Russell Investments Canada Limited and the Class Portfolios
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from multi-layering prohibition in paragraph 2.5(2)(b) of NI 81-102 to permit certain top mutual funds to invest 100% of their assets in bottom mutual funds, which are more than 10% invested in underlying mutual funds -- The three tier fund structure is analogous to the current clone fund multi-layering exception in NI 81-102 -- Transparent investment portfolio and accountability for portfolio management -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.5(2)(b), 19.1.
December 7, 2015
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 RUSSELL INVESTMENTS CANADA LIMITED (the Filer) AND IN THE MATTER OF THE CLASS PORTFOLIOS (defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Class Portfolios for a decision under the securities legislation of the Jurisdiction (the Legislation) pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) exempting each Class Portfolio from paragraph 2.5(2)(b) of NI 81-102 to permit each Class Portfolio to invest in securities of its corresponding Trust Portfolio (defined below) which, in turn, invests in securities of one or more Underlying Trust Funds (defined below) representing more than 10% of the net asset value of the Trust Portfolio (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 the 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 (together with Ontario, the Applicable 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.
The terms "Class Portfolios", "Trust Portfolios" and "Underlying Trust Funds" (collectively, the Funds) refer to the existing and future class portfolios, their existing and future corresponding trust portfolios and the existing and future underlying trust funds in which the existing and future trust portfolios invest, respectively, as further described below.
Representations
This decision is based on the following facts represented by the Filer which, in the case of the Funds not in existence on the date hereof, are represented as being true as of the time a future Class Portfolio is relying upon the Exemption Sought:
The Filer
1. The Filer is a corporation incorporated under the federal laws of Canada with its head office located in Toronto, Ontario.
2. The Filer is registered in each of the provinces and territories of Canada in the categories of investment fund manager, portfolio manager and exempt market dealer. The Filer also is registered in Ontario as a commodity trading manager and as a mutual fund dealer exempt from membership in the Mutual Funds Dealer Association of Canada. The Manager also is registered in Manitoba as an advisor (commodities).
3. The Filer is the manager of the existing Funds and will be the manager of any future Funds.
4. The Filer is not in default of the securities legislation of any Applicable Jurisdiction.
The Funds
5. Each Fund is a "reporting issuer" (or the equivalent) under the securities legislation of one or more Applicable Jurisdictions and a mutual fund subject to the requirements of NI 81-102 and the terms of any discretionary exemptive relief it may be granted from any such requirements. Each Fund offers or has offered its securities pursuant to a simplified prospectus, annual information form and fund facts prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
6. Each Class Portfolio is a class of shares of a mutual fund corporation. Each Trust Portfolio and Underlying Trust Fund is a trust governed by the terms of a master declaration of trust under the laws of the Province of Ontario of which the Filer is the trustee.
7. Each Trust Portfolio is a fund of funds that invests in one or more Underlying Trust Funds. Each Trust Portfolio also may invest in other portfolio securities and other assets.
8. Each Underlying Trust Fund primarily invests directly in a portfolio of securities and other assets.
9. Though not currently stated expressly in its investment objective, it is a fundamental feature of each existing Class Portfolio that it seeks to provide a return similar to an existing Trust Portfolio (its corresponding Trust Portfolio); as reflected in the description of its investment strategies in its simplified prospectus, it currently does so by investing in Underlying Trust Funds and other portfolio securities and assets using weightings similar to its corresponding Trust Portfolio. For this reason, the name of each existing Class Portfolio includes part of the name of its Trust Portfolio. The existing Class Portfolios and their existing corresponding Trust Portfolios are set out in Schedule A. A future Class Portfolio may similarly seek to track the performance of a future Trust Portfolio.
10. Each Class Portfolio and its corresponding Trust Portfolio provide investors with exposure to one or more asset classes. The asset allocation of each Class Portfolio and its corresponding Trust Portfolio differs from each other Class Portfolio and its corresponding Trust Portfolio in order to provide investors with a variety of risk/return profiles from which they can select the asset allocation most suitable for their particular circumstances.
11. The Class Portfolios provide taxable investors with a more tax-efficient version of the Trust Portfolios; in particular, they enable taxable investors to switch to other Class Portfolios, or other mutual fund classes, of the same mutual fund corporation on a tax-deferred basis. There is no equivalent ability to switch from a Trust Portfolio to another mutual fund managed by the Filer on a tax-deferred basis.
12. Each existing Fund is not in default of the securities legislation of any Applicable Jurisdiction.
Three Tier Investing
13. In order to pursue its objective, each Class Portfolio wishes to be able to invest substantially all of its assets in securities of its corresponding Trust Portfolio (Three Tier Investing). The underlying portfolio exposure of each existing Class Portfolio immediately following the commencement of Three Tier Investing will be substantially similar to its portfolio exposure immediately prior to commencing Three Tier Investing.
14. No inter-fund transfers of securities between any existing Class Portfolio and its corresponding Trust Portfolio are contemplated.
15. Each Class Portfolio's investment in securities of its corresponding Trust Portfolio will result in a three tier fund of fund structure. Such a multi-tiered fund structure is contrary to the multi-layering prohibition 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.
16. Each future Class Portfolio will (like each existing Class Portfolio) include in its name part of the name of its corresponding Trust Portfolio.
