Russell Investments Canada Limited (RICL), 2011 CanLII 38079

Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions - Relief granted from sections 2.3(f), 2.3(h), 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 - Mutual Funds to permit mutual fund to invest in silver and to invest up to 10% of net assets in leveraged ETFs, inverse ETFs, gold ETFs, silver ETFs, leveraged gold ETFs and leveraged silver ETFs traded on Canadian or US stock exchanges, subject to 10% exposure to gold and silver, and certain conditions. Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, paragraphs 2.3(f), 2.3(h), 2.5(2)(a), 2.5(2)(c) and section 19.1.

June 28, 2011

(the "Jurisdiction")

AND

(THE FILER)

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:

(a) an exemption (the Silver Exemption) relieving the existing funds (the Existing Funds and future mutual funds managed by the Filer that are subject to National Instrument 81-102 Mutual Funds (NI 81-102) other than money market funds as defined in NI 81-102 (the Existing Funds and the Future Funds, respectively, together, the Funds and individually, a Fund) from the prohibitions contained in paragraphs 2.3(f) and 2.3(h) of NI 81-102 to permit each Fund to

(A) purchase and hold silver,

(B) purchase and hold a certificate that represents silver that is:

(I) available for delivery in Canada, free of charge, to or to the order of the holder of the certificate;

(II) of a minimum fineness of 999 parts per 1,000;

(III) held in Canada;

(IV) in the form of either bars or wafers; and

(V) if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a province or territory of Canada,

(Permitted Silver Certificates)

(C) purchase, sell or use a specified derivative, the underlying interest of which is silver or a specified derivative of which the underlying interest is silver on an unlevered basis

(Silver Derivatives, which together with silver and Permitted Silver Certificates are hereinafter referred to as Silver),

(b) an exemption (the ETF Exemption) relieving the Funds from the prohibitions contained in paragraphs 2.3(h), 2.5(2)(a) and 2.5(2)(c) of NI 81-102, to permit each Fund to purchase and hold securities of

(i) exchange-traded funds (ETFs) that seek to provide daily results that replicate the daily performance of a specified widely-quoted market index (the ETF's Underlying Index) by a multiple of 200% (Leveraged Bull ETFs) or an inverse multiple of 200% (Leveraged Bear ETFs, which together with Leveraged Bull ETFs are referred to collectively in this decision as Leveraged ETFs);

(ii) ETFs that seek to provide daily results that replicate the daily performance of their Underlying Index by an inverse multiple of 100% (Inverse ETFs);

(iii) ETFs that seek to replicate the performance of gold or silver, or the value of a specified derivative the underlying interest of which is gold or silver on an unlevered basis; and

(iv) ETFs that seek to provide daily results that replicate the daily performance of gold or silver or the value of a specified derivative the underlying interest of which is gold or silver on an unlevered basis (the ETF's Underlying Gold or Silver Interest), by a multiple of 200% (Leveraged Gold ETFs and Leveraged Silver ETFs, respectively),

(the ETFs referred in paragraph (b)(iii) above, Leveraged Gold ETFs and Leveraged Silver ETFs are referred to collectively in this decision as the Gold and Silver ETFs, which together with Leveraged ETFs, and Inverse ETFs are referred to collectively in this decision as the Underlying ETFs).

The Silver Exemption and the ETF Exemption are collectively, the Requested Relief.

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

the Ontario Securities 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon Territories and Nunavut (collectively with the Jurisdiction, the Jurisdictions).

INTERPRETATION

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined.

REPRESENTATIONS

This decision is based on the following facts represented by the Filer:

The Filer and the Funds

The Filer is registered in the Province of Ontario as an investment fund manager, adviser in the category of portfolio manager, a commodity trading manager and an exempt market dealer.
The head office of the Filer is located in Ontario.
The Filer is the manager of each of the Existing Funds, and will be the manager of each of the Future Funds. The Filer is the portfolio manager of each of the Existing Funds, and will be the portfolio manager of, or will appoint a portfolio manager for, each of the Future Funds.
Each Existing Fund is, and each Future Fund will be: (a) an open-ended mutual fund established under the laws of the province of Ontario, (b) a reporting issuer under the laws of some or all of the provinces and territories of Canada, and (c) governed by the provisions of NI 81-102.
Securities of each Existing Fund are, and securities of each Future Fund will be, qualified for distribution in some or all of the provinces and territories of Canada under a simplified prospectus and annual information form prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and filed with and receipted by the securities regulators in the applicable jurisdiction(s).
Neither the Filer nor any of the Existing Funds is in default of securities legislation in the Jurisdictions.

Investments in Silver

In addition to investing in gold, the Funds propose to have the ability to invest in Silver.
To obtain exposure to gold or silver indirectly, the Filer intends to use specified derivatives the underlying interest of which is gold or silver and invest in Gold and Silver ETFs (which together with gold, silver, permitted gold certificates and Permitted Silver Certificates are referred to collectively in this decision as Gold and Silver Products).
Permitting a Fund to invest in Gold and Silver Products, 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.
The Filer believes that the markets in gold and silver are highly liquid, and there are no liquidity concerns with permitting a Fund to invest in Gold and Silver Products.
The Filer believes that the potential volatility or speculative nature of silver (or the equivalent in certificates or specified derivatives of which the underlying interest is silver) is no greater than that of gold, or of equity securities.
If the investment in Gold and Silver Products represents a material change for any Existing Fund, the Filer will comply with the material change reporting obligations for that Fund.
Any investment by a Fund in Silver will be made in compliance with the custodian requirements in Part 6 of NI 81-102.

The Underlying ETFs

In addition to investing in securities of ETFs that are "index participation units" as defined in NI 81-102 (IPUs), the Funds propose to have the ability to invest in the Underlying ETFs, whose securities are not IPUs.
The amount of the loss that can result from an investment by a Fund in an Underlying ETF will be limited to the amount invested by the Fund in securities of the Underlying ETF.
Each Leveraged ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed +/-200% of the corresponding daily performance of its Underlying Index.
Each Inverse ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed -100% of the corresponding daily performance of its Underlying Index.
Each Leveraged Gold ETF and Leveraged Silver ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Gold or Silver Interest will not exceed +200% of the corresponding daily performance of its Underlying Gold or Silver Interest.

Investment in the Underlying ETFs and Silver

Each Existing Fund is, and each Future Fund will be, permitted, in accordance with its investment objectives and investment strategies, to invest in Underlying ETFs and Silver.
The Underlying ETFs and Silver are attractive investments for the Funds as they provide an efficient and cost effective means of achieving diversification in addition to any investment in gold.
But for the Silver Exemption, paragraph 2.3(f) of NI 81-102 would prohibit a Fund from purchasing Silver.
But for the Silver Exemption, paragraph 2.3(h) of NI 81-102 would prohibit a Fund from entering into Silver Derivatives.
But for the ETF Exemption, paragraph 2.3(h) of NI 81-102 would prohibit a Fund from purchasing a Silver ETF or a Leveraged Silver ETF.
But for the ETF Exemption, paragraph 2.5(2)(a) of NI 81-102 would prohibit a Fund from purchasing or holding a security of an Underlying ETF, because the Underlying ETFs are not subject to both NI 81-102 and NI 81-101.
But for the ETF Exemption, paragraph 2.5(2)(c) of NI 81-102 would prohibit a Fund from purchasing or holding securities of some Underlying ETFs, because some Underlying ETFs will not be qualified for distribution in the local jurisdiction.
An investment by a Fund in securities of an Underlying ETF and/or Silver will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.
The simplified prospectus of each Fund discloses, or will disclose the next time it is renewed after the date hereof, (i) in the Investment Strategy section of the prospectus, the fact that the Fund has obtained relief to invest in the Underlying ETFs and Silver, together with an explanation of what each Underlying ETF is, and (ii) the risks associated with investments in the Underlying ETFs and Silver.

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 Requested Relief is granted provided that:

(a) the investment by a Fund in securities of an Underlying ETF and/or Silver is in accordance with the fundamental investment objectives of the Fund;

(b) a Fund does not short sell securities of an Underlying ETF;

(d) the securities of the Underlying ETFs are treated as specified derivatives for the purposes of Part 2 of NI 81-102;

(e) a Fund does not purchase securities of an Underlying ETF if, immediately after the purchase, more than 10% of the net assets of the Fund in aggregate, taken at market value at the time of the purchase, would consist of securities of the Underlying ETFs;

(f) a Fund does not enter into any transaction if, immediately after the transaction, more than 20% of the net assets of the Fund, taken at market value at the time of the transaction, would consist of, in aggregate, securities of Underlying ETFs and all securities sold short by the Fund;

(g) a Fund does not purchase Gold and Silver Products if, immediately after the transaction, more than 10% of the net assets of the Fund, taken at market value at the time of the transaction, would consist of Gold and Silver Products; and

(h) a Fund does not purchase Gold and Silver Products if, immediately after the transaction, the market value exposure to gold or silver through the Gold and Silver Products is more than 10% of the net assets of the Fund, taken at market value at the time of the transaction.

"Vera Nunes"

Vera Nunes

Manager, Investment Funds Branch

ONTARIO SECURITIES COMMISSION

SEDAR Project Number: 1741294