Horizons ETFs Management (Canada) Inc. (Re), 2022 CanLII 73430

August 15, 2022

IN THE MATTER OF

THE SECURITIES LEGISLATION OF ONTARIO

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) BetaPro Equal Weight Canadian Bank 2x Daily Bull ETF (HBKU) and BetaPro Equal Weight Canadian Bank -2x Daily Bear ETF (HBKD, together with HBKU, the Funds and each, a Fund)

DECISION

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 the principal regulator (the Legislation) relieving each Fund from subsection 2.1(1.1) of National Instrument 81-102 Investment Funds (NI 81-102) (the Concentration Restriction) to permit each Fund to enter into purchase and/or specified derivatives transactions to obtain exposure to the Constituent Banks (defined below) of the Solactive Equal Weight Canada Banks Index (the Index) in accordance with, and as limited by, its investment objective of seeking daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that correspond to: (a) in the case of HBKU, two times (200% of) the daily performance of the Index; and (b) in the case of HBKD, two times the inverse (opposite) of (-200% of) the daily performance of the Index (the Proposed Transactions) (the Exemption Sought).

Under National Policy 11-203 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) 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 Ontario (together with Ontario, 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 and the Funds

1The Filer is a corporation incorporated under the laws of Canada, with its head office located in Toronto, Ontario.

2The Filer will be the promoter, investment fund manager and portfolio manager of the Funds and is registered as: (a) an investment fund manager in Newfoundland and Labrador, Ontario and Québec; (b) a portfolio manager in Alberta, British Columbia, Ontario and Québec; (c) a dealer in the category of exempt market dealer in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec and Saskatchewan; (d) a commodity trading adviser in Ontario; and (e) a commodity trading manager in Ontario.

3Each of the Funds will be an exchange traded alternative mutual fund structured as a separate class of shares of Horizons ETF Corp., a mutual fund corporation established under the federal laws of Canada (Horizons MFC). Each Fund will launch with a single series.

4Each Fund is a separate investment fund having specific investment objectives and is specifically referable to a separate portfolio of investments.

5The shares of each Fund will be offered pursuant to a long form prospectus (the Prospectus) and ETF Facts prepared and filed for each Fund in accordance with National Instrument 41-101 General Prospectus Requirements with the securities regulatory authority in each of the Jurisdictions.

6Each Fund will be a reporting issuer under the laws of the Jurisdictions and subject to NI 81-102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities.

7The shares of the Funds will be listed on the Toronto Stock Exchange (the TSX), subject to satisfying the TSX’s listing requirements.

8Neither the Filer nor any Fund is in default of any of its obligations under securities legislation in any of the Jurisdictions.

Rationale for the relief

9The constituent securities of the Index are the TSX-listed common shares of the six largest Canadian banks by market capitalization (each, a Constituent Bank), currently: Canadian Imperial Bank of Commerce, Bank of Montreal, National Bank of Canada, Royal Bank of Canada, Toronto Dominion Bank and The Bank of Nova Scotia.

10Each Fund will use leverage in order to seek to achieve its investment objective. The amount of leverage will be reset on a daily basis (referred to as the Daily Leverage Reset). Due to the Daily Leverage Reset, each Fund does not seek to achieve 2 times, or 2 times the inverse (opposite) of, the performance of the Index over a period of time greater than one day.

