Fidelity Investments Canada ULC
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from paragraph 2.5(2)(b) of NI 81-102 to permit fund to invest in mutual fund that holds greater than 10% of its net assets in securities of other mutual funds, including commodity ETFs that are not managed by the filer or an affiliate -- relief is subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(b) and 19.1.
November 29, 2021
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 FIDELITY INVESTMENTS CANADA ULC (the Filer) AND IN THE MATTER OF THE FIDELITY FUNDS (as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application on behalf of the current and future mutual funds, exchange-traded funds and alternative mutual funds managed by the Filer or an affiliate of the Filer (the Fidelity Funds), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Fidelity Funds from the requirement in clause 2.5(2)(b) of National Instrument 81-102 Investment Funds (NI 81-102) to permit each Fidelity Fund to purchase and hold directly or indirectly securities of the Fidelity Inflation Focused Fund (the Inflation Focused Fund), which is managed by the Filer, which Inflation Focused Fund may hold, directly or indirectly (a) securities of other conventional mutual funds, alternative mutual funds, and exchange-traded investment funds managed by the Filer (the Third-Tier Funds) that, immediately after the purchase of such securities by the Inflation Focused Fund, Third-Tier Funds collectively constitute not more than 10% of the net asset value of the Inflation Focused Fund, and (b) securities of one or more Commodity ETFs (as defined herein) that, immediately after the purchase of a Commodity ETF by the Inflation Focused Fund, Commodity ETFs collectively constitute not more than 10% of the net asset value of the Inflation Focused Fund (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 each of the other provinces and territories of Canada (collectively, the Passport Jurisdictions, and together with the Jurisdiction, the Jurisdictions).
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.
Commodity ETFs means exchange-traded funds traded on a stock exchange in Canada or the United States that do not qualify as index participation units that have exposure to one or more physical commodities, including, but not limited to, gold and silver on an unlevered basis.
Commodity ETF Relief refers to a decision dated May 18, 2018, that among other things, granted relief to the Fidelity Funds (including the Inflation Focused Fund) to purchase securities of a Commodity ETF provided that such purchase does not result in the Fidelity Fund having more than 10% of its net assets invested in securities of Commodity ETFs.
Policy means the Filer's retail Fund of Fund Significant Trade Policy dated as of May 18, 2018, as the same may be amended, restated, or replaced from time to time and last reviewed by the Fidelity Funds' independent review committee on June 1, 2021.
Three-Tier Structure means the structure where a Fidelity Fund purchases and holds, or will purchase and hold, securities of one or more investment funds, and such investment funds in turn, holds or will hold, more than 10% of its net asset value in securities of one or more investment funds.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation continued under the laws of the Province of Alberta with its head office located in Toronto, Ontario.
2. The Filer is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, as a portfolio manager in each of the Jurisdictions, as a commodity trading manager in Ontario and as a mutual fund dealer in each of the Jurisdictions.
3. The Filer or an affiliate is, or will be, the investment fund manager of the Fidelity Funds, the Inflation Focused Fund, and the Third-Tier Funds.
4. The Filer is not in default of securities legislation in any of the Jurisdictions.
The Fidelity Funds
5. Each Fidelity Fund, the Inflation Focused Fund and each Third-Tier Fund is, or will be, an open-ended mutual fund or a class of a mutual fund corporation, including an exchange-traded fund or an alternative mutual fund, organized and governed by the laws of a Jurisdiction or the laws of Canada.
6. Each Fidelity Fund, is, or will be, a reporting issuer in one or more Jurisdictions governed by the provisions of NI 81-102, subject to any exemption therefrom that has been, or may be, granted by the securities regulatory authorities.
7. None of the Fidelity Funds are in default of securities legislation in any of the Jurisdictions.
The Inflation Focused Fund
8. The Inflation Focused Fund seeks a real return consistent with reasonable investment risk by using a balanced approach. It invests primarily in a mix of equity and fixed income securities of issuers located anywhere in the world which are expected to be collectively resilient to inflation.
9. While most of the investments of the Inflation Focused Fund will be in securities of government and corporate issuers, the Inflation Focused Fund may invest in underlying funds as well.
10. The Inflation Focused Fund expects to invest in Third-Tier Funds for tactical purposes. These investments will, immediately after purchase, comprise, in aggregate, up to 10% of the net asset value of the Inflation Focused Fund.
11. As a result of market movement, Third-Tier Funds may comprise more than 10% of the net asset value of the Inflation Focused Fund at any time.
Commodity ETFs
12. The Inflation Focused Fund also seeks exposure of approximately 10% of its net assets to commodities and proposes to attain that exposure through investment in Commodity ETFs, pursuant to the Commodity ETF Relief.
13. The Inflation Focused Fund's portfolio manager believes that the intended exposure to commodities can be attained most cost-effectively and efficiently through investment in Commodity ETFs
14. As a result of market movement, the proportion of the Inflation Focused Fund's net assets invested in Commodity ETFs could exceed 10% of the Inflation Focused Fund's net asset value from time to time.
15. The Filer or its affiliates are not the investment fund managers of the Commodity ETFs.
16. The Commodity ETFs do not issue "index participation units" as defined in NI 81-102.
Investment in the Inflation Focused Fund
17. The Filer anticipates that one of more Fidelity Funds will seek to invest a portion of their net assets in securities of the Inflation Focused Fund.
