Hamilton Capital Partners Inc. (Re), 2020 CanLII 35293

April 29, 2020

AND

IN THE MATTER OF Hamilton Capital Partners Inc. (the Filer)

AND

Hamilton Canadian Bank Mean Reversion Index ETF (HCA)

and

Hamilton Australian Bank Equal-Weight Index ETF (HBA and together with HCA, the FUNDS and each a FUND).

Background

The principal regulator in Ontario has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of Ontario (the Legislation) for exemptive relief (the Exemption Sought) relieving the Funds from subsection 2.1(1) of National Instrument 81-102 – Investment Funds (NI 81-102), which prohibits a mutual fund from purchasing a security of an issuer, entering into a specified derivatives transaction or purchasing an index participation unit if, immediately after the transaction, more than 10% of the net assets of the mutual fund, taken at market value at the time of the transaction, would be invested in securities of any issuer (the Concentration Restriction) to permit:

(a) HCA to replicate the performance of a rules-based, variable-weight Canadian bank index (the Canadian Bank Index); and

(b) HBA to replicate the performance of an equal-weight Australian bank index (the Australian Bank Index).

Under National Policy 11-203 - Process for Exemptive Relief Applications in Multiple Jurisdictions (NP 11-203):

(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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Northwest Territories, Nunavut and Yukon (together with Ontario , the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 - Definitions, NI 81-102 or in MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.

Representations

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

General

The Filer is a corporation organized under the laws of Ontario with a head office in Toronto.
The Filer will be the trustee, portfolio manager and investment fund manager of each Fund.
The Filer is not in default of securities legislation in any of the Jurisdictions.
The Filer is registered as: (i) an investment fund manager in Ontario, Quebec and Newfoundland & Labrador; (ii) an exempt market dealer in Ontario; and (iii) a portfolio manager in Ontario.
Each Fund will be an exchange traded mutual fund trust governed by the laws of Ontario and a reporting issuer under the laws of the Jurisdictions.
The Filer has filed a preliminary long form prospectus on behalf of the Funds with the securities regulatory authority in each of the Jurisdictions.
Each Fund will be subject to NI 81-102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities
Each Fund will be subject to National Instrument 81-107 Independent Review Committee for Investment Funds.
Units of each Fund will (subject to satisfying the Toronto Stock Exchange’s (the TSX) original listing requirements) be listed on the TSX.

Hamilton Canadian Bank Mean Reversion Index ETF

The investment objective of HCA will be to replicate, to the extent reasonably possible and before the deduction of fees and expenses, the performance of the Canadian Bank Index. Specifically, HCA seeks to replicate the Solactive Canadian Bank Mean Reversion Index, a newly created index (or any successor thereto) that is a rules-based, variable-weight index.
The constituent securities of the Canadian Bank Index will be the common shares of the six largest Canadian banks by market capitalization listed on the TSX or other recognized exchange in Canada (the Canadian Banks and each a Canadian Bank). Currently, the constituents of the Canadian Bank Index are Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank.
The Canadian Bank Index uses a rules-based mean reversion strategy. The Canadian Bank Index will rebalance the portfolio once a month (an HCA Rebalance Date) based on the percent difference between each Canadian Bank’s stock price and its 50-day average price. On an HCA Rebalance Date it is expected that: (i) the three Canadian Banks with the lowest percentage difference between their current trading price and their 50-day average price will be “over-weighted” at approximately 26.5% each of the Canadian Bank Index; and (ii) the three Canadian Banks with the highest percentage difference between their current trading price and their 50-day average price will be “under-weighted” at approximately 6.5% each of the Canadian Bank Index. Such portfolio weightings will be maintained until the next HCA Rebalance Date, at which point the rebalancing process is repeated.
The investment strategy of HCA will be to invest in and hold the constituent securities (common shares of the Canadian Banks) of the Canadian Bank Index in substantially the same proportion as they are reflected in the Canadian Bank Index or securities intended to replicate the performance of the Canadian Bank Index. As an alternative to, or in conjunction with investing in and holding common shares of the Canadian Banks, HCA may therefore invest in other securities to obtain exposure to the Canadian Banks in a manner that is consistent with HCA’s investment objective. HCA may also hold cash and cash equivalents or other money market instruments in order to meet its obligations.
In order to achieve its investment objective, and based on the proposed investment strategy, HCA therefore wishes to be able to invest in a portfolio of Canadian Banks, such that immediately after a purchase, more than 10% of HCA’s NAV may be invested in any one Canadian Bank for the purposes of determining compliance with the Concentration Restriction.
The investment objective and investment strategy of HCA, as well as the risk factors associated therewith, including concentration risk, will be disclosed in the prospectus of HCA, as may be renewed or amended from time to time. The names of the Canadian Banks will also be disclosed in the prospectus of HCA, as may be renewed or amended from time to time.
The common shares of the Canadian Banks are listed on the TSX.
The Canadian Banks are among the largest public issuers in Canada.

