August 29, 2014
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
ASTON HILL ASSET MANAGEMENT INC. (the Filer)
AND
ASTON HILL CANADIAN TOTAL RETURN FUND ASTON HILL CAPITAL GROWTH CLASS ASTON HILL CAPITAL GROWTH FUND ASTON HILL ENERGY GROWTH CLASS ASTON HILL GLOBAL GROWTH & INCOME CLASS ASTON HILL GLOBAL GROWTH & INCOME FUND ASTON HILL GLOBAL RESOURCE & INFRASTRUCTURE CLASS ASTON HILL GLOBAL RESOURCE & INFRASTRUCTURE FUND ASTON HILL GROWTH & INCOME CLASS ASTON HILL GROWTH & INCOME FUND ASTON HILL STRATEGIC YIELD II CLASS ASTON HILL STRATEGIC YIELD II FUND (the Current Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption, pursuant to section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102), from:
(a) paragraph 2.3(f) of NI 81-102 (the Silver Exemption) to permit each Fund (as defined below) to:
(i) purchase and hold silver; and
(ii) purchase and hold a certificate representing silver that is:
(A) available for delivery in Canada, free of charge, to or to the order of the holder of such silver certificate;
(B) of a minimum fineness of 999 parts per 1,000;
(C) held in Canada;
(D) in the form of either bars or wafers; and
(E) if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a jurisdiction,
(Permitted Silver Certificates);
(b) paragraph 2.3(h) of NI 81-102 (the Silver Derivatives Exemption) to permit each Fund to purchase, sell or use a specified derivative the underlying interest of which is:
(i) silver; or
(ii) a specified derivative of which the underlying interest is silver on an unlevered basis
(Silver Derivatives and, together with silver and Permitted Silver Certificates, Silver); and
(c) paragraphs 2.3(h), 2.5(2)(a) and 2.5(2)(c) of NI 81-102 (the ETF Exemption) to permit each Fund to purchase and hold securities of:
(i) exchange-traded funds (ETFs) that seek to provide daily results that replicate the daily performance of a specified widely-quoted market index (the ETF’s Underlying Index) by:
(A) a multiple of up to 200% (Leveraged Bull ETFs); or
(B) an inverse multiple of up to 200% (Leveraged Bear ETFs and, together with Leveraged Bull ETFs, Leveraged ETFs);
(ii) ETFs that seek to provide daily results that replicate the daily performance of their Underlying Index by an inverse multiple of 100% (Inverse ETFs);
(iii) ETFs that seek to replicate the performance of:
(A) gold or silver; or
(B) the value of a specified derivative the underlying interest of which is gold or silver on an unlevered basis (Gold ETFs and Silver ETFs, as the case may be, and collectively, Commodity ETFs); and
(iv) ETFs that seek to provide daily results that replicate the daily performance of:
(A) gold or silver; or
(B) the value of a specified derivative the underlying interest of which is gold or silver,
(the ETF’s Underlying Gold Interest or the ETF's Underlying Silver Interest),
by a multiple of up to 200% (Leveraged Gold ETFs and Leveraged Silver ETFs, respectively, and collectively, Leveraged Commodity ETFs),
(the Leveraged ETFs, Inverse ETFs, Commodity ETFs and Leveraged Commodity ETFs are referred to collectively herein as Permitted ETFs),
(the Silver Exemption, the Silver Derivatives Exemption and the ETF Exemption are collectively referred to as the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the 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, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut.
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 81-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:
Funds means the Current Funds and all mutual funds (the Future Funds) managed by the Filer in the future that are subject to NI 81-102, other than a Fund that is a “money market fund” as defined in NI 81-102, and any one of them may be referred to as a Fund.
Gold and Silver Products means gold, permitted gold certificates, Silver, investments in Gold ETFs, Silver ETFs, Leveraged Gold ETFs, Leveraged Silver ETFs, and investments in specified derivatives the underlying interest of which is gold.
Representations
This decision is based on the following facts represented by the Filer: The Filer and the Funds
The Filer is a corporation incorporated under the laws of the Province of Ontario with its head office located in Toronto, Ontario. The Filer is registered under the securities legislation of Ontario as an investment fund manager and portfolio manager. The Filer is not in default of securities legislation in any jurisdiction.
The Filer is the manager of each Fund.
Each Fund is a “mutual fund” (as such term is defined under the Securities Act (Ontario)), and to which National Instrument 81-101 Mutual Fund Prospectus Disclosure and NI 81-102 applies.
None of the Funds are in default of securities legislation in any jurisdiction.
Investments in gold and silver
The Filer proposes that each Fund have the ability to invest in Silver as investing in Silver will provide each Fund with an opportunity to further diversify its investments. In accordance with its investment objectives and investment strategies, each Fund is permitted generally to invest in gold and Silver.