11The Index is an equal-weight index and uses a rules-based methodology. The Index rules require its six Constituent Banks to be equally weighted as at each semi-annual rebalancing date in March and September (each, an Index Rebalancing Date). In accordance with the Index methodology, on each Index Rebalancing Date, the Index is rebalanced such that each Constituent Bank is once again equally weighted based on the closing prices on the second Friday in March and September of each year. The Fund’s indirect exposure to the portfolio of Constituent Banks will be rebalanced at the same frequency as, and on or about the same date as, the Index, such that each Constituent Bank is once again equally weighted in the Fund’s portfolio at that time (each, a Portfolio Rebalancing Date, together with the Index Rebalancing Date, the Rebalancing Date). Beginning at each Rebalancing Date, and until the immediately next Rebalancing Date, the composition of the Constituent Banks in the Index and in the Fund’s portfolio will increase or decrease based on the Constituent Banks’ relative and proportionate market values during that time. Similarly, any indirect exposure obtained or reduced by a Fund following a Portfolio Rebalancing Date (owing, for example, to subscriptions or redemptions received in respect of shares of the Fund or expenses or distributions paid by the Fund, if any) will be increased or decreased pro rata based on the Constituent Banks’ relative and proportionate market values and corresponding weight in the Index and in the Fund’s portfolio during that time (the Fund’s rebalancing strategy as described in this paragraph, the Rebalancing Strategy).

12The combination of a Daily Leverage Reset with a semi-annual rebalancing of the Index and Fund portfolio, as compared to a Daily Leverage Reset with a daily rebalancing of the Index and Fund portfolio, is not expected to have a material impact on the concentration levels of the Constituent Banks in the portfolio of any Fund. Since the inception of the Index in 2017, no Constituent Bank has exceeded 20% of the composition of the Index at any time following a semi-annual Index Rebalancing Date.

13The investment objective and investment strategies of each Fund, as well as the risk factors associated therewith, including concentration risk and use of leverage, will be prominently disclosed in the Prospectus.

14The Concentration Restriction restricts 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 its net asset value (NAV) would be invested in securities of any one issuer. Given the composition of the Index, it would be impossible for a Fund to achieve its investment objective and pursue its investment strategy without obtaining relief from the Concentration Restriction.

15Absent the Exemption Sought, neither Fund would be able to achieve its investment objective, since each Constituent Bank, after taking into account the Daily Leverage Reset, would represent a greater portion of the NAV of the Fund than is permitted by the Concentration Restriction. As of May 31, 2022, in order to achieve the investment objectives of the Funds, the Constituent Banks would represent a percentage of initial NAV of each Fund as follows:

Constituent Bank

Constituent Bank as a percentage of NAV on any given day (no leverage)

Constituent Bank as a percentage of NAV (based on Daily Leverage Reset) (two times (200%) daily leverage per the investment objectives)

Canadian Imperial Bank of Commerce

15.41%

30.82%

Bank of Montreal

16.46%

32.92%

National Bank of Canada

17.48%

34.96%

Royal Bank of Canada

16.84%

33.68%

Toronto Dominion Bank

17.35%

34.70%

The Bank of Nova Scotia

16.45%

32.90%

16The Filer notes that, in respect of the Funds, its strategy to obtain exposure to the Constituent Banks will be transparent, passive and fully disclosed to investors. The Funds will not invest in or provide exposure to securities other than securities of the Constituent Banks (or securities designed to gain exposure to the securities of the Constituent Banks as described herein). In addition, the names of the Constituent Banks will be listed in the Prospectus.

17The Filer submits that the Constituent Banks consistently represent some of the most liquid equity securities listed on the Toronto Stock Exchange and are less likely to be subject to liquidity concerns than the securities of other issuers.

18The liquidity of the common shares of the Constituent Banks is evidenced by the markets for options in connection therewith. A liquid market for options in the common shares of the Constituent 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 under the Legislation is that the Exemption Sought is granted provided that, for each Fund:

(a) the Proposed Transactions and investments in the Constituent Banks are in accordance with the Fund’s investment objectives and investment strategies to seek daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that correspond to: (i) in the case of HBKU, two times (200% of) the daily performance of the Index; and (ii) in the case of HBKD, two times the inverse (opposite) of (-200% of) the daily performance of the Index;

(b) the Fund’s Prospectus and investment strategies disclose that the Fund will obtain exposure to the Constituent Banks based on its investment objectives, Daily Leverage Reset and Rebalancing Strategy as described in paragraphs 10 and 11 above; and

(c) the Fund includes in its Prospectus: (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 Constituent Banks and the risks associated therewith.