Vanguard Investments Canada Inc.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from the investment fund self-dealing restrictions in the Securities Act (Ontario) and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to allow pooled funds to invest in securities of underlying funds under common management -- relief subject to certain conditions.

Applicable Legislative Provisions

Securities Act (Ontario) R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(2)(c), 111(4), 113.

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a), 15.1.

March 29, 2016

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 VANGUARD INVESTMENTS CANADA INC. (the Filer) AND IN THE MATTER OF THE TOP FUNDS (as defined below)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on its behalf and on behalf of the existing investment funds listed as Initial Top Funds in Schedule "A" (the Initial Top Funds) hereto, and any other investment fund which is not a reporting issuer under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), for which the Filer is, or will be, the investment fund manager (the Future Top Funds and, together with the Initial Top Funds, the Top Funds) and for which the Filer or an affiliate is, or will be, the portfolio manager, for a decision under the Legislation exempting the Top Funds and the Filer from:

(a) the restriction in the Securities Act (Ontario) (the Act) which prohibits an investment fund from knowingly making an investment in any person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial securityholder;

(b) the restriction in the Act which prohibits an investment fund from knowingly making an investment in an issuer in which any of the following has a significant interest:

(i) any officer or director of the investment fund, its management company or distribution company or an associate of either of them, or

(ii) any person or company who is a substantial securityholder of the investment fund, its management company or its distribution company; and

(c) the restriction in the Act which prohibits an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraphs (a) or (b) above

(collectively, the Related Issuer Relief); and

(d) the restrictions contained in subsection 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which prohibit a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as adviser, to purchase a security of an issuer in which a responsible person or an associate of a responsible person is a partner, officer or director, unless the fact is disclosed to the client and the written consent of the client to the investment is obtained before the purchase

(the Consent Relief, and together with the Related Issuer Relief, the Exemptions Sought).

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 Alberta.

Interpretation

Terms defined in 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 head office of the Filer is located in Toronto, Ontario.

2. The Filer is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, a portfolio manager in Ontario, a commodity trading manager in Ontario and an exempt market dealer in each of the provinces of Canada.

3. The Filer is not a reporting issuer in any jurisdiction of Canada and is not in default of securities legislation in any jurisdiction of Canada.

4. The Filer is the investment fund manager and portfolio manager of the Initial Top Funds. The Filer will be the investment fund manager of the Future Top Funds. The Filer, or an affiliate of the Filer, is or will be the portfolio manager of the Future Top Funds.

5. The Filer, or an affiliate of the Filer, is the investment fund manager and portfolio manager of the existing investment funds listed as Initial Underlying Funds in Schedule "A" (collectively, the Initial Underlying Funds). The Filer, or an affiliate of the Filer, is or will be the investment fund manager and portfolio manager of any other investment fund that exists or that may be established by the Filer, or an affiliate of the Filer, after the date hereof (collectively, the Future Underlying Funds, as further defined below, and together with the Initial Underlying Funds, the Underlying Funds).

6. As the Filer, or an affiliate of the Filer, is, or will be, the portfolio manager for the Top Funds and the Underlying Funds, the Filer, or an affiliate of the Filer, is, or will each be, a "responsible person" within the meaning of the applicable provisions of NI 31-103.

The Top Funds

7. Each Initial Top Fund is, and each Future Top Fund will be, a "mutual fund" for the purposes of the Legislation. Each Initial Top Fund is not in default of securities legislation in Canada.

8. Each Initial Top Fund is an open-ended, mutual fund trust established pursuant to a declaration of trust under the laws of Ontario. Each Future Top Fund will be an open-ended, mutual fund trust established pursuant to a declaration of trust under the laws of Ontario or another jurisdiction of Canada.

9. Each Initial Top Fund is not a reporting issuer under the Legislation and no Future Top Fund will be a reporting issuer in any province or territory of Canada.

10. Securities of each Top Fund will be offered for sale to "accredited investors", within the meaning of National Instrument 45-106 Prospectus Exemptions (NI 45-106) and section 73.3 of the Act and to other investors pursuant to other available prospectus exemptions and applicable laws.

