Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from subsection 2.1(1) and paragraphs 2.2(1)(a), 2.5(2)(a), 2.5(2)(e) and 2.5(2)(f) of NI 81-102 to allow certain conventional open-end mutual funds and ETFs to invest without restriction in ETFs under common management or managed by an affiliate, and to allow the top funds to pay brokerage commissions for the purchase and sale of the securities of the underlying ETFs -- Relief needed because underlying ETFs are mutual funds that do not file a simplified prospectus under NI 81-101 and are not index participation units eligible for exemptions under the rule -- Underlying ETFs are subject to NI 81-102, are not commodity pools under NI 81-104, and do not rely on any exemptive relief from the restrictions regarding the purchase of physical commodities, the use of derivatives and the use of leverage -- Top funds to apply "look-through" requirement in subsections 2.1(3) and (4) of NI 81-102 to each investment in securities of an Underlying ETF.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.2(1)(a), 2.5(2)(a), 2.5(2)(e), 2.5(2)(f).

August 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
ALPHAPRO MANAGEMENT INC.
(the Filer)

AND

THE TOP 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 relieving the existing mutual funds listed at Schedule "A" (the Existing Top Funds) and such mutual funds that may be managed by the Filer or its affiliates in the future (the Future Top Funds, and together with the Existing Top Funds, the Top Funds and individually, a Top Fund) that are subject to National Instrument 81-102 -- Mutual Funds (NI 81-102), from the prohibitions in:

(a) subsection 2.1(1) of NI 81-102 to permit each Top Fund to purchase a security of an Underlying ETF (as defined below) or enter into a specified derivatives transaction with respect to an Underlying ETF even though immediately after the transaction, more than 10 percent of the net asset value of the Top Fund would be invested, directly or indirectly, in the securities of the Underlying ETF;

(b) paragraph 2.2(1)(a) of NI 81-102 to permit each Top Fund to purchase securities of an Underlying ETF such that, after the purchase, the Top Fund would hold securities representing more than 10 percent of

(i) the votes attaching to the outstanding voting securities of the Underlying ETF; or

(ii) the outstanding equity securities of the Underlying ETF.

(c) paragraph 2.5(2)(a) of NI 81-102 to permit each Top Fund to invest in exchange traded mutual funds that are not subject to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101); and

(d) paragraphs 2.5(2)(e) and 2.5(2)(f) of NI 81-102 to permit each Top Fund to pay brokerage commissions in relation to its purchase and sale on a recognized exchange of securities of exchange traded mutual funds that are managed by the Filer or an affiliate of the Filer

(collectively, 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 each of the other provinces and territories of Canada.

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

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

About the Filer

1. The Filer is a corporation incorporated pursuant to the laws of Canada.

2. The Filer, or an affiliate of the Filer, acts as, or will act as, the investment fund manager of the Top Funds.

3. The Filer is not in default of the securities legislation of any of the provinces or territories of Canada.

About the Top Funds

4. The Top Funds are, or will be, open end mutual funds established as trusts under the laws of the Province of Ontario.

5. The Top Funds are, or will be, governed by the provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities.

6. Each Top Fund distributes, or will distribute, securities pursuant to a simplified prospectus and annual information form prepared under NI 81-101 or pursuant to a long form prospectus prepared under Form 41-101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2).

7. The Top Funds are, or will be, reporting issuers in each of the provinces and territories of Canada (the Jurisdictions).

8. The Existing Top Funds are not in default of any requirements of the securities legislation of any of the Jurisdictions.

9. The Filer would like to be able to invest the assets of the Top Funds in the exchange traded funds set out in Schedule "B" (theExisting Underlying ETFs) and such other exchange traded mutual funds that may be established by the Filer or its affiliates in the future (the Future Underlying ETFs, and together with the Existing Underlying ETFs, the Underlying ETFs or individually an Underlying ETF).

10. The investment by a Top Fund in securities of an Underlying ETF will be made in accordance with the fundamental investment objective of the Top Fund and will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Funds.

11. The Top Funds do not, and will not, sell short securities of any Underlying ETF.

12. Each Top Fund is not, or will not be, a commodity pool governed by National Instrument 81-104 Commodity Pools ("NI 81-104").

13. No Top Fund has, or will have, a net market exposure greater than 100% of its net asset value.

About the Underlying ETFs

14. The Filer, or an affiliate of the Filer, is or will be the investment fund manager of the Underlying ETFs.

15. Each Underlying ETF is, or will be:

(a) an open end mutual fund subject to NI 81-102 and National Instrument 41-101 General Prospectus Requirements (NI 41-101), subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities;

(b) a reporting issuer in each of the Jurisdictions; and

(c) listed on the Toronto Stock Exchange (the TSX) or another "recognized exchange" in Canada as that term is defined in securities legislation.

16. The Existing Underlying ETFs are not in default of any requirements of the securities legislation of any of the Jurisdictions.

17. Each Underlying ETF distributes, or will distribute, its securities pursuant to a long form prospectus prepared under Form 41-101F2.

