The Ontario Securities Commission granted an exemption to investment funds managed by Northwest & Ethical Investments L.P. from the concentration restriction in subsection 2.1(1) of National Instrument 81-102 Investment Funds (NI 81-102). This exemption allows these funds to invest more than 10% of their net asset value in debt securities issued or guaranteed by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which exceed the limits set by NI 81-102.
The decision was based on the reasoning that debt securities from Fannie Mae and Freddie Mac are implicitly guaranteed by the U.S. government, despite the lack of an explicit guarantee. These entities are integral to the U.S. mortgage industry and are considered government-sponsored entities under the U.S. Investment Company Act of 1940. Their securities have a credit rating equivalent to that of the U.S. government.
The exemption is subject to conditions, including that the securities must have a U.S. Government Equivalent Rating and a minimum rating of BBB- or equivalent at the time of purchase. The funds’ simplified prospectus must disclose the exemption and the associated risks, including the potential lack of a U.S. government guarantee and the risks of investing more than 10% of net assets in Fannie Mae or Freddie Mac securities.
If the credit rating of these securities falls below the required minimum or if there is significant risk that the implied U.S. government guarantee could be removed due to proposed legislation, the funds must take steps to dispose of the securities to comply with subsection 2.1(1) of NI 81-102.
The decision was made under the securities legislation of Ontario, pursuant to section 19.1 of NI 81-102, and is applicable across multiple Canadian jurisdictions through the Multilateral Instrument 11-102 Passport System.