July 13, 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
GOODMAN & COMPANY, INVESTMENT COUNSEL LTD.
(the Filer)
and
DYNAMIC STRATEGIC GOLD CLASS
(the Fund)
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 an exemption, pursuant to section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) from (i) clause 2.3(e) of NI 81-102 to permit the Filer on behalf of the Fund to invest up to 100% of the net assets of the Fund, taken at the market value thereof at the time of investment, in gold and/or permitted gold certificates (as such term is defined in NI 81-102), and (ii) clauses 2.3(f) and (h) of NI 81-102 to permit the Filer on behalf of the Fund to invest up to 5% of the net assets of the Fund, taken at the market value thereof at the time of investment, in each of silver, platinum and palladium (or the equivalent in certificates or specified derivatives of which the underlying interest is silver, platinum or palladium) (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, Québec, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, the Yukon Territory and Nunavut Territory, where applicable.
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 Fund
The Filer is a corporation incorporated under the laws of the Province of Ontario and holds a registration in the categories of “investment counsel” and “portfolio manager” in Ontario. The Filer also holds a registration in the categories of “investment counsel” and “portfolio manager”, or equivalent in British Columbia, Alberta, Manitoba, Quebec, New Brunswick and Nova Scotia. The head office of the Filer is in Toronto, Ontario. The Filer will act as the manager and portfolio adviser for the Fund.
The Fund is an open-end mutual fund. The Fund is a class of the Dynamic Global Fund Corporation, a mutual fund corporation existing under the laws of the Province of Ontario.
Neither the Filer nor the Fund is in default of securities legislation in any province or territory of Canada.
A preliminary simplified prospectus in respect of the Fund was filed via SEDAR under project No. 1436548 on June 12, 2009. Once a final prospectus for the Fund is filed and receipt is obtained, the Fund will be a “reporting issuer” or equivalent in each Jurisdiction.
The investment objective of the Fund is to achieve long-term capital appreciation by investing primarily, directly or indirectly, in gold and/or securities of issuers engaged in the exploration, development or production of gold.
Bullion Held by the Fund
Pursuant to the amended and restated custodian agreement dated April 27, 2004 between the Filer and State Street Trust Company Canada (the “Custodian”), and the instrument of accession thereto to be entered into between the Filer and the Custodian prior to the filing of the final prospectus in respect of the Fund (the “Custodian Agreement”), the Custodian or the sub-custodian will be responsible for storage and handling of gold bullion for the Fund.
All bullion held by the Fund in bar form will be physically held in the vaults of the Custodian or the sub-custodian in a location in Canada.
The Fund’s auditors will perform a physical count once every year of all bullion held by the Fund in bar form.
The Fund’s bullion will be insured by the Custodian or the sub-custodian against all risk, including, but not limited to, the risk of loss, damage, destruction or misdelivery, and excepting only those risks for which insurance is not currently available, including, but not limited to, war, terrorist events, nuclear incident or government confiscations.
Investment in Gold
The Fund’s investment strategies are specific and, as the name indicates, the Fund offers investors an opportunity to obtain exposure primarily to gold. To fulfill its investment objectives, the Fund requires the ability to invest primarily in gold and/or permitted gold certificates beyond the limits of NI 81-102.
The Filer believes that as the market in gold is highly liquid, there are no liquidity concerns with permitting the Fund to invest in gold bullion or permitted gold certificates beyond the limits of NI 81-102.
Investment in Silver, Platinum and Palladium
NI 81-102 allows mutual funds to purchase gold or permitted gold certificates up to 10% of the net assets of the mutual fund, taken at market value at the time of purchase, in its recognition that gold is a fairly liquid commodity. The Filer is requesting a similar investment flexibility in the form of exemptive relief that would permit it to make investments in three other precious metals: silver, platinum and palladium, although to a reduced limit, not exceeding 5% for each of silver, platinum and palladium based on the same rationale applied for gold and its liquidity.
The Filer believes that the markets in these precious metals are highly liquid, and there are no liquidity concerns with permitting the Fund to invest in these precious metals to a limit not exceeded, for each of them, 5% of the net assets of the mutual fund, taken at market value at the time of purchase.
The Filer intends to invest in precious metals, including silver, platinum and palladium, as part of its investment strategy as a precious metals fund. The Filer has advised that permitting the investments in silver, platinum, and palladium along with gold, will permit the portfolio manager of the Fund additional flexibility to increase gains for the Fund in certain market conditions, which may have otherwise caused the Fund to have significant cash positions and therefore deter from its ability to achieve its investment objective of providing long-term capital appreciation and value.
The Filer believes that the potential volatility or speculative nature of silver, platinum or palladium (or the equivalent in certificates or specific derivatives of which the underlying interest is silver, platinum or palladium) is no greater than that of gold or of equity securities of issuers in which the Fund invests and, in the portfolio context of the Fund, can provide additional diversification to the Fund.
As the investments in each of silver, platinum and palladium (or the equivalent in certificates or specified derivatives of which the underlying interest is silver, platinum or palladium) would be 5% or less of the net assets of the Fund, taken at the market value thereof at the time of investment, there would be no significant change in the risk profile of the Fund. The final prospectus will state that the Fund will invest in precious metals and the risks associated with such investments.
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, so long as:
(a) the final prospectus of the Fund will contain disclosure regarding the unique risks associated with an investment in the Fund including the risk that direct purchases of gold by the Fund may generate higher transaction and custody costs than other types of investments, which may impact the performance of the Fund;
(b) the investment strategy section in Part B of the final prospectus of the Fund will include disclosure to the effect that (i) the Fund may invest in precious metals when deemed appropriate by the portfolio adviser and (ii) the Filer has received approval of the Canadian securities regulators to permit the Fund to invest up to 5% of its assets in each of silver, platinum and palladium (or the equivalent in certificates or specified derivatives of which the underlying interest is silver, platinum or palladium); and
(c) the risks section in Part B of the final prospectus of the Fund will include disclosure to the effect that (i) the unit value of the Fund will be affected by changes in the price of, among other things, the price of gold, silver, platinum and palladium; (ii) commodity prices can change as a result of supply and demand, speculation and government and regulatory activities; and (iii) gold, silver, platinum and palladium are also affected by international monetary and political factors, central bank activity and changes in interest rates and currency values.
Manager, Investment Funds Branch
Ontario Securities Commission
Sedar Project# 1438269
Headnote
MP 11-102 and NP 11-203 – exemption granted from s. 2.3(e) of NI 81-102 to permit the Fund to invest up to 100% of its net assets in gold, and from s. 2.3(f) and (h) of NI 81-102 to permit the Fund to invest up to 5% of its net assets in each of silver, platinum and palladium.
Applicable Legislative Provisions
National Instrument NI 81-102 – Mutual Funds – s. 2.3(e), (f) and (h), and s. 19.1.