AGF Investments Inc. et al.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption granted to a precious metals fund to permit the fund to invest in precious metals indirectly by precious metals ETF, and derivatives subject to certain conditions -- permit the Fund to invest in leveraged ETFs and inverse ETFs subject to certain conditions -- to permit the Fund to acquire, store and hold precious metals 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 81-102 Mutual Funds, ss. 2.3(h), 2.5(2)(a), 2.5(2)(c), 6.1(2), 6.1(3)(b), 6.2, 6.3, 19.1.

May 12, 2011

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

AGF INVESTMENTS INC.

(THE FILER)

AND

IN THE MATTER OF

AGF PRECIOUS METALS FUND

(THE FUND)

AND

IN THE MATTER OF

CITIBANK CANADA

(THE CUSTODIAN)

DECISION

BACKGROUND

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption relieving the Fund from:

Derivatives and ETFs Relating to Precious Metals

(i) clause 2.3(h) of NI 81-102, to permit the Fund to purchase, sell or use specified derivatives, the direct or indirect underlying interest of which is silver, platinum, palladium or rhodium on an unlevered basis (SPPR Metals Derivatives);

(ii) clause 2.5(2)(a) and (c) of NI 81-102, to permit the Fund to invest in exchange-traded funds traded on a stock exchange in Canada or the United States, the underlying interest of which is gold, silver, platinum, palladium and/or rhodium (Precious Metals ETFs);

Leveraged ETFS

(iii) paragraphs 2.5(2)(a) and (c) of NI 81-102, to permit the Fund to purchase and hold securities of

(A) Exchange Traded Funds (ETFs) that seek to provide daily results that replicate the daily performance of a specified widely-quoted market index (the ETF's Underlying Index) by a multiple of 200% (Leveraged Bull ETFs) or an inverse multiple of 200% (Leveraged Bear ETFs, which together with Leveraged Bull ETFs are referred to collectively in this decision as Leveraged Index ETFs);

(B) ETFs that seek to provide daily results that replicate the daily performance of their Underlying Index by an inverse multiple of 100% (Inverse Index ETFs); and

(C) ETFs that seek to provide daily results that replicate the daily performance of gold or silver or the value of a specified derivative the underlying interest of which is gold or silver by a multiple of 200% (Leveraged Gold ETFs and Leveraged Silver ETFs, respectively);

(Leveraged Index ETFs, Inverse Index ETFs, Leveraged Gold ETFs and Leveraged Silver ETFs are referred to collectively in this decision as the Leveraged ETFs);

Custody of Precious Metals

(iv) clause 6.1(2)(b) of NI 81-102, to permit the physical bullion of the Fund to be held outside of Canada by the Custodian, for purposes other than facilitating portfolio transactions of the Fund;

(v) clause 6.1(3)(b) of NI 81-102, to permit the Custodian to authorize the Bank of Nova Scotia (the Bullion Sub-Custodian) to appoint the Brinks Company, or its subsidiaries or affiliates (Brinks) or Via Mat International Ltd., or its subsidiaries or affiliates (Via Mat), which are persons or companies that are not described in section 6.2 or 6.3 of NI 81-102, to act as sub-custodians to hold the Fund's physical bullion;

(vi) section 6.2 of NI 81-102 to permit Brinks or Via Mat to be appointed as sub-custodians of the Fund to hold the Fund's physical bullion in Canada; and

(vii) section 6.3 of NI 81-102 to permit Brinks and Via Mat to be appointed as sub-custodians of the Fund to hold the Fund's physical bullion outside Canada;

(collectively, the Requested Exemption);

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

1. the Ontario Securities Commission is the Principal Regulator for this application; and

2. 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon Territories and Nunavut (collectively with the Jurisdiction, the Jurisdictions).

INTERPRETATION

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

REPRESENTATIONS

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

The Filer and the Fund

1. The Filer is a corporation organized under the laws of the province of Ontario and is registered as an adviser in the category of portfolio manager to provide discretionary advisory services in all provinces and territories of Canada. The Filer is also registered as a mutual fund dealer, exempt market dealer and commodity trading manager in Ontario and as a mutual fund dealer in British Columbia.

2. The head office of the Filer is located in Ontario.

3. The Filer is the investment fund manager and portfolio manager of the Fund.

4. The Fund is: (a) an open-ended mutual fund established under the laws of the province of Ontario in 1993, (b) a reporting issuer under the laws of all of the provinces and territories of Canada, and (c) governed by the provisions of NI 81-102.