11. Securities of some or all of the Top Funds may be suitable investment options for capital accumulation plans (CAPs), which are tax assisted investment or savings plans that permit their members to make investment decisions among two or more options offered within the CAP, and for certain "overflow" savings plans sponsored by plan sponsors that would not constitute CAPs (Non-Tax Assisted Plans) (CAPs and Non-Tax Assisted Plans, collectively, the Plans). Securities of each Top Fund may be distributed to Plans pursuant to the exemptions from the prospectus requirements contained in discretionary exemptive relief granted to certain record-keepers, administrators and plan sponsors of Plans and also in blanket orders adopted on October 21, 2005 by the regulators of certain provinces and territories of Canada (collectively, the Plan Prospectus Exemptions).

12. To achieve its investment objective, a Top Fund may invest some or all of its assets in one or more Underlying Funds (as further defined below), which investment or investments will be consistent with the Top Fund's investment objectives and strategies (each, a Fund-on-Fund Structure).

The Underlying Funds

13. Each Initial Underlying Fund is a "mutual fund" as defined under the Legislation. The Initial Underlying Funds are comprised of:

(a) an exchange-traded fund, the securities of which are "index participation units" as such term is defined in NI 81-102 (IPUs), organized as a class of shares of a Delaware statutory trust; and

(b) open-ended, mutual fund trusts established pursuant to a declaration of trust under the laws of Ontario or another jurisdiction of Canada, each of which is not a reporting issuer under the Legislation, the securities of which will be offered for sale to one or more Top Funds and may also be offered for sale to other "accredited investors", within the meaning of NI 45-106 and section 73.3 of the Act, and to other investors pursuant to other available prospectus exemptions and applicable laws.

14. Each Initial Underlying Fund is not in default of securities legislation in any jurisdiction of Canada.

15. Each Future Underlying Fund will be a "mutual fund" as defined under the Legislation and will be:

(a) a mutual fund offered by simplified prospectus to which NI 81-102 applies (each, an NI 81-102 Fund);

(b) an exchange-traded fund, the securities of which are IPUs, organized as a trust under the laws of Ontario, which is a reporting issuer and which is subject to NI 81-102 (each, a Canadian ETF);

(c) an exchange-traded fund, the securities of which are IPUs, organized as a class of shares of a Delaware statutory trust or other similar entity domiciled in the United States (each, a Foreign ETF); or

(d) an open-ended, mutual fund trust established pursuant to a declaration of trust established under the laws of Ontario or another jurisdiction of Canada, which is not a reporting issuer under the Legislation, the securities of which will be offered for sale to one or more Top Funds and may also be offered for sale to other "accredited investors", within the meaning of NI 45-106 and section 73.3 of the Act, and to other investors pursuant to other available prospectus exemptions and applicable laws

(the Initial Underlying Funds together with the Future Underlying Funds are, collectively, the Underlying Funds).

Fund-on-Fund Structure

16. Each Top Fund allows investors in the Top Fund to obtain exposure to the investment portfolios of one or more Underlying Funds and their investment strategies through the Fund-on-Fund Structure. The Filer believes that investing in one or more Underlying Funds will allow a Top Fund to achieve its investment objective in an efficient and cost effective way and will not be detrimental to the interests of the other securityholders of the Underlying Funds. This is because the Fund-on-Fund Structure can provide greater diversification for a Top Fund in particular asset classes, on a more cost-efficient basis, than investing directly in the securities held by the Underlying Funds. The Fund-on-Fund Structure will also allow investors with smaller investments to have access to a larger variety of investments than would otherwise be available.

17. The assets of the Top Funds and, except for the Foreign ETFs, the Underlying Funds will be held by a custodian that meets the qualifications set out in subsection 6.2 of NI 81-102. The assets of the Foreign ETFs will be held by a custodian that meets the qualifications set out in Section 17(f) of the Investment Company Act of 1940.

18. Each of the Top Funds and, except for the Foreign ETFs, the Underlying Funds will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and will otherwise comply with the requirements of NI 81-106 applicable to them. Each of the Foreign ETFs will prepare financial statements in accordance with applicable law. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund.

19. The Top Funds are, or will be, related mutual funds by virtue of the common management by the Filer. The amount invested from time to time in an Underlying Fund by a Top Fund, either alone or together with one or more other Top Funds, may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, each Top Fund could, either alone or together with one or more other Top Funds, become a substantial securityholder of an Underlying Fund.

20. An investment in an Underlying Fund by a Top Fund will be effected at an objective price. According to the Filer's policies and procedures, an objective price, for this purpose, shall be the net asset value per security (NAV) of the applicable Underlying Fund.

21. The portfolio of each Underlying Fund will consist primarily of publicly traded securities. No Underlying Fund will hold more than 10% of its net asset value in "illiquid" assets (as defined in NI 81-102).

22. Investing in the Underlying Funds will allow the Top Funds to achieve their investment objectives in a cost efficient manner and will not be detrimental to the interests of other securityholders of the Underlying Funds.

23. In addition, the Fund-on-Fund Structure may result in a Top Fund investing in an Underlying Fund in which an officer or director of the Filer has a significant interest and/or a Top Fund investing in an Underlying Fund in which a person or company who is a substantial securityholder of the Top Fund or the Filer has a significant interest.

24. In the absence of the Related Issuer Relief, each Top Fund would be precluded from purchasing and holding securities of an Underlying Fund due to the investment restrictions contained in the Legislation. Specifically, the Top Funds would be prohibited from becoming substantial securityholders of the Underlying Funds.

25. In the absence of the Consent Relief, the Top Funds may be precluded from investing in Underlying Funds unless the specific fact is disclosed to securityholders of the Top Fund and the written consent of the securityholders of the Top Fund to the investment is obtained prior to the purchase, since an officer and/or director of the Filer, or its affiliate, who may be considered a "responsible person" (as per section 13.5 of NI 31-103) or an associate of a responsible person, may also be a partner, officer and/or director of the applicable Underlying Fund.

26. Since the Top Funds do not offer their securities under a simplified prospectus, they are not subject to NI 81-102 and, therefore, the Top Funds are unable to rely upon the exemption codified under subsection 2.5(7) of NI 81-102.

27. The investment objectives and restrictions applicable to a Top Fund are or will be described in the offering memorandum of the Top Fund (the Offering Memorandum), as are the fees, compensation and expenses payable by the Top Fund and matters relating to the structure of the Top Fund, the calculation of net asset value, distributions, the powers and duties of the investment fund manager and all other matters material to the Top Fund. The Offering Memorandum also discloses, or will disclose, that in pursuing its investment objectives, a Top Fund may invest in one or more Underlying Funds as an investment strategy.

28. No Underlying Fund will be a Top Fund in a Fund-on-Fund Structure.

29. The securityholders of a Top Fund will receive, on request, a copy of the audited annual financial statements and interim unaudited financial statements of any Underlying Fund in which the Top Fund invests.

30. The Top Funds and the Underlying Funds will have matching valuation and redemption dates.

31. An investment by a Top Fund in securities of an Underlying Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund and the Underlying Fund, as applicable.

32. The Underlying Funds that are not Foreign ETFs are, or will be, subject to the restrictions in NI 81-102 with respect to investments in other mutual funds.

33. To the extent that a Top Fund is distributed pursuant to the Plan Prospectus Exemption, the Top Fund will comply with Part 2 of NI 81-102, as modified by this Decision.

Decision

The principal regulator is satisfied that the exemptive relief application 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 Exemptions Sought are granted provided that:

(a) securities of each Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106, the Act or the Plan Prospectus Exemptions;

(b) securities of a Top Fund will not be distributed to Plans under the Plan Prospectus Exemptions unless both the Top Fund and each Underlying Fund that is not a reporting issuer held by the Top Fund comply with Part 2 of NI 81-102 (as modified by this decision);

(c) the investment by a Top Fund in one or more Underlying Funds is compatible with the investment objectives of the Top Fund;

(d) no Top Fund will purchase or hold securities of an Underlying Fund unless, at the time of the purchase of securities of the Underlying Fund, the Underlying Fund holds not more than 10% of its net assets in securities of other investment funds unless the Underlying Fund:

(i) is a "clone fund" (as defined by NI 81-102),

(ii) purchases or holds securities of a "money market fund" (as defined by NI 81-102); or

(iii) purchases or holds securities that are IPUs issued by an investment fund;

(e) no management fees or incentive fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service;

(f) no sales fees or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund;

(g) the Filer, or its affiliate, does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of the Underlying Fund, as the case may be, except that the Filer, or its affiliate, may arrange for the securities the Top Fund holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund; and

(h) the Offering Memorandum of a Top Fund will be provided to investors in a Top Fund, prior to the time of investment and will disclose:

(i) that the Top Fund may purchase securities of one or more Underlying Funds;

(ii) that the Filer, or an affiliate of the Filer, is the investment fund manager and portfolio manager of both the Top Fund and the Underlying Funds;

(iii) the approximate or maximum percentage of net assets of the Top Fund that the Top Fund intends to invest in securities of the Underlying Funds;

(iv) each officer, director or substantial securityholder of the Filer, or its affiliate, or of a Top Fund that also has a significant interest in an Underlying Fund, the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of the net asset value of the Underlying Fund, and the potential conflicts of interest that may arise from such relationships;

(v) the fees and expenses payable by the Underlying Funds that the Top Fund may invest in, including any incentive fees;

(vi) that investors are entitled to receive from the Filer, or its affiliate, on request and free of charge, a copy of the Offering Memorandum or other similar disclosure document of any Underlying Fund in which the Top Fund invests; and

(vii) that investors are entitled to receive from the Filer, or its affiliate, on request and free of charge, the annual or semi-annual financial statements relating to any Underlying Fund in which the Top Fund invests; and

(i) Condition (h) will not apply to a Top Fund where it distributes its securities pursuant to the Plan Prospectus Exemption and other conditions to that relief are complied with.

The Consent Relief

"Darren McKall"
Manager, Investment Funds & Structured Products Branch
Ontario Securities Commission

The Related Issuer Relief

"Edward P. Kerwin"
"Timothy Moseley"
Commissioner
Commissioner
Ontario Securities Commission
Ontario Securities Commission

 

SCHEDULE "A"

Initial Top Funds

Vanguard Target Retirement Income Pooled Fund
Vanguard Target Retirement 2015 Pooled Fund
Vanguard Target Retirement 2020 Pooled Fund
Vanguard Target Retirement 2025 Pooled Fund
Vanguard Target Retirement 2030 Pooled Fund
Vanguard Target Retirement 2035 Pooled Fund
Vanguard Target Retirement 2040 Pooled Fund
Vanguard Target Retirement 2045 Pooled Fund
Vanguard Target Retirement 2050 Pooled Fund
Vanguard Target Retirement 2055 Pooled Fund
Vanguard Canadian All-Cap Equity Index Pooled Fund
Vanguard U.S. All-Cap Equity Index Pooled Fund
Vanguard Developed All-Cap ex North America Equity Index Pooled Fund
Vanguard Emerging Markets All-Cap Equity Index Pooled Fund
Vanguard Canada Universe Bond Index Pooled Fund
Vanguard Global ex-Canada Fixed Income Index Pooled Fund (CAD-hedged)

Initial Underlying Funds

Vanguard FTSE Emerging Markets ETF
Vanguard Canadian All-Cap Equity Index Pooled Fund
Vanguard U.S. All-Cap Equity Index Pooled Fund
Vanguard Developed All-Cap ex North America Equity Index Pooled Fund
Vanguard Emerging Markets All-Cap Equity Index Pooled Fund
Vanguard Canada Universe Bond Index Pooled Fund
Vanguard Global ex-Canada Fixed Income Index Pooled Fund (CAD-hedged)