Hamilton Capital Partners Inc. (Re), 2020 CanLII 73251

October 5, 2020

AND

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

AND

Hamilton Canadian Bank 1.25x Leverage ETF

(HCAL or the Fund)

Background

The principal regulator in Ontario has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of Ontario (the Legislation) for exemptive relief (the Exemption Sought) relieving the Fund from subsection 2.1(1.1) of National Instrument 81-102 – Investment Funds (NI 81-102), which prohibits an alternative 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 20% 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 HCAL to replicate a 1.25 times multiple of the performance of a rules-based, variable-weight Canadian bank index (the 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 the 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.
The 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 Fund will also be an “alternative mutual fund”, as such term is defined in NI 81-102.
The Filer has filed a preliminary long form prospectus on behalf of the Fund with the securities regulatory authority in each of the Jurisdictions.
The Fund will be subject to NI 81-102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities
The Fund will also be subject to National Instrument 81-107 Independent Review Committee for Investment Funds.
Units of the Fund will (subject to satisfying the Toronto Stock Exchange’s (the TSX) original listing requirements) be listed on the TSX.

Hamilton Canadian Bank 1.25x Leverage ETF

The investment objective of the Fund will be to replicate, to the extent reasonably possible and before the deduction of fees and expenses, a multiple of the performance of a rules-based, variable-weight Canadian bank index. Specifically, the Fund will seek to replicate a 1.25 times multiple of the Solactive Canadian Bank Mean Reversion Index (or any successor thereto).
The Fund will use leverage in order to seek to achieve its investment objective. Leverage will be created through the use of cash borrowings or as otherwise permitted under applicable securities legislation for alternative mutual funds.
The constituent securities of the Bank Index are the top six Canadian banks listed on the Toronto Stock Exchange or other recognized exchange in Canada by market capitalization (the Banks and each a Bank). Currently, the constituents of the 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 Bank Index uses a rules-based mean reversion strategy. The Bank Index will rebalance the portfolio once a month (an Index Rebalance Date) based on the percent difference between each Bank’s stock price and its 50-day average price. On an Index Rebalance Date: (i) the three 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 Bank Index; and (ii) the three 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 Bank Index. Such portfolio weightings will be maintained until the next Index Rebalance Date, at which point the rebalancing process is repeated.
HCAL will seek to achieve its investment objective by borrowing cash to invest in and hold a proportionate share of, or a sampling of the constituent securities of, the Bank Index in order to track approximately 1.25x the performance of the Bank Index. As an alternative to, or in conjunction with investing in and holding the constituent securities, HCAL may also invest in other securities, including other mutual funds or exchange traded funds to obtain exposure to the constituent securities of the Bank Index in a manner that is consistent with HCAL’s investment objective. HCAL may also hold cash and cash equivalents or other money market instruments in order to meet its obligations.
The maximum aggregate exposure of the Fund to cash borrowing, short selling and specified derivatives will not exceed approximately 125% of its net asset value (NAV).
In order to ensure that a unitholder’s risk is limited to the capital invested, the Fund’s leverage ratio will rebalanced in certain circumstances and when the leverage ratio breaches certain bands. Specifically, the Fund’s leverage will be rebalanced back to 125% of the Fund’s NAV within two business days (a Leverage Rebalance Date and together with an Index Rebalance Date, a Rebalance Date) of the Fund’s leverage ratio moving 2% away from its target leverage ratio of 125% (i.e., if the leverage ratio is less than 123% or if the leverage ratio is greater than 127%).
Following a Rebalance Date, the Fund will generally acquire and/or dispose of the appropriate number of securities in order to track the stated, approximate, multiple of the portfolio weighting of the Bank Index. As a result: (i) units of the Fund may be issued, or cash may be paid, in consideration for constituent securities making up the Bank Index and to be acquired by the Fund, as determined by its portfolio adviser; and (ii) units may be exchanged in consideration for those securities that the portfolio adviser determines should be sold by the Fund, or cash may be paid as determined by the portfolio adviser. Generally, such transactions may be implemented by a transfer of constituent securities to the Fund that the portfolio adviser determines should be acquired by the Fund or a transfer of those securities that the portfolio adviser determines should be sold by the Fund.
Outside of a Rebalance Date, any investments by the Fund (owing, for example, to subscriptions received in respect of Units of the Fund), if any, will be such that securities are acquired up to the same weights as such securities exist in the Fund’s portfolio, based on their relative market values, at the time of such investment.
On a leveraged basis, the Fund may therefore invest up to approximately: (i) 33.3% of its NAV in a Bank security that is over-weighted in the Bank Index; and (ii) 8.3% of its NAV in a Bank security that is underweighted in the Bank Index.
In order to achieve its investment objective, and based on the proposed investment strategy, HCAL therefore wishes to be able to invest in a portfolio of Banks, such that immediately after a purchase, more than 20% of HCAL’s NAV may be invested in any one Bank for the purposes of determining compliance with the Concentration Restriction.
The investment objective and investment strategy of HCAL, as well as the risk factors associated therewith, including concentration risk, will be disclosed in the prospectus of HCAL, as may be renewed or amended from time to time. The names of the Banks will also be disclosed in the prospectus of HCAL, as may be renewed or amended from time to time.
The common shares of the Banks are listed on the TSX.
The Banks are among the largest public issuers in Canada.

Rationale for Investment

The Filer notes that, in respect of the Fund, its strategy to acquire securities of an applicable Bank will be transparent, passive and fully disclosed to investors. The Fund will not invest in securities other than Bank securities (or securities designed to gain exposure to the Bank securities as described herein). In addition, in respect of the Fund, the names of the Banks to be invested in will be listed in the Fund’s prospectus. Consequently, unitholders of the Fund will be fully aware of the risks involved with an investment in the securities of the Fund.
Given the proposed composition of the 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 the 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 the Fund will occur in the secondary market.
If required to facilitate distributions or pay expenses of the Fund, securities of the 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 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, the Fund is also akin to a “fixed portfolio investment fund”, as such term is defined in NI 81-102, in that it 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. The Fund will not be a “fixed portfolio investment fund” as it is an alternative mutual fund and 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 Banks, the Banks are among the largest public issuers in Canada. The common shares of the 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 Banks is evidenced by the markets for options in connection therewith. A liquid market for options on the common shares of the Banks is provided by the Montreal Exchange.

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 is that the Exemption Sought is granted for so long as:

(a) the investment in a Bank is made in accordance with HCAL’s investment objectives and investment strategies to replicate a 1.25 times multiple of the performance of the Bank Index;

(b) HCAL’s investment strategies disclose that, as of a Rebalance Date, HCAL will invest in the Banks up to the stated maximum percentages described at representation 20, above. Outside of a Rebalance Date, any investments by HCAL, if any, will be such that securities of each Bank are acquired up to the same weights as the Bank securities exist in HCAL’s portfolio, based on their relative market values at the time of such investment;

(d) HCAL 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 HCAL’s investments in the Banks and the risks associated therewith.

“Darren McKall”

Darren McKall, Manager

Investment Funds & Structured Products Branch Ontario Securities Commission

Application #2020/0434

SEDAR #: 3120279