1832 Asset Management L.P.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from paragraph 2.5(2)(b) of National Instrument 81-102 Investment Funds to allow mutual funds to invest in related ETFs that invest more than 10% in underlying mutual funds – The ETFs do not technically qualify as “clone funds” but operate in a manner that is substantially similar to a “clone fund.” – Top fund must also comply with terms of relief granted from fund on fund restrictions to invest in ETFs that do not qualify as index participation units.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.5(2)(b), 19.1.

December 20, 2017

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

1832 ASSET MANAGEMENT L.P.

(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of existing and future mutual funds that are managed by the Filer or an affiliate or associate of the Filer (the Top Funds), for a decision (the Exemption Sought) under the securities legislation of the principal regulator (the Legislation) exempting each Fund from the prohibition in subsection 2.5(2)(b) of National Instrument 81-102 Investment Funds (81-102) to permit each Top Fund to purchase and hold a security of a Dynamic/BlackRock ETF (as defined herein) that holds up to 100% of its net asset value (NAV) in securities of a corresponding Underlying Fund (as defined herein) (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 paragraph 4.7(l)(c) of Multilateral Instrument 11-102 – Passport System (MI 11-102) is intended to be relied upon in all of the provinces and territories of Canada other than Ontario (together with Ontario, the Jurisdictions).

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

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

The Filer

1.             The Filer is an Ontario limited partnership, which is wholly-owned by the Bank of Nova Scotia (BNS). The general partner of the Filer is 1832 Asset Management G.P. Inc., an Ontario corporation wholly-owned by BNS with its head office located in Toronto, Ontario.

2.             The Filer is the manager of the Top Funds and is registered as: (i) a portfolio manager in all of the provinces of Canada and in the Northwest Territories and the Yukon; (ii) an exempt market dealer in all of the provinces of Canada (except Prince Edward Island and Saskatchewan); (iii) an investment fund manager in Ontario, Québec, Newfoundland and Labrador and the Northwest Territories; and (iv) a commodity trading manager in Ontario.

3.             The Filer and the existing Top Funds are not in default of securities legislation in any of the Jurisdictions.

4.             The Filer or an affiliate or associate of the Filer is, or will be, the investment fund manager of the Top Funds.

The Top Funds

5.             Each Top Fund is, or will be, a mutual fund organized and governed by the laws of a Jurisdiction of Canada.

6.             Each Top Fund distributes, or will distribute, some or all of its securities pursuant to a simplified prospectus prepared pursuant to National Instrument 81-101 Mutual Fund Prospectus Disclosure and Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1) or a long form prospectus prepared pursuant to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and Form 41-101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2) and is, or will be, governed by the applicable provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities.

7.             Each Top Fund is, or will be, a reporting issuer in one or more Jurisdictions.

8.             Each Top Fund is, or will be, subject to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).

9.             The investment objectives and investment strategies of each Top Fund permit it, or will permit it, to hold part or substantially all of its NAV directly in one or more other mutual funds. Pursuant to the terms of exemptive relief from certain provisions of section 2.5 of NI 81-102 that has been obtained by the Filer on behalf of the Top Funds in the form of a decision document dated December 20, 2017 (the IPU Decision), this may include investments in exchange traded mutual funds that are not index participation units.

10.          Each Top Fund wishes to have the ability to invest up to 100% of its NAV in any one or more exchange traded mutual funds created and managed by BlackRock Asset Management Canada Limited, each of which provides, or will provide, investors with exposure to a corresponding Underlying Fund (the Dynamic/BlackRock ETFs).

The Dynamic/BlackRock ETFs

11.          Each Dynamic/BlackRock ETF is, or will be, organized and governed by the laws of the Province of Ontario.

12.          Each Dynamic/BlackRock ETF distributes, or will distribute, securities pursuant to a long form prospectus prepared in accordance with NI 41-101 and Form 41-101F2, and is, or will be, governed by the provisions of NI 81-102, subject to any exemptions therefrom that have been, or may be, granted by the securities regulatory authorities.

13.          Each Dynamic/BlackRock ETF is, or will be, a reporting issuer in the provinces and territories of Canada in which its securities are distributed.

14.          Securities of each Dynamic/BlackRock ETF are, or will be, listed on a recognized exchange in Canada and the market for them is liquid because it is supported by designated brokers and dealers. As a result, the Filer expects that the Top Funds would be able to dispose of its securities in any of the Dynamic/BlackRock ETFs through market facilities in order to raise cash, including to fund redemption requests.

15.          Pursuant to its investment objectives and a cooperation services agreement dated November 18, 2016, between BlackRock Canada and the Filer (the Cooperation Services Agreement), each Dynamic/BlackRock ETF invests, or will invest, all or substantially all of its net assets in securities of a corresponding mutual fund created and managed by the Filer (each an Underlying Fund and collectively the Underlying Funds).

