Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – application requesting new relief under NP 11-203 which replaces and varies a decision made under the Mutual Reliance Review System for Exemptive Relief Applications before March 17, 2008 – relief granted to commodity pool from the concentration and the illiquid asset restrictions in ss.2.1(1) and 2.4 of NI 81-102 to allow it to invest substantially all of its assets in short-term notes linked to the performance of a diversified commodity index – National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 1.1, 2.1(1), 2.4 and 19.1.
National Instrument 81-104 Commodity Pools.
July 3, 2009
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 Criterion Diversified Commodities Currency Hedged Fund (the Filer or the Trust)
DECISION
MRRS Decision Background
In May 2006, the local securities regulatory authority or regulator in each of the provinces of Canada (the MRRS Jurisdictions) received an application from Criterion Investments Limited (the Manager) on behalf of the Filer (then known as the Criterion Dow Jones – AIG Commodity Index Fund) for an exemption from the following provisions of National Instrument 81-102 Mutual Funds (NI 81-102) so as to permit the Filer to conduct its investment operations as described in its prospectus dated June 5, 2006:
(i) section 2.1(1), which prohibits a mutual fund from having more than 10% of its net assets invested in the securities of any one issuer; and
(ii) section 2.4, which prohibits a mutual fund from making certain illiquid investments;
(the MRRS Relief). The MRRS Jurisdictions granted the MRRS Relief in the Mutual Reliance Review System Decision Document dated June 5, 2006 (the MRRS Decision).
Application Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption to vary the MRRS Decision so as to more closely align the MRRS Decision with the Filer’s current name, investment objectives and strategies, and in particular to permit the Filer to invest all of its assets in one or more performance certificates, notes or other similar instruments having a term to maturity of no more than one year that are linked to a diversified commodity index (Notes), and to carry forward the MRRS Relief and the conditions of the MRRS Decision into a new passport decision under NI 81-102 (the Current Relief 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.
Interpretation
Terms defined in 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 and the Manager:
The Trust is an investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of May 18, 2005 and currently governed by an amended and restated declaration of trust dated October 22, 2008 (the Declaration of Trust). The Manager acts as the manager and trustee of the Trust. The head office of the Manager is located in Toronto, Ontario.
The Trust was established as a closed-end fund and completed its initial public offering of units on May 31, 2005. Its units were redeemable on an annual basis and were listed on the Toronto Stock Exchange (TSX). On May 12, 2006, the holders of units of the Trust (the Unitholders) approved the conversion of the Trust to an open-end commodity pool (the Mutualization) at a special meeting called for that purpose. As part of the Mutualization, the existing units, which were re-designated as Class E Units, were de-listed from the TSX and became redeemable at the option of the holder each business day, and the name of the Trust was changed to “Criterion Diversified Commodities Currency Hedged Fund”. The beneficial interest in the net assets and net income of the Trust was then divided into trust units of six classes, namely Class A Units, Class B Units, Class C Units, Class D Units and Class F Units, in addition to the Class E Units referred to above. In connection with the Mutualization, the Trust became subject to NI 81-102 and National Instrument 81-104 Commodity Pools.
Shortly following the Mutualization, substantially all of the assets of the Trust were invested in a series of index-linked notes with a term of not more than three months (the Original Notes) issued by AIG – FP Private Funding (Cayman) Limited (the Original Note Issuer) linked to the Dow Jones – AIG Commodity Total Return Index (the Original Index). The Original Notes were purchased in order to provide the Trust with the returns of the Original Index. The Original Notes provided the Trust on the maturity date of the Original Notes, or earlier at the request of the Trust in whole or in part, an amount calculated on the basis of a notional investment in the Original Index of an amount equal to the aggregate amount delivered to the Original Note Issuer during the term of the Original Note denominated in U.S. dollars and the performance of the Original Index from the date on which the monies are received by the Original Note Issuer from time to time (subject to adjustments as a result of partial settlements from time to time under the Original Notes). The obligations of the Original Note Issuer under the Original Notes were guaranteed by American International Group Inc. (AIG), which then had an approved credit rating, as that term is defined in NI 81-102.
Following the approval of the Unitholders given at a meeting held on January 7, 2008, the investment strategy of the Trust changed on February 2, 2008 from investing in an Original Note linked to the Original Index to investing in an Original Note linked to the AIG Basis Select Index Total Return.
At the January 7, 2008 meeting, Unitholders also approved an amendment to the Declaration of Trust to permit the Manager, as trustee of the Trust, to effect amendments to the Declaration of Trust to change the investment strategy of the Trust as the Manager deems necessary or advisable, provided that the investment strategy remains index- or rules-based and focussed on commodities. Accordingly, if the Trust purchases Notes linked to a commodity index to achieve its investment objectives, the issuer of the Notes may change from time to time, and the commodity index to which the Notes are linked may change from time to time.
