Horizons ETFs Management (Canada) Inc.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted to permit a Canadian exchange-traded mutual fund to invest in an underlying fund based in Hong Kong whose securities would meet the definition of index participation unit in NI 81-102, but for the fact that they are listed on the Stock Exchange of Hong Kong -- relief is subject to certain conditions and requirements including the underlying fund is not a synthetic ETF -- National Instrument 81-102 Investment Funds.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.1(1), 2.5(2)(a), (c) and (f), 19.1.

July 24, 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 HORIZONS ETFS MANAGEMENT (CANADA) INC. (the Filer)

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) in connection with the proposed initial public offering of a class or series of units of an exchange traded fund (the Proposed ETF) to be established by the Filer, to exempt the Proposed ETF from subsection 2.1(1) and paragraphs 2.5(2)(a), 2.5(2)(c) and 2.5(2)(e) of National Instrument 81-102 Investment Funds (NI 81-102) to permit the Proposed ETF to purchase securities of the Underlying ETF (as defined below) (the Requested Relief).

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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Manitoba, Saskatchewan, Québec, Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, the Northwest Territories, Nunavut and the Yukon Territory (together with Ontario, the Jurisdictions).

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:

1. The Filer is a corporation incorporated under the federal laws of Canada with its head office located in Toronto, Ontario, and is registered under the securities legislation of Ontario as an investment fund manager.

2. The Filer is a subsidiary of Mirae Asset Global Investments Co., Ltd., the Korea-based asset management entity of Mirae Asset Financial Group.

3. The Filer will act as trustee and manager of the Proposed ETF.

4. The Proposed ETF will be (i) an open-ended mutual fund trust governed by the laws of the province of Ontario, (ii) a reporting issuer under the laws of all of the Jurisdictions, and (iii) governed by NI 81-102, subject to exemptive relief granted by the securities regulatory authorities.

5. The securities of the Proposed ETF will be qualified for distribution in each of the Jurisdictions under a long form prospectus filed in accordance with NI 41-101 and receipted by the securities regulatory authorities in each of the Jurisdictions.

6. The investment objective of the Proposed ETF will be substantially similar to the following: to seek to replicate, to the extent possible, the performance (Total Return) of the Hang Seng High Dividend Yield Index (the Index), net of expenses, by investing directly in the constituent securities of the Index or indirectly through the Horizons Hang Seng High Dividend Yield ETF (the Underlying ETF).

The Underlying ETF

7. The Underlying ETF is a sub-fund of the Horizons Exchange Traded Funds Series, an umbrella unit trust established under Hong Kong law by a trust deed between Mirae Asset Global Investments (Hong Kong) Limited, as manager, and Cititrust Limited, as trustee.

8. Mirae Asset Global Investments (Hong Kong) Limited (the Underlying Manager), the manager of the Underlying ETF, was incorporated in 2003 under the laws of Hong Kong and licensed by the Hong Kong Securities and Futures Commission (the HK Commission) and is an affiliate of Mirae Asset Global Investments Co., Ltd.

9. The Underlying Manager is licensed by the HK Commission to carry on three regulated activities under the Securities and Futures Ordinance: (i) dealing in securities, (ii) advising on securities, and (iii) asset management.

10. The Underlying ETF was established on June 11, 2013 and currently lists its securities on the Stock Exchange of Hong Kong Limited (the SEHK) pursuant to a prospectus dated September 19, 2014.

11. The Underlying ETF is a "mutual fund" within the meaning of applicable Canadian securities legislation.

12. The investment objective of the Underlying ETF is to seek to provide investment results that, before deduction of fees and expenses, closely correspond to the performance of the Index. The Underlying Manager seeks to achieve its investment objective by primarily investing in securities comprising the Index.

13. The Underlying ETF employs a passive investment strategy.

The Index

14. The Index was launched on December 10, 2012, and is calculated and maintained by Hang Seng Indexes Company Limited.

15. The Filer and the Underlying Manager are independent of Hang Seng Indexes Company Limited.

16. The Index methodology includes the top 50 large-capitalization and mid-capitalization constituents from the HSCI (capped at 10% in any single constituent according to the index methodology), each of which have their primary listing on the SEHK.

17. The methodology for the selection and weighting of the Index constituents, including the names of the issuers included in the Index, is publicly available and updated from time to time.

Reasons for the Requested Relief

18. But for the requirement in the definition of "index participation unit" that a security be traded on a stock exchange in Canada or the United States, securities of the Underlying ETF would be "index participation units".

