MD Physician Services Inc.
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 -- Mutual Funds to permit specified mutual funds to invest up to 10 percent of their net assets in U.S. ETFs that track an index, but are not index participation units under NI 81-102. U.S. ETFs subject to U.S. 1940 Investment Companies Act and are not commodity pools in the U.S.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.5(2)(a) and (c), 19.1.
April 29, 2014
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 MD PHYSICIAN SERVICES INC. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for an exemption pursuant to section 19.1 of National Instrument 81-102 -- Mutual Funds (NI 81-102) exempting MDPIM Strategic Yield Pool, MDPIM Strategic Opportunities Pool, MD Strategic Yield Fund and MD Strategic Opportunities Fund (each, a Strategic Fund and collectively, the Strategic Funds) from clauses 2.5(2)(a) and (c) of NI 81-102 to permit each Strategic Fund to invest in securities of the following U.S. exchange traded funds (collectively, the US ETFs and each, a US ETF):
1. IQ Hedge Multi-Strategy Tracker ETF;
2. IQ Hedge Macro Tracker ETF; and
3. Proshares Hedge Replication ETF.
(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 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
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 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:
1. The Filer is the investment fund manager and portfolio manager of the Strategic Funds, which are publicly offered mutual funds.
2. Two of the Strategic Funds are part of the MDPIM family of mutual funds managed by the Filer (theMDPIM Funds), with the remaining two Strategic Funds being part of the MD family of mutual funds managed by the Filer (the MD Funds).
3. The Filer is registered as a portfolio manager in each of the provinces and territories of Canada and is registered in Ontario in the category of exempt market dealer and investment fund manager. The Filer is also registered as an investment fund manager in the provinces of Quebec and Newfoundland and Labrador. The Filer is indirectly wholly owned by the Canadian Medical Association.
4. None of the Filer, any MDPIM Fund or any MD Fund is in default of securities legislation in any Jurisdiction.
5. The Strategic Funds are open-end mutual fund trusts that were created under the laws of the Province of Ontario and are reporting issuers in each of Jurisdictions. The Strategic Funds that are part of the MDPIM Funds first commenced offering their securities to the public in February 2013, while the Strategic Funds that are part of the MD Funds first commenced offering their securities to the public in February 2014.
6. The securities of each of the Strategic Funds are currently qualified for distribution pursuant to a simplified prospectus, annual information form and Fund Facts documents for the MDPIM Funds and the MD Funds, respectively, in each of the Jurisdictions (the Current Prospectus).
7. As with all of the mutual funds managed by the Filer, the Strategic Funds are available for investment only by "qualified eligible investors", which essentially means that the investors must be either physicians who are members of the Canadian Medical Association or relatives of those individuals.
(a) The MDPIM Funds are only available to "qualified eligible investors" who are either clients of MD Private Trust Company or MD Private Investment Counsel, a division of the Filer (MDPIC), and who have appointed MDPIC to provide them with discretionary portfolio management services and advice. The MDPIM Funds are designed to be a part of managed portfolios of the MDPIM Funds for managed account clients of MDPIC which portfolios will be recommended for the clients by representatives of MDPIC. Investors in the MDPIM Funds pay MDPIC a managed account fee on their entire managed account investments -- no management fees are charged to the MDPIM Funds. Presently, the Filer absorbs all expenses otherwise payable by the MDPIM Funds, although it reserves the right to cease to do this. Investors also do not pay any sales or redemption fees in connection with their investment in the MDPIM Funds.
(b) The MD Funds are only available to "qualified eligible investors" who are clients of MD Management Limited (MD Management), a registered investment dealer and member of the Investment Industry Regulatory Organization of Canada (IIROC). The fees and charges payable by investors with respect to the MD Funds depend on the series of the MD Fund being invested in and are disclosed in the simplified prospectus and Fund Facts documents of the applicable MD Fund.
8. The Filer has engaged QS Investors, LLC as the Investment Adviser to the Strategic Funds (QS Investors). The head office of QS Investors is located in New York City. QS Investors is a registered investment adviser with the Securities and Exchange Commission in the United States. QS Investors is also registered with the OSC as an adviser (portfolio manager) and relies on the "international adviser" exemption provided for in National Instrument 31-103 to provide advisory services (to other unrelated clients) in Quebec.
9. The investment objective of the MDPIM Strategic Yield Pool and MD Strategic Yield Fund is to provide income and long-term capital appreciation. They invest primarily in equity securities, exchange traded funds listed on a Canadian or U.S. stock exchange and fixed income securities that emphasize alternative or non-traditional asset classes or strategies. They will also have exposure to currencies and commodities.
