Headnote National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -variation of previously granted relief that permitted a mutual fund that invests primarily in the energy sector to invest in standardized futures with underlying interests in oil and natural gas for hedging and non-hedging purposes – relief to permit standardized futures to be purchased on the NYMEX or ICE Futures Europe – 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 81-102Mutual Funds. Applicable Legislative Provisions National Instrument 81-102 Mutual Funds,ss. 2.3(h) and 19.1.
September 19, 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
IN THE MATTER OF Dynamic Strategic ENERGY CLASS (PREVIOUSLY DYNAMIC GLOBAL ENERGY CLASS) (the “Fund”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund of which the Filer is the manager and adviser and to which National Instrument 81-102 Mutual Funds (“NI 81-102”) applies for a decision under the securities legislation of the Jurisdiction of the principal regulator (“Legislation”):
(i) exempting the Fund from section 2.3(h) of NI 81-102 to enable the Fund to invest in standardized futures (as such term is 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, when and to the extent the Filer is concerned about the volatility of securities in the oil and gas sector; and
(ii) revoking the Original Decision (as defined below);
(together, the “Exemption Sought”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the “OSC”) 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 is intended to be relied upon in each of the other provinces and territories of Canada (together with Ontario, the “Jurisdictions”).
Interpretation
Terms defined in National Instrument 14-101 Definitions, NI 81-102 and National Instrument 81-107 Independent Review Committee for Investment Funds (“NI 81-107”) have the same meaning if used in this decision, unless otherwise defined. References to “oil” and “gas” in this application are to sweet crude oil and natural gas, respectively.
Representations
The Filer is a corporation existing under the laws of the Province of Ontario, 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, Nova Scotia and Prince Edward Island and is registered as a commodity trading manager and investment fund manager with the OSC.
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 Filer.
The securities of the Fund are qualified for distribution in each of the Jurisdictions pursuant to a simplified prospectus (the “Prospectus”) and annual information form (the “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 Filer nor the Fund is in default of securities legislation in any of the Jurisdictions.
Pursuant to a decision of the principal regulator In the Matter of Goodman & Company, Investment Counsel Ltd. and Dynamic Global Energy Class dated March 22, 2011 (the “Original Decision”), the Fund received exemptive relief from the prohibition in section 2.3(h) of NI 81-102 to enable the Fund to invest in standardized futures with underlying interests in sweet crude oil or natural gas, for hedging and non-hedging purposes, subject to certain conditions, including that such purchases be made on the New York Mercantile Exchange (the “NYMEX”).
The investment objectives and investment strategies of 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 and to gain exposure to individual securities and markets and/or to generate income.
The prices of oil and gas can be volatile, and the Filer has determined that it would be in the best interests of the Fund and its securityholders for the Filer 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 Filer 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 use of standardized futures contracts where the underlying interests are oil and 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 is optimal from a number of perspectives including in respect of liquidity, cost, complexity and diversification.
Pursuant to the Original Decision, the Fund was permitted to trade in standardized futures contracts on the NYMEX. The Filer has determined that the Brent and West Texas Intermediate crude futures contracts traded on the ICE Futures Europe (“ICE Europe”) represent the world’s leading sweet crude oil pricing benchmarks because ICE Europe’s trading volume in such contracts represents a significant amount of the global supply of such commodities. Accordingly, the Filer now wishes to be able to trade standardized futures on the NYMEX and ICE Europe.
ICE Europe is a London-based futures exchange which hosts approximately half of the world’s daily trade in crude and refined oil futures contracts. ICE Europe is subject to the supervision of the United Kingdom’s Financial Services Authority.
The standardized futures traded by the Fund on the NYMEX and ICE Europe will be traded for cash or an offsetting contract to satisfy the Fund’s obligations in a standardized future.
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:
(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 or ICE Europe;
(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 trades of standardized future contracts on ICE Europe, the Filer will prepare and file an amendment to the Prospectus and Annual Information Form to disclose that trades in standardized futures may be made through ICE Europe.
“Raymond Chan”
Raymond Chan
Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR NOS. 1799627