Russell Investments Canada Limited and The Top Funds
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to permit investment funds subject to NI 81-102 to invest in securities of related underlying investment funds that are not reporting issuers and that hold more than 10% of their net asset value in securities of other related and unrelated investment funds -- Relief subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(a), 2.5(2)(b), 2.5(2)(c) and 19.1.
November 14, 2024
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 TOP FUNDS
(as Defined Below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of each of the Filer, the Filer's affiliates, the investment funds managed by the Filer or by an affiliate of the Filer that are reporting issuers subject to National Instrument 81-102 Investment Funds (NI 81-102) and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) (the Existing Top Funds) and any future investment funds managed by the Filer or an affiliate of the Filer that are, or will be, reporting issuers subject to NI 81-102 and NI 81-107 (the Future Top Funds, and together with the Existing Top Funds, the Top Funds).
The Filer intends for one or more Top Funds to invest, as the Filer considers in the best interest of the Top Fund and in accordance with its investment objectives and strategies, a portion of its assets in securities of Russell Investments Global Unlisted Infrastructure Fund S.C.A., SICAV-RAIF, an investment company with variable capital (société d'investissement à capital variable) (SICAV) established as a public limited liability company (société anonyme) in accordance with the Luxembourg law of 10 August 1915 on commercial companies and registered under Part II of the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment that is not currently subject to NI 81-102 or NI 81-107 (the Initial Underlying Fund), and/or in any other future investment fund that is, or will be, managed by the Filer or any affiliate and that is not subject to NI 81-102 or NI 81-107 (the Future Underlying Funds and, together with the Initial Underlying Fund, the Underlying Funds), each of which Underlying Fund in turn may hold more than 10% of its net asset value (NAV) in securities of one or more investment funds (the Third Tier Funds and, each, a Third Tier Fund) (each, a Three-Tier Structure). The Filer has therefore applied for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Top Funds from the following prohibitions in NI 81-102:
(a) paragraph 2.5(2)(a) of NI 81-102, which prohibits an investment fund from purchasing or holding a security of another investment fund unless, if the investment fund is a mutual fund, other than an alternative mutual fund, either of the following applies: (i) the other investment fund is a mutual fund, other than an alternative mutual fund, that is subject to NI 81-102; (ii) the other investment fund is an alternative mutual fund or a non-redeemable investment fund that is subject to NI 81-102 and, at the time of the purchase of that security, the investment fund holds no more than 10% of its NAV in securities of alternative mutual funds and non-redeemable investment funds;
(b) paragraph 2.5(2)(b) of NI 81-102, which prohibits an investment fund from purchasing or holding a security of another investment fund which in turn may hold more than 10% of its NAV in securities of one or more investment funds; and
(c) paragraph 2.5(2)(c) of NI 81-102, which prohibits an investment fund from purchasing or holding a security of another investment fund unless the other investment fund is a reporting issuer in a jurisdiction
(collectively, 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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Québec, Prince Edward Island, Saskatchewan and Yukon (together with the Jurisdiction, the Canadian Jurisdictions).
Interpretation
Terms defined in Legislation, National Instrument 14-101 Definitions, NI 81-102 and NI 81-107 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 incorporated under the federal laws of Canada with its head office located in Toronto, Ontario.
2. The Filer currently is registered under the securities legislation in:
(i) each Canadian Jurisdiction in the categories of investment fund manager, portfolio manager and exempt market dealer;
(ii) Ontario as a commodity trading manager and as a mutual fund dealer exempt from membership in the Mutual Fund Dealers Association of Canada (now the Canadian Investment Regulatory Organization); and
(iii) Manitoba as an advisor (commodities).
3. The Filer is not in default of securities legislation in any of the Canadian Jurisdictions.
The Top Funds
4. Each Top Fund is, or will be, an investment fund to which NI 81-102 applies, and will be organized and governed by the laws of a Canadian Jurisdiction.
5. The Filer is the manager of the Existing Top Funds and the Filer, or an affiliate of the Filer, will be the manager of any Future Top Funds. To the extent that the Filer or its affiliate is the manager of any Future Top Fund, the representations set out in this Application will apply to the same extent to such Future Top Fund.
