Securities Law & Instruments

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemptive relief granted to closed end fund convertible automatically into exchange traded fund offered in continuous distribution from prohibition on purchases of silver, custodial provisions to allow Brinks and Via Mat to act as sub-custodians of the fund, and certain mutual fund requirements and restrictions on: transmission of purchase or redemption orders, issuing units for cash or securities, calculation and payment of redemptions and date of record for payment of distributions -- National Instruments 41-101 Prospectus Contents -- Non-Financial Matters and 81-102 Mutual Funds

Applicable Legislative Provisions

National Instrument 41-101 Prospectus Contents -- Non-Financial Matters, ss. 14.2, 14.3 and 19.1.

National Instrument 81-102 Mutual Funds, ss. 2.3(c), 6.1(2), 6.2, 6.3, 9.1, 9.4(2), 10.2, 10.3, 14.1 and 19.1.

July 14, 2009

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

CLAYMORE INVESTMENTS, INC.

(the "Filer")

AND

IN THE MATTER OF

CLAYMORE SILVER BULLION TRUST

(the "Fund")

AND

IN THE MATTER OF

THE BANK OF NOVA SCOTIA

(the "Custodian")

 

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction (the "Legislation") for a decision that exempts the Fund from:

1. Section 2.3(f) of National Instrument 81-102 -- Mutual Funds ("NI 81-102") to permit the Fund to invest up to 100% of its net assets, taken at market value at the time of purchase, in physical silver bullion in 1,000 troy ounce international bar sizes;

2. Section 6.1(2) of NI 81-102 to permit the Fund's silver bullion to be acquired, stored and held outside of Canada by a custodian or sub-custodian for purposes other than facilitating portfolio transactions of the Fund outside of Canada;

3. Section 6.1(3)(b) of NI 81-102 to permit the Custodian to appoint an entity that is not listed in Section 6.2 of NI 81-102 to act as a sub-custodian;

4. Section 6.2 of NI 81-102 to permit an entity not listed in Section 6.2 of NI 81-102 to act as a sub-custodian for portfolio assets of the Fund held in Canada;

5. Section 6.3 of NI 81-102 to permit an entity not listed in Section 6.3 of NI 81-102 to act as a sub-custodian for portfolio assets of the Fund held outside of Canada;

6. Sections 9.1 and 10.2 of NI 81-102, to permit purchases and sales of Common Units (as defined below) of the Fund on the Toronto Stock Exchange (the "Exchange");

7. Subsection 9.4(2) of NI 81-102, to permit the Fund to accept a combination of cash and physical silver bullion as subscription proceeds for Common Units;

8. Section 10.3 of NI 81-102, to permit the Fund to redeem less than the Prescribed Number of Common Units (as defined below) at a discount to their market price, instead of at their net asset value; and

9. Section 14.1 of NI 81-102, to permit the Fund to establish a record date for distributions in accordance with TSX Rules,

(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 Alberta, British Columbia, Saskatchewan, Manitoba, Quebec, Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, Yukon, Northwest Territories and Nunavut.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.

The following terms shall also have the meanings ascribed below:

"Common Units" means the redeemable, transferable trust units of the Fund, after Conversion.

"Designated Brokers" means registered brokers and dealers that enter into agreements with the Fund to perform certain duties in relation to the Fund.

"Prescribed Number of Common Units" means the number of Common Units of the Fund determined by Claymore from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.

"Underwriters" means registered brokers and dealers that have entered into underwriting agreements with the Fund and that subscribe for and purchase Common Units from the Fund, and "Underwriter" means any one of them.

"Unitholders" means beneficial and registered holders of Common Units.

Representations

This decision is based on the following facts represented by the Filer, the Fund and the Custodian.

The Fund and the Filer

1. The Fund is a closed-end investment trust (a non-redeemable investment fund under the Legislation) governed by the laws of Ontario. A preliminary long form prospectus of the Fund was filed on SEDAR under project no. 01435591 on April 21, 2009 and a final long form prospectus (the "Final Prospectus") was filed on SEDAR and a receipt for such was issued on June 30, 2009. The Fund is a reporting issuer under the securities legislation of each province and territory of Canada. The Final Prospectus qualifies the issuance of redeemable, transferable trust units of the Fund ("Fund Units") and purchase warrants ("Warrants"). Each Warrant will entitle its holder to purchase one Fund Unit at an exercise price of $10.00 at any time before 4:00 p.m. (Toronto time) on the date that is 6 months following the closing of the Fund's initial public offering (the "Expiry Time"). Any Warrant that is not exercised by the Expiry Time will be void and of no value.

