CI Investments Inc. and CI First Asset U.S. Trendleaders Index ETF
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from sections 2.3(e), 2.3(f), 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 Investment Funds to permit an index mutual funds to invest in a gold ETF traded on a U.S. stock exchange in accordance with the index methodology of the index being tracked.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.3(e), 2.3(f), 2.5(2)(a) and 2.5(2)(c) and 19.1.
September 2, 2020
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 CI INVESTMENTS INC. (the Filer) AND IN THE MATTER OF CI FIRST ASSET U.S. TRENDLEADERS INDEX ETF (the Fund)
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of the Fund, an exchange-traded investment fund managed by CI to which National Instrument 81-102 Investment Funds (NI 81-102) applies, a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) pursuant to section 19.1 of NI 81-102:
(a) exempting the Fund from sub-sections 2.3(e) and (f) of NI 81-102 to permit the Fund to invest indirectly in gold through investments in shares of the SPDR Gold Trust which, immediately after the purchase thereof, would constitute up to 33 1/3 percent of the net asset value (NAV) of the Fund (the Commodity ETF Relief) to track the performance of the performance of the CIBC U.S. Trendleaders Index (the "Index"); and
(b) exempting the Fund from sub-sections 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to permit the Fund to invest in the shares of the SPDR Gold Trust to track the performance of the Index notwithstanding that such shares do not qualify as "index participation units" (IPUs) (as defined in NI 81-102) and that SPDR Gold Trust is not an investment fund subject to NI 81-102 (the FOF Relief and, together with the Commodity ETF Relief, the Relief 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;
(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 provinces and territories of Canada other than Ontario (together with the Jurisdiction, the Jurisdictions).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
The decision is based on the following facts represented by CI:
CI and the Fund
1. The Filer is a corporation amalgamated under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
2. The Filer is registered under the securities legislation in:
(a) as an investment fund manager in Ontario, Québec and Newfoundland and Labrador,
(b) as a portfolio manager and exempt market dealer in each of the Jurisdictions, and
(c) as a commodity trading counsel and commodity trading manager under the Commodity Futures Act in Ontario.
3. The Filer is the manager of the Fund.
4. The Filer is not in default of securities legislation in any of the Jurisdictions.
5. The Fund is 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.
6. The Fund is a reporting issuer under the securities legislation of all the Jurisdictions.
7. The Fund is not in default of securities legislation in any of the Jurisdictions, other than in respect of the matters addressed in this Application.
The Fund and the Index
8. The Fund's investment objective is to replicate the Index, net of expenses. CIBC World Markets Inc. is the Index sponsor and Solactive AG, a Germany-based index provider operating globally that develops tailor-made and multi-asset class index solutions for exchange-traded funds and other index-linked investment products with the leading global investment banks and asset managers as clients, is the Index calculator. The Index is composed primarily of equity securities included in the Solactive U.S. Large and Midcap Index, a separate index published by Solactive AG. The Fund seeks to meet its investment objective by holding certain securities in the Solactive U.S. Large and Midcap Index in the same proportions as such securities appear in the Index from time to time.
9. The Index is comprised of a portfolio of equity securities of U.S. companies. The Index employs a proprietary rules-based model developed by CIBC World Markets (the "Index Construction Rules") which systematically and objectively selects and ranks securities based on the duration and longevity of certain underlying strengths and incorporates an objective quantitative filter for technical factors. The Index was developed based on the empirical evidence that shows that equity securities with the highest trend scores will continue to generate better absolute and relative returns on a more frequent basis and will undergo different cycles of mean-reversion, mostly tied to the duration of the period during which the trend factors are expanding or contracting. The Index Construction Rules are available on the Fund's CI Website, which is publicly available.
10. To qualify for inclusion in the Index, an equity security must: (i) be a constituent of the Solactive U.S. Large and MidCap Index, and (ii) meet a minimum average daily traded dollar value volume threshold. The Index is reconstituted and rebalanced monthly in order to remove constituents with weakening or stagnating trend scores and replace them with a new set of higher trend-scoring constituents.
11. The Index Construction Rules governing the Index provide that, in the event that the filtering of the eligible equity securities result in numbers of eligible securities falling below the required minimum of 30 from the Solactive US Large Cap Index and 20 from the Solactive US Mid Cap Subgroup, the Index in the following month will be linked to the performance of an equally weighted basket of SPDR S&P 500 Trust ETF securities, iShares iBoxx $ Investment Grade Corporate Bond ETF securities and SPDR Gold Shares (the "Fallback Portfolio").
12. The Index is reconstituted and rebalanced on the 2nd business day of each month. If the Index in the prior month comprises the Fallback Portfolio but the filtering of the eligible equity securities provided by the Index Construction Rules for the following month results in the numbers of eligible securities being above the required minimum of 30 from the Solactive US Large Cap Index and 20 from the Solactive US Mid Cap Subgroup, the Index will revert back to a broad selection of such equity securities.
