AGF Investments Inc. (Re), 2016 CanLII 76827

November 2, 2016

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 AGF INVESTMENTS INC. (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of mutual funds subject to National Instrument 81-102 Investment Funds (NI 81-102) that it currently manages (the Existing Funds) and such mutual funds as the Filer, or an affiliate of the Filer, may manage in the future (the Future Funds, and together with the Existing Funds, the Funds and each, a Fund) for a decision under the securities legislation of the principal regulator (the Legislation) that exempts the Filer and each Fund from the following provisions of NI 81-102 (the Exemption Sought) in order to permit the Funds to invest in securities of exchange-traded funds that are not index participation units (the Underlying ETFs):

(a) subsection 2.1(1) of NI 81-102 (the Concentration Restriction) to permit each Fund to purchase securities of an Underlying ETF or enter into a specified derivatives transaction with respect to an Underlying ETF even though, immediately after the transaction, more than 10% of the net asset value (NAV) of the Fund would be invested, directly or indirectly, in securities of the Underlying ETF (the Concentration Relief);

(b) paragraph 2.2(1)(a) of NI 81-102 (the Control Restriction) to permit each Fund to purchase securities of an Underlying ETF such that, after the purchase, the Fund would hold securities representing more than 10% of:

(i) the votes attaching to the outstanding voting securities of the Underlying ETF; or

(ii) the outstanding equity securities of the Underlying ETF (the Control Relief);

(c) paragraph 2.5(2)(a) of NI 81-102 to permit each Fund to invest in securities of Underlying ETFs that do not offer securities under a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and that may not be subject to NI 81-102;

(d) paragraph 2.5(2)(c) of NI 81-102 to permit each Fund to invest in securities of U.S. Underlying ETFs (as defined below); and

(e) paragraph 2.5(2)(e) of NI 81-102 to permit each Fund to pay brokerage fees in relation to its purchase and sale of securities of a Related Underlying ETF (the Brokerage Fee 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 all of the provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, 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.

Canadian Underlying ETF means an Underlying ETF whose securities are listed for trading on a stock exchange in Canada.

Related Underlying ETF means an Underlying ETF that is managed by the Filer or an affiliate of the Filer.

U.S. Underlying ETF means an Underlying ETF whose securities are listed for trading on a stock exchange in the United States.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is a corporation incorporated 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 in the provinces of Ontario, Alberta, British Columbia, Newfoundland and Labrador and Quebec, a portfolio manager in each of the provinces and territories, a mutual fund dealer in the provinces of Ontario, British Columbia and Quebec and an exempt market dealer and commodity trading manager in the province of Ontario.

3. The Filer or an affiliate is, or will be, the manager of the Funds.

4. Neither the Filer nor the Existing Funds are in default of securities legislation in any of the Jurisdictions.

The Funds

5. The Funds are, or will be, open-ended mutual funds or exchange-traded open-ended mutual funds organized and governed by the laws of a jurisdiction of Canada.

6. Each Fund distributes, or will distribute, its securities pursuant to a simplified prospectus prepared pursuant to NI 81-101 and Form NI 81-101F1 Contents of Simplified Prospectus (Form 81-101F1) or a long form prospectus prepared pursuant to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and Form 41-101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2) and is, or will be, governed by the applicable provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities.

7. The Funds are, or will be, reporting issuers in one or more province and territory of Canada in which their securities are distributed.

8. Each Fund is, or will be, subject to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).

9. The Funds may, from time to time, wish to invest in Underlying ETFs.

The Underlying ETFs

10. An Underlying ETF will not meet the definition of index participation unit (IPU) as set out in NI 81-102 because it will not:

(a) hold securities that are included in a specified widely quoted index in substantially the same proportion as those securities are reflected in that index; or

(b) invest in a manner that causes the Underlying ETF to replicate the performance of that index.

11. The securities of an Underlying ETF are, or will be, listed on a recognized exchange in Canada or the United States and the market for them is, or will be, liquid because it is, or will be, supported by designated brokers. As a result the Filer expects a Fund to be able to dispose of such securities through market facilities in order to raise cash, including to fund the redemption requests of its securityholders.

12. No Underlying ETF will hold more than 10% of its NAV in securities of another investment fund unless (a) the other investment fund is a clone fund or money market fund, as defined in NI 81-102; or (b) securities of the other investment fund are IPUs.

