National Bank Securities Inc.

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from the requirements contained in paragraphs 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 Mutual Funds -- Top Funds permitted to invest up to 10% in aggregate in securities of exchange-traded funds traded on a Canadian or American stock exchange -- The exchange-traded funds are defined by categories and the relief subject to certain conditions.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.5(2)(a), 2.5(2)(c), 19.1.

May 6, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

QUÉBEC AND ONTARIO

(the Jurisdictions)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

NATIONAL BANK SECURITIES INC.

(NBSI or the Filer)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption relieving the mutual funds managed by it 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 the Filer or an affiliate of the Filer in the future (the Future Funds, together with the Existing Funds, individually, a Fund and, collectively, the Funds) from:

(a) the prohibition contained in paragraph 2.5(2)(a) of NI 81-102 that would prevent the Funds from investing in the Underlying Funds (as defined below), some of which are mutual funds that are not subject to NI 81-102 and/or National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101); and

(b) the prohibition contained in paragraph 2.5(2)(c) of NI 81-102 that would prevent the Funds from investing in the Underlying Funds, some of which are mutual funds that are not qualified for distribution in the local jurisdiction

to permit each Fund to invest in Underlying Funds (collectively, the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a) the Autorité des marchés financiers (AMF) is the principal regulator for this 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 British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon Territory and Nunavut; and

(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario (OSC).

Interpretation

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer:

1. NBSI is a corporation governed under the Canada Business Corporations Act and has its head office located in Montréal, Québec.

2. NBSI is registered as a mutual fund dealer (or equivalent) in each of the provinces and territories of Canada and is a member of the Mutual Fund Dealers Association of Canada.

3. Each Existing Fund is managed by the Filer and each Future Fund will be managed by the Filer or an affiliate of the Filer.

4. Each Existing Fund is, and each Future Fund will be, a) an open-ended mutual fund organized and governed under the laws of a jurisdiction of Canada, b) a reporting issuer under the laws of some or all of the provinces and territories of Canada, and c) governed by the provisions of NI 81-102.

5. Securities of each Existing Fund are, and securities of each Future Fund will be, qualified for distribution in some or all of the provinces and territories of Canada under a simplified prospectus and annual information form filed with and receipted by the securities regulators in the applicable jurisdiction(s).

6. Neither the Filer nor any of the Existing Funds are in default of securities legislation in any of the jurisdictions.

7. Each Existing Fund is, and each Future Fund will be, permitted, in accordance with its investment objective, to invest in exchange traded funds (ETFs).

8. In addition to investing in ETFs that qualify as index participation units as defined in NI 81-102 (IPUs), the Funds propose to invest in the following:

a) ETFs that use leverage to obtain exposure to no more than +/- 200% of a widely-quoted market index (the ETF's Underlying Index) on a daily basis (Leveraged ETFs). Leveraged ETFs invest in a manner to replicate, before fees and expenses, the performance of an Underlying Index on a multiple or an inverse (opposite) multiple basis. A Leveraged ETF that tracks the inverse of its Underlying Index by no more than 200% is referred to as a Bear ETF. As each Leveraged ETF uses some form of leverage to track either its Underlying Index or the inverse of its Underlying Index by a specified multiple on a daily basis, it does not "replicate" the performance of a specified widely-quoted market index and is not, therefore, an IPU;

b) ETFs that hold gold, permitted gold certificates or specified derivatives of which the underlying interest is gold or permitted gold certificates (Gold ETFs). Underlying assets of the Gold ETFs are assets that the Funds are permitted to hold pursuant to section 2.3 of NI 81-102. Gold ETFs invest in a manner to replicate, before fees and expenses, the price of gold. As Gold ETFs track the price of gold, rather than a "specified widely-quoted market index", they are not IPUs; and

c) Gold ETFs that are also Leveraged ETFs (Leveraged Gold ETFs). Leveraged Gold ETFs are a combination of Leveraged ETFs and Gold ETFs and so will not meet the definition of an IPU.

The Leveraged ETFs, Gold ETFs and Leveraged Gold ETFs are referred to collectively in this decision as Underlying Funds.

9. The maximum exposure of an investment by a Fund in an Underlying Fund will be the amount invested by the Fund in securities of the Underlying Fund.

10. The securities of the Underlying Funds purchased by a Fund will trade on a stock exchange in Canada or the United States.

11. The Underlying Funds are attractive investments for the Funds, as they provide an efficient and cost effective means of achieving diversification and exposure.

12. NBSI is not currently related to any Underlying Fund, it is not the manager of an Underlying Fund and it does not currently expect to be so related in the near future.

13. An investment by a Fund in securities of an Underlying Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

14. Absent the Exemption Sought, an investment by a Fund in an Underlying Fund that is a mutual fund would be prohibited by section 2.5 of NI 81-102 because:

a) none of the Underlying Funds are or will be subject to NI 81-101;

b) some of the Underlying Funds are not, or will not be, subject to NI 81-102; and

c) some of the Underlying Funds may not be qualified for distribution in each jurisdiction in which the Funds are or will be qualified for distribution.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:

a) a Fund may not purchase securities of an Underlying Fund 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 the Underlying Funds;

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 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 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) each Fund will limit its exposure to gold (including direct purchases of gold, permitted gold certificates, investments in Gold ETFs, investments in Leveraged Gold ETFs, investments in specified derivatives the underlying interest of which is gold and investments in IPUs that track a gold index), to no more than 20% of the net assets of the Fund, taken at market value at the time of purchase;

d) the investment by a Fund in securities of an Underlying Fund is in accordance with the fundamental investment objective of the Fund;

e) the Exemption Sought does not apply to a Fund that is a 'money market fund' (as defined in NI 81-102);

f) the prospectus of each Fund discloses, or will disclose the next time it is renewed after the date hereof, (i) in the Investment Strategy section of the prospectus, the fact that the Fund has obtained relief to invest in Leveraged ETFs, Leveraged Gold ETFs and Gold ETFs, as appropriate, and (ii) to the extent applicable, the risks associated with such an investment;

g) in determining a Fund's compliance with the concentration restriction in section 2.1 of NI 81-102, the Fund will, for each unit of an Underlying Fund held by it, consider that it holds directly its proportionate share of the securities held by the Underlying Fund;

h) despite g), the Fund shall not include in the determination referred to in g), a security that is a component of an Underlying Fund that represents less than 10% of the Underlying Index, and

i) each Fund will not invest in an Underlying Fund with an Underlying Index based, directly or indirectly through a specified derivative or otherwise, on a physical commodity other than gold.