Definition of Index Participation Unit

This article was originally published in the Investment Funds Practitioner in May 2011.

We have received a number of inquiries seeking staff’s views on what constitutes a “widely quoted market index” for the purposes of the definition of “index participation unit” in NI 81-102. In particular, we have been asked whether an index that tracks the price of a commodity or the price of options on a commodity could be considered a “market index”.

Staff are generally of the view that the term “market index” should be interpreted in a manner that is consistent with the investment restrictions set out in NI 81-102. As a result, an index, which provides exposure to asset classes or strategies that a mutual fund would not be able to engage in directly, would not generally qualify as a “market index”.

On this basis, staff would not generally consider an index that tracks the price of a commodity to be a “market index”. The same conclusion would apply to an index that purports to track the performance of hedge funds, real property, or that incorporates leverage or shorting strategies.

We note that over the past few years there has been a proliferation in the number of product offerings from index providers. We also recognize that there is an interest on the part of exchange traded fund providers to differentiate themselves in the market by branching out beyond the traditional indices. Staff caution filers and their advisors that, while an index provider may label something as an “index” and that index may appear to be widely quoted, it still may not qualify as a “market index” under NI 81-102.

Additionally, we note that the prospectus for certain exchange traded funds includes disclosure stating that the fund qualifies as an IPU for the purposes of NI 81-102. Mutual fund managers and portfolio managers, however, should conduct their own analysis of whether that fund is an IPU and should not rely solely on the disclosure provided by the exchange traded fund.