National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Mutual funds granted relief from certain restrictions in National Instrument 81-102 Investment Funds regarding securities lending transactions including: (i) the 50% limit on lending; (ii) the requirement to use the fund's custodian or sub-custodian as lending agent; and (iii) the requirement to hold the collateral during the course of the transaction -- Mutual funds invest their assets in a portfolio of cash and underlying securities that are pledged to a Counterparty for performance of the funds' obligations under forward contracts giving the funds exposure to underlying interests -- Mutual funds wanting to lend up to 100% of the net assets of the fund -- Counterparty must release its security interest in the underlying securities in order to allow the funds to lend such securities, provided the funds grant the Counterparty a securities interest in the collateral held by the fund for the loaned securities -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.12(1)1, 2.12(1)2, 2.12(1)12, 2.12(3), 6.8(5), 2.15, 2.16, 19.1.
Citation: Re Auspice Capital Advisors Ltd., 2015 ABASC 766
July 3, 2015
IN THE MATTER OF THE SECURITIES LEGISLATION OF ALBERTA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF AUSPICE CAPITAL ADVISORS LTD. (the Filer)
The securities regulatory authority or regulator in each of the Jurisdictions (each a Decision Maker) has received an application from the Filer on behalf of the existing exchange traded funds the Filer manages (each an Existing ETF) and such other exchange traded funds as the Filer or an affiliate of the Filer (each an ETF Manager) manages or may establish and manage in the future (each a Future ETF, and together with the Existing ETFs, the ETFs and individually, an ETF) for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting each ETF from the following provisions of National Instrument 81-102 Investment Funds (NI 81-102):
(a) paragraph 2.12(1)1 of NI 81-102 to permit an ETF to enter into securities lending transactions that will not be administered and supervised in compliance with certain requirements of sections 2.15 and 2.16 of NI 81-102 as set forth in paragraphs (e) and (f) below;
(b) paragraph 2.12(1)2 of NI 81-102 to permit an ETF to enter into securities lending transactions that are not made under an agreement that fully implements the requirements of section 2.12 of NI 81-102;
(c) paragraph 2.12(1)12 of NI 81-102 to permit an ETF to enter into securities lending transactions in which the aggregate market value of securities loaned by the ETF exceeds 50% of the total assets of the ETF;
(d) subsection 2.12(3) of NI 81-102 to permit an ETF, during the term of a securities lending transaction, to pledge the collateral delivered to it as collateral in the transaction to a Counterparty (as defined below);
(e) section 2.15 of NI 81-102 to permit an ETF to appoint an agent, other than the custodian or sub-custodian of the ETF, as agent for administering the securities lending transactions entered into by the ETF;
(f) section 2.16 of NI 81-102 only to the extent this section contemplates that securities lending transactions must be entered into through an agent appointed under section 2.15 of NI 81-102; and
(g) subsection 6.8(5) of NI 81-102, only to permit an ETF, in connection with a securities lending transaction it has entered into, to deliver any collateral, cash proceeds or purchased securities that it has received to a Counterparty, that is not the custodian or sub-custodian of the ETF
(h) (collectively, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Alberta Securities Commission is the principal regulator for this application;
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Northwest Territories, Yukon and Nunavut; and
(c) this decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined herein.
This decision is based on the following facts represented by the Filer.
1. Each ETF is, or will be, a mutual fund trust governed by the laws of Ontario and a reporting issuer under the laws of some or all of the jurisdictions of Canada.
2. Each ETF is, or will be, subject to NI 81-102, National Instrument 81-106 Investment Fund Continuous Disclosure and National Instrument 81-107 Independent Review Committee for Investment Funds and is, or may be, subject to other rules applicable to mutual funds, including National Instrument 81-104 Commodity Pools, subject to any exemptions therefrom that have been, or may be, granted by the applicable securities regulatory authorities or regulators.
3. Each ETF is, or will be, in continuous distribution. The units of each ETF are, or will be, listed on the Toronto Stock Exchange (the TSX) or another marketplace in Canada as defined in National Instrument 21-101 Marketplace Operations (a Marketplace).
4. An ETF Manager has filed, or will file, a long form prospectus in accordance with National Instrument 41-101 General Prospectus Requirements on behalf of each ETF, subject to any exemptions that have been or may be granted by the applicable securities regulatory authorities or regulators.
5. An ETF Manager will not file a final prospectus for an ETF until the TSX or another Marketplace has conditionally approved the listing of units of the ETF.
6. The Filer will be the manager and trustee of the Existing ETFs and an ETF Manager will be the manager and trustee of the Future ETFs.
7. The Filer is a corporation organized under the laws of Alberta, with a head office in Calgary, Alberta. The Filer is registered as: (i) an investment fund manager in Alberta, British Columbia and Ontario; (ii) an exempt market dealer in Alberta, British Columbia and Ontario; (iii) a portfolio manager in Alberta; and (iv) a commodity trading manager in Ontario.
8. Neither the Filer nor any Existing ETF is in default of securities legislation in any of the jurisdictions of Canada.
9. Horizons ETFs Management (Canada) Inc., a registered portfolio manager, will act as portfolio adviser to the Existing ETFs.
10. Units of each ETF are, or will be, distributed on a continuous basis in one or more of the jurisdictions of Canada under a long form prospectus. Therefore, the ETFs must file a renewal prospectus on an annual basis in each such jurisdiction of Canada in accordance with applicable securities legislation.
