I.G. Investment Management, Ltd. and Investors Morgage Fund - MRRS Decision
Headnote
Mutual Reliance Review System for exemptive relief application -- mortgage investment fund permitted to change method of acquiring mortgages in non-arms-length transactions from the Forward Commitment Rate to the Modified Lender's Rate and to exempt the Fund from the investment restriction that only permits a mortgage fund to invest up to 10% in residential mortgages with terms between 5 and 10 years to permit the Fund to invest up to 40% of its net assets in such mortgages and to exempt the investment fund from the requirement to hold a unitholder vote in circumstances where the basis of the calculation of the fee or expense that is charged to the mutual fund by the mutual fund or its manager is changed in a way that could result in an increase in charges to the mutual fund. -- The relief is necessary to permit the Manager to restructure an existing mortgage fund which includes changes in the investment objectives and strategies and changes to the administrative fees and management fees charged to the Fund -- Approval to change valuation methods to the Modified Lender's Rate given as the Fund has entered into an agreement to repurchase the mortgages from the Fund in circumstances benefiting the Fund and that such an agreement is considered by the Administrators to justify the difference in yield to the Fund, relief granted to permit the Fund to invest up to 40% in residential mortgages with a 5 to 10 year maturity as restructuring provides for appropriate level of diversification, and relief granted from the requirement to have a securityholder's vote on the conditions that the Manager provide an undertaking that it will absorb/waive these expenses on a daily basis to insure that in no case will the overall fees paid to the Manager by the Fund increase as a result of the restructuring and the Manager will provide an annual certificate in this regard.
Applicable Legislative Provisions
Section 2.6 part III of National Policy No. 29, section 2.1(g) parts III of National Policy No. 29 -- section 5.1(a) of National Instrument 81-102 Mutual Funds.
June 6, 2006
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUÉBEC,NEW BRUNSWICK,
NOVA SCOTIA, PRINCE EDWARD ISLAND,
NEWFOUNDLAND AND LABRADOR,
YUKON TERRITORY, NORTHWEST TERRITORIES
AND NUNAVUT TERRITORY
(THE "JURISDICTIONS")
AND
IN THE MATTER OF
THEMUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
I.G. INVESTMENT MANAGEMENT, LTD.
(the "Manager")
AND
INVESTORS MORTGAGE FUND
(the "Fund")
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Manager and the Fund (the "Filers") for a decision under the securities legislation of the Jurisdictions (the "Legislation") for:
• approval to permit the Fund to change the method of valuation of mortgages acquired in non-arm's length transactions from the Forward Commitment Rate to the Modified Lender's Rate (the "Approval"); and
• Exemptive Relief:
(i) to permit the Fund to invest up to 40% of its net assets in residential mortgages having terms to maturity greater than 5 years, but not exceeding 10 years; and
(ii) to permit the Fund to revise its fee structure by introducing a new fee payable by the Fund to the Manager based on the value of mortgages for which the Manager provides ongoing mortgage administration services, and reducing the overall management fee payable by the Fund to the Manager, without prior securityholder approval;
(referred to collectively as the "Requested Relief").
Under the Mutual Reliance Review System for Exemptive Relief Applications:
(a) The Manitoba Securities Commission is the principal regulator for this application; and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained in National Instrument 14-101 - Definitions have the same meaning in this decision unless they are defined in this decision. The following additional terms shall have the following meanings:
"Authorities" means the securities regulatory authority of a Jurisdiction;
"Fund" means Investors Mortgage Fund;
"Instrument" means National Instrument 81-102 -- Mutual Funds;
"Meeting" means a special meeting of securityholders of the Fund to approve changes to the Fund's investment objective and strategy;
"NP 29" means National Policy Statement No. 29 - Mutual Funds Investing in Mortgages; and
"Trustee" means Investors Group Trust Co. Ltd.
Representations
This decision is based on the following facts represented by the Filers:
1. The Manager is a corporation having its registered head office in Winnipeg, Manitoba.
2. The Manager provides day-to-day administration, including securityholder record-keeping, tax reporting and mortgage administration services for the Fund.
