National Bank Investments Inc.

Policy Statement 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted to allow open-ended mutual funds to invest in ETFs in Canada and the United States, and to allow the top funds to pay brokerage commissions for the purchase and sale of the securities of the underlying ETFs – Underlying ETFs are subject to National Instrument 81-102 or the United States Investment Company Act of 1940 – Investments in U.S. ETFs limited to 10% of net asset value – Relief subject to terms and conditions based on investment restrictions of National Instrument 81-102 such that top funds cannot do indirectly via investment in underlying ETFs what they cannot do directly under National Instrument 81-102.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.1(1), 2.2(1)(a), 2.5(2)(a), (b), (c) and (e).

[TRANSLATION]

July 10, 2017

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
(the Jurisdictions)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
NATIONAL BANK INVESTMENTS INC.
(the Filer)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (each a Decision Maker) has received an application from the Filer on behalf of the mutual funds subject to Regulation 81-102 respecting Investment Funds (c. V-1.1, r.39) (Regulation 81-102) that are currently managed by the Filer (the Existing Funds) and such mutual funds as may be managed by the Filer or an affiliate of the Filer in the future (the Future Funds, and together with the Existing Funds, the Funds and each individually, a Fund) for a decision under the securities legislation of the Jurisdictions (the Legislation) that exempts the Filer and each Fund from the following provisions of Regulation 81-102 (the Exemption Sought) in order to permit the Funds to invest in securities of exchange-traded funds that are not index participation units (IPU) (the Underlying ETFs):

(a)           subsection 2.1(1) of Regulation 81-102 (the Concentration Restriction) to permit each Fund to purchase securities of an Underlying ETF or enter into a specified derivatives transaction with respect to an Underlying ETF even though, immediately after the transaction, more than 10% of the net asset value (NAV) of the Fund would be invested, directly or indirectly, in securities of the Underlying ETF (the Concentration Relief);

(b)           paragraph 2.2(1)(a) of Regulation 81-102 (the Control Restriction) to permit each Fund to purchase securities of an Underlying ETF such that, immediately after the purchase, the Fund would hold securities representing more than 10% of:

i.              the votes attaching to the outstanding voting securities of the Underlying ETF; or

ii.             the outstanding equity securities of the Underlying ETF (the Control Relief);

(c)           paragraph 2.5(2)(a) of Regulation 81-102 to permit each Fund to invest in securities of Underlying ETFs that do not offer securities under a simplified prospectus in accordance with Regulation 81-101 respecting Mutual Fund Prospectus Disclosure (V-1.1, r.38) (Regulation 81-101) and that may not be subject to Regulation 81-102;

(d)           paragraph 2.5(2)(b) of Regulation 81-102 to permit each Fund to invest in securities of an Underlying ETF which may, at the time of the purchase, hold more than 10% of its NAV in securities of other investment funds (the Three-Tier Relief);

(e)           paragraph 2.5(2)(c) of Regulation 81-102 to permit each Fund to invest in securities of a U.S. Underlying ETF (as defined below) and to permit each Fund to invest in securities of a Canadian Underlying ETF (as defined below) that is not a reporting issuer in the same local jurisdiction as the applicable Fund; and

(f)            paragraph 2.5(2)(e) of Regulation 81-102 to permit each Fund to pay brokerage fees in relation to its purchase and sale of securities of a Related Underlying ETF (as defined below) (the Brokerage Fee Relief).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a)           the Autorité des marchés financiers is the principal regulator for this application;

(b)           the Filer has provided notice that subsection 4.7(1) of Regulation 11-102 respecting Passport System (V-1.1, r.1) (Regulation 11-102) is intended to be relied upon in the jurisdictions of Canada other than the Jurisdictions; and

(c)           the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in Regulation 81-102, Regulation 14-101 respecting Definitions (c. V-1.1, r.3) and Regulation 11-102 have the same meaning if used in this decision, unless otherwise defined.

In addition, capitalized terms used in this decision have the following meanings:

CSA means the Canadian Securities Administrators .

Canadian Underlying ETF means an Underlying ETF, including but not limited to a Related Underlying ETF (as defined below), whose securities are listed for trading on a Recognized Exchange (as defined below) in Canada.

Form 41-101F2 means Form 41-101F2 – Information Required in an Investment Fund Prospectus.

Form 81-101F1 means Form 81-101F1 Contents of Simplified Prospectus.

Investment Company Act means the United States Investment Company Act of 1940.

National Securities Exchange means a national securities exchange in the United States, as that term is defined in the 1934 Act.

