Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from subsection 2.1(1) and paragraph 2.5(2)(a) of NI 81-102 to allow certain conventional open-end mutual funds to invest in securities of another mutual fund and exceed the 10% concentration restriction -- Relief needed because underlying 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 fund is not subject to NI 81-102, is not a commodity pool under NI 81-104, and does 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 fund to apply "look-through" requirement in subsections 2.1(3) and (4) of NI 81-102 to each investment in securities of an Underlying Fund.

Applicable Legislative Provisions

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

September 8, 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 FT PORTFOLIOS CANADA CO. (the Filer) AND IN THE MATTER OF FIRST TRUST ADVANTAGED SHORT DURATION HIGH YIELD BOND FUND (the "Top 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 (the Legislation) granting an exemption (the Exemption Sought) to the Top Fund from the following prohibitions in NI 81-102 Investment Funds ("NI 81-102"):

(a) subsection 2.1(1) (the Concentration Restriction), to permit the Top Fund to indirectly hold units of Short Duration High Yield Portfolio Trust (the Underlying Fund) even though, immediately after the transaction, more than 10 percent of the net asset value (NAV) of the Top Fund would be invested, directly or indirectly, in the securities of the Underlying Fund; and

(b) subsection 2.5(2)(a) of NI 81-102, to permit the Top Fund to indirectly invest in securities of the Underlying Fund.

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 paragraph 4.7(1)(c) 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, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.

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 Filer

1. The Filer is a corporation formed by amalgamation pursuant to a certificate of amalgamation dated November 29, 2001 under the federal laws of Nova Scotia. The head office of the Filer is located in Toronto, Ontario.

2. The Filer or an affiliate of the Filer acts or will act as the investment fund manager of the Top Fund and the Underlying Fund. The Filer is a registered as an investment fund manager in the Province of Ontario.

3. The principal offices of the Filer, the Top Fund and the Underlying Fund is 330 Bay Street, Suite 1300, Toronto, ON, M5H 2S8.

4. None of the Filer, the Top Fund or Underlying Fund is in default of any of its obligations under the securities legislation of any of the provinces and territories of Canada.

The Top Fund

5. The Top Fund is a closed-end investment fund established under the laws of the Province of Ontario pursuant to a declaration of trust dated April 26, 2011. Computershare Trust Company of Canada acts as the trustee of the Top Fund.

6. The Top Fund is a reporting issuer in all of the provinces and territories of Canada.

7. The Top Fund, through exposure to a diversified portfolio comprised of high yield debt and other assets acquired and held by the Underlying Fund, seeks to achieve the following objectives: (i) provide the Top Fund unitholders with attractive, monthly, tax-advantaged distributions and (ii) preserve capital. The Top Fund obtains exposure to North American high yield bonds, and in particular short duration high yield bonds. Under normal circumstances, at least 70% of the fund's total assets are invested in below investment-grade North American debt securities, comprised primarily of U.S. dollar-denominated debt securities. The focus is on short duration high yield bonds with a maximum remaining term to maturity of five years. The holdings of the portfolio are diversified by industry sector, maturity and credit rating.

8. To achieve its investment objective, the Top Fund has entered into a forward agreement, which is a specified derivative as defined in NI 81-102, with The Bank of Nova Scotia (the "Counterparty") dated May 20, 2011 (the "Forward Agreement"). The return to unitholders of the Top Fund is dependent upon the return on the portfolio held by the Underlying Fund by virtue of the Forward Agreement. Pursuant to the Forward Agreement, the Counterparty has agreed to deliver to the Top Fund on May 20, 2016 (the "Termination Date") a portfolio of common shares of Canadian public companies that are "Canadian securities" for the purposes of the Income Tax Act with an aggregate value equal to the redemption proceeds of a corresponding number of units of the Underlying Fund, net of any amount owing by the Top Fund to the Counterparty.

9. The Filer is proposing to convert the Top Fund into an exchange traded fund (ETF) and change its investment objectives and strategy to align with First Trust Short Duration High Yield Bond ETF (FHY) (the Conversion) and then merge FHY into the Top Fund (the Merger). The Conversion was approved by the unitholders of the Top Fund at a special meeting of unitholders. If the Conversion and Merger are implemented, the Class A units and Class F units of the Top Fund will be redesignated as advisor class units and common units, respectively, and the name of the Top Fund will be changed to First Trust Short Duration High Yield Bond ETF II, as the continuing fund after merging with FHY.

10. In connection with the Conversion:

(a) the investment objectives and investment strategies of the Top Fund will be changed so that they align with the investment objectives and investment strategies of FHY (while maintaining the Top Fund's forward agreement structure for as long as the Top Fund may derive benefits from it under Canadian tax laws);

(b) the Filer will remain as manager of the Top Fund and the Underlying Fund and will become the trustee of the Top Fund, replacing Computershare Trust Company of Canada;

(c) First Trust Advisors L.P. (the "Portfolio Advisor") will remain as advisor to the Top Fund and the Underlying Fund, and will manage the High Yield Portfolio (as defined below) instead of continuing the existing sub-advisor relationship with First Western Capital Management Company;

(d) CIBC Mellon Trust Company and CIBC Mellon Global Securities Services Company will assume the roles of custodian and valuation agent of the Top Fund, respectively. They now perform those roles for the other ETFs managed by the Filer;

(e) Equity Financial Trust Company will assume the role of the registrar and transfer agent, and distribution reinvestment plan agent for the advisor class units and common units of the Top Fund. It now performs these roles for the other ETFs managed by the Filer; and

(f) the Independent Review Committee of the Top Fund will remain the same.