3. The Fund was established by a Trust Agreement under the laws of Manitoba.
4. The Fund is an open-end mutual fund. The net asset value of units of the Fund is calculated on a daily basis on each business day.
5. The units of the Fund are qualified for distribution in each province and territory of Canada pursuant to the simplified prospectus of the Investors Group Funds dated June 30, 2005, as amended, and the annual information form of the Investors Group Funds dated June 30, 2005, as amended.
6. The Fund is a reporting issuer under the applicable securities legislation of each province and territory of Canada and is not on the list of defaulting reporting issuers maintained under the applicable securities legislation of the Authorities.
7. The current investment objective of the Fund is to provide a consistent level of current income and stability by investing primarily in mortgages on improved real estate in Canada. To achieve this objective the Fund has assembled and intends to continue to assemble a diversified portfolio of first insured and non-insured mortgages. The Fund invests in mortgages on single family dwellings, condominiums, multi-unit dwellings and commercial properties, all as permitted under NP 29.
8. The Fund follows the standard investment restrictions and practices applicable to mutual funds pursuant to the Instrument and applicable securities legislation established by the Authorities, including the investment restrictions applicable to mortgage mutual funds prescribed by NP 29, except to the extent that the Fund has obtained orders to deviate from such Instrument and applicable securities legislation.
9. The Fund may acquire mortgages from both the Manager and from arm's length sources. Most often, however, it acquires mortgages from the Manager, and has primarily done so for the past several years to the extent that all, or substantially all, of the mortgages now in its portfolio were acquired through the Manager. The valuation methods for mortgages acquired by the Fund are stipulated in Section III of NP 29. Paragraph 2.4 of Section III in NP 29 provides that when acquiring mortgages from lending institutions with which the Fund, the Manager and/or insiders of either of them are not dealing at arm's length, these mortgages must be purchased by the Fund pursuant to any one of three prescribed valuation methods. Paragraph 2.6 of Section III in NP 29 provides that any change by a fund from one of these methods to another of these methods is subject to the prior approval of the "Administrators". Since inception of the Fund in 1973, the mortgages obtained from the Manager have been acquired using the Forward Commitment Rate valuation method.
10. With respect to acquiring mortgages from the Manager under the Modified Lender's Rate, the Manager will enter into an arrangement with the Fund to repurchase any mortgages in circumstances benefiting the Fund, thereby providing the Fund with a credit default guarantee and liquidity guarantee for these mortgages. Therefore, under the Modified Lender's Rate method:
(i) the Manager will assume the risk of changing interest rates between the commitment date and the date when mortgages are acquired by the Fund, and the Manager expects that the change to the Modified Lender's Rate method will allow the Fund a better opportunity to take advantage of relatively more favourable yields; and
(ii) securityholders will also benefit from the credit default and liquidity guarantees provided by the Manager because this will help protect the Fund from losses in the event of default by the borrowers under these mortgages.
11. The Manager further proposes to change the Fund's investment objective and strategy to limit the Fund's investment in mortgages to not more than about 40% of Fund assets. This will enable the Fund to better manage the overall duration of its portfolio through the greater use of bonds and other fixed-term liquid investments.
12. The Fund consistently maintains a high liquidity to ensure it has moneys available for transactional purposes, including client switches and redemptions. The Fund will continue to be subject to the minimum liquidity requirements prescribed by NP 29 even if its investment in mortgages falls below 50% of its net assets.
13. Most of the Fund's mortgage portfolio has been invested in single family residential mortgages, and it is expected that this will continue in the future. Under NP 29, the Fund now has the ability to invest up to 10% of its net assets in residential mortgages having terms between 5 and 10 years. In conjunction with the changes to the Fund's investment objective and strategy described in paragraph 11 above, the Filers seek to have the ability to invest up to 40% of the Fund's net assets in residential mortgages having terms exceeding 5 years, but with a maturity not exceeding 10 years. The Manager expects that this will allow the Fund to better diversify its mortgage portfolio, generate higher income, maximize yield, provide the opportunity to optimize returns for investors and should provide it with greater stability, in part because the Fund should experience less turnover of its mortgage portfolio.
