Securities Law & Instruments

Headnote

National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to mutual fund subject to NI 81-102, to invest in up to 20% of its NAV in standardized futures the underlying interest of which is oil or natural gas, for hedging purposes only -- relief conditions include that the purchase of a standardized future be effected through the NYMEX or ICE Europe, 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.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.3(h), 19.1.

April 9, 2013


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
SUN LIFE GLOBAL INVESTMENTS (CANADA) INC.
(the Filer)

AND

IN THE MATTER OF
SUN LIFE DYNAMIC EQUITY INCOME FUND
(the Equity Income Fund)

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 from section 2.3(h) of National Instrument 81-102 Mutual Funds (NI 81-102) to permit the Equity Income Fund to invest in standardized futures (as such term is defined in NI 81-102) with underlying interests in sweet crude oil or natural gas (Oil and Gas Contracts) for hedging purposes (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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Yukon, Northwest Territories and Nunavut with respect to the relief sought.

Interpretation

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

Representations

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

The Filer and the Funds

1. The Filer is a corporation incorporated under the laws of Canada with its head office in Toronto, Ontario.

2. The Filer is registered as a commodity trading manager, investment fund manager and portfolio manager in Ontario.

3. The Filer acts as the investment fund manager and portfolio manager of the Equity Income Fund. To the extent that the Filer appoints a sub-advisor for the Equity Income Fund, the sub-advisor will be registered as a commodity trading manager in Ontario or relying on an exemption therefrom.

4. The Equity Income Fund is: (a) an open-ended mutual fund established under the laws of Ontario, (b) a reporting issuer under the laws of all provinces and territories of Canada, and (c) governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

5. Securities of the Equity Income 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 and filed with and receipted by the securities regulators in the applicable jurisdictions.

6. Neither the Filer nor the Equity Income Fund is in default of securities legislation in any of the provinces or territories of Canada.

7. The investment objective for the Equity Income Fund is to seek to achieve income and long-term capital growth primarily by investing directly in equity securities that pay a dividend or distribution, or indirectly by investing in mutual funds (including exchange-traded funds) that invest in such securities.

8. The investment strategies of the Equity Income Fund have no restrictions on market capitalization, industry sector or geographic mix. While the Equity Income Fund initially seeks to achieve its investment objective by investing all or substantially all of its assets in Dynamic Equity Income Fund (the Dynamic Underlying Fund), a mutual fund that is currently managed by GCIC Ltd., the Equity Income Fund is permitted by its investment objective to invest in securities directly and anticipates doing so once the portfolio has reached sufficient scale.

9. When the Equity Income Fund adopts the strategy of investing in securities directly, the Equity Income Fund may directly invest in securities of issuers in the oil and gas sector. Accordingly, the Filer has determined that it would be in the best interest of the Equity Income Fund to have the ability to invest in Oil and Gas Contracts traded on the ICE Futures Europe (ICE Europe) and New York Mercantile Exchange (NYMEX) for hedging purposes in order to reduce the volatility that can result from the changing prices of the securities of such oil and gas issuers. Until the Equity Income Fund adopts the strategy of investing in securities directly, it will not be transacting in Oil and Gas Contracts for hedging purposes.

10. When the Equity Income Fund invests in Oil and Gas Contracts, the Filer proposes to trade such standardized futures contracts for cash or an offsetting contract to satisfy the obligations in the Oil and Gas Contracts.

11. The Filer has ongoing compliance monitoring in place to ensure that the Equity Income Fund's long positions in oil and gas securities match the Equity Income Fund's hedge positions in oil and gas standardized futures.

12. The Filer has ongoing monitoring and compliance procedures in place to ensure that there is an appropriate correlation between movements in the price of oil and gas commodities and the share price of related oil and gas securities held within the Equity Income Fund's portfolio, and that any hedging is carried out in accordance with the requirements of NI 81-102.

13. The Filer believes that the Oil and Gas Contracts markets on the ICE Europe and NYMEX are highly liquid.

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 Exemption Sought is granted, provided that the Equity Income Fund will invest in Oil and Gas Contracts only if:

1. the purchases, uses and sales of Oil and Gas Contracts 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;

2. an Oil and Gas Contract will be traded only for cash or an offsetting standardized futures contract to satisfy the obligations under the Oil and Gas Contract and will be sold at least one day prior to the date on which delivery of the underlying commodity is due under the Oil and Gas Contract;

3. the purchase of an Oil and Gas Contract will be effected through ICE Europe or NYMEX;

4. the Equity Income Fund will not purchase an Oil and Gas Contract for hedging purposes if, immediately following the purchase, the aggregate of such investments would exceed or represent greater than 20% of the Equity Income Fund's net asset value;

5. the Equity Income Fund will keep proper books and records of all purchases and sales of Oil and Gas Contracts;

6. the prospectus of the Equity Income Fund discloses:

(a) that the Equity Income Fund may invest in standardized futures with underlying interests in oil and gas for hedging purposes, provided that the aggregate of such investments would not exceed or represent greater than 20% of the Equity Income Fund's net asset value;

(b) the risks associated with the investments described in (a); and

(c) that the Equity Income Fund has obtained relief to invest in Oil and Gas Contracts.

'Vera Nunes'
Manager, Investment Funds