2. The Filer is the trustee and manager of the Fund and is a registered investment counsel, portfolio manager and limited market dealer in Ontario and is registered as an investment adviser with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. The Filer is a wholly-owned subsidiary of Claymore Group, Inc., a financial services and asset management company based in Chicago, Illinois.

3. The principal offices of the Filer and the Fund are located at 200 University Avenue, 13th Floor, Toronto, Ontario, M5H 3C6.

4. Neither the Filer nor the Fund is in default of the securities legislation of any province or territory of Canada.

The Fund's Investment Objective and Investment Restrictions

5. The investment objective of the Fund is to replicate the performance of the price of silver bullion, less the Fund's expenses and fees. The Fund is not actively managed. The Fund does not anticipate making regular distributions.

6. The Fund has been created to provide holders of Fund Units and Common Units with an exposure to physical silver bullion with a currency hedge against the US dollar ("USD"). The Manager believes that the Fund will provide a secure, low-cost and convenient alternative to investors interested in holding silver bullion. Given that silver bullion is priced in USD, the Fund will hedge substantially all of the Fund's USD currency value back to the Canadian dollar.

7. The Fund's investment restrictions provide that:

(a) the Fund will hold a minimum of 90% of its net assets in physical silver bullion in 1,000 troy ounce international bar sizes; and

(b) for working capital purposes, the Fund may hold no more than 10% of its net assets in cash and interest-bearing accounts, short-term government debt or short-term investment grade corporate debt.

8. The net proceeds of the Fund's initial public offering (the "Offering") will be used to purchase and hold the portfolio of the Fund which includes physical silver bullion, together with any cash or other assets purchased by the Fund (the "Portfolio") in accordance with the investment objective, strategy, policies and restrictions of the Fund.

The Silver Bullion of the Fund

9. The Fund and the Manager believe that, assuming normal market conditions, the silver market is liquid enough that generally, the amount of silver to be acquired and held by the Fund (assuming the maximum Offering) can be bought and/or sold without adversely impacting the market price of silver (e.g. increasing or depressing the price). Relative to the gold market, the silver market is extremely small, with higher volatility and tighter demand. However, according to statistics published by the London Bullion Market Association ("LBMA"), the daily average amount of silver (in ounces) cleared through London wholesale bullion market in May was approximately five times that of gold.

10. The Fund and the Manager believe that investing substantially all of the assets of the Fund in physical silver bullion will not impact the Fund's ability to satisfy redemptions of Fund Units and Common Units.

The Fund Units and Warrants

11. The Filer has applied and received conditional approval from the Exchange for the listing of the Fund Units and Warrants, subject to the Filer fulfilling all of the listing requirements of the Exchange on or before September 18, 2009.

12. Commencing in 2010, Fund Units may be surrendered annually for redemption during the period from June 1 until 5:00 p.m. (Toronto time) on the 20th business day before the last business day in July in each year (the "Notice Period") subject to the Fund's right to suspend redemptions in certain circumstances. Fund Units surrendered for redemption during the Notice Period will be redeemed on the second last business day of July of each year (the "Annual Redemption Date") and Unitholders will receive payment on or before the 15th day following the Annual Redemption Date. Redeeming Unitholders will receive a redemption price per Fund Unit equal to the net asset value ("NAV") per Fund Unit determined as of the Annual Redemption Date less any costs and expenses incurred by the Fund in order to fund such redemption. Fund Units are also redeemable monthly for a redemption price determined by reference to the trading price of the Fund Units.

13. Neither Fund Units nor Common Units issued by the Fund will be Index Participation Units within the meaning of National Instrument 81-102 -- Mutual Funds ("NI 81-102").

Conversion of the Fund to an ETF

14. The Fund is structured such that commencing after six months following the closing of the Offering, if for a period of 10 consecutive trading days, the daily weighted average trading price (or, in the event there has been no trading on a particular day, the average of the closing bid and ask prices) of the Fund Units reflects a discount of greater than 2% of NAV per Fund Unit for that day, there will be an automatic conversion (a "Conversion") of the Fund to an open-ended exchange-traded fund ("ETF"). In the event of a Conversion, the Fund's investment objective, investment strategy and investment restrictions will remain the same. After a Conversion, the Fund will be generally described as an ETF and would become a "mutual fund" under the Legislation and accordingly, would be subject to the provisions of NI 81-102.

