Hamilton Capital Partners Inc. (Re), 2023 CanLII 11897

February 15, 2023

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 Hamilton Capital Partners Inc. (the Filer)

AND

Hamilton Enhanced Canadian Bank ETF (HCAL or the ETF).

DECISION

Background

The principal regulator in Ontario has received an application from the Filer on behalf of the ETF for a decision under the securities legislation of Ontario (the Legislation) for exemptive relief (the Exemption Sought):

(a) relieving the ETF from subsection 2.1(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 20% of the net asset value (NAV) 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 multiple of a rules-based, equal-weight Canadian bank index, currently, the Solactive Equal Weight Canada Banks Index (the Equal Weight Index); and

(b) to revoke and replace the Original Decision (as such term is defined below).

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

1. The Filer is a corporation organized under the laws of Ontario with a head office in Toronto.

2. The Filer is the trustee, portfolio manager and investment fund manager of the ETF.

3. 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.

4. The ETF is an exchange traded mutual fund trust governed by the laws of Ontario and a reporting issuer under the laws of the Jurisdictions. HCAL is also an “alternative mutual fund”, as such term is defined in NI 81-102.

5. The securities of HCAL are offered pursuant to a long form prospectus dated August 17, 2022, as amended by amendment no. 1 dated January 13, 2023.

6. The ETF is subject to NI 81-102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities.

7. The ETF is subject to National Instrument 81-107 Independent Review Committee for Investment Funds.

8. Units of the ETF are listed on the Toronto Stock Exchange (TSX).

9. The ETF, subject, to the Proposed Objective Change being approved, will seek to achieve its investment objective through direct or indirect exposure to the constituent securities of the Equal Weight Index. Specifically, HCAL will seek to track approximately 1.25x the performance of the Equal Weight Index.

10. Neither the Filer, nor the ETF, is in default of securities legislation in any of the Jurisdictions.

11. The ETF previously obtained relief from the Concentration Restriction pursuant to a decision dated October 8, 2021 (the Original Decision).

Proposed Investment Objective Change

12. The investment objectives and strategies of the ETF is currently based on replicating, 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, currently the Solactive Canadian Bank Mean Reversion Index (the Current Index).

13. The Filer anticipates seeking unitholder approval in order to amend the investment objective of the ETF (the Proposed Objective Changes). As a result, if all required approvals are obtained and the investment objective of the ETF is amended, certain of the conditions and representations contained in the Original Decision will no longer be accurate and, as a result, the ETF will not be able to rely on the Original Decision. It is anticipated that such unitholder approval will be sought at a special meeting to be held on or about February 15, 2023.

14. If the Proposed Objective Change is implemented, the ETF will no longer be able to rely on the Original Decision.

The Current Index

15. The constituent issuers of the Current 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 Current 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.

16. The Current Index uses a rules-based mean reversion strategy that is rebalanced quarterly (a Current Index Rebalance Date) based on the percent difference between each Bank’s stock price and its 200-day average price. On a Current Index Rebalance Date: (i) the three Banks with the lowest percentage difference between their current trading price and their 200-day average price are “over-weighted” at approximately 26.5% each of the Current Index (each an Over-Weight Position); and (ii) the three Banks with the highest percentage difference between their current trading price and their 200-day average price are “under-weighted” at approximately 6.5% each of the Current Index (each an Under-Weight Position). Such portfolio weightings are maintained until the next Current Index Rebalance Date, at which point the rebalancing process is repeated.

17. The common shares of the Banks are listed on the TSX.

18. The Banks are among the largest public issuers in Canada.

The Equal Weight Index

19. The constituent issuers of the Equal Weight Index are currently the same as the Current Index, being the Banks. Constituents are subject to minimum market capitalization and liquidity screens. Currently, the constituents of the Equal Weight Index are also the same as the Current Index – being the 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.