11. In order to obtain exposure to the performance of an applicable index or reference portfolio, each ETF has entered, or will enter, into one or more forward purchase and sale agreements or other derivative agreements (each a Forward Contract) with a Canadian chartered bank or an affiliate thereof (each a Counterparty). Pursuant to a Forward Contract, each ETF will invest the net proceeds of its continuous offerings in a portfolio of cash and underlying securities (the Securities Portfolio) which the ETF will deliver to the Counterparty from time to time in exchange for a purchase price determined by reference to the performance of an applicable index or of a fund that invests in or obtains exposure to the applicable index or the constituent securities thereof or an applicable reference portfolio. However, neither the ETFs, nor their unitholders by virtue of their investment in units of an ETF, will have any ownership interest in the applicable index, securities or any other financial instrument, if any, that the Counterparty chooses to use to hedge its exposure under the applicable Forward Contract.
12. Currently, National Bank of Canada acts as Counterparty in respect of the Existing ETFs.
13. The Securities Portfolio of each ETF generally is and will be a static portfolio that will not be actively managed except in limited circumstances. The Securities Portfolio of each ETF is expected to be held by the Counterparty as pledged security to the Forward Contract the ETF has entered into.
14. The Filer proposes and each ETF Manager is anticipated to engage in securities lending transactions on behalf of each ETF it manages that may represent up to 100% of the net assets of the ETF, in order to earn additional returns for the ETF.
15. An ETF Manager may lend the securities of an ETF to one or more borrowers indirectly through an agent, other than the custodian or sub-custodian of the ETF, which will be a Canadian financial institution or the investment bank affiliate of a Canadian financial institution. It may not be practical for the custodian of an ETF to act as agent with respect to an ETF's securities lending transactions as it may not have control over the ETF's assets for the reasons set out above.
16. An ETF will appoint the Counterparty or, in appropriate circumstances, an affiliated dealer of the Counterparty, to act as the ETF's agent in administering the ETF's securities lending activities. It is also possible that an ETF's custodian will, with the consent of the Counterparty, act as the ETF's agent with respect to the ETF's securities lending activities.
17. Each ETF Manager will ensure that any agent through which the ETF lends securities maintains appropriate internal controls, procedures, and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.
18. The Securities Portfolio of an ETF will be pledged to the applicable Counterparty as collateral for the obligations of the ETF under its Forward Contract. The Counterparty will release its security interest in the Securities Portfolio of the ETF in order to allow the ETF to lend the portfolio assets in the Securities Portfolio of the ETF, provided that the ETF grants the Counterparty a security interest in the collateral held by the ETF for the loaned portfolio assets in the Securities Portfolio of the ETF. To facilitate the Counterparty's release of its security interest in the Securities Portfolio of such an ETF, the applicable ETF Manager will ensure that the portfolio assets of the Securities Portfolio of the ETF are loaned to an affiliate of the Counterparty, which will be a registered dealer and a member of the Investment Industry Regulatory Organization of Canada (IIROC) or another borrower that is acceptable to both the ETF Manager and the Counterparty. The collateral received by the ETF in respect of a securities lending transaction, will not be reinvested in any other types of investment products.
19. The revenues from the securities lending transactions paid to an ETF will not be affected by the borrower of the portfolio assets of the ETF being an affiliate of the Counterparty. Revenue generated from an ETF's securities lending transactions will be paid to the ETF.
20. The prospectus of each ETF will contain disclosure about its proposed securities lending transactions before that ETF enters into such securities lending transactions. Except pursuant to the Exemption Sought, all securities lending transactions on behalf of an ETF will be conducted in accordance with the provisions of NI 81-102.
Each Decision Maker is satisfied that the decision meets the test set out in the Legislation for that Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted in respect of an ETF provided that by the date the ETF needs to rely on the Exemption Sought, and on an ongoing basis thereafter, the ETF and the applicable ETF Manager will be in compliance with each of the following conditions:
(a) with respect to the exemption from paragraph 2.12(1)12 of NI 81-102, the ETF enters into a Forward Contract with a Counterparty and grants the Counterparty a security interest in its Securities Portfolio and in connection with a securities lending transaction relating to such Securities Portfolio:
(i) receives the collateral that:
(A) is prescribed by paragraphs 2.12(1)3 to 6 of NI 81-102 other than collateral described in subparagraph 2.12(1)6(d) or in paragraph (b) of the definition of "qualified security"; and
(B) is marked to market on each business day in accordance with paragraph 2.12(1)7 of NI 81-102;
(ii) has the rights set forth in paragraphs 2.12(1)8, 2.12(1)9 and 2.12(1)11 of NI 81-102;
(iii) complies with paragraph 2.12(1)10 of NI 81-102; and
(iv) lends its securities only to borrowers that are acceptable to that ETF and the Counterparty, and that have a designated rating or whose obligations to that ETF are fully and unconditionally guaranteed by one or more persons or companies that have a designated rating;
(b) with respect to the exemption from subsection 2.12(3) of NI 81-102, the ETF, to the extent necessary, provides a security interest to the applicable Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described above;
(c) with respect to the exemption from section 2.15 of NI 81-102:
(i) the ETF enters into a written agreement with an agent that complies with each of the requirements set forth in subsection 2.15(4) of NI 81-102, except as set out herein; and
(ii) the agent administering the securities lending transaction of the ETF:
(A) is in compliance with subsection 2.15(5) of NI 81-102; and
(B) is the Counterparty or an affiliate of the Counterparty that is registered as an investment dealer;
(d) with respect to the exemption from section 2.16 of NI 81-102, the ETF Manager and the ETF comply with the requirements of section 2.16 of NI 81-102 as if the agent appointed by the Filer were the agent contemplated in that section; and
(e) with respect to the exemption from subsection 6.8(5) of NI 81-102:
(i) the ETF provides a security interest to the applicable Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described in representation 18; and
(ii) the collateral delivered to the ETF pursuant to the securities lending transaction is held by an affiliate of the Counterparty, which will be a registered dealer and a member of IIROC, as described in representation 18.