15. At the time of a Conversion, the Fund will prepare and file a preliminary prospectus of the Fund relating to the proposed continuous distribution of Common Units issuable after Conversion and enter into the necessary designated broker and underwriting agreements in connection with such offerings. The Fund will not commence continuous distribution of the Common Units at least until the final prospectus in respect of such distribution has been receipted.

16. In the event of the Conversion of the Fund to an ETF, annual redemptions will no longer be available and Unitholders will be able to exchange and redeem their Common Units daily. After Conversion, on any trading day, Unitholders may exchange the Prescribed Number of Common Units (or an integral multiple thereof) for baskets of physical silver bullion and cash. Also after Conversion, on any trading day, Unitholders may redeem Common Units of the Fund for cash at a redemption price per Common Unit equal to 95% of the closing price for the Common Units on the Exchange on the effective day of the redemption.

The Fund's Bullion Custody Arrangements

17. All of the Fund's physical silver bullion will be held on an allocated basis by the Bank of Nova Scotia, a Canadian Schedule I chartered bank (the "Custodian") or an affiliate or a division thereof, or a sub-custodian. The Custodian will act through its ScotiaMocatta division, which is a division of the Custodian that specializes in precious metals trading, financing and physical metal distribution, as well as the provision of custodial services relating thereto. The Custodian has advised the Fund that due to physical storage capacity constraints, having regard to the amount of silver bullion which the Fund anticipates acquiring in connection with the Offering, as well as in contemplation of the exercise of any Warrants (silver requires approximately sixty times the storage space of the equivalent dollar amount of gold), the Fund will be required to store and hold the physical silver bullion in the vault facilities of the Custodian or an affiliate or a division thereof or a sub-custodian, in Canada, London, and New York. The custody arrangements between the Fund and the Custodian will be governed by the terms of a custodian agreement (the "Custodian Agreement").

18. As a result of the foregoing, the Custodian has advised the Fund that, in order to accommodate the objectives of the Fund, the Custodian will be required to use the services of sub-custodians. The Custodian has advised the Fund that it proposes to use The Brinks Company ("Brinks"), a public company listed on the NYSE (acting through a subsidiary) and Via Mat International Ltd. ("Via Mat") as sub-custodians for the silver bullion of the Fund held in Canada, London and New York.

19. Brinks and Via Mat are leading providers of secure logistics for valuables, including diamonds, jewellery, precious metals, securities, currency and secure data, serving banks, retailers, governments, mines, refiners, metal traders, diamantaires. Brinks and Via Mat are also authorized depositories for NYMEX/COMEX or have vault facilities that are accepted as warehouses for the London Bullion Market Association.

20. The number of entities in Canada which are eligible to act as sub-custodians for the physical storage of silver bullion is limited. Of these eligible entities, some already have exclusive relationships with other investment funds for storage purposes who have first right to any additional capacity whereas others simply do not have the excess capacity needed to store the amount of physical silver bullion contemplated by the Offering and have advised that they would be required to secure additional space through the vaulting facilities of Brinks and/or Via Mat or such other equivalent service provider. These capacity constraints have been intensified due to the relatively recent run-up in demand for physical commodities and the corresponding need to arrange for safe-keeping.

21. In all instances, the relationship between the Custodian and either Brinks or Via Mat is primarily one whereby the Custodian is sub-contracting the vault facilities of these service providers for the purposes of storing physical silver bullion. The Custodian remains responsible for (i) ensuring that adequate safeguards are in place, including satisfactory insurance arrangements and (ii) indemnifying the Fund for any losses that may occur in connection with any material that is stored at such facilities.

22. The Fund, the Manager and the Custodian believe that both Brinks and Via Mat are appropriate sub-custodians for the silver bullion held in the Portfolio of the Fund. The activities of Brinks and Via Mat will be limited to holding the silver bullion of the Fund and the Custodian will be responsible for all cash holdings.

23. Pursuant to the Custodian Agreement, in carrying out its duties, the Custodian is required to exercise: (i) the degree of care, diligence and skill that a reasonably prudent custodian of property would exercise in the circumstances; or (ii) at least the same degree of care which it gives to its own property of a similar kind under its custody, if this is a higher degree of care than in paragraph (i) above.