Hamilton Australian Bank Equal-Weight Index ETF

The investment objective of HBA will be to replicate, to the extent reasonably possible and before the deduction of fees and expenses, the performance of the Australian Bank Index. Specifically, HBA seeks to replicate the Solactive Australian Bank Equal-Weight Index, a newly created index (or any successor thereto).
The constituent securities of the Australian Bank Index will be the common shares of the five largest Australian banks by market capitalization listed on the Australian Securities Exchange (ASE) (the Australian Banks and each an Australian Bank and together with the Canadian Banks the Banks and each a Bank). Constituents of the Australian Bank Index will be subject to minimum market capitalization and liquidity screens and will be rebalanced semi-annually (an HBA Rebalance Date and together with an HCA Rebalance Date, a Rebalance Date). Currently, the constituents of the Australian Bank Index are Commonwealth Bank of Australia, Australia and New Zealand Banking Group, Westpac Banking Corporation, National Australia Bank and Macquarie Group Inc.
As of April 22, 2020, the market capitalizations of the Australian Banks range from A$34.7 billion (CDN$31.0 billon) (Macquarie Group Inc.) to A$104.9 billion (CDN$93.7 billion) (Commonwealth Bank of Australia), with well over $100 million of shares of each stock traded each day. In view of the Filer, such figures are evidence of the liquidity of the Australian Banks.
In the view of the Filer, the Australian Banks are subject to materially similar banking regulations and capital requirements as those to which the Canadian Banks are subject, pursuant to Canadian law.
On an HBA Rebalance Date, each security in the Australian Bank Index will be allocated an equal weight rather than a market capitalization weight. As such, on an HBA Rebalance Date, any one Australian Bank will represent 20% of the Australian Bank Index.
HBA will seek to achieve its investment objective by investing in and holding a proportionate share of the Australian Bank Index. As an alternative to, or in conjunction with investing in and holding common shares of the Australian Banks, HBA may also invest in other securities to obtain exposure to the Australian Banks in a manner that is consistent with HBA’s investment objective. HBA may also hold cash and cash equivalents or other money market instruments in order to meet its obligations.
In order to achieve its investment objective, and based on the proposed investment strategy, HBA therefore wishes to be able to invest in a portfolio of Australian Banks, such that immediately after a purchase, more than 10% of HBA’s NAV may be invested in any one Australian Bank for the purposes of determining compliance with the Concentration Restriction.
The investment objective and investment strategy of HBA, as well as the risk factors associated therewith, including concentration risk, will be disclosed in the prospectus of HBA, as may be renewed or amended from time to time. The names of the Australian Banks will also be disclosed in the prospectus of HBA, as may be renewed or amended from time to time.
The common shares of the Australian Banks are listed on the Australian Stock Exchange.
The Australian Banks are among the largest public issuers in Australia.