17. Prior to relying on the Exemption Sought, the simplified prospectus of the Class Portfolio will:
(a) include in the description of the investment objective of the Class Portfolio (including each existing Class Portfolio, whose investment objective the Filer will clarify) an express statement that it seeks to provide a return similar to its corresponding Trust Portfolio and the name of its corresponding Trust Portfolio. The Fund Facts of each existing and future Class Portfolio will include similar disclosure;
(b) include in the investment strategies of the Class Portfolio the investment strategies of its corresponding Trust Portfolio; and
(c) disclose that the accountability for portfolio management (including investment decision-making) is:
(i) at the level of the Trust Portfolio with respect to the investment portfolio of the Trust Portfolio; and
(ii) at the level of the Underlying Trust Fund with respect to the investment portfolio of the Underlying Trust Fund.
18. Each Class Portfolio will comply with the requirements under National Instrument 81-106 Investment Fund Continuous Disclosure 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 Class Portfolio were investing directly in the Underlying Trust Funds held by its corresponding Trust Portfolio.
19. Each investment by a Class Portfolio in securities of its corresponding Trust Portfolio will be made in accordance with the provisions of section 2.5 of NI 81-102, except for the requirements of paragraph 2.5(2)(b). Each investment by a Trust Portfolio in securities of an Underlying Trust Fund is made in accordance with the provisions of section 2.5 of NI 81-102.
20. There will be no duplication of fees between each tier of the multi-tier structure. The simplified prospectus of each Class Portfolio and Trust Portfolio discloses that fees and expenses will not be duplicated as a result of investments in underlying funds.
21. The Exemption Sought, which will permit each Class Portfolio to invest in securities of its corresponding Trust Portfolio which, in turn, invests in securities one or more Underlying Trust Funds, is akin to, and no more complex than, the three tier structure currently permitted under paragraph 2.5(4)(a) of NI 81-102.
22. The Filer has determined that it may be more efficient and less costly in some circumstances for a Class Portfolio to pursue its investment objective by using Three Tier Investing than by seeking to invest directly in the same securities and other assets, and in the same proportions, as its corresponding Trust Portfolio. For example, where a Class Portfolio is smaller than its corresponding Trust Portfolio, the Class Portfolio will incur proportionately higher brokerage and other implementation costs for making the same investments in portfolio securities as its corresponding Trust Portfolio. By instead investing in its corresponding Trust Portfolio, the Class Portfolio will be able to combine its assets with the Trust Portfolio and thereby obtain exposure to such investments while indirectly bearing only its proportionate share of the lower brokerage and other implementation costs of the Trust Portfolio.
23. The Filer also has determined that Three Tier Investing will reduce tracking error between the performance of a Class Portfolio and the performance of its corresponding Trust Portfolio because:
(a) when not using Three Tier Investing, a Class Portfolio may not be able to invest its assets at all times in the same securities and other assets and in the same proportions as its Trust Portfolio. For example, where a Class Portfolio is smaller than its corresponding Trust Portfolio, it may have difficulty obtaining and maintaining the same exposure as its corresponding Trust Portfolio with a smaller amount of assets compared to its corresponding Trust Portfolio; and
(b) when using Three Tier Investing: (i) the Class Portfolio will have indirect exposure to all the same securities and other assets held by its corresponding Trust Portfolio and in the same proportions, and (ii) any adjustment made by the corresponding Trust Portfolio to its holdings will automatically result in a corresponding adjustment to the Class Portfolio's indirect exposure to those holdings.
24. The Filer intends to consider the costs and benefits to the Class Portfolio of Three Tier Investing and make the determination whether a Class Portfolio utilizes Three Tier Investing to track the performance of its corresponding Trust Portfolio on a case-by-case basis.
25. Each investment by a Class Portfolio in securities of its corresponding Trust Portfolio will represent the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Class Portfolio.
26. The Filer has determined that it would be in the best interests of each Class Portfolio and not prejudicial to the public interest to receive the Exemption Sought.
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:
(a) the investment objective of each Class Portfolio, as stated in its simplified prospectus and Fund Facts, states that it seeks to provide a return similar to its corresponding Trust Portfolio and states the name of its corresponding Trust Portfolio; and
(b) each investment by a Class Portfolio in securities of its corresponding Trust Portfolio 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 requirements.
Schedule A
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Existing Class Portfolio |
Corresponding Existing Trust Portfolio |
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Russell Multi-Asset Fixed Income Class |
Russell Multi-Asset Fixed Income |
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Russell LifePoints Conservative Income Class Portfolio |
Russell LifePoints Conservative Income Portfolio |
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Russell LifePoints Balanced Income Class Portfolio |
Russell LifePoints Balanced Income Portfolio |
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Russell LifePoints Balanced Class Portfolio |
Russell LifePoints Balanced Portfolio |
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Russell LifePoints Balanced Growth Class Portfolio |
Russell LifePoints Balanced Growth Portfolio |
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Russell LifePoints Long-Term Growth Class Portfolio |
Russell LifePoints Long-Term Growth Portfolio |
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Russell LifePoints All Equity Class Portfolio |
Russell LifePoints All Equity Portfolio |
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Russell Income Essentials Class Portfolio |
Russell Income Essentials Portfolio |
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Russell Diversified Monthly Income Class Portfolio |
Russell Diversified Monthly Income Portfolio |
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Russell Multi-Asset Growth & Income Class |
Russell Multi-Asset Growth & Income |