Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from subsection 2.1(1) and paragraphs 2.5(2)(a), (b) and (c) of NI 81-102 to permit an exchange traded commodity pool to enter into a forward agreement providing exposure to the portfolio of a reference fund comprised of underlying exchange traded mutual funds established in Canada or the U.S. and trading on Canadian or U.S. stock exchanges -- Exchange traded commodity pool employing three-tier structure contrary to multi-layering restriction in paragraph 2.5(2)(b) -- Reference fund and underlying exchange traded mutual funds may not be subject to NI 81-101 and NI 81-102, nor qualified for distribution in the same jurisdictions as the exchange traded commodity pool, contrary to paragraphs 2.5(2)(a) and (c) of NI 81-102 -- Exchange traded commodity pool prohibited by subsection 2.1(1) from being 100% exposed to the portfolio of the reference fund through the forward agreement -- Units of the reference fund sold only to the counterparty under the forward agreement on an exempt basis -- Majority of underlying exchange traded mutual funds consisting of exchange traded mutual funds established in Canada or the U.S. that issue IPUs traded on a Canadian or U.S. stock exchange -- No more than 10% of the exchange traded commodity pool's net asset value, in aggregate, will be exposed to underlying exchange traded mutual funds, other than those that issue IPUs, whose securities are not qualified for distribution in the same jurisdictions as the exchange traded commodity pool -- National Instrument 81-102 Mutual Funds.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.5(2)(a), (b) and (c), 19.1.

August 5, 2010

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

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

THE HORIZONS ALPHAPRO FIERA TACTICAL BOND ETF

(the Fund ETF)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Horizons AlphaPro Fiera Tactical Bond Fund (the Fund), which is expected to convert into the Fund ETF, for a decision under the securities legislation of the Jurisdiction (the Legislation) granting exemptive relief, pursuant to section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102), from the requirements of subsection 2.1(1) and paragraphs 2.5(2)(a), (b) and (c) of NI 81-102 in order to permit the Fund ETF to enter into one or more forward purchase and sale agreements (the Forward Agreement) which provides exposure to the portfolio of the Tactical Global Bond ETF Fund (the Reference Fund) which is comprised of exchange traded mutual funds that have been established in North America and trade on North American stock exchanges (each an Underlying ETF) (the Exemption Sought).

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

1. the Ontario Securities Commission is the principal regulator for this application; and;

2. the Filer has provided notice that subsection 4.7(1) 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 (collectively, with Ontario, the Jurisdictions).

Interpretation

Terms defined in NI 81-102, 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:

The Filer

1. The Filer is a corporation incorporated under the laws of Canada and acts as the trustee and manager of the Fund.

2. The Filer will also act as the trustee and manager of the Fund ETF.

The Fund

3. The Fund is a closed-end fund that is a mutual fund trust organized under the laws of Ontario, and is a reporting issuer under the laws of all of the Jurisdictions.

4. The Fund is currently not subject to NI 81-102 or National Instrument 81-104 Commodity Pools (NI 81-104).

5. Class A units and Class F units of the Fund are qualified for distribution in each of the Jurisdictions pursuant to an amended and restated long form prospectus dated July 2, 2009.

6. Class A units of the Fund are listed on the Toronto Stock Exchange (the TSX).

7. The investment objectives of the Fund are to provide its unitholders with: (i) a stable stream of tax-efficient monthly distributions; and (ii) the opportunity for capital appreciation through exposure to a tactical asset allocation strategy.

8. JovInvestment Management Inc. (JovInvestment), an affiliate of the Filer, is the portfolio manager of the Fund. JovInvestment is registered as a portfolio manager, commodity trading manager and commodity trading counsel in Ontario.

9. The Fund seeks to achieve its investment objectives through exposure to an actively managed portfolio consisting primarily of the Underlying ETFs, providing exposure to global fixed income markets, including government treasury securities, corporate bonds and high yield debt securities. This exposure is achieved through the Forward Agreement which provides 100% exposure to the portfolio of the Reference Fund, which holds the securities of the Underlying ETFs. Consequently, the returns to the Fund and its unitholders are based upon the return of the portfolio of the Reference Fund by virtue of the Forward Agreement with one or more counterparties (collectively, the Counterparty).

10. The Fund's exposure to the portfolio of the Reference Fund through the Forward Agreement may be increased to a maximum of 133% of the unleveraged assets of the Reference Fund (tested daily) by adding leveraged exposure to the Forward Agreement as may be determined by JovInvestment from time to time, and in accordance with the Fund's investment strategy (i.e., equivalent to leverage of approximately 1.33:1).

11. Pursuant to the Forward Agreement, the Fund has invested its net proceeds in a basket of common shares of Canadian public companies (the Common Share Basket).

12. The Counterparty has agreed to purchase the Common Share Basket from the Fund for an amount based on the redemption proceeds that will be paid by the Reference Fund, which holds the securities of the Underlying ETFs, to holders of an applicable number of units of the Reference Fund less amounts related to any leverage used under the Forward Agreement.

13. The Fund is expected to convert into the Fund ETF after June 30, 2010, upon meeting the conversion test specified in its prospectus.

The Reference Fund and the Underlying ETFs

14. The Reference Fund is an open-end mutual fund that is a mutual fund trust organized under the laws of Ontario. It is a non-offering reporting issuer in Ontario and Québec by virtue of a non-offering long form prospectus dated June 29, 2009.

15. The Filer is the trustee and manager of the Reference Fund, and JovInvestment is the portfolio manager of the Reference Fund.