6. The securities of each of the Top Funds are, or will be, qualified for distribution in one or more of the Canadian Jurisdictions and distributed to investors pursuant to a simplified prospectus and fund facts document(s), prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), or as applicable, pursuant to ETF facts document(s) prepared in accordance with National Instrument 41-101 General Prospectus Requirements (NI 41-101).
7. Each Top Fund is, or will be, a reporting issuer under the securities legislation of one or more Canadian Jurisdictions.
8. The Existing Top Funds are not in default of the securities legislation of any of the Canadian Jurisdictions.
9. The Top Funds wish to have the ability to purchase securities of the Underlying Funds, each of which may hold more than 10% of its NAV in securities of the Third Tier Funds, as described below.
10. Other than as described herein and pursuant to other exemptive relief, each Top Fund will comply with the investment restrictions and practices provided in Part 2 of NI 81-102 in making any investment in an Underlying Fund and, in particular, will comply with the concentration restriction in section 2.1 of NI 81-102 and the illiquid assets restriction in section 2.4 of NI 81-102.
11. No Top Fund will actively participate in the business or operations of an Underlying Fund.
12. Each Top Fund qualifies to invest in securities of the Underlying Funds pursuant to applicable exemptions from the prospectus requirement under National Instrument 45-106 Prospectus Exemptions (NI 45-106) and/or the Legislation.
13. The simplified prospectus of each Top Fund discloses, or will disclose, in its description of the Top Fund's investment strategies that the Top Fund may invest up to 10% of its assets directly or indirectly in the Underlying Funds.
14. Each Top Fund is, or will be, subject to NI 81-107 and the Filer has established, or will establish an independent review committee (IRC) in order to review conflict of interest matters pertaining to its management of the Top Funds as required by NI 81-107.
The Underlying Funds
15. Russell Investments Limited, an affiliate of the Filer, is the investment manager of the Initial Underlying Fund. The Filer, or an affiliate of the Filer, will be the manager of any Future Underlying Funds. To the extent that the Filer or an affiliate of the Filer is the manager of any Future Underlying Funds, the representations set out in this decision will apply to the same extent to such Future Underlying Funds.
16. The Initial Underlying Fund is an alternative investment fund (within the meaning of such term under Luxembourg law) established as a SICAV under the laws of Luxembourg.
17. The Initial Underlying Fund falls within the definition of "investment fund" under the Legislation as it will not invest for the purpose of exercising or seeking to exercise control over any issuer.
18. Each Future Underlying Fund will be structured as a limited partnership, trust, corporation or other domestic or foreign entity under the laws of a province or territory of Canada, the United States, Luxembourg, or another jurisdiction and will not be subject to NI 81-102 or NI 81-107.
19. Future Underlying Funds will be "investment funds" under the Legislation.
20. No Underlying Fund will prepare a simplified prospectus in accordance with NI 81-101 or a long form prospectus in accordance with NI 41-101.
21. The Underlying Funds are not, or will not be, reporting issuers in any of the Canadian Jurisdictions or listed on any recognized stock exchange.
22. Securities of the Underlying Funds will be distributed solely to investors in Canada pursuant to exemptions from the prospectus requirements in accordance with NI 45-106 and the Legislation and may be sold by way of prospectus or private placement in other jurisdictions.
23. The Underlying Funds are, or will be, primarily held by investors who would qualify as accredited investors under NI 45-106 (or a similar equivalent in other jurisdictions) and who are not affiliated with the Filer.
24. The Initial Underlying Fund is not in default of the securities legislation of any of the Canadian Jurisdictions.
25. The investment objective of the Initial Underlying Fund is to invest in a broadly diversified portfolio of unlisted infrastructure funds in open-end format managed by investment managers that are unaffiliated with the Filer or its affiliates, co-investments alongside third-party investment managers and other investment structures that may become available from time to time, including public securities.
