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 to permit mutual funds to invest up to 10% of net asset value in leveraged ETFs, inverse ETFs and commodity ETFs traded on Canadian or U.S. stock exchanges.

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.

December 16, 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 SPROTT ASSET MANAGEMENT LP (the Filer) AND IN THE MATTER OF THE FUNDS (as defined below)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the existing and future mutual funds managed by the Filer (each, a Fund and collectively, the Funds), other than Sprott Gold Bullion Fund, Sprott Silver Bullion Fund, Sprott Gold Bullion Class and Sprott Silver Bullion Class, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Funds from:

(a) sections 2.3(1)(f) and 2.3(1)(h) of National Instrument 81-102 Mutual Funds (NI 81-102) to permit each Fund to invest indirectly in physical commodities other than gold through investments in Commodity ETFs (as defined below); and

(b) sections 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to permit each Fund to invest in the following categories of exchange-traded funds (ETFs) traded on a stock exchange in Canada or the United States that do not qualify as "index participation units" (IPUs) (as defined in NI 81-102) (the following ETFs are each referred to as an Underlying ETF and collectively as Underlying ETFs):

(i) ETFs that 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, which, together with Leveraged Bull ETFs are collectively referred to as Leveraged ETFs);

(ii) ETFs that 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) ETFs that seek to provide daily results that replicate the daily performance of gold or silver or the value of a specified derivative the underlying interest of which is gold or silver on an unlevered basis (the ETF's Underlying Gold or Silver Interest), by a multiple of up to 200% (Leveraged Gold ETFs and Leveraged Silver ETFs, respectively); and

(iv) ETFs that have exposure to one or more physical commodities, including but not limited to gold and silver, on an unlevered basis (Unlevered Commodity ETFs, which, together with Leveraged Gold ETFs and Leveraged Silver ETFs, are collectively referred to as Commodity ETFs)

(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.

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 limited partnership formed and organized under the laws of the Province of Ontario. The general partner of the Filer is Sprott Asset Management GP Inc., a corporation incorporated under the laws of the Province of Ontario. The head office of the Filer is located in Ontario.

2. The Filer is registered under the securities legislation: (i) in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador as an adviser in the category of portfolio manager; (ii) in Ontario, Newfoundland and Labrador and Quebec as an investment fund manager; and (iii) in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador as a dealer in the category of exempt market dealer. The Filer is also registered in Ontario as a commodity trading manager.

3. The Filer acts, or will act, as manager and portfolio manager of each of the Funds.

4. Each Fund is, or will be, a mutual fund governed by the laws of Canada or a jurisdiction in Canada and a reporting issuer under the laws of one or more provinces and territories of Canada.

5. Neither the Filer nor the Funds are in default of securities legislation in any of the provinces or territories of Canada.

6. Securities of each Fund are or will be qualified for distribution in some or all of the jurisdictions of Canada under a simplified prospectus, annual information form and fund facts prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure. Each Fund is, or will be, governed by NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

Existing Commodity Relief and Fund-of-Funds Relief

7. Except as described below, none of the existing Funds currently has relief from sections 2.3(1)(f) and (h) of NI 81-102.

8. As part of its investment strategy, each of Sprott Resource Class, Sprott Silver Equities Class, Sprott Gold and Precious Minerals Fund and Sprott Canadian Equity Fund has already obtained an exemption from the requirements of sections 2.3(1)(e), 2.3(1)(f) and/or 2.3(1)(h) of NI 81-102 to invest in certain physical commodities, as described below. In respect of these Funds, the Filer seeks to extend and complement the applicable existing relief of the applicable Fund to invest pursuant to the Exemption Sought. In particular, the Filer is of the view that Commodity ETFs can provide an efficient means of obtaining exposure to physical commodities without physical holdings or entering into derivatives the underlying interest of which is a physical commodity.

9. Sprott Resource Class obtained relief to invest up to 10% of its total net assets, taken at market value at the time of purchase, in gold, permitted gold certificates, silver, silver certificates and/or specified derivatives of which the underlying interest is gold or silver in a decision document dated January 31, 2012.

10. Sprott Silver Equities Class is a "precious metals fund" as defined in National Instrument 81-104 Commodity Pools (NI 81-104). Sprott Silver Equities Class obtained relief to invest up to 20% of its total net assets, taken at market value at the time of purchase, in silver, silver certificates and/or specified derivatives of which the underlying interest is silver in a decision document dated January 31, 2012.

11. Sprott Gold and Precious Minerals Fund is a "precious metals fund" as defined in NI 81-104. Sprott Gold and Precious Minerals Fund obtained relief (i) to invest more than 10% of its net assets, taken at the market value thereof at the time of investment, in gold, gold certificates or specified derivatives of which the underlying interest is gold; and (ii) to permit the Fund to obtain indirect exposure to, or invest directly in, precious metals and minerals in a decision document dated October 24, 2001.

12. Sprott Canadian Equity Fund obtained relief to invest up to 20% of its net assets, taken at the market value thereof at the time of investment, in gold, permitted gold certificates and silver (or specified derivatives of which the underlying interest is gold or silver) in decision documents dated October 6, 2003 and April 28, 2005.

13. The Filer, together with other unrelated investment fund managers, obtained relief from section 2.5(2)(a) of NI 81-102 to invest in certain Leveraged ETFs managed by BetaPro Management Inc. in a decision document dated January 13, 2009 (the BetaPro Relief).

