FT Portfolios Canada Co. (Re), 2024 CanLII 85648

September 11, 2024

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 FT PORTFOLIOS CANADA CO.

(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the First Trust Vest SMID Rising Dividend Achievers Target Income ETF (the Fund), an exchange-traded mutual fund subject to National Instrument 81-102 Investment Funds (NI 81-102) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from:

(a) subsection 2.1(1) of NI 81-102 to permit the Fund to purchase securities of the U.S. Underlying ETF (as defined below) even though, immediately after the transaction, more than 10% of the Fund’s net asset value (NAV) would be invested in it;

(b) paragraph 2.5(2)(a) of NI 81-102 to permit the Fund to purchase securities of the U.S. Underlying ETF (as defined below) even though it is not subject to NI 81-102; and

(c) paragraph 2.5(2)(c) of NI 81-102 to permit the Fund to purchase securities of the U.S. Underlying ETF (as defined below) even though it is not a reporting issuer in a Jurisdiction,

(collectively, the Exemption Sought).

Under the 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 section 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.

U.S. means the United States of America.

U.S. Underlying ETF means First Trust Vest SMID Rising Dividend Achievers Target Income ETF, an exchange traded mutual fund whose securities are listed on Cboe BZX Exchange, Inc. (Cboe BZX).

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1. The Filer is a corporation formed by amalgamation pursuant to a certificate of amalgamation dated November 29, 2001 under the laws of the province of Nova Scotia.

2. The Filer is the investment fund manager of the Fund and is registered as an investment fund manager under the securities legislation in Ontario, Québec and Newfoundland and Labrador and is also registered in Ontario as a mutual fund dealer. The head office of the Filer is in Toronto, Ontario.

3. The Filer is not in default of the securities legislation in any of the Jurisdictions.

The Fund and the U.S. Underlying ETF

4. The Fund is an actively managed exchange-traded open-ended mutual fund governed by the laws of the province of Ontario.

5. The U.S. Underlying ETF is an actively managed exchange-traded fund subject to the U.S. Investment Company Act of 1940 (the Investment Company Act) and is an “investment fund” within the meaning of applicable Canadian securities legislation.

6. First Trust Advisors L.P. (FTA), an affiliate of the Filer, acts as the portfolio advisor for the Fund and the U.S. Underlying ETF. FTA is registered under the Securities Act (Ontario) as a portfolio manager and is also registered with the U.S. Securities and Exchange Commission (the SEC) under the U.S. Investment Advisers Act of 1940.

The primary investment objective of the Fund is to provide its unitholders with current income. The secondary objective of the Fund is to provide its unitholders with capital appreciation by investing primarily in a portfolio of equity securities included in the Nasdaq US Small Mid Cap Rising Dividend Achievers^TM Index (the Index) as well as listed options on the Russell 2000® Index or exchange-traded funds that track the Russell 2000® Index (the Russell Index). The Fund will seek to achieve its investment objectives by investing all, or substantially all, of its assets in the U.S. Underlying ETF.

7. The primary investment objective of the U.S. Underlying ETF is to provide high current income and its secondary investment objective is to provide capital appreciation. The U.S. Underlying ETF seeks to achieve its investment objectives by investing primarily in a portfolio of equity securities that are included in the Index (the SMID Equities) in addition to utilizing an “option strategy” consisting of writing U.S. exchange-traded call options on the Russell Index or ETFs that track the Russell Index (the Options Overlay Strategy).

8. The Index is designed to measure the performance of securities in the small- to mid-capitalization space determined by NASDAQ, Inc. (the index provider) to have increased their dividend value over the previous three-year and five-year annual periods, while being best positioned to continue the dividend increase. The Russell Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell Index is a subset of the Russell 3000® Index representing approximately 7% of the total market capitalization of that index, as of the most recent reconstitution. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

9. The Fund will seek to hedge its U.S. dollar currency exposure only in respect of the hedged units in the capital of the Fund (the Hedged Units), all of the gains or losses associated with any hedging transactions in that regard will be solely for the account of the Hedged Units.

10. The portfolio managers at FTA responsible for overseeing the Fund’s and the U.S. Underlying ETF’s portfolio and investments are the same portfolio managers.

11. The Fund distributes its securities pursuant to a long form prospectus prepared pursuant to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and Form 41- 101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2) and is governed by the applicable provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the Canadian securities regulatory authorities.

12. Units of the Fund will be, subject to receiving conditional approval and satisfying the original listing requirements of Cboe Canada Inc. (the Exchange), listed and traded on the Exchange.

13. The Fund will be a reporting issuer in each of the Jurisdictions.

14. The Fund is not in default of the securities legislation in any of the Jurisdictions.

15. Each of FTA and the U.S. Underlying ETF is regulated by the SEC. The regulatory oversight of FTA and the U.S. Underlying ETF by the SEC is functionally equivalent to that of the Filer and the Fund which are both primarily regulated by the OSC.

16. The Bank of New York Mellon, a sister of CIBC Mellon Trust Company, the Fund’s custodian, fund accountant and valuation agent, acts as the administrator, custodian and fund accountant and transfer agent for the U.S. Underlying ETF.

17. As at July 31, 2024, the total value of the U.S. Underlying ETF was $115,090,731, the U.S. Underlying ETF held 101 individual positions (excluding cash) across 8 industries, its average monthly option write was 11.46%, its average monthly upside participation was 88.54% and its average ATM short call maturity was 7 days. “Average monthly option write” is the prior calendar month average percentage of the NAV of the U.S. Underlying ETF used for writing call options against a long position at each monthly call selling date. “Average monthly upside participation” is the prior calendar month average percentage of participation in the price returns of the underlying instrument at each monthly call selling date. “Average ATM short call maturity” reflects the average number of days until expiration of the call options written over the prior calendar month.

18. Neither the Fund nor the U.S. Underlying ETF will employ leverage for the purposes of obtaining additional exposure to the SMID Equities.

19. The portfolio holdings of the U.S. Underlying ETF are available on the U.S. Underlying ETF’s website and are updated on a daily basis.

20. Securities of the U.S. Underlying ETF are offered in their primary market in a manner similar to the Fund pursuant to a prospectus filed with the SEC which discloses material facts, similar to the disclosure requirements under Form 41-101F2.

21. The U.S. Underlying ETF is required to prepare key investor information documents which provide disclosure that is substantially similar to the disclosure required to be included in the ETF facts document required by Form 41-101F4 Information Required in an ETF Facts Document.

22. The U.S. Underlying ETF is subject to continuous disclosure obligations which are substantially similar to the disclosure obligations under National Instrument 81-106 Investment Fund Continuous Disclosure.

23. The U.S. Underlying ETF is required to update information of material significance in its prospectus, to prepare management reports and an unaudited set of financial statements at least semi-annually, and to prepare management reports and an audited set of financial statements annually.

24. FTA is subject to a governance framework which sets out the duty of care and standard of care, which require FTA to act in the best interest of unitholders of the U.S. Underlying ETF.

25. The securities of the U.S. Underlying ETF are listed and traded on Cboe BZX (a recognized exchange in the United States). The listing requirements of Cboe BZX are consistent with the listing requirements of the Exchange and the Toronto Stock Exchange in Canada.

26. The market for securities of the U.S. Underlying ETF is liquid because it is a large fund with US$115,090,731 in assets (as at July 31, 2024) and is traded on the Cboe BZX (i.e. it is more liquid because of its size and its trading volume). In addition, it is supported by authorized participants (who are U.S. broker-dealers) which make the market for the securities of the U.S. Underlying ETF and are incentivized to do so because of the arbitrage opportunities inherent in making such market. Accordingly, the Filer expects the Fund to be able to dispose of its securities of the U.S. Underlying ETF through market facilities in order to raise cash, including to fund the redemption requests of its unitholders from time to time.

Reasons for the Exemption Sought

28. Absent the Exemption Sought, an investment by the Fund of up to 100% of its NAV in securities of the U.S. Underlying ETF would be prohibited by:

(a) subsection 2.1(1) of NI 81-102 because more than 10% of the Fund’s NAV would be invested in securities of the U.S. Underlying ETF;

(b) paragraph 2.5(2)(a) of NI 81-102 because the U.S. Underlying ETF is not subject to NI 81-102; and

(c) paragraph 2.5(2)(c) of NI 81-102 because the U.S. Underlying ETF is not a reporting issuer in a Jurisdiction.

29. The units of the U.S. Underlying ETF would be considered to be an “index participation unit” (as defined in NI 81-102) given that the U.S. Underlying ETF will invest in the SMID Equities in the same proportion as such securities are reflected in the Index however, the U.S. Underlying ETF will also utilize the Options Overlay Strategy in seeking to generate additional income pursuant to which the portfolio managers of the U.S. Underlying ETF will actively write exchange-traded call options.

30. Accordingly, an investment by the Fund in the U.S. Underlying ETF would not qualify for the exception in (a) subsection 2.1(2) or (b) paragraph 2.5(3)(a) of NI 81-102 because the securities of the U.S. Underlying ETF are not index participation units.