14. Securityholders of the Fund will be asked to approve changes to the Fund's investment objective and fundamental investment strategy, including the changes described in paragraph 13 above, at a special meeting scheduled to be held on or about June 15, 2006 (the "Meeting"). A notice of meeting, management information circular and a proxy in connection with the Meeting has been filed on SEDAR and was mailed to securityholders of the Fund on or before May 23, 2006. A Material Change Report and Media Release in respect of the changes were filed on SEDAR on April 28, 2006. A report of voting results as required by National Instrument 81-102 will be filed on SEDAR in due course after the meeting.
15. The Fund has been an "Underlying Fund" investment for certain other fund-of-funds offered through Investors Group (referred to as the "Portfolios") since 1989. These investments are in compliance with section 2.5 of the Instrument. All of the disclosure material prepared in connection with the Meeting will be provided to securityholders of the Portfolios and they will be able to direct the Manager or Trustee as to how to vote their Portfolio's Holdings in the Fund.
16. The Manager also intends to restructure the fees and expenses payable by the Fund in a way that ensures that the Fund remains competitive, and that reflects fairly the actual costs of operating the Fund. In this regard, the Manager intends to introduce an annual fee of up to 0.15% on the value of mortgages held by the Fund for which the Manager provides ongoing service and administration. This fee will apply only to the assets of the Fund invested in mortgages for which the Manager provides these administration services.
17. Concurrent with the change in the fees described in paragraph 16 above, the Manager intends to reduce the annual management fee now payable by the Fund by 0.10% to 1.55% of the Fund's net assets. The management fee will continue to be calculated and accrued daily based on the net asset value of the Fund. The Manager has determined that this decrease in the Fund's annual management fee, when combined with the 0.15% fee on mortgages serviced by the Manager, should be expected to result over time in an overall net reduction in the Fund's management expense ratio as the Fund's mortgage portfolio decreases from current levels.
18. The Manager undertakes to absorb sufficient fees and/or expenses (if necessary) on a daily basis to ensure that in no case will the overall fees paid to the Manager by the Fund (as a percentage of total assets) increase as a result of these changes. Accordingly, the changes in the fee structure of the Fund will not result in any increase in the fees payable by the Fund to the Manager. The Manager expects that the overall effect of these changes in the Fund's fee structure, objective and strategy, will result over time in relatively lower fees and expenses, and better diversification, and that this will provide the Fund with a greater opportunity to enhance its returns.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that:
1. The Approval is granted in respect of the change in valuation method used by the Fund to value mortgages acquired from non-arm's length parties to the Modified Lender's Rate, provided that the Manager (or an affiliate of the Manager) agrees to repurchase at the request of the Fund any mortgages in default that were acquired by the Fund from the Manager (or a related party) for an amount equal to the outstanding principal balance on those mortgages and any accrued and unpaid interest; and
2. The Requested Relief is granted, provided that:
(a) the relief from the requirement in section 5.1(a) of the Instrument that securityholders of the Fund approve the change in the Fund's fee structure is subject to the Manager waiving or absorbing sufficient fees and/or expenses to ensure that the introduction of any new fees, or the calculation in the basis of any existing fees, does not result in an increase in the total amount of fees payable by the Fund to the Manager as a percentage of the Fund's net assets;
(b) the Manager will provide the Authorities with an undertaking regarding it waiving or absorbing the fees and/or expenses described in clause (a) and will certify at least annually that the Manager is complying with the condition in clause (a), until such time that the mortgage component of the Fund is reduced to 40% of the Fund's net assets; and
(c) the relief from the investment restriction in section 2.1(g) of Part III in NP 29 to allow the Fund to invest up to 40% of its net assets in residential mortgages with terms exceeding 5 years, but not exceeding 10 years, is subject to securityholder approval of the changes in the Fund's investment objective and strategy, including this aspect of the Fund's strategy.