5. Securities of the Fund are qualified for distribution in all of the provinces and territories of Canada under a simplified prospectus and annual information form prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and filed with and receipted by the securities regulators in the Jurisdictions.

6. The Fund's objective is to provide long-term growth of capital by investing, directly or indirectly, in equity securities and in precious metals consisting primarily of gold and, to a lesser extent, silver, platinum, palladium and rhodium.

7. Due to exemptive relief obtained when the Fund was first offered, the Fund has been permitted since its inception to invest in gold, silver, platinum, palladium and rhodium and certificates representing the same, without any concentration restriction.

8. Neither the Filer nor the Fund is in default of securities legislation in the Jurisdictions.

Investment in SPPR Derivatives

9. The Fund is not restricted from entering into derivatives, the underlying interest of which is gold (Gold Derivatives) provided it complies with section 2.7 to 2.11 of NI 81-102.

10. The Fund proposes to have the ability similarly to invest in SPPR Derivatives, subject to and in compliance with the limitations in section 2.7 to 2.11 of NI 81-102.

11. The use of SPPR Derivatives are attractive investments for the Fund, as they provide an efficient and cost effective means of achieving exposure to silver, platinum, palladium and rhodium and present no greater volatility than holding such metals as physical commodities.

Investment in Exchange Traded Funds (ETFs) which are Precious Metals ETFs

12. To obtain exposure to gold, silver, platinum, palladium and rhodium indirectly, the Fund intends to invest in Precious Metals ETFs.

13. Each Precious Metals ETF is a "mutual fund" (as such term is defined under the Securities Act (Ontario)) and is listed and traded on a stock exchange.

14. The assets of each Precious Metals ETF consist primarily of gold, silver, platinum palladium and/or rhodium, as applicable. The objective of each Precious Metals ETF is to reflect the price of the relevant precious metal(s) (less the Precious Metals ETF's expenses and liabilities) on an unlevered basis and the objective of each Precious Metals ETF is to replicate the performance of the underlying metal(s) on an unlevered basis.

15. In accordance with the concentration restrictions in NI 81-102, no investment in a Precious Metals ETF will exceed 10% of the Fund's net asset value, taken at market value at the time of purchase.

16. The Fund will not invest in leveraged Precious Metals ETFs or inverse Precious Metals ETFs, other than Leveraged Gold ETFs and Leveraged Silver ETFs, as permitted by this decision.

17. An investment by the Fund in securities of a Precious Metals ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

Investment in Leveraged ETFs

18. The Fund proposes to have the ability to invest in the following Leveraged ETFs:

(a) Leveraged Bull ETFs;

(b) Inverse ETFs; and

(c) Leveraged Gold ETFs and Leveraged Silver ETFs.

19. Each Leveraged Bull ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed +/-200% of the corresponding daily performance of its Underlying Index.

20. Each Inverse ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed -100% of the corresponding daily performance of its Underlying Index.

21. Each Leveraged Gold ETF and Leveraged Silver ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Gold or Silver Interest will not exceed +200% of the corresponding daily performance of its Underlying Gold or Silver Interest.

22. The amount of the loss that can result from an investment by a Fund in a Leveraged ETF will be limited to the amount invested by the Fund in securities of the Leveraged ETF.

23. An investment by the Fund in securities of a Leveraged ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interest of the Fund.

Custody of Bullion Held by the Fund

24. The Custodian acts as the custodian of the property for all mutual funds managed by the Filer, including any of the Fund's physical gold, silver, platinum, palladium and rhodium bullion, and the terms of the Custodian Agreement between the Filer on behalf of the funds and the Custodian comply with all requirements in Part 6 of NI 81-102.

25. The Custodian has appointed the Bullion Custodian to be a sub-custodian of the Fund in respect of the Fund's physical gold, silver, platinum, palladium and rhodium bullion. The custody arrangements with respect to the Fund's physical gold, silver, platinum and palladium bullion will be governed by the terms of agreements between the Custodian and the Bullion Sub-Custodian (the Bullion Sub-Custodian Agreement). Except as represented below, the terms of the Bullion Sub-Custodian Agreement will comply with all requirements in Part 6 of NI 81-102.

