Securities Law & Instruments

Headnote

MP 11-102 and NP 11-203 -- exemption granted from s. 6.1(2), s. 6.1(3)(b), s. 6.2, s. 6.3 of NI 81-102 to permit the Fund to acquire, store and hold portfolio assets in and outside Canada through Brinks or Via Mat, for purposes other than facilitating portfolio transactions of the Fund.

Applicable Legislative Provisions

National Instrument NI 81-102 Mutual Funds, ss. 6.1(2), 6.1(3)(b), 6.2, 6.3, 19.1.

January 15, 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

CLAYMORE INVESTMENTS, INC.

(the "Filer")

AND

IN THE MATTER OF

CLAYMORE GOLD BULLION ETF

(the "ETF")

AND

IN THE MATTER OF

THE BANK OF NOVA SCOTIA

(the "Custodian")

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the ETF for a decision under the securities legislation of the Jurisdiction (the "Legislation") for a decision that exempts the ETF from:

1. Section 6.1(2) of National Instrument 81-102 -- Mutual Funds ("NI 81-102") to permit the ETF's gold bullion to be acquired, stored and held outside of Canada by a custodian or sub-custodian for purposes other than facilitating portfolio transactions of the ETF outside of Canada;

2. Section 6.1(3)(b) of NI 81-102 to permit the Custodian to appoint an entity that is not listed in Section 6.2 of NI 81-102 to act as a sub-custodian;

3. Section 6.2 of NI 81-102 to permit an entity not listed in Section 6.2 of NI 81-102 to act as a sub-custodian for portfolio assets of the ETF held in Canada; and

4. Section 6.3 of NI 81-102 to permit an entity not listed in Section 6.3 of NI 81-102 to act as a sub-custodian for portfolio assets of the ETF held outside of Canada,

(the "Exemption Sought").

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

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

(b) 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 Alberta, British Columbia, Saskatchewan, Manitoba, Quebec, Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, Yukon, Northwest Territories and Nunavut.

Interpretation

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

The following terms shall also have the meanings ascribed below:

"Basket of Physical Gold Bullion" means a preset amount of gold bullion that the Filer will determine and publish on its website following the close of business on each trading day.

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

"Fund" means Claymore Gold Bullion Trust.

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

"Units" means the hedged common units and non-hedged common units of the ETF.

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

"Unitholders" means beneficial and registered holders of Units.

Representations

1. This decision is based on the following facts represented by the Filer, the ETF and the Custodian.

The ETF and the Filer

2. On May 19, 2009, the Fund filed a (final) prospectus (the "Prospectus") with the securities regulatory authorities in each of the Jurisdictions to qualify the issuance of its units (the "Initial Units"). Each Initial Unit was comprised of one redeemable, transferable trust unit of the Fund (each, a "Fund Unit") and one warrant (each, a "Warrant"). The Initial Units separated into Fund Units and Warrants immediately upon the closing (the "Closing Date") of the offering (the "Offering"). Each Warrant entitled the holder thereof to acquire one Fund Unit at an exercise price of $10.00 at any time before 4:00 p.m. (Toronto time) on the date that was 6 months following the closing date of the Offering (the "Expiry Time"). Warrants not exercised by the Expiry Time expired and are void and of no value.

3. Pursuant to the Prospectus, the Fund automatically converted into an exchange traded fund if, commencing after November 28, 2009, the daily weighted average trading price of the Fund Units was greater than a discount of 2% of the net asset value per Fund Unit for that day, for a period of 10 consecutive trading days. The conversion test has been met and, effective the date of receiving a final receipt for the preliminary prospectus (the "ETF Prospectus") dated December 14, 2009 relating to the continuous offering of its units, the Fund Units shall convert into the Hedged Common Units (as described below).

4. After conversion, the new name of the Fund will be the "Claymore Gold Bullion ETF". Pursuant to the ETF Prospectus, the ETF will offer on a continuous distribution basis two classes of units: (i) hedged common units (the "Hedged Common Units") and (ii) non-hedged common units (the "Non-Hedged Common Units").