26. The Future Underlying Funds will provide exposure to investments in one or a combination of alternative or private market asset classes, including private equity, private credit, private infrastructure, private real estate, and other alternative investments (the Private Market Investments).
27. The securities of each Underlying Fund are, or will be, illiquid assets for purposes of NI 81-102 including for purposes of the restriction in section 2.4 of NI 81-102 applicable to each of the Top Funds.
28. As part of its investment objective and strategies, each Underlying Fund may invest in securities of Third Tier Funds.
29. Paragraph 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 than 10% of its net assets invested in securities of other investment funds (the Multi-Tier Prohibition).
30. Since an Underlying Fund's investment in securities of the Third Tier Funds may, from time to time, exceed 10% of the NAV of the Underlying Fund, the Multi-Tier Prohibition will prohibit a Top Fund from investing in an Underlying Fund.
31. An investment by a Top Fund in an Underlying Fund would not qualify for the exemptions in paragraph 2.5(4) of NI 81-102 from the Multi-Tier Prohibition because the Underlying Funds do not issue index participation units and are not clone funds or money market funds.
32. No Underlying Fund will sell short securities of a Third Tier Fund, excluding index participation units.
33. The Third Tier Funds may be managed by the Filer or its affiliates.
34. A NAV of each Underlying Fund will be calculated and will be, used for the purposes of determining the purchase and redemption price of the securities of the Underlying Fund.
35. The value of the underlying portfolio assets of the Initial Underlying Fund will be determined by a third-party administrator that is independent of the Filer, the Top Funds and the Underlying Funds. The value of the underlying portfolio assets of the Initial Underlying Fund will be determined on at least a quarterly basis. Similar independent valuation will be carried out in respect of the underlying portfolio assets of each Future Underlying Fund.
36. Each Underlying Fund produces, and will produce, audited financial statements on an annual basis, in accordance with generally accepted accounting principles with a qualified auditing firm as the auditor of those financial statements.
Investments by Top Funds in the Underlying Funds
37. An investment by a Top Fund in an Underlying Fund will only be made if the investment is, or will be, compatible with the investment objectives of the Top Fund.
38. An investment by a Top Fund in an Underlying Fund will only be made if such investment represents the business judgment of a responsible person uninfluenced by considerations other than the best interests of that Top Fund.
39. The investments in the Underlying Funds will be included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102 for each Top Fund.
40. The Filer believes that the investment by a Top Fund in an Underlying Fund will provide the Top Fund with an efficient and cost-effective way for the Top Fund to obtain exposure to Private Market Investments, which are generally not available through investment funds that are reporting issuers or through direct investment. A Top Fund will also gain access to the investment expertise of the portfolio manager to the underlying assets of each Underlying Fund, as well as to their investment strategies and asset types.
41. The Filer believes that a meaningful allocation to Private Market Investments provides Top Fund investors with unique diversification opportunities and represents an appropriate investment tool for the Top Fund that has not been widely available in the past. Private Market Investments have historically provided diversification benefits in adverse market conditions and so the Filer believes that permitting a Top Fund to increase its allocation to such strategies, offers the potential to improve a Top Fund's risk adjusted returns.
42. The Filer believes that an optimal way to access such investment strategies is through investments in the Underlying Funds. Investing in the Underlying Funds will provide the Top Funds with access to investments in these strategies that the Top Funds would not otherwise have exposure to through portfolios diversified across different strategies, industry sectors and geographies constructed by the Filer's and/or its affiliates' experienced investment professionals.
43. Investments by a Top Fund in an Underlying Fund will be effected at an objective price. The Filer's policies and procedures provide that an objective price, for this purpose, will be the NAV per security of the applicable Underlying Fund.
44. Each Top Fund is, or will be, valued and redeemable daily and the Underlying Funds may be potentially subject to redemption limitations, including lock-up periods, early redemption penalties and other restrictions on redemptions in a given period of time (a Redemption Limitation).
45. A Top Fund will not invest in an Underlying Fund unless the portfolio manager of the Top Fund believes that the liquidity of the Top Fund's portfolio is adequately managed through other strategies.
