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 – Certificate 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.
April 30, 2013
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 FT PORTFOLIOS CANADA CO. (the “Filer”)
DECISION
Background
The principal regulator has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the “Legislation”) for exemptive relief from the Legislation so that:
all purchasers (“Unitholders”) of units (“Units”) of First Trust AlphaDEX Canadian Dividend Plus ETF, First Trust AlphaDEX U.S. Dividend Plus ETF, First Trust AlphaDEX Emerging Market Dividend ETF, First Trust AlphaDEX Global Energy Income Plus ETF, First Trust Senior Loan ETF (the “Proposed Funds”) and any additional exchange-traded funds of which the Filer, or an affiliate of the Filer, may be the trustree and/or manager and which operate on a similar basis as the Proposed Funds (the “Future Funds”, which together with the Proposed Funds are collectively referred to as the “Funds”) be exempted from the requirements of the Legislation related to take-over bids (the “Take-Over Bid Exemption”), including the requirement to file a report of a take-over bid and the accompanying fee with each applicable Jurisdiction, (the “Take-Over Bid Requirements”) in respect of take-over bids for the Funds; and
the Funds are exempt from the requirement that the prospectus of the Funds contain a certificate of the underwriter or underwriters who are in a contractual relationship with the Funds (the “Underwriter Certificate Exemption”, and together with the Take-Over Bid Exemption, the “Exemption Sought”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
the OSC 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, Yukon, Northwest Territories and Nunavut.
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 determined by the Filer from time to time representing the constituents of the investment portfolio then held by the Funds.
“Designated Brokers” means registered brokers and dealers that enter into agreements with the Funds to perform certain duties in relation to the Funds.
“Prescribed Number of Units” means the number of Units of the Funds determined by the Filer from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.
“Underwriters” means registered brokers and dealers that have entered into underwriting agreements with the Funds and that subscribe for and purchase Units from the Funds, and
“Underwriter” means any one of them.
“Unitholders” means beneficial and registered holders of Units.
Terms defined in National Instrument 14-101 – Definitions, Multilateral Instrument 11-102 – Passport System and NI 81-102 – Mutual Funds (“NI 81-102”) 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 Funds are or will be mutual funds trusts governed by the laws of Ontario and will be reporting issuers under the laws of all of jurisdictions in Canada.
The Filer will apply to list the Units of the Funds on the TSX. The Filer will not file a final prospectus for the Funds until the TSX has conditionally approved the listing of Units.
The Funds will be generally described as exchange-traded funds.
The Filer, a registered mutual fund dealer and investment fund manager in Ontario, is the trustee and manager of the Funds and is responsible for the administration of the Funds.
First Trust Advisors L.P., a registered portfolio manager, will act as portfolio advisor to the Proposed Funds.
Generally, Units may only be subscribed for or purchased directly from the Funds by Underwriters or Designated Brokers and orders may only be placed for Units in the Prescribed Number of Units (or an integral multiple thereof) on any day when there is a trading session on the TSX.
The Funds will appoint Designated Brokers to perform certain functions which include standing in the market with a bid and ask price for Units of the Funds for the purpose of maintaining liquidity for the Units.
Each Underwriter or Designated Broker that subscribes for Units must deliver, in respect of each Prescribed Number of Units to be issued, a Basket of Securities and cash in an amount sufficient so that the value of the Basket of Securities and cash delivered is equal to the net asset value of the Units subscribed for next determined following the receipt of the subscription order. In the discretion of the Filer, the Funds may also accept subscriptions for Units in cash only, in securities other than Baskets of Securities and/or in a combination of cash and securities other than Baskets of Securities, in an amount equal to the net asset value of the Units next determined following the receipt of the subscription order.
The net asset value per Unit of each class of the Funds will be calculated and published daily at www.firsttrust.ca.
Upon notice given by the Filer from time to time and, in any event, not more than once quarterly, a Designated Broker will subscribe for Units in cash in an amount not to exceed 0.30% of the net asset value of the Units of the class, or such other amount established by the Filer and disclosed in the prospectus of the Funds, next determined following delivery of the notice of subscription to that Designated Broker.
Neither the Underwriters nor the Designated Brokers will receive any fees or commissions in connection with the issuance of Units to them. The Filer may, at its discretion, charge an administration fee on the issuance of Units to the Designated Brokers or Underwriters.
Except as described in paragraphs 6 through 11 above, Units may not be purchased directly from the Funds. Investors are generally expected to purchase Units through the facilities of the TSX. However, Units may be issued directly to Unitholders upon the reinvestment of distributions of income or capital gains.
Unitholders that wish to dispose of their Units may generally do so by selling their Units on the TSX, through a registered broker or dealer, subject only to customary brokerage commissions. A Unitholder that holds a Prescribed Number of Units or an integral multiple thereof may exchange such Units for Baskets of Securities and cash; 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 date of redemption.
As manager, the Filer receives a fixed annual fee from the Funds. Such annual fee is calculated as a fixed percentage of the net asset value of the Units of each class. As manager, the Filer is responsible for all costs and expenses of the Funds except the management fee, the costs and expenses incurred in complying with NI 81-107 (including any expenses related to the implementation and on-going operation of an independent review committee), brokerage expenses and commissions, income and withholding taxes as well as all other applicable taxes, including HST, the costs of complying with any new governmental or regulatory requirement introduced after establishment of the Funds and extraordinary expenses.
Unitholders have, or will have, the right to vote at a meeting of Unitholders in respect of the matters prescribed by NI 81-102 Mutual Funds.
The Filer, on behalf of the Funds, may enter into various continuous distribution dealer agreements with registered dealers (that may or may not be Designated Brokers) pursuant to which the Underwriters may subscribe for Units of one or more of the Funds. However, no Underwriter would be involved in the preparation of the Funds’ prospectus and no Underwriter would perform any review or any independent due diligence of the contents of the Funds’ prospectus. In addition, the Funds will not pay any commissions to the Underwriters. As the Underwriters will not receive any remuneration for distributing Units and as the Underwriters will change from time to time, it is not practical to provide an underwriters’ certificate in the prospectus of the Funds.
Although Units of the Funds will trade on the TSX and the acquisition of Units can therefore be subject to the Take-over Bid Requirements:
(a) it is not, or will not, be possible for one or more Unitholders to exercise control or direction over a Fund as the declaration of trust of the Funds provides, or will provide, that a person who holds (either alone or jointly with another person or persons) 20% or more of the Units of a Fund may not exercise any voting rights attached to Units that represent more than 20% of the votes attached to all outstanding Units of that Fund;
(b) it is, or will be, difficult for purchasers of Units of a 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 each Fund; and
(c) the way in which Units of a Fund are, or 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 each Fund is, or 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 Funds 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 Funds.
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 a 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 as it relates solely to the Underwriter Certificate Exemption shall terminate on the earlier of (a) August 31, 2013; 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.
“James E.A. Turner” “James D. Carnwath”
Name: James E.A. Turner Name: James D. Carnwath
Title: Vice-Chair Title: Commissioner
Ontario Securities Commission Ontario Securities Commission
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 – Certificate 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.