26. The Fund's physical gold, silver, platinum, palladium and rhodium bullion will be stored and held either on an allocated and segregated basis in the vault facilities of the Custodian, the Bullion Sub-Custodian, in Canada, London, England or New York, U.S.A, or will be stored in the vault of a sub-custodian on an allocated and segregated basis in Canada, London, England or New York, U.S.A, where in the latter case it shall be identified as the property of the Bullion Sub-Custodian. The Bullion Sub-Custodian shall at all times record and identify in the books and records maintained by the Bullion Sub-Custodian that such bullion is being held on behalf of the Bullion Sub-Custodian. The Bullion Sub-Custodian is one of the largest providers of physical precious metals trading and custodial services in the world. The Custodian has determined that the Bullion Sub-Custodian will be the appropriate choice to provide custodial services to the Fund because the Bullion Sub-Custodian is experienced in providing gold, silver, platinum, palladium and rhodium storage and custodial services, and is familiar with the requirements relating to the physical handling and storage of gold, silver, platinum, palladium and rhodium bullion.

27. The Fund will not insure its physical gold, silver, platinum, palladium or rhodium bullion. The Bullion Sub-Custodian Agreement requires that the Bullion Sub-Custodian or any sub-custodian maintain insurance on such terms and conditions as it considers appropriate against all risk of physical loss of, or damage to, bullion stored in the Bullion Sub-Custodian's or such sub-custodian's vaults except the risk of war, nuclear incident, terrorism events or government confiscation. Neither the Filer nor the Fund are beneficiaries of any such insurance and neither of them have the ability to dictate the existence, nature or amount of coverage.

28. The Custodian has discussed such insurance coverage with the Bullion Sub-Custodian, and stated to the Filer that it believes that the insurance that the Bullion Sub-Custodian or any sub-custodian has obtained will be appropriate for the Fund. The Bullion Sub-Custodian Agreement provides or will provide that neither the Bullion Sub-Custodian shall cancel its insurance or permit its sub-custodian to cancel such insurance except upon 30 days prior written notice to the Filer. The Fund will disclose the material details of that insurance arrangement in the next renewal of its annual information form.

29. The Custodian has advised the Filer that due to physical storage capacity constraints, having regard to the amount of gold, silver, platinum, palladium and rhodium bullion which the Fund may acquire, there may not be sufficient space in the vault facilities of the Custodian or the Bullion Sub-Custodian to store all of the Fund's physical gold, silver, platinum, palladium and rhodium bullion.

30. As a result, the Bullion Sub-Custodian may be required to use the services of sub-custodians to store some of the Fund's physical gold, silver, platinum, palladium and rhodium bullion.

31. The Bullion Sub-Custodian has advised the Filer, through the Custodian, that it proposes to use Brinks and Via Mat, as sub-custodians, if necessary, to hold the physical gold, silver, platinum, palladium and rhodium bullion of the Fund. Brinks and Via Mat are not entities that are currently approved to act as a custodian or sub-custodian for assets held in Canada, or to act as a sub-custodian for assets held outside of Canada as Brinks and Via Mat are not, among other things, a bank listed in Schedule I, II or III of the Bank Act (Canada) or a trust company incorporated under the laws of Canada.

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

33. The number of entities in Canada which are eligible to act as sub-custodians for the physical storage of bullion is limited. Of these eligible entities, some already have exclusive relationships with other investment funds for storage purposes whereas others simply may not have the excess capacity that the Fund may need to store physical bullion. These capacity constraints have been intensified due to the increased demand for physical commodities and the corresponding need to arrange for safe-keeping.

34. The Filer, the Custodian and the Bullion Sub-Custodian believe that both Brinks and Via Mat are appropriate sub-custodians for the Fund's physical gold, silver, platinum, palladium and rhodium bullion. The Bullion Sub-Custodian has engaged in a review of the facilities, procedures, records and the level of insurance coverage of Brinks and Via Mat, and will engage in a similar review annually, to satisfy itself as to the continuing appropriateness of using Brinks and Via Mat as sub-custodians of the Fund's physical bullion.

35. The custody arrangements with respect to the holding of the Fund's physical gold, silver, platinum, palladium and rhodium bullion by Brinks or Via Mat will be governed by the terms of an agreement between the Bullion Sub-Custodian and Brinks or Via Mat, as the case may be (the Brinks/Via Mat Agreements), the terms of which will comply with Part 6 of NI 81-102, except as represented herein.

