1832 Asset Management L.P.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from sections 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 Gold ETFs traded on Canadian or U.S. stock exchanges.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(a), 2.5(2)(c), 19.1.
November 10, 2016
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 for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), exempting all current and future mutual funds, managed and/or advised by the Filer or an affiliate of the Filer, other than money market funds, (each, a Fund) from:
(a) section 2.5(2)(a) of NI 81-102 to permit the Funds to invest in Gold ETFs (as defined below); and
(b) section 2.5(2)(c) of NI 81-102 to permit the Funds to invest in Gold ETFs that are not qualified for distribution in any jurisdiction in Canada but are listed and traded on stock exchanges in the United States.
(collectively, the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (OSC) 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 each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).
INTERPRETATION
Unless otherwise defined herein, terms defined in National Instrument 14-101 Definitions, MI 11-102 and National Instrument 81-102 Investment Funds (NI 81-102) have the same meaning in this decision. In addition, the following terms have the following meanings:
Act means the Securities Act (Ontario) as may be amended from time to time;
Gold ETFs means exchange-traded funds that are traded on a stock exchange in Canada or the United States and that hold or seek to replicate the performance of gold, permitted gold certificates or specified derivatives, of which the underlying interest is gold or permitted gold certificates, on an unlevered basis;
Prior Relief means collectively the 1993 Prior Relief, the 2008 Prior Relief, the 2009 Prior Relief, the 2011 Prior Relief and the 2013 Prior Relief;
1993 Prior Relief means the relief granted in the August 6, 1993 decision to Dynamic Precious Metals Fund Re Dynamic Precious Metals Fund whereby Dynamic Precious Metals Fund obtained relief to invest in excess of 10% of the fund’s total assets in gold in the form of bullion, coins or certificates representing same;
2008 Prior Relief means the relief granted in the June 12, 2008 decision Goodman & Company, Investment Counsel Ltd. (Re), (2008) whereby the following fourteen mutual funds managed by the Manager obtained relief to invest up to 5% of the net assets of each fund, taken at the market value thereof at the time of investment, in each of silver and platinum (or the equivalent in certificates or specified derivatives of which the underlying interest is silver and platinum): Dynamic Dividend Fund, Dynamic Dividend Income Fund, Dynamic Power Small Cap Fund, Dynamic Power Canadian Growth Fund, Dynamic Power Balanced Fund, Dynamic Diversified Real Asset Fund, Dynamic American Value Fund, Dynamic Global Discovery Fund, Dynamic Global Dividend Fund (formerly, Dynamic Global Dividend Value Fund), Dynamic Global Asset Allocation Fund (formerly, Dynamic Global Value Balanced Fund), Dynamic Global Discovery Class, Dynamic Dividend Income Class, Dynamic Power Canadian Growth Class and Dynamic Global Dividend Class (formerly, Dynamic Global Dividend Value Class);
2009 Prior Relief means the relief granted in the July 13, 2009 decision Goodman & Company, Investment Counsel Ltd. and Dynamic Strategic Gold Class (Re), (2009) whereby Dynamic Global Strategic Gold Class obtained relief to invest up to 100% of its net asset value, taken at the market value at the time of investment, in gold and/or permitted gold certificates and up to 5% of its net asset value, taken at the market value at the time of investment, in each of silver, platinum and palladium (or the equivalent in certificates or specified derivatives of which the underlying interest is silver, platinum or palladium);
2011 Prior Relief means the relief granted in the November 15, 2011 decision to Dynamic Strategic Resource Class Goodman & Company, Investment Counsel Ltd. and Dynamic Strategic Resource Class (Re), (2011) whereby Dynamic Strategic Resource Class obtained relief to, among other things, invest up to an aggregate of 10% of its net assets, taken at the market value thereof at the time of investment, in gold, silver, platinum or palladium (or the equivalent in certificates or specified derivatives of which the underlying interest is gold, silver, platinum or palladium) or standardized futures with underlying interests in oil or gas for non-hedging purposes; and
2013 Prior Relief means the relief granted in the October 31, 2013 decision 1832 Asset Management L.P. (Re), (2013) whereby existing and future mutual funds for which the Manager or an affiliate of the Manager acts as manager (other than the funds that obtained the 1993 Prior Relief, the 2008 Prior Relief, the 2011 Prior Relief and money market funds) obtained relief to invest up to 10% of its net assets, taken at the market value thereof at the time of investment, in gold and silver (or the equivalent in certificates or specified derivatives of which the underlying interest is gold or silver).
REPRESENTATIONS
This decision is based on the following facts represented by the Filer in respect of the Filer and the Funds:
The Manager
1. The Filer is an Ontario limited partnership, which is wholly-owned, indirectly, by the Bank of Nova Scotia (BNS). The general partner of the Manager is 1832 Asset Management G.P. Inc., an Ontario corporation wholly-owned directly by BNS with its head office in Ontario.
2. The Filer 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 or an affiliate of the Filer acts or will act as the manager and/or portfolio advisor of the Funds.