18. Each Underlying ETF does not or will not, at the time securities of that Underlying ETF are bought by a Top Fund, hold more than 10 percent of its net asset value in securities of any other mutual fund other than the securities of a money market fund or a mutual fund that issues index participation units.

19. Each Underlying ETF does not, or will not, rely on exemptive relief from:

(a) the requirements of section 2.3 of NI 81-102 regarding the purchase of physical commodities;

(b) the requirements of sections 2.7 and 2.8 of NI 81-102 regarding the purchase, sale or use of specified derivatives, with the exception of the relief from subsections 2.7(1)(a) and 2.8(1) of NI 81-102 granted to certain Underlying ETFs pursuant to the In the Matter of AlphaPro Management Inc. decision dated November 18, 2010 (the AlphaPro Relief); and

(c) subsections 2.6(a) and (b) of NI 81-102 with respect to the use of leverage.

20. Each Underlying ETF issues, or will issue, securities which are qualified for distribution in each of the Jurisdictions.

21. Each Underlying ETF is not, or will not be, a commodity pool governed by NI 81-104.

22. The Underlying ETFs do not or will not issue "index participation units" as defined in NI 81-102.

23. No Underlying ETF has, or will have, a net market exposure greater than 100% of its net asset value.

24. Each Underlying ETF does not or will not pay management or incentive fees which to a reasonable person would duplicate a fee payable by the Top Funds for the same service.

25. If the investment fund manager of a Top Fund (the "Top Fund Manager") determines that the management fees and incentive fees payable by an Underlying ETF to its investment fund manager (the "Underlying ETF Manager") would duplicate a fee payable by the Top Fund for the same service, the Underlying ETF Manager will pay a management fee rebate to the Top Fund that will not exceed the management fee payable by the Top Fund to the Top Fund Manager in respect of the Top Fund's investment in the Underlying ETF.

26. Holders of securities of an Underlying ETF may:

(a) sell securities of the Underlying ETF on the TSX or another recognized exchange in Canada on which securities of the Underlying ETF are listed for trading;

(b) redeem securities of the Underlying ETF in any number for cash at a redemption price equal to 95% of the closing price for a security of the Underlying ETF on the applicable exchange on the effective day of redemption; or

(c) redeem or exchange a prescribed number of securities (e.g., units) (a PNU) of the Underlying ETF for cash or securities equal to the net asset value of each security of the Underlying ETF tendered for redemption or exchange, respectively.

27. Each Underlying ETF may, from time to time, retain:

(a) National Bank Financial Inc., an associate of the Filer, to act as its designated broker, distributor and securities lending agent;

(b) Fiera Capital Corporation, an associate of an indirect minority shareholder of the Filer, to act as portfolio sub-adviser; and

(c) Horizons Investment Management Inc., an affiliate of the Filer, to act as its manager, trustee, or portfolio manager.

28. The Existing Underlying ETFs primarily achieve, and the Future Underlying ETFs will primarily achieve, their investment objectives through direct holdings of cash and securities and, in some circumstances, through investment in specified derivatives for hedging and non-hedging purposes, in accordance with their investment objectives and strategies and the requirements of NI 81-102.

29. All brokerage costs related to trades in securities of an Underlying ETF by a Top Fund will be borne by the Top Fund in the same manner as any other portfolio transaction made on an exchange.

30. If a Top Fund makes a trade in securities of an Underlying ETF with or through an affiliate or associate of the Filer acting as dealer, the Filer will comply with its obligations under National Instrument 81-107 Independent Review Committee for Investment Funds in respect of any proposed related party transactions. All such related party transactions will be disclosed to securityholders of the applicable Top Fund in its management report of fund performance.

Reasons for the Exemption Sought

31. An investment in an Underlying ETF by a Top Fund is an efficient and cost effective alternative to administering one or more investment strategies directly or engaging a sub-adviser to implement an investment strategy for the Top Fund.

32. Absent the Exemption Sought, an investment by a Top Fund in securities of an Underlying ETF would be restricted by the concentration restriction in subsection 2.1(1) to no more than 10% of the net asset value of the Top Fund. Furthermore, due to the potential size disparity between the various Top Funds and Underlying ETFs, it is possible that a relatively small investment, on a percentage of NAV basis, by a relatively large Top Fund in a relatively small Underlying ETF could result in that Top Fund holding securities representing more than 10% of (i) the votes attaching to the outstanding voting securities of an Underlying ETF, or (ii) the outstanding equity securities of that Underlying ETF, contrary to the control restriction in paragraph 2.2(1)(a) of NI 81-102.

33. Absent the Exemption Sought, an investment by a Top Fund in securities of an Underlying ETF would be prohibited by paragraph 2.5(2)(a) of NI 81-102 solely because the Underlying ETF is not governed by NI 81-101.