5. The principal offices of the Filer and the ETF are located at 200 University Avenue, 13th Floor, Toronto, Ontario, M5H 3C6.

6. Neither the Filer nor the ETF is in default of the securities legislation in any of the Jurisdictions.

The ETF's Investment Objective and Investment Restrictions

7. The investment objective of the ETF is to replicate the performance of the price of gold bullion, less the ETF's expenses and fees. The ETF is not actively managed. The ETF does not anticipate making regular distributions.

8. The ETF has been created to provide holders of Units with an exposure to physical gold bullion. The Hedged Common Units will also provide a currency hedge against the US dollar ("USD"). The Filer believes that the ETF will provide a secure, low-cost and convenient alternative to investors interested in holding gold bullion.

9. The ETF's investment restrictions provide that (a) the ETF will hold a minimum of 90% of its net assets in physical gold bullion in 100 or 400 troy ounce international bar sizes and (b) for working capital purposes, the ETF may hold no more than 10% of its net assets in cash and interest-bearing accounts, short-term government debt or short-term investment grade corporate debt or permitted gold certificates.

10. The assets of the ETF consist of physical gold bullion which the ETF purchases and holds in accordance with its investment objective, strategy, policies and restrictions, as well as the forward contracts relating to the currency hedge, cash and permitted gold certificates, if any.

The Units

11. The Fund Units are currently listed on the Toronto Stock Exchange ("TSX") under the symbol CGL.UN. The Filer, on behalf of the ETF, has applied (i) to change the name of the Fund to the "Claymore Gold Bullion ETF", (ii) to change the name of the currently traded Fund Units to "Common Units", (iii) to list the Non-Hedged Common Units on the TSX and (iv) for a supplemental listing of additional Hedged Common Units. Subject to receiving conditional approval and meeting the TSX's listing requirements with respect to the Units, the Units of the ETF will be offered on a continuous basis.

12. The only difference between the Hedged Common Units and the Non-Hedged Common Units is that the Hedged Common Units will contain a currency hedge against the USD. Accordingly, the net asset value ("NAV") per Unit of each class of Unit will not be the same as a result of the hedging strategy of the ETF. The attributes of the Units will be identical in all other respects.

13. The Units issued by the ETF will not be Index Participation Units within the meaning of NI 81-102. After conversion, the Fund will be generally described as an ETF and would become a "mutual fund" under applicable securities laws and accordingly, would be subject to the provisions of NI 81-102.

14. After completion of conversion of the Fund to an ETF, annual redemptions will no longer be available and Unitholders will be able to exchange and redeem their Units daily. Upon completion of the conversion, on any trading day, Unitholders may exchange the Prescribed Number of Units (or an integral multiple thereof) for Baskets of Physical Gold Bullion and cash. Also upon conversion, on any trading day, Unitholders may redeem Units of the ETF for cash at a redemption price per Unit equal to 95% of the closing price for the Units on the TSX on the effective day of the redemption.

The ETF's Bullion Custody Arrangements

15. All of the ETF's physical gold bullion is held on an allocated basis by the Bank of Nova Scotia, a Canadian Schedule I chartered bank, acting through its ScotiaMocatta division (the "Custodian") or an affiliate or a division thereof, or a sub-custodian. The Custodian has advised the ETF that due to physical storage capacity constraints, having regard to the amount of gold bullion which the ETF currently holds (due to both the Offering and pursuant to the exercise of the Warrants) and anticipates acquiring and holding in connection with the continuous distribution of its Units, the ETF will be required to store and hold the physical gold bullion in the vault facilities of the Custodian or an affiliate or a division thereof or a sub-custodian, in Canada, London and New York. The custody arrangements between the ETF and the Custodian are governed by the terms of a custodian agreement (the "Custodian Agreement").

