September 30, 2015
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 MACKENZIE FINANCIAL CORPORATION (Mackenzie or the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from Mackenzie on behalf of the existing and future mutual funds managed by Mackenzie that are subject to National Instrument 81-102 Investment Funds (NI 81-102) other than Mackenzie Global Resource Class, Mackenzie Gold Bullion Class and Mackenzie Precious Metals Class and that are not money market funds as defined by NI 81-102 (the Existing Funds and the Future Funds respectively, and together, the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):
(a) revoking and replacing the Previous Decision (as defined below), and
(b) exempting the Funds from the prohibitions contained in paragraphs 2.3(1)(f), 2.3(1)(h), 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to permit each Fund to invest in the following:
(i) silver, Permitted Silver Certificates (as defined below) and Silver Derivatives (as defined below), sometimes collectively referred to in this decision as Silver; and
(ii) the Underlying ETFs (as defined below).
(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 all of the other provinces and territories of Canada.
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. The following additional terms have the following meanings:
ETFs means exchange-traded funds.
IPU means an “index participation unit” as defined by NI 81-102.
Permitted Silver Certificates means certificates that represent silver that is:
(i) available for delivery in Canada, free of charge, to or to the order of the holder of the certificate;
(ii) of a minimum fineness of 999 parts per 1,000;
(iii) held in Canada;
(iv) in the form of either bars or wafers; and
(v) 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 province or territory of Canada.
Silver Derivative means a specified derivative the underlying interest of which is silver or a specified derivative the underlying interest of which is silver, on an unlevered basis.
Underlying ETFs means ETFs traded on a stock exchange in Canada or the United States whose securities are not IPUs and that:
(i) seek to provide daily results that replicate the daily performance of a specified widely-quoted market index (the Underlying Index) by a multiple of up to 200% (Leveraged Bull ETFs), inverse multiple of up to 100% (Inverse ETFs) or inverse multiple of up to 200% (Leveraged Bear ETFs);
(ii) seek to provide daily results that replicate the daily performance of gold or silver, or the value of a specified derivative the underlying interest of which is gold or silver on an unlevered basis (the Underlying Gold or Silver Interest), by a multiple of up to 200% (Leveraged Gold ETFs and Leveraged Silver ETFs, collectively, the Leveraged Gold/Silver ETFs); and
(iii) invest directly, or indirectly through derivatives, in physical commodities, including but not limited to gold and silver, on an unlevered basis, as further described below (the Unlevered Commodity ETFs, together with the Leveraged Gold/Silver ETFs, collectively, the Commodity ETFs).
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation amalgamated under the laws of the Province of Ontario, with its head office located in Toronto, Ontario.
2. The Filer is registered as an investment fund manager, portfolio manager, exempt-market dealer and commodity trading manager in the Province of Ontario. The Filer is also registered as a portfolio manager and exempt-market dealer in all other provinces and territories of Canada and as an investment fund manager in the Provinces of Quebec and Newfoundland & Labrador.
3. The Filer is the investment fund manager and portfolio manager of the Existing Funds and will be the investment fund manager and portfolio manager of the Future Funds.
The Funds
4. Each Existing Fund is, and each Future Fund will be: (a) an open-end mutual fund established under the laws of Canada or the laws of a province or territory of Canada; (b) a reporting issuer under the laws of some or all of the provinces or territories of Canada; and (c) governed by the provisions of NI 81-102.
5. Securities of each Existing Fund are, and securities of each Future Fund will be, qualified for distribution in some or all of the provinces or territories of Canada under a simplified prospectus, annual information form and fund facts prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and filed with and receipted by the securities regulators in the applicable provinces or territories of Canada.
6. Except as described in the Previous Decision (defined below), none of the Existing Funds currently has relief from paragraphs 2.3(1)(f) or 2.3(1)(h) of NI 81-102 other than certain Existing Funds that are permitted to invest in oil and natural gas futures contracts for hedging purposes pursuant to a decision dated October 3, 2012.
7. The Funds do not and will not rely on the exemptive relief granted to Counsel Portfolio Services Inc. (an affiliate of the Filer) dated October 31, 2013.
8. The Filer and the Existing Funds are not in default of securities legislation in any of the provinces or territories of Canada.
The Previous Decision
9. The Filer obtained a previous decision dated June 2, 2011 (the Previous Decision) exempting the Funds from (then) paragraphs 2.3(f), 2.3(h), 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to permit each Fund to invest in securities of Underlying ETFs except Unlevered Commodity ETFs with exposure to physical commodities other than gold and silver. The Previous Decision also permitted the Funds to invest in silver, Permitted Silver Certificates and Silver Derivatives.
10. Since the Previous Decision did not permit the Funds to invest in securities of Unlevered Commodity ETFs with exposure to physical commodities other than gold and silver, the Filer has requested that the Previous Decision be revoked and replaced by this decision in order to permit the Funds to also invest in Unlevered Commodity ETFs with exposure to physical commodities other than gold and silver.
11. The Filer has determined that it would be in the best interests of the Funds to receive the Exemption Sought and replace the Previous Decision with this decision for the reasons further set out in the application for the Exemption Sought and below.
