National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from multi-layering prohibition in paragraph 2.5(2)(b) of NI 81-102 to permit certain top funds to invest 100% of their assets in bottom funds, which are more than 10% invested in underlying funds and ETFs -- The three-tier fund structure is analogous to the current multi-layering exception in NI 81-102 -- Transparent investment portfolio and accountability for portfolio management -- National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.5(2)(b), 19.1.
September 24, 2014
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 FIDELITY INVESTMENTS CANADA ULC (the Filer), FIDELITY PREMIUM TACTICAL FIXED INCOME CAPITAL YIELD PRIVATE POOL AND FIDELITY GLOBAL DIVIDEND CLASS (the Existing Funds) AND ALL FUTURE AND EXISTING MUTUAL FUNDS MANAGED BY THE FILER THAT ARE SIMILAR TO AN EXISTING FUND (together with the Existing Funds, the Top Funds)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Top Funds for a decision (the Exemption Sought) under the securities legislation of the Jurisdiction (the Legislation)
(a) pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) exempting the Top Funds from paragraph 2.5(2)(b) of NI 81-102 to permit each Top Fund, whether directly or through one or more derivative instruments, to invest in and/or obtain exposure to another mutual fund subject to NI 81-102 that is, or will be, managed by the Filer (a Reference Fund), which Reference Fund, either directly or through one or more derivative instruments, holds or obtains exposure to, or will hold or obtain exposure to, securities of one or more other mutual funds (each, a Third Tier Fund) subject to NI 81-102 that are, or will be, managed by the Filer, which securities represent more than 10% of the Reference Fund's net asset value; and
(b) revoking the Previous Decision (as defined below).
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 Jurisdictions).
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 defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is an unlimited liability company continued under the laws of Alberta. The Filer is, or will be, the manager of each Top Fund, Reference Fund and Third Tier Fund. The Filer or an affiliate of the Filer is, or will be, the portfolio adviser of each Top Fund, Reference Fund and Third Tier Fund.
2. The Filer is registered in Ontario, Québec and Newfoundland and Labrador in the category of investment fund manager. The Filer is also registered as a portfolio manager and mutual fund dealer in each of the provinces and territories of Canada and is registered under the Commodity Futures Act (Ontario) in the category of commodity trading manager. The head office of the Filer is in Toronto, Ontario.
3. The Filer is not in default of securities legislation in any of the Jurisdictions.
The Top Funds, Reference Funds and Third Tier Funds
4. Each Top Fund, Reference Fund and Third Tier Fund is, or will be, either an open-end mutual fund trust that has been or will be created under the laws of the Province of Ontario or a class of a mutual fund corporation.
5. Each Top Fund, Reference Fund and Third Tier Fund is, or will be, a reporting issuer under the laws of some or all of the provinces and territories of Canada and subject to NI 81-102. The securities of each Top Fund, Reference Fund and Third Tier Fund are, or will be, qualified for distribution pursuant to a simplified prospectus, annual information form and fund facts that have been, or will be, prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
6. Each Top Fund seeks, or will seek, to provide a return that is similar to its corresponding Reference Fund. In order to meet its investment objectives, each Top Fund invests or will invest, either directly or through one or more derivative instruments, substantially all of its assets in its corresponding Reference Fund, which Reference Fund has or will have the same investment objective as the Top Fund.
7. Each Reference Fund is, or will be, a fund of funds that invests, or will invest, either directly or through one or more derivative instruments in one or more Third Tier Funds and that may also invest in other portfolio securities.
8. Each Third Tier Fund primarily invests, or will invest, directly in a portfolio of securities and/or other assets.
9. No existing Top Fund, Reference Fund or Third Tier Fund is in default of securities legislation in any of the Jurisdictions.
Three-Tier Fund Structure
10. For purposes of section 2.5 of NI 81-102, each Top Fund will be considered to be holding securities of its Reference Fund either because it will hold such securities directly or because it will enter into one or more derivative instruments the underlying interest of which will be securities of the Reference Fund. Accordingly, each Top Fund's holdings in its Reference Fund or its use of derivative instruments to gain exposure to its Reference Fund will result in a three-tier fund of fund structure. This multi-tiered fund structure is contrary to the multi-layering prohibition in paragraph 2.5(2)(b) of NI 81-102 and does not fit within the exceptions to paragraph 2.5(2)(b) found in subsection 2.5(4) of NI 81-102.
