Securities Law & Instruments


[OSC Web Editor's Correction Note dated 2013-11-21: Notice of Correction: Counsel Portfolio Services Inc.]


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 funds to invest in commodities up to 10% of net assets. Investments in non-silver and gold commodities are capped at 2.5% of net assets per commodity sector. The Fund already had existing relief for trading in 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 10 % total exposure in gold and silver, and certain conditions. The decision revokes and replaces the prior decision.

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.

October 31, 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
COUNSEL PORTFOLIO SERVICES INC.
(Counsel)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from Counsel on behalf of the existing and future mutual funds managed by Counsel or an affiliate of Counsel (collectively, the Filer) that are subject to National Instrument 81-102 Mutual Funds (NI 81-102) other than money market funds (the Existing Funds and the Future Funds, respectively, together, the Funds, and individually, a Fund) under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):

(a) to revoke and replace the Previous Decision (as defined below), and

(b) to exempt the Funds from the prohibitions contained in paragraphs 2.3(f), 2.3(h), 2.5(2)(a), 2.5(2)(b) and 2.5(2)(c) of NI 81-102 to permit each Fund to invest in the following:

(i) silver, Permitted Silver Certificates (as defined below) and Silver Derivatives (as defined below) (the Silver Derivatives, together with silver and Permitted Silver Certificates is hereinafter referred to as Silver);

(ii) Underlying ETFs (as defined below), and

(iii) Commodity ETFs (as defined below), (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 11-102Passport System (MI 11-102) is intended to be relied upon in all 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. The following additional terms have the following meanings:

Commodity ETFs means ETFs (as defined below) traded on a stock exchange in Canada or the United States that invest, directly or indirectly through derivatives, in physical commodities, including but not limited to gold and silver.

ETFs means exchange-traded funds.

IPU means an "index participation unit" as defined in NI 81-102.

Permitted Silver Certificates means certificates that represent silver that is:

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

(ii) of a minimum fineness of 999 parts per 1,000;

(iii) held in Canada;

(iv) in the form of either bars or wafers; and

(v) 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.

Silver Derivative means a specified derivative, the underlying interest of which is silver.

Underlying ETFs means:

(i) 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 up to 200% (Leveraged Bull ETFs) or an inverse multiple of up to 200% (Leveraged Bear ETFs, which together with Leveraged Bull ETFs are referred to collectively in this decision as Leveraged ETFs);

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

(iii) ETFs that seek to replicate the performance of gold or silver or the value of a specified derivative the underlying interest of which is gold or silver on an unlevered basis, and

(iv) 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 on an unlevered basis (the ETF's Underlying Gold or Silver Interest), by a multiple of up to 200% (Leveraged Gold ETFs and Leveraged Silver ETFs, respectively),

(the ETFs referred to in (iii) above, Leveraged Gold ETFs and Leveraged Silver ETFs are referred to collectively in this decision as the Gold and Silver ETFs).

Representations

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

1. The Filer is a corporation governed by the laws of Ontario and is registered as a Portfolio Manager and Investment Fund Manager in Ontario and as an Investment Fund Manager in Newfoundland and Labrador.

2. The Filer is the manager of each of the Existing Funds and will be the manager of each of the Future Funds. The Filer is the portfolio manager of, or has appointed a sub-adviser for, each of the Existing Funds, and will be the portfolio manager of, or will appoint a sub-adviser for, each of the Future Funds.

3. Each Existing Fund is, and each Future Fund will be: (a) an open-end mutual fund established under the laws of Canada or the laws of a province or territory of Canada, (b) a reporting issuer under the laws of some or all of the provinces or territories of Canada, and (c) governed by the provisions of NI 81-102.

4. Securities of each Existing Fund are, and securities of each Future Fund will be, qualified for distribution in some or all of the provinces or territories of Canada under a simplified prospectus, annual information form and fund facts prepared in accordance with National Instrument 81-101 Mutual Funds Prospectus Disclosure (NI 81-101) and filed with and receipted by the securities regulators in the applicable provinces or territories of Canada.

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

The Previous Decision

6. The Filer obtained a previous decision dated September 7, 2011 (the Previous Decision) exempting the Funds from paragraphs 2.3(f), 2.3(h), 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to permit each Fund to purchase and hold securities of the Underlying ETFs. The Previous Decision also permitted the Funds to purchase and hold silver, Permitted Silver Certificates and Silver Derivatives.

7. The Previous Decision did not permit the Funds to purchase and hold securities of Commodity ETFs. As a result, the Filer has requested that the Previous Decision be revoked and replaced by this decision in order to permit the Funds to invest in Commodity ETFs pursuant to this decision.

8. The Filer has determined that it would be in the best interests of the Funds to receive the Exemption Sought and replace the Previous Decision with this decision.

9. As of the date of this decision, the Filer will no longer rely on the Previous Decision.

Investments in Gold and Silver

10. In addition to investing in gold, the Funds propose to have the ability to invest in Silver.

11. To obtain exposure to gold or silver indirectly, the Funds intend to use specified derivatives the underlying interest of which is gold or silver and invest in the Gold and Silver ETFs (which together with gold, silver, permitted gold certificates and Permitted Silver Certificates are referred to collectively in this decision as Gold and Silver Products).

12. NI 81-102 allows mutual funds to purchase gold or permitted gold certificates or enter into a specified derivative the underlying interest of which is gold, in its recognition that gold is a fairly liquid commodity. The Filer is requesting a similar investment flexibility that would permit a Fund to make investments in silver, based on the same rationale applied for gold and its liquidity.

13. The Filer believes that the markets in gold and silver are highly liquid, and there are no liquidity concerns with permitting a Fund to invest in Gold and Silver Products.

14. Permitting a Fund to invest in Gold and Silver Products will provide the portfolio manager, or sub-adviser of the Funds, as the case may be, with additional flexibility to increase gains for the Fund in certain market conditions which may have otherwise caused the Fund to have significant cash positions and therefore deter from its ability to achieve its investment objective.

The Underlying ETFs

15. Each Leveraged 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.

16. 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.

17. 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.

Commodity ETFs

18. Each Commodity ETF is or will be an "investment fund" as such term is defined under the Securities Act (Ontario).

19. The securities of each Commodity ETF trade or will trade on stock exchanges in Canada or the United States.

20. The assets of each Commodity ETF consist or will consist primarily of one or more physical commodities or derivatives that have an underlying interest in such physical commodity or commodities. These physical commodities may include, but are not limited to, agriculture or livestock (such as soy meal, sugar, wheat, cotton, coffee and live cattle), energy (such as crude oil, gasoline, heating oil, gas oil and natural gas), precious metals (such as gold, silver and platinum) and industrial metals (such as copper and aluminum).

21. The objective of each Commodity ETF is or will be to:

(a) reflect the price of the applicable physical commodity or commodities (less the Commodity ETF's expenses and liabilities) on an unlevered basis, or

(b) track the performance of an index which is intended to reflect the changes in the market value of the physical commodity or commodities sector.

Investment in IPUs, the Underlying ETFs, the Commodity ETFs and Silver

22. In addition to investing in securities of ETFs that are IPUs, the Funds propose to have the ability to invest in the Underlying ETFs and the Commodity ETFs, whose securities are not IPUs.

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

24. Any investment by a Fund will be made in compliance with the custodian requirements in Part 6 of NI 81-102.

25. Each Existing Fund is, and each Future Fund will be, permitted, in accordance with its investment objectives and investment strategies, to invest in Underlying ETFs, Commodity ETFs and Silver.

26. But for the Exemption Sought, paragraph 2.3(f) of NI 81-102 would prohibit a Fund from purchasing Silver.

27. But for the Exemption Sought, paragraph 2.3(h) of NI 81-102 would prohibit a Fund from entering into Silver Derivatives.

28. But for the Exemption Sought, paragraph 2.3(h) of NI 81-102 would prohibit a Fund from purchasing a Silver ETF or a Leveraged Silver ETF.

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

30. But for the Exemption Sought, paragraph 2.5(2)(b) of NI 81-102 would prohibit a Fund from purchasing or holding securities of some Commodity ETFs, because some Commodity ETFs may hold more than 10% their net assets in securities of other mutual funds.

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

32. An investment by a Fund in securities of an Underlying ETF, in securities of a Commodity ETF and/or Silver will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

33. Part B of the Funds' simplified prospectus discloses or will disclose under the section entitled "Investment Objectives and Strategies" the Funds' ability to invest in Silver, Underlying ETFs and Commodity ETFs pursuant to the Exemption Sought.

34. The Part B of each Fund's simplified prospectus that seeks to rely on the Exemption Sought will disclose under the section entitled "What are the risks of investing in this Fund?" the risks associated with such Fund's investments in Silver, Underlying ETFs and Commodity ETFs.

35. If the Exemption Sought represents a material change for any Existing Fund, the Filer will comply with the material change reporting obligations for that Existing Fund.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make a decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:

(a) the investment by a Fund in securities of an Underlying ETF, securities of an Commodity ETF and/or Silver is in accordance with the fundamental investment objectives of the Fund;

(b) a Fund does not short sell securities of an Underlying ETF or securities of a Commodity ETF;

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

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

(e) a Fund does 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 net asset value of the Fund, taken at market value at the time of the transaction;

(f) a Fund does not purchase Gold and Silver Products if, immediately after the transaction, more than 10% of the net asset value, in aggregate, of the Fund, taken at market value at the time of the transaction, would consist of Gold and Silver Products, securities of Underlying ETFs and securities of Commodity ETFs;

(g) a Fund does not purchase securities of an Underlying ETF if, immediately after the transaction, more than 10% of the net asset value, in aggregate, of the Fund, taken at market value at the time of the transaction, would consist of Gold and Silver Products, securities of Underlying ETFs and securities of Commodity ETFs;

(h) a Fund does not purchase securities of a Commodity ETF if, immediately after the transaction, more than 10% of the net asset value, in aggregate, of the Fund, taken at market value at the time of the transaction, would consist of Gold and Silver Products, securities of Underlying ETFs and securities of Commodity ETFs;

(i) the prospectus of each Existing Fund discloses upon the Existing Fund's renewal immediately following the date of this decision (i) in Part B of the Existing Fund the fact that the Existing Fund has obtained relief to invest in Silver, securities of Underlying ETFs and securities Commodity ETFs and (ii) in the risk disclosure section of the Existing Fund that seeks to rely on the Exemption Sought the risks associated with an Existing Fund's investment in Silver, securities of the Underlying ETFs and securities of the Commodity ETFs, and

(j) the prospectus of each Future Fund discloses (i) in Part B of the Future Fund the fact that the Future Fund has obtained relief to invest in Silver, securities of Underlying ETFs and securities Commodity ETFs and (ii) in the risk disclosure section of the Future Fund that seeks to rely on the Exemption Sought the risks associated with a Future Fund's investment in Silver, securities of the Underlying ETFs and securities of the Commodity ETFs.

"Darren McKall"
Manager, Investment Funds
Ontario Securities Commission