Hamilton Capital Partners Inc. (Re), 2023 CanLII 13974

February 28, 2023

AND

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

AND

Hamilton Canadian Bank Equal-Weight Index ETF

(the ETF).

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) relieving the ETF from subsection 2.1(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 10% 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 the ETF to replicate the performance of an equal weight Canadian bank index, currently, the Solactive Equal Weight Canada Banks Index (the 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 is the trustee, portfolio manager and investment fund manager of the ETF.
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 ETF 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 Filer will file a preliminary long form prospectus on behalf of the ETF with the securities regulatory authority in each of the Jurisdictions. It is anticipated that such filing will occur by, on or about, March 1, 2023.
The ETF will be subject to NI 81-102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities.
The ETF will be subject to National Instrument 81-107 Independent Review Committee for Investment Funds.
Subject to meeting the listing requirements of the TSX, units of the ETF will be listed on the TSX.
The ETF will seek to achieve its investment objective through direct or indirect exposure to the constituent securities of the Index.
The Filer is not in default of securities legislation in any of the Jurisdictions.

The Index

The constituent issuers of the Index are the top six Canadian banks listed on the TSX or other recognized exchange in Canada by market capitalization (the Banks and each a Bank). Currently, the constituents of the 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 Index uses a rules-based methodology that is rebalanced semi-annually on an equal weight basis (a Rebalance Date).
Based on discussions with Staff, the Filer understands the Index may not be considered a “permitted index” as such term is defined in NI 81-102.

The ETF

The investment objective of the ETF will be to replicate, to the extent reasonably possible and before the deduction of fees and expenses, the performance of an equal weight Canadian bank index, currently, the Index.
The ETF will seek to achieve its investment objective by obtaining direct or indirect exposure to the constituent securities of the Index (being the Banks), in substantially the same proportion as the Index, in order to track the Index’s performance. As an alternative to, or in conjunction with investing in and holding the constituent securities, the ETF may also invest in other securities, including other investment funds to obtain direct or indirect exposure to the constituent securities of the Index in a manner that is consistent with the ETF’s investment objective. The ETF may also hold cash and cash equivalents or other money market instruments in order to meet its obligations.
Following a Rebalance Date, the investment portfolio of the ETF will be rebalanced, and the ETF will acquire and/or dispose of the appropriate number of Bank securities in order to track the portfolio weighting of the Index.
Outside of a Rebalance Date, any investments by the ETF (owing, for example, to subscriptions received in respect of units of the ETF), if any, will be such that securities are acquired up to the same weights as such securities exist in the ETF’s portfolio, based on their relative market values, at the time of such investment.
The ETF may therefore, on a Rebalance Date, invest up to, approximately, 16.7% in any one Bank security.
In order to achieve its investment objective, and based on its investment strategy, the ETF will therefore invest in a portfolio of Banks, such that immediately after a purchase, more than 10% of the ETF’s NAV may be invested in any one Bank security for the purposes of determining compliance with the Concentration Restriction.
The investment objective and investment strategy of the ETF, as well as the risk factors associated therewith, including concentration risk, will be disclosed in the prospectus of the ETF, as may be renewed, or amended from time to time. The names of the Banks will also be disclosed in the prospectus of the ETF, as may be renewed, or amended from time to time.

Rationale for Investment

The Concentration Restriction is generally meant to protect a mutual fund from liquidity issues and the risks associated with investing a large portion of its assets in the securities of a single issuer. A portfolio that is not well diversified is more likely to experience significant losses (and gains) than one that is more broadly diversified.
In view of the Filer, the policy concern raised by the Concentration Restriction is not as applicable to the ETF as it is to certain other mutual funds as the fundamental investment objective of the ETF, its investment strategies and the risks associated therewith, will be clearly disclosed in the ETF’s prospectus, and will be disclosed in each renewal prospectus of the ETF.
The Filer also notes that its strategy to acquire securities of an applicable Bank will be 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 will be listed in the ETF’s prospectus. Consequently, unitholders of the ETF will be aware of the risks involved with an investment in the securities of the ETF.
Given the expected composition of the ETF’s portfolio, it will be impossible for the ETF to achieve its investment objective and pursue its investment strategy without obtaining relief from the Concentration Restriction.
The units of the ETF will be highly liquid securities as designated brokers will 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 will occur in the secondary market.
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.
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.
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.
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.
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.
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) 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, the performance of the Index;

(b) the ETF’s investment strategies disclose that, as of a Rebalance Date, the ETF will invest in the Banks up to the stated maximum percentages described at paragraph 18, above. Outside of a 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 includes in its prospectus and on subsequent renewals: (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 # 2023/0045

Sedar #: 3498162