10. The investment objective of the MDPIM Strategic Opportunities Pool and MD Strategic Opportunities Fund is to provide long-term capital appreciation. They invest primarily in equity securities, exchange traded funds listed on a Canadian or U.S. stock exchange and fixed income securities that emphasize alternative or non-traditional asset classes or strategies. They will also have exposure to currencies and commodities.
11. In order to allow each Strategic Fund to more effectively meet its investment objectives, the Filer, in consultation with QS Investors, wishes each Strategic Fund to be permitted to invest in the US ETFs, which are U.S. exchange traded funds that follow an "absolute return" investment strategy. Because of the indices followed by the US ETFs, the US ETFs do not fall within the definition of "index participation unit" as used in NI 81-102, but they can be considered to be "mutual funds", which means the "fund of fund" rules in NI 81-102, without the Exemption Sought, apply to prohibit any investment by the Strategic Funds in the US ETFs.
12. A key benefit of investing in alternative asset classes and strategies is improved portfolio diversification and potentially enhanced returns. For example:
(a) The investment strategies of the US ETFs typically have a low correlation to traditional asset classes such as bonds and stocks, which in turn gives rise to increased diversification.
(b) The investment strategies of the US ETFs typically have low exposure to traditional equity and fixed income markets, which in turn can help provide potential risk reduction.
(c) The investment strategies of the US ETFs offer a highly liquid way of getting access to returns from alternative investment strategies that are otherwise not available to the Strategic Funds.
13. The Filer believes that having the option of allocating a limited portion of each Strategic Fund's assets to the US ETFs will increase diversification opportunities and improve the Strategic Fund's overall risk/reward profile. Reduced access to these US ETFs would result in the diminished ability of QS Investors to diversify the portfolio and to mitigate other economic risks for the Strategic Funds. By investing in the US ETFs, the Strategic Funds will be able to gain exposure to the benefits of absolute return strategies through stock exchange listed, transparent, regulated and liquid investments. The US ETFs are not themselves "hedge funds" nor are they funds of hedge funds. The US ETFs have highly transparent portfolios and trading information, all of which is available on a daily basis.
14. The US ETFs are those exchange traded funds that QS Investors, in consultation with the Filer, consider the most appropriate investments for the Strategic Funds having regard to the investment objectives and strategies, including risk parameters of the Strategic Funds. QS Investors, in consultation with the Filer, has been unable to source a comparable exchange traded fund that would be suitable for the Strategic Funds and also that would qualify for investment under NI 81-102 by the Strategic Funds as an index participation unit, or that is regulated as a mutual fund by the Canadian securities administrators.
15. Each US ETF is a publicly offered mutual fund subject to the United States Investment Company Act of 1940 (the 40 Act), whose securities are listed for trading on the NYSE Arca. None of the US ETFs are commodity pools in the United States and their investment advisers are not required to register as commodity pool operators in connection with the US ETFs.
16. Each US ETF invests according to a specific named index. To the best of the knowledge of the Filer, after consultation with QS Investors, each US ETF complies with the 40 Act.
17. Each US ETF is regulated in a manner that is identical in all material respects to the regulation of other exchange traded funds listed on stock exchanges in the United States that fall within the definition of "index participation unit" in NI 81-102.
18. The investment objective of the IQ Hedge Multi-Strategy Tracker ETF is to seek results that correspond (before fees and expenses) generally to the price and yield performance of its underlying index, the IQ Hedge Multi-Strategy Index, which seeks to track the "beta" portion of returns (i.e. that portion of the returns of hedge funds that are non-idiosyncratic or unrelated to manager skill) of hedge funds that employ various hedge fund investment styles. It invests at least 80 percent of its net assets (excluding collateral held from securities lending), plus the amount of any borrowings for investment purposes, in the investments included in its underlying index, which includes underlying funds. The underlying index consists of a number of components which include primarily exchange traded funds and/or other exchange-traded vehicles issuing equity securities organized in the U.S. It may also invest in futures contracts and swap agreements. It does not invest in hedge funds and the underlying index does not include hedge funds as underlying index components. It is not a fund of hedge funds.
19. The IQ Hedge Multi-Strategy Tracker ETF is managed by IndexIQ Advisors LLC. It is passively invested according to the underlying index, which was developed by Financial Development Holdco LLC, which is the parent company to the US ETF's investment adviser. Information about this US ETF is publicly available via SEC filings (on EDGAR), but also at the investment adviser's website. This information includes the fund's holdings on a daily basis.
