Headnote National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions – Exemptive relief granted to exchange-traded funds for initial and continuous distribution of units. – Relief to permit the funds’ prospectus to not contain an underwriter’s certificate and relief from take-over bid requirements in connection with normal course purchases of units on the Toronto Stock Exchange subject to undertaking by unitholders not to exercise any votes attached to units which represent more than 20% of the votes attached to all outstanding units of the funds – Relief subject to sunset clause. – Securities Act (Ontario). Applicable Legislative Provisions Securities Act,R.S.O. 1990, c.S.5, as am., Sections 74(1), 95-100, 104(2)(c) and 147.
July 27, 2012
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
INVESCO CANADA LTD
(the Filer)
DECISION
Background
The principal regulator has received an application from the Filer under the securities legislation of the Jurisdiction (the Legislation) for a decision (the Exemption Sought) that:
(a) Exempts all purchasers of units (Units) of PowerShares Tactical Bond ETF (the Fund) from the requirements of the Legislation related to take-over bids, including the requirement to file a report of a take-over bid and to pay the accompanying fee with each applicable jurisdiction (the Take-over Bid Requirements) in respect of take-over bids for the Fund; and
(b) Exempts the Fund from the requirement that the prospectus of the Fund contain a certificate of the underwriter or underwriters who are in a contractual relationship with the Fund.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(c) the OSC is the principal regulator for this application; and
(d) 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, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (collectively, the Passport Jurisdictions).
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.
Basket of Securities means a group of securities selected by a Sub-advisor from time to time that collectively reflect the constituents of the portfolio of the Fund.
Designated Broker means a registered dealer that has entered into a designated broker agreement with the Filer, on behalf of the Fund, to perform certain duties in relation to the Fund.
Dealer means a registered broker or dealer that has entered into a continuous distribution dealer agreement with the Filer, on behalf of the Fund, and that subscribes for and purchases Units from the Fund.
Prescribed Number of Units means the number of Units of the Fund determined by the Filer from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.
PowerShares portfolio means a PowerShares exchange-traded fund that is listed and traded on a stock exchange.
Take-over Bid Requirements means the requirements of the Legislation relating to take-over bids, including the requirement to file a report of a take-over bid and to pay the accompanying fee, in each of the Jurisdiction and the Passport Jurisdictions.
Unitholders means beneficial or registered holders of Units, as applicable.
Units means the redeemable, transferable units of the Fund.
Representations
This decision is based on the following facts represented by the Filer:
The Fund will be a mutual fund trust governed by the laws of Ontario and will be a reporting issuer under the laws of each of the Jurisdiction and the Passport Jurisdictions. The Filer is not, and the Fund will not be, in default of securities legislation in any of the Jurisdiction or the Passport Jurisdictions.
The Filer has applied to list the Units of the Fund on the TSX. The Filer will not file a final prospectus for the Fund until the TSX has conditionally approved the listing of Units.
The Filer is a registered investment fund manager, portfolio manager, commodity trading manager, exempt market dealer and mutual fund dealer in Ontario. The Filer will be the trustee and the manager of the Fund and will be responsible for the administration of the Fund.
The Filer is a corporation amalgamated under the laws of Ontario and its head office is located in Toronto, Ontario.
The Fund will seek investment results by investing primarily in securities of one or more PowerShares portfolios that provide exposure primarily to fixed-income securities.
In seeking to achieve its investment objective, the Fund may invest in other investment funds, provided that there will be no duplication of management fees chargeable in respect of the same service in connection with the Fund and its investment in the other investment fund. All investments of the Fund in another investment fund will be made in compliance with section 2.5 of National Instrument 81-102 – Mutual Funds (NI 81–102).
Generally, Units of the Fund may only be subscribed for or purchased directly from the Fund by Designated Brokers or Dealers and orders may only be placed for Units in the Prescribed Number of Units (or any additional multiple thereof) on any day where there is a trading session on the TSX.
The Fund will appoint one or more Designated Brokers to perform certain functions, which include standing in the market with a bid and ask price for Units of the Fund for the purpose of maintaining liquidity for the Units.
Each Designated Broker or Dealer that subscribes for Units agrees to deliver, in respect of each Prescribed Number of Units to be issued, a Basket of Securities and/or cash in an amount sufficient so that the value of the securities and/or the cash received is equal to the aggregate net asset value per Unit of the Prescribed Number of Units next determined following the receipt of the subscription order.
The net asset value per Unit of the Fund will be calculated and published at the end of each business day at www.powershares.ca.
The Filer may from time to time and, in any event not more than once quarterly, require a Designated Broker to subscribe for Units of the Fund in cash in an amount not to exceed 0.30% of the net asset value of the Fund or such other amount established by the Filer and disclosed in the prospectus of the Fund.
Neither the Designated Brokers nor the Dealers will receive any fee or commission in connection with the issuance of Units of the Fund to them. On the issuance of Units of the Fund, the Filer or the Fund may, in the Filer’s discretion, charge a fee to a Designated Broker or a Dealer to offset the expenses incurred in issuing the Units.
Except as described in paragraphs 7 through 12 above and other than any Units that may be purchased on a private placement basis pursuant to applicable exemptions, persons that are not Designated Brokers or Dealers and that are not purchasing Units on a private placement basis are generally expected to purchase Units through the facilities of the TSX. Units may be issued directly to all Unitholders upon the reinvestment of distributions.
Unitholders that are not Designated Brokers or Dealers that wish to dispose of their Units may generally do so by selling their Units on the TSX, through a registered dealer, subject only to customary brokerage commissions. A Unitholder that holds a Prescribed Number of Units or any additional multiple thereof may exchange such Units for Baskets of Securities and/or cash, in the Fund’s discretion. Unitholders may also redeem their Units for cash at a redemption price equal to 95% of the closing price of the Units on the TSX on the effective date of redemption.
Unitholders will have the right to vote at a meeting of Unitholders in respect of the matters prescribed by NI 81-102.
Although Units of the Fund will trade on the TSX and the acquisition of Units can therefore be subject to the Take-over Bid Requirements:
(a) it will not be possible for one or more Unitholders to exercise control or direction over the Fund, as the declaration of trust of the Fund will provide that a person who holds (either alone or jointly with another person or persons) 20% or more of the Units of the Fund may not exercise any voting rights attached to Units that represent more than 20% of the votes attached to all outstanding Units of the Fund;
(b) it will be difficult for purchasers of Units of the Fund to monitor compliance with Take-over Bid Requirements because the number of outstanding Units will always be in flux as a result of the ongoing issuance and redemption of Units by the Fund; and
(c) the way in which Units of the Fund will be priced deters anyone from either seeking to acquire control, or offering to pay a control premium, for outstanding Units because Unit pricing for the Fund will be dependent upon the performance of the portfolio of the Fund as a whole.
The application of the Take-over Bid Requirements to the Fund would have an adverse impact on Unit liquidity because they could cause Designated Brokers and other large Unitholders to cease trading Units once prescribed take-over bid thresholds are reached. This, in turn, could serve to provide conventional mutual funds with a competitive advantage over the Fund.
The Filer, on behalf of the Fund, may enter into various continuous distribution dealer agreements with registered dealers (that may or may not be Designated Brokers) pursuant to which the Dealers may subscribe for Units of the Fund. However, no Dealer would be involved in the preparation of the Fund’s prospectus and a Dealer would generally not perform any review or any independent due diligence of the contents of the Fund’s prospectus. In addition, the Fund will not pay any commission to the Dealers in connection with the subscriptions for the Units. As the Dealers will not receive any remuneration from the Fund for distributing Units and as the Dealers will change from time to time, it is not practical to provide an underwriters’ certificate in the prospectus of the Fund.
The Filer has previously been granted similar relief for exchange-traded funds that are managed by the Filer, or an affiliate of the Filer, and that issue index participation units, as defined in NI 81-102. As the Units of the Fund will not be index participation units, the Filer is unable to rely on this relief in connection with the Fund.
This decision shall not be construed as granting relief from any prospectus delivery requirement under the Legislation.
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 is that the Exemption Sought is granted so long as a purchaser of Units of the Fund (Unit Purchaser), and any person or company acting jointly or in concert with the Unit Purchaser (a Concert Party), prior to making any take-over bid for Units of the Fund that is not otherwise exempt from the Take-over Bid Requirements, provides the Filer with an undertaking not to exercise any votes attached to the Units held by the Unit Purchaser and any Concert Party that represent more than 20% of the votes attached to the outstanding Units of the Fund.
This decision shall terminate on the earlier of (a) November 30, 2012 and (b) an amendment to this decision that is agreed to by staff of the principal regulator and the Filer and that addresses the applicable prospectus delivery obligations.
“Mary Condon”
______________________
Name: Mary Condon
Title: Commissioner
Ontario Securities Commission
“Sarah B. Kavanagh”
_______________________________
Name: Sarah Kavanagh
Title: Commissioner
Ontario Securities Commission