13. No Fund will pay management or incentive fees which, to a reasonable person, would duplicate a fee payable by an Underlying ETF for the same service.

14. Absent the Exemption Sought, an investment by a Fund in an Underlying ETF would be prohibited by paragraph 2.5(2)(a) of NI 81-102 because the Underlying ETFs do not offer securities under a simplified prospectus in accordance with NI 81-101, and in the case of the U.S. Underlying ETFs, are not subject to NI 81-102. An investment by a Fund in an Underlying ETF would not qualify for the exception in paragraph 2.5(3)(a) of NI 81-102 because the securities of the Underlying ETF are not IPUs.

The Canadian Underlying ETFs

15. Each Canadian Underlying ETF is, or will be, an open-ended mutual fund subject to NI 81-102, subject to any exemption therefrom that may be granted by the securities regulatory authorities.

16. Securities of each Canadian Underlying ETF are, or will be:

(a) distributed pursuant to a long form prospectus prepared pursuant to NI 41-101 and Form 41-101F2 or a simplified prospectus prepared pursuant to NI 81-101 and Form 81-101F1; and

(b) listed on the Toronto Stock Exchange (TSX) or another “recognized exchange” in Canada, as that term is defined in securities legislation.

17. Because securities of each Canadian Underlying ETF are, or will be, distributed pursuant to a long form prospectus prepared pursuant to NI 41-101 and Form 41-101F2 or a simplified prospectus pursuant to NI 81-101 and Form 81-101F1, each Canadian Underlying ETF is, or will be, a reporting issuer in the provinces and territories of Canada in which its securities are, or will be, distributed.

18. Each Canadian Underlying ETF is, or will be, subject to NI 81-107 generally and in respect of conflict of interest matters to which NI 81-107 applies.

19. The Filer, or an affiliate of the Filer, may qualify for distribution securities of the Related Underlying ETFs whose securities do not meet the definition of IPU, as set out in NI 81-102. The Funds may, from time to time, wish to invest in such Related Underlying ETFs.

20. Each Related Underlying ETF will be a Canadian Underlying ETF or U.S. Underlying ETF.

The U.S. Underlying ETFs

21. Each U.S. Underlying ETF is, or will be, a publicly offered mutual fund subject to the United States Investment Company Act of 1940 (the Investment Company Act).

22. The Filer has concluded that it could not currently gain exposure to applicable asset classes, sectors and/or markets entirely through existing Canadian fund alternatives. Currently, the U.S. Underlying ETFs provide significantly broader exposure to asset classes, sectors and markets than those available from existing Canadian fund alternatives. As the Canadian market for actively-managed exchange-traded funds and fund alternatives evolves, the Filer may consider such products as a vehicle to achieve the investment objectives of a Fund.

23. Absent the Exemption Sought, an investment by a Fund in a U.S. Underlying ETF would be prohibited by paragraph 2.5(2)(c) of NI 81-102 because such U.S. Underlying ETF is not a reporting issuer in the local jurisdiction.

24. The Filer submits that having the option to allocate a very limited portion of each Fund’s assets to U.S. Underlying ETFs will increase diversification opportunities and improve a Fund’s overall risk/reward profile.

25. A key benefit of investing in the Underlying ETFs, including the U.S. Underlying ETFs, is improved portfolio diversification and potentially enhanced returns. For example:

(a) an investment in the Underlying ETFs will provide the Funds with access to specialized knowledge, expertise and/or analytical resources of the investment adviser to the Underlying ETFs;

(b) the Underlying ETFs provide a potentially better risk profile and improved liquidity/tradability than direct holdings of asset classes to which the Underlying ETFs provide exposure; and

(c) the investment strategies of the U.S. Underlying ETFs offer significantly broader exposure to asset classes, sectors and markets than those available in the existing Canadian exchange-traded fund market.

The Concentration Relief and Control Relief

26. An investment in an Underlying ETF by a Fund is an efficient and cost effective alternative to administering one or more investment strategies similar to that of the Underlying ETF.

27. An investment in an Underlying ETF by a Fund should pose limited investment risk to the Fund because each Underlying ETF will be subject to NI 81-102 or the Investment Company Act, subject to any exemption therefrom that may in the future be granted by the securities regulatory authorities.

28. Due to the potential size disparity between the Funds and the Underlying ETFs, it is possible that a relatively small investment, on a percentage of NAV basis, by a relatively larger Fund in securities of an Underlying ETF could result in such Fund holding securities representing more than 10% of: (i) the votes attaching to the outstanding voting securities of the Underlying ETF; or (ii) the outstanding equity securities of that Underlying ETF, contrary to the Control Restriction.

