Mutual Reliance Review System for Exemptive Relief Applications -- Relief granted to mutual funds from prohibition against purchasing a specified derivative the underlying interest of which is a physical commodity other than gold -- Mutual funds wanting to invest in standardized futures with underlying interests in oil or natural gas as a hedge against the prices of related securities held by them -- Relief granted provided purchase of standardized future is effected through the NYMEX, the standardized future is traded only for cash or an offsetting standardized future contract, and the standardized future is sold at least one day prior to the date on which delivery of the underlying commodity is due under the standardized future -- National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.3(h), 19.1.
November 14, 2007
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, NORTHWEST
TERRITORIES, YUKON AND NUNAVUT
IN THE MATTER OF THE
MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
MACKENZIE FINANCIAL CORPORATION
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer on behalf of each of the Mutual Funds listed in Schedule "A" (the Funds) for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting the Funds from the prohibition in paragraph 2.3(h) of National Instrument 81-102 -- Mutual Funds (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 Requested 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 (MRRS) 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.
Defined terms contained in National Instrument 14-101 -- Definitions have the same meaning in this decision unless they are defined in this decision.
1. The Filer is a corporation amalgamated under the laws of Ontario and is registered as an advisor in the categories of Investment Counsel and Portfolio Manager in Ontario, Manitoba and Alberta. Mackenzie is also registered in Ontario as a dealer in the category of Limited Market Dealer, as well as registered under the Commodity Futures Act (Ontario) in the categories of Commodity Trading Counsel & Commodity Trading Manager. The Filer's head office is in Toronto, Ontario.
2. The Funds' portfolio advisor is generally either the Filer and/or another portfolio advisor or portfolio sub-advisor registered under the Commodity Futures Act (Ontario) or subject to an exemption from that Act.
3. 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 Filer is both the trustee (in the case of mutual fund trusts) and manager.
4. 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.
5. The investment objectives and investment strategies for each of the Funds permit portfolio investments in oil and gas securities. In addition, the Filer may choose to use derivatives to hedge against losses from changes in the prices of a Fund's investments.
6. Of late, the price of oil has continued to trend higher to reach record highs, whereas the price of natural gas has continued to trend lower. Canadian prices for natural gas have dropped approximately 20% since July 2007 alone, and the price of natural gas has lost more than half its value since its highs of late 2005, when it plummeted from its hurricane-assisted highs because of weak demand and high storage levels in North America. In light of both these trends, the Funds' portfolio managers have determined that it would be in the best interests of the Funds and their investors for the Funds' respective portfolio advisors or sub-advisors to have the ability to implement an appropriate risk management strategy to protect the Funds from fluctuations in the prices of oil and gas.
7. The Filer 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 Requested Relief is sought, is optimal from a number of perspectives including in respect of liquidity, cost and complexity.
8. 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.
9. Under the Requested Relief, the Funds' portfolio advisor and/or portfolio sub-advisor(s) proposes to trade in standardized futures contracts for cash or an offsetting contract to satisfy its obligations in a standardized futures contract.
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 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) 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 its portfolio advisor and/or portfolio sub-advisor making purchase and sale decisions for the Funds' respective portfolios has been granted registration as a Commodity Trading Manager under the Commodity Futures Act (Ontario) or been granted an exemption from this registration requirement;
(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. Mackenzie Universal Canadian Resource Fund: 75%;ii. Mackenzie Universal World Resource Class: 75%;iii. Mackenzie Growth Fund: 35%;iv. Mackenzie Sentinel Income Trust Fund: 25%;v. Keystone Dynamic Power Small-Cap Class: 25%;vi. Mackenzie Universal U.S. Dividend Income Fund: 20%;vii. Mackenzie Universal North American Growth Class: 20%;viii. Mackenzie Universal Global Growth Class: 20%;ix. Mackenzie Universal Global Growth Fund: 20%;x. Mackenzie Maxxum Global Explorer Class: 20%;xi. Mackenzie Maxxum Dividend Class: 20%;xii. Mackenzie Maxxum Dividend Fund: 20%;xiii. Mackenzie Maxxum Dividend Growth Fund: 20%;xiv. Mackenzie Maxxum Canadian Value Class: 20%;xv. Mackenzie Maxxum Canadian Value Fund: 20%;xvi. Mackenzie Maxxum Monthly Income Fund: 20%;xvii. Symmetry Equity Class: 20%;xviii. Mackenzie Cundill Canadian Security Class: 10%;xix. Mackenzie Cundill Canadian Security Fund: 10%; andxx. Mackenzie Cundill Canadian Balanced Fund: 10%.
(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 granted under this decision prior to implementing the Proposed Strategy.
THE MUTUAL FUNDS