46. The Filer does not anticipate that any sales fees or redemption fees would be incurred, directly or indirectly, by a Top Fund with respect to an investment in an Underlying Fund and between the Underlying Funds and the Third Tier Funds if such Third Tier Funds are managed by the Filer or its affiliates that, to a reasonable person, would duplicate a fee payable by the Top Fund or its investors to the Filer, unless the Top Fund redeems its securities of the Underlying Fund during a Redemption Limitation, in which case a fee may be payable by the Top Fund.
47. In respect of an investment by a Top Fund in an Underlying Fund and between the Underlying Funds and the Third Tier Funds if such Third Tier Funds are managed by the Filer or its affiliates, no management fees or incentive fees will be payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service.
Generally
48. Since the Underlying Funds are not reporting issuers and are not subject to NI 81-102, the Top Funds are unable to rely upon the exemption codified under subsection 2.5(7) of NI 81-102 for investments by investment funds subject to NI 81-102 in other investment funds.
49. Absent the Exemption Sought, a Top Fund would be prohibited by paragraphs 2.5(2)(a), 2.5(2)(b) and 2.5(2)(c) of NI 81-102 from purchasing or holding securities of an Underlying Fund because the Underlying Funds (i) are not subject to NI 81-102; (ii) may hold more than 10% of its NAV in securities of other investment funds; and (iii) are not reporting issuers in the Canadian Jurisdictions.
50. The Filer considers that investments in the Underlying Funds by the Top Funds raise "conflict of interest matters" within the meaning of NI 81-107 and therefore if the Exemption Sought is granted, the Filer will request approvals of the IRC for the proposed investments of the Top Funds in the Underlying Funds, including by way of standing instructions. No such investments will be made until the IRC provides its approvals under section 5.2 of NI 81-107. The manager of the Top Funds will comply with section 5.1 of NI 81-107 and the manager of the Top Funds and the IRC of the Top Funds will comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions. If the IRC becomes aware of an instance where the manager of a Top Fund did not comply with the terms of any decision evidencing the Exemption Sought, or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Top Fund will, as soon as practicable, notify in writing the securities regulatory authority or regulator in the Canadian Jurisdiction under which the Top Fund is organized.
51. On an annual basis, the financial statements of each Underlying Fund are, or will be, audited by the Underlying Fund's external auditors, which audit includes independent confirmation of the fair value of each portfolio investment. Such appointed auditor also audits the value of the portfolio investments to ensure that they are accurately valued in accordance with the Underlying Fund's valuation policy. Such financial statements will be accessible in the ordinary course by the Filer.
52. Aside from the sections covered by the Exemption Sought, the Top Funds will comply with section 2.5 of NI 81-102 with respect to any investment in an Underlying Fund and the investments in the Underlying Funds will be included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102 applicable to each Top Fund.
53. The Filer will foster standards of fairness in the allocation of orders policy, the purpose of which 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 assessing material costs between funds that pertain to transaction charges. This policy is designed to isolate material and/or excessive transaction costs associated with significant trades, at the Filer's discretion, 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.
54. The Filer has implemented a liquidity risk management policy, the purpose of which is to monitor underlying liquidity of investment funds managed by the Filer, with each such investment fund potentially considered a large unitholder investment. This policy seeks to ensure that unitholders are not adversely impacted by trading activities of large unitholders.
55. The Filer has its own liquidity risk management policy and manages each Top Fund's liquidity prudently under the policy. Given the readily available liquidity of the remainder of each Top Fund's investment portfolio, the Filer believes that the risk of the Top Funds needing to liquidate its investments in these illiquid Underlying Funds when markets are under stress or in other environments where liquidity may be reduced is remote.