On September 17, 2008, the Trust redeemed the Original Note then outstanding, as a result of concerns about the solvency of the Original Note Issuer and AIG as its guarantor, as well as concerns about AIG’s impending loss of an approved credit rating. On an interim basis, the Trust entered into an agreement with UBS AG to purchase a performance certificate that provided a return linked to the Dow-Jones–AIG Commodity Index Total Return. The initial term of this performance certificate was until October 22, 2008. The purpose of this transaction was to provide the Trust with exposure to a broad commodities index on an interim basis while the Manager sought a long-term commodities strategy for the Trust. Effective October 22, 2008, the Manager entered into an agreement with UBS AG in respect of such a long-term commodities strategy, which is the current strategy now used by the Trust.
The Trust’s investment objective, as disclosed in its current prospectus, is to provide Unitholders with the opportunity for capital appreciation, using an investment strategy that is either index-based or rules-based and focused on commodities. All or substantially all of the value of the Trust’s assets denominated in a currency other than the Canadian dollar will be hedged back to the Canadian dollar at all times.
Currently, in seeking to achieve its investment objective, the Trust provides Unitholders with indirect exposure to the returns of the UBS Bloomberg Constant Maturity Commodity Index (CMCI) AM Composite USD Total Return (the CMCI AM). To achieve this exposure, the Filer now invests substantially all of its assets in performance certificates issued by UBS AG (London Branch) (UBS) with a maximum term of one year (the UBS Notes).
The UBS Notes are uncollateralized obligations of UBS. The return on a UBS Note is linked to the performance of the CMCI AM. A UBS Note provides the Trust on the maturity date of the UBS Note (or earlier at the request of the Trust in whole or in part as described below) an amount calculated on the basis of a notional investment in the CMCI AM of an amount equal to the aggregate amount delivered to UBS during the term of the UBS Note denominated in U.S. dollars and the performance of the CMCI AM from the date on which the monies from the Trust are received by UBS from time to time, subject to adjustments as a result of repurchases from time to time (the Maturity Value).
Prior to the maturity date of a UBS Note, the Trust may, by giving notice to UBS on any scheduled trading day, request that UBS repurchase all or a portion of the UBS Note. UBS will repurchase all or a portion of the UBS Note at the Maturity Value (unless UBS determines that normal conditions or applicable laws do not prevail in any markets relevant to the UBS Notes, UBS or the CMCI AM) and pay the repurchase amount within two business days. As a result, the value of a UBS Note at any time reflects the return of the CMCI AM.
For the purposes of calculating the net asset value of the Trust, the value of a UBS Note is determined by reference to the CMCI AM, which is based on the value of the commodity futures contracts comprising the CMCI. UBS calculates the Maturity Value of the UBS Notes in the same manner.
While the Trust currently holds UBS Notes, the Trust may in the future hold Notes issued by another issuer and that may be linked to another diversified commodity index. Such Notes constitute “debt-like securities” and “specified derivatives”, as those terms are defined in NI 81-102.
To enable the Trust to meet redemption requests and other obligations when due, the Trust will require the terms of the Notes to provide that the issuer of the Notes must redeem or repurchase the Notes on each business day, at the request of the Trust, at a price that reflects the closing level of the underlying index on the day of redemption or repurchase of the Notes, unless normal market conditions do not prevail. The Trust will require that the terms of the Notes provide that the issuer of the Notes will pay the proceeds of the redemption or repurchase within two business days.
An “illiquid asset” is defined in NI 81-102 to include a portfolio asset that cannot be readily disposed of through market facilities on which public quotations in common use are widely available at an amount that at least approximates the amount at which the portfolio asset is valued in calculating the net asset value per security of the mutual fund. As the UBS Notes and any Notes that the Trust may purchase in the future may not be disposed of through market facilities on which public quotations in common use are widely available, they would be considered to be illiquid assets.
As the Trust may invest up to 100% of its net assets in Notes (such as the UBS Notes), the Trust would have more than 10% of its net assets invested in the securities of an issuer. As well, the Trust’s investments in illiquid assets would exceed the limits in s.2.4 of NI 81-102.
Following the issuance of this Decision, the Trust will no longer rely on the MRRS Decision.
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 Current Relief Sought is granted provided that:
(a) the issuer of Notes acquired by the Trust have an approved credit rating, as that term is defined in NI 81-102, at the time the Notes are acquired by the Trust,
(b) the Trust redeem, sell or otherwise dispose of the Notes if the issuer of the Notes fails to maintain an approved credit rating, as that term is defined in NI 81-102, and
(c) the terms of the Notes require the issuer of the Notes to redeem or repurchase the Notes on each business day upon the terms set out in paragraph 13 above.
“Darren McKall”
Darren McKall
Assistant Manager, Investment Funds
ONTARIO SECURITIES COMMISSION
SEDAR Project No. 1440947