AlphaPro Management Inc. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from subsections 2.1(1), 2.2(2) and paragraphs 2.5(2)(a), (b) and (c) of NI 81-102, to permit commodity pools to enter into a forward agreement providing exposure to underlying commodity pools, which may gaining exposure to exchange traded mutual funds tracking the performance of, physical commodities. Relief revokes and replaces prior relief granted to the filers.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.2(1), 2.5(2)(a), (b) and (c), 19.1.
National Instrument 81-104 Commodity Pools, s. 1.1(1).
April 3, 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
HORIZONS AUSPICE MANAGED FUTURES INDEX ETF
HORIZONS MORNINGSTAR HEDGE FUND INDEX ETF
(each an Existing ETF)
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 (the Legislation) for:
(a) an exemption (the ETF Exemption) for the Existing ETFs and any other exchange traded fund that is established by the Filer or an affiliate of the Filer in the future (each a New ETF and collectively with the Existing ETFs, theETFs and individually, an ETF), pursuant to section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) from Sections 2.1(1), 2.2(1) and 2.5(2)(a), (b) and (c) of NI 81-102 in order to allow each ETF to gain exposure to its Portfolio (as defined below) by means of one or more forward purchase and sale agreements, swap agreements or other derivative agreements, which will not be a prepaid forward, (each a Forward Agreement) in order to achieve its investment objectives; and
(b) revocation of the Decision Document granted by the principal regulator to the Filer on February 23, 2012 (the Revocation Relief).
The ETF Exemption and the Revocation Relief are collectively, 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.
2. The Filer or an affiliate of the Filer is or will be the manager and trustee of each ETF.
ETFs
3. Each ETF is or will be a newly created fund organized under the laws of Ontario.
4. Each ETF is or will be a commodity pool, as such term is defined in Section 1.1(1) of National Instrument 81-104 Commodity Pools (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.
5. The applicable class(es) of units of each ETF are or will be qualified for distribution in each of the Jurisdictions.
6. An application has or will be filed with the Toronto Stock Exchange (the TSX) to list the applicable class(es) of units of each ETF on the TSX, which will be issued and sold on a continuous basis on the TSX.
7. The investment objective of each ETF will be to seek to:
(a) gain exposure to a portfolio of securities and other instruments that provide exposure to the price of a commodity or commodities that are relevant to that ETF; or
(b) replicate, to the best of its ability, the performance of an index (the Underlying Index);
8. Horizons Investment Management Inc. (Horizons Investment), an affiliate of the Filer is or will be the portfolio manager of each ETF. 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. Horizons Investment may engage the services of another party to act as sub-adviser to a Reference Fund (as defined below).
10. Each ETF will seek to achieve its investment objective through exposure to the investment portfolio (the Portfolio) of a reference fund (a Reference Fund). Each Portfolio may include futures contracts, money market instruments, cash, exchange traded funds and/or Commodity Participation Units (defined below) in order to replicate, to the best of its ability, the performance of one or more commodities, or an Underlying Index, depending on the investment objective of the relevant ETF. Each Portfolio may also use derivatives, including futures contracts and forwards, for hedging purposes.
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. Each Underlying Index will measure the performance of an index or an investable factor-based replication strategy (a Replication Strategy) that aims to replicate, as closely as possible, the performance of an index.
13. If a Reference Fund is using a Replication Strategy, the applicable Portfolio will not invest directly or indirectly in the elements of the Underlying Index that the Replication Strategy is trying to replicate.
14. The returns to each ETF and its unitholders will be based upon the return of the applicable Portfolio and the performance of its underlying investments by virtue of one or more Forward Agreements with one or more counterparties, which provide exposure to that ETF's Reference Fund.
Reference Funds
15. Each Reference Fund is or will be a newly created investment trust organized under the laws of Ontario.
16. The Filer or an affiliate of the Filer is or will be the manager and trustee of each Reference Fund.
17. Horizons Investment is or will be the portfolio manager of each Reference Fund, which may or may not use the services of a sub-adviser.
18. Each Reference Fund will, subject to any exemptive relief that has been or is obtained, operate in accordance with the investment requirements of NI 81-102 except as modified by NI 81-104.
19. Each Reference Fund has or will file a non-offering prospectus with the Autorité des marchés financiers and is or will become a reporting issuer in Québec.
20. The units of each Underlying Fund will only be offered on an exempt basis.
21. Each Reference Fund is or will be created for the purpose of acquiring and holding a Portfolio.
22. Neither the Filer nor any Existing ETF nor any existing Reference Fund is in default of the securities legislation of any Jurisdiction.
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 Portfolio, which may include 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, as modified by NI 81-104, other than the requirements of section 2.2(1), and 2.5(2)(a) and (c) of NI 81-102 to enable its investments, as necessary, in securities of other exchange traded funds;
(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.