16.          The prospectus of each Dynamic/BlackRock ETF discloses, or will disclose, in the investment objectives the name of the applicable Underlying Fund that the Dynamic/BlackRock ETF will primarily invest in. Any change resulting from a substitution of the Underlying Fund in the investment objectives of a Dynamic/BlackRock ETF will be treated as a fundamental change requiring prior approval of securityholders under Part 5 of NI 81-102.

17.          The ultimate investment strategies and performance achieved by each Dynamic/BlackRock ETF will be substantially similar to the investment strategies and performance of its corresponding Underlying Fund.

The Underlying Funds

18.          Each Underlying Fund is, or will be, a mutual fund organized and governed by the laws of the Province of Ontario.

19.          Each Underlying Fund distributes, or will distribute, series O units pursuant to a simplified prospectus prepared in accordance with NI 81-101 and Form 81-101F1 and is, or will be, governed by the provisions of NI 81-102, subject to any exemptions therefrom that have been, or may be, granted by the securities regulatory authorities.

20.          Each Underlying Fund is, or will be, a reporting issuer in the provinces and territories of Canada in which their securities are distributed.

21.          Each Underlying Fund primarily invests directly in a portfolio of securities and/or other assets.

22.          Pursuant to the Cooperation Services Agreement, series O units of each Underlying Fund are only sold to the corresponding Dynamic/BlackRock ETF and, accordingly, are not sold to the general public. Accordingly, the corresponding Dynamic/BlackRock ETF is, or will be, the sole unitholder of an Underlying Fund.

23.          Pursuant to the Cooperation Services Agreement, each Underlying Fund has agreed to restrict its purchases and holding in securities of other investment funds to no more than 10% of its NAV.

24.          No management fees are currently payable by the holders of series O units to the Filer.

Reasons for Exemption Sought

25.          Absent the Exemption Sought, a Top Fund would not be able to purchase securities of a BlackRock/Dynamic ETF that invests substantially all of its assets in securities of an Underlying Fund because subsection 2.5(2)(b) of NI 81-102 prohibits an investment fund from purchasing or holding a security of another investment fund that holds more than 10% of its NAV in securities of other investment funds.

26.          The investment objectives of each Dynamic/BlackRock ETF are not expressly limited to tracking the performance of the applicable Underlying Fund as per the definition of a “clone fund” in NI 81-102. As a result, an investment by a Top Fund in a Dynamic/BlackRock ETF does not qualify for the exception in paragraph 2.5(4)(a) of NI 81-102, as the Dynamic/BlackRock ETFs does not meet the strict definition of “clone fund” since they have not adopted a fundamental investment objective to track the performance of another investment fund.

27.          Although each Dynamic/Blackrock ETF does not technically fit within the definition of “clone fund”, by having investment objectives and strategies that permit it to invest substantially all of its net assets in the securities of its corresponding Underlying Fund, each Dynamic BlackRock ETF operates in a manner that is substantially similar to a “clone fund”. The Exemption Sought, therefore, will result in a fund of fund structure that is akin to, and no more complex than, the three-tier structure currently permitted under subsection 2.5(4)(a) of NI 81-102.

28.          An investment in a Dynamic/BlackRock ETF by a Top Fund should pose little investment risk to the Top Fund because the Dynamic/BlackRock ETFs and the corresponding Underlying Funds are both subject to NI 81-102, subject to any exemption therefrom that has been, or may in the future be, granted by the securities regulatory authorities.

29.          In accordance with subsection 2.5(2)(d) of NI 81-102, no management or incentive fees are, or will be, payable by a Top Fund or a Dynamic/BlackRock ETF that would duplicate a fee payable by the other investment fund for the same service. As there is no management fee payable by the series O units of the Underlying Funds, the fee structure is not complex and easily monitored by the Filer for compliance.

30.          Each Top Fund will comply with the requirement under National Instrument 81-106 Continuous Disclosure relating to the top 25 positions portfolio holdings disclosure in its management report of fund performance and the requirements of Form 81-101F3 Contents of Fund Facts Document relating to top 10 position portfolio holdings disclosure in its Fund Facts as if the Top Fund were investing directly in the Underlying Fund held by the corresponding Dynamic/BlackRock ETFs.

31.          An investment by a Top Fund in a Dynamic/BlackRock ETF will represent the business judgement of responsible persons of the Top Funds, uninfluenced by considerations other than the best interests of the Top Funds.

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:

1.             An investment by a Top Fund in securities of a Dynamic/BlackRock ETF is in accordance with the investment objectives of the Top Fund;

2.             An investment by a Top Fund in securities of a Dynamic/BlackRock ETF complies with the terms and conditions of the IPU Decision, other than in respect of the Exemption Sought;

3.             A Top Fund does not invest in a Dynamic/BlackRock ETF that in turn invests in another investment fund other than the Underlying Fund that is identified in the investment objectives of the Dynamic/BlackRock ETF;

4.             The Cooperation Agreement remains in effect; and

5.             The prospectus of each Top Fund discloses, or will disclose in the next renewal of its prospectus following the date of this decision, the fact that the Top Fund has obtained the Exemption Sought.

“Darren McKall”

Manager,

Investment Funds and Structured Products Branch

Ontario Securities Commission