Mutual Reliance Review System for Exemptive Relief Applications – a commodity pool subject to National Instrument 81-104 Commodity Pools granted exemptions from National Instrument 81-102 Mutual Funds to engage in short selling of securities up to 40% of net assets, subject to certain conditions and requirements.

National Instrument 81-102 Mutual Funds, subsections 2.6(a) and (c), 6.1(1) and section 19.1.

National Instrument 81-104 Commodity Pools, section 10.1.

November 19, 2009

(the Jurisdiction)

AND

IN THE MATTER OF ALPHAPRO Management Inc.

(the Filer)

AND

(the ETF)

Background

The principal regulator in the Jurisdiction has received an application from the Filer, the manager of the ETF for a decision under the securities legislation of the Jurisdiction (the Legislation) for exemptive relief from sections 2.6(a), 2.6(c) and 6.1(1) of National Instrument 81-102 Mutual Funds (NI 81-102) to permit the ETF to sell securities short, provided the aggregate market value of all securities sold short by the ETF does not exceed 40% of the net assets of the ETF on a daily marked-to-market basis, except as otherwise permitted by National Instrument 81-104 Commodity Pools (NI 81-104), to provide a security interest over the ETF’s assets in connection with such short sales and to deposit the ETF’s assets with Borrowing Agents (as defined below) as security for such transactions (the Exemption Sought).

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

the Ontario Securities Commission (the Commission) is the principal regulator for this application; and;
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 other province and territory of Canada.

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:

A long form prospectus dated February 26, 2009 for the Horizons AlphaPro Gartman Fund (the Fund) has been receipted by the securities regulatory authorities or regulator in each province and territory of Canada. The Fund will automatically convert into the ETF if after September 30, 2009, the daily weighted average trading price (or, in the event there has been no trading on a particular day, the average of the closing bid and ask prices) of the Class A units of the Fund (each a Class A Unit) is greater than a discount of 2% of the net asset value per Class A Unit for that day or exceeds their issue price of $10.00, in each case for a period of 10 consecutive trading days, but in any event no later than March 31, 2010.
The ETF will be a mutual fund established under the laws of Ontario.
The ETF will be a “commodity pool” for purposes of NI 81-104 and its securities will be offered pursuant to a long form prospectus as required by NI 81-104.
The Filer will be the manager of the ETF. The head office of the Filer is located in Ontario.
The ETF filed a final prospectus dated October 14, 2009 under SEDAR project #1475168 in all of the provinces and territories of Canada and received a receipt from the Commission on the same date. As a result, the ETF is a reporting issuer in all of the provinces and territories of Canada.
Neither the Filer, the Fund nor the ETF are in default of the securities legislation in any of the provinces or territories of Canada.
JovInvestment Management Inc. (JovInvestment), an affiliate of the Filer, will be the investment manager of the ETF.
The ETF will be an actively managed exchange traded fund and its securities will be listed on the Toronto Stock Exchange (the TSX).
The Fund will convert into the ETF and begin trading on the TSX on November 19, 2009.
The investment objective of the ETF will be to provide investors with the opportunity for capital appreciation through exposure to the investment strategies of The Gartman Letter, L.C. (Gartman), which was founded by Dennis Gartman. The ETF will use equity securities, futures contracts and exchange-traded funds to provide the ETF with long and short exposure to multiple asset classes which may include but are not limited to global equities, commodities, fixed income and currencies.
JovInvestment will retain the services of Gartman as sub-adviser to the ETF.
The net assets of the ETF will be invested in an actively managed portfolio of investments that Gartman believes will provide the greatest opportunity for consistent capital appreciation through all market and business cycles. The ETF will invest in a variety of portfolio securities and instruments which may include, but are not limited to, equity securities, futures contracts and exchange-traded funds, including exchange-traded funds managed by BetaPro Management Inc., an affiliate of the Filer.
The ETF will invest in equity securities and exchange-traded funds, including inverse exchange-traded funds, to gain exposure to the global equity markets, individual issuers, industry sectors and industry sub-sectors. The ETF will also use exchange-traded funds and derivative instruments such as standardized futures contracts to obtain exposure to equity indices, foreign securities, financial instruments and traditional commodities including, but not limited to, metals, energy and agricultural products.
As a commodity pool, in addition to its investment options under NI 81-104, which will allow the ETF to invest in currency and commodity forwards, future contracts, options and other over-the-counter derivatives, in a manner that a typical mutual fund cannot, the ETF wants to have the ability to sell securities short, provided the aggregate market value of all securities sold short by the ETF does not exceed 40% of the net assets of the ETF on a daily marked-to-market basis, except as otherwise permitted by NI 81-104.
The Fund’s investment objectives and strategies are the same as the ETF’s will be, and the Fund is currently engaged in short selling of equity securities in aggregate up to a maximum of 40% of the net assets of the Fund.
The investment practices of the ETF will, except to the extent that exemptive relief has been obtained or as permitted by NI 81-104, comply in all respects with the requirements of Part 2 of NI 81-102.
Each short sale made by the ETF will comply with its investment objective.
In order to effect short sales of securities, the ETF will borrow securities from either its custodian or a dealer (in either case, a Borrowing Agent), which Borrowing Agent may be acting either as principal for its own account or as agent for other lenders of securities.
The ETF will implement the following controls when conducting short sales of securities:

