Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from sections 2.3(1)(f), 2.3(1)(h), 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 -- Investment Funds a) to permit mutual funds (other than money market funds and commodity pools) to invest in gold and silver, and b) to permit mutual funds (other than money market funds, but including commodity pools) up to 10% of net asset value in leveraged ETFs, inverse ETFs, gold ETFs, silver ETFs, leveraged gold ETFs and leveraged silver ETFs traded on Canadian or US stock exchanges, subject to a maximum of 10% of the Fund's net asset value exposed to gold and silver.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.3(1)(f), 2.3(1)(h), 2.5(2)(a), 2.5(2)(c), 19.1.

October 14, 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 ARROW CAPITAL MANAGEMENT INC. (the Filer) AND EXEMPLAR TACTICAL CORPORATE BOND FUND, EXEMPLAR INVESTMENT GRADE FUND, EXEMPLAR LEADERS FUND, EXEMPLAR YIELD FUND, EXEMPLAR PERFORMANCE FUND, EXEMPLAR GROWTH AND INCOME FUND, EXEMPLAR CANADIAN FOCUS PORTFOLIO AND EXEMPLAR DIVERSIFIED PORTFOLIO (the Existing Funds)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Existing Funds and future mutual funds managed by the Filer or an affiliate of the Filer that are subject to National Instrument 81-102 Investment Funds (NI 81-102) and are not money market funds (the Future Funds, and together with the Existing Funds, the Funds, and individually, a Fund) under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) pursuant to Section 19.1 of NI 81-102 for a decision:

(a) exempting each Fund that is not a Commodity Pool (as defined below) from the prohibition contained paragraph 2.3(1)(f) of NI 81-102 (the Silver Exemption) to permit such Funds to:

(i) purchase and hold silver; and

(ii) purchase and hold a certificate representing silver that is:

(A) available for delivery in Canada, free of charge, to or to the order of the holder of such silver certificate;

(B) of a minimum fineness of 999 parts per 1,000;

(C) held in Canada;

(D) in the form of either bars or wafers; and

(E) if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a province or territory of Canada,

(the Permitted Silver Certificate);

(b) exempting each Fund that is not a Commodity Pool (as defined below) from the prohibition contained in paragraph 2.3(1)(h) of NI 81-102 (the Silver Derivatives Exemption) to permit such Funds to purchase, sell or use a specified derivative the underlying interest of which is:

(i) silver; or

(ii) a specified derivative of which the underlying interest is silver on an unlevered basis,

(Silver Derivative and, together with silver and Permitted Silver Certificate, Silver);

(c) exempting each Fund that is not a Commodity Pool (as defined below) from the restrictions contained in paragraphs 2.3(1)(h), 2.5(2)(a) and 2.5(2)(c) of NI 81-102 and exempting each Fund that is a Commodity Pool (as defined below) from the restrictions contained in paragraphs 2.5(2)(a) and 2.5(2)(c) of NI 81-102 (the ETF Exemption) to permit each Fund to purchase and hold securities of exchange-traded funds (ETFs) traded on a stock exchange in Canada or the United States that are not IPUs (as defined below) that:

(i) seek to provide daily results that replicate the daily performance of a specified widely-quoted market index (the Underlying Index) by a multiple of up to 200% (Leveraged Bull ETFs) or an inverse multiple of up to 200% (Leveraged Bear ETFs and together with Leveraged Bull ETFs, collectively, Leveraged ETFs); and

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

(iii) seek to replicate the daily performance of:

(A) gold or silver; or

(B) the value of a specified derivative the underlying interest of which is gold or silver,

on an unlevered basis (collectively, Commodity ETFs) or by a multiple of up to 200% (collectively, Leveraged Commodity ETFs),

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

(the Silver Exemption, the Silver Derivatives Exemption and the ETF Exemption are collectively referred to as 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 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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut.

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.

Commodity Pool has the meaning as such term is defined in National Instrument 81-104 Commodity Pools (NI 81-104).

IPU means an "index participation unit" as defined by NI 81-102.

Representations

This decision is based on the following facts represented by the Filer in respect of the Filer and the Funds:

1. The Filer is a corporation incorporated under the Business Corporations Act (Ontario) with its head office located in Toronto, Ontario.

2. The Filer is registered in the following categories in certain of the Jurisdictions indicated below:

(a) Ontario: portfolio manager (PM), investment fund manager (IFM); exempt market dealer (EMD) and commodity trading manager under the Commodity Futures Act (Ontario);

(b) Alberta: EMD;

(c) British Columbia: EMD;

(d) Québec: EMD and IFM; and

(e) Newfoundland and Labrador: IFM.

3. The Filer is the manager of each of the Existing Funds and will be the manager of each of the Future Funds. The Filer is the portfolio manager of, and/or has appointed a sub-adviser for, each of the Existing Funds, and will be the portfolio manager of, and/or will appoint a sub-adviser for, each of the Future Funds.

4. Each Existing Fund is, and each Future Fund will be: (a) an open-end mutual fund established under the laws of Canada or the laws of a province or territory of Canada, (b) a reporting issuer under the laws of some or all of the provinces or territories of Canada, and (c) subject to NI 81-102. Certain Existing Funds are, and certain Future Funds may also be Commodity Pools.

