Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to allow exchange traded mutual funds to short sell up to 20% of net assets, subject to certain conditions -- National Instrument 81-102 Mutual Funds.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.6(a) and (c), 6.1(1), 19.1.

February 25, 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

HORIZONS ALPHAPRO DIVIDEND ETF, HORIZONS

ALPHAPRO NORTH AMERICAN VALUE ETF,

HORIZONS ALPHAPRO NORTH AMERICAN

GROWTH ETF, HORIZONS ALPHAPRO MANAGED

S&P/TSX 60™ ETF (the "Existing ETFs") AND

SUCH OTHER EXCHANGE TRADED MUTUAL FUNDS

AS MAY BE MANAGED BY THE FILER OR AN

AFFILIATE OF THE FILER IN THE FUTURE

(the "Future ETFs" and, together with

the Existing ETFs, the "ETFs")

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the ETFs for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") exempting the ETFs from the following requirements of the Legislation to permit each ETF to sell securities short, to provide a security interest over the ETF's assets in connection with such short sales and to deposit the ETF's assets with Borrowing Agents (as defined below) as security for such transactions (the "Requested Relief"):

(a) the requirement contained in subsection 2.6(a) of National Instrument 81-102 Mutual Funds ("NI 81-102") prohibiting a mutual fund from providing a security interest over its assets;

(b) the requirement contained in subsection 2.6(c) of NI 81-102 prohibiting a mutual fund from selling securities short; and

(c) the requirement contained in subsection 6.1(1) of NI 81-102 prohibiting a mutual fund from depositing any part of its assets with an entity other than that mutual fund's custodian.

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 each of the provinces and territories of Canada other than the Jurisdiction.

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 on behalf of itself and the ETFs:

The Filer and the ETFs

1. The Filer is the manager of each Existing ETF and the Filer or an affiliate of the Filer will be the manager of each Future ETF. JovInvestment Management Inc. ("JovInvestment"), which is registered under the Ontario Securities Act as a portfolio manager, is the portfolio advisor of each Existing ETF and will be the portfolio advisor of each Future ETF.

2. JovInvestment has retained Patient Capital Management Inc. to act as sub-adviser to Horizons AlphaPro North American Value ETF and has retained JovInvestment's affiliate, Leon Frazer & Associates Inc., to act as sub-adviser to Horizons AlphaPro Dividend ETF.

3. The head office of the Filer is located in Toronto, Ontario. Neither the Filer, nor JovInvestment, nor the Existing ETFs are in default of applicable securities legislation in any of the provinces or territories of Canada.

4. Each Existing ETF is, and each Future ETF will be, a reporting issuer in one or more of the provinces and territories of Canada. Each Existing ETF distributes, and each Future ETF will distribute, its securities in such jurisdictions under a long form prospectus in the form of Form NI 41-101F2 (the "Prospectus").

5. Each Existing ETF is, and each Future ETF will be, a mutual fund that is subject to NI 81-102, the securities of which are listed and posted for trading on the Toronto Stock Exchange and are not index participation units.

6. The investment practices of each Existing ETF comply, and the investment practices of each Future ETF will comply, in all respects with the requirements of Part 2 of NI 81-102, except to the extent that the ETF has received permission from the applicable securities regulatory authorities or regulators of the provinces and territories of Canada to deviate therefrom.

The Previous Decision

7. In a decision document dated February 13, 2004, the predecessor to Horizons AlphaPro Managed S&P/TSX 60 ETF, Accumulus Talisman Fund, and Accumulus Balanced Fund (together the "Accumulus Funds") were granted short selling relief in the Jurisdiction, British Columbia, Alberta, Saskatchewan, Manitoba and each territory of Canada limited, amongst other limitations reflected in the representations and conditions of the decision document, to 10% of total fund net assets (the "Previous Decision").

8. The Accumulus Funds were mutual funds managed by Accumulus Management Ltd. (subsequently amalgamated with JovFunds Management Inc.) whose units were qualified for distribution by simplified prospectus under National Instrument 81-101 Mutual Fund Distributions. Accumulus Balanced Fund was renamed Jov Leon Frazer Balanced Fund then later merged into Jov Leon Frazer Dividend Fund. Accumulus Talisman Fund was renamed Jov Talisman Fund then later converted into and renamed Horizons AlphaPro Managed S&P/TSX 60 ETF. Responsibility for the management of Horizons AlphaPro Managed S&P/TSX 60 ETF has been reassigned from JovFunds Management Inc. to the Filer.

9. The Filer is seeking the Requested Relief in this new decision to vary the Previous Decision by updating it. This decision updates the Previous Decision by:

(a) extending the Requested Relief beyond the Accumulus Funds, which were structured as conventional mutual funds, to the ETFs, including Horizons AlphaPro Managed S&P/TSX 60 ETF (as successor to Accumulus Talisman Fund), three new Existing ETFs (without predecessors included in the Previous Decision) and the Future ETFs; and

(b) conforming the representations and conditions to those of more recent decisions which have granted exemptive relief similar to the Requested Relief.

10. The Accumulus Funds have been succeeded, the representations of the Previous Decision do not apply to their successors and their successors, including Horizons AlphaPro Managed S&P/TSX 60 ETF, do not and will not rely on the Previous Decision, which as of the date of this decision will be considered succeeded by this decision.

Short selling strategy and controls

11. The Filer proposes that each ETF be authorized to engage in a limited, prudent and disciplined amount of short selling. The Filer and JovInvestment believe that each ETF could benefit from the implementation and execution of a controlled and limited short selling strategy. This strategy would operate as a complement to each ETF's primary discipline of buying securities with the expectation that they will appreciate in market value.