(a) securities will be sold short for cash, with the ETF assuming the obligation to return to the Borrowing Agent the securities borrowed to effect the short sale;

(b) the short sales will be effected through market facilities through which the securities sold short are normally bought and sold;

(c) the ETF will receive cash for securities sold short within normal trading settlement periods for the market in which the short sale is effected;

(d) the equity securities sold short will be liquid securities that are listed and posted for trading on a stock exchange, and

(i) the issuer of the security has a market capitalization of not less than Cdn. $500 million, or the equivalent thereof, of such security at the time the short sale is effected; or

(ii) the investment advisor has pre-arranged to borrow for the purposes of such short sale;

(e) JovInvestment will monitor the short positions of the ETF at least as frequently as daily;

(f) the ETF deposits its assets with the Borrowing Agent as security in connection with the short sale transaction;

(g) the ETF keeps proper books and records of all short sales and all of its assets deposited with Borrowing Agents as security;

(h) the ETF has developed written policies and procedures for the conduct of short sales;

(i) the ETF has disclosed in its prospectus a description of (i) short selling, (ii) how the ETF engages in short selling, (iii) the risks associated with short selling, and (iv) in the investment strategy section of the prospectus, the ETF’s strategy with respect to short selling and the exemptive relief obtained with respect to such short selling; and

(j) the ETF has disclosed in its prospectus the following information:

(i) that there are written policies and procedures in place that set out the objectives and goals for short selling and the risk management procedures applicable to short selling;

(ii) who is responsible for setting and reviewing the policies and procedures referred to in the preceding paragraph, how often the policies and procedures are reviewed, and the extent and nature of the involvement of the Filer, JovInvestment, an affiliate or other applicable parties in the risk management process;

(iii) the trading limits and other controls on short selling and who is responsible for authorizing the trading and placing limits or other controls on the trading;

(iv) whether there are individuals or groups that monitor the risks independent of those who trade; and

(v) whether risk measurement procedures or simulations are used to test the portfolio under stress conditions.

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:

the aggregate market value of all securities sold short by the ETF does not exceed 40% of the net assets of the ETF on a daily marked-to-market basis, except as otherwise permitted by NI 81-104;
at the time securities of a particular issuer are sold short, the aggregate market value of all short positions of the ETF in that issuer, whether direct short positions or indirect short positions through specified derivatives, will not exceed 10% of the net assets of the ETF;
despite condition 2, the ETF shall not include in the determination referred to in condition 2 a security or an instrument that is a component of, but that represents less than 10% of,

(i) a stock or bond index that is the underlying interest of a specified derivative; or

(ii) the securities held by the issuer of an index participation unit;

the ETF holds “cash cover” (as defined in NI 81-102) in an amount, including the ETF’s assets deposited with Borrowing Agents as security in connection with short sale transactions, that is at least 150% of the aggregate market value of all equity securities sold short by the ETF on a daily marked-to-market basis;
no proceeds from short sales of securities by the ETF will be used by the ETF to purchase long positions in securities other than cash cover;
the ETF maintains appropriate internal controls regarding its short sales, including written policies and procedures, risk management controls and proper books and records;
any short sale made by the ETF will be subject to compliance with its investment objective;
for short sale transactions in Canada, every dealer that holds assets of the ETF as security in connection with short sale transactions by the ETF will be a registered dealer in Canada and a member of a self-regulatory organization that is a participating member of the Canadian Investor Protection Fund;
for short sale transactions outside of Canada, every dealer that holds assets of the ETF as security in connection with short sale transactions by the ETF will:

(i) be a member of a stock exchange and, as a result, be subject to a regulatory audit; and

(ii) have a net worth in excess of the equivalent of Cdn. $50 million determined from its most recent audited financial statements that have been made public;

except where the Borrowing Agent is the custodian or a sub-custodian of the ETF, when the ETF deposits its assets with a Borrowing Agent as security in connection with a short sale transaction, the amount of the assets of the ETF deposited with the Borrowing Agent does not, when aggregated with the amount of the assets of the ETF already held by the Borrowing Agent as security for outstanding short sale transactions by the ETF, exceed 10% of the net assets of the ETF, taken at market value at the time of the deposit; and
the security interest provided by the ETF over any of its assets that is required to enable the ETF to effect short sale transactions will be made in accordance with industry practice for that type of transaction and relate only to obligations arising under such short sale transactions.

“Rhonda Goldberg”

Rhonda Goldberg Manager, Investment Funds

ONTARIO SECURITIES COMMISSION

SEDAR Project No. 1481389

Headnote

Rules Cited