20. The investment objective of the IQ Hedge Macro Tracker ETF is to seek results that correspond (before fees and expenses) generally to the price and yield performance of its underlying index, the IQ Hedge Macro Index, which seeks to track the "beta" portion of the returns (i.e. that portion of the returns of hedge funds that are non-idiosyncratic or unrelated to manager skill) of a combination of hedge funds that pursue a macro strategy and hedge funds pursuing an emerging markets strategy. Macro hedge funds typically employ top-down macro analysis (e.g. political trends, macro economics etc.) to identify dislocations in equity, fixed-income, currency and commodity markets that are expected to lead to large price movements. It invests at least 80 percent of its net assets (excluding collateral held from securities lending), plus the amount of any borrowings for investment purposes, in the investments included in its underlying index, which includes underlying funds. The underlying index consists of a number of components which include primarily exchange traded funds and/or other exchange-traded vehicles issuing equity securities organized in the U.S. It may also invest in futures contracts and swap agreements. It does not invest in hedge funds and the underlying index does not include hedge funds as underlying index components. It is not a fund of hedge funds.
21. The IQ Hedge Macro Tracker ETF is managed by IndexIQ Advisors LLC. It is passively invested according to the underlying index, which was developed by Financial Development Holdco LLC, which is the parent company to the US ETF's investment adviser. Information about this US ETF is publicly available via SEC filings, but also at the investment adviser's website. This information includes the fund's holdings on a daily basis.
22. The investment objective of the Proshares Hedge Replication ETF is to seek results (before fees and expenses) that track the performance of its underlying index, the Merrill Lynch Factor Model -- Exchange Series. It invests in a combination of equity securities and derivatives that track the performance of its underlying index. The underlying index seeks to provide the risk and return characteristics of a hedge fund asset class by targeting a high correlation to the HFRI Fund Weighted Composite Index. The latter HFRI Index is designed to reflect hedge fund industry performance through an equally weighted composite of over 2000 constituent funds. The underlying index is established by Merrill Lynch International and is published under the Bloomberg ticker symbol MLEIFCTX. The factors that comprise the underlying index are (1) the S&P 500 Total Return Index, (2) the MSCI EAFE US Dollar Net Total Return Index, (3) the MSCI Emerging Markets US Dollar Net Total Return Index, (4) the Russell 200 Total Return Index, (5) three-month U.S. Treasury Bills, and (6) the ProShares UltraShort Euro ETF.
23. The Proshares Hedge Replication ETF is managed by ProShare Advisors LLC and passively invested according to the underlying index. It invests in a combination of securities and derivatives that ProShare Advisors believe should track the performance of the underlying index. Information about this US ETF is publically available through the SEC filings and also at ProShares' website. This information includes the fund's holdings on a daily basis.
24. None of the US ETFs are related to the Filer or QS Investors, in that they are managed and administered by other portfolio managers, all of whom are based in the United States.
25. The US ETFs do not seek to provide leveraged returns and the amount of loss that can result from an investment by a Strategic Fund will be limited to the amount invested by the Strategic Fund in the US ETF.
26. Each Strategic Fund previously received relief in the following decisions (the Commodity ETF Decisions):
(a) MDPIM Strategic Yield Pool and MDPIM Strategic Opportunities Pool -- decision of the Jurisdictions dated January 28, 2013; and
(b) MD Strategic Yield Fund and MD Strategic Opportunities Fund -- decision of the Jurisdictions dated February 3, 2014.
27. The Commodity ETF Decisions provided exemptions to permit the Strategic Funds to invest in Commodity ETFs (as defined in those decisions) that are not index participation units.
28. The Filer seeks the Exemption Sought to allow the Strategic Funds to invest in the US ETFs in addition to the Commodity ETFs. Both investments will be subject to an aggregate limit of 10 percent of the assets of each Strategic 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 Exemption Sought is granted provided that, in respect of each Strategic Fund:
(a) an investment by the Strategic Fund in securities of a US ETF is in accordance with the fundamental investment objectives of the Strategic Fund;
(b) each US ETF is, immediately before purchase by the Strategic Fund of securities of that US ETF, an investment company subject to the 40 Act in good standing with the SEC;
(c) each US ETF is, immediately before the purchase by the Strategic Fund of securities of that US ETF, not a commodity pool (as defined under applicable U.S. laws) and its investment adviser is not required to register as a commodity pool operator in the U.S. in connection with the US ETFs;
(d) the Strategic Fund may not purchase securities of a US ETF if, immediately after the purchase, more than 10 percent of the net assets of the Strategic Fund in aggregate, taken at market value at the time of purchase, would consist of US ETFs and Commodity Products (as defined in the Commodity ETF Decisions);
(e) the Strategic Fund does not short sell securities of a US ETF;
(f) the securities of each US ETF continue to trade on NYSE Arca; and
(g) the prospectus of the Strategic Fund discloses in the investment strategy section, that the Strategic Fund may invest in the US ETFs and the Commodity Products, subject to the conditions established by this Decision and the Commodity ETF Decision.