31. Since inception of the U.S. Underlying ETF on September 8, 2023, the U.S. Underlying ETF’s average monthly option write was approximately 11.51%, its average monthly upside participation was approximately 88.49% and its average ATM short call maturity was 7 days. Accordingly, the Options Overlay Strategy represents a small portion of the U.S. Underlying ETF’s NAV with the majority of the fund’s assets being invested in SMID Equities in a manner to replicate the Index.

32. The Filer believes that an investment in securities of the U.S. Underlying ETF by the Fund is an efficient and cost-effective alternative to the Fund investing in the SMID Equities and undertaking the Options Overly Strategy directly.

33. The investment objectives, investment strategies, investment restrictions and risk factors applicable to the Fund and the U.S. Underlying ETF are substantially the same. The Fund is essentially the Canadian version of the U.S. Underlying ETF and is managed by affiliates and advised by the same portfolio advisor and portfolio management team. Accordingly, as FTA is the portfolio advisor for both funds, the Filer is in a position to ensure that the requirements of NI 81-102 are complied with.

34. The only material difference in the investment strategies utilized by the Fund and the U.S. Underlying ETF is that the Fund seeks to hedge substantially all of its U.S. dollar currency exposure back to the Canadian dollar.

35. The Fund will not pay any management or incentive fees in connection with an investment in securities of the U.S. Underlying ETF which to a reasonable person would duplicate a fee payable by the U.S. Underlying ETF for the same service.

36. The management, portfolio management and administration of the U.S. Underlying ETF is substantially similar to that of the Fund given that (a) the manager of the U.S. Underlying ETF is an affiliate of the Filer, (b) FTA manages the investment portfolio of both funds using the same portfolio managers, (c) the custodian, administrator, valuation agent and transfer agent of the U.S. Underlying ETF is a sister company of the custodian, administrator and valuation agent of the Fund and (d) Deloitte LLP is the auditor of both funds.

37. A summary of the key benefits to the Fund in investing 100% of its assets in securities of the U.S. Underlying ETF include:

(a) the Fund would continue to have access to specialized knowledge, expertise and/or analytical resources of FTA;

(b) it is an efficient and cost effective alternative for the Fund to invest directly in the U.S. Underlying ETF instead of mirroring the investments of the U.S. Underlying ETF by investing in a portfolio of SMID Equities and using the Options Overlay Strategy directly; and

(c) unitholders of the Fund will continue to have the ability to make their investments using Canadian dollars.

38. The Filer believes that an investment in securities of the U.S. Underlying ETF by the Fund should pose limited additional investment risk to the Fund because the U.S. Underlying ETF will be subject to the Investment Company Act and oversight of the SEC and the U.S. Underlying ETF will comply with sections 2.1 (concentration restriction), 2.2 (control restrictions), 2.3 (restrictions concerning types of assets), 2.4 (restrictions concerning illiquid assets), 2.6 (restrictions on borrowing and other investment practices) and 2.6(1) (restrictions regarding short sales) of NI 81-102.

39. The amount of loss that could result from an investment by the Fund in securities of the U.S. Underlying ETF will be limited to the amount invested by the Fund in the U.S. Underlying ETF.

40. An investment by the Fund in securities of the U.S. Underlying ETF represents, or will represent, the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Fund.

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 is that the Exemption Sought is granted, provided that:

(a) the investment by the Fund in securities of the U.S. Underlying ETF is in accordance with the investment objectives of the Fund;

(b) the U.S. Underlying ETF is an investment company subject to the Investment Company Act in good standing with the SEC;

(c) the portfolio manager of the Fund and the U.S. Underlying ETF is FTA, or its successor, that is: (i) registered under the Securities Act (Ontario) as a portfolio manager and (ii) registered with the SEC under the U.S. Investment Advisers Act of 1940;

(d) the U.S. Underlying ETF will not, at the time securities of the U.S. Underlying ETF are acquired by the Fund, hold more than 10% of its NAV in securities of any other mutual fund;

(e) the U.S. Underlying ETF does not use leverage; and

(f) the prospectus of the Fund will disclose in the next renewal of its prospectus following the date of this decision, in the investment strategy section, the fact that the Fund has obtained the Exemption Sought to permit investments in the U.S. Underlying ETF on the terms described in this decision.

“Darren McKall”

Darren McKall

Manager, Investment Management Division

Ontario Securities Commission

Application #2024/0497

SEDAR+ #6170473