34. Absent the Exemption Sought, an investment by a Top Fund in securities of an Underlying ETF would not qualify for the exemptions in

(a) paragraph 2.1(2)(d) of NI 81-102 from paragraph 2.1(1) of NI 81-102;

(b) paragraph 2.2(1.1)(b) of NI 81-102 from paragraph 2.2(1)(a) of NI-81-102; and

(c) subsection 2.5(3) of NI 81-102 from paragraph 2.5(2)(a) of NI 81-102;

because the securities of the Underlying ETF would not be index participation units.

35. The only material difference between the securities of an Underlying ETF and the securities of any other mutual fund governed by NI 81-102 is the method of distribution. If the Exemption Sought is granted, the Top Funds will be permitted to purchase securities of a mutual fund that is listed on the TSX or another recognized exchange in Canada in the same manner that they are permitted to invest in securities of a mutual fund that is not listed on such an exchange.

36. It is anticipated that many of the trades made by a Top Fund will not be of the size necessary for the Top Fund to be able to purchase or redeem a PNU of an Underlying ETF directly from or to the Underlying ETF, as applicable. As a result, it is anticipated that a majority of the trades in securities of an Underlying ETF by a Top Fund will be done in the secondary market through the TSX or another recognized exchange in Canada.

37. Absent the Exemption Sought, when a Top Fund buys or sells securities of an Underlying ETF on the TSX or another recognized exchange in Canada, paragraphs 2.5(2)(e) and 2.5(2)(f) of NI 81-102 would not permit the Top Fund to pay any brokerage fees incurred in connection with such a trade.

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

(a) a Top Fund does not short sell securities of an Underlying ETF; and

(b) the Underlying ETFs do not rely on exemptive relief from

(i) the requirements of section 2.3 of NI 81-102 regarding the purchase of physical commodities;

(ii) the requirements of sections 2.7 and 2.8 of NI 81-102 regarding the purchase, sale or use of specified derivatives, with the exception of the relief from subsections 2.7(1)(a) and 2.8(1) of NI 81-102 granted to certain Underlying ETFs pursuant the AlphaPro Relief; and

(iii) subsections 2.6(a) and (b) of NI 81-102 with respect to the use of leverage;

(c) each Top Fund and each Underlying ETF is not a commodity pool governed by NI 81-104 and neither the Top Funds nor the Underlying ETFs will use leverage;

(d) in connection with the relief from subsection 2.1(1) under this decision allowing a Top Fund to invest more than 10% of its net asset value in the securities of an Underlying ETF, the Top Fund shall, for each investment it makes in securities of an Underlying ETF, apply subsections 2.1(3) and 2.1(4) of NI 81-102 as if those provisions applied to a Top Fund's investments in securities of an Underlying ETF, and accordingly limit a Top Fund's indirect holdings in securities of an issuer held by one or more Underlying ETFs to no more than 10% of the Top Fund's net asset value;

(e) the relief from paragraphs 2.5(2)(e) and 2.5(2)(f) will only apply to the brokerage fees incurred for the purchase and sale of securities of Underlying ETFs by the Top Funds; and

(f) the prospectus of each Top Fund discloses, or will disclose the next time it is renewed after the date of this decision, the fact that the Top Funds have obtained the Exemption Sought to permit the relevant transactions on the terms described in this decision.

"Darren McKall"
Manager, Investment Funds
Ontario Securities Commission

 

SCHEDULE "A"

EXISTING TOP FUNDS

Horizons Active Cdn Dividend ETF

Horizons Active Global Dividend ETF

Horizons Active Diversified Income ETF

Horizons Active Corporate Bond ETF

Horizons Active US Floating Rate Bond (USD) ETF

Horizons Active Preferred Share ETF

Horizons Active Floating Rate Bond ETF

Horizons Active High Yield Bond ETF

Horizons S&P/TSX 60 Equal Weight Index ETF

Horizons Active Cdn Bond ETF

Horizons Active Emerging Markets Dividend ETF

Horizons Universa Canadian Black Swan ETF

Horizons Universa US Black Swan ETF

 

SCHEDULE "B"

EXISTING UNDERLYING ETFs

Horizons Active Cdn Dividend ETF

Horizons Active Global Dividend ETF

Horizons Active Diversified Income ETF

Horizons Active Corporate Bond ETF

Horizons Active US Floating Rate Bond (USD) ETF

Horizons Active Preferred Share ETF

Horizons Active Floating Rate Bond ETF

Horizons Active High Yield Bond ETF

Horizons S&P/TSX 60 Equal Weight Index ETF

Horizons Active Cdn Bond ETF

Horizons Active Emerging Markets Dividend ETF

Horizons Universa Canadian Black Swan ETF

Horizons Universa US Black Swan ETF

Horizons US Dollar Currency ETF

Horizons Australian Dollar Currency ETF

Horizons Enhanced Income Equity ETF

Horizons Enhanced Income Energy ETF

Horizons Enhanced Income Financials ETF

Horizons Enhanced Income Gold Producers ETF

Horizons Enhanced Income US Equity (USD) ETF

Horizons Enhanced Income International Equity ETF

Horizons Enhanced US Equity Income ETF

Horizons Active S&P/TSX 60TM Index Covered Call ETF