AlphaPro Management Inc. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from subsection 2.1(1) and paragraphs 2.5(2)(a), (b) and (c) of NI 81-102, the fund on funds restrictions, to permit commodity pools to enter into a forward agreement providing exposure to commodity pools investing in, or gaining exposure to exchange traded mutual funds tracking the performance of, physical commodities.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.5(2)(a), (b) and (c), 19.1.
National Instrument 81-104 Commodity Pools.
February 23, 2012
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
ALPHAPRO MANAGEMENT INC.
(the Filer)
AND
IN THE MATTER OF
HORIZONS GOLD YIELD ETF
HORIZONS SILVER YIELD ETF
HORIZONS CRUDE OIL YIELD ETF
HORIZONS NATURAL GAS YIELD ETF
HORIZONS DIVERSIFIED COMMODITY YIELD ETF
(each a Commodity ETF)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Horizons Gold Yield Fund (the Fund), which is expected to convert into the Horizons Gold Yield ETF (the Gold ETF) between February 1, 2012 and July 31, 2012, each of the other Commodity ETFs and any other commodity based exchange traded fund that is established by the Filer or an affiliate of the Filer in the future (each a New Commodity ETF and collectively with the Commodity ETFs, the ETFs and individually, an ETF) for a decision under the securities legislation of the Jurisdiction (the Legislation) granting exemptive relief, pursuant to section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) from Sections 2.1(1), and 2.5(2)(a), (b) and (c) of NI 81-102 in order to allow each ETF to gain exposure to its Commodity Portfolio (as defined below) by means of one or more forward purchase and sale agreements, which will not be a prepaid forward, (each a Forward Agreement) in order to achieve its investment objectives (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission is the principal regulator for this application; and;
2. 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 (collectively, with Ontario, the Jurisdictions).
Interpretation
Terms defined in NI 81-102, 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 a corporation incorporated under the laws of Canada and is the trustee and manager of the Fund.
2. The Filer or an affiliate of the Filer will be the trustee and the manager of each ETF.
The Fund
3. The Fund is a closed end fund organized under the laws of Ontario.
4. The Fund is not subject to NI 81-102 or National Instrument 81-104 Commodity Pools (NI 81-104).
5. Class A units and Class F units of the Fund were initially distributed in each of the Jurisdictions pursuant to a prospectus dated November 26, 2010.
6. The Class A units of the Fund are listed on the Toronto Stock Exchange (the TSX).
7. The investment objectives of the Fund are to provide its unitholders with: (i) exposure to the price of gold bullion hedged to the Canadian dollar, less the Fund's fees and expenses; and (ii) tax-efficient monthly distributions.
8. Horizons Investment Management Inc. (Horizons Investment), an affiliate of the Filer, is the portfolio manager of the Fund. Horizons Investment is registered as a portfolio manager, a commodity trading manager, a commodity trading counsel and as an investment fund manager in Ontario.
9. The Fund seeks to achieve its investment objectives by gaining exposure to a portfolio consisting of securities and other instruments that provide exposure to the price of gold bullion (the Gold Portfolio). The Gold Portfolio is comprised primarily of exchange traded funds that directly, and only, hold gold bullion (each a Gold Bullion ETF), but may include gold futures contracts from time to time.
10. The securities of each Gold Bullion ETF in the Gold Portfolio will be Commodity Participation Units (as defined below).
11. A Commodity Participation Unit is defined as a security traded on a stock exchange in Canada or the United States and issued by an issuer, the only purpose of which is to:
(a) hold a physical commodity as defined in NI 81-102 (a Physical Commodity) or more than one Physical Commodity;
(b) hold commodity futures that are widely quoted or used as the benchmark for pricing the future price of a Physical Commodity or more than one Physical Commodity; or
(c) invest in a manner that causes the mutual fund to replicate the performance of a Physical Commodity or more than one Physical Commodity, or commodity futures, referred to in subparagraphs 11(a) and 11(b);
12. The returns to the Fund and its unitholders are based upon the return of the Gold Portfolio and the performance of its underlying investments by virtue of a Forward Agreement with one or more counterparties, which provide exposure to the Gold Yield Trust (the Gold Reference Fund).
