CIBC Asset Management Inc. and Conservative Income Portfolio
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from fund multi-layering restriction in paragraph 2.5(2)(b) of NI 81-102 to permit certain three-tier fund structures, subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(b) and 19.1.
December 13, 2023
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
CIBC ASSET MANAGEMENT INC. (CIBC)
AND
IN THE MATTER OF
CONSERVATIVE INCOME PORTFOLIO
(the Existing Fund)
and all other existing and future mutual funds, including exchange-traded funds (ETFs), but excluding alternative mutual funds, managed by CIBC or an affiliate (the Filer)
(together with the Existing Fund, the Funds)
DECISION
Background
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) pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) exempting the Funds from the multi-tier fund-of-fund restriction in paragraph 2.5(2)(b) of NI 81-102 to permit a three-tier structure where a Fund purchases and holds directly or indirectly securities of one or more other mutual funds, excluding ETFs and alternative mutual funds, each of which is, or will be, subject to NI 81-102 and managed by the Filer (each, a Reference Fund), which Reference Fund in turn holds directly or indirectly more than 10% of its net asset value (NAV) in securities of one or more other mutual funds, excluding ETFs and alternative mutual funds, each of which is, or will be, subject to NI 81-102 and managed by the Filer (each, a Third Tier Fund) (each, a Three-Tier Structure) (the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator for this application; and
(ii) the Filer has provided notice that subsection 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).
Interpretation
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. In addition to the defined terms used in this decision, capitalized terms used in this decision have the following meanings:
Policies means the Filer's Large Unitholder Policy dated as of January 2022 and Compliance Policy dated as of December 2021, as the same may be amended, restated or replaced from time to time (the Large Unitholder Policy and the Compliance Policy, respectively).
Further, each of the terms "invests", "holds", "investment" and "holding" refers to any investing or investment made in, or holding of, securities either directly or indirectly through specified derivatives, as the context requires.
Representations
This decision is based on the following facts represented by the Filer:
1. CIBC is a corporation incorporated under the laws of Canada with its head office located in Toronto, Ontario.
2. CIBC is registered as a portfolio manager in all Jurisdictions, as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, as a commodity trading manager in Ontario, and as a derivative portfolio manager in Québec.
3. The Filer is or will be, the registered investment fund manager of each fund in a Three-Tier Structure.
4. The Filer may act as the registered portfolio manager of the funds in a Three-Tier Structure or may appoint one or more registered portfolio managers or sub-advisors to provide the Filer with investment advice in respect of the funds' investments.
5. Each Fund, Reference Fund and Third Tier Fund is, or will be, an open-ended mutual fund trust or class of a mutual fund corporation organized and governed by the laws of a Jurisdiction or the laws of Canada. The securities of each Reference Fund and Third Tier Fund may be sold to investors other than the Funds.
6. Each Fund, Reference Fund and Third Tier Fund is, or will be, an investment fund to which NI 81-102 applies, subject to any exemptions therefrom that have been, or may be, granted by the applicable securities regulatory authorities, and offered by a prospectus filed and receipted in the Jurisdictions and, accordingly, a reporting issuer in the Jurisdictions.
7. Neither the Filer nor any existing Fund, Reference Fund or Third Tier Fund is in default of securities legislation in any Jurisdiction.
Three-Tier Structure
8. Each Reference Fund may invest, among other things, in one or more Third Tier Funds. In some circumstances, these investments in Third Tier Funds will exceed 10% of the Reference Fund's NAV.
9. Each Third Tier Fund in the Three-Tier Structure primarily invests, or will primarily invest, directly in a portfolio of securities and/or other assets. It may also invest up to 10% of its NAV in securities of other investment funds.
10. Each Three-Tier Structure is subject to the Policies. The Compliance Policy includes a fair allocation policy whereby the Filer, in its capacity as portfolio manager of funds, must treat each fund, including in a Three-Tier Structure, fairly, honestly and in good faith. The fair allocation policy includes processes to ensure that funds are treated fairly with respect to allocation of securities, prices and commissions between funds or between a fund and other clients of a sub-advisor where the sub-advisor is trading in securities for more than one client. The Filer also reviews and assesses the trade allocation policies of the sub-advisor to ensure fair treatment of all clients in allocating investment opportunities and that such policies include the recommended disclosure in OSC Staff Notice 33-723 Fair Allocation of Investment Opportunities. Additionally, the Filer has put in place certain rules under the Large Unitholder Policy to manage large unitholder investments, with a view to limiting the aggregate holdings and activities of large unitholders in each Fund. The Large Unitholder Policy seeks to ensure that unitholders are not adversely impacted by trading activities of large unitholders.