Rationale for Investment

The Filer notes that, in respect of each Fund, its strategy to acquire securities of an applicable Bank will be transparent, passive and fully disclosed to investors. A Fund will not invest in securities other than applicable Bank securities (or securities designed to gain exposure to the Bank securities as described herein). In addition, in respect of a Fund, the names of the applicable Banks to be invested in will be listed in the Fund’s prospectus. Consequently, unitholders of a Fund will be fully aware of the risks involved with an investment in the securities of the Fund.
Given the proposed composition of each Fund’s portfolio, it would be impossible for the Fund to achieve its investment objective and pursue its investment strategy without obtaining relief from the Concentration Restriction.
The units of a Fund will be highly liquid securities, as designated brokers act as intermediaries between investors and the Fund, standing in the market with bid and ask prices for the units of the Fund to maintain a liquid market for the units of the Fund. The majority of trading in units of a Fund will occur in the secondary market.
If required to facilitate distributions or pay expenses of a Fund, securities of the applicable Bank securities will be sold pro-rata across the Fund’s portfolio according to their relative market values at the time of such sale.
Future subscriptions for Fund securities, if any, will be used to acquire securities of each applicable Bank up to the same weights as the Bank securities exist in the Fund’s portfolio, based on their relative market values at the time of such subscription.
In view of the Filer, each Fund is also akin to a “fixed portfolio investment fund”, as such term is defined in NI 81-102, in that each will: (a) have fundamental investment objectives that include holding and maintaining a fixed portfolio of publicly traded equity securities of one or more issuers, the names of which are disclosed in its prospectus; and (b) trade the securities referred to in paragraph (a) only in the circumstances disclosed in its prospectus. Each Fund will not be a “fixed portfolio investment fund” as each will be in continuous distribution.
The Filer further notes that a “fixed portfolio investment fund” is exempt from the Concentration Restrictions, provided purchases of securities are made in accordance with its investment objectives.
With respect to the Canadian Banks, the Canadian Banks are among the largest public issuers in Canada. The common shares of the Canadian Banks are some of the most liquid equity securities listed on the TSX and are less likely to be subject to liquidity concerns than the securities of other issuers.
The liquidity of the common shares of the Canadian Banks is evidenced by the markets for options in connection therewith. A liquid market for options on the common shares of the Canadian Banks is provided by the Montreal Exchange.
In view of the Filer, similar to an investment in Canadian Banks, an investment in Australian Banks is also less likely to be subject to liquidity concerns than an investment in the securities of other issuers.

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 is that the Exemption Sought is granted in respect of HCA for so long as:

(a) the investment in a Canadian Bank is made in accordance with HCA’s investment objectives and investment strategies to replicate the performance of the Canadian Bank Index;

(b) HCA’s investment strategies disclose that, as of an applicable HCA Rebalance Date, HCA will invest in the Canadian Banks up to the stated maximum percentages described at representation 12, above. Outside of an HCA Rebalance Date, any investments by HCA, if any, will be such that securities of each Canadian Bank are acquired up to the same weights as the Canadian Bank securities exist in HCA’s portfolio, based on their relative market values at the time of such investment;

(d) HCA includes in its final prospectus: (i) disclosure regarding the Exemption Sought under the heading “Exemptions and Approvals”; and (ii) a risk factor regarding the concentration of HCA’s investments in the Canadian Banks and the risks associated therewith.

The decision of the principal regulator is that the Exemption Sought is granted in respect of HBA for so long as:

(a) the investment in an Australian Bank is made in accordance with HBA’s investment objectives and investment strategies to replicate the performance of the Australian Bank Index;

(b) HBA’s investment strategies disclose that, as of an HBA Rebalance Date, HBA will invest in the Australian Banks in the percentages described at representation 22, above. Outside of an HBA Rebalance Date, any investments by HBA, if any, will be such that securities of each Australian Bank are acquired up to the same weights as the Australian Bank securities exist in HBA’s portfolio, based on their relative market values at the time of such investment;

(d) HBA includes in its final prospectus: (i) disclosure regarding the Exemption Sought under the heading “Exemptions and Approvals”; and (ii) a risk factor regarding the concentration of HBA’s investments in the Australian Banks and the risks associated therewith.

Darren McKall, Manager Investment Funds & Structured Products Branch Ontario Securities Commission

Application # 2020/0213