11. After the Conversion is implemented:

(a) the Top Fund will be an open-ended mutual fund organized and governed by the laws of a jurisdiction of Canada;

(b) the Top Fund 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 and the Top Fund will not be a commodity pool governed by National Instrument 81-104 Commodity Pools ("NI 81-104");

(c) the investment objective of the Top Fund will be to provide unitholders with a high level of current income by investing primarily in a diversified portfolio of below investment grade debt securities as rated by Moody's Investor Services, Inc., and Standard & Poors (Ba1/BB+ or below) or a similar rating by a designated rating organization (as defined in NI 81-102), and a secondary objective will be to seek capital appreciation;

(d) the Top Fund will no longer employ leverage and will not have a net market exposure greater than 100% of its net asset value;

(e) the Top Fund will distribute, its securities pursuant to a long form prospectus prepared pursuant to NI 41-101 General Prospectus Requirements and Form 41-101F2;

(f) the Top Fund proposes to maintain its investment in the Forward Agreement after the Conversion for as long as the Top Fund may derive benefits from it under Canadian tax laws. As a result, the Top Fund will be considered by virtue of the Forward Agreement to be holding securities of the Underlying Fund directly. After May 20, 2016, the Top Fund will no longer employ a forward agreement and will thereafter hold all of its portfolio investments directly;

(g) the exposure by the Top Fund to securities of the Underlying Fund by virtue of the Forward Agreement will be in accordance with the fundamental investment objective of the Top Fund and represents the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Top Fund; and

(h) the Top Fund may pre-settle the Forward Agreement in whole or in part prior to the Termination Date at any time and from time to time, in order to fund redemptions, distributions, or operating expenses and other liabilities of the Top Fund, and upon any such settlement, the Counterparty to the Forward Agreement will deliver to the Fund common shares of Canadian public companies that are liquid, with an aggregate value equal to the redemption proceeds of a corresponding number of units of the Underlying Fund (net of any amount owing by the Top Fund to the counterparty).

The Underlying Fund

12. The Underlying Fund is an investment fund governed by the laws of the Province of Ontario pursuant to a declaration of trust dated April 26, 2011.

13. The Underlying Fund is a reporting issuer in the Provinces of Ontario and Quebec.

14. The Underlying Fund is not subject to NI 81-102 since it has not offered its securities pursuant to a prospectus, however, the Underlying Fund will comply with the investment restrictions in Part 2 of NI 81-102 applicable to a mutual fund that is subject to NI 81-102.

15. The Underlying Fund's investment objective is to maximize total returns for holders of units while preserving capital. The fund has been established for the purpose of acquiring and holding a diversified, short duration high yield bond portfolio, actively managed by the fund's sub-advisor, comprised primarily of North American high yield debt securities, generally with remaining terms to maturity of five years or less, that are generally rated at or below BB+ by Standard & Poor's, or Ba1 or less by Moody's Investor Services, Inc., or an approved credit rating organization (the "High Yield Portfolio").

16. The securities of the Underlying Fund do not constitute index participation units ("IPUs").

17. The Underlying Fund does not 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.

18. The Underlying Fund is not a commodity pool governed by National Instrument 81-104 Commodity Pools (NI 81-104).

19. The Underlying Fund will not employ leverage.

20. The Underlying Fund will not pay management or incentive fees which to a reasonable person would duplicate a fee payable by the Top Fund for the same service.

Reasons for the Exemption Sought

21. Absent the Exemption Sought, the Top Fund would be prohibited by subsection 2.1(1) of NI 81-102 from indirectly investing more than 10 percent of its NAV in the securities of the Underlying Fund through the Forward Agreement. The Exemption Sought would only grant the Top Fund relief from the Concentration Restriction in respect of the Top Fund's direct or indirect holdings of securities issued by the Underlying Fund. The Exemption Sought would not relieve the Top Fund from the obligation to comply with the Concentration Restriction in respect of the Top Fund's indirect holdings in securities held by the Underlying Fund and the Top Fund will comply with the Concentration Restriction in respect of the Top Fund's indirect holdings in securities held by the Underlying Fund and apply sections 2.1(3) and (4) of NI 81-102.

22. Absent the Exemption Sought, an investment by the Top Fund in the Underlying Fund indirectly through the Forward Agreement, would be prohibited by paragraph 2.5(2)(a) of NI 81-102 because the Underlying Fund does not and will not have offered securities under a simplified prospectus in accordance with NI 81-101 Mutual Funds Prospectus Disclosure as contemplated by section 2.5(2)(a) of NI 81-102.

23. An investment by the Top Fund in the Underlying Fund would not qualify for the exemption in paragraph 2.5(3)(a) of NI 81-102 from paragraph 2.5(2)(a) of NI 81-102 because the Underlying Fund does not issue IPUs.

24. The Underlying Fund will comply with section 2.3 of NI 81-102 regarding the purchase of physical commodities, sections 2.7 and 2.8 of NI 81-102 regarding the purchase, sale or use of specified derivatives, and sections 2.6(a) and (b) of NI 81-102 with respect to the use of leverage.

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

(b) the Underlying Fund will comply with Part 2 of NI 81-102

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

(d) the Top Fund will not short sell securities of the Underlying Fund;

(e) the prospectus of the 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; and

(f) the Exemption Sought will expire as of May 20, 2016.

"Darren Mckall"
Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission