Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption granted to a mutual fund to use ETFs and specified derivatives to gain up to 10% exposure to silver, platinum or palladium consistent with existing relief previous granted to the fund – relief permits fund to do indirectly what it may currently do directly – the fund will not invest in leveraged ETFs or inverse ETFs.
Applicable Legislative Provisions National Instrument 81-102 Mutual Funds, ss. 2.3(h), 2.5(2)(a), 2.5(2)(c) and 19.1.
August 24, 2010
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
CANADIAN IMPERIAL BANK OF COMMERCE (CIBC)
(the Manger)
and
CIBC CANADIAN RESOURCES FUND
(the Fund)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Manager 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 the following provisions of NI 81-102:
(a) Clause 2.3(h) of NI 81-102 to permit the Fund to invest indirectly in silver, platinum and palladium, including through derivatives which have an underling interest in silver, platinum and palladium; and
(b) Clause 2.5(2)(a) and (c) of NI 81-102 to permit the Fund to invest in exchange-traded funds traded on a stock exchange in Canada or the United States, the underlying interest of which is gold, silver, platinum or palladium (Underlying ETFs)
(collectively 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 Manager 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 all of the provinces and territories of Canada (other than the Jurisdiction).
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 Manager:
The Manager and the Fund
CIBC is a Canadian chartered bank and has its head office located in Toronto, Ontario.
The Fund is managed by the Manager.
The Fund is (a) an open-ended mutual fund established under the laws of the Jurisdiction, (b) a reporting issuer under the laws of all of the provinces and territories of Canada, and (c) governed by the provisions of NI 81-102.
Securities of the Fund are qualified for distribution in all of the provinces and territories of Canada under a simplified prospectus and annual information form filed with the securities regulators in the applicable jurisdictions.
Neither the Manager nor the Fund is in default of securities legislation in any of the provinces and territories of Canada.
The Fund currently has relief to invest up to 10% of its net assets in certain physical commodities including gold, silver, platinum and palladium. However, the Fund would like to be able to invest indirectly in gold, silver, platinum and palladium through Underlying ETFs and specified derivatives.
The Fund’s investment objectives focus on the Canadian natural resources sector and are designed to offer investors exposure to that sector. The Fund’s investment strategies state that the Fund may invest up to 10% of its net assets directly in physical commodities such as precious metals.
Investment in Gold
- The Manager submits that there are no liquidity concerns with permitting the Fund to invest directly or indirectly in gold beyond the limits of NI 81-102, since the market for gold is highly liquid
Investment in Silver, Platinum and Palladium
- Similar to the market for gold, the Manger submits that the markets for silver, platinum and palladium are also highly liquid, and there are no liquidity concerns with permitting the Fund to invest in these precious metals.
Investment in IPUs and the Underlying ETFs
To fulfill its investment objectives, the Fund requires the ability to invest, directly and indirectly, in instruments which provide an exposure to gold, silver, platinum and palladium.
The Fund is permitted, in accordance with its investment objective and/or investment strategies, to invest in exchange-traded funds (ETFs). In addition to ETFs that qualify as index participation units (IPUs) as defined in NI 81-102, the Manager would like the Fund to be able to invest in the following:
(a) ETFs that hold gold, permitted gold certificates or specified derivatives of which the underlying interest is gold or permitted gold certificates (Gold ETFs). Gold ETFs invest in a manner to replicate, before fees and expenses, the price of gold on an unlevered basis;
(b) ETFs that hold silver, silver certificates or specified derivatives of which the underlying interest is silver (Silver ETFs). Silver ETFs invest in a manner to replicate, before fees and expenses, the price of silver on an unlevered basis;
(c) ETFs that hold platinum, platinum certificates or specified derivatives of which the underlying interest is platinum (Platinum ETFs). Platinum ETFs invest in a manner to replicate, before fees and expenses, the price of platinum on an unlevered basis; and
(d) ETFs that hold palladium, palladium certificates or specified derivatives of which the underlying interest is palladium (Palladium ETFs). Palladium ETFs invest in a manner to replicate, before fees and expenses, the price of palladium on an unlevered basis.
Securities of the Underlying ETF trade on a stock exchange in Canada or the United States.
The Underlying ETFs are attractive investments for the Fund, as they provide an efficient and cost effective means of achieving diversification and exposure while eliminating various risks because the Underlying ETFs are a pure play on their respective commodity.
Permitting the Fund to invest in the Underlying ETFs will provide the portfolio manager 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.
CIBC is not currently related to any Underlying ETF, is not the manager of an Underlying ETF and does not currently expect to be so related in the near future.
An investment by the Fund in securities of an Underlying ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.
The Fund will not invest in leveraged Underlying ETFs or inverse Underlying ETFs.
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 investment by the Fund in an Underlying ETF is in accordance with the fundamental investment objectives of the Fund;
no more than 10% of the Fund’s net assets, taken at market value at the time of investment, is invested directly and indirectly in physical commodities (including through Underlying ETFs and underlying market exposure of specified derivatives);
the Fund does not short sell securities of an Underlying ETF;
the securities of the Underlying ETFs are traded on a stock exchange in Canada or the United States;
the securities of the Underlying ETFs are treated as specified derivatives for the purpose of Part 2 of NI 81-102; and
the prospectus of the Fund discloses, or will disclose the next time it is renewed after the date hereof, that the Fund (i) may invest in the Underlying ETFs and (ii) to the extent applicable, the risks associated with such an investment.
“Raymond Chan”
Raymond Chan
Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR NO. 1771726
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption granted to a mutual fund to use ETFs and specified derivatives to gain up to 10% exposure to silver, platinum or palladium consistent with existing relief previous granted to the fund – relief permits fund to do indirectly what it may currently do directly – the fund will not invest in leveraged ETFs or inverse ETFs.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.3(h), 2.5(2)(a), 2.5(2)(c) and 19.1.