12. As of the date of this decision, the Filer will no longer rely on the Previous Decision.
Investments in gold and silver
13. In addition to having the ability to invest in gold as permitted under NI 81-102, the Filer wishes for the Funds to have the ability to invest in silver and Permitted Silver Certificates directly, and in silver and gold indirectly by investing in Silver Derivatives and Commodity ETFs.
14. The Filer believes that NI 81-102 allows mutual funds to purchase gold or permitted gold certificates or enter into a specified derivative the underlying interest of which is gold, in recognition that gold is a fairly liquid commodity. The Filer is requesting similar investment flexibility to permit a Fund to make investments in silver based on the Filer’s submission that silver is also a fairly liquid commodity.
15. The Filer believes that the markets in gold and silver are highly liquid, and that there are no liquidity concerns with permitting a Fund to invest in silver and Permitted Silver Certificates directly, and in silver and gold indirectly by investing in Silver Derivatives and Commodity ETFs, as proposed.
16. Permitting a Fund to invest in silver and Permitted Silver Certificates directly, and in silver and gold indirectly by investing in Silver Derivatives and Commodity ETFs, will provide the portfolio manager of a Fund with additional flexibility to increase gains for the Fund in certain market conditions, which may have otherwise caused the Fund to have significant cash positions and therefore deterred from the Fund’s ability to achieve its investment objective.
The Underlying ETFs
17. Each Underlying ETF will be a mutual fund, and not a non-redeemable investment fund, as defined in the Legislation.
18. Each Leveraged Bull ETF and Leveraged Bear ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed +/-200%, as applicable, of the corresponding daily performance of its Underlying Index.
19. 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.
20. Each Leveraged Gold ETF and Leveraged Silver ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Gold or Silver Interest will not exceed +200% of the corresponding daily performance of its Underlying Gold or Silver Interest.
21. The assets of each Unlevered Commodity ETF consist or will consist primarily of one or more physical commodities or derivatives that have an underlying interest in such physical commodity or commodities. These physical commodities may include, but are not limited to, agriculture or livestock (such as soy meal, sugar, wheat, cotton, coffee and live cattle), energy (such as crude oil, gasoline, heating oil, gas oil and natural gas), precious metals (such as gold, silver and platinum) and industrial metals (such as copper and aluminum).
22. The objective of each Unlevered Commodity ETF is or will be, on an unlevered basis, to:
(a) reflect the price of the applicable physical commodity or commodities (less the Unlevered Commodity ETF’s expenses and liabilities), or
(b) track the performance of an index which is intended to reflect the changes in the market value of the physical commodity or commodities sector.
Investments in IPUs, the Underlying ETFs and Silver
23. In addition to investing in securities of ETFs that are IPUs, the Funds propose to have the ability to invest in the Underlying ETFs, whose securities are not IPUs.
24. The amount of the loss that can result from an investment by a Fund in an Underlying ETF will be limited to the amount invested by the Fund in securities of the Underlying ETF.
25. Each Existing Fund is, and each Future Fund will be, permitted, in accordance with its investment objectives and investment strategies, to invest in Silver and securities of Underlying ETFs.
26. The Exemption Sought is needed because:
(a) paragraphs 2.3(1)(f) and (h) of NI 81-102 would prohibit the Funds from investing in Silver or securities of Commodity ETFs;
(b) paragraph 2.5(2)(a) of NI 81-102 would prohibit a Fund from investing in securities of Underlying ETFs because the Underlying ETFs will not be subject to NI 81-101 and may not be subject to NI 81-102; and
(c) paragraph 2.5(2)(c) of NI 81-102 would prohibit a Fund from investing in securities of some Underlying ETFs because some Underlying ETFs will not be qualified for distribution in the local jurisdiction.
27. Any investment by a Fund in Silver or securities of an Underlying 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 Exemption Sought is granted provided that:
(a) the investment by a Fund in Silver and in securities of Underlying ETFs is in accordance with the fundamental investment objectives of the Fund;
(b) the securities of the Underlying ETFs are traded on a stock exchange in Canada or the United States;
(c) a Fund does not purchase securities of an Underlying ETF if, immediately after the transaction, more than 10% of the net asset value of the Fund, taken at market value at the time of the transaction, would consist of securities of Underlying ETFs;
(d) a Fund does not purchase securities of Inverse ETFs or securities of Leveraged Bear ETFs or sell any securities short if, immediately after the transaction, the Fund’s aggregate market value exposure represented by all such securities purchased and/or sold short would exceed 20% of the net asset value of the Fund, taken at market value at the time of the transaction;
(e) immediately after entering into a purchase, derivative or other transaction providing exposure to one or more physical commodities, the Fund’s aggregate market value exposure (whether direct or indirect, including through Commodity ETFs) to all physical commodities (including gold) does not exceed 10% of the net asset value of the Fund, taken at market value at the time of the transaction; and
(f) the simplified prospectus of each Existing Fund discloses, or will disclose the next time it is renewed, and the simplified prospectus of each Future Fund discloses:
(i) in the investment strategy section: (A) that the Fund has obtained relief to invest in Silver and securities of Underlying ETFs; (B) an explanation of what each type of Underlying ETF is; and (C) to the extent the Fund may invest in securities of a Commodity ETF, that the Fund may indirectly invest in gold and other physical commodities; and
(ii) the risks associated with such investments and strategies.
signed “Raymond Chan”
Raymond Chan Manager, Investment Funds and Structured Products
Ontario Securities Commission