Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from fund on funds restrictions for commodity pools investing in exchange traded mutual funds tracking the performance of one or more physical commodities -- Mutual funds, including commodity pools, are subject to various restrictions in investing in other mutual funds -- The applicants are commodity pools and the underlying funds are limited to mutual funds tracking performance of physical commodities -- Section 2.5 of National Instrument 81-102.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c.S.5, as am.

National Instrument 81-102 Mutual Funds, ss. 2.5, 19.1.

National Instrument 81-104 Commodity Pools.

July 7, 2010

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

ALPHAPRO MANAGEMENT INC.

(the Filer)

AND

IN THE MATTER OF

HORIZONS ALPHAPRO SEASONAL ROTATION ETF

HORIZONS ALPHAPRO GARTMAN ETF

(the Existing Commodity Pools)

DECISION

Background

The principal regulator in Ontario has received an application from the Filer, the manager of the Existing Commodity Pools for a decision under the securities legislation of Ontario (the Legislation) for an exemption relieving the Existing Commodity Pools and such other exchange-traded funds that the Filer or an affiliate of the Filer has or may establish in the future (each a Future Commodity Pool and, together with the Existing Commodity Pools, individually a Commodity Pool and, collectively, the Commodity Pools) from:

(a) the prohibition contained in Section 2.1(1) of National Instrument 81-102 Mutual Funds (NI 81-102) that would prevent the Commodity Pools from purchasing Commodity Participation Units (as defined below) of a mutual fund if, immediately after the transaction, more than 10 percent of the net asset value of the Commodity Pool, taken at market value at the time of the transaction, would be invested in securities of that mutual fund;

(b) the prohibition contained in Section 2.5(2)(a) of NI 81-102 that would prevent the Commodity Pools from investing in the Commodity Participation Units that are not subject to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and/or NI 81-102; and

(c) the prohibition contained in Section 2.5(2)(c) of NI 81-102 that would prevent the Commodity Pools from investing in the Commodity Participation Units, some of which are mutual funds that are not qualified for distribution in the local jurisdiction;

to permit each Commodity Pool to purchase and hold Commodity Participation Units (the Exemption Sought).

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

(i) the Ontario Securities Commission is the principal regulator for this application; and;

(ii) 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 other province and territory of Canada (including Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

1. The Filer, a corporation incorporated under the laws of Canada, or an affiliate, acts or will act as the trustee and manager of each Commodity Pool. The head office of the Filer is located in Toronto, Ontario.

2. The Filer is not in default of securities legislation in any of the Jurisdictions.

3. JovInvestment Management Inc. (JovInvestment), a corporation incorporated under the laws of Ontario and an affiliate of the Filer, acts as the investment manager of each of the Existing Commodity Pools and acts or may act as the investment manager of each Future Commodity Pool. JovInvestment is registered as a portfolio manager under the Securities Act (Ontario), and as a commodity trading counsel and as a commodity trading manager under the Commodity Futures Act (Ontario).

4. Each Commodity Pool is or will be a mutual fund established under the laws of Ontario, and is or will be a reporting issuer under the laws of some or all of the Jurisdictions.

5. Each Commodity Pool is or will be a "commodity pool" for purposes of National Instrument 81-104 Commodity Pools (NI 81-104) and its securities are or will be offered pursuant to a long form prospectus prepared in accordance with Form 41-101F2 Information Required in an Investment Fund Prospectus. Each Commodity Pool is or will adopt a fundamental investment objective that permits the Commodity Pool to use or invest in financial instruments in a manner that is not permitted under NI 81-102. As each Commodity Pool is or will be a commodity pool, subject to NI 81-104, unlike a conventional retail mutual fund, each Commodity Pool is or will also be permitted to invest in physical commodities.

6. Each Commodity Pool is or will be an actively managed exchange-traded fund and its securities are or will be listed on a public stock exchange.

7. Long form prospectuses dated November 10, 2009 and October 14, 2009 for the Horizons AlphaPro Seasonal Rotation ETF and Horizons AlphaPro Gartman ETF, respectively, were receipted by the securities regulator authority or regulator in each of the Jurisdictions.