20. The Equal Weight Index uses a rules-based methodology that is rebalanced semi-annually on an equal weight basis (each, an Equal Weight Index Rebalance Date and together with a Current Index Rebalance Date an Index Rebalance Date).

Hamilton Enhanced Canadian Bank ETF

21. Currently, the investment objective of HCAL is to replicate, to the extent reasonably possible and before the deduction of fees and expenses, a multiple of the performance of the Current Index. Specifically, HCAL seeks to replicate approximately 1.25 times the Current Index.

22. HCAL uses leverage. The leverage may be created through the use of cash borrowings or as otherwise permitted under applicable securities legislation and shall not exceed the limits on the use of leverage permitted under applicable securities legislation for alternative mutual funds.

23. At present, HCAL seeks 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 Current Index in order to track approximately 1.25x the performance of the Current 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 Current 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.

24. The maximum aggregate exposure of HCAL to cash borrowing, short selling and specified derivatives will not exceed approximately 125% of its NAV.

25. In order to ensure that a unitholder’s risk is limited to the capital invested, HCAL’s leverage ratio will be rebalanced in certain circumstances and when the leverage ratio breaches certain bands. Specifically, HCAL’s leverage ratio will be rebalanced back to 125% of HCAL’s NAV within two business days (a Leverage Rebalance Date and together with an Index Rebalance Date, a Rebalance Date) of the ETF’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%).

26. Following a Rebalance Date, the investment portfolio of HCAL will have been rebalanced and HCAL will have acquired and/or disposed of the appropriate number of securities in order to track the multiple of the portfolio weighting of the Current Index.

27. Outside of a Rebalance Date, any investments by HCAL (owing, for example, to subscriptions received in respect of Units of HCAL), if any, will be such that securities are acquired up to the same weights as such securities exist in HCAL’s portfolio, based on their relative market values, at the time of such investment.

28. On a leveraged basis, HCAL therefore currently invests up to approximately: (i) 33.3% of its NAV in a Bank security that represents an Over-Weight Position in the Current Index; and (ii) 8.3% of its NAV in a Bank security that represents an Under-Weight Position in the Current Index.

29. Should the applicable Proposed Objective Change be approved, the investment objective of HCAL will be to replicate, to the extent reasonably possible and before the deduction of fees and expenses, a 1.25 times multiple of the performance of an equal-weight Canadian bank index (currently, the Equal Weight Index).

30. If the applicable Proposed Objective Change is approved, apart from the change in Index, HCAL will essentially operate in a consistent manner as it does currently. Specifically:

(a) HCAL will continue to use leverage. As is the case currently, the leverage may be created through the use of cash borrowings or as otherwise permitted under applicable securities legislation and shall not exceed the limits on the use of leverage permitted under applicable securities legislation for alternative mutual funds.

(b) HCAL will seek to achieve its investment objective by borrowing cash or using derivatives to obtain direct or indirect exposure to the constituent securities of, the Equal Weight Index in order to track approximately 1.25x the performance of the Equal Weight Index.

(c) 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 direct or indirect exposure to the constituent securities of the Equal Weight 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.

(d) The maximum aggregate exposure of HCAL to cash borrowing, short selling and specified derivatives will not exceed approximately 125% of its NAV.

(e) In order to ensure that a unitholder’s risk is limited to the capital invested, HCAL’s leverage ratio will continue to be rebalanced in the same manner as described in paragraph 25.

(f) Following a Rebalance Date, the investment portfolio of HCAL will have been rebalanced and HCAL will have acquired and/or disposed of the appropriate number of securities in order to track the multiple of the portfolio weighting of the Equal Weight Index.

(g) Outside of a Rebalance Date, any investments by HCAL (owing, for example, to subscriptions received in respect of Units of HCAL), if any, will be such that securities are acquired up to the same weights as such securities exist in HCAL’s portfolio, based on their relative market values, at the time of such investment.