14. As of the date of the decision, the Filer will no longer rely on the BetaPro Relief.

The Underlying ETFs

15. Each Leveraged ETF will be generally 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.

16. Each Inverse ETF will be generally 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.

17. Each Leveraged Gold ETF and Leveraged Silver ETF will be generally rebalanced daily to ensure that its performance and exposure to its Underlying Gold or Silver Interest will not exceed +200% of the corresponding daily performance of its Underlying Gold or Silver Interest. Each Leveraged Gold ETF and Leveraged Silver ETF provides a Fund with market value exposure to the underlying physical commodity (i.e. gold or silver) that is two times the net asset value of the ETF on a daily basis.

18. Each Underlying ETF is, or will be, a "mutual fund" as such term is defined under the Securities Act (Ontario).

19. The securities of each Underlying ETF trade, or will trade, on a stock exchange in Canada or the United States.

20. The assets of a Leveraged Gold ETF and Leveraged Silver ETF consist primarily of gold or silver, as the case may be, or derivatives the underlying interest of which is gold or silver on an unlevered basis, as the case may be. The objective of these ETFs is to reflect the price of gold or silver, as the case may be (less the ETF's expenses and liabilities) on a leveraged basis.

21. The assets of Unlevered Commodity ETFs consist primarily of one or more physical commodities, or derivatives that have an underlying interest in such physical commodity or commodities. These physical commodities may include, without limitation, precious metals commodities (such as gold, silver, platinum, platinum certificates, palladium and palladium certificates), energy commodities (such as crude oil, gasoline, heating oil and natural gas), industrials and/or metals commodities (such as aluminum, copper, nickel and zinc) and agricultural commodities (such as coffee, corn, cotton, lean hogs, live cattle, soybeans, soybean oil, sugar and wheat). The objective of an Unlevered Commodity ETF is to reflect the price of the applicable commodity or commodities (less such Unlevered Commodity ETF's expenses and liabilities) on an unlevered basis, or track the performance of an index which is intended to reflect the changes in the market value of the applicable physical commodity or commodities sector.

Investment in the Underlying ETFs

22. The Funds propose to have the ability to invest in the Underlying ETFs, the securities of which are not IPUs.

23. Each Fund is, or will be, permitted, in accordance with its investment objectives and investment strategies, to invest in the Underlying ETFs.

24. Any regulatory concerns, such as undue risk, liquidity concerns or lack of transparency, in connection with investing in the Underlying ETFs are mitigated by the following facts:

(a) The Underlying ETFs trade on a Canadian or U.S. exchange and are generally relatively liquid. The Underlying ETFs will either be "registered" investment companies in the United States or reporting issuers in one or more jurisdictions in Canada, which means that there will be clear disclosure about the Underlying ETFs readily available in the marketplace.

(b) The amount of loss that can result from an investment by a Fund in an Underlying ETF will be limited to the amount invested by the Fund in securities of the Underlying ETF.

(c) Investments by the Funds in Commodity ETFs will be very limited. In accordance with the investment strategies of the Funds, no more than 10% of the net asset value of the Fund will be invested in a combination of Underlying ETFs taken at market value at the time of purchase.

(d) The simplified prospectus of the Funds will disclose: (i) in the investment strategy section: (I) that the Fund has obtained relief to invest in securities of the Underlying ETFs; (II) an explanation of what each type of Underlying ETFs is; (III) to the extent the Fund may invest in securities of a Commodity ETF, that the Fund may indirectly invest in gold and other physical commodities; and (ii) the risks associated with such investments and strategies.

25. An investment by a Fund in securities of an Underlying 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 Exemption Sought is granted, provided that:

(a) the investment by a Fund in securities of an Underlying ETF is in accordance with the fundamental investment objectives of the Fund;

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

(c) 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 securities sold short would exceed 20% of the net asset value of the Fund, taken at market value at the time of the transaction;

(d) other than Sprott Silver Equities Class, Sprott Gold and Precious Minerals Fund and Sprott Canadian Equity Fund, a Fund's 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;

(e) for Sprott Silver Equities Class,

(i) the Fund only purchases Commodity ETFs that provide exposure to silver; and

(ii) the Fund's market value exposure (whether direct or indirect, including through Commodity ETFs) to silver does not exceed 20% of the net asset value of the Fund, taken at market value at the time of the transaction.

(f) for Sprott Gold and Precious Minerals Fund,

(i) the Fund only purchases Commodity ETFs that provide exposure to gold, silver and other precious metals and minerals; and

(ii) the Fund's market value exposure (whether direct or indirect, including through Commodity ETFs) to gold, silver and other precious metals and minerals does not exceed 100% of the net asset value of the Fund, taken at market value at the time of the transaction;

(g) for Sprott Canadian Equity Fund,

(i) the Fund's market value exposure (whether direct or indirect, including through Commodity ETFs) to all physical commodities (including gold and silver) does not exceed 20% of the net asset value of the Fund, taken at market value at the time of the transaction; and

(ii) the Fund does not purchase securities of a Commodity ETF if, immediately after the transaction, the Fund's market value exposure to physical commodities other than gold and silver is more than 10% of the net asset value of the Fund, taken at market value at the time of the transaction.

(h) each Fund does not purchase securities of an Underlying 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 Underlying ETFs;

(i) the simplified prospectus of each Existing Fund discloses or will disclose the next time it is renewed, and the simplified prospectus of each Future Fund discloses:

(i) in the investment strategy section:

(I) that the Fund has obtained relief to invest in securities of the Underlying ETFs;

(II) an explanation of what each type of Underlying ETFs is; and

(III) to the extent the Fund may invest in securities of a Commodity ETF, that the Fund may indirectly invest in gold and other physical commodities; and

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

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