8. The investment objective and strategy of both of the Existing Commodity Pools includes the ability to invest in physical commodities, commodity futures, and exchange traded funds that invest in or are exposed to physical commodities and commodity futures.

9. In this Decision, a Commodity Participation Unit is defined as a security that is issued by an issuer, the only purpose of which is to hold:

(a) a physical commodity as defined in NI 81-102 (a Physical Commodity) or more than one Physical Commodity;

(b) commodity futures that are widely quoted or used as the benchmark for pricing the future price of a Physical Commodity or more than one Physical Commodity; or

(c) specified derivatives that replicate the performance of a Physical Commodity or more than one Physical Commodity, or commodity futures, referred to in subparagraphs 9(a) and 9(b).

10. In accordance with its investment strategies, as stated in its prospectus, in order to meet its investment objective the Existing Commodity Pools may invest in mutual funds that trade on a stock exchange in Canada or the United States that either:

(a) issue index participation units as defined in NI 81-102 (the IPUs); or

(b) subject to obtaining the Exemption Sought, issue Commodity Participation Units.

11. Issuers of Commodity Participation Units that refer to more than one category of Physical Commodity or commodity future will state in the issuer's current public offering document that it seeks to replicate the performance of an index of widely quoted or used benchmarks for physical commodities or categories of physical commodities that employs an empirical, rules based allocation methodology.

12. The Commodity Pool will invest in Commodity Participation Units that provide indirect exposure to the same physical commodities that, in accordance with NI 81-104, the Commodity Pool could acquire directly and in concentrations that it could accumulate directly.

13. Commodity Participation Units that are reporting issuers in one or more Jurisdictions are subject to NI 81-102 but are not subject to NI 81-101.

14. Commodity Participation Units issued by mutual funds that are reporting issuers in a Jurisdiction will be qualified for distribution in one of the same Jurisdictions in which the Commodity Pools are, or will be qualified for distribution but may not be qualified in all of the same Jurisdictions.

15. Commodity Participation Units issued by mutual funds that are not reporting issuers in a Jurisdiction but are traded on a stock exchange in Canada or the United States will not be subject to NI 81-102 and will not be subject to NI 81-101.

16. As each Commodity Participation Unit will be a mutual fund, without the Exemption Sought, a Commodity Pool's investment in a Commodity Participation Unit may only be made in accordance with Sections 2.1 and 2.5 of NI 81-102.

17. The Commodity Participation Units are attractive investments for the Commodity Pools, as they provide an efficient and cost effective means of achieving diversification and exposure.

18. An investment by a Commodity Pool in securities of a Commodity Participation Unit will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Commodity Pool.

Decision

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 to a Commodity Pool provided that:

a) the investment by the Commodity Pool in securities of an Commodity Participation Unit is in accordance with the fundamental investment objective of the Commodity Pool;

b) the Commodity Pool's investment strategies specify investments in physical commodities, commodity futures and exchange traded funds that invest in or are exposed to physical commodities and commodity futures;

c) each Commodity Participation Unit is listed on an exchange in Canada or the United States;

d) the Commodity Pool will only invest in an Commodity Participation Unit pursuant to internal policies and procedures, that will be established by the Filer or an affiliate of the Filer for the Commodity Pool, which will set out (i) the maximum concentration of Commodity Participation Units the Commodity Pool can purchase in Canada and the United States based on the fundamental investment objective, investment strategies and investment restrictions of the Commodity Pool, and (ii) the minimum market capitalization and/or minimum average daily trading volume each Commodity Participation Unit must have to ensure the Commodity Pool does not have any liquidity issues when buying or selling securities of the Commodity Participation Unit; and

e) the prospectus of the Commodity Pool discloses in the investment strategy section of the prospectus of the Commodity Pool, the fact that the Commodity Pool has obtained the Exemption Sought with the applicable investment strategy disclosure and, to the extent applicable, the risks associated with relying on such relief.

"Vera Nunes"
Assistant Manager, Investment Funds
Ontario Securities Commission