Securities Law & Instruments

Headnote

National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from sections 2.3(f), 2.3(h), 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 -- Mutual Funds to permit mutual fund to invest in a) silver, and b) up to 10% of net asset value in leveraged ETFs, inverse ETFs, gold ETFs, silver ETFs, leveraged gold ETFs and leveraged silver ETFs traded on Canadian or US stock exchanges, subject to a maximum of 10% of the Fund's net asset value exposed to gold and silver.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.3(f), 2.3(h), 2.5(2)(a), 2.5(2)(c), 19.1.

January 14, 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
THE FUNDS (as defined below)

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:

(a) from sections 2.3(f) and 2.3(h) of NI 81-102 (Silver Exemption) to permit each Fund to:

(i) purchase and hold silver;

(ii) purchase and hold a certificate that represents silver that is:

• available for delivery in Canada, free of charge, to or to the order of the holder of the certificate;

• of a minimum fineness of 999 parts per 1000;

• held in Canada;

• in the form of either bars or wafers; and

• if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a province or territory of Canada

(Permitted Silver Certificates); and

(iii) purchase, sell or use a specified derivative, the underlying interest of which is silver (Silver Derivatives)

(silver, Permitted Silver Certificates and Silver Derivatives are collectively hereinafter referred to as Silver);

and

(b) from sections 2.3(h), 2.5(2)(a) and 2.5(2)(c) of NI 81-102 (ETF Exemption) to permit each Fund to purchase and hold securities of:

(i) 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%, by an inverse multiple of 200% or an inverse multiple of 100% (Inverse or Leveraged ETFs);

(ii) ETFs that hold or seek to replicate the performance of gold, permitted gold certificates or specified derivatives of which the underlying interest is gold or permitted gold certificates on an unlevered basis (Gold ETFs);

(iii) ETFs that hold or seek to replicate the performance of silver, permitted silver certificates or specified derivatives of which the underlying interest is silver or permitted silver certificates on an unlevered basis (Silver ETFs);

(iv) Gold ETFs that are also Inverse or Leveraged ETFs, by a multiple of up to 200% (Leveraged Gold ETFs); and

(v) Silver ETFs that are also Inverse or Leveraged ETFs, by a multiple of up to 200% (Leveraged Silver ETFs).

(Inverse or Leveraged ETFs, Gold ETFs, Silver ETFs, Leveraged Gold ETFs and Leveraged Silver ETFs are collectively referred to as the Underlying ETFs),

(the Silver Exemption and the ETF Exemption are collectively referred to as 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. The following additional terms shall have the following meanings:

Funds means the existing mutual funds (the Existing Funds) or any future mutual funds (the Future Funds) managed by the Filer that are subject to NI 81-102, other than a Fund that is a "money market fund" as defined in NI 81-102, and any one of them may be referred to as a Fund.

NI 81-102 means National Instrument 81-102 Mutual Funds.

Gold and Silver Products means gold or silver, permitted gold certificates, Permitted Silver Certificates, investments in Gold ETFs, Silver ETFs, Leveraged Gold ETFs, Leveraged Silver ETFs, and investments in specified derivatives the underlying interest of which is gold or silver.

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, or will act, as the investment fund manager of each of the Funds.

4. Each Existing Fund is, and each Future Fund will be: (a) an open-ended mutual fund established under the laws of Canada or a province or territory of Canada, (b) a reporting issuer under the laws of some or 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 each Existing Fund are, and securities of each Future Fund will be, qualified for distribution in some or 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 applicable jurisdiction(s).

6. Neither the Filer nor the Existing Funds are in default of securities legislation in any of the provinces or territories of Canada.

Investments in Silver

7. In addition to investing in gold, the Funds wish to have the ability to invest in Silver.

8. A Fund will only invest in Silver in accordance with its investment objectives and investment strategies.

9. Permitting each Fund to invest in Silver will afford the Fund additional flexibility to increase gains in certain market conditions, which may otherwise cause the Fund to have significant cash positions and therefore deter from its ability to achieve its investment objective.

10. The Filer believes that the market in silver is highly liquid, and there are no liquidity concerns with permitting a Fund to invest, directly or through permitted derivatives or ETFs, up to 10% in total of its net asset value in silver.

11. The Filer believes that the potential volatility or speculative nature of Silver is no greater than that of gold, or of equity securities.

12. An investment by a Fund in Silver will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

13. Any investment by a Fund in Silver will be made in compliance with the custodian requirements in Part 6 of NI 81-102 or pursuant to exemptive relief therefrom.

14. But for the Silver Exemption, paragraph 2.3(f) of NI 81-102 would prohibit an investment by a Fund in Silver, because a Fund is prohibited from purchasing a physical commodity other than gold or permitted gold certificates.

