July 23, 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 GOLD PARTICIPATION AND INCOME FUND
(the Filer)
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 of the principal regulator (the Legislation) for relief from Section 14.2(3)(b) of National Instrument 81-106 – Investment Fund Continuous Disclosure (NI 81‑106), which requires that the net asset value of an investment fund that uses specified derivatives (as defined in National Instrument 81‑102 – Mutual Funds) be calculated at least once every business day (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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Prince Edward Island, Nova Scotia, 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:
The Filer is a non-redeemable investment fund to be established under the laws of the Province of Ontario.
A preliminary prospectus for the Filer was filed in each of the provinces of Canada on June 5, 2009 (SEDAR Project No. 1434750).
Mulvihill Capital Management Inc. (MCM) is the promoter and investment manager of the Filer.
Mulvihill Fund Services Inc. (the Manager), a wholly-owned subsidiary of MCM, is the manager of the Filer and will perform administrative services on behalf of the Filer. The head office of the Manager is located at 121 King Street West, Standard Life Centre, Suite 2600, Toronto, Ontario, M5H 3T9.
The Filer is authorized to issue Combined Units of the Fund (Combined Units), where each Combined Unit consists of one transferable, redeemable Unit (referred to herein as the Unit) and one transferable Warrant for one Unit (referred to herein as the Warrant).
Each Warrant for one Unit entitles the holder to purchase one Unit at a subscription price of $12.00 on the first Friday of the third, sixth, ninth and twelfth month following the closing of the Offering (the Exercise Date). Warrants may be tendered for exercise during the two-week period up to and including the Exercise Date. Warrants for Units not exercised by the Exercise Date will be void and of no value.
The Filer is designed to provide investors with Canadian-dollar exposure to the long-term performance of gold bullion and gold equity securities, while providing a monthly distribution stream and mitigating downside risk.
The Filer will seek to achieve its objectives by investing 100% of its net assets in the gold sector – initially 50% in Shares of SPDR Gold Trust, an exchange-traded fund that seeks to track the price of gold by investing directly in gold bullion, and 50% in a portfolio (the Managed Gold Portfolio) of equity securities in the S&P/TSX Global Gold Index, a dynamic international benchmark of the world’s leading gold companies.
The Filer intends to write covered call options on approximately 25% of its portfolio securities in order to mitigate downside risk for holders of its Units (Unitholders) and to generate additional returns above the distribution income earned on its portfolio.
As a result of its holdings of U.S.-dollar denominated securities, the Filer will be exposed to changes in the value of the U.S. dollar against the Canadian dollar. The Filer will hedge substantially all of the Filer’s foreign currency exposure back to the Canadian dollar.
The Filer’s investment objectives are: (a) to maximize total returns for Unitholders including both long-term appreciation in net asset value (NAV) per Unit and distributions; and (b) to pay Unitholders monthly distributions in an amount targeted to be 6.5% per annum on the NAV of the Filer.
Although the Filer will be a mutual fund trust for the purposes of the Income Tax Act (Canada), it will not be a mutual fund for the purposes of Canadian securities legislation.
The operations of the Filer will differ in some respects from those of a conventional mutual fund, including the following:
(a) the Filer does not intend to continuously offer its Units once it is out of primary distribution; and
(b) the Units are expected to be listed and posted for trading on the Toronto Stock Exchange (TSX). Because the Units will be listed for trading on the TSX, Unitholders will not have to rely solely on the redemption features of the Units to provide liquidity for their investment.
Units may be surrendered at any time for redemption by the Filer. Units will be redeemable at the option of a Unitholder on a monthly basis at a price determined by reference to the market price of the Units. Commencing in January 2011, Units will also be redeemable annually at a price determined by reference to the NAV of the Filer.
For the period up to the Exercise Date of the Warrants,
(a) the Filer will compute a basic NAV per Unit;
(b) the Filer will compute a diluted NAV per Unit if the basic NAV per Unit exceeds $11.70; and
(c) for purposes of reporting compliance with the targeted monthly distribution rate (as specified in the investment objective section of the Fund’s prospectus), the basic NAV per Unit will be used (and not the diluted NAV per Unit).
The Fund will calculate and publish its basic and, as required, diluted NAV per Unit on a weekly basis.
As disclosed in the Preliminary Prospectus, the basic NAV per Unit and, as required, the diluted NAV per Unit will be provided to Unitholders at no cost on a weekly basis on a website established for such purpose and on request by contacting the Manager.
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 relating to investment fund continuous disclosure is granted provided that:
a) the net asset value calculation is available to the public upon request; and
b) the public has access to a website for this purpose;
for so long as:
c) the Units are listed on the TSX; and
d) the Filer calculates its net asset value at least weekly.
“Darren McKall”
Darren McKall
Assistant Manager, Investment Funds Branch
Ontario Securities Commission
Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption from National Instrument 81-106 Investment Fund Continuous Disclosure to permit an investment fund that uses specified derivatives to calculate its NAV on a weekly basis subject to certain conditions – relief required from the requirement that an investment fund that uses specified derivatives calculate its NAV daily.
Applicable Legislative Provisions
National Instrument 81-106 Investment Fund Continuous Disclosure, s. 14.2(3)(b).