Headnote
National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from sections 2.3(f), 2.3(h), 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 – Mutual Funds to permit a mutual fund to use ETFs to invest up to 10 percent of its net assets, in aggregate, in gold and other physical commodities provided that no more than 2.5 percent of the mutual fund’s net assets may be invested in any one commodity sector, other than gold and silver – ETFs will be traded on a Canadian or U.S. stock exchange – subject to 10 percent exposure to physical commodities, in aggregate, and certain conditions
Applicable Legislative Provisions
National Instrument 81-102 – Mutual Funds, ss. 2.3(f) and (h), 2.5(2)(a) and (c), and section 19.1.
January 28, 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
MD Physician Services Inc.
(the Filer or MDPSI)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer for an exemption pursuant to section 19.1 of National Instrument 81-102 – Mutual Funds (NI 81-102) exempting MDPIM Strategic Yield Pool and MDPIM Strategic Opportunities Pool (the Funds) from:
(a) clauses 2.3(f) and (h) of NI 81-102 to permit the Funds to invest indirectly in physical commodities (in addition to gold, which is permitted by clause 2.3(e) of NI 81-102) through investments in Gold/Silver ETFs (as defined below) and/or Other Physical Commodity ETFs (as defined below); and
(b) clauses 2.5(2)(a) and (c) of NI 81-102 to permit the Funds to invest in the following categories of exchange-traded funds traded on a stock exchange in Canada or the United States that do not qualify as “index participation units” (as defined in NI 81-102) (ETFs):
(i) gold or silver ETFs, whether on an unlevered basis (Unlevered Gold/Silver ETFs) or based on a multiple of 200% (Leveraged Gold/Silver ETFs and together with Unlevered Gold/Silver ETFs, Gold/Silver ETFs); and
(ii) ETFs that have exposure to one or more physical commodities other than gold or silver, on an unlevered basis (Other Physical Commodity ETFs) (collectively, Gold/Silver ETFs and Other Physical Commodity ETFs, Commodity ETFs)
(collectively, 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 section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) 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, MI 11-102 and 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
MDPSI will be the investment fund manager of each Fund. MDPSI is registered as a portfolio manager in each of the provinces and territories of Canada and is registered in Ontario in the category of exempt market dealer and investment fund manager. MDPSI is also registered as an investment fund manager in each of the provinces of Newfoundland & Labrador and Quebec. MDPSI is indirectly wholly owned by the Canadian Medical Association.
The Funds will be open-end mutual fund trusts created under the laws of the Province of Ontario.
The securities of the Funds will be qualified for distribution pursuant to a simplified prospectus and annual information form that will be prepared and filed in accordance with the securities legislation of the Jurisdictions. The Funds are reporting issuers or the equivalent in each Jurisdiction.
The Filer is not in default of securities legislation in any Jurisdiction.
As with all of the mutual funds managed by MDPSI, the Funds will be available for investment only by “qualified eligible investors”, which essentially means that the investors must be either physicians who are members of the Canadian Medical Association or relatives of those individuals. Securities of the mutual funds managed by MDPSI are available for acquisition only through MD Management Limited, a registered investment dealer and member of the Investment Industry Regulatory Organization of Canada (IIROC).
The Funds will be members of the family of mutual funds known as the MDPIM Funds. There are currently seven mutual funds in this family of mutual funds that are either Canadian, US or international equity or Canadian fixed income funds. The Funds, together with the other MDPIM Funds, are only available to “qualified eligible investors” who are either clients of MD Private Trust Company or MD Private Investment Counsel, a division of MDPSI (MDPIC), and who have appointed MDPIC to provide them with discretionary portfolio management services and advice.
The Funds will principally invest in equity securities, exchange traded funds listed on a Canadian or U.S. stock exchange and fixed income securities that emphasize alternative or non-traditional asset classes or strategies. The Funds will also have exposure to currencies and commodities.
(i) MDPIM Strategic Yield Pool – its investment objective is to provide income and long-term capital appreciation. It will principally invest in equity securities, exchange traded funds listed on a Canadian or U.S. stock exchange and fixed income securities that emphasize alternative or non-traditional asset classes or strategies. It will also have exposure to currencies and commodities.
(ii) MDPIM Strategic Opportunities Pool – Its investment objective is to provide long-term capital appreciation. It will principally invest in equity securities, exchange traded funds listed on a Canadian or U.S. stock exchange and fixed income securities that emphasize alternative or non-traditional asset classes or strategies. It will also have exposure to currencies and commodities.
MDPSI proposes to engage QS Investors, LLC (QS Investors), which is a registered investment adviser in the United States based in New York City, to be the portfolio manager and investment adviser to the Funds. QS Investors provides investment and advisory services to a diverse array of institutional clients. QS Investors relies on the “international adviser” registration exemption in Ontario and Quebec to advise various “Canadian permitted clients” in these provinces. The Funds qualify as such “Canadian permitted clients” as such term is defined in National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations. Accordingly, QS Investors relies on the “international adviser” registration exemption in Ontario to advise the Funds. QS Investors has experience advising investment funds that invest solely in other funds and ETFs in the United States, and that have investment objectives and strategies similar to the Funds.
MDPSI expects that the Funds will invest in ETFs that are “index participation units” as such term is defined in NI 81-102 (IPUs). MDPSI also proposes that the Funds gain exposure to non-traditional asset classes and strategies, through investing in Commodity ETFs that are not IPUs. In other words, it is the view of MDPSI that the universe of IPUs is not sufficiently broad to allow the Funds to fully achieve their investment objectives through investing only in IPUs or other securities that are permitted under NI 81-102. MDPSI believes that it is necessary for the Funds to invest in the following types of Commodity ETFs that are not IPUs in order to achieve the Funds’ investment objectives:
(i) Gold/Silver ETFs, and
(ii) Other Physical Commodity ETFs.
- MDPSI wishes the Funds to be able to invest in any one or more types of Commodity ETFs to a maximum collective limit of 10 percent of its net assets, taken at market value at the time of the purchase.
The Commodity ETFs
- Each Commodity ETF will be a “mutual fund” (as such term is defined under the Securities Act (Ontario)) and will be listed and traded on a stock exchange in Canada or the United States. The various categories of Commodity ETFs have the following characteristics:
(i) The assets of a Gold/Silver ETF consist primarily of gold or silver, as the case may be, or derivatives that have an underlying interest in gold or silver, as the case may be. The objective of a Gold/Silver ETF is to reflect the price of gold or silver, as the case may be (less the Gold/Silver ETF’s expenses and liabilities), whether on an unlevered basis, in the case of an Unlevered Gold/Silver ETFs, or on a leveraged basis, in the case of a Leveraged Gold/Silver ETF. A Leveraged Gold/Silver ETF is generally rebalanced daily to ensure that its performance and exposure to the price of gold or silver, as the case may be, will not exceed +200% of the corresponding daily performance of the price of gold or silver, as the case may be.
(ii) The assets of an Other Physical Commodity ETF consist primarily of one or more physical commodities, other than gold or silver, or derivatives that have an underlying interest in such physical commodity or commodities. These physical commodities may include, without limitation, precious metals commodities (such as platinum, platinum certificates, palladium and palladium certificates), energy commodities (such as crude oil, gasoline, heating oil and natural gas), industrials and/or metals commodities (such as aluminum, copper, nickel and zinc) and agricultural commodities (such as coffee, corn, cotton, lean hogs, live cattle, soybeans, soybean oil, sugar and wheat). The objective of an Other Physical Commodity ETF is to reflect the price of the applicable commodity or commodities (less the Other Physical Commodity ETF’s expenses and liabilities) on an unlevered basis.
Investments in Commodity ETFs
The investment objectives and investment strategies of the Funds are designed to offer investors an opportunity to obtain exposure to a number of non-traditional – or “alternative” asset classes and strategies, including equity securities and bonds issued by entities which are in commodity-based businesses, commodities and currencies. To fulfill their investment objectives, the Funds require the ability to invest in physical commodities, in addition to gold, and to invest in Commodity ETFs.
There are no liquidity concerns with permitting the Fund to invest in Commodity ETFs, since the securities of Commodity ETFs trade on a Canadian or U.S. exchange and therefore are highly liquid investments. The Commodity ETFs will either be “registered” investment companies in the United States or reporting issuers in one or more of the Jurisdictions, which means that there will be clear disclosure about the Commodity ETFs readily available in the marketplace.
In accordance with its investment objective and investment strategies and in addition to its investments indirectly in commodities, the Fund will be permitted generally to invest in ETFs.
In addition to investing in securities of ETFs that are IPUs, the Fund proposes to have the ability to invest in the Commodity ETFs whose securities are not IPUs.
The amount of loss that can result from an investment by a Fund in a Commodity ETF will be limited to the amount invested by the Fund in securities of the Commodity ETF.
The Commodity ETFs are attractive investments for the Funds, as, in addition to being liquid, they provide an efficient and cost effective means of achieving diversification and exposure to the asset classes and strategies that the Funds will invest in.
In accordance with the investment strategies of the Funds, no more than 10 percent of the net asset value of the Fund will be invested in a combination of Commodity ETFs taken at market value at the time of purchase. In addition, no more than 2.5 percent of the net asset value of each of the Funds may be invested in any one commodity sector, other than gold and/or silver, taken at market value at the time of purchase. For this purpose, the relevant commodity sectors are energy, grains, industrial metals, livestock, precious metals other than gold and silver and softs (e.g., cocoa, cotton, coffee and sugar).
The aggregate investment in Commodity ETFs by the Fund will not exceed 10 percent of the Fund’s net asset value, taken at market value at the time of purchase.
The simplified prospectus of the Funds states that the Funds may invest indirectly in gold and other physical commodities and describes the risks associated with such investments and strategies.
The Funds are available for acquisition only by a limited group of individuals, all of whom have a connection with MDPSI, given MDPSI’s ownership by the Canadian Medical Association, and also a managed account relationship with MDPIC. It is extremely unlikely that an investor will invest all of his or her assets in one of the Funds – rather the Funds will be one part of a managed portfolio of MDPIM Funds.
An investment by the Funds in securities of a Commodity ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interest of the Funds.
Any investment in Commodity ETFs will be made in compliance with the custodian requirements in Part 6 of NI 81-102.
The Filer has determined that it would be in the best interests of the Funds to receive the Exemption Sought.
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, in respect of each Fund:
(a) an investment by the Fund in securities of a Commodity ETF is in accordance with the fundamental investment objectives of the Fund;
(b) the Fund does not purchase gold, permitted gold certificates, securities of an Commodity ETF or enter into specified derivatives the underlying interest of which is gold (the Commodity Products) if, immediately after the purchase, more than 10 percent of the net assets of the Fund in aggregate, taken at market value at the time of purchase, would consist of Commodity Products;
(c) the Fund does not purchase Commodity Products if, immediately after the transaction, the market value exposure to all physical commodities (whether direct or indirect) through the Commodity Products is more than 10 percent of the net assets of the Fund in aggregate, taken at market value at the time of purchase;
(d) no more than 2.5% of the net asset value of the Fund may be invested in any one commodity sector, other than gold and/or silver, taken at market value at the time of purchase. For this purpose, the relevant commodity sectors are energy, grains, industrial metals, livestock, precious metals other than gold and silver and softs (e.g., cocoa, cotton, coffee and sugar);
(e) the securities of the Commodity ETFs are treated as specified derivatives for the purposes of Part 2 of NI 81-102;
(f) the Fund does not short sell securities of a Commodity ETF;
(g) the securities of the Commodity ETFs are traded on a stock exchange in Canada or the United States; and
(h) the prospectus of the Fund discloses (i) in the investment strategy section, the fact that the Fund has obtained relief to invest in the Commodity ETFs, together with an explanation of what each category of Commodity ETF is, and (ii) the risks associated with the Fund’s investment in securities of the Commodity ETFs.
“Raymond Chan”
Raymond Chan
Manager, Investment Funds Branch
Ontario Securities Commission