18. Subsection 2.5(2)(b) of NI 81-102 prohibits an investment fund from investing in another investment fund, if at the time of purchase, the other investment fund has more 10% of its net assets invested in securities of other investment funds (the Multi-Tier Prohibition).
19. Because the Inflation Focused Fund's investment in securities of the Third Tier Funds and the Commodity ETFs, may each, from time to time exceed 10% of the Inflation Focused Fund's net assets, the Multi-Tier Prohibition will prohibit a Fidelity Fund from investing in the Inflation Focused Fund.
20. An investment by a Fidelity Fund in the Inflation Focused Fund will not fit within the exceptions to the Multi-Tier Prohibition found in subsection 2.5(4) of NI 81-102.
The Multi-Tier FOF Decision
21. A decision was issued to the Filer on October 20, 2020, (the Multi-Tier FOF Decision) granting relief from the Multi-Tier Prohibition to permit Three-Tier Structures. Under the Multi-Tier FOF Decision, however, (a) each fund in the Three-Tier Structure must be a Fidelity Fund, for which the Filer or an affiliate acts as investment fund managers and (b) each Fidelity Fund that invests in a mutual fund that invests in Third-Tier Funds must not invest in portfolio securities directly (other than cash equivalents and specified derivatives).
22. A Fidelity Fund cannot therefore rely on the Multi-Tier FOF Decision to invest in the Inflation Focused Fund (a) due to Inflation Focused Fund's investments in Commodity ETFs, which are not managed by the Filer or an affiliate, and (b) due to the fact that a Fidelity Fund may invest in portfolio securities directly.
Generally
23. An investment by a Fidelity Fund in securities of the Inflation Focused Fund would be permitted if the Inflation Focused Fund invested in commodities directly or indirectly, through permitted certificates or specified derivatives. The Filer obtained the Commodity ETF Relief on the basis that Fidelity Funds attaining exposure to commodities through an investment in Commodity ETFs is more efficient and provides greater liquidity to the Fidelity Funds, than investing in commodities directly or through specified derivatives.
24. Each fund-of-fund investment in a Three-Tier Structure is subject to the Policy. The purpose of the Policy is to seek the fair treatment for investors in all investment funds managed by the Filer that are involved in a fund of fund structure by allocating transaction costs fairly between funds. The Policy is designed to isolate the transaction costs associated with significant trades and to prevent the dilution of a fund's assets when these material transactions occur by taking steps to ensure that the applicable fund or funds bear(s) the appropriate economic impact of such transaction costs.
25. The prospectus of each Fidelity Fund in a Three-Tier Structure discloses or will disclose that the Fund invests in securities of one or more mutual funds, and that each such other mutual fund may invest more than 10% of its net asset value in the securities of Third Tier Funds and Commodity ETFs.
26. The prospectus of each Fund in a Three-Tier Structure discloses or will disclose that the accountability for portfolio management is (a) at the level of each other mutual fund with respect to the selection of Third Tier Funds to be purchased by that other mutual fund and with respect to the purchase and sale of any other portfolio securities or other assets held by that other mutual fund and (b) 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.
27. There will be no duplication of fees between each tier of the Three-Tier Structure. The prospectus of each Fidelity Fund will disclose that fees and expenses will not be duplicated as a result of investments in underlying funds.
28. Except for clause 2.5(2)(b), a Fidelity Fund's investment in the Inflation Focused Fund will be made in accordance with the provisions of section 2.5 of NI 81-102.
29. The purchase and holding of Inflation Focused Fund by a Fidelity Fund represent the business judgment of the portfolio manager of the Fidelity Fund and is consistent with, or necessary to meet, the investment objectives of the Fidelity Fund.
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 Exemption Sought is granted provided that:
(i) the Filer is the investment fund manager and portfolio manager of each Fidelity Fund but not any Commodity ETF;
(ii) the investment strategies of each Fidelity Fund that invests in Inflation Focused Fund, as stated in its prospectus (which, in the case of an existing Fidelity Fund, means the prospectus next receipted after the Fidelity Fund becomes part of a Three-Tier Structure), states that the Fidelity Fund will invest in one or more other mutual funds and that each of these other mutual funds may invest more than 10% of its net assets in one or more other investment funds;
(iii) an investment by the Inflation Focused Fund in Third-Tier Funds, will, immediately after purchase, comprise, in aggregate, no more than 10% of the net asset value of the Inflation Focused Fund, but, as a result of market movement may exceed 10% of the Inflation Focused Fund's net asset value at any time;
(iv) an investment by the Inflation Focused Fund in Commodity ETFs, will, immediately after purchase, comprise, in aggregate, no more than 10% of the net asset value of the Inflation Focused Fund, but, as a result of market movement may exceed 10% of the Inflation Focused Fund's net asset value at any time;
(v) the proposed investment of each Fidelity Fund in the Inflation Focused Fund 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;
(vi) there is no duplication of management fees or administrative fees between each tier of the Three-Tier Structure;
(vii) 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;
(viii) 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 Fidelity Fund in a Three-Tier Structure is managed as a stand-alone investment for purposes of these policies and procedures;
(ix) each Fidelity 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 Fidelity Fund was investing directly in the Third Tier Funds; and
(x) neither Inflation Focused Fund nor any Third Tier Fund is 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.
"Darren McKall"
Manager
Investment Funds and Structured Products
Ontario Securities Commission
Application File #: 2021/0493
SEDAR #: 3275967