Securities Law & Instruments

Headnote

MRRS -- Exemptive relief from borrowing prohibition to allow exchange-traded funds to borrow up to 15% of net assets -- Exemptive relief also granted from certain mutual fund requirements concerning: transmission of purchase or redemption orders, issuing units for cash or securities, calculation and payment of redemptions, and date of record for payment of distributions -- National Instrument 81-102 Mutual Funds.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.6(a), 9.1, 10.2, 10.3, 14.1, 19.1.

January 5, 2007

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

MANITOBA, ONTARIO, QUÉBEC, NEW BRUNSWICK,

NOVA SCOTIA, PRINCE EDWARD ISLAND,

NEWFOUNDLAND AND LABRADOR

(the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

HORIZONS BETAPRO S&P/TSX 60 BEAR PLUS ETF

AND

HORIZONS BETAPRO S&P/TSX 60 BULL PLUS ETF

(collectively, the "Existing ETFs")

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from BetaPro Management Inc. ("BetaPro") on behalf of the Existing ETFs and such other exchange-traded funds as BetaPro may establish in the future (each a "Future ETF" and together with the Existing ETFs, the "ETFs" or individually, an "ETF") for a decision under the securities legislation of the Jurisdictions (the "Legislation") exempting the ETFs from the following provisions of National Instrument 81-102 -- Mutual Funds ("NI 81-102"), subject to certain terms and conditions:

1. subsection 2.6(a) to permit each of the ETFs to borrow to a limit of 15% of their respective net asset value under an overdraft facility, and in each case to provide a security interest over their respective portfolio assets in connection therewith;

2. sections 9.1 and 10.2 to permit purchases and sales of units ("Units") of the ETFs on The Toronto Stock Exchange ("TSX"), instead of through order receipt offices;

3. section 10.3 to permit the ETFs to redeem less than the Prescribed Number of Units at a discount to their market price, instead of at their net asset value; and

4. section 14.1 to permit the ETFs to establish a record date for distributions in accordance with TSX Rules.

Paragraphs 1 through 4 above are collectively referred to in this decision as the "Requested Relief".

Under the Mutual Reliance Review System for Exemptive Relief Applications:

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

2. this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

"Designated Brokers" means registered brokers and dealers that enter into agreements with the ETFs to perform certain duties in relation to the ETFs.

"Index" means an index provided to BetaPro by a third party provider for use in connection with an ETF.

"Prescribed Number of Units" means, in relation to an ETF, the number of Units of the ETF determined by BetaPro from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.

"Underwriters" means registered brokers and dealers that have entered into underwriting agreements with the ETFs and that subscribe for and purchase Units from the ETFs, and "Underwriter" means any one of them.

"Unitholders" means beneficial and registered holders of Units of an ETF.

Section references set out in this decision are references to NI 81-102, unless otherwise indicated.

Defined terms contained in NI 81-102 and National Instrument 14-101 -- Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

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

The ETFs

1. Each ETF is or will be a mutual fund trust governed by the laws of Ontario and a reporting issuer under the laws of all of the Jurisdictions.

2. A preliminary long form prospectus for the Existing ETFs dated November 10, 2006 was filed with, and granted a preliminary receipt from, the securities regulatory authorities in each of the Jurisdictions on November 10, 2006.

3. BetaPro has or will apply to list the Units of the ETFs on the TSX. BetaPro will not file a final prospectus for an ETF until the TSX has conditionally approved the listing of Units of the ETF.

4. Each ETF is or will be a commodity pool as such term is defined in Section 1.1 of National Instrument 81-104 -- Commodity Pools, in that each ETF has or will have adopted fundamental investment objectives that permit each ETF to use or invest in specified derivatives in a manner that is not permitted under NI 81-102.

5. Each ETF's investment objective is, or 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 an index, security, currency or commodity.

6. The investment objective and applicable Index for an ETF, as well as its investment strategy, will be disclosed on an ongoing basis in the prospectus of the ETF.

7. In order to achieve its investment objective, each ETF may invest in equity securities and/or other financial instruments, including derivatives. Each ETF will employ leverage.

Management of the ETFs

8. BetaPro, a corporation incorporated under the laws of Canada, will act as the trustee and manager of each ETF.

9. Jove Investment Management Inc. ("Jove"), a corporation incorporated under the laws of Ontario, will act as the investment manager of each ETF. Jove is registered in the categories of investment counsel and portfolio manager under the Securities Act (Ontario) ("OSA") and as a commodity trading counsel and as a commodity trading manager under the Commodity Futures Act (Ontario) ("CFA").

10. Jove will retain ProFund Advisors LLC ("ProFund"), a limited liability company organized under the laws of the state of Maryland, or an affiliate of ProFund, to act as a sub-adviser on behalf of each ETF and to make and execute investment decisions on behalf of each ETF. ProFund or an affiliate of ProFund are or will be exempt from the registration requirements of the OSA and the CFA.

Use of Derivatives

11. Each ETF will use specified derivatives to achieve its investment objective, which may involve establishing an account (each an Account) with a futures commission merchant (FCM) or a counterparty (a "Counterparty") in Canada and/or the United States. Each FCM or Counterparty will be regulated by an applicable regulatory authority (e.g., the Commodity Futures Trading Commission in the United States) and will be subject to capital, insurance and periodic compliance reviews by such regulatory authority.

12. The Account of each ETF, which will be segregated, will consist of cash and/or securities as collateral for the specified derivative transactions of that ETF ("Margin"). An ETF's Margin, which allows the ETF to use leverage, is the minimum amount that must be deposited with a FCM or a Counterparty to initiate trading in specified derivative transactions, or to maintain the FCM's or the Counterparty's open position in standardized futures, on behalf of the ETF.

Overdraft Facility

13. Each ETF wishes to use an overdraft facility to a limit of 15% of the net assets of that ETF. The purpose of the overdraft facility is to accommodate redemptions of a Prescribed Number of Units (or multiple thereof) by Underwriters or Designated Brokers which exceed the 5% borrowing threshold in subsection 2.6(a).

Subscriptions and Redemptions of Units

14. As listed securities, Units of the ETFs will be available for purchase by investors from IDA registrants.

15. Units of the ETFs may only be subscribed for or purchased directly from the ETFs by Underwriters or Designated Brokers and orders may only be placed for a Prescribed Number of Units of an ETF (or an integral multiple thereof) on any day when there is a trading session on the TSX.

16. The ETFs will appoint one or more Designated Brokers to perform certain functions which include standing in the market with a bid and ask price for Units of each ETF for the purpose of maintaining liquidity for such Units.

17. The net asset value per Unit of each ETF will be calculated and published on each day on which there is a trading session on the TSX and will be made available on BetaPro's website.

18. Neither the Underwriters nor the Designated Brokers will receive any fees or commissions in connection with the issuance of Units of an ETF to them. BetaPro may, at its discretion, charge an administration fee on the issuance of Units of an ETF to Designated Brokers or Underwriters.

19. Except as described in paragraphs 15 through 17 above, Units of an ETF may not be purchased directly from the ETF. Investors are generally expected to purchase Units of an ETF through the facilities of the TSX. However, Units of an ETF may be issued directly to Unitholders of the ETF upon the reinvestment of distributions of income or capital gains.

20. Unitholders of an ETF that wish to dispose of their Units of the ETF may generally do so by selling their Units of the ETF on the TSX, through IDA brokers or dealers, subject only to customary brokerage commissions. Unitholders of an ETF may also redeem their Units of the ETF for cash at a redemption price equal to 95% of the closing price of such Units on the TSX on the date of redemption.

21. As the TSX listing will represent the principal means of liquidity for investors in the ETFs, the ETFs are not required to, on a daily basis, maintain and allocate a portion of cash or other portfolio assets to the funding of anticipated redemptions. Consequently, the existence of a security interest over an ETF's portfolio assets to secure obligations under the loan facility will not impact the liquidity of the ETF's Units on the TSX.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Makers under the Legislation is that the Requested Relief is granted to the ETFs provided that:

1. in respect of the relief granted from subsection 2.6(a),

(a) if trading of an ETF's Units on the TSX is suspended for a period exceeding thirty days, the ETF will begin taking all necessary steps to ensure that all amounts borrowed under the overdraft facility are fully repaid as soon as commercially reasonable but no later than sixty days from the date of suspension, provided that such repayment need not be completed if the suspension is lifted within sixty days from the date of the suspension;

(b) an ETF does not make a distribution to Unitholders of the ETF where that distribution would impair the ability of the ETF to repay the funds borrowed under the overdraft facility;

(c) an ETF's final prospectus to be filed in connection with the continuous distribution of Units of the ETF discloses the maximum percentage of assets of the ETF that the borrowing may represent, the ETF's intended use of amounts borrowed under the overdraft facility, the material terms of the overdraft facility and the risks arising from the borrowing under the overdraft facility; and

2. in respect of the relief granted from section 14.1, the ETFs comply with applicable TSX requirements in setting the record date for the payment of distributions.

"Leslie Byberg"
Manager, Investment Funds Branch