Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions --Relief granted to a mutual fund that invests primarily in the energy sector to invest in standardized futures with underlying interests in oil and natural gas for hedging and non-hedging purposes -- standardized futures to be purchased on the NYMEX or ICE Futures Europe -- the standardized futures contract is traded only for cash or an offsetting standardized futures contract and the standardized futures contract is sold at least one day prior to the date on which delivery of the underlying commodity is due under the standardized future -- relief is subject to limits on investments in the standardized futures for both hedging and non-hedging purposes -- National Instrument 81-102 Investment Funds.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.3(1)(h), 19.1.

July 28, 2015

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 ENERGY FUND (the 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 paragraph 2.3(1)(h) of National Instrument 81-102 Investment Funds (NI 81-102) to permit the 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 and non-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 an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, a mutual fund dealer in each Jurisdiction, and a commodity trading manager and portfolio manager in Ontario.

3. The Filer will act as manager of the Fund.

4. Neither the Filer nor the Fund is in default of securities legislation in any Jurisdiction.

5. The Fund will be a mutual fund under the laws of Ontario and a reporting issuer under the securities laws of all Jurisdictions and will be governed by NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

6. The Filer filed a preliminary prospectus for the Fund on June 11, 2015.

7. The Filer will be the portfolio manager of the Fund and 1832 Asset Management L.P. will be the sub-advisor of the Fund (the Sub-Advisor). The Sub-Advisor is registered as a portfolio manager and commodity trading manager in Ontario.

8. The proposed investment objective for the Fund is to seek to achieve long-term capital appreciation primarily by investing directly in equity securities of North American companies involved in broadly defined energy-based or alternative energy activities across multiple components of the energy sector, including oil and gas, or indirectly by investing in mutual funds (including exchange-traded funds) that invest in such securities.

9. The proposed investment strategies of the Fund have no restrictions on market capitalization, industry sector or geographic mix.

10. In pursuing its investment objective, the Fund may invest in securities of issuers in the oil and gas sector.

11. Given the recent volatility of oil and gas prices, the Filer has determined that it would be in the best interest of the Fund to have the ability to implement an appropriate risk management strategy to hedge the Fund against fluctuations in prices of oil and gas securities. The Filer has considered alternative strategies for risk management and has determined that investing in Oil and Gas Contracts traded on the ICE Futures Europe (ICE Europe) and New York Mercantile Exchange (NYMEX) would be an optimal risk management strategy to reduce the volatility that can result from the changing prices of the securities of such oil and gas issuers.

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

13. The ability to invest up to 80% of the Fund's net assets in Oil and Gas Contracts will allow the Sub-Advisor to have optimal flexibility to use this strategy to hedge the Fund against fluctuations in prices of oil and gas securities.

14. The Fund's investments in Oil and Gas Contracts for hedging purposes will only apply to the portion of the Fund's portfolio that is invested in (1) oil and gas exploration issuers, (2) oil and gas production issuers or (3) oil and gas exploration and production issuers (each such issuer an E&P Issuer). The Fund's investments in Oil and Gas Contracts for hedging purposes will only apply a particular E&P Issuer if there is a high degree of negative correlation between the changes in the value of such E&P Issuer and the changes in the value of Oil and Gas Contracts.

15. The ability to invest up to 10% of the Fund's net assets in Oil and Gas Contracts for non-hedging purposes will allow the Sub-Advisor to increase the portfolio's allocation to pure, market-based oil and gas exposure rather than having to invest at the company level, which may add unwanted company-specific risk to the Fund's portfolio.

16. When the 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.

17. The Filer will implement compliance and monitoring procedures to ensure that the Fund's long positions in oil and gas securities match the Fund's hedge positions in Oil and Gas Contracts and 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 Fund's portfolio and that any hedging is carried out in accordance with the requirements of NI 81-102.

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 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 and non-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 NYMEX or ICE Europe;

4. the Fund will not purchase an Oil and Gas Contract for non-hedging purposes if, immediately following the purchase, the Fund's aggregate underlying market exposure to all physical commodities (including gold) would exceed or represent greater than 10% of the net asset value of the Fund at the time of purchase;

5. the Fund will not purchase an Oil and Gas Contract for hedging purposes if, immediately following the purchase, the Fund's aggregate underlying market exposure of such investments would exceed or represent greater than 80% of the net asset value of the Fund at the time of purchase;

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

7. the prospectus of the Fund will disclose:

(a) in the investment strategy section that the Fund may invest in standardized futures with underlying interests in oil and gas for (1) non-hedging purposes, provided the Fund's underlying market exposure to all physical commodities (including gold) would not exceed or represent greater than 10% of the net asset value of the Fund at the time of purchase and (2) hedging purposes, provided the Fund's aggregate underlying market exposure of such investments would not exceed or represent greater than 80% of the net asset value of the Fund at the time of purchase;

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

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

"Raymond Chan"
Manager,
Investment Funds and Structured Products Branch
Ontario Securities Commission