4. The Filer is not in default of securities legislation in any Jurisdiction.
5. The Filer and certain Funds have received Prior Relief to permit the Funds to invest in gold, silver, platinum and/or palladium. In respect of these Funds, the Filer will continue to rely on the Prior Relief in addition to the Requested Relief.
The Funds
6. Each of the Funds is or will be established as an open-ended mutual fund trust, limited partnership or class of shares of a mutual fund corporation, in each case established or governed under the laws of the Province of Ontario or the laws of Canada.
7. Each of the Funds is or will be a “reporting issuer” (as defined in the Act) in one or more of the Jurisdictions. The securities of each Fund are or will be qualified for distribution in one or more of the Jurisdictions pursuant to a simplified prospectus and annual information form that has been or will be filed in accordance with the securities legislation of each of the relevant Jurisdictions.
8. No Fund is in default of securities legislation in any Jurisdiction.
9. In accordance with its fundamental investment objectives and investment strategies, each Fund is or will be permitted generally to invest in other investment funds, including exchange-traded funds.
Investment in Gold ETFs
10. In addition to investing in ETFs the securities of which qualify as index participation units (IPUs), as defined in NI 81-102, the Funds wish to invest in Gold ETFs, the securities of which are not IPUs.
11. In the absence of the Requested Relief, an investment by a Fund in a Gold ETF will be prohibited by section 2.5(2)(a) of NI 81-102 because none of the Gold ETFs are or will be subject to both National Instrument 81-101 – Mutual Fund Prospectus Disclosure (NI 81-101) and NI 81-102.
12. In the absence of the Requested Relief, an investment by a Fund in a Gold ETF will be prohibited by section 2.5(2)(c) of NI 81-102 because some of the Gold ETFs are not qualified for distribution in Canada.
13. In addition, an investment by a Fund in a Gold ETF would not qualify for the exemption from sections 2.5(2)(a) and 2.5(2)(c) of NI 81-102 that is contained in section 2.5(3)(a) of NI 81-102 because the securities of the Gold ETF are not IPUs.
14. A Fund will only invest in Gold ETFs in accordance with its fundamental investment objectives and investment strategies.
15. A Fund will not invest in leveraged Gold ETFs.
16. The Filer believes that it would be in the best interests of each Fund to have the flexibility to obtain exposure, from time to time, to gold, permitted gold certificates or specified derivatives, the underlying interest of which is gold or permitted gold certificates, by investing a portion of its assets in Gold ETFs.
17. Where appropriate, the Filer intends to invest in Gold ETFs as part of a Fund’s overall gold strategy in accordance with the fundamental investment objectives and strategies of the Fund. The Filer also intends to invest in Gold ETFs as a defensive strategy in adverse market, economic, political or other circumstances. The Filer considers Gold ETFs to be a viable alternative to holding cash or cash equivalents in such markets. Permitting the investments in Gold ETFs will give each Fund increased liquidity, improved execution ability and additional flexibility to increase gains in certain market conditions, which may otherwise cause the Fund to have significant cash positions and therefore deter from its ability to achieve its fundamental investment objectives.
18. Any regulatory concerns, such as undue risk, liquidity concerns or lack of transparency, in connection with investing in Gold ETFs are mitigated by the following facts:
a. Gold ETFs trade on a Canadian or U.S. exchange, which means that there will be clear disclosure about Gold ETFs readily available in the marketplace, and are generally relatively liquid;
b. the amount of loss that can result from an investment by a Fund in a Gold ETF will be limited to the amount invested by the Fund in securities of the Gold ETF;
c. in accordance with the investment strategies of the Funds, no more than 10% of the net asset value of a Fund will be invested in Gold ETFs taken at market value at the time of purchase; and
d. the simplified prospectus of the Funds will disclose: (i) in the investment strategy section the fact that the Fund obtained relief to invest in securities of Gold ETFs and may indirectly invest in gold; and (ii) to the extent applicable, the risks associated with such investments.
19. An investment by a Fund in Gold ETFs 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 Requested Relief is granted provided that:
(a) the investment by a Fund in securities of a Gold ETF is in accordance with the fundamental investment objectives of the Fund;
(b) the securities of Gold ETFs are traded on a stock exchange in Canada or the United States;
(c) for Dynamic Precious Metals Fund and Dynamic Strategic Gold Class, each Fund will not purchase securities of a Gold ETF if, immediately after such purchase, more than 10% of its net assets, taken at the market value thereof at the time of investment, would consist of Gold ETFs;
(d) except for Dynamic Precious Metals Fund and Dynamic Strategic Gold Class, immediately after entering into a purchase, derivative or other transaction providing exposure to gold (whether direct or indirect, including through Gold ETFs), each Fund’s aggregate market value exposure to gold (whether direct or indirect, including through Gold ETFs) does not exceed 10% of the net asset value of the Fund, taken at market value at the time of the transaction; and
(e) the simplified prospectus of each Fund that intends to rely on Requested Relief discloses or will disclose the next time it is renewed
(i) in the investment strategy section, the fact that the Fund obtained relief to invest in securities of Gold ETFs and may indirectly invest in gold, and
(ii) to the extent applicable, the risks associated with such investments and strategies.
“Darren McKall”
Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission