Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from sections 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 -- Investment Funds to permit mutual funds to invest up to 10% of net asset value in leveraged ETFs and inverse ETFs traded on Canadian or US stock exchanges.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.3(f), 2.3(h), 2.5(2)(a), 2.5(2)(c), 19.1.

September 30, 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 PICTON MAHONEY ASSET MANAGEMENT (the Filer) AND PICTON MAHONEY FORTIFIED EQUITY FUND, PICTON MAHONEY FORTIFIED INCOME FUND, PICTON MAHONEY FORTIFIED MULTI-ASSET FUND (the Current Funds)

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, pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), from paragraphs 2.5(2)(a) and 2.5(2)(c) of NI 81-102 (the Requested Relief) to permit each Fund to purchase and hold securities of:

(a) exchange-traded funds (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:

(i) a multiple of up to 200% (Leveraged Bull ETFs); or

(ii) an inverse multiple of up to 200% (Leveraged Bear ETFs and, together with Leveraged Bull ETFs, Leveraged ETFs); and

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

(the Leveraged ETFs and Inverse ETFs are referred to collectively herein as Permitted ETFs).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for the 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 all other provinces and territories of Canada.

INTERPRETATION

Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 81-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:

Funds means the Current Funds and all mutual funds managed by the Filer in the future that are subject to NI 81-102, other than a Fund that is a "money market fund" as defined in NI 81-102, and any one of them may be referred to as a Fund.

REPRESENTATIONS

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

1. The Filer is a partnership governed by the laws of the Province of Ontario with its head office located in Toronto, Ontario. The Filer is registered under the securities legislation of Ontario as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager.

2. The Filer is not in default of securities legislation in any Jurisdiction.

3. The Filer is and will be the manager of, each Fund.

4. Each Fund will be a "mutual fund" (as such term is defined under the Securities Act (Ontario)), and to which National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and NI 81-102 applies.

5. None of the Current Funds are in default of securities legislation in any jurisdiction.

Investments in Permitted ETFs

6. In accordance with its investment objectives and investment strategies, each Fund is permitted generally to invest in ETFs.

7. The Filer, as the manager of the Funds, believes that it would be in the best interests of each Fund to have the flexibility to obtain diversification and exposure from time to time to Underlying Indices by investing a portion of its assets in Permitted ETFs.

8. Each Permitted ETF will be a "mutual fund" (as such term is defined under the Securities Act (Ontario)) and will be listed and traded on a stock exchange in Canada or the United States.

9. The amount of loss that can result from an investment by a Fund in a Permitted ETF will be limited to the amount invested by the Fund in securities of the Permitted ETF.

10. 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.

11. 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.

12. But for the Requested Relief, paragraph 2.5(2)(a) of NI 81-102 would prohibit a Fund from purchasing or holding a security of some Permitted ETFs because such Permitted ETFs are not mutual funds that both: (i) are subject to NI 81-102, and (ii) offer or have offered securities under a simplified prospectus in accordance with NI 81-101.

13. But for the Requested Relief, paragraph 2.5(2)(c) of NI 81-102 would prohibit a Fund from purchasing or holding securities of some Permitted ETFs that are traded on a stock exchange in the United States because such Permitted ETFs are not reporting issuers in the local jurisdiction.

14. The Filer is not currently, and does not currently expect to become in the future, the manager of, nor the Filer is or will be affiliated with the manager of, any Permitted ETF.

15. An investment by a Fund in securities of a Permitted ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

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) each investment by the Fund in securities of a Permitted ETF is permitted by the fundamental investment objective of the Fund;

(b) the securities of the Permitted ETFs are traded on a stock exchange in Canada or the United States;

(c) the Fund does not purchase securities of a Permitted ETF if, immediately after the purchase, more than 10% of the Fund's net asset value would consist of securities of Permitted ETFs;

(d) if the Fund engages in short selling, the Fund does not purchase securities of an Inverse ETF or Leveraged Bear ETF (collectively, Bear ETFs) or sell any securities short if, immediately after the transaction, the aggregate market value of (i) all securities sold short by the Fund; and (ii) all securities of Bear ETFs held by the Fund, would exceed 20% of the Fund's net asset value; and

(e) the prospectus of the Fund discloses (i) in the investment strategy section of the prospectus, the fact that the Fund has obtained relief to invest in Permitted ETFs; and (ii) to the extent applicable, the risks associated with such an investment.

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