29. An investment by a Fund in securities of an Underlying ETF will not qualify for the exemptions set out in:

(a) paragraph 2.1(2)(d) of NI 81-102 from the Concentration Restriction; and

(b) paragraph 2.2(1.1)(b) of NI 81-102 from the Control Restriction;

because securities of the Underlying ETFs are not IPUs.

30. The material difference between the securities of an Underlying ETF and the securities of a conventional mutual fund is the method of distribution and disposition.

The Brokerage Fee Relief

31. The trades conducted by a Fund may not be of the size necessary for the Fund to be eligible to purchase or exchange securities of a Related Underlying ETF directly from the Related Underlying ETF at its NAV per security. Trades in securities of a Related Underlying ETF are therefore likely to be conducted by a Fund in the secondary market through the facilities of a recognized exchange. Absent the Brokerage Fee Relief, paragraph 2.5(2)(e) of NI 81-102 would not permit a Fund to pay brokerage fees incurred in connection with a Related Underlying ETF.

32. All brokerage fees related to trades in securities of Related Underlying ETFs will be borne by the Funds in the same manner as any other portfolio transactions made on an exchange.

33. If a Fund trades in securities of a Related Underlying ETF with or through an affiliate or associate of the Filer acting as dealer, the Filer will comply with its obligations under NI 81-107 in respect of any proposed related party transactions. These related party transactions will be disclosed to securityholders of the applicable Fund in its management report of fund performance.

The Other ETF Decision

34. The Funds previously received exemptive relief on November 8, 2010 (the Other ETF Decision) to permit the Funds to invest in securities of Leveraged ETFs, Inverse ETFs, Leveraged Gold ETFs and Leveraged Silver ETFs (as such terms are defined in the Other ETF Decision, collectively, the Other ETFs) that are not IPUs.

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 securities of an Underlying ETF is in accordance with the investment objectives of the Fund;

(b) in respect of a Fund’s purchase of securities of Underlying ETFs other than Related Underlying ETFs, a Fund does not purchase securities of such Underlying ETFs if, immediately after the purchase, more than 30% of the NAV of the Fund in aggregate, taken at market value at the time of purchase, would consist of securities of such Underlying ETFs;

(c) a Fund does not purchase securities of a U.S. Underlying ETF (including a U.S. Underlying ETF that is a Related Underlying ETF) if, immediately after the purchase, more than 10% of the NAV of the Fund in aggregate, taken at market value at the time of the purchase, would consist of securities of U.S. Underlying ETFs;

(d) a Fund does not short sell securities of an Underlying ETF;

(e) an Underlying ETF is not a commodity pool as defined in National Instrument 81-104 Commodity Pools or under applicable U.S. laws and its investment adviser is not required to register as a commodity pool operator in the United States in connection with the U.S. Underlying ETFs;

(f) the Canadian Underlying ETF does not rely on exemptive relief from the requirements of:

(i) section 2.3 of NI 81-102 regarding the purchase of physical commodities;

(ii) sections 2.7 and 2.8 of NI 81-102 regarding the purchase, sale or use of specified derivatives; or

(iii) paragraphs 2.6(a) and 2.6(b) of NI 81-102 with respect to the use of leverage;

(g) securities of each Underlying ETF are listed on a recognized exchange in Canada or the United States;

(h) each U.S. Underlying ETF is, immediately before the purchase by a Fund of securities of that U.S. Underlying ETF, an investment company subject to the Investment Company Act in good standing with the United States Securities and Exchange Commission;

(i) a Fund does not purchase securities of an Underlying ETF if, immediately after the purchase, more than 10% of the NAV of the Fund in aggregate, taken at market value at the time of the purchase, would consist of a combination of securities of Underlying ETFs and Other ETFs that provide leverage exposure, further to the Other ETF Decision; and

(j) the prospectus of each Fund discloses, or will disclose in the next renewal of its prospectus following the date of this decision, in the investment strategy section, the fact that the Fund has obtained the Exemption Sought to permit investments in Underlying ETFs on the terms described in this decision.

“Raymond Chan”

Name: Raymond Chan

Title: Manager, Investment Funds & Structured Products

Ontario Securities Commission

SEDAR Project Nos. 2534665, 2534669 and 2534673