12. Any short sales will be consistent with each ETF's investment objectives and investment strategies.

13. In order to effect a short sale, an ETF will borrow securities from either its custodian or a dealer (in either case, the "Borrowing Agent"), which Borrowing Agent may be acting either as principal for its own account or as agent for other lenders of securities.

14. Each ETF will implement the following requirements and controls when conducting a short sale:

(a) securities will be sold short for cash, with the ETF assuming the obligation to return to the Borrowing Agent the securities borrowed to effect the short sale;

(b) the short sale will be effected through market facilities through which the securities sold short are normally bought and sold;

(c) the ETF will receive cash for the securities sold short within normal trading settlement periods for the market in which the short sale is effected;

(d) the securities sold short will be liquid securities that satisfy either (i.) or (ii.) below:

(i.) the securities are listed and posted for trading on a stock exchange; and

(A) the issuer of the securities has a market capitalization of not less than CDN $100 million, or the equivalent thereof, at the time the short sale is effected; or

(B) the ETF's portfolio advisor has pre-arranged to borrow the securities for the purpose of such short sale, or

(ii.) the securities are bonds, debentures or other evidences of indebtedness of, or guaranteed by, the Government of Canada or any province or territory of Canada or the Government of the United States of America;

(e) at the time securities of a particular issuer are sold short:

(i.) the aggregate market value of all securities of that issuer sold short by the ETF will not exceed 5% of the total net assets of the ETF; and

(ii.) the ETF will place a "stop-loss" order with a dealer to immediately purchase for the ETF an equal number of the same securities if the trading price of the securities exceeds 120% (or such lesser percentage as the Filer may determine) of the price at which the securities were sold short;

(f) the ETF will deposit assets of the ETF with Borrowing Agents as security in connection with the short sale transactions;

(g) the ETF will maintain appropriate internal controls regarding short sales prior to conducting any short sales, including written policies and procedures and risk management controls;

(h) the ETF will keep proper books and records of all short sales and assets of the ETF deposited with Borrowing Agents as security; and

(i) each ETF will provide disclosure in its Prospectus of the proposed use of short selling by the ETF, the specific risks related to short selling by the ETF and details of this exemptive relief prior to implementing the short selling strategy.

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 Requested Relief is granted provided that in respect of each ETF:

(a) the aggregate market value of all securities sold short by the ETF does not exceed 20% of the total net assets of the ETF on a daily marked-to-market basis;

(b) any short sale made by the ETF is subject to compliance with the investment objectives of the ETF;

(c) the ETF is not and will not be classified as a money market fund;

(d) the ETF maintains appropriate internal controls regarding its short sales, including written policies and procedures, risk management controls and proper books and records;

(e) the ETF holds "cash cover" (as defined in NI 81-102) in an amount, including the assets of the ETF deposited with Borrowing Agents as security in connection with short sale transactions, that is at least 150% of the aggregate market value of all securities sold short by the ETF on a daily marked-to-market basis;

(f) no proceeds from short sales by the ETF are used by the ETF to purchase long positions in securities other than cash cover;

(g) for short sale transactions in Canada, every dealer that holds assets of the ETF as security in connection with short sale transactions by the ETF is a registered dealer in Canada and a member of a self-regulatory organization that is a participating member of the Canadian Investor Protection Fund;

(h) for short sale transactions outside of Canada, every dealer that holds assets of the ETF as security in connection with short sale transactions by the ETF:

(i.) is a member of a stock exchange and, as a result, subject to a regulatory audit; and

(ii.) has a net worth in excess of the equivalent of CDN $100 million determined from its most recent audited financial statements that have been made public;

(i) except where the Borrowing Agent is the ETF's custodian, when the ETF deposits assets of the ETF with a Borrowing Agent as security in connection with a short sale transaction, the amount of assets of the ETF deposited with the Borrowing Agent does not, when aggregated with the amount of the assets of the ETF already held by the Borrowing Agent as security for outstanding short sale transactions of the ETF, exceed 10% of the total net assets of the ETF, taken at market value as at the time of the deposit;

(j) the security interest provided by the ETF over any of its assets that is required to enable the ETF to effect short sale transactions is made in accordance with industry practice for that type of transaction and relates only to obligations arising under such short sale transactions;

(k) prior to conducting any short sales, the ETF discloses in its Prospectus, a description of: (i.) short selling, (ii.) how the ETF intends to engage in short selling, (iii.) the risks associated with short selling, and (iv.) in the Investment Strategy section of the Prospectus, the ETF's strategy and this exemptive relief;

(l) prior to conducting any short sales, the ETF discloses in its Prospectus the following information:

(i.) that there are written policies and procedures in place that set out the objectives and goals for short selling and the risk management procedures applicable to short selling;

(ii.) who is responsible for setting and reviewing the policies and procedures referred to in the preceding paragraph (i.), how often the policies and procedures are reviewed, and the extent and nature of the involvement of the board of directors of the Filer in the risk management process;

(iii.) the trading limits or other controls on short selling in place and who is responsible for authorizing the trading and placing limits or other controls on the trading;

(iv.) whether there are individuals or groups that monitor the risks independent of those who trade; and

(v.) whether risk measurement procedures or simulations are used to test the portfolio under stress conditions; and

(m) prior to conducting any short sales, the ETF has provided to its securityholders not less than 60 days' written notice that discloses the ETF's intent to begin short selling transactions and the disclosure required in the ETF's Prospectus as outlined in paragraphs (k) and (l) above, or the ETF's initial Prospectus and each renewal thereof, has included such disclosure.

The Requested Relief shall terminate upon the coming into force of any legislation or rule of the principal regulator dealing with the matters referred to in subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102.

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