13. On March 2, 2020, the Filer was notified by Solactive AG, as index calculation agent on behalf of CIBC World Markets that, with effect from March 4, 2020, the Index would be linked to the Fallback Portfolio. In lieu of securities in iShares iBoxx $ Investment Grade Corporate Bond ETF, the notice from Solactive AG advised that the Fallback Portfolio would comprise securities in the iShares Broad USD Investment Grade Corporate Bond ETF, an ETF similar to the iShares iBoxx $ Investment Grade Corporate Bond ETF. In accordance with its usual practice, the Fund followed the Index by disposing of the equity securities that had previously been in the Index and investing in the securities comprising the Fallback Portfolio.
14. The securities of the SPDR S&P 500 Trust, the iShares iBoxx Investment Grade Corporate Bond ETF and the iShares Broad USD Investment Grade Corporate Bond ETF qualify as IPUs because they are securities traded on a stock exchange in the United States and are issued by an issuer, the only purpose of which is to hold the securities that are included in a specified widely-quoted market index in substantially the same proportion as those securities are reflected in that index. The SPDR S&P 500 Trust tracks the S&P 500 index, the iShares iBoxx Investment Grade Trust tracks the iBoxx Investment Grade Corporate Bond index and the iShares Broad USD Investment Grade Corporate Bond ETF tracks the ICE BofAML US Corporate Index.
15. Unlike the securities of the SPDR S&P 500 Trust, the iShares iBoxx Investment Grade Corporate Bond ETF and the iShares Broad USD Investment Grade Corporate Bond ETF, the securities of the SPDR Gold Trust do not qualify as IPUs because they track the value of gold bullion rather than the securities in a "specified widely quoted market index".
The Relief Sought
16. Under sub-section 2.1(5) of NI 81-102, an index mutual fund, the name of which includes the word "index", may, in order to satisfy its fundamental investment objectives, purchase a security, enter into a specified derivatives transaction or purchase index participation units if its prospectus contains the disclosure referred to in subsection (5) of Item 6 and subsection (5) of Item 9 of Part B of Form 81-101F1 Contents of Simplified Prospectus. This includes disclosure that, as an index fund, the Fund may, in basing its investment decisions on a permitted index, have more of its net asset value invested in one or more issuers than is usually permitted for investment funds.
17. The Fund qualifies as an index mutual fund under sub-section 2.1(5) of NI 81-102 because its name includes "index" and its prospectus includes the disclosure required by sub-section 2.1(5) of NI 81-102.
18. However, because the securities of the SPDX Gold Trust do not qualify as IPUs, they might be characterized as specified derivatives, the underlying interest of which is gold, and the Fund would therefore be restricted by sub-sections 2.3(e) and (f) of NI 81-102 from purchasing such securities if, following such purchase, more than 10 percent of its NAV is invested in such securities.
19. In addition, given the securities of SPDR Gold Trust do not qualify as IPUs, the Fund is not permitted by sub-sections 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to purchase such securities due to the fact that the SPDR Gold Trust is not an investment fund subject to NI 81-102 and is not a reporting issuer in one of the Jurisdictions.
20. The Relief Sought is requested in order to permit the Fund to continue to meet its fundamental investment objectives, in compliance with the exception to the concentration limit in sub-section 2.1(5) of NI 81-102, and in accordance with the expectation of investors in the Fund. It is anticipated that the Relief Sought would only need to be relied on in exceptional market circumstances such as those in February and March 2020.
21. Any regulatory concerns, such as undue risk, liquidity concerns or lack of transparency, in connection with investing in the SPDR Gold Trust ETFs are mitigated by the following:
(a) The SPDR Gold Trust is the largest physically-backed gold ETF in the world and is liquid. It trades on the New York Stock Exchange and the Singapore, Tokyo, Hong Kong and Mexico stock exchanges;
(b) The SPDR Gold Trust is a "registered" investment company in the United States, which means that there will be clear disclosure about the SPDR Gold Trust readily available in the marketplace;
(c) The amount of loss that can result from an investment by the Fund in the SPDR Gold Trust will be limited to the amount invested by the Fund in securities of the SPDR Gold Trust;
(d) The prospectus of the Fund on its renewal will disclose:
(i) in the investment strategy section: (I) that the Fund has obtained relief to invest in securities of the SPDR Gold Trust; (II) an explanation of what the SPDR Gold Trust is; (III) that the Fund may indirectly invest in gold; and
(ii) the risks associated with investment in gold through the SPDR Gold Trust.
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:
(a) the investment by a Fund in securities of the SPDR Gold Trust is in accordance with the fundamental investment objectives of the Fund and solely to track the Index;
(b) the securities of the SPDR Gold Trust are traded on a stock exchange in the United States;
(c) apart from investment in the securities of SPDR Gold Trust, the Fund does not incur any other direct or indirect exposure to physical commodities;
(d) the prospectus of the Fund discloses on its renewal:
(i) in the investment strategy section:
(A) that the Fund has obtained relief to invest in securities of the SPDR Gold Trust;
(B) an explanation of what the SPDR Gold Trust is; and
(C) that the Fund may indirectly invest in gold; and
(ii) the risks associated with such investments and strategies.
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission