April 20, 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
HORIZONS ETFS MANAGEMENT (CANADA) INC.
(the Filer)
And
HORIZONS US MARIJUANA INDEX ETF (HMUS)
HORIZONS PSYCHEDELIC STOCK INDEX ETF (PSYK, and together with HMUS, the Funds and each, a Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), granting an exemption from section 2.12(1)12 of National Instrument 81-102 Investment Funds (NI 81-102) to permit the Funds to enter into securities lending transactions in which the aggregate market value of all securities loaned by a Fund exceeds 50% of the net asset value of the Fund (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator for this application; and
(ii) 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 each of the other provinces and territories of Canada (together with Ontario, the Canadian Jurisdictions).
Interpretation
Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
The Filer is the trustee, investment fund manager and portfolio manager of the Funds. The Filer is registered as an investment fund manager, portfolio manager, exempt market dealer, commodity trading manager and commodity trading adviser in Ontario. The head office of the Filer is in Toronto, Ontario.
The Funds are open-end exchange traded mutual funds established under the laws of the Province of Ontario, pursuant to a declaration of trust. The Funds are governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.
The Filer and the Funds are not in default of securities legislation in any of the Canadian Jurisdictions.
Units of the Funds are listed on the Neo Exchange Inc.
The investment objective of HMUS is to seek to replicate, to the extent possible, the performance of the US Marijuana Companies Index, net of expenses. The US Marijuana Companies Index is designed to provide exposure to the performance of a basket of North American publicly-listed life sciences companies having significant business activities in, or significant exposure to, the United States marijuana or hemp industries.
To achieve HMUS’s investment objectives, HMUS invests and holds the equity securities of the constituent issuers of its underlying index in substantially the same proportion as its underlying index. HMUS employs a passive investment strategy that is not actively managed, and the equity holdings in the portfolio are designed to maintain their same relative portfolio weightings between rebalancing dates. The US Marijuana Companies Index is rebalanced on a quarterly basis only.
The investment objective of PSYK is to seek to replicate, to the extent possible and net of expenses, the performance of a market index that is designed to provide exposure to the performance of a basket of North American publicly-listed life sciences companies having significant business activities in, or significant exposure to, the psychedelics industry. PSYK currently seeks to replicate the performance of the North American Psychedelics Index.
To achieve PSYK’s investment objectives, PSYK invests and holds the equity securities of the constituent issuers of its underlying index in substantially the same proportion as its underlying index. PSYK employs a passive investment strategy that is not actively managed, and the equity holdings in the portfolio are designed to maintain their same relative portfolio weightings between rebalancing dates. The North American Psychedelics Index is rebalanced on a quarterly basis only.
In order to earn additional returns for the Funds, the Filer proposes to enter into securities lending transactions on behalf of each Fund for which the aggregate market value of securities loaned by a Fund may represent up to 100% of the net asset value of the Fund to be lent to one or more borrowers through an agent, which agent is not the Fund’s custodian or sub-custodian.
The securities lending agent of each Fund maintains appropriate internal controls, procedures, and records for securities lending transactions in compliance with the requirements of subsection 2.16(3) of NI 81-102.
The Filer believes that the equity securities held by each Fund are well suited for securities lending above the 50% of net asset value limitation set out in NI 81-102 because each Fund employs a passive investment strategy and the equity securities held in each Fund’s portfolio are considered to be liquid by the Filer.
The Filer has ensured that the agent through which each Fund lends securities maintains appropriate internal controls, procedures and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.
Securities in each Fund’s portfolio have been loaned only to borrowers that have been considered acceptable to each Fund as contemplated by subsection 2.16(2) of NI 81-102.
Each Fund has the rights set forth in subsections 2.12(1)8, 2.12(1)9 and 2.12(1)11 of NI 81- 102, including the right to keep any collateral on deposit in the event of default by a borrower.
The collateral received by each Fund in respect of a securities lending transaction is in the form of cash, Government of Canada bonds and close equivalents, and provincial bonds and close equivalents subject to minimum credit rating criteria and/or other collateral permitted by NI 81- 102.
On a daily mark-to-market basis, each Fund receives collateral worth at least 102% of the value of the loaned securities, as required under NI 81-102. In respect of securities lending transactions in which the aggregate market value of securities loaned by a Fund represents in excess of 50% of net asset value, the Fund will only enter such securities lending transactions if it receive securities lending collateral with a market value equal to at least 110% of the market value of any securities that are to be loaned at or prior to the term of the loan.
The collateral received by each Fund in respect of a securities lending transaction is not reinvested in any other types of investment products.
The prospectus of each Fund will contain disclosure specifying that the Fund may, pursuant to exemptive relief granted by Canadian securities regulatory authorities, enter into securities lending transactions for which the aggregate market value of securities loaned by the Fund may represent up to 100% of the net asset value of the Fund.
Other than as set forth herein, any securities lending transactions entered into by each Fund are and will be conducted in accordance with the provisions of NI 81-102.
The Filer submits that it is in the best interests of each Fund to be permitted to enter into securities lending transactions in which the aggregate market value of securities loaned by the Fund represents up to 100% of the net asset value of the Fund, and that it would not be prejudicial to the public interest to grant the Exemption Sought.
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 each Fund, in connection with a securities lending transaction:
- receives the collateral that:
a) is prescribed by paragraphs 2.12(1)3 to 6 of NI 81-102, other than collateral described in subsection 2.12(1)6(d) or in paragraph (b) of the definition of "qualified security"; and
b) is marked to market on each business day in accordance with paragraph 2.12(1)7
of NI 81-102;
has the rights set forth in paragraphs 2.12(1)8, 2.12(1)9 and 2.12(1)11 of NI 81-102;
complies with paragraph 2.12(1)10 of NI 81-102; and
lends its securities only to borrowers that are acceptable to the Fund.
“Darren McKall”
__________________________________
Darren McKall
Investment Funds and Structured Products
Ontario Securities Commission
Application #2021/0196
Sedar #s: 3216497 and 3216504