Securities Law & Instruments

Headnote

Exemptive relief granted to mutual funds to permit investment in standardized futures contracts based on oil and natural gas for hedging purposes only.

Rules Cited

National Instrument 81-102 - Mutual Funds, ss. 2.3(h) and 19.1.

National Instrument 81-106 - Investment Funds Continuous Disclosure.

October 12, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION

OF BRITISH COLUMBIA, ALBERTA,

SASKATCHEWAN, MANITOBA, ONTARIO,

QUEBEC, NEW BRUNSWICK, NOVA SCOTIA,

PRINCE EDWARD ISLAND, NEWFOUNDLAND

AND LABRADOR, YUKON, NUNAVUT

AND THE NORTHWEST TERRITORIES

(the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

GOODMAN & COMPANY, INVESTMENT COUNSEL LTD.

(the "Manager")

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Manager of each of the Mutual Funds listed in Appendix "A" (the "Funds") for a decision under Section 19.1 of National Instrument 81-102 -- Mutual Funds ("NI 81-102") for an exemption from Section 2.3(h) of NI 81-102 to exempt the Funds from complying with Section 2.3(h) of NI 81-102 to enable the Funds to invest in standardized futures (as such term is defined in Section 1.1 of NI 81-102) with underlying interests in sweet crude oil ("oil") or natural gas ("gas") (the "Proposed Relief") in order to hedge the risks associated with the Funds' portfolio investments in oil and gas securities (the "Proposed Strategy").

Under the Mutual Reliance Review System for Exemptive Relief Applications,

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

It is the responsibility of each of the Decision Makers to assess the appropriateness of granting exemptive relief from Section 2.3(h) of NI 81-102 in relation to the facts of this application.

Interpretation

Defined terms contained in National Instrument 14-101 -- Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

1. The Manager is registered under the Securities Act (Ontario) (the "Act") as an advisor in the categories of investment counsel and portfolio manager, and is also registered under the legislation of the other Jurisdictions in the equivalent categories.

2. Each of the Funds is an open-end mutual fund trust or a class of shares of a mutual fund corporation established under the laws of Ontario of which the Manager is both the trustee (in the case of mutual fund trusts) and manager.

3. The securities of the Funds are qualified for distribution in each of the Jurisdictions pursuant to simplified prospectuses and annual information forms that have been prepared and filed in accordance with the securities legislation of their respective Jurisdictions. The Funds are, accordingly, reporting issuers in all of the Jurisdictions.

4. The investment objectives and investment strategies for each of the Funds permit portfolio investments in oil and gas securities. In addition, the Manager may choose to use derivatives to hedge against losses from changes in the prices of a Fund's investments.

5. The prices of oil and gas have been rising in recent months. While this is a favourable trend for the Funds and their securityholders, there is always the risk that the prices of oil and gas will fall and the Manager has determined that it would be in the best interests of the Funds and their securityholders for the Manager to have the ability to implement an appropriate risk management strategy to protect the Funds from fluctuations in the prices of oil and gas.

6. The Manager has considered a number of alternative strategies for risk management with respect to the prices of oil and gas, and has determined that the Proposed Strategy, for which the Proposed Relief is sought, is optimal from a number of perspectives including in respect of liquidity, cost and complexity.

7. The Proposed Strategy would enable the Funds to trade in standardized futures contracts on the New York Mercantile Exchange (the "NYMEX"), where the underlying interests are oil and gas, as a hedge against the prices of related securities held by the Funds.

8. Under the Proposed Relief, the Manager proposes to trade in standardized futures contracts for cash or an offsetting contract to satisfy its obligations in a standardized futures contract.

9. The Manager applied to become registered under the Commodity Futures Act (Ontario) on September 8, 2005 as a Commodity Trading Manager.

Decision

Each of the Decision Makers has assessed the appropriateness of granting an exemption in this instance from subsection 2.3(h) of NI 81-102 and is satisfied that, at the time this Decision is granted, such relief is appropriate.

The Decision of the Decision Makers under the Legislation is that the Proposed Relief is granted provided that:

(a) the purchases, uses and sales of standardized futures which have underlying interests in oil or gas are made in accordance with the provisions otherwise relating to the use of specified derivatives for hedging purposes in NI 81-102 and the related disclosure otherwise required in National Instrument 81-101 -- Mutual Fund Prospectus Disclosure and National Instrument 81-106 -- Investment Fund Continuous Disclosure;

(b) subject to the risk factors disclosed in the simplified prospectus for "Derivatives Risk" generally and to be disclosed for the Proposed Strategy, a standardized future contract will be traded only for cash or an offsetting standardized future contract to satisfy the obligations under the standardized future and will be sold at least one day prior to the date on which delivery of the underlying commodity is due under the standardized future;

(c) the purchase of a standardized future will be effected through the NYMEX;

(d) a Fund will not engage in the Proposed Strategy under the Decision unless and until the Manager has been granted registration as a Commodity Trading Manager under the Commodity Futures Act (Ontario);

(e) a Fund will not purchase a standardized future if, immediately following the purchase, all the standardized futures contracts purchased and then held by a particular Fund relate to barrels of oil and/or British Thermal Units of gas representing an aggregate value that would exceed the percentage of the total net assets of the particular Fund at that time, as set out below:

i. Dynamic Focus + Diversified Income Trust Fund: 25%;

ii. Dynamic Focus + Energy Income Trust Fund: 100%;

iii. Dynamic Focus + Small Business Fund: 25%;

iv. Dynamic Dividend Fund: 10%;

v. Dynamic Dividend Income Fund: 10%;

vi. Dynamic Diversified Real Asset Fund: 20%;

vii. Dynamic Power Canadian Growth Fund: 25%;

viii. Dynamic Power Canadian Growth Class: 25%;

ix. Dynamic Power Balanced Fund: 25%; and

x. Dynamic Power Small Cap Fund: 25%;

(f) each Fund will keep proper books and records of all such purchases and sales; and

(g) each Fund will provide disclosure in its simplified prospectus of the Proposed Strategy, the risks associated with the Proposed Strategy and the exemptive relief prior to implementing the strategy.

"Leslie Byberg"
Manager, Investment Funds Branch

 

APPENDIX "A"

THE MUTUAL FUNDS

Dynamic Mutual Funds

Dynamic Focus+ Diversified Income Trust Fund

Dynamic Focus+ Energy Income Trust Fund

Dynamic Focus+ Small Business Fund

Dynamic Dividend Fund

Dynamic Dividend Income Fund

Dynamic Power Canadian Growth Fund

Dynamic Power Balanced Fund

Dynamic Power Small Cap Fund

Dynamic Diversified Real Asset Fund

Dynamic Diversified Real Asset Fund

Dynamic Global Fund Corporation

Dynamic Power Canadian Growth Class