Headnote NP 11-203 – Process for Exemptive Relief Application in Multiple Jurisdictions
Relief granted to commodity pools from concentration, control and fund-on-fund restrictions in sections 2.1(1), 2.2(1), 2.5(2)(a) and (c) of National Instrument 81-102 Mutual Funds to permit certain commodity pools to gain exposure to US commodity ETFs tracking the performance of physical commodities, subject to certain conditions.
Relief granted to commodity pools from fund-on-fund restrictions in section 2.5(2)(e) and (f) of National Instrument 81-102 Mutual Funds to permit commodity pools to pay brokerage commissions incurred for the purchase or sale of securities of US commodity ETFs.
Relief granted from section 3.2(2)(a) of National Instrument 81-104 Commodity Pool to permit manager to redeem seed investment in commodity pools provided pools have received subscriptions from investors totalling at least $5 million and provided the manager maintains working capital as required for investment fund managers under National Instrument 31-103 Registration Requirements and Exemptions.
Applicable Legislative Provisions National Instrument 81-102 Mutual Funds, sections 2.1(1), 2.2(1), 2.5(2)(a), 2.5(2)(c), 2.5(2)(e) and 2.5(2)(f) and section 19.1.
National Instrument 81-104 Commodity Pools, sections 3.2(2)(a) and section 10.1.
August 22, 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)
AND
IN THE MATTER OF
POWERSHARES DB COMMODITY (CAD HEDGED) INDEX ETF
POWERSHARES DB AGRICULTURE (CAD HEDGED) INDEX ETF
(the Proposed Commodity Pools)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Proposed Commodity Pools and any similar exchange-traded commodity pools that the Filer or an affiliate of the Filer may create and manage in the future (the Future Commodity Pools and, together with the Proposed Commodity Pools, the Commodity Pools) for exemptive relief from paragraph 3.2(2)(a) of National Instrument 81-104 Commodity Pools (NI 81‑104) to permit the required initial investment of $50,000 in each Commodity Pool to be redeemed in accordance with this decision (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 Filer has provided notice that Subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon (with Ontario, the Jurisdictions).
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions, National Instrument 81-102 Mutual Funds (NI 81–102) and NI 81-104 have the same meanings if used in this decision unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer and the Commodity Pools
The Filer is a corporation amalgamated under the laws of Ontario and its head office is located in Toronto, Ontario.
The Filer will be the trustee, manager and portfolio manager of the Proposed Commodity Pools. The Filer or an affiliate of the Filer will be the trustee, manager and portfolio manager of the Future Commodity Pools. The Filer is registered as a portfolio manager and mutual fund dealer in certain of the provinces and territories of Canada and is registered in Ontario as an investment fund manager and under the Commodity Futures Act (Ontario) in the category of commodity trading manager.
The Filer is not in default of securities legislation in any province or territory of Canada.
Each Commodity Pool will be: (a) an open-end mutual fund trust established under the laws of Ontario; (b) governed by the provisions of NI 81-102 as modified by any exemptions as may be granted by the securities regulatory authorities and those exceptions relating to commodity pools outlined in NI 81-104; (c) qualified for distribution in some or all of the provinces and territories of Canada under a prospectus prepared in accordance with National Instrument 41-101 General Prospectus Requirements that will be filed with and receipted by the securities regulators in the applicable Jurisdiction(s); and (d) once receipted, a reporting issuer under the securities laws of some or all of the provinces and territories of Canada.
Each Commodity Pool will be a “commodity pool”, as such term is defined in subsection 1.1(1) of NI 81-104, in that each Commodity Pool will adopt investment objectives that permit that Commodity Pool to invest directly, or indirectly through one or more derivative instruments, in physical commodities in a manner that is not permitted under NI 81-102.
Each Commodity Pool and its units (the Units) will be listed on the Toronto Stock Exchange (the TSX). The Filer will not file a final prospectus for a Commodity Pool unless the TSX has conditionally approved the listing of Units of the Commodity Pool.
