April 27, 2021
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 EVOLVE FUNDS GROUP INC. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Evolve FANGMA Index ETF (the Fund), for a decision (the Exemption Sought) under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) relieving the Fund from section 2.1(1) of National Instrument 81-102 Investment Funds (NI 81-102), in order to permit the Fund to purchase securities of an issuer, enter into a specified derivatives transaction or purchase an index participation unit even though, immediately after the transaction, more than 10% of the net asset value (NAV) of the Fund would be invested in securities of any issuer (the Concentration 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 subsection 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.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer is a corporation incorporated under the laws of Canada, with its head office located in Toronto, Ontario.
The Filer will be the promoter, trustee and investment fund manager of the Fund and is registered as: (i) a portfolio manager in Ontario and (ii) an investment fund manager in Newfoundland and Labrador, Ontario and Quebec.
The Filer or an affiliate or associate of the Filer is, or will be, the investment fund manager of the Fund.
The Fund
The Fund will be an exchange traded mutual fund governed by the laws of a Jurisdiction of Canada and a reporting issuer under the laws of the Jurisdictions.
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 be subject to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).
The Units of the Fund will (subject to satisfying the Toronto Stock Exchange’s (the TSX) original listing requirements) be listed on the TSX.
The investment objective of the Fund will be to seek to replicate, to the extent reasonably possible and before fees and expenses, the performance of the Solactive FANGMA Equal Weight Index Canadian Dollar Hedged, or any successor thereto (the Index).
The constituent securities of the Index are the equity securities (the Shares) of Alphabet Inc., Amazon Inc., Apple Inc., Facebook Inc., Netflix Inc. and Microsoft Corp. (each, a Company).
The Index will rebalance the portfolio quarterly (an Index Rebalance Date). On an Index Rebalance Date, each Company will be assigned an equal weight of the Index.
Following a Rebalance Date, the Fund will generally acquire and/or dispose of the appropriate number of securities in order to track the portfolio weighting of the 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 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.
The Fund wishes to be able to invest in the Shares of the Companies, such that immediately after a purchase, more than 10 percent of its net assets may be invested in the Shares of one Company for the purposes of determining compliance with the Concentration Restriction.
The investment objective and investment strategy of the Fund, as well as the risk factors associated therewith, including concentration risk, are and will be disclosed in the prospectus of the Fund, as may be amended from time to time. The names of the Companies will also be disclosed in the prospectus of the Fund, as may be renewed or amended from time to time.
The Shares are listed on the NASDAQ.
The Companies are among the largest public issuers in North America.
Rationale for Investment
The Filer notes that, in respect of the Fund, its strategy to acquire securities of an applicable Company will be transparent, passive and fully disclosed to investors. The Fund will not invest in securities other than the Shares. In addition, in respect of the Fund, the names of the Companies 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 composition of the Index and 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, the Shares will be sold pro-rata across the Fund's portfolio according to their relative market values at the time of such sale.
Future subscriptions proceeds from the sale of units of a Fund, if any, will be used to acquire Shares of each Company up to the same portfolio weights as the 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 similar 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 (i.e. equal) weighting 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 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 Companies, the Companies are among the largest public issuers in North America. The common shares of the Companies are some of the most liquid equity securities listed on the NASDAQ and are less likely to be subject to liquidity concerns than the securities of other issuers.
The Exemption Sought is sought to permit the Fund to purchase Shares or enter into specified derivatives transactions in connection therewith such that, immediately after the transaction, more than 10 percent of its net assets would be invested in the Shares of one Company for the purposes of determining compliance with the Concentration Restriction (the Proposed Transactions).
Neither the Filer or the Fund is in default of any of its obligations under securities legislation in any of the Jurisdictions.
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 Proposed Transactions are in accordance with the investment objectives and investment strategies of the Fund to replicate the performance of the Solactive FANGMA Equal Weight Index Canadian Dollar Hedged, or any successor thereto;
(b) the Fund’s investment strategies disclose that, as of a Rebalance Date, the Fund will invest in the Companies in equal weights. Outside of a Rebalance Date, any investments by the Fund, if any, will be such that securities of each Company are acquired up to the same weights as the Shares exist in the Fund’s portfolio, based on their relative market values at the time of such investment;
(c) the Fund’s investment strategies disclose that the Fund’s portfolio will be rebalanced as of each Rebalance Date; and
(d) the final prospectus of the Fund includes: (i) disclosure regarding the Exemption Sought under the heading “Exemptions and Approvals”; and (ii) a risk factor regarding the concentration of the Fund’s investments in the Companies and the risks associated therewith.
“Darren McKall”
Darren McKall
Manager, Investment Funds and Structured Products
Ontario Securities Commission
Sedar Project #3183043
Application File # 2021/0121