National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to mutual funds from paragraph 2.5(2)(a) of National Instrument 81-102 Mutual Funds to permit the funds to invest up to 10% of net assets in exchange-traded commodity pools that correlate to a multiple (or inverse multiple) of the performance of an underlying index, which are not subject to National Instrument 81-101 Mutual Fund Prospectus Disclosure, and qualified for sale using a long form prospectus, subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.5(2)(a), 19.1.
February 24, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
AGF FUNDS INC.
COUNSEL GROUP OF FUNDS INC.
IN THE MATTER OF
BETAPRO MANAGEMENT INC.
The Ontario Securities Commission has received an application from the Managers with respect to mutual funds managed by them that are subject to National Instrument 81-102 Mutual Funds (NI 81-102) (the Existing Funds), and such other mutual funds subject to NI 81-102 that are managed by a Manager or an affiliate of the Manager in the future (together with the Existing Funds, individually, a Fund and, collectively, the Funds), and BetaPro, the manager and trustee of the Horizons BetaPro ETFs listed in Schedule A (each an Existing HBP ETF) and such other similar funds managed by BetaPro in the future (together with the Existing HBP ETFs, individually a HBP ETF and, collectively, the HBP ETFs), for a decision under Ontario securities legislation (the Legislation) exempting the Funds from paragraph 2.5(2)(a) of NI 81-102 to permit each Fund to invest in HBP ETFs (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(i) the Ontario Securities Commission is the principal regulator for this application; and
(ii) the Managers on behalf of the Funds have provided notice that subsection 4.7(2) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other Provinces and Territories of Canada (together with Ontario, the Jurisdictions, and individually a Jurisdiction).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by each of the Managers on its own behalf and on behalf of the Funds it or an affiliate manages or will manage, and by BetaPro on its own behalf and on behalf of the HBP ETFs:
1. Each Existing Fund is managed by a Manager. Each future Fund will be managed by a Manager, or an affiliate of the Manager.
2. None of the Managers, or any of the Existing Funds, is in default of securities legislation in any of the Jurisdictions.
3. Each Existing Fund is, and each future Fund will be, (a) a mutual fund organized under the laws of Canada or a Jurisdiction, and (b) a reporting issuer under the laws of one or more of the Jurisdictions.
4. Securities of each Existing Fund are, and securities of each future Fund will be, distributed pursuant to a prospectus that has been filed with, and receipted by, some or all of the securities regulatory authorities in the Jurisdictions.
5. The location of the head office of each Manager is as follows:
Manager Head Office Location AGF Funds Inc. Toronto, Ontario Norrep Inc. Calgary, Alberta Counsel Group of Funds Inc. Toronto, Ontario
6. BetaPro, a corporation incorporated under the laws of Canada, acts as the trustee and manager of each HBP ETF, and will act as the trustee and manager of any future HBP ETF. The head office of BetaPro is located in Toronto, Ontario.
7. Neither BetaPro, nor any of the HBP ETFs listed in Schedule A, are in default of securities legislation in any of the Jurisdictions.
8. Each HBP ETF is, and each future HBP ETF will be, (a) a mutual fund organized under the laws of Ontario, and (b) a reporting issuer under the laws of some or all of the Jurisdictions.
9. Securities of each HBP ETF are, and securities of any future HBP ETF will be, listed on the Toronto Stock Exchange (the TSX). BetaPro will not file a final prospectus for an HBP ETF unless the TSX has conditionally approved the listing of securities of the HBP ETF.
10. Each HBP ETF is, and each future HBP ETF will be, a commodity pool, as such term is defined in section 1.1(1) of National Instrument 81-104 Commodity Pools (NI 81-104), in that each HBP ETF has adopted, and each future HBP ETF will adopt, fundamental investment objectives that permit that HBP ETF to use or invest in financial instruments in a manner that is not permitted under NI 81-102.
11. Each HBP ETF's investment objective is, and each future HBP ETF's investment objective will be, to provide daily results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to a multiple or the inverse (opposite) multiple of the daily performance of a "permitted index" as defined in NI 81-102 (the Underlying Index).
12. In order to achieve its investment objective, each HBP ETF will invest in equity securities and/or other financial instruments, including derivatives.
13. An HBP ETF will not track its Underlying Index by a multiple (or inverse multiple) that exceeds +200% (or -200%) on a daily basis. Each bull HBP ETF uses, or will use, financial instruments to track its Underlying Index by +200% on a daily basis (a Bull HBP ETF). Each bear HBP ETF uses, or will use, financial instruments to track its Underlying Index by -200% on a daily basis (a Bear HBP ETF).
14. Each Bull HBP ETF will be rebalanced daily to ensure that its exposure and performance will be +200% of its Underlying Index on each day on which it is valued and each Bear HBP ETF will be rebalanced daily to ensure that its exposure and performance will be -200% of its Underlying Index on each day on which it is valued.
15. The maximum exposure of an investment by a Fund in a HBP ETF will be the amount invested by the Fund in securities of the HBP ETF.
16. The HBP ETFs are attractive investments for the Funds as they provide an efficient and cost effective means of achieving diversification and exposure that would not otherwise be possible.
17. An investment by a Fund in units of a HBP ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.
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 in those Jurisdictions in which a Fund is a reporting issuer provided that:
(a) A Fund may not purchase securities of an HBP ETF if, immediately after the purchase, more than 10% of the net assets of the Fund, taken at market value at the time of the purchase, would consist of securities of HBP ETFs;
(b) In addition to (a), if short selling relief has been obtained in respect of a Fund, the Fund may not purchase securities of a Bear HBP ETF or sell any security short if, immediately after the transaction, the aggregate market value of (i) all securities sold short by the Fund, and (ii) all securities of Bear HBP ETFs held by the Fund, would exceed 20% of the Fund's net assets, taken at market value at the time of the transaction;
(c) the investment by a Fund in securities of a HBP ETF is in accordance with the fundamental investment objective of the Fund;
(d) the Exemption Sought does not apply to a Fund that is a money market fund;
(e) the prospectus of each Fund discloses, or will disclose the next time it is renewed after the date hereof, (i) to the extent applicable, the risks associated with an investment in HBP ETFs, and (ii) in the Investment Strategy section of the prospectus, the fact that the Fund has obtained relief that permits it to invest in commodity pools that use financial instruments that correlate to a multiple (or inverse multiple) of the performance of an Underlying Index; and
(f) a Fund will not invest in an HBP ETF with an Underlying Index based, directly or indirectly through a specified derivative or otherwise, on a physical commodity other than gold.