National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- International non-resident investment fund manager exempted from the investment fund manager registration requirement on conditions analogous to the permitted client exemption in Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers -- Relief required because Filer wishes to solicit investments by permitted clients, despite the existence of certain investors that do not qualify as permitted clients who made purchases while resident outside of Canada and subsequently requested an address change as a result of a move to Canada -- Filer will not permit existing investors that do not qualify as a permitted client to purchase additional shares, other than purchases of additional shares that result from the investor's participation in an automatic distribution reinvestment program.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., s. 25(4), 74(1).
Multilateral Instrument 11-102 Passport System.
Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers, s. 1, 3, 4.
May 6, 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 FRANKLIN TEMPLETON INTERNATIONAL SERVICES S.à. r.l. (the Filer)
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Filer from the investment fund manager registration requirement in the Legislation in respect of its acting as an investment fund manager for the SICAV Funds (as defined below), including the existing SICAV Funds of which the Filer is the investment fund manager and any additional SICAV Funds that may be established in the future of which the Filer may be the investment fund manager (the Exemption 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 Québec and Newfoundland and Labrador (together with Ontario, the Jurisdictions)
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
The term Permitted Client has the same meaning as in section 1 of Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers (MI 32-102).
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation established under the laws of the Grand Duchy of Luxembourg, with its head office located at 8A, rue Albert Borschette, L-1246 Luxembourg, Grand Duchy of Luxembourg. The Filer does not have a place of business in Canada.
2. The Filer is the investment fund manager of Franklin Templeton Investment Funds (FTIF), a corporation established under the laws of the Grand Duchy of Luxembourg as a société anonyme and qualified as a société d'investissement à capital variable (SICAV). FTIF is currently comprised of 88 sub-funds and may add or remove sub-funds from time to time (each, a SICAV Fund and collectively, the SICAV Funds).
3. The Filer is a wholly-owned subsidiary of Franklin Templeton Luxembourg S.A., a corporation established under the laws of the Grand Duchy of Luxembourg, which is an indirect wholly-owned subsidiary of Franklin Resources, Inc. (FRI).
4. FRI is a global investment management organization operating as Franklin Templeton Investments. FRI and its subsidiaries provide global and domestic investment management solutions for institutional and retail clients in over 150 countries.
5. Franklin Templeton Investments Corp. (FTIC) is an indirect wholly-owned subsidiary of FRI, and is a corporation amalgamated under the laws of Ontario, having its head office in Toronto, Ontario. FTIC is registered under the securities legislation in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, Saskatchewan and Yukon as an adviser in the category of portfolio manager and as a dealer in the categories of mutual fund dealer and exempt market dealer. FTIC is also registered under the securities legislation in Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia, Ontario and Quebec as an investment fund manager and under the Commodity Futures Act in Ontario as an adviser in the category of commodity trading manager.
6. The SICAV Funds are distributed in 31 European countries pursuant to the European passport implemented by the European Union regulations of collective investment schemes, known as the UCITS (Undertakings for Collective Investment in Transferable Securities) Directives. The SICAV Funds are also distributed in Chile, Peru, South Korea, Taiwan, Singapore, Hong Kong, Macau and South Africa.
7. The Filer has implemented restrictions to prevent Canadian residents from making purchases of the SICAV Funds. The transfer agency responsible for the SICAV Funds has implemented internal policies for new account onboarding and has a rejection process for any applications with a Canadian tax residency code. The transfer agency's oversight team also reviews all new accounts and would flag any account for further review if an investor's residence were in question. The SICAV Fund prospectus also contains language indicating that the SICAV Funds are not available for sale to residents of Canada unless otherwise permitted under Canadian securities laws.
8. It has come to the Filer's attention that there are presently 10 accounts in the SICAV Funds with clients who have a Canadian tax residency code, each of whom became a shareholder while resident outside of Canada and subsequently requested an address change as a result of a move to Canada (the Canadian SICAV Shareholders). The Canadian SICAV Shareholders are resident in a Jurisdiction and are unlikely to fall within the definition of "permitted client" in MI 32-102.
9. Restrictions have been implemented that prevent a Canadian SICAV Shareholder from purchasing additional shares of the SICAV Funds. However, the Canadian SICAV Shareholders continue to hold the SICAV Funds and any distributions on shares of the funds have been reinvested in additional shares pursuant to an automatic distribution reinvestment program for the SICAV Funds where a dividend or distribution out of earnings, surplus, capital or other sources payable in respect of the SICAV Fund's shares is applied to the purchase of the same class or series of the SICAV Fund's shares as the shares to which the dividend or distribution is attributable (the Automatic Distribution Reinvestment Program). Each Canadian SICAV Shareholder entered into the Automatic Distribution Reinvestment Program at the time of the shareholder's initial purchase of the SICAV Funds outside of Canada.
10. Given the large number of countries in which the SICAV Funds are distributed, it is likely that there will be additional Canadian SICAV Shareholders in the future solely as a result of these investors purchasing the SICAV Funds while resident outside of Canada and subsequently moving to Canada.
11. The Filer currently relies on the "no active solicitation" exemption under section 3 of MI 32-102 from the requirement to register as an investment fund manager in the Jurisdictions.
12. The Filer wishes to solicit, through FTIC, investments by Permitted Clients in the SICAV Funds.
13. The Filer is unable to rely on the "permitted clients" exemption under section 4 of MI 32-102 (the Permitted Client Exemption) from the requirement to register as an investment fund manager in the Jurisdictions because all of the Canadian SICAV Shareholders do not qualify as Permitted Clients.
14. Although the Filer has taken precautions in prohibiting the sales of the SICAV Funds to Canadian residents, the Filer is not able to control the movement of investors in the SICAV Funds into the Jurisdictions after they have purchased the SICAV Funds.
15. In order to rely on the Permitted Client Exemption to enable Permitted Clients in the Jurisdictions to be solicited for investments in the SICAV Funds, the Filer could redeem the shares of the funds held by the Canadian SICAV Shareholders. However, such approach may have adverse tax or other consequences on the Canadian SICAV Shareholders. Further, such approach does not effect a permanent solution for the Filer because it is possible that investors in the SICAV Funds that are not resident in Canada and that are not Permitted Clients could become Canadian SICAV Shareholders in the future as a result of a move to Canada.
16. The Filer is seeking the Exemption Sought to permit the marketing and sale of the SICAV Funds to Permitted Clients in the Jurisdictions on conditions analogous to the Permitted Client Exemption, but that allow for the existing Canadian SICAV Shareholders and any future Canadian SICAV Shareholders to continue to hold the SICAV Funds and participate in the automatic distribution reinvestment program of the SICAV Funds.
17. The Filer would be able to meet all of the conditions of the Permitted Client Exemption but for the movement of Canadian SICAV Shareholders that purchased the SICAV Funds outside of Canada into the Jurisdictions.
18. The Filer is not in default under the securities laws of any of the Jurisdictions.
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:
1. All securities of the SICAV Funds distributed in the local jurisdiction are distributed under an exemption from the prospectus requirement to either:
(a) a Permitted Client;
(b) a Canadian SICAV Shareholder pursuant to such Canadian SICAV Shareholder's participation in the Automatic Distribution Reinvestment Program; or
(c) a person to whom the legal or beneficial ownership of the securities is transferred as a consequence of a Canadian SICAV Shareholder's death or mental incapacity or planning for same (the "Successor Shareholder") pursuant to such Successor Shareholder's participation in the Automatic Distribution Reinvestment Program.
2. The Filer will not permit a Canadian SICAV Shareholder or Successor Shareholder that does not qualify as a Permitted Client to purchase additional shares of a SICAV Fund, other than purchases of additional shares that result from the Canadian SICAV Shareholder's or Successor Shareholder's participation in the Automatic Distribution Reinvestment Program.
3. The Filer does not have its head office or its principal place of business in Canada.
4. The Filer is incorporated, formed or created under the laws of a foreign jurisdiction.
5. None of the SICAV Funds are reporting issuers in any jurisdiction of Canada.
6. The Filer has submitted to the securities regulatory authority in each Jurisdiction a completed Form 32-102F1 Submission to Jurisdiction and Appointment of Agent for Service for International Investment Fund Manager.
7. The Filer has notified the Permitted Client or Canadian SICAV Shareholder in writing of all of the following:
(a) the Filer is not registered in the applicable Jurisdiction to act as an investment fund manager;
(b) the foreign jurisdiction in which the head office or principal place of business of the Filer is located;
(c) all or substantially all of the assets of the Filer may be situated outside of Canada;
(d) there may be difficulty enforcing legal rights against the Filer because of the above; and
(e) the name and address of the agent for service of process of the Filer in the applicable Jurisdiction.
8. If the Filer relied on the Exemption Sought in a Jurisdiction during the 12 month period preceding December 1 of a year, it must notify the securities regulatory authority in the applicable Jurisdiction, by December 1 of that year, of the following:
(a) the fact that it relied upon the Exemption Sought;
(b) the total assets under management expressed in Canadian dollars of the SICAV Funds, attributable to securities beneficially owned by residents of the applicable Jurisdiction as at the most recently completed month.
9. The Filer files with the securities regulatory authority in the applicable Jurisdiction, a completed Form 32-102F2 Notice of Regulatory Action (Form 32-102F2) within 10 days of the date on which the Filer began relying on the Exemption Sought in the applicable Jurisdiction.
10. The Filer must notify the securities regulatory authority in the applicable Jurisdiction, of any change to the information previously submitted in Form 32-102F2 within 10 days of the change.
11. The Filer complies with the filing and fee payment requirements applicable to an unregistered investment fund manager under OSC Rule 13-502 Fees.