31. Moreover, under the proposed new investment objective, the securities that primarily make up HCAL’s portfolio (being Bank securities) will not change. Rather, and more simply, the Index upon which its investment objective is based will be changed from a variable weight index to an equal weight index. Each Bank will therefore be equal weighted in the ETF’s portfolio, rather than “over-weighted” and “under-weighted” as is currently the case and as described above.

32. On a leveraged basis, in accordance with the amended investment objective, on an Equal Weight Index Rebalance Date, HCAL will therefore invest approximately 20.83% of its NAV in each Bank security in the Equal Weight Index.

33. In order to achieve the proposed new investment objective, and based on its investment strategy, HCAL will therefore continue to invest in a portfolio of Bank securities, such that immediately after a purchase, more than 20% of HCAL’s NAV may be invested in any one Bank security for the purposes of determining compliance with the Concentration Restriction.

34. It is anticipated that required unitholder approval for the applicable Proposed Investment Objective Change will be sought at a meeting to be held, on or about, February 15, 2023.

35. The investment objective and investment strategy of HCAL, as well as the risk factors associated therewith, including concentration risk, are disclosed in the prospectus of HCAL, as may be renewed or amended from time to time. The names of the Banks are also disclosed in the prospectus of HCAL, as may be renewed or amended from time to time.

Rationale for Investment

36. The Filer notes that, in respect of the ETF, its strategy to acquire securities of an applicable Bank is transparent, passive and fully disclosed to investors. The ETF 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, the names of the applicable Banks invested are listed in the ETF’s prospectus. Consequently, unitholders of the ETF are already fully aware of the risks involved with an investment in the securities of the ETF.

37. Given the composition of the ETF’s portfolio, if the Proposed Investment Objective Change is made, it will be impossible for the ETF to achieve its investment objective and pursue its investment strategy without obtaining further relief from the Concentration Restriction.

38. The units of the ETF are highly liquid securities, as designated brokers act as intermediaries between investors and the ETF, standing in the market with bid and ask prices for the units of the ETF to maintain a liquid market for the units of the ETF. The majority of trading in units of the ETF occurs in the secondary market.

39. If required to facilitate distributions or pay expenses of the ETF, securities of the applicable Bank securities will be sold pro-rata across the ETF’s portfolio according to their relative market values at the time of such sale.

40. Future subscriptions for ETF 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 ETF’s portfolio, based on their relative market values at the time of such subscription.

41. In view of the Filer, the ETF is 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.

42. The Filer further notes that a “fixed portfolio investment fund” is exempt from the Concentration Restriction, provided purchases of securities are made in accordance with its investment objectives. Given the similarities between the ETF and “fixed portfolio investment funds”, the Filer submits it would not be unreasonable to grant the Exemption Sought.

43. 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.

44. 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.

45. The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

Decision

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

(a) all required approvals for the Proposed Objective Change being obtained and the Proposed Objective Change being implemented;

(b) the investment in a Bank is made in accordance with the ETF’s investment objectives and investment strategies to replicate, to the extent reasonably possible and before the deduction of fees and expenses, 1.25 times the performance of the Equal Weight Index;

(c) the ETF’s investment strategies disclose that, as of an Equal Weight Index Rebalance Date, the ETF will invest in the Banks up to the stated maximum percentages described at paragraph 32. Outside of an Equal Weight Index Rebalance Date, any investments by the ETF, if any, will be such that securities of each applicable Bank are acquired up to the same weights as the Bank securities exist in the ETF’s portfolio, based on their relative market values at the time of such investment;

(d) the ETF’s investment strategies disclose the rebalance frequency of the ETF’s portfolio; and

(e) the ETF includes at the time its prospectus is next renewed: (i) disclosure regarding the Exemption Sought under the heading “Exemptions and Approvals”; and (ii) a risk factor regarding the concentration of the ETF’s investments in the Banks and the risks associated therewith.

“Darren McKall”

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

Application # 2022/0579

Sedar # 3490783