11. The name of each Top Fund includes or will include part of the name of its Reference Fund and the investment objectives of each Top Fund specify or will specify the name of its Reference Fund.
12. The investment objectives of each Top Fund disclose or will disclose that the Top Fund seeks to provide a return that is similar to its Reference Fund, which, in turn, invests in Third Tier Funds. The disclosure in the simplified prospectus of each Top Fund will disclose in the investment strategies the investment strategies of its Reference Fund.
13. The simplified prospectus of each Top Fund discloses or will disclose to investors that the accountability for portfolio management is (a) at the level of the Reference Fund with respect to the selection of Third Tier Funds to be purchased by the Reference Fund and with respect to the purchase and sale of any other portfolio securities held by the Reference Fund and (b) at the level of the applicable Third Tier Fund with respect to the purchase and sale of portfolio securities and other assets held by that Third Tier Fund.
14. Each Top Fund complies or will comply with the requirements under National Instrument 81-106 Investment Fund Continuous Disclosure relating to top 25 positions portfolio holdings disclosure in its management reports of fund performance and the requirements of Form 81-101F3 Contents of Fund Facts Document relating to top 10 position portfolio holdings disclosure in its Fund Facts as if the Top Fund were investing directly in the Third Tier Funds.
15. An investment by a Top Fund in securities of its Reference Fund will be made in accordance with the provisions of section 2.5 of NI 81-102, except for the requirements of paragraph 2.5(2)(b). An investment by a Reference Fund in securities of one or more Third Tier Funds is, and will be, made in accordance with the provisions of section 2.5 of NI 81-102.
16. There will be no duplication of fees between each tier of the multi-tier structure. The simplified prospectus for each Top Fund and Reference Fund discloses, or will disclose, that fees and expenses will not be duplicated as a result of investments in underlying funds.
17. The Exemption Sought, which will result in a Top Fund investing directly or indirectly in its Reference Fund, which in turn invests in one or more Third Tier Funds, is akin to, and no more complex than, the three-tier structure currently permitted under paragraph 2.5(4)(a) of NI 81-102.
18. The Filer has determined that it is more efficient and less costly for each Top Fund if the Top Fund achieves its investment objectives by investing all, or substantially all, of its assets in securities of its corresponding Reference Fund, instead of investing directly in the same securities and in the same proportions in which the Reference Fund invests. The Filer has also determined that it will reduce tracking error if exposure to a Third Tier Fund occurs at the Third Tier Fund level. Any adjustment made by a Reference Fund to its Third Tier Funds is made by simply acquiring or redeeming securities of the Third Tier Fund in the ordinary course and automatically results in a corresponding indirect adjustment to the Top Fund's exposure to that Third Tier Fund.
19. An investment by a Top Fund in its Reference Fund and by a Reference Fund in each of its Third Tier Funds represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund or the Reference Fund, as the case may be.
20. The Filer has determined that it would be in the best interests of the Top Funds and not prejudicial to the public interest to receive the Exemption Sought.
The Previous Decision
21. On August 24, 2012, the Filer obtained exemptive relief from paragraph 2.5(2)(b) of NI 81-102 on behalf of certain mutual funds managed by the Filer to permit such funds to obtain exposure to reference funds, which invest more than 10% of their net asset value in other mutual funds (the Previous Decision). However, as the Previous Decision contemplated that the exposure to the reference funds would be obtained through one or more specified derivatives, the Previous Decision would not exempt the Top Funds from paragraph 2.5(2)(b) of NI 81-102 in respect of direct purchases of units of the Reference Funds.
22. Accordingly, the Filer wishes to revoke and replace the Previous Decision with this 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:
(i) the investment objectives of each Top Fund as stated in the simplified prospectus states the name of its Reference Fund, and
(ii) the proposed investment of each Top Fund in its Reference Fund is otherwise made in compliance with all other requirements of section 2.5 of NI 81-102, except to the extent that discretionary relief has been granted from any such requirement.