15. But for the Silver Exemption, paragraph 2.3(h) of NI 81-102 would prohibit an investment by a Fund in Silver because a Fund is prohibited from purchasing, selling or using a specified derivative the underlying interest of which is a physical commodity other than gold or a specified derivative of which the underlying interest is a physical commodity other than gold.

16. If an investment in Gold and Silver Products represents a material change for any Existing Fund, the Filer will comply with the material change reporting obligations for that Fund.

Investments in Underlying ETFs

17. In addition to investing in securities of ETFs that qualify as index participation units as defined in NI 81-102 (IPUs), the Funds wish to invest in the Underlying ETFs, whose securities are not IPUs.

18. A Fund will only invest in Underlying ETFs in accordance with its investment objectives and investment strategies.

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

20. To obtain exposure to gold or silver indirectly, the Funds wish to have the ability to use specified derivatives the underlying interest of which is gold or silver, and invest in Gold ETFs, Silver ETFs, Leveraged Gold ETFs and Leveraged Silver ETFs, as these investments may provide a more efficient way to obtain exposure to gold or silver, as applicable.

21. Each Inverse or Leveraged ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed -100% or +/-200%, as the case may be, of the corresponding daily performance of its Underlying Index.

22. 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 -100% or +/-200%, as the case may be, of the corresponding daily performance of the underlying gold or silver interest, as applicable.

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

24. The Underlying ETFs and Silver are attractive investments for the Funds, as they provide an efficient and cost effective means of achieving diversification and exposure.

25. But for the ETF Exemption, paragraph 2.5(2)(a) of NI 81-102 would prohibit a Fund from purchasing or holding a security of an Underlying ETF, because the Underlying ETFs are not subject to both NI 81-102 and National Instrument 81-101.

26. But for the ETF Exemption, paragraph 2.5(2)(c) of NI 81-102 would prohibit a Fund from purchasing or holding securities of some Underlying ETFs, because some Underlying ETFs will not be qualified for distribution in the local jurisdiction.

27. The Filer is not currently related to any Underlying ETF, is not the manager of an Underlying ETF and does not currently expect to be so related in the near future.

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:

1. A Fund will invest in Silver only if:

(a) the silver certificates that a Fund invests in are Permitted Silver Certificates;

(b) in determining a Fund's compliance with the concentration restriction in section 2.1 of NI 81-102, the Fund will not invest in gold, silver, Permitted Silver Certificates, permitted gold certificates or derivatives the underlying interest of which is either silver or gold, if immediately after giving effect to the transaction, in the aggregate such investments would exceed 10% of the Fund's net asset value; and

(c) the prospectus of each Fund that intends to rely on the Silver Exemption discloses, or will disclose the next time it is renewed, (i) in the Investment Strategy section of the prospectus, the fact that the Fund has obtained relief to invest in Silver, and (ii) to the extent applicable, the risks associated with such an investment.

2. A Fund will invest in Underlying ETFs only if:

(a) the investment by a Fund in securities of an Underlying ETF is in accordance with the fundamental investment objective of the Fund;

(b) the Funds do not short sell securities of an Underlying ETF;

(c) the securities of the Underlying ETFs are traded on a stock exchange in Canada or the United States;

(d) a Fund may not purchase securities of an Underlying ETF if, immediately after the purchase, more than 10% of the Fund's net asset value would consist of securities of the Underlying ETFs;

(e) if a Fund engages in short selling, the Fund does not purchase securities of an Inverse or Leveraged ETF that tracks the inverse of its Underlying Index by no more than 200% (a Bear ETF) or sell any securities short if, immediately after the transaction, the aggregate market value of (i) all securities sold short by the Fund, and (ii) all securities of Bear ETFs held by the Fund, would exceed 20% of the Fund's net asset value;

(f) each Fund that intends to rely on the ETF Exemption will not purchase Gold and Silver Products if, immediately after the transaction, more than 10% of the Fund's net asset value would consist of Gold and Silver Products;

(g) each Fund that intends to rely on the ETF Exemption will not purchase Gold and Silver Products if, immediately after the transaction, the market value exposure to gold or silver through the Gold and Silver Products is more than 10% of the Fund's net asset value;

(h) the securities of the Underlying ETFs are treated as specified derivatives for the purposes of Part 2 of NI 81-102; and

(i) the prospectus of each Fund that intends to rely on the ETF Exemption discloses, or will disclose the next time it is renewed, (i) in the Investment Strategy section of the prospectus, the fact that the Fund has obtained relief to invest in Inverse or Leveraged ETFs, Gold ETFs, Silver ETFs, Leveraged Gold ETFs or Leveraged Silver ETFs, as appropriate, and (ii) to the extent applicable, the risks associated with such an investment.

"Vera Nunes"
Manager, Investment Funds
Ontario Securities Commission