11. To manage liquidity risk due to cross-ownership of funds within a Three-Tier Structure, the Filer will use a combination of risk management tools to address the significant investor risk, including (i) Independent Review Committee (or IRC) approved governance policies that have been adopted to protect all investors in the funds, (ii) internal portfolio manager notification requirements of significant cash flows into the funds, (iii) ongoing liquidity monitoring of each fund's portfolio, and (iv) real time cash projection reporting for the funds. Each fund in a Three-Tier Structure will be managed as a stand-alone investment for purposes of the application of these risk management tools.
12. The investment strategies of each Fund in a Three-Tier Structure, as stated in the Fund's prospectus, state or will state (in the next regularly scheduled renewal, or amendment if earlier), that the Fund will invest in one or more Reference Funds and that each of these Reference Funds may invest more than 10% of its net assets in a class of securities of one or more Third Tier Funds that does not charge management or other fees.
13. For purposes of section 2.5 of NI 81-102, each Fund will be considered to be holding securities of each Reference Fund, whether the Fund holds the securities of each Reference Fund directly or indirectly through one or more specified derivatives. Accordingly, each Fund's investment in one or more of the Reference Funds will result in a Three-Tier Structure. This Three-Tier Structure is contrary to the multi-layering restriction 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. Except for paragraph 2.5(2)(b), a Fund's use of the Three-Tier Structure will be made in accordance with the provisions of section 2.5 of NI 81-102.
14. An investment by a Reference Fund in securities of its Third Tier Funds is, and will be, made in accordance with the provisions of section 2.5 of NI 81-102. Any investment by a Reference Fund in a Third Tier Fund will be in a class of securities of such Third Tier Fund that charges nil management and other fees. Accordingly, there shall be no duplication of fees payable by the Fund, Reference Fund or Third Tier Fund of any Three-Tier Structure, as applicable.
15. The prospectus of each Fund in a Three-Tier Structure will also disclose in the next regularly scheduled renewal, or amendment if earlier, that the accountability for portfolio management is (a) at the level of each Fund with respect to the selection of Reference Funds to be purchased by that Fund and with respect to the purchase and sale of any other portfolio securities or other assets held by that Fund, (b) at the level of each Reference Fund with respect to the selection of Third Tier Funds to be purchased by that Reference Fund and with respect to the purchase and sale of any other portfolio securities or other assets held by that Reference Fund and (c) at the level of each Third Tier Fund with respect to the purchase and sale of portfolio securities and other assets held by that Third Tier Fund.
16. Each Fund in a Three-Tier Structure will comply with the requirements under National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) 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 Fund was investing directly in the Third Tier Funds.
17. The investment objectives of the underlying funds held by a Fund in a Three-Tier Structure will generally be independent of each other in order to minimize potential overlap between the securities held by the respective portfolios of the underlying funds. To address any potential duplication of securities between underlying funds, the Filer will, through its compliance testing, aggregate the portfolio holdings across all underlying funds in a Three-Tier Structure for purposes of determining compliance with the concentration, control and other threshold limits under NI 81- 102.
18. It would not be prejudicial to the public interest to grant the Requested Relief to the Funds.
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 Requested Relief is granted, provided that:
(i) the Filer is the registered investment fund manager of each Fund, Reference Fund and Third Tier Fund in a Three-Tier Structure;
(ii) the investment strategies of each Fund in a Three-Tier Structure, as stated in the Fund's prospectus (which, in the case of an existing Fund, means the Fund's prospectus or amendment next receipted after the Fund becomes part of a Three-Tier Structure), state that the Fund will invest in one or more Reference Funds and that each of these Reference Funds may invest more than 10% of its net assets in a class of securities of one or more Third Tier Funds that does not charge management or other fees;
(iii) the proposed investment of each Fund in its Reference Fund(s) and of each Reference Fund in its Third Tier Fund(s) in a Three-Tier Structure 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;
(iv) there is no duplication of management fees or administrative fees between each tier of the Three-Tier Structure;
(v) the Three-Tier Structure is implemented in a manner that seeks the fair treatment for investors in all of the investment funds managed by the Filer that are involved in a Three-Tier Structure by allocating portfolio transaction costs fairly among all of such investment funds;
(vi) the Filer maintains investor protection policies and procedures that address liquidity and redemption risk due to cross-ownership of funds within a Three-Tier Structure, and each fund in a Three-Tier Structure is managed as a stand-alone investment for purposes of these policies and procedures;
(vii) each Fund in a Three-Tier Structure complies with the requirements under NI 81-106 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 Fund was investing directly in the Third Tier Funds; and
(viii) each Reference Fund and Third Tier Fund in a Three-Tier Structure is not an alternative mutual fund and does not rely on any discretionary relief permitting the fund to exceed the leverage exposure otherwise permitted under NI 81-102 through the use of borrowing, short selling and specified derivatives.