36. To the best of the Filer's, the Fund's, the Custodian's and the Bullion Sub-Custodian's knowledge, the Bullion Sub-Custodian Agreement and the Brinks/Via Mat Agreements are consistent with industry practice.

37. In relation to the Fund, the sub-custodial activities of Brinks and Via Mat will be limited to holding the Fund's physical gold, silver, platinum, palladium and rhodium bullion. All physical gold, silver, platinum, palladium and rhodium bullion of the Fund held by Brinks and Via Mat will be held in vault facilities in Canada, London, England or New York, U.S.A, on an allocated and segregated basis. The Bullion Sub-Custodian will exercise its audit rights under each Bullion Sub-Custodian Agreement on an on-going basis in order to satisfy itself that Brinks and Via Mat are in substantial compliance with the terms of the relevant Bullion Sub-Custodian Agreement and, in particular, that the bullion of the Fund which the Bullion Sub-Custodian has transferred to Brinks and Via Mat on behalf of the Fund (i) is held by Brinks and Via Mat at vault facilities that are accepted as warehouses for the London Bullion Market Association, (ii) is physically segregated and specifically identified, both in the vault facilities in which such bullion is held by Brinks and Via Mat and on the books and records of Brinks and Via Mat, as constituting the property of the Bullion Sub-Custodian or the Fund, (iii) has not sustained loss, damage or destruction (but with no obligation on the part of the Bullion Sub-Custodian to verify the weight, quality, fineness, assay characteristics, authenticity or composition of such bullion or that such bullion conforms to any good delivery standards for the London Bullion Market Association, NYMEX/COMEX, the London Platinum and Palladium Market Association or any other bullion trading body or that such bullion is otherwise fit for any purpose), and (iv) remains the subject of a subsisting policy of insurance that covers Brinks' and Via Mats' liability for the loss, damage or destruction of such bullion.

38. Pursuant to the Custodian Agreement, in safekeeping the property of the Fund, the Custodian is required to exercise (i) the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances; or (ii) at least the same degree of care as it exercises with respect to its own property of a similar kind, if this is a higher degree of care than the degree of care referred to in (i). In addition, pursuant to the Custodian Agreement, the Custodian is not entitled to an indemnity from the Fund in the event the Custodian breaches its standard of care. The Bullion Sub-Custodian Agreement includes a similar standard of care in respect of the obligations of the Bullion Sub-Custodian and a similar provision in respect of the Bullion Sub-Custodian's indemnity. The Bullion Sub-Custodian has satisfied itself that the degree of care to which Brinks and Via Mat are subject in respect of the Bullion Sub-Custodian Agreement is no less than the degree of care referred to in (i).

39. The Bullion Sub-Custodian Agreement provides that the Bullion Sub-Custodian shall, at all times, indemnify and save harmless the Custodian from and against any and all losses, charges, damages, actions, demands, costs, expenses, claims and liabilities (except for indirect, incidental, exemplary, punitive, consequential or special damages) arising from the Bullion Sub-Custodian's own negligence or willful misconduct in the performance or non-performance of its duties under the Bullion Sub-Custodian Agreement.

40. The Custodian Agreement provides that if the Fund suffers a loss as a result of any act or omission of the Custodian or of any other agent appointed by the Custodian (rather than appointed by the Filer), including the Bullion Sub-Custodian, 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 (except for indirect, incidental, exemplary, punitive, consequential or special damages), and shall reimburse the Fund accordingly. The Bullion Sub-Custodian Agreement provides that if the Custodian suffers a loss as a result of any act or omission of a sub-custodian (including Brinks or Via Mat) or of any other agent appointed by the Bullion Sub-Custodian (rather than appointed by the Custodian) 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 Bullion Sub-Custodian Agreement or the applicable Bullion Sub-Custodian Agreement, then the Bullion Sub-Custodian shall assume liability for such loss directly (except for indirect, incidental, exemplary, punitive, consequential or special damages) and shall reimburse the Custodian accordingly.