24. Prior to using the custody services of any sub-custodians, and periodically after engaging those services, the Custodian engages in a review of the facilities, procedures, records and creditworthiness of each sub-custodian. The Fund will not have the ability to engage in these services and relies upon the Custodian, who is in the business of precious metals storage, to satisfy itself as to the appropriateness of the use of any potential sub-custodian.

25. All silver bullion purchased by the Fund will be certified by the relevant vendor as either "LBMA Good Delivery" or "COMEX Good Delivery".

26. The Fund does not insure its silver. Allocated silver bullion owned by the Fund is stored in the vaults of the Custodian or an affiliate or a division or a sub-custodian thereof once it is delivered to the Custodian and/or the sub-custodian. The Custodian and/or sub-custodian maintain insurance as the Custodian and/or sub-custodian deems appropriate against all risks of physical loss or damage except the risk of war, nuclear incident, terrorism events or government confiscation. The Custodian and/or sub-custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate. The Fund is not a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage.

27. The Custodian is one of the largest providers of precious metals trading and custodial services in the world. The Manager has determined that the Custodian would be the appropriate choice to provide custodial services to the Fund. The following are some of the factors which the Manager considered in making this determination:

(a) The Custodian is experienced in providing silver storage and custodial services;

(b) The Custodian is familiar with the unique requirements of ETFs as they relate to the physical handling and storage of silver bullion required in connection with the creation and redemption of Units. This is an important consideration in the event of a Conversion;

(c) The Custodian shall indemnify the Fund in respect of all direct loss, damage or expense arising out of any negligence, wilful misconduct, fraud or lack of good faith by the Custodian or any sub-custodian or sub-sub-custodian; and

(d) The Custodian Agreement shall provide that the Custodian shall not cancel its insurance except upon 30 days prior written notice to the Manager.

28. The Custodian shall arrange for insurance coverage on the facilities and the contents therein in which the Custodian will store physical silver bullion on behalf of the Fund and other clients of the Custodian. The Manager has discussed the level of insurance coverage obtained by the Custodian and believes that the level of insurance will be sufficient.

29. As the Custodian in the silver storage business, it is in the best position, using its business judgment, to determine and obtain the appropriate level of insurance that is required for the storage of silver bullion.

30. The Manager and the Fund believe that the Custodian will obtain and will provide adequate insurance and the Fund has disclosed in its final prospectus the details associated with that insurance arrangement.

31. The Custodian has also advised the Fund and the Manager that, pursuant to the terms of their existing relationship, each of Brinks and Via Mat have arranged for sufficient insurance coverage in respect of any material held by the Custodian through the facilities of these entities. The Manager has discussed with the Custodian the level of insurance coverage obtained by Brinks and Via Mat and the risks insured against by these sub-custodians and believes that the level of insurance will be sufficient.

32. The Fund's auditors will be present and will verify the physical count of all of the Fund's silver bullion held by the Custodian and/or any sub-custodian at least once every year. The Fund and its auditors will have the ability, with sufficient advance notice to the Custodian and any sub-custodians, to attend at the vaults of the Custodian or any sub-custodian to verify the silver bullion held by the Custodian or any sub-custodian on behalf of the Fund.

33. The Custodian Agreement provides that, in addition to any other rights of the Fund thereunder, the Custodian shall indemnify and hold harmless the Fund in respect of all direct loss, damage or expense arising out of any negligence, wilful misconduct, fraud or lack of good faith by the Custodian or any subcustodian or sub-subcustodian in respect of the services contemplated thereunder, provided however, that the liability for any loss, damage or expense to which the above indemnity would apply shall be limited to losses, damages or expenses as follows:

(a) in the case of the loss of silver bullion or any other property of the Fund, such silver bullion or other property shall be replaced where commercially practicable and reasonably feasible; provided, however, that, in the context of silver bullion, the replacement silver which is to be provided by the Custodian shall be of the same fineness and shall be in the same form as the allocated silver actually delivered and then held by the Custodian at the time of the incurrence of the relevant loss (and, in such respect, the Custodian's opinion shall be determinative as to such fineness and form);

(b) where replacement of such silver bullion or other property is not commercially practicable and reasonably feasible, the Fund shall be paid the market value of such silver bullion based upon fineness and the form of the allocated silver actually delivered and then held by the Custodian at the time of the incurrence of the relevant loss (and, in such respect, the Custodian's opinion shall be determinative as to such fineness and form) or other property at the time the loss is discovered; and

(c) in any other case, the amount of any interest or income to which the Fund is entitled, