National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted to permit a Canadian exchange-traded mutual fund to invest in an underlying fund based in Hong Kong whose securities would meet the definition of index participation unit in NI 81-102, but for the fact that they are listed on the Stock Exchange of Hong Kong -- relief is subject to certain conditions and requirements including the underlying fund is not a synthetic ETF -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.1(1), 2.5(2)(a) and (c), 19.1.
September 18, 2019
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 CHINA BOND FUND (The Proposed Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Proposed Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption, pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) from subsection 2.1(1) and paragraphs 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to permit the Proposed Fund to purchase securities of the Underlying ETF (as defined below) (the Requested Relief).
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).
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.
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 all other Canadian provinces and territories and as an investment fund manager in Newfoundland and Labrador and Québec.
3. The Filer will be the manager and trustee of the Proposed Fund.
4. The Proposed Fund will be (i) an open-ended mutual fund trust established under the laws of the province of Ontario, (ii) a reporting issuer under the laws of all of the Jurisdictions, and (iii) governed by NI 81-102, subject to exemptive relief granted by the securities regulatory authorities.
5. Securities of the Proposed Fund will be qualified for distribution in all of the provinces and territories in Canada under a simplified prospectus filed in accordance with NI 81-101 and, accordingly, the Proposed Fund will be a reporting issuer in one or more provinces and territories of Canada.
6. The Filer is not in default of securities legislation in any jurisdiction of Canada.
7. The investment objective of the Proposed Fund is expected to be substantially as follows: "Mackenzie China Bond Fund seeks to replicate, to the extent reasonably possible and before fees and expenses, the performance of the Bloomberg Barclays Treasury + Policy Bank Total Return Index (the Index), or any successor thereto, by investing directly in the constituent securities of the Index, or indirectly through China AMC Bloomberg Barclays China Treasury + Policy Bank Bond Index ETF (the Underlying ETF) or other exchange-traded funds that track the Bloomberg Barclays China Treasury + Policy Bank Total Return Index. Mackenzie China Bond Fund has significant exposure to Chinese issuers."
8. In order to achieve its investment objective, the Proposed Fund will invest primarily in units of the Underlying ETF. The Underlying ETF seeks to provide investment results that, before fees and expenses, closely correspond to the performance of the Index.
The Underlying Manager
9. China Asset Management (Hong Kong) Limited (the Underlying Manager) is the manager of the Underlying ETF.
10. The Underlying Manager was incorporated in 2008 under the laws of Hong Kong and is a fully-owned subsidiary of China Asset Management Co., Ltd (China AMC).
11. The Underlying Manager is licensed by the Hong Kong Securities and Futures Commission (the HK Commission) to carry on three regulated activities under the Securities and Futures Ordinance (SFO): (i) dealing in securities; (ii) advising on securities; and (iii) asset management. The HK Commission is an Ordinary Member of the International Organization of Securities Commissions (IOSCO).
12. As of June 30, 2019, (i) the Filer owns a 13.9% interest in China AMC; and (ii) Power Corporation of Canada, the ultimate parent company of the Filer, owns a 13.9% interest in China AMC.
The Underlying ETF
13. The Underlying ETF is a sub-fund of the ChinaAMC Global ETF Series, an umbrella unit trust established under Hong Kong law by a trust deed between the Underlying Manager, as manager, and HSBC Institutional Trust Services (Asia) Limited, as trustee.
14. The Underlying ETF was established on June 6, 2018 and commenced trading on the Stock Exchange of Hong Kong Limited (the SEHK) pursuant to a prospectus dated February 2018 (the HK Prospectus).
15. As at July 19, 2019, the Underlying ETF held RMB67,657,147.42 (approximately equal to C$12,761,788.26 based on the Bank of Canada exchange rate as at August 6, 2019) in assets under management.
16. It is the Filer's understanding that the HK Prospectus complies with the Rules Governing the Listing of Securities on the SEHK, the Code on Unit Trusts and Mutual Funds and the "Overarching Principles" of the Securities and Futures Commission Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products for the purposes of giving information with regard to the securities of the Underlying ETF.
17. The Underlying ETF is a "mutual fund" within the meaning of applicable Canadian securities legislation.
18. The investment objective of the Underlying ETF is to seek to provide investment results that, before deduction of fees and expenses, closely correspond to the performance of the Index. The Underlying Manager seeks to achieve its investment objective by primarily investing in securities comprising the Index.
19. The Underlying ETF employs a passive investment strategy.
20. HSBC Institutional Trust Services (Asia) Limited is the trustee and registrar of the Underlying ETF.
21. The Hongkong and Shanghai Banking Corporation Limited is the custodian of the Underlying ETF.
22. The Index was launched on January 1, 2004 and is calculated and maintained by Bloomberg Index Services Limited.
23. The Filer and the Underlying Manager are independent of Bloomberg Index Services Limited.
24. The Index includes all securities that are constituent securities of the Bloomberg Barclays China Aggregate Index Treasury Bonds and Policy Bank Bonds. Eligible constituent securities of the Bloomberg Barclays China Aggregate Index are RMB-denominated debt securities listed on the PRC inter-bank bond market that fulfill certain disclosed criteria, including that the bonds must have at least one year until final maturity, must carry a fixed rate coupon and must have a par value of at least RMB5 billion for treasury and government-related securities (including policy banks). The number of constituent securities is variable and there is no limit to the number of constituents.
25. The Index is a total return index. A total return index calculates the performance of the index constituents on the basis that any dividends or distributions are reinvested.
26. The methodology for the selection and weighting of the Index constituents, including the names of the issuers included in the Index, is publicly available and updated from time to time. The Index information is widely quoted and broadly disseminated by major market data vendors, including Bloomberg and Reuters.
Reasons for the Requested Relief
27. But for the requirement in the definition of "index participation unit" that a security be traded on a stock exchange in Canada or the United States, securities of the Underlying ETF would be "index participation units".
28. The Proposed Fund seeks to obtain indirect exposure to the securities of the Index, including through the Underlying ETF, on the same basis as would be permitted under subsection 2.1(1) and paragraphs 2.5(2)(a) and 2.5(2)(c) of NI 81-102, as if the securities of the Underlying ETF were listed on a stock exchange in Canada or the United States and were, as a result, index participation units.
29. The investment objectives and strategies of the Underlying ETF are such that the Underlying ETF will invest in a manner that is consistent with the investment restrictions within NI 81-102.
30. Given that the Principal Regulator and the HK Commission are both members of IOSCO, the Filer submits that the regulatory regime applicable to the Underlying ETF and Proposed Fund have demonstrated their commitment to developing, implementing and promoting adherence to internationally recognized and consistent standards of regulation, oversight and enforcement in order to protect investors and maintain fair, efficient and transparent markets.
31. No management fees or incentive fees will be payable by the Proposed Fund that, to a reasonable person, would duplicate a fee payable by such Underlying ETF for the same service.
32. The regulatory regime, administration, operation, investment objectives and restrictions applicable to the Underlying ETF are comparable to those applicable to the Proposed Fund and therefore make securities of the Underlying ETF an appropriate investment for the Proposed Fund.
33. As the Underlying Manager is subject to the laws of Hong Kong and licensed to carry on three regulated activities: (i) to deal in securities, (ii) advise in securities, and (iii) asset management, by the HK Commission, the Underlying Manager is subject to similar regulatory oversight as the Filer, which is primarily regulated by the Principal Regulator.
34. The SEHK is subject to similar regulatory oversight to securities exchanges in Canada and the United States and therefore the listing requirements and regulatory oversight of the SEHK should be recognized as providing an appropriate trading platform for securities purchased, directly or indirectly, by the Proposed Fund on an equivalent basis to the way in which the listing requirements and regulatory oversight of securities exchanges in Canada and the United States are so recognized.
35. The Underlying ETF is subject to the following regulatory requirements:
a. The Underlying ETF is required to prepare a prospectus that discloses material facts similar to the disclosure requirements under Form 41-101F2 Information Required in an Investment Fund Prospectus.
b. The Underlying ETF prepares fact sheets and/or key investor information documents which, taken together, provide disclosure that is similar to ETF Facts Document prescribed by Form 41-101F4 Information Required in an ETF Facts Document.
c. The Underlying ETF is subject to continuous disclosure obligations which are substantially similar to the disclosure obligations under National Instrument 81-106 Investment Fund Continuous Disclosure.
d. The Underlying ETF is required to update information of material significance in the prospectus and to prepare semi-annual (unaudited) and annual financial statements (audited).
e. The Underlying ETF is subject to investment restrictions concerning the Underlying ETF's portfolio concentration, ability to control issuers in its portfolio, the liquidity of its portfolio securities, investments in other investment funds, investments in real estate, short selling, writing of call options, and securities lending.
f. The Underlying ETF is generally not permitted to invest more than 10% of its net asset value in securities of any single issuer or to hold more than 10% of a class of securities of any single issuer, except for securities of issuers that are constituents of the Index which account for more than 10% of the weighting of the Index and the Underlying Fund's holding of any such constituent securities does not exceed their respective weightings in the Index, except where the weightings are exceeded as a result of changes in the composition of the Index and the excess is only transitional and temporary in nature, or otherwise approved by the Hong Kong Securities Clearing Company Limited and the HK Commission.
g. The Underlying ETF does not invest in financial derivatives instruments (and has not adopted a synthetic replication strategy) and does not intend to engage in securities lending or repurchase transactions in respect of its portfolio.
36. In the absence of the Requested Relief:
a. the Proposed Fund would not be able to rely on the exemption available for "index participation units" in paragraph 2.1(2) because index participation units are currently defined to be securities that are traded in Canada or the United States only, and accordingly, the Proposed Fund would be prohibited from purchasing or holding units of the Underlying ETF if, immediately after any such purchase, more than 10% of the net asset value Proposed Fund would be invested in units of the Underlying ETF.
b. The Proposed Fund would not be able to rely on the exemption available for "index participation units" in paragraph 2.5(3) because index participation units are currently defined to be securities that are traded in Canada or the United States only, and accordingly, the Proposed Fund would be prohibited from purchasing or holding units of the Underlying ETF.
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. the Underlying ETF is not a "synthetic ETF", meaning that the Underlying ETF will not principally rely on an investment strategy that makes use of swaps or other derivatives to gain an indirect financial exposure to the return of the Index;
2. the prospectus of the Proposed Fund discloses the fact that the Proposed Fund has obtained relief to invest in the Underlying ETF;
3. the investment objective of the Proposed Fund names the Underlying ETF;
4. the investment objective of the Proposed Fund will state that the Proposed Fund will seek to replicate, to the extent possible, the performance of the Index; and
5. in the event that the regulatory regime applicable to the Underlying ETF is changed in any material way, the Proposed Fund does not acquire any additional securities of the Underlying ETF, and disposes of any securities of the Underlying ETF then held, within six months.
The Requested Relief will terminate six months after the coming into force of any amendments to paragraphs 2.5(a) or (c) of NI 81-102 that restrict or regulate the Proposed Fund's ability to invest in the Underlying ETF.