Permitting each Fund to invest in Silver will provide the Funds additional flexibility to increase gains for the Funds in certain market conditions, which may otherwise cause the Funds to have significant cash positions.
The Filer believes that the markets in gold and silver are highly liquid, and there are no liquidity concerns with permitting each Fund to invest directly, or indirectly through derivatives or Commodity ETFs, up to 10% of its net asset value in gold and Silver, in the aggregate.
To obtain exposure to gold or silver indirectly, the Filer intends to use Gold and Silver Products.
Any investment by a Fund in Silver will be made in compliance with the custodian requirements in Part 6 of NI 81-102.
If commencing to invest in Gold and Silver Products represents a material change for a Current Fund, the Current Fund will comply with the material change reporting obligations in respect of such change.
The Filer believes that the potential volatility or speculative nature of Silver is no greater than that of gold, or of equity securities.
An investment by a Fund in Silver will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.
But for the Silver Exemption, paragraph 2.3(f) of NI 81-102 would prohibit an investment by a Fund in Silver because each Fund is prohibited from purchasing a physical commodity other than gold or permitted gold certificates.
But for the Silver Exemption, paragraph 2.3(h) of NI 81-102 would prohibit an investment by a Fund in Silver because each Fund is prohibited from purchasing, selling or using a specified derivative the underlying interest of which is a physical commodity other than gold or a specified derivative of which the underlying interest is a physical commodity other than gold.
Investments in Permitted ETFs
The Filer believes that it would be in the best interests of each Fund to have the flexibility to obtain exposure to, from time to time, to Underlying Indices, gold and silver by investing a portion of its assets in Permitted ETFs.
Each Permitted 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 amount of loss that can result from an investment by a Fund in a Permitted ETF will be limited to the amount invested by the Fund in securities of the Permitted ETF.
Each Leveraged ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed +/-200% of the corresponding daily performance of its Underlying Index.
Each Inverse ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed -100% of the corresponding daily performance of its Underlying Index.
Each Leveraged Commodity ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Gold Interest or Underlying Silver Interest will not exceed +200% of the corresponding daily performance of its Underlying Gold Interest or Underlying Silver Interest.
The Filer believes that there are no liquidity concerns with permitting each Fund to invest in Commodity ETFs since the securities of Commodity ETFs trade on exchanges and are highly liquid.
In accordance with its investment objectives and investment strategies, each Fund is permitted generally to invest in ETFs.
But for the ETF Exemption, paragraph 2.5(2)(a) of NI 81-102 would prohibit a Fund from purchasing or holding a security of a Permitted ETF, because the Permitted ETFs are not subject to both NI 81-102 and National Instrument 81-101.
But for the ETF Exemption, paragraph 2.5(2)(c) of NI 81-102 would prohibit a Fund from purchasing or holding securities of some Permitted ETFs, because some Permitted ETFs are not qualified for distribution in the local jurisdiction.
The Filer is not currently, and does not currently expect to become in the near future, the manager of, nor affiliated with the manager of, any Permitted ETF.
An investment by a Fund in securities of a Permitted ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.
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 Requested Relief is granted, provided that:
(a) each investment by the Fund in securities of a Permitted ETF and/or Silver is permitted by the fundamental investment objective of the Fund;
(b) the Fund does not short sell securities of any Permitted ETF;
(c) the securities of the Permitted ETFs are traded on a stock exchange in Canada or the United States;
(d) the Fund does not purchase securities of a Permitted ETF if, immediately after the purchase, more than 10% of the Fund’s net asset value would consist of securities of Permitted ETFs;
(e) if the Fund engages in short selling, the Fund does not purchase securities of an Inverse ETF or Leveraged Bear ETF (collectively, Bear ETFs) or sell any securities short if, immediately after the transaction, the aggregate market value of:
(i) all securities sold short by the Fund; and
(ii) all securities of Bear ETFs held by the Fund, would exceed 20% of the Fund’s net asset value;
(f) the Fund does not purchase Gold and Silver Products if, immediately after the transaction, more than 10% of the Fund’s net asset value would consist of Gold and Silver Products;
(g) the Fund does not purchase Gold and Silver Products if, immediately after the transaction, the market value exposure to gold or silver through the Gold and Silver Products would be more than 10% of the Fund’s net asset value; and
(h) the prospectus of the Fund discloses, or will disclose the next time it is renewed:
(i) in the Investment Strategy section of the prospectus, the fact that the Fund has obtained relief to invest in Permitted ETFs and Silver, as appropriate; and
(ii) to the extent applicable, the risks associated with such an investment.
“Darren McKall”
Manager, Investment Funds
Ontario Securities Commission