Securities Law & Instruments


Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – An ETF that invests in a portfolio consisting of the six largest Canadian banks in its investment objectives granted relief from the concentration restriction in NI 81-102.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.1(1), 19.1.

July 10, 2018

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
HAMILTON CAPITAL PARTNERS INC.
(the Filer)

AND

HAMILTON CAPITAL CANADIAN BANK DYNAMIC-WEIGHT ETF
(the ETF or HCB)

DECISION

Background

The principal regulator in Ontario has received an application from the Filer on behalf of the ETF for a decision under the securities legislation of Ontario (the Legislation) for exemptive relief (the Exemption Sought) relieving the ETF from subsection 2.1(1) of National Instrument 81-102 – Investment Funds (NI 81-102), which prohibits a mutual fund from purchasing a security of an issuer, entering into a specified derivatives transaction or purchasing an index participation unit if, immediately after the transaction, more than 10% of the net assets of the mutual fund, taken at market value at the time of the transaction, would be invested in securities of any issuer (the Concentration Restriction).

Under National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions (NP 11-203):

(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, Québec, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Northwest Territories, Nunavut and Yukon (together with Ontario , the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 – Definitions, NI 81-102 or in MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.

Representations

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

1.             The Filer is a corporation organized under the laws of Ontario with a head office in Toronto.

2.             The Filer will be the trustee, portfolio manager and investment fund manager of the ETF.

3.             The Filer is not in default of securities legislation in any of the Jurisdictions.

4.             The Filer is registered as: (i) an investment fund manager in Ontario, Quebec and Newfoundland & Labrador; (ii) an exempt market dealer in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland & Labrador, Northwest Territories, Nova Scotia, Ontario, Prince Edward Island, Quebec and Saskatchewan; and (iii) a portfolio manager in Ontario.

5.             The ETF will be an exchange traded mutual fund trust governed by the laws of Ontario and a reporting issuer under the laws of the Jurisdictions.

6.             The ETF will be subject to NI 81-102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities

7.             The ETF will be subject to National Instrument 81-107 – Independent Review Committee for Investment Funds.

8.             The Filer filed a preliminary long form prospectus in accordance with NI 41-101 on behalf of the ETF with the securities regulatory authority in each of the Jurisdictions on July 4, 2018.

9.             Units of the ETF will (subject to satisfying the Toronto Stock Exchange (the TSX)’s original listing requirements) be listed on the TSX.

10.          The investment objective of the ETF will be to generate long-term returns consisting of long-term capital growth as well as regular dividend income by investing in an equity portfolio of Canadian banks. HCB will employ a proprietary rules-based portfolio rebalancing methodology in an effort to improve the return potential of the ETF.

11.          The Canadian banks to be invested by the ETF are: the Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank or in the event of a merger, acquisition or other significant corporate action or event of or affecting any such bank, the top six Canadian banks listed on the Toronto Stock Exchange or other recognized exchange in Canada by market capitalization. (each, a Bank, and collectively, the Banks).

12.          The ETF will seek to achieve its investment objective by applying a dynamic re-weighting strategy to a portfolio of the six largest Canadian Banks. In determining the portfolio’s composition, the Filer, as portfolio adviser, will apply its own proprietary rules-based re-weighting strategy. On the last trading day of each calendar month (each an HCB Rebalance Date), the Filer will rebalance HCB’s portfolio such that three issuers are over-weighted and three issuers are under-weighted. For trading efficiency, an HCB Rebalance Date for a particular calendar month may be moved to the second last trading day of a calendar month or the first trading day of the following calendar month. The portfolio composition is determined based on the percent difference between each Bank’s stock price and its 50-day average price. On an HCB Rebalance Date: (i) the three issuers with the lowest percentage difference between their current trading price and their 50-day average price are “over-weighted” at approximately 26.5% each of HCB’s portfolio; and (ii) the three issuers with the highest percentage difference between their current trading price and their 50-day average price are “under-weighted” at approximately 6.5% each of HCB’s portfolio. Such portfolio weightings are maintained until the next HCB Rebalance Date, at which point the rebalancing process is repeated. In order to achieve its investment objective, and based on the investment strategy, the ETF wishes to be able to invest in a portfolio of Banks, such that immediately after a purchase, more than 10% of the ETF’s NAV may be invested in any one Bank for the purposes of determining compliance with the Concentration Restriction. HCB may also, from time to time, hold cash and cash equivalents or other money market instruments in order to meet its current obligations.

13.          The investment objective and investment strategy of the ETF, as well as the risk factors associated therewith, including concentration risk, will be disclosed in the prospectus of the ETF, as may be amended and renewed from time to time (the Prospectus).

14.          The common shares of the Banks are listed on the TSX.

15.          The Banks are among the largest public issuers in Canada. The common shares of the Banks are some of the most liquid equity securities listed on the TSX and are less likely to be subject to liquidity concerns than the securities of other issuers.

16.          The liquidity of the common shares of the Banks is evidenced by the markets for options in connection therewith. A liquid market for options on the common shares of the Banks is provided by the Montreal Exchange.

17.          Given the proposed composition of the ETF’s portfolio, it would be impossible for the ETF to achieve its investment objective and pursue its investment strategy without obtaining relief from the Concentration Restriction.

18.          The units of the ETF will be highly liquid securities, as designated brokers act as intermediaries between investors and the ETF, standing in the market with bid and ask prices for the units of the ETF to maintain a liquid market for the units of the ETF.

19.          The majority of trading in units of the ETF will occur in the secondary market.

20.          If required to facilitate distributions or pay expenses of the ETF, securities of each Bank will be sold pro-rata across the ETF’s portfolio according to their relative market values at the time of such sale.

21.          Future subscriptions for ETF securities, if any, will be used to acquire securities of each Bank up to the same weights as the Bank securities exist in the ETF’s portfolio, based on their relative market values at the time of such subscription.

22.          As the ETF will not invest in securities other than securities of the Banks and the names of the Banks to be invested in will be listed in the ETF’s Prospectus and tied to its investment objective, unitholders of the ETFs will be fully aware of the risks involved with an investment in the securities of the ETF.

23.          The investment objective and investment strategy of the ETF, as well as the risk factors associated therewith, including concentration risk, will be disclosed in the Prospectus of the ETF.

24.          The Exemption Sought is sought to permit the ETF to purchase common shares of the Banks or enter into specified derivative transactions in connection therewith such that, immediately after the transaction more than 10% of its NAV would be invested in common shares of one or more Banks for the purposes of determining compliance with the Concentration Restriction.

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 is that the Exemption Sought is granted, provided that:

(a)           the investment in the Banks is made in accordance with the ETF’s investment objectives and investment strategies;

(b)           the ETF’s investment strategies disclose that the ETF will invest in the Banks in the stated fixed percentages described at paragraph 12 of this Decision;

(c)           the ETF’s investment strategies disclose that the ETF’s portfolio will be rebalanced monthly;

(d)           the ETF includes in its final Prospectus (i) disclosure regarding this decision under the heading “Exemptions and Approvals” and (ii) a risk factor regarding the concentration of the ETF’s investments in the Banks and the risks associated therewith.

“Darren McKall”
Manager
Investment Funds & Structured Products Branch
Ontario Securities Commission