16. As a result of the foregoing, the Custodian has advised the ETF that, in order to accommodate the objectives of the ETF, the Custodian will be required to use the services of sub-custodians. The Custodian has advised the ETF that it proposes to use The Brinks Company ("Brinks"), a public company listed on the NYSE (acting through a subsidiary) and Via Mat International Ltd. ("Via Mat") as sub-custodians for the gold bullion of the ETF held in Canada, London and New York.

17. Brinks and Via Mat are leading providers of secure logistics for valuables, including diamonds, jewellery, precious metals, securities, currency and secure data, serving banks, retailers, governments, mines, refiners, metal traders, diamantaires. Brinks and Via Mat are also authorized depositories for NYMEX/COMEX or have vault facilities that are accepted as warehouses for the London Bullion Market Association.

18. The number of entities in Canada which are eligible to act as sub-custodians for the physical storage of gold bullion is limited. Of these eligible entities, some already have exclusive relationships with other investment funds for storage purposes who have first right to any additional capacity whereas others simply do not have the excess capacity needed to store the amount of physical gold bullion that the ETF currently holds (due to both the Offering and pursuant to the exercise of the Warrants) and anticipates acquiring and holding in connection with the continuous distribution of its Units, and have advised that they would be required to secure additional space through the vaulting facilities of Brinks and/or Via Mat or such other equivalent service provider. These capacity constraints have been intensified due to the relatively recent run-up in demand for physical commodities and the corresponding need to arrange for safe-keeping.

19. In all instances, the relationship between the Custodian and either Brinks or Via Mat is primarily one whereby the Custodian is sub-contracting the vault facilities of these service providers for the purposes of storing physical gold bullion. The Custodian remains responsible for (i) ensuring that adequate safeguards are in place, including satisfactory insurance arrangements and (ii) indemnifying the ETF for any losses that may occur in connection with any material that is stored at such facilities.

20. The ETF, the Manager and the Custodian believe that both Brinks and Via Mat are appropriate sub-custodians for the gold bullion held in the Portfolio of the ETF. The activities of Brinks and Via Mat will be limited to holding the gold bullion of the ETF and the Custodian will be responsible for all cash holdings.

21. Pursuant to the Custodian Agreement, in carrying out its duties, the Custodian is required to exercise: (i) the degree of care, diligence and skill that a reasonably prudent custodian of property would exercise in the circumstances; or (ii) at least the same degree of care which it gives to its own property of a similar kind under its custody, if this is a higher degree of care than in paragraph (i) above

22. Prior to using the custody services of any sub-custodians, and periodically after engaging those services, the Custodian engages in a review of the facilities, procedures, records and creditworthiness of each sub-custodian. The ETF will not have the ability to engage in these services and relies upon the Custodian, who is in the business of precious metals storage, to satisfy itself as to the appropriateness of the use of any potential sub-custodian.

23. All of the gold purchased by the ETF will be certified either "LMBA Good Delivery List" or "COMEX Good Delivery".

24. The ETF does not insure its gold. Allocated gold bullion owned by the ETF is stored in the vaults of the Custodian or an affiliate or a division thereof or sub-custodian once it is delivered to the Custodian or sub-custodian, as applicable. The Custodian maintains insurance as the Custodian deems appropriate against all risk of physical loss or damage except the risk of war, nuclear incident, terrorism events or government confiscation. The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate. The ETF is not a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage.

25. The Custodian is one of the largest providers of precious metals trading and custodial and/or sub-custodial services in the world. The Filer has determined that the Custodian is the appropriate choice to provide custodial services to the ETF. The following are some of the factors which the Filer considered in making this determination:

(a) The Custodian is experienced in providing gold storage and custodial services;

(b) The Custodian is familiar with the unique requirements of ETFs as they relate to the physical handling and storage of gold bullion required in connection with the creation and redemption of Units;

(c) In addition to the other requirements in NI 41-101 and NI 81-102 for custodian agreements, in the Custodian Agreement, the Custodian shall indemnify the ETF in respect of all direct loss, damage or expense arising out of any negligence, wilful misconduct, fraud or lack of good faith by the Custodian or any sub-custodian or sub-sub-custodian; and

(d) The Custodian Agreement provides that the Custodian shall not cancel its insurance except upon 30 days prior written notice to the Filer.