5. Securities of each Existing Fund are, and securities of each Future Fund will be qualified for distribution in some or all of the provinces or territories of Canada under either: (1) a simplified prospectus, annual information form and fund facts prepared in accordance with National Instrument 81-101 Mutual Funds Prospectus Disclosure (NI 81-101); or (2) a long form prospectus prepared in accordance with National Instrument 41-101 General Prospectus Requirements, in each case, as amended, superseded or replaced, and filed with and receipted by the securities regulators in the applicable provinces or territories of Canada.

6. Neither the Filer nor the Existing Funds are in default of securities legislation in any province or territory of Canada.

Investment in Gold and Silver

7. But for the Silver Exemption and Silver Derivatives Exemption, paragraphs 2.3(1)(f) and 2.3(1)(h) of NI 81-102 would prohibit an investment by a Fund that is not a Commodity Pool in Silver.

8. Provided that an investment in Silver is in accordance with its investment objectives and investment strategies, the Filer proposes that each Fund have the ability to invest in Silver, as investing in Silver will provide each Fund with an opportunity to further diversify its investments.

9. Permitting the Funds that are not Commodity Pools to invest in Silver will provide the Funds additional flexibility to increase gains for the Funds in certain market conditions, which may otherwise cause the Funds to have significant cash positions.

10. The Filer believes that the markets in gold and silver are highly liquid, and there are no liquidity concerns with permitting each Fund that is not a Commodity Pool to invest directly, or indirectly through derivatives, up to 10% of its net asset value in gold and Silver, in the aggregate.

11. The Funds that are Commodity Pools, pursuant to NI 81-104, may invest more than 10% of their net asset value in gold and Silver, directly, or indirectly through derivatives.

12. To obtain exposure to gold or silver indirectly, the Filer intends to use Commodity ETFs and Leveraged Commodity ETFs. In the case of the Funds that are Commodity Pools, the use of Commodity ETFs and Leveraged Commodity ETFs will provide additional flexibility in terms of obtaining exposure to gold and silver.

13. Any investment by a Fund in Silver will be made in compliance with the custodian requirements in Part 6 of NI 81-102.

14. If commencing to invest in Commodity ETFs or Leveraged Commodity ETFs represents a material change for an existing Fund, the Existing Fund will comply with the material change reporting obligations in respect of such change.

15. The Filer believes that the potential volatility or speculative nature of Silver is no greater than that of gold, or of equity securities.

16. An investment by a Fund in Silver will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

Investment in Permitted ETFs

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

18. 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.

19. 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.

20. 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.

21. Each Leveraged Commodity ETF will be rebalanced daily to ensure that its performance and exposure to its underlying gold or silver interest will not exceed +/-200%, as the case may be, of the corresponding daily performance of the underlying gold or silver interest, as applicable.

22. 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.

23. In accordance with its investment objectives and investment strategies, each Fund is permitted generally to invest in exchange-traded funds.

24. But for the ETF Exemption, paragraph 2.5(2)(a) of NI 81-102 would prohibit a Fund from purchasing or holding a security of a Permitted ETF, because some Permitted ETFs are not subject to both NI 81-102 and NI 81-101.

25. But for the ETF Exemption, paragraph 2.5(2)(c) of NI 81-102 would prohibit a Fund from purchasing or holding securities of some Permitted ETFs, because some Permitted ETFs are not qualified for distribution in the local jurisdiction.

26. The Filer is not currently, and does not currently expect to become in the near future, the manager of, nor affiliated with the manager of, any Permitted ETF.

27. 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 a decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:

(a) the investment by a Fund in Silver and securities of a Permitted ETF is in accordance with 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) a Fund does not purchase securities of a Permitted ETF if, immediately after the transaction, more than 10% of the net asset value of the Fund, taken at market value at the time of the transaction, would consist of securities of Permitted ETFs;

(d) a Fund does not purchase securities of Inverse ETFs or securities of Leveraged Bear ETFs or sell any securities short if, immediately after the transaction, the Fund's aggregate market value exposure represented by all such securities purchased and/or sold short would exceed 20% of the net asset value of the Fund, taken at market value at the time of the transaction; provided that if a Fund has obtained or does obtain relief to permit such Fund to sell securities short in excess of 20%, the foregoing shall apply to such Fund based on the limitation set in such relief;

(e) a Fund, unless such Fund is a Commodity Pool, does not enter into a purchase, derivative or any other transaction providing exposure to gold or Silver, if immediately after entering into the transaction, the Fund's aggregate market value exposure (whether direct or indirect, including through Commodity ETFs) to all physical commodities (including gold) does not exceed 10% of the net asset value of the Fund, taken at market value at the time of the transaction; and

(f) the simplified prospectus or long form prospectus, as applicable, of each Existing Fund discloses, or will disclose the next time it is renewed, and the prospectus of each Future Fund discloses:

(i) in the investment strategy section: (a) that the Fund has obtained relief to invest in Silver and securities of Permitted ETFs; (b) an explanation of what each type of Permitted ETF is; and (c) to the extent the Fund may invest in securities of a Commodity ETF and/or a Leveraged Commodity ETF, that the Fund may indirectly invest in gold and Silver; and

(ii) the risks associated with such investments and strategies.

"Stephen Paglia"
Acting Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission