National Bank Investments inc. et al.

Headnote

Policy Statement 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption from subsection 2.1(1) of Regulation 81-102 respecting Mutual Funds to permit global fixed-income mutual fund to invest more than 10% of net asset value in securities issued by a foreign government or permitted supranational agency, subject to certain conditions.

Applicable Legislative Provisions

Regulation 81-102 respecting Investment Funds, s. 2.1(1).

[TRANSLATION]

December 5, 2019

IN THE MATTER OF THE SECURITIES LEGISLATION OF QUÉBEC AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF NATIONAL BANK INVESTMENTS INC. (the Filer) AND IN THE MATTER OF NBI UNCONSTRAINED FIXED INCOME ETF, NBI GLOBAL BOND FUND (FORMERLY, NATIONAL BANK GLOBAL RSP BOND FUND), NBI GLOBAL TACTICAL BOND FUND (FORMERLY, NATIONAL BANK GLOBAL TACTICAL BOND FUND) AND NBI UNCONSTRAINED FIXED INCOME FUND (collectively, the Existing Funds) AND IN THE MATTER OF SUCH OTHER GLOBAL OR INTERNATIONAL BOND FUNDS MANAGED BY THE FILER OR AN AFFILIATE OF THE FILER THAT ARE SUBJECT TO REGULATION 81-102 RESPECTING INVESTMENT FUNDS (the Future Funds and, together with the Existing Funds, the Funds, each a Fund)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (each a Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for a decision (the Exemption Sought):

a) to revoke the 2003 Decision (as defined below) and the Sovereign Government and Supranational Entity Concentration Relief granted in the 2016 Decision (as defined below); and

b) to exempt each Fund, pursuant to section 19.1 of Regulation 81-102 respecting Investment Funds (c. V-1.1, r. 39) (Regulation 81-102), from subsection 2.1(1) of Regulation 81-102 (the Concentration Restriction) to permit each Fund to invest up to:

(i) 20% of its net asset value, taken immediately after the transaction, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments, other than the government of Canada, the government of a jurisdiction in Canada or the government of the United States of America, and are rated "AA" by S&P Global Ratings Canada (S&P) or its DRO affiliate (as defined in Regulation 81-102), or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates; and

(ii) 35% of its net asset value, taken immediately after the transaction, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments, other than the government of Canada, the government of a jurisdiction in Canada or the government of the United States of America, and are rated "AAA" by S&P or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates,

(such evidences of indebtedness are collectively referred to as Foreign Government Securities).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

a) the Autorité des marchés financiers is the principal regulator for this application;

b) the Filer has provided notice that subsection 4.7(1) of Regulation 11-102 respecting Passport System (c. V-1.1, r. 1) (Regulation 11-102) is intended to be relied upon in the jurisdictions of Canada other than the Jurisdictions; and

c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in Regulation 81-102, Regulation 14-101 respecting Definitions (c. V-1.1, r. 3) and Regulation 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 Filer is a corporation amalgamated under the laws of Canada with its head office in Montréal, Québec.

2. The Filer is registered as an investment fund manager in Québec, Ontario and Newfoundland and Labrador and as a mutual fund dealer in each of the jurisdictions of Canada.

3. The Filer or an affiliate of the Filer is, or will be, the investment fund manager of each Fund.

4. The Filer is not in default of securities legislation in any of the jurisdictions of Canada.

The Funds

5. Each Fund is, or will be, a mutual fund governed by the provisions of Regulation 81-102 and organized and governed by the laws of Canada or a Jurisdiction.

6. Securities of each Fund are, or will be, offered by a simplified prospectus prepared pursuant to Regulation 81-101 respecting Mutual Funds Prospectus Disclosure (c.V-1.1, r. 38) and Form 81-101F1 Contents of Simplified Prospectus or a long form prospectus prepared pursuant to Regulation 41-101 respecting General Prospectus Requirements (V-1.1, r.14) and Form 41-101F2 Information Required in an Investment Fund Prospectus, which is, or will be, filed in one or more jurisdictions of Canada (both of the simplified prospectus and the long form prospectus hereinafter referred to individually as the "prospectus"). Accordingly, each Fund is, or will be, a reporting issuer or the equivalent in one or more of the jurisdictions of Canada.

7. The investment objective of NBI Unconstrained Fixed Income ETF is to maximize total return, consistent with preservation of capital. The fund invests, directly or indirectly through investments in securities of one or many other mutual funds or through the use of derivatives, in a diversified portfolio composed mainly of fixed-income securities of issuers located throughout the world with various maturities and credit ratings.

8. The investment objective of NBI Global Bond Fund is to provide an attractive rate of current income while providing long-term capital growth and preserving capital. The fund invests primarily in high-quality debt securities denominated in foreign currencies. Although these investments have a greater degree of risk, they offer potentially higher returns to investors.

9. The investment objective of NBI Global Tactical Bond Fund is to generate income and capital growth, while focusing on capital preservation. To do this, the fund invests directly, or indirectly through investments in securities of other mutual funds or through the use of derivatives, in a diverse portfolio mainly composed of bonds and other foreign fixed-income securities with various maturities and credit ratings.

10. The investment objective of NBI Unconstrained Fixed Income Fund is to maximize total return, consistent with preservation of capital. The fund invests, directly or indirectly through investments in securities of other mutual funds or through the use of derivatives, in a diversified portfolio composed mainly of fixed-income securities of issuers located throughout the world with various maturities and credit ratings.

11. The Existing Funds are not in default of securities legislation in any of the jurisdictions of Canada.

Investments in Foreign Government Securities

12. As part of a Fund's investment strategies, the portfolio manager of each Fund may wish to invest a portion of the Fund's assets in Foreign Government Securities. Depending on market conditions, the portfolio manager seeks the discretion for a Fund to gain exposure to any one issuer of Foreign Government Securities in excess of the Concentration Restriction.

13. Subsection 2.1(1) of Regulation 81-102 prohibits a Fund from purchasing a security of an issuer, other than a "government security", as defined in Regulation 81-102, if, immediately after the transaction, more than 10% of the net asset value of the Fund, at the time of the transaction, would be invested in securities of that issuer. Subsection 2.1(2) of Regulation 81-102 sets out certain exceptions, including in respect of a "government security" as defined in Regulation 81-102.

14. The Foreign Government Securities are not "government securities" as such term is defined in Regulation 81-102.

15. The Filer believes that the ability to purchase Foreign Government Securities in excess of the limit in subsection 2.1(1) of Regulation 81-102 will better enable each Fund to achieve its fundamental investment objectives, thereby benefitting each Fund's investors.

16. The Filer submits that allowing a Fund to hold highly rated fixed-income securities issued by governments will enable the Fund to preserve capital in foreign markets during adverse market conditions, to have access to assets with minimal credit risk, and will enable the portfolio manager to assess its views on interest rates and duration.

17. The Filer submits that the increased flexibility to hold Foreign Government Securities may also yield higher returns than Canadian shorter-term government fixed-income alternatives.

18. The Filer submits that each Fund will only purchase Foreign Government Securities if the purchase is consistent with the Fund's fundamental investment objectives.

19. The Filer submits that the prospectus for each Fund will disclose the risks associated with the concentration of assets of the Fund in securities of a limited number of issuers.

20. The Filer submits that each Fund seeks the Exemption Sought to enhance its ability to pursue and achieve its investment objectives.

The Previous Decisions

21. The Filer obtained a previous decision dated April 3, 2003 (the 2003 Decision) to permit NBI Global Bond Fund (formerly named National Bank Global RSP Bond Fund) to purchase Foreign Government Securities in excess of the limit in subsection 2.1(1) of Regulation 81-102.

22. The Filer obtained a previous decision dated November 11, 2016 (the 2016 Decision) to permit NBI Global Tactical Bond Fund (formerly named National Bank Global Tactical Bond Fund) and NBI Unconstrained Fixed Income Fund to purchase Foreign Government Securities in excess of the limit in subsection 2.1(1) of Regulation 81-102 (the Sovereign Government and Supranational Entity Concentration Relief), which decision includes other cleared swaps and derivative cover relief.

23. The Filer seeks to revoke the 2003 Decision and the Sovereign Government and Supranational Entity Concentration Relief granted in the 2016 Decision with this decision so that the Funds are granted the Exemption Sought in a single decision document, as opposed to three separate decision documents.

24. The Filer has determined that it would be in the best interests of the Funds to receive the Exemption Sought with this decision for the reasons set out above.

25. As of the date of this decision, the Filer will no longer rely on the 2003 Decision or the Sovereign Government and Supranational Entity Concentration Relief.

26. The 2003 Decision and the Sovereign Government and Supranational Entity Concentration Relief were granted on conditions that have been incorporated into this decision in all material respects.

27. The Filer submits that the Exemption Sought is not contrary to the public interest, is in the best interest of each Fund, and represents the business judgement of responsible persons uninfluenced by considerations other than the best interests of each Fund.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:

1. subparagraphs (b)(i) and (b)(ii) of the Exemption Sought cannot be combined for any one issuer;

2. any security that is purchased by a Fund pursuant to the Exemption Sought is traded on a mature and liquid market;

3. the acquisition by a Fund of the securities purchased pursuant to this decision is consistent with the fundamental investment objectives of the Fund;

4. the prospectus of each Fund will disclose the additional risks associated with the concentration of the net asset value of a Fund in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the Fund has so invested and the risks, including foreign exchange risks, of investing in the country in which the issuer is located; and

5. the prospectus of each Fund will disclose, in the investment strategies section, a summary of the nature and terms of the Exemption Sought, along with the conditions imposed and the type of securities covered by this decision.

Jacinthe Des Marchais

Senior Director, Investment Funds (interim)