16. Fiera Capital Inc. (Fiera), has been retained by JovInvestment, as the sub-advisor of the Reference Fund. Fiera is registered as a portfolio manager, commodity trading manager and as an exempt market dealer in Ontario.

17. Fiera, as sub-advisor, analyzes and selects from a universe of more than 80 Underlying ETFs in order to assemble and manage the Reference Fund's portfolio. By investing primarily in the Underlying ETFs, Fiera seeks to provide investment diversification which reduces the single issuer risk typically associated with a traditional fixed income portfolio on a cost-effective basis

18. The Reference Fund was created for the purpose of carrying out the common investment objectives and strategy of the Fund and Fund ETF. It is intended as a mechanism whereby the Fund and Fund ETF can through the Forward Agreement gain exposure to the value of the securities of the Underlying ETFs held in the Reference Fund's portfolio.

19. Units of the Reference Fund have only been, and will only be, offered to the Counterparty on an exempt basis.

20. The Reference Fund is not subject to NI 81-102 as it has not, and will not, offer its units to the public in any of the Jurisdictions.

21. After the Fund converts to the Fund ETF, the Reference Fund will continue to be a reporting issuer in Ontario and Québec subject to the continuous disclosure requirements of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106).

22. The Reference Fund's investment objectives are to maximize total returns for holders of its units. It achieves its investment objectives by acquiring and holding an actively managed portfolio consisting primarily of the Underlying ETFs, providing exposure to global fixed income markets, including government treasury securities, corporate bonds and high yield debt securities. The Underlying ETFs consist largely of exchange-traded mutual funds that issue index participation units (IPUs), but may also include inverse exchange traded funds, as well as other types of exchange traded funds that are established, and trade on a stock exchange, in North America.

23. Each Underlying ETF will have filed either a prospectus or a registration statement with the applicable securities regulatory authority governing its operation in Canada or the United States, as applicable, and will comply with the laws of that jurisdiction.

24. Each Underlying ETF will generally have a market capitalization of not less than $100 million or a 30-day average trading volume of not less than $5 million per day at the time the Reference Fund purchases its securities.

25. None of the Underlying ETFs in the Reference Fund's portfolio that issue units that are not IPUs will invest more than 10% of its net assets in other mutual funds.

26. The Underlying ETFs in the Reference Fund's portfolio are not subject to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101). Those Underlying ETFs that have qualified their securities for distribution in the Jurisdictions are subject to NI 81-102. All other Underlying ETFs are not subject to NI 81-102.

The Fund ETF

27. Following conversion, the Class A units and Class F units of the Fund will be converted into Class E units of the Fund ETF. As at the date of this decision, the Filer has filed a preliminary long form prospectus dated June 22, 2010 with each of the Jurisdictions to qualify the continuous offering of Class E units of the Fund ETF.

28. The Fund ETF will be a commodity pool, as such term is defined in Section 1.1(1) of NI 81-104, in that the Fund ETF will adopt fundamental investment objectives that permit the Fund ETF to use or invest in financial instruments in a manner that is not permitted under NI 81-102. The Fund ETF will otherwise be required to comply with applicable requirements of NI 81-102, including the fund-on-fund requirements of section 2.5 of NI 81-102.

29. The Filer will be the trustee and manager of the Fund ETF, and JovInvestment will be the portfolio manager of the Fund ETF.

30. Class E units of the Fund ETF will be issued and sold on a continuous basis and will be listed on the TSX.

31. The investment objectives, investment strategy and investment restrictions of the Fund ETF will be the same as the Fund, except as may be necessary to comply with applicable law, including NI 81-102.

32. In the absence of the Exemption Sought, the Fund ETF would not be permitted to invest through the Forward Agreement in the Reference Fund because:

(a) as the Reference Fund holds more than 10% of the market value of its net assets in securities of the Underlying ETFs, the Fund ETF's indirect investment in the Reference Fund would be contrary to the multi-layering restriction in paragraph 2.5(2)(b) of NI 81-102; and

(b) the Reference Fund is not subject to NI 81-102 and its securities are not qualified for distribution in the Jurisdictions, and similarly, the Underlying ETFs in the Reference Fund's portfolio are not subject to NI 81-101, may not in all cases be subject to NI 81-102, and their securities may not be qualified for sale in one or more of the Jurisdictions, contrary to the requirements of paragraphs 2.5(2)(a) and (c) and subsection 2.1(1) of NI 81-102.

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 provided that:

(a) The exposure of the Fund ETF to the portfolio of the Reference Fund, which is generally comprised of the securities of the Underlying ETFs, is in accordance with the fundamental investment objectives of the Fund ETF;

(b) The Reference Fund operates in accordance with the requirements of NI 81-102 other than the requirements of paragraphs 2.5(2)(a) and (c) of NI 81-102 as necessary to enable its investments in securities of the Underlying ETFs;

(c) The Reference Fund remains a reporting issuer in Ontario and Québec subject to the requirements of NI 81-106;

(d) No securities of the Reference Fund are distributed in Canada other than to the Counterparty under the Forward Agreement;

(e) The Underlying ETFs are established, and trade on a stock exchange, in Canada or the United States; and

(f) The Underlying ETFs in the Reference Fund's portfolio whose securities are not qualified for distribution in the Jurisdictions, excluding those Underlying ETFs that issue IPUs, do not in the aggregate represent more than 10% of the Fund ETF's net asset value.

"Darren McKall"
Assistant Manager, Investment Funds Branch
Ontario Securities Commission