56. The prospectus of the Top Fund discloses or will disclose in the next regularly scheduled renewal, or amendment if earlier, that the Top Fund invests in securities of the Underlying Funds, and that each Underlying Fund may invest more than 10% of its NAV in securities, on an aggregate basis of other investment funds, including Third Tier 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 Exemption Sought is granted, provided that:
a) the Filer or an affiliate is the registered investment fund manager of each Top Fund, each Underlying Fund and each Third Tier Fund;
b) no Top Fund will actively participate in the business or operations of any Underlying Fund;
c) each Top Fund will be treated similar to an arm's-length investor when making investments in each Underlying Fund, with such investment being accepted by the Underlying Fund on a fair and equitable basis as compared to all other third-party investors;
d) the investment by a Top Fund in securities of an Underlying Fund is compatible with the investment objectives and strategies of the Top Fund;
e) a direct or indirect investment by a Top Fund in an Underlying Fund will be compatible with the investment objective and strategies of such Top Fund and included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102;
f) the IRC of a Top Fund will review and provide its approval, including by way of standing instructions, prior to the purchase of securities of an Underlying Fund, directly or indirectly, by the Top Fund, in accordance with subsection 5.2(2) of NI 81-107. The Filer will comply with section 5.1 of NI 81-107, and the Filer and the IRC of the Top Fund will comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions;
g) the Filer does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the holders of such securities, except that the Filer may arrange for the securities the Top Fund holds of an Underlying Fund to be voted by the beneficial owners of the securities of the Top Fund who are not the Filer or an officer, director or substantial securityholder of the Filer;
h) a Top Fund will invest in, and redeem, each Underlying Fund at the NAV of the applicable securities of the Underlying Fund, which will be based on the valuation of the applicable portfolio assets, including the Third Tier Funds, to which the Underlying Fund has exposure, determined by a third party that is independent of the Filer and the Top and Underlying Funds;
i) a Top Fund will invest in a Future Underlying Fund only where it is managed by the Filer or an affiliate, structured in similar ways to the Initial Underlying Fund and the NAV of the Future Underlying Fund is based on a valuation that is determined by a third party that is independent of the Filer and the Top and Underlying Funds;
j) the prospectus of a Top Fund relying on this decision discloses, or will disclose, in the next renewal or amendment thereto following the date of this decision, the fact that the Top Fund may invest in an Underlying Fund, and that each Underlying Fund may invest more than 10% of its NAV in securities, on an aggregate basis, of other investment funds, including Third Tier Funds;
k) the Top Fund's investment in securities of each Underlying Fund and each Underlying Fund's investment in each Third Tier Fund 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), including, for greater certainty that:
i. no management fees or incentive fees will be payable by a Top Fund or an Underlying Fund, respectively, that, to a reasonable person, would duplicate a fee payable by an Underlying Fund or a Third Tier Fund, respectively, for the same service;
ii. no sales fees or redemption fees will be payable by a Top Fund or an Underlying Fund, respectively, in relation to its purchases or redemptions of the securities of an Underlying Fund or a Third Tier Fund, respectively, unless the Top Fund redeems its securities of the Underlying Fund during a Redemption Limitation, in which case a fee may be payable by the Top Fund; and
iii. no sales fees or redemption fees will be payable by a Top Fund or an Underlying Fund, respectively, in relation to its purchases or redemptions of securities of an Underlying Fund or Third Tier Fund, respectively, that, to a reasonable person, would duplicate a fee payable by an investor in the Top Fund or Underlying Fund, respectively.
l) 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 assessing material portfolio transaction costs among all of such investment funds;
m) 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 Top Fund, Underlying Fund and Third Tier Fund in a Three-Tier Structure is managed as a stand-alone investment for purposes of these policies and procedures;
n) each Top Fund in a Three-Tier Structure complies with the requirements under NI 81-106 relating to quarterly portfolio holdings, top 25 positions portfolio holdings disclosure in its management reports of fund performance, and statement of investment portfolio in its annual and interim financial reports, and the requirements of Form 81-101F3 relating to top 10 position portfolio holdings disclosure in its Fund Facts, in respect of its investment in an Underlying Fund and, where applicable, as if the Top Fund was investing directly in the Third Tier Funds; and
o) none of the Top Funds, Underlying Funds and Third Tier Funds relies on any discretionary relief permitting such 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 Management Division
Ontario Securities Commission
Application File #: 2024/0639
SEDAR+ File #: 6200453