41. The Fund's auditors will be present during, and will verify, a physical count of all of the Fund's physical gold, silver, platinum, palladium and rhodium bullion, whether held by the Custodian, the Bullion Sub-Custodian, Brinks, or Via Mat, at least once every year. The Fund and its auditors will have the ability, with sufficient advance notice to the Custodian, who shall make arrangements with the Bullion Sub-Custodian, Brinks or Via Mat, where required, to attend at the vaults of the Custodian, Bullion Sub-Custodian, Brinks and/or Via Mat as required to verify the gold, silver, platinum, palladium and rhodium bullion held by the Custodian, the Bullion Sub-Custodian, Brinks or Via Mat on behalf of the Fund.

42. The Custodian shall, to the best of its ability, monitor the most recent audited financial statements of Brinks and Via Mat or their respective affiliates or subsidiaries, in order to ensure that the shareholders' equity of such entities is sufficient with what the Custodian believes to be appropriate for an entity acting as custodian of physical bullion and, in any event at sufficient levels in order to meet the Custodian's own internal requirements as though the Custodian were seeking to deposit its own physical bullion with such sub-custodians.

43. All bullion purchased by the Fund will be certified by the relevant vendor as bullion conforming to the good delivery standards of the London Bullion Market Association, the London Platinum and Palladium Market or another internationally recognized bullion trading body.

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 Exemption is granted provided that:

(a) the investment by the Fund in SPPR Derivatives, Precious Metals ETFs and Leveraged ETFs is in accordance with the fundamental investment objectives of the Fund;

(b) the Fund does not short sell securities of a Precious Metals ETF or Leveraged ETF;

(c) the Fund does not enter into a SPPR Derivative, or purchase securities of a Precious Metals ETF if, immediately after the purchase, more than 10% of the net assets of the Fund in aggregate, taken at market value at the time of the purchase, would consist of the underlying market exposure of the SPPR Derivatives and securities of the Precious Metals ETFs;

(d) the Fund does not purchase securities of a Leveraged ETF if, immediately after the purchase, more than 10% of the net assets of the Fund in aggregate, taken at market value at the time of the purchase, would consist of securities of the Leveraged ETFs;

(e) the Fund does not enter into any transaction if, immediately after the transaction, more than 20% of the net assets of the Fund, taken at market value at the time of the transaction, would consist of, in aggregate, securities of the Leveraged ETFs and all securities sold short by the Fund;

(f) the securities of the Precious Metals ETFs and the Leveraged ETFs are traded on a stock exchange in Canada or the United States;

(g) the securities of the Precious Metals ETFs and Leveraged ETFs are treated as specified derivatives for the purposes of Part 2 of NI 81-102;

(h) the prospectus of the Fund discloses, or will disclose the next time it is renewed after the date hereof, (i) in the Investment Strategy section of the prospectus, the fact that the Fund has obtained relief to enter into or invest in the SPPR Derivatives, the Precious Metals ETFs and Leveraged ETFs, together with the risks associated with investments in the SPPR Derivatives, Precious Metals ETFs and Leveraged ETFs, to the extent they differ from direct investments in precious metals, securities or the use of derivatives generally;

(i) in respect of the relief granted from the requirements of sections 6.1(2)(b), 6.1(3)(b), 6.2 and 6.3, the Fund, the Filer, the Custodian and the Bullion Sub-Custodian are limited to using Brinks and Via Mat as sub-custodians for the gold, silver, platinum, palladium and rhodium bullion of the Fund which will be held only in Canada, London or New York;

(j) in respect of the compliance reports to be prepared by the Custodian pursuant to section 6.7 of NI 81-102, in lieu of including the information required by paragraphs 6.7(1)(a), 6.7(1)(b), 6.7(1)(c) and 6.7(2)(b) and (c) in respect of the Custodian's review of the sub-custodian arrangements involving Brinks and Via Mat, the Custodian shall instead be entitled to rely on a certificate of the Bullion Sub-Custodian prepared in respect of the Bullion Sub-Custodian's annual review process for Brinks and Via Mat referred to in paragraph 34 above, and whether the Bullion Sub-Custodian remains of the view that Brinks and Via Mat continue to be appropriate sub-custodians to hold the Fund's physical gold, silver, platinum, palladium and rhodium bullion; and

(k) the annual information form of the Fund discloses, or will disclose the next time it is renewed after the date hereof, the material details of the insurance arrangements in relation to the Bullion Sub-Custodian Agreement and Brinks/Via Mat Agreements.

"Darren McKall"
Manager, Investment Funds
Ontario Securities Commission