The Securities Commission has granted certain investment funds managed by Manulife Investment Management Limited, or its affiliates, an exemption from the concentration limits prescribed in subsections 2.1(1) and 2.1(1.1) of National Instrument 81-102 Investment Funds (NI 81-102). This exemption allows the funds to invest more than the standard 10% (for mutual funds) or 20% (for alternative mutual funds and non-redeemable investment funds) of their net asset value in debt obligations issued or guaranteed by Fannie Mae or Freddie Mac.
The decision is based on the fact that Fannie Mae and Freddie Mac are instrumentalities of the U.S. government and play a critical role in the U.S. mortgage industry. Although their debt is not explicitly guaranteed by the U.S. government, it is widely assumed that there is an implicit guarantee due to their significance in the mortgage market. During the 2008 financial crisis, both entities were placed under conservatorship to avoid default, reinforcing the perception of an implicit government guarantee. Their securities are considered government securities under the U.S. Investment Company Act of 1940, and they are rated equivalent to U.S. government debt by designated rating organizations.
The exemption is subject to conditions that the securities must have a U.S. Government Equivalent Rating and a minimum credit rating at the time of purchase. The funds’ prospectuses must disclose the permission to exceed the standard concentration limits and the associated risks, including the lack of an explicit government guarantee and the potential legislative changes that could affect the implied guarantee.
If the credit rating of the securities falls below the required threshold or if U.S. Congress proposes or enacts legislation that could remove the implied guarantee, the funds must dispose of the securities in a manner that complies with the standard concentration limits of NI 81-102.