13. If certain conditions are satisfied after January 31, 2012, the Fund will convert into the Gold ETF sometime on or after February 1, 2012 and by no later than July 31, 2012.
The Reference Funds
14. The Gold Reference Fund is an investment trust organized under the laws of Ontario.
15. The reference fund for each ETF, excluding the Gold Reference Fund, will be an investment trust organized under the laws of Ontario (each a New Reference Fund and collectively with the Gold Reference Fund, the Reference Funds and individually, a Reference Fund).
16. Horizons Investment or an affiliate is or will be the manager, trustee and portfolio manager of each Reference Fund.
17. The Gold Reference Fund filed a prospectus dated November 26, 2010 with the Autorité des marchés financiers (the AMF) to become a reporting issuer in Québec.
18. A preliminary prospectus has or will be filed for each of the Reference Funds, excluding the Gold Reference Fund, with the AMF to become a reporting issuer in Québec.
19. Units of each Reference Fund will only be offered on an exempt basis.
20. Each Reference Fund was or will be created for the purpose of acquiring and holding its Commodity Portfolio.
ETFs
21. Following conversion, the Class A units and Class F units of the Fund will be converted into Class E units of the Gold ETF.
22. A preliminary prospectus dated January 4, 2012 has been filed by the Commodity ETFs with the securities regulatory authority in each of the Jurisdictions.
23. A preliminary prospectus will be filed by each ETF, excluding the Commodity ETFs, with the securities regulatory authority in each of the Jurisdictions.
24. Each ETF will be a commodity pool, as such term is defined in Section 1.1(1) of NI 81-104, in that each ETF will adopt fundamental investment objectives that permit each ETF to use or invest in financial instruments in a manner that is not permitted under NI 81-102. Each ETF will also be subject to NI 81-102 to the extent applicable, unless exemptive relief has been obtained.
25. The Filer or an affiliate of the Filer will be the trustee and manager of each ETF, and Horizons Investment will be the portfolio manager of each ETF.
26. Units of each ETF will be issued and sold on a continuous basis and will be listed on the TSX.
27. The investment objectives, investment strategy and investment restrictions of the Gold ETF will be substantially the same as the Fund, except as may be necessary to comply with applicable law, including NI 81-102.
28. Each ETF will seek to achieve its investment objectives by gaining exposure to a portfolio of securities and other instruments that provide exposure to the price of the commodity or commodities that is relevant to that ETF (each a New Commodity Portfolio and collectively with the Gold Portfolio, the Commodity Portfolios, and individually, a Commodity Portfolio).
29. The securities of each Commodity Portfolio will consist of Commodity Participation Units and other appropriate investments.
30. The returns of each ETF will be based upon the return of that ETF's Commodity Portfolio and the performance of its underlying investments by virtue of a Forward Agreement with one or more counterparties, which provide exposure to that ETF's Reference 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:
(a) The exposure of an ETF to its Commodity Portfolio, which includes securities of Commodity Participation Units, is in accordance with the fundamental investment objectives of the ETF;
(b) The Reference Fund of each ETF operates in accordance with the investment requirements of NI 81-102 other than the requirements of paragraphs 2.5(2)(a) and (c) of NI 81-102 as necessary to enable its investments in securities of the applicable Commodity Participation Units;
(c) Each Reference Fund remains a reporting issuer in Québec subject to the requirements of National Instrument 81-106 Investment Fund Continuous Disclosure;
(d) No securities of a Reference Fund are distributed in Canada other than in reliance on prospectus exemptions; and
(e) The Commodity Participation Units are established, and trade on a stock exchange, in Canada or the United States.