Headnote National Policy 11-203 – ETF granted concentration restriction relief on conditions to pursue its investment objective and strategy of purchasing, or gaining exposure to, securities of constituents of the Dow Jones Industrial Average in the proportions in which they are reflected in the index, the ETF also employs a covered call option writing strategy – ETF analogous to index mutual fund or partially-indexed mutual fund. Applicable Legislative Provision Section 2.1(1) and 19.1 of National Instrument 81-102 Mutual Funds.
November 19, 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 BMO ASSET MANAGEMENT INC. (the Filer)
AND
IN THE MATTER OF BMO COVERED CALL DOW JONES INDUSTRIAL AVERAGE HEDGED TO CAD ETF (the Fund)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction (the Legislation) granting exemptive relief (the Exemption Sought) from section 2.1(1) (the Concentration Restriction) of National Instrument 81-102 Mutual Funds (NI 81-102) to permit the Fund to purchase, or obtain exposure to, a security of an issuer (a DJIA Issuer) included as a constituent in the Dow Jones Industrial Average (the DJIA) such that, immediately after the transaction, more than 10 percent of the Fund’s net asset value (NAV) would be invested, either directly or indirectly, in securities of that DJIA Issuer for the purposes of determining compliance with the Concentration Restriction.
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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.
Interpretation
Terms defined in National Instrument 14-101 Definitions, NI 81-102 and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer.
The Filer is a corporation incorporated under the laws of the province of Ontario. The Filer's head office is located in Toronto, Ontario. The Filer acts as the trustee, investment fund manager and portfolio manager of the Fund. The Filer is registered as an investment fund manager, a portfolio manager and an exempt market dealer under the Securities Act (Ontario) and as a commodity trading manager under the Commodity Futures Act (Ontario).
The Fund is:
(a) an open-ended mutual fund established as a trust under the laws of the Province of Ontario;
(b) a reporting issuer in each province and territory of Canada. The Fund’s securities are distributed pursuant to a long-form prospectus (the Prospectus) filed with and receipted by the securities regulatory authority in each province and territory of Canada under National Instrument 41-101 General Prospectus Requirements;
(c) subject to NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities; and
(d) an exchange-traded fund or “ETF”, and generally described as such. The units of the Fund are listed on the Toronto Stock Exchange.
The Fund's investment objective, as currently stated in the Prospectus, is to seek to provide its unitholders with exposure to the performance of a portfolio of U.S. stocks while mitigating downside risk, and also to seek to provide its unitholders with monthly distributions. The Fund will primarily invest in and hold a portfolio of securities selected from the constituents of the DJIA, although any investment in a single issuer will be made only in accordance with applicable Canadian securities legislation. In addition, depending on market volatility and other factors, the Fund will write covered call options on these securities.
The Filer seeks to replicate, to the extent possible subject to its option writing activities under its covered call option writing strategy, the performance of the DJIA. The Fund is not considered an “index mutual fund” for the purposes of NI 81-102 because its covered call option writing strategy results in the Fund earning option premiums and may require the Fund to sell securities to a counterparty exercising a covered call option written by the Fund, both of which impact the ability of the Fund to exactly track the DJIA at all times.
The Fund will seek to invest in DJIA Issuers in the proportions in which they are represented in the DJIA and in so doing, over time, the Fund will generally seek to replicate the performance of the DJIA, subject to its option writing activities under its covered call option writing strategy.
From time-to-time, the weight of a DJIA Issuer in the DJIA may exceed 10 percent. The Fund wishes to be able to purchase, or gain exposure to, securities of a DJIA Issuer such that, immediately after the transaction, more than 10 percent of the Fund’s NAV would be invested, either directly or indirectly, in securities of that DJIA Issuer for the purposes of determining compliance with the Concentration Restriction. The Fund will invest, directly or indirectly, in securities of DJIA Issuers in weights that correspond to, and will not exceed, their weights in the DJIA.
The Exemption Sought would provide the Fund with the flexibility to manage its portfolio in a manner consistent with the make-up of the DJIA while pursuing its covered call option writing strategy in seeking to earn option premiums and mitigate downside risk.
The investment objectives and investment strategies of the Fund, as well as the risk factors associated therewith, including concentration risk, are disclosed in the Prospectus.
The Prospectus discloses that the Fund has applied for the Exemption Sought.
Before relying on this decision, the Filer and the Fund will:
(a) clarify in the stated investment objectives of the Fund, as set out in each prospectus of the Fund filed after the date of this decision (each, a Subsequent Prospectus), that the Fund will primarily invest in and hold securities of DJIA Issuers in the proportions in which they are reflected in the DJIA, subject to its option writing activities under its covered call option writing strategy; and
(b) file a press release:
(i) describing the clarifications to the stated investment objectives of the Fund;
(ii) confirming that the Fund has obtained the relief applied for from the Concentration Restriction referred to in the Prospectus;
(iii) confirming that the Fund will commence investing in reliance on the relief obtained such that its investment in one or more DJIA Issuers may exceed the Concentration Restriction, limited only by the weight of the DJIA Issuer in the DJIA; and
(iv) making the disclosure contemplated in condition (c) of this decision.
- The Filer and the Fund are not in default of any of their obligations under securities legislation in any of Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories or Nunavut.
Decision
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
(a) the Fund’s name includes the name of the DJIA;
(b) the Fund’s investment in DJIA Issuers is consistent with the Fund’s stated investment objectives as set out in each Subsequent Prospectus, which will specify that the Fund will primarily invest in and hold securities of DJIA Issuers in the proportions in which they are reflected in the DJIA, subject to its option writing activities under its covered call option writing strategy;
(c) each Subsequent Prospectus will include the disclosure required by section 2.1(5) of NI 81-102 for an index mutual fund;
(d) the Fund will not purchase, or gain exposure to, a security of a DJIA Issuer if, immediately after the transaction, more than the Threshold Percentage of the Fund’s NAV would be invested, either directly or indirectly, in securities of that DJIA Issuer (for this purpose, Threshold Percentage means the weight of the DJIA Issuer in the DJIA, expressed as a percentage); and
(e) each Subsequent Prospectus discloses that the Filer has obtained the Exemption Sought on the terms described in this decision.
signed “Darren McKall”
Darren McKall Manager, Investment Funds Ontario Securities Commission
Headnote
National Policy 11-203 – ETF granted concentration restriction relief on conditions to pursue its investment objective and strategy of purchasing, or gaining exposure to, securities of constituents of the Dow Jones Industrial Average in the proportions in which they are reflected in the index, the ETF also employs a covered call option writing strategy – ETF analogous to index mutual fund or partially-indexed mutual fund.
Applicable Legislative Provision Section 2.1(1) and 19.1 of National Instrument 81-102 Mutual Funds.