Other Decision ETFs as defined at paragraph 41 hereof.

Other ETF Decision means the previous exemptive relief received by the Funds on May 6, 2009.

Recognized Exchange means a recognized exchange in Canada, as that term is defined in Canadian securities legislation.

Regulation 41-101 means Regulation 41-101 respecting General Prospectus Requirements (V-1.1, r.14).

Regulation 81-104 means Regulation 81-104 respecting Commodity Pools (V-1.1, r.40).

Regulation 81-107 means Regulation 81-107 respecting Independent Review Committee for Investment Funds (V-1.1, r.43).

Related Underlying ETF means a Canadian Underlying ETF that is managed, or in the future will be managed, by the Filer or an affiliate or associate of the Filer.

Technical Clone Fund is defined at paragraph 36 hereof.

TSX means Toronto Stock Exchange.

U.S. Underlying ETF means an Underlying ETF that is not a reporting issuer in Canada and whose securities are listed for trading on a National Securities Exchange in the United States.

Representations

This decision is based on the following facts represented by the Filer:

General:

The Filer

1.             The Filer is a corporation amalgamated under the laws of Canada with its head office in Montréal, Québec.

2.             The Filer is registered as an investment fund manager in each of the provinces of Québec, Ontario and Newfoundland and Labrador and as a mutual fund dealer in each of the jurisdictions of Canada.

3.             The Filer or an affiliate of the Filer is, or will be, the investment fund manager of each Fund.

4.             The Filer is not in default of securities legislation in the jurisdictions of Canada.

The Funds

5.             The Funds are, or will be, open-ended mutual funds organized and governed by the laws of Canada or a jurisdiction of Canada.

6.             Each Fund distributes, or will distribute, its securities pursuant to a simplified prospectus prepared pursuant to Regulation 81-101 and Form 81-101F1 and is, or will be, governed by the applicable provisions of Regulation 81-102.

7.             The Funds are, or will be, reporting issuers in one or more of the jurisdictions of Canada in which their securities are, or will be, distributed.

8.             The Funds may, from time to time, wish to invest in Underlying ETFs.

9.             Each investment by a Fund in securities of an Underlying ETF will be made in accordance with the investment objectives of the Fund.

10.          The Existing Funds are not in default of securities legislation in the jurisdictions of Canada.

The Underlying ETFs

11.          The securities of an Underlying ETF are, or will be, listed on a Recognized Exchange in Canada, or on a National Securities Exchange in the United States, and the market for them is, or will be, liquid because it is, or will be, supported by designated brokers. As a result, the Filer expects a Fund to be able to dispose of such securities through market facilities in order to raise cash, including to fund the redemption requests of its securityholders.

12.          Each Underlying ETF is not, and will not be, a commodity pool governed by Regulation 81-104 or under applicable U.S. laws.

13.          Absent the Exemption Sought, an investment by a Fund in an Underlying ETF would be prohibited by paragraph 2.5(2)(a) of Regulation 81-102 because the Underlying ETFs do not offer securities under a simplified prospectus in accordance with Regulation 81-101, and in the case of the U.S. Underlying ETFs, are not subject to Regulation 81-102.

14.          In addition, an investment by a Fund in an Underlying ETF would not qualify for the exception in paragraph 2.5(3)(a) of Regulation 81-102 because the securities of the Underlying ETF are not IPUs.

15.          Other than as described in paragraphs 16 and 34 to 37 below, no Underlying ETF will hold more than 10% of its NAV in securities of another investment fund unless: (a) the other investment fund is a clone fund or money market fund; or (b) securities of the other investment fund are IPUs.

16.          An Underlying ETF may be structured as a “fund-of-fund” to achieve economies of scale. Absent the Three-Tier Relief, an investment by a Fund in an Underlying ETF that invests substantially all of its assets in securities of another investment fund would be prohibited by paragraph 2.5(2)(b) of Regulation 81-102, as more than 10% of the NAV of the Underlying ETF would be invested in securities of other investment funds.

17.          Due to the potential size disparity between the Funds and the Underlying ETFs, it is possible that a relatively small investment, on a percentage of NAV basis, by a relatively larger Fund in securities of an Underlying ETF could result in such Fund holding securities representing more than 10% of: (i) the votes attaching to the outstanding voting securities of the Underlying ETF; or (ii) the outstanding equity securities of that Underlying ETF, contrary to the Control Restriction.