19. The Proposed ETF seeks to obtain indirect exposure to the securities of the Index, including through the Underlying ETF, on the same basis as would be permitted under subsection 2.1(1) and paragraphs 2.5(2)(a), 2.5(2)(c) and 2.5(2)(e) of NI 81-102, as if the securities of the Underlying ETF were listed on a stock exchange in Canada or the United States and were, as a result, index participation units.

20. The regulatory regime, administration, operation, investment objectives and restrictions applicable to the Underlying ETF are as rigorous as those applicable to the Proposed ETF and therefore make securities of the Underlying ETF an appropriate investment for the Proposed ETF.

21. In particular, the Underlying ETF is subject to the following regulatory requirements:

(a) The Underlying ETF is required to prepare a prospectus that discloses material facts similar to the disclosure requirements under Form 41-101F2 Information Required in an Investment Fund Prospectus.

(b) The Underlying ETF prepares fact sheets and/or key investor information documents which, taken together, provide disclosure that is substantially similar to ETF summary documents currently prepared by Canadian ETF managers.

(c) The Underlying ETF is subject to continuous disclosure obligations which are substantially similar to the disclosure obligations under National Instrument 81-106 Investment Fund Continuous Disclosure.

(d) The Underlying ETF is required to update information of material significance in the prospectus and to prepare semi-annual (unaudited) and annual financial statements (audited).

(e) The Underlying ETF is subject to investment restrictions concerning the Underlying ETF's portfolio concentration, ability to control issuers in its portfolio, the liquidity of its portfolio securities, investments in other investment funds, investments in real estate, short selling, writing of call options, and securities lending.

(f) The Underlying ETF is not permitted to hold more than 10% of a class of securities of any single issuer.

(g) The Underlying ETF is not permitted to invest more than 10% of its net asset value in securities of any single issuer.

(h) The Underlying ETF does not invest in financial derivatives instruments (and has not adopted a synthetic replication strategy) and does not intend to engage in securities lending or repurchase transactions in respect of its portfolio.

22. As the Underlying Manager is subject to the laws of Hong Kong and licensed carry on three regulated activities: (i) to deal in securities, (ii) advise in securities, and (iii) asset management, by the HK Commission, the Underlying Manager is subject to equivalent regulatory oversight as the Filer, which is primarily regulated by the Principal Regulator.

23. The SEHK is subject to similar regulatory oversight to securities exchanges in Canada and the United States and therefore the listing requirements and regulatory oversight of the SEHK should be recognized as providing an appropriate trading platform for securities purchased, directly or indirectly, by the Proposed ETF on an equivalent basis to the way in which the listing requirements and regulatory oversight of securities exchanges in Canada and the United States are so recognized.

24. No management fees or incentive fees will be payable by the Proposed ETF that, to a reasonable person, would duplicate a fee payable by such Underlying ETF for the same service.

25. In the absence of the Requested Relief:

(a) the Proposed ETF would not be able to rely on the exemption available for "index participation units" in paragraph 2.1(2) because index participation units are currently defined to be securities that are traded in Canada or the United States only, and accordingly, the Proposed ETF would be prohibited from purchasing or holding units of the Underlying ETF if, immediately after any such purchase, more than 10% of the net asset value Proposed ETF would be invested in units of the Underlying ETF.

(b) The Proposed ETF would not be able to rely on the exemptions available for "index participation units" in paragraphs 2.5(3) and 2.5(5) because index participation units are currently defined to be securities that are traded in Canada or the United States only, and accordingly, the Proposed ETF would be prohibited from purchasing or holding units of the Underlying ETF.

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 Requested Relief is granted provided that:

(a) the Underlying ETF is not a "synthetic ETF", meaning that the Underlying ETF will not principally rely on an investment strategy that makes use of swaps or other derivatives to gain an indirect financial exposure to the return of the Index;

(b) the relief from paragraph 2.5(2)(e) of NI 81-102 will only apply to brokerage fees incurred for the purchase or sale of the Underlying ETF;

(c) each prospectus of the Proposed ETF discloses the fact that the Proposed ETF has obtained relief to invest in the Underlying ETF;

(d) the investment objective of the Proposed ETF names the Underlying ETF; and

(e) in the event that the regulatory regime applicable to the Underlying ETF is changed in any material way, the Proposed ETF does not acquire any additional securities of the Underlying ETF, and disposes of any securities of the Underlying ETF then held, within six months.

The Requested Relief will terminate six months after the coming into force of any amendments to paragraphs 2.5(a), (c) or (e) of NI 81-102 that restrict or regulate the Proposed ETF's ability to invest in the Underlying ETF.

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