Headnote National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions – relief granted to mutual fund from prohibition against purchasing a specified derivative the underlying interest of which is a physical commodity other than gold – mutual fund that invests primarily in the energy sector desires to invest in standardized futures with underlying interests in oil and natural gas for hedging and non-hedging purposes – relief granted provided purchase of standardized future is effected through the NYMEX, the standardized future is traded only for cash or an offsetting standardized future contract, and the standardized future is sold at least one day prior to the date on which delivery of the underlying commodity is due under the standardized future – relief is subject to limits on investments in the standardized futures for both hedging and non-hedging purposes – National Instrument 81-102 Mutual Funds. Applicable Legislative Provisions National Instrument 81-102 Mutual Funds, ss. 2.3(h) and 19.1.
March 22, 2011
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 GLOBAL ENERGY 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”) pursuant to Section 19.1 of National Instrument 81-102 – Mutual Funds (“NI 81-102”) exempting the Fund from Section 2.3(h) of NI 81-102 to enable the Fund to invest in specified derivatives, namely standardized futures (as such terms are defined in Section 1.1 of NI 81-102) with underlying interests in sweet crude oil or natural gas, for hedging and non-hedging purposes, to reduce volatility in the Fund’s portfolio if, when and to the extent the Manager is concerned about the volatility of securities in the oil and gas sector, the “Exemptions 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 all provinces and territories of Canada other than Ontario.
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. References to “oil” and “gas” in connection with the Proposed Investment Strategy (as defined below) are to sweet crude oil and natural gas respectively.
Representations
This decision is based on the following facts represented by the Filer:
The Manager is a corporation existing under the laws of the Province of Ontario and is registered with the OSC as an adviser in the category of portfolio manager, is further registered in that category in each of British Columbia, Alberta, Manitoba, Saskatchewan, Quebec, New Brunswick and Nova Scotia and is registered as a commodity trading manager with the OSC. The Manager has also applied for registration in the category of investment fund manager.
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, and is one of the group of Dynamic Funds managed by the Manager.
The securities of the Fund are qualified for distribution in each of the Jurisdictions pursuant to a simplified prospectus and annual information form that have been prepared and filed in accordance with the securities legislation of the respective Jurisdictions. The Fund is, accordingly, a reporting issuer in all of the Jurisdictions.
Neither the Manager nor the Fund is in default of securities legislation in any province or territory of Canada.
The investment objectives and investment strategies for the Fund permit portfolio investments in oil and gas securities and the use of derivatives to hedge against losses from changes in the prices of the Fund’s investments, to gain exposure to individual securities and markets and/or to generate income.
The prices of oil and gas can be volatile, and the Manager has determined that it would be in the best interests of the Fund and its securityholders for the Manager to have the ability to implement appropriate risk management and diversification strategies for the Fund in connection with price fluctuations and volatility in securities of issuers in the oil and gas sector.
The Manager has considered a number of alternative strategies for risk management and portfolio diversification with respect to the prices of oil and gas, and has determined that the proposed investment strategy (the “Proposed Investment Strategy”), as described below, is optimal from a number of perspectives including in respect of liquidity, cost, complexity and diversification.
The Proposed Investment Strategy would enable the Fund to trade in standardized futures contracts on the New York Mercantile Exchange (the “NYMEX”) where the underlying interests are oil or gas, for hedging and non-hedging purposes, primarily as a means of reducing the volatility that can result from the changing prices of securities of issuers in the oil and gas sector.
Under the Proposed Investment Strategy, the Manager proposes to trade in standardized futures contracts for cash or an offsetting contract to satisfy its obligations in a standardized futures contract.
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 Exemptions Sought are granted provided that:
(a) the purchases, uses and sales of standardized futures which have underlying interests in oil or gas are made in accordance with the provisions otherwise relating to the use of specified derivatives for hedging and non-hedging purposes in NI 81-102, National Instrument 81-101 Mutual Fund Prospectus Disclosure and National Instrument 81-106 Investment Fund Continuous Disclosure;
(b) a standardized futures contract will be traded only for cash or an offsetting standardized future contract to satisfy the obligations under the standardized future and will be sold at least one day prior to the date on which delivery of the underlying commodity is due under the standardized future;
(c) the purchase of a standardized future will be effected through the NYMEX;
(d) the Fund will not purchase a standardized futures contract for hedging purposes if, immediately following the purchase, the Fund would hold standardized futures contracts for hedging purposes relating to barrels of oil and/or British Thermal Units of gas representing an aggregate value that exceeds 80% of the total net assets of the Fund at that time;
(e) the Fund will not purchase a standardized futures contract for non-hedging purposes if, immediately following the purchase, the Fund would hold standardized futures contracts for non-hedging purposes relating to barrels of oil and/or British Thermal Units of gas representing an aggregate value that exceeds 10% of the total net assets of the Fund at that time;
(f) the Fund will keep proper books and records of all such purchases and sales; and
(g) prior to commencing the Proposed Investment Strategy, the Fund will provide disclosure in its simplified prospectus of the Proposed Investment Strategy, the risks associated with the Proposed Investment Strategy and the exemptive relief.
“Darren McKall”
Darren McKall
Assistant Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR NO. 1661393