26. The Custodian has arranged for insurance coverage on the facilities and the contents therein in which the Custodian will store physical gold bullion on behalf of the ETF and other clients of the Custodian. The Filer has discussed the level of insurance coverage generally obtained by the Custodian and believes that the level of insurance will be sufficient.

27. As it is in the gold storage business, the Custodian is in the best position, using its business judgment, to determine and obtain the appropriate level of insurance that is required for the storage of gold bullion.

28. The Filer and the ETF believe that the Custodian has obtained and currently provides adequate insurance.

29. The Custodian has also advised the ETF and the Manager that, pursuant to the terms of their existing relationship, each of Brinks and Via Mat have arranged for sufficient insurance coverage in respect of any material held by the Custodian through the facilities of these entities. The Manager has discussed with the Custodian the level of insurance coverage obtained by Brinks and Via Mat and the risks insured against by these sub-custodians and believes that the level of insurance will be sufficient.

30. The ETF's auditors will be present and will verify the physical count of all gold bullion held by the ETF at least once every year. The ETF and its auditors will have the ability, with sufficient advance notice to the Custodian and any sub-custodians, to attend at the vaults of the Custodian or any sub-custodian to verify the gold bullion held by the Custodian or any sub-custodian on behalf of the ETF.

31. The Custodian Agreement provides that, in addition to any other rights of the ETF thereunder, the Custodian shall indemnify and hold harmless the ETF in respect of all direct loss, damage or expense arising out of any negligence, wilful misconduct, fraud or lack of good faith by the Custodian or any subcustodian or sub-subcustodian in respect of the services contemplated thereunder, provided however, that the liability for any loss, damage or expense to which the above indemnity would apply shall be limited to losses, damages or expenses as follows:

(a) in the case of the loss of gold bullion or any other property of the ETF, such gold bullion or other property shall be replaced where commercially practicable and reasonably feasible; provided, however, that, in the context of gold bullion, the replacement gold which is to be provided by the Custodian shall be of the same fineness and shall be in the same form as the allocated gold actually delivered and then held by the Custodian at the time of the incurrence of the relevant loss (and, in such respect, the Custodian's opinion shall be determinative as to such fineness and form);

(b) where replacement of such gold bullion or other property is not commercially practicable and reasonably feasible, the ETF shall be paid the market value of such gold bullion based upon fineness and the form of the allocated gold actually delivered and then held by the Custodian at the time of the incurrence of the relevant loss (and, in such respect, the Custodian's opinion shall be determinative as to such fineness and form) or other property at the time the loss is discovered; and

(c) in any other case, the amount of any interest or income to which the ETF is entitled, but which is not received by the ETF, shall be paid to it.

32. The Custodian Agreement provides that if the ETF suffers a loss as a result of any act or omission of a subcustodian, or of any other agent appointed by the Custodian (rather than appointed by the Manager) and if such loss is directly attributable to the failure of such agent to comply with its standard of care in the provision of any service to be provided by it under the Custodian Agreement, then the Custodian shall assume liability for such loss directly, and shall reimburse the ETF accordingly.

Arrangements From and After Conversion

33. From and after conversion:

(a) Units may only be subscribed for or purchased directly from the ETF by Underwriters or Designated Brokers and orders may only be placed for Units in the Prescribed Number of Units (or an integral multiple thereof) on any day when there is a trading session on the TSX. Under Designated Broker and Underwriter agreements, the Designated Brokers and Underwriters agree to offer Units for sale to the public only as permitted by applicable Canadian securities legislation, which requires a prospectus to be delivered to purchasers buying Units as part of a distribution. Therefore, first purchasers of Units in the distribution on the TSX will receive a prospectus from the Designated Brokers and Underwriters.

(b) The ETF will appoint Designated Brokers to perform certain functions which include standing in the market with a bid and ask price for Units of the ETF for the purpose of maintaining liquidity for the Units.

(c) For each Prescribed Number of Units issued, a Designated Broker or Underwriter must deliver payment consisting of, in the Filer's discretion as manager of the ETF, (i) one Basket of Physical Gold Bullion and cash in an amount sufficient so that the value of the physical gold bullion and the cash received is equal to the NAV of the Units next determined following the receipt of the subscription order; (ii) cash in an amount equal to the NAV of the Units next determined following the receipt of the subscription order; or (iii) a different combination of physical gold bullion than is represented by a Basket of Physical Gold Bullion and cash, as determined by the Filer, in an amount sufficient so that the value of the physical gold bullion and cash received is equal to the NAV of the Units next determined following the receipt of the subscription order.

(d) The net asset value per Unit of the ETF will be calculated and published daily and will be made available daily on the Filer's website.

(e) Upon notice given by the Filer from time to time and, in any event, not more than once quarterly, a Designated Broker will subscribe for Units in cash in an amount not to exceed 0.3% of the NAV of the ETF, or such other amount established by the Filer and disclosed in the prospectus of the ETF, next determined following delivery of the notice of subscription to that Designated Broker.

(f) Neither the Underwriters nor the Designated Brokers will receive any fees or commissions in connection with the issuance of Units to them. The Filer may, at its discretion, charge an administration fee on the issuance of Units to the Designated Brokers or Underwriters.

(g) Except as described in subparagraphs (a) through (f) above, Units may not be purchased directly from the ETF. Investors are generally expected to purchase Units through the facilities of the TSX. However, Units may be issued directly to Unitholders upon the reinvestment of distributions of income or capital gains and in accordance with the distribution reinvestment plan of the ETF.

(h) Unitholders that wish to dispose of their Units may generally do so by selling their Units on the TSX through a registered broker or dealer, subject to customary brokerage commissions. A Unitholder that holds a Prescribed Number of Units or an integral multiple thereof may exchange such Units for Baskets of Physical Gold Bullion and cash at an exchange price equal to the NAV per Unit on the effective day of the exchange request. Unitholders may also redeem their Units for cash at a redemption price equal to 95% of the closing price of the Units on the TSX on the date of redemption.

(i) As manager, the Filer receives a fixed annual fee from the ETF. Such annual fee is calculated as a fixed percentage of the NAV of the ETF. As manager, the Filer is responsible for all costs and expenses of the ETF except the management fee, any expenses related to the implementation and on-going operation of an independent review committee under National Instrument 81-107, brokerage expenses and commissions, income taxes, goods and services taxes, withholding and other taxes, gold settlement fees and extraordinary expenses.

(j) Unitholders will have the right to vote at a meeting of Unitholders in respect of the ETF in certain circumstances, including prior to any change in the investment objective of the ETF, any change to their voting rights and prior to any increase in the amount of fees payable by the ETF.

Decision

The principal regulator is satisfied that the decision meets the tests 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) In respect of the relief granted from sections 6.1(2), 6.1(3)(b), 6.2 and 6.3, the ETF and the Custodian are limited to using The Brinks Company and Via Mat International Ltd. and their subsidiaries as sub-custodians for the gold bullion of the ETF which will be held only in Canada, London and New York; and

(b) In respect of the compliance reports to be prepared by the Custodian pursuant to sections 6.7(1)(b), 6.7(1)(c)(ii) and 6.7(2)(c), as such sections will not be applicable given the nature of the relief granted herein, the Custodian shall include a statement in such reports in respect of the completion of the Custodian's review process for the sub-custodian of the ETF and that the Custodian is of the view that such sub-custodians continue to be appropriate entities for the safekeeping of the ETF's gold bullion.

"Rhonda Goldberg"
Manager, Investment Funds
Ontario Securities Commission