BetaPro Management Inc. et al. - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications -- Relief granted from seed capital requirements for commodity pools in NI 81-104 - Pools having fixed investment objective of providing performance that corresponds to a multiple or inverse multiple of the daily performance of an Underlying Index - Manager permitted to redeem $50,000 seed capital investment in each Pool provided the Pool has received subscriptions from investors other than the Manager totalling at least $5.0 million and provided the Manager maintain $100,000 in excess working capital - Paragraph 3.2(2)(a) of NI 81-104.
Applicable Legislative Provisions
National Instrument 81-104 Commodity Pools, ss. 3.2(2)(a), 10.1.
November 19, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ALBERTA, SASKATCHEWAN, MANITOBA,
ONTARIO, QUÉBEC, NEW BRUNSWICK,
NOVA SCOTIA, PRINCE EDWARD ISLAND,
AND NEWFOUNDLAND AND LABRADOR
(the Jurisdictions)
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
BETAPRO MANAGEMENT INC. (the Filer)
AND
IN THE MATTER OF
HORIZONS BETAPRO S&P/TSX 60® BULL PLUS ETF
HORIZONS BETAPRO S&P/TSX 60® BEAR PLUS ETF
HORIZONS BETAPRO S&P/TSX CAPPED FINANCIALS BULL PLUS ETF
HORIZONS BETAPRO S&P/TSX CAPPED FINANCIALS BEAR PLUS ETF
HORIZONS BETAPRO S&P/TSX CAPPED ENERGY BULL PLUS ETF
HORIZONS BETAPRO S&P/TSX CAPPED ENERGY BEAR PLUS ETF
HORIZONS BETAPRO S&P/TSX GLOBAL GOLD BULL PLUS ETF
HORIZONS BETAPRO S&P/TSX GLOBAL GOLD BEAR PLUS ETF
HORIZONS BETAPRO S&P/TSX 60® BULL PLUS FUND
HORIZONS BETAPRO S&P/TSX 60® BEAR PLUS FUND
HORIZONS BETAPRO NASDAQ-100® BULL PLUS FUND
HORIZONS BETAPRO NASDAQ-100® BEAR PLUS FUND
HORIZONS BETAPRO CANADIAN BOND BULL PLUS FUND
HORIZONS BETAPRO CANADIAN BOND BEAR PLUS FUND
HORIZONS BETAPRO U.S. DOLLAR BULL PLUS FUND
HORIZONS BETAPRO U.S. DOLLAR BEAR PLUS FUND
HORIZONS BETAPRO NYMEX® OIL BULL PLUS FUND
HORIZONS BETAPRO NYMEX® OIL BEAR PLUS FUND
HORIZONS BETAPRO S&P 500® BULL PLUS FUND
HORIZONS BETAPRO S&P 500® BEAR PLUS FUND
HORIZONS BETAPRO COMEX® GOLD BULL PLUS FUND
HORIZONS BETAPRO COMEX® GOLD BEAR PLUS FUND
(collectively, the Existing Pools)
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer on behalf of the Existing Pools and such other commodity pools as the Filer may establish in the future (each a Future Pool and together with the Existing Pools, the Pools or individually, a Pool) for a decision under the securities legislation of the Jurisdictions (the Legislation) granting relief from the requirement in paragraph 3.2(2)(a) of National Instrument 81-104 Commodity Pools (NI 81-104) which requires a commodity pool to have invested in it at all times securities that were issued pursuant to paragraph 3.2(1)(a) of NI 81-104 and had an aggregate issue price of $50,000 (the Requested Relief).
Under the Mutual Reliance Review System (MRRS) for Exemptive Relief Applications:
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained in NI 81-104 and National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
1. Each Pool is, or will be, a mutual fund trust governed by the laws of Ontario and a reporting issuer under the laws of one of more of the Jurisdictions. Each Pool is, or will be, continuously offered under a prospectus filed in the applicable Jurisdictions.
2. Each Pool is, or will be, a commodity pool as such term is defined in section 1.1 of NI 81-104, in that each Pool has adopted or will adopt fundamental investment objectives that permit that Pool to use or invest in specified derivatives in a manner that is not permitted under National Instrument 81-102 Mutual Funds (NI 81-102).
3. Each Pool's investment objective is, or will be, to provide daily results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to (i) a multiple or the inverse (opposite) multiple of the daily performance of an index, security, currency or commodity (an Underlying Index) or (ii) an index that is a multiple or the inverse (opposite) multiple of the daily performance of the Underlying Index.
4. In order to achieve its investment objective, each Pool will invest in equity securities and/or other financial instruments, including derivatives. Each Pool may employ leverage.
5. The Filer, a corporation incorporated under the laws of Canada, acts, or will act, as the trustee and manager of each Pool.
6. JovInvestment Management Inc. (JovInvestment), a corporation incorporated under the laws of Ontario, acts, or will act, as the investment manager of each Pool. JovInvestment is registered in the categories of investment counsel and portfolio manager under the Securities Act (Ontario) and as a commodity trading manager under the Commodity Futures Act (Ontario).
7. JovInvestment has retained, or will retain, ProShare Advisors LLC (ProShare), a limited liability company organized under the laws of the state of Maryland, or an affiliate of ProShare, to act as a sub-adviser on behalf of each Pool and to make and execute investment decisions on behalf of each Pool. ProShare is registered as an investment advisor with the U.S. Securities and Exchange Commission and is exempt from registration as a commodity pool operator and commodity trading advisor.
8. Eight of the Existing Pools are exchange-traded funds and are listed on the Toronto Stock Exchange. Future Pools may similarly be exchange-traded.
9. The Pools may, but are not required to directly invest in commodities. Rather, the Pools are similar to index participation units with the difference that they aim to provide a magnified return, from a bull or bear perspective, of the Underlying Index. This fixed fundamental investment objective is a unique feature of the Pools and distinguishes them from typical commodity pools. The requirement to achieve and maintain correlation with the Underlying Index leaves no discretion in how the Filer manages the Pools which consequently significantly limits the Filer's ability to take undue risks in managing the Pools.
10. Under paragraph 3.2(1)(a) of NI 81-104, the Filer, as manager of each Pool, is required to make a seed capital investment of $50,000 in each Pool. Paragraph 3.2(2)(a) of NI 81-104 does not allow the Filer to redeem this seed capital investment except upon dissolution or termination of the Pool.
11. At the time of this decision, 22 Pools exist, representing a total initial investment by the Filer of $1.1 million in seed capital, and additional Pools are contemplated. This represents a substantial investment which is onerous for the Filer to make and maintain.
12. If the Pools were governed by the provisions of NI 81-102, the Filer would be allowed to redeem its seed capital investment in each Pool upon the Pool having received subscriptions totalling not less than $500,000 from investors other than the Filer or persons or companies related to it.
13. The Filer understands that the policy rationale behind the permanent seed capital requirement for commodity pools under NI 81-104 is to encourage promoters to ensure that the commodity pool is being properly run for the benefit of the investors, by requiring that the promoter of a Pool, or a related party, will itself be an investor in the Pool at all times. The seed capital requirement is therefore intended to align the interest of promoters of the Pool with that of investors.
14. The Filer wishes to redeem the seed capital invested in each Pool subject to the conditions set out in this decision.
15. The Filer is obliged in accordance with the terms of the trust agreement governing each Pool, and in accordance with the Legislation, to at all times act honestly and in good faith, and in the best interests of the Pool, and exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
16. Having regard to the Filer's fiduciary obligation and the Pools' fixed investment objective, not having $50,000 invested in each Pool at all times will not change how the Filer manages each Pool. The Filer's interests will at all times be aligned with those of investors in the Pool.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that:
1.
(a) the Filer may not redeem any of its initial investment of $50,000 in a Pool unless and until the value of units of the Pool subscribed for by investors other than the persons and companies referred to in paragraph 3.2(1)(a) of NI 81-104 reaches $5.0 million;
(b) if, after the Filer redeems its initial investment of $50,000 in a Pool in accordance with condition 1.(a) above, the value of the units of a Pool subscribed for by investors other than the persons and companies referred to in paragraph 3.2(1)(a) of NI 81-104 drops below $5.0 million for more than 30 consecutive days, the Filer will, unless the Pool is in the process of being dissolved or terminated, reinvest $50,000 in the Pool and maintain that investment until condition 1.(a) is again satisfied; and
(c) the Filer will at all times maintain excess working capital of a minimum of $100,000.
2. Condition 1.(c) above will cease to apply upon the coming into force of any legislation or rule of the Decision Makers dealing with the maintenance of excess working capital for investment fund managers.