The Canadian Underlying ETFs

18.          Each Canadian Underlying ETF is, or will be, an open-ended mutual fund subject to Regulation 81-102.

19.          Securities of each Canadian Underlying ETF are, or will be:

(a)           distributed pursuant to a long form prospectus prepared pursuant to Regulation 41-101 and Form 41-101F2 or a simplified prospectus prepared pursuant to Regulation 81-101 and Form 81-101F1; and

(b)           listed on the TSX or another Recognized Exchange in Canada.

20.          Each Canadian Underlying ETF is, or will be, a reporting issuer in the jurisdictions of Canada in which its securities are, or will be, distributed.

21.          Absent the Exemption Sought, an investment by a Fund in a Canadian Underlying ETF would be prohibited by paragraph 2.5(2)(c) of Regulation 81-102 where such Canadian. Underlying ETF is not a reporting issuer in the same local jurisdiction as the applicable Fund.

22.          Each Canadian Underlying ETF is, or will be, subject to Regulation 81-107.

23.          The Funds may, from time to time, wish to invest in Related Underlying ETFs.

24.          As the securities of Related Underlying ETFs are not IPUs an investment by a Fund in securities of a Related Underlying ETFs will not qualify for the exception set out in subsection 2.5(5) of Regulation 81-102. Absent the Brokerage Fee Relief paragraph 2.5(2)(e) of Regulation 81-102 would not permit a Fund to pay brokerage fees incurred in connection with a trade in securities of a Related Underlying ETF.

The U.S. Underlying ETFs

25.          Each U.S. Underlying ETF is, or will be, a publicly offered mutual fund subject to the Investment Company Act.

26.          The Filer has concluded that it could not currently gain exposure to applicable asset classes, sectors and/or markets entirely through existing Canadian exchange-traded funds. Currently, the U.S. Underlying ETFs provide significantly broader exposure to asset classes, sectors and markets than those available from existing Canadian exchange-traded funds. As the Canadian market for actively-managed exchange-traded funds evolves, the Filer may consider such products as a vehicle to achieve the investment objectives of a Fund.

27.          Absent the Exemption Sought, an investment by a Fund in a U.S. Underlying ETF would be prohibited by paragraph 2.5(2)(c) of Regulation 81-102 because such U.S. Underlying ETF is not a reporting issuer in the local jurisdiction.

Reasons supporting the Concentration Relief, the Control Relief and Relief from paragraphs 2.5(2)(a), and 2.5(2)(c) of Regulation 81-102

28.          An investment in an Underlying ETF by a Fund is an efficient and cost effective alternative to administering one or more investment strategies similar to that of the Underlying ETF.

29.          A key benefit of investing in the Underlying ETFs, including the U.S. Underlying ETFs, is improved portfolio diversification and potentially enhanced returns. For example:

(a)           an investment in the Underlying ETFs will provide the Funds with access to specialized knowledge, expertise and/or analytical resources of the adviser to the Underlying ETFs;

(b)           the Underlying ETFs provide a potentially better risk profile and improved liquidity/tradability than direct holdings of asset classes to which the Underlying ETFs provide exposure; and

(c)           the investment strategies of the U.S. Underlying ETFs offer significantly broader exposure to asset classes, sectors and markets than those available in the existing Canadian exchange-traded fund market.

30.          The Filer submits that having the option to allocate a very limited portion of each Fund’s assets to U.S. Underlying ETFs will increase diversification opportunities and improve a Fund’s overall risk/reward profile.

31.          An investment in an Underlying ETF by a Fund should pose limited investment risk to the Fund because each Underlying ETF will be subject to Regulation 81-102 or the Investment Company Act, subject to any exemption therefrom that may in the future be granted by the securities regulatory authorities.

32.          The material difference between the securities of an Underlying ETF and the securities of a conventional mutual fund is the method of distribution and disposition.

33.          In addition, with respect more specifically to paragraphs 2.5(2)(a) and 2.5(2)(c) of regulation 81-102, an investment by a Fund in a Canadian Underlying ETF would be consistent with the position the CSA took in the publication of the CSA Notice and Request for Comment – Modernization of Investment Product Regulation – Alternatives Funds on September 22, 2016.

Reasons supporting the Three-Tier Relief

34.          An Underlying ETF may be structured as a “fund-of-fund” to achieve economies of scale. The Underlying ETF may invest in a separate series of a master trust or separate class of a corporation. The master trust or corporation in turn invests in, or obtains exposure to, certain asset classes, sectors and/or markets. Economies of scale may be achieved by centralizing investments at the master trust or corporate level. In the absence of such structure, each series or class would need to attract sufficient assets to invest in, or gain exposure to, applicable investments.

35.          An investment by a Fund in an Underlying ETF may not qualify for the exception in paragraph 2.5(4)(a) of Regulation 81-102, as the Underlying ETF may not meet the strict definition of “clone fund” set forth in Regulation 81-102.

36.          Although the Underlying ETF’s investment objective does not specifically state that it will track the performance of another investment fund, the Underlying ETF has adopted a fundamental investment objective akin to that of its underlying fund. As a result, the Underlying ETF could be seen as a “Technical Clone Fund”.

37.          The Filer submits that to the extent that an Underlying ETF is a Technical Clone Fund, a three-tier “fund-on-fund” structure should be permissible.

Reasons supporting the Brokerage Fee Relief

38.          The trades conducted by a Fund may not be of the size necessary for the Fund to be eligible to purchase or exchange securities of a Related Underlying ETF directly from the Related Underlying ETF at its NAV per security. Trades in securities of a Related Underlying ETF are therefore likely to be conducted by a Fund in the secondary market through the facilities of a Recognized Exchange. Absent the Brokerage Fee Relief, paragraph 2.5(2)(e) of Regulation 81-102 would not permit a Fund to pay brokerage fees incurred in connection with a Related Underlying ETF.

39.          All brokerage fees related to trades in securities of Related Underlying ETFs will be borne by the Funds in the same manner as any other portfolio transactions made on an exchange.

40.          If a Fund trades in securities of a Related Underlying ETF with or through an affiliate or associate of the Filer acting as dealer, the Filer will comply with its obligations under Regulation 81-107 in respect of any proposed related party transactions. These related party transactions will be disclosed to securityholders of the applicable Fund in its management report of fund performance.

The Other ETF Decision

41.          The Other ETF Decision permits the Funds to invest in, among other things, securities of Leveraged ETFs and Leveraged Gold ETFs as such terms are defined in the Other ETF Decision, (collectively, the Other Decision ETFs), that are not IPUs and limits a Fund’s investment in securities of the Other Decision ETFs to 10% of a Fund's NAV.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:

(a)           the investment by a Fund in securities of an Underlying ETF is in accordance with the investment objectives of the Fund;

(b)           in respect of a Fund’s purchase of securities of Underlying ETFs (other than Related Underlying ETFs), a Fund does not purchase securities of such Underlying ETFs if, immediately after the purchase, more than 30% of the NAV of the Fund in aggregate, taken at market value at the time of purchase, would consist of securities of such Underlying ETFs;

(c)           a Fund does not purchase securities of a U.S. Underlying ETF (including U.S. Underlying ETFs that are Other Decision ETFs) if, immediately after the purchase, more than 10% of the NAV of the Fund in aggregate, taken at market value at the time of purchase, would consist of securities of U.S. Underlying ETFs;

(d)           a Fund does not purchase securities of an Underlying ETF if, immediately after the purchase, more than 10% of the NAV of the Fund in aggregate, taken at market value at the time of purchase, would consist of a combination of securities of Underlying ETFs that provide leverage exposure and Other Decision ETFs that provide leverage exposure;

(e)           a Fund does not short sell securities of an Underlying ETF;

(f)            an Underlying ETF is not a commodity pool as defined in Regulation 81-104 or under applicable U.S. laws and its adviser is not required to register as a commodity pool operator in the United States in connection with the U.S. Underlying ETFs;

(g)           the Canadian Underlying ETF does not rely on exemptive relief from the requirements of:

a.             section 2.3 of Regulation 81-102 regarding the purchase of physical commodities;

b.             sections 2.7 and 2.8 of Regulation 81-102 regarding the purchase, sale or use of specified derivatives; or

c.             paragraphs 2.6(a) and 2.6(b) of Regulation 81-102 with respect to the use of leverage;

(h)           securities of each Underlying ETF are listed on a Recognized Exchange in Canada or on a National Securities Exchange in the United States;

(i)            each U.S. Underlying ETF is, immediately before the purchase by a Fund of securities of that U.S. Underlying ETF, an investment company subject to the Investment Company Act;

(j)            in respect of the Three-Tier Relief, the Underlying ETF is a Technical Clone Fund; and

(k)           the prospectus of each Fund discloses, or will disclose in the next renewal of its prospectus following the date of this decision, in the investment strategy section, the fact that the Fund has obtained the Exemption Sought to permit investments in Underlying ETFs on the terms described in this decision.

“Hugo Lacroix”
Senior Director, Investment Funds
Autorité des marchés financiers