The investment objective of each Commodity Pool will be to seek to replicate, to the extent reasonably possible and before fees and expenses, the performance of a specified commodity index, which index will track the price of one or more physical commodities. In the case of PowerShares DB Commodity (CAD Hedged) Index ETF and as at the date of this decision, the index is the DBIQ Optimum Yield Diversified Commodity Index Excess Return Hedged CAD. In the case of PowerShares DB Agriculture Fund and as at the date of this decision, the index is the DBIQ Diversified Agriculture Index Excess Return Hedged CAD.
Seed Capital
The Filer or an affiliate of the Filer (in either case being the Initial Investor) will provide seed capital by investing an aggregate of at least $50,000 in the Units of a Commodity Pool before the time of filing the final prospectus of that Commodity Pool.
According to paragraph 3.2(2)(a) of NI 81-104, unless a redemption, repurchase or return is effected as part of the dissolution or termination of the commodity pool, a commodity pool may redeem, repurchase or return any amount invested in securities issued upon the investment in the commodity pool referred to in paragraph 3.2(1)(a) of NI 81-104 only if securities issued under paragraph 3.2(1)(a) of NI 81-104 that had an aggregate issue price of $50,000 remain outstanding and at least $50,000 invested under paragraph 3.2(1)(a) of NI 81-104 remains invested in the commodity pool.
The Initial Investor wishes to be able to redeem the seed capital invested under paragraph 3.2(1)(a) of NI 81-104 in accordance with this decision.
The Filer understands that the policy rationale behind the permanent seed capital requirement for commodity pools under NI 81-104 is to encourage promoters to ensure that the commodity pool is being properly run for the benefit of the investors by requiring that the promoter of a pool, or a related party, will itself be an investor in the pool at all times.
The Commodity Pools will be properly managed for the benefit of investors because, as trustee and manager of the Commodity Pools, the Filer has the following obligations:
(a) the trustee of each Commodity Pool will have a fiduciary duty to manage the Commodity Pool in the best interests of its unitholders;
(b) under applicable securities law, the manager of each Commodity Pool will be obliged at all times to act honestly and in good faith, and in the best interests of the Commodity Pool, and to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances; and
(c) under the declaration of trust governing each Commodity Pool, the trustee of the Commodity Pool will be obliged to act as a reasonably prudent person.
Having regard to the fiduciary obligations and standards of care set out in paragraph 12 above, as well as the investment objective of each Commodity Pool, not having $50,000 invested by the Initial Investor in a Commodity Pool at all times will not change how the Commodity Pool is managed.
If the Commodity Pools were governed solely by the provisions of NI 81-102 (rather than NI 81-104), the Initial Investor would be allowed to redeem its seed capital investment in a Commodity Pool upon the Commodity Pool having received subscriptions totalling not less than $500,000 from investors other than the persons or companies referred to in paragraph 3.1(1)(a) of NI 81-102.
A Commodity Pool will not issue Units to other investors unless subscriptions from such investors aggregating at least $500,000 have been received and accepted by it.
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 Initial Investor may not redeem any of its initial investment in a Commodity Pool until $5.0 million in subscriptions has been received by the Commodity Pool from persons or companies other than the persons and companies referred to in paragraph 3.2(1)(a) of NI 81-104;
(b) if, after the Initial Investor redeems its initial investment in a Commodity Pool in accordance with condition (a) above, the value of the Units subscribed for by investors other than the persons and companies referred to in paragraph 3.2(1)(a) of NI 81-104 drops below $5.0 million for more than 30 consecutive days, the Initial Investor will, unless the Commodity Pool is in the process of being dissolved or terminated, reinvest $50,000 in the Commodity Pool and maintain that investment until condition (a) is again satisfied;
(c) the Filer will at all times comply with the applicable requirements of registration as an investment fund manager under National Instrument 31-103 Registration Requirements and Exemptions; and
(d) the basis on which the Initial Investor may redeem any of its initial investment in a Commodity Pool will be disclosed in any prospectus of the Commodity Pool.
“Raymond Chan”
Raymond Chan
Manager, Investment Funds
Ontario Securities Commission