In the Matter of Caldwell Investment Management Ltd., 2018 CanLII 117229

November 7, 2018

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 CALDWELL INVESTMENT MANAGEMENT LTD. (CIM)

DECISION

BACKGROUND

The principal regulator in the Jurisdiction has received an application from CIM on behalf of the Tactical Sovereign Bond Fund (the Fund), for a decision under the securities legislation of the principal regulator (the Legislation), exempting the Fund from paragraphs 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 Investment Funds (NI 81-102) to permit the Fund to invest in securities of exchange-traded funds (ETFs) that seek to provide daily results that replicate the daily performance of a specified widely-quoted index (Underlying Index) by an inverse multiple of up to 100%, which are traded on a stock exchange in Canada or the United States and do not qualify as “index participation units” (IPUs) (as defined in NI 81-102) (each, a Underlying ETF and collectively, the Underlying ETFs) (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) CIM has provided notice that subsection 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 (other than Québec) 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. In addition, the following terms have the following meanings:

Canadian Underlying ETF means an Underlying ETF the securities of which are traded on a recognized exchange in Canada.

U.S. Underlying ETF means an Underlying ETF the securities of which are traded on a recognized exchange in the U.S.

Representations

The decision is based on the following facts represented by CIM:

CIM

1. CIM is a corporation existing under the laws of the Province of Ontario with its head office located in Toronto, Ontario.

2. CIM is the trustee, manager, promoter and portfolio manager of the Fund and is registered in the categories of: (a) investment fund manager in the Provinces of Alberta, British Columbia, Manitoba, Ontario, Québec, Newfoundland and Labrador and Saskatchewan and (b) portfolio manager in the Provinces of Alberta, British Columbia, Manitoba, Ontario, Québec and Saskatchewan.

3. CIM and the Fund are not in default of securities legislation in any of the Jurisdictions.

The Fund

4. The Fund is a mutual fund organized and governed by the laws of the Province of Ontario and is a reporting issuer in all of the Jurisdictions.

5. The Fund distributes its securities pursuant to a simplified prospectus, annual information form and fund facts pursuant to National Instrument 81-101 – Mutual Fund Prospectus Disclosure (NI 81-101) and Form 81-101F1 – Contents of Simplified Prospectus and Form 81-101F2 – Contents of Annual Information Form, respectively, and is governed by the applicable provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

6. The Fund is subject to National Instrument 81-107 – Independent Review Committee for Investment Funds (NI 81-107).

7. The Fund may, from time to time, wish to invest up to 10% of its net asset value (NAV) in one or more Underlying ETFs in accordance with its investment objectives.

Underlying ETFs

8. Each Underlying ETF is, or will be, an exchange-traded fund traded on an exchange in Canada or the United States.

9. Each Underlying ETF will generally 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.

10. The securities of an Underlying ETF will not meet the definition of IPU in NI 81-102 because the purpose of the Underlying ETF will not be to:

(a) hold the securities that are included in a specified widely quoted market 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. An investment by the Fund in securities of an Underlying ETF will represent the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Fund.

12. Any regulatory concerns, such as undue risk, liquidity concerns or lack of transparency, in connection with investing in the Underlying ETFs are mitigated by the following facts:

(a) The Underlying ETFs trade, or will trade, on a Canadian or U.S. exchange and are, or will be, generally relatively liquid. The Underlying ETFs will either be “registered” investment companies in the United States or reporting issuers in one or more jurisdictions in Canada, which means that there will be clear disclosure about the Underlying ETFs readily available in the marketplace.

(b) The amount of 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.

(c) Investments by the Fund in Underlying ETFs will be very limited as no more than 10% of the NAV of the Fund may be invested in a combination of Underlying ETFs taken at market value at the time of purchase.

(d) The simplified prospectus of the Fund will disclose the next time it is renewed: (i) in the investment strategy section: (A) that the Fund has obtained relief to invest in securities of the Underlying ETFs and (B) an explanation of what each type of Underlying ETFs is and (ii) the risks associated with such investments and strategies.

13. The Fund will not pay any 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 the Fund in an Underlying ETF would be prohibited by (a) 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 (b) in the case of the U.S. Underlying ETFs, are not subject to NI 81-102.

The Canadian Underlying ETFs

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

(a) distributed pursuant to a long form prospectus prepared pursuant to National Instrument 41-101 – General Prospectus Disclosure and Form 41-101F2 – Information Required in an Investment Fund Prospectus; and

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

16. Each Canadian Underlying ETF is, or will be, a reporting issuer in one or more of the Jurisdictions.

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

The U.S. Underlying ETFs

18. 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).

19. Absent the Exemption Sought, an investment by the 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.

20. CIM submits that having the option to allocate a limited portion of the Fund’s assets to U.S. Underlying ETFs will assist the Fund in seeking to meet its investment objectives, will increase diversification opportunities and improve the Fund’s overall risk/reward profile.

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

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

(c) the Fund does not purchase securities of an Underlying ETF if, immediately after the transaction, more than 10% of the NAV of the Fund in aggregate, taken at market value at the time of the transaction, would consist of securities of Underlying ETFs (which for greater certainty shall include alternative mutual funds (as defined in the amendments to NI 81-102 which were published on October 4, 2018));

(d) the Fund does not purchase securities of an Underlying ETF or sell any securities short if, immediately after the transaction, the Fund’s aggregate market value exposure represented by all such securities purchased and securities sold short would exceed 20% of the NAV of the Fund, taken at market value at the time of the transaction; and

(e) the simplified prospectus of the Fund will disclose the next time it is renewed following the date of this decision,

(i) in the investment strategy section:

(A) that the Fund has obtained relief to invest in securities of the Underlying ETFs and;

(B) an explanation of what each type of Underlying ETF is; and

(ii) the risks associated with such investments and strategies.

“Neeti Varma”

Neeti Varma, Acting Manager Investment Funds and Structured Products Branch Ontario Securities Commission

SEDAR # 2830213