX" means the "Toronto Stock Exchange".
"Underwriters" means registered brokers and dealers who have entered into underwriting agreements with the iUnits Funds and who subscribe for and purchase Units from the iUnits Funds, and "Underwriter" means any one of them.
"Unitholders" means beneficial and registered holders of Units.
Section references set out in this decision are references to NI 81-102, unless otherwise indicated.
Defined terms contained in NI 81-102 and National Instrument 14-101 have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Affected iUnits Funds:
Background
1. Each Affected iUnits Fund is a mutual fund trust governed by the laws of Ontario.
2. Each Affected iUnits Fund is a reporting issuer under the laws of all of the Jurisdictions.
3. Units of each Affected iUnits Fund are listed on the TSX.
4. Units issued by XIC, XSP and XIN are, and Units issued by XGV, under its proposed investment objective will be, index participation units within the meaning of NI 81-102. The Affected iUnits Funds are generally described as exchange traded funds ("ETFs").
5. Barclays Canada is the trustee of all iUnits Funds. Barclays Canada is registered under the Legislation of all Jurisdictions and the securities regulatory authority in Québec, as a portfolio manager and investment counsel (or the equivalent categories of registration). Barclays Canada is also registered as a Commodity Trading Manager and Limited Market Dealer in Ontario and as a Limited Market Dealer in Newfoundland and Labrador.
6. iUnits Funds, including the Affected iUnits Funds, have received exemptive relief from certain provisions of NI 81-102 pursuant to the Existing Decisions. The Existing Decisions refer specifically to the investment objectives and, in some cases, the investment strategies of each iUnits Fund. However, the reasons that the Existing Decisions are appropriate for each iUnits Fund are not based on the specific investment objective or strategy of the iUnits Fund. Rather, the Existing Decisions are appropriate because the iUnits Funds are ETFs and (with the exception of XGV under its current investment objectives) index participation units and, as such, operate differently from conventional mutual funds.
7. The Existing Decisions do not apply in Québec because the Affected iUnits Funds were not considered mutual funds in Québec at the time when the Existing Decisions were issued. The Affected iUnits Funds are now considered mutual funds in Québec based on the new definition of mutual fund adopted by the Autorite des marches financiers du Québec as of August 15, 2005. Therefore, Québec has been included as a Jurisdiction in this Decision Document.
Meetings
8. Barclays Canada has called the Meetings to seek Unitholder approval for the Proposed Changes. The current and proposed investment objective and strategy of each Affected iUnits Fund and a summary of the related changes to the declarations of trust of the Affected iUnits Funds to be considered at the Meetings are set out in Schedule A. If the Proposed Changes are approved, Barclays Canada intends to change the name of each Affected iUnits Fund to reflect its new investment objective. The proposed name changes are also set out in Schedule A.
9. The Circular dated October 18, 2005, describing the Proposed Changes, has been sent to Unitholders of record as of October 12, 2005 and has been filed with each of the Decision Makers.
10. An amendment to the prospectus of the Affected iUnits Funds dated October 7, 2005 (the "Amendment") has been filed with and a receipt for such Amendment has been issued by each of the Decision Makers and the securities regulatory authority in Québec.
11. If the Proposed Changes are approved at the Meetings, Barclays Canada intends to implement the new investment objectives and strategies during the Transition Period between the date of the Meetings and the Effective Date. During the Transition Period, Barclays Canada will reconstitute the holdings of each Affected iUnits Fund by disposing of some or all of its existing portfolio of securities and acquiring the initial portfolio of securities that reflects such Affected iUnits Fund's new investment objective.
12. Because many of the Existing Decisions refer to specific investment objectives, and, in some cases, strategies of the Affected iUnits Funds, it is necessary for the Existing Decisions to be revoked and replaced to reflect the new investment objectives and strategies that will be implemented by the Affected iUnits Funds during the Transition Period and that will apply on and after the Effective Date, subject to approval of the Proposed Changes at the Meetings.
Proposed Changes to XGV
13. The terms of XGV's Existing Relief from Section 9.4(2) permit XGV to accept payment for Units from Underwriters or Designated Brokers to be made in "5-year benchmark bonds and cash". Therefore, XGV requires the terms of its Existing Relief from Section 9.4(2) to be revoked and replaced to reflect changes in the securities that will be held by XGV under its new investment objective.
Proposed Changes to XSP and XIN
14. All iUnits Funds other than XSP, XIN and iUnits S&P/TSX Capped REIT Index Fund have been granted the relief from Sections 9.1 and 10.2 that is now being requested by XSP and XIN. All iUnits Funds other than XSP and XIN have been granted the relief from Section 9.4(2) that is now being requested by XSP and XIN.
15. The current investment objectives and strategies of XSP and XIN are to replicate the performance of the International Fund Indices by investing primarily in exchange traded futures contracts based on the International Fund Indices as well as high quality short term money market instruments and forward and futures contracts to match the currency exposure of the International Fund Indices. As a result, XSP and XIN do not invest significantly in securities and, therefore, the declarations of trust of XSP and XIN provide that Units may be subscribed or redeemed for cash only.
16. The proposed investment objectives and strategies of XSP and XIN are to replicate the performance of the International Fund Indices, hedged to Canadian dollars, by investing primarily in iShares funds that track the International Fund Indices and hedging any resulting currency exposure back to Canadian dollars. iShares funds are U.S.-based exchange traded funds managed by an affiliate of Barclays Canada.
17. If the Proposed Changes are approved, the subscription and redemption provisions of the declarations of trust of XSP and XIN will be amended to reflect the fact that XSP and XIN will invest in iShares funds and, potentially, other securities in the discretion of Barclays Canada. As of the Effective Date, XSP and XIN require relief from:
(a) Sections 9.1 and 10.2, to reflect the new settlement processes that will be implemented for XSP and XIN; and
(b) Section 9.4(2) to reflect the fact that, under their new investment objectives, Units of XSP and XIN may be subscribed for by delivery of a combination of Baskets of iShares and cash.
Representations of the Affected iUnits Funds
If the Proposed Changes are approved by Unitholders and implemented, the following representations will be true as of the Effective Date. Many of these representations are already true and form the basis for the Existing Decisions.
18. Units may only be subscribed or purchased directly from the Affected iUnits Funds by Underwriters or Designated Brokers and orders may only be placed for Units in the Prescribed Number of Units (or an integral multiple thereof) on any day when there is a trading session on the TSX.
19. The Affected iUnits Funds have appointed Designated Brokers to perform certain functions which include standing in the market with a bid and ask price for each Affected iUnits Fund's Units for the purpose of maintaining liquidity for units of the Units and, in the case of XIC and XGV (under its proposed investment objective), facilitating adjustments to Baskets both as a result of adjustments that have been made to the relevant index and as a result of non-cash distributions received by XIC or XGV.
20. Each Underwriter or Designated Broker who subscribes for Units must deliver, in respect of each Prescribed Number of Units to be issued, a Basket and cash in an amount sufficient so that the value of the Basket and cash delivered is equal to the net asset value of the Units to be issued. XGV, XSP and XIN may also accept cash-only subscriptions for Units in an amount equal to the net asset value of the Units next determined following the receipt of the subscription order.
21. The net asset value of each Affected iUnits Fund is calculated and published daily.
22. Upon notice given by Barclays Canada from time to time and, in any event, not more than once quarterly, a Designated Broker will subscribe for Units in an amount not to exceed 0.15% of the net asset value of XIC and XGV or an amount not to exceed 0.30% of the net asset value of XSP or XIN, next determined following delivery of the notice of subscription to that Designated Broker.
23. Neither Underwriters nor the Designated Brokers will receive any fees or commissions in connection with the issuance of Units to them. Barclays Canada may, at its discretion, charge an administration fee on the issuance of Units to the Designated Brokers or Underwriters.
24. Except as described in paragraphs 17 through 21 above, Units may not be purchased directly from the Affected iUnits Funds. Investors are generally expected to purchase Units through the facilities of the TSX. However, Units may be issued directly to Unitholders upon the reinvestment of distributions of income or capital gains.
25. While Unitholders that wish to dispose of their Units may generally do so by selling their Units on the TSX, a Unitholder who holds a Prescribed Number of Units or an integral multiple thereof may exchange such Units for Baskets and cash; Unitholders may also redeem their Units for cash at a redemption price equal to 95% of the closing price of the Units on the TSX on the date of redemption.
26. As trustee, Barclays Canada will be entitled to receive a fixed annual fee from each Affected iUnits Fund. Such annual fee will be calculated as a fixed percentage of the net asset value of each Affected iUnits Fund. Barclays Canada will be responsible for the payment of all expenses of the Affected iUnits Funds, except for the trustee fee, any administration fee payable by Designated Brokers or Underwriters in connection with the issuance of Units, any redemption fees payable by Unitholders upon the redemption of a Prescribed Number of Units, any withholding taxes and any income taxes.
Decision
Each of the Decision Makers is satisfied that the test contained in NI 81-102 that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under NI 81-102 is that:
1. Section 5.5(1)(d) -- The Affected iUnits Funds are permitted to suspend redemptions of their Units during the Transition Period provided that the Affected iUnits Funds will resume redemptions of their Units following the end of the Transition Period.
2. The Affected iUnits Funds are exempt from the following provisions of NI 81-102, on the following conditions:
(a) Sections 9.1 and 10.2 -- to enable the purchase and sale of Units of the Affected iUnits Funds on the TSX, which precludes the transmission of purchase or redemption orders to the order receipt offices of the Affected iUnits Funds.
(b) Section 9.4(2) -- to permit payment for the issuance of Units of the Affected iUnits Funds to be made partially in cash and partially in securities, provided that the acceptance of securities as payment is made in accordance with Section 9.4(2)(b).
(c) In respect of XSP and XIN only:
(i) Section 10.3 -- to permit the redemption of less than the Prescribed Number of Units of XSP or XIN at a price equal to 95% of the closing price of the Units on the TSX; and
(ii) Section 14.1 -- to relieve XSP and XIN from the requirement relating to the record date for the payment of distributions, provided that XSP and XIN comply with applicable TSX requirements.
"Rhonda Goldberg"
Assistant Manager, Investment Funds Branch
Ontario Securities Commission
SCHEDULE A
Changes to Investment Objectives and Strategies
Barclays Canada proposes to change the investment objectives and strategies of the Affected iUnits Funds as follows:
Changes to Declarations of Trust
In connection with the changes to the iUnits Funds' investment objectives, Barclays Canada is seeking approval to make certain related amendments to the iUnits Funds' Declarations of Trust including, without limitation, to reflect the following: (i) in the case of all iUnits Funds, changes in investment objectives, strategies and names; (ii) in the case of XGV, XSP and XIN, changes in subscription, exchange and redemption features; and (iii) in the case of XGV, changes in the valuation of securities held by XGV for the purpose of calculating the net asset value of XGV and contingencies in the event of a discontinuance of the SC Short Bond Index.
Proposed Name Changes
If the Proposed Changes are approved at the Meetings and implemented, Barclays Canada intends to change the English names of the Affected iUnits Funds as follows:
In connection with the change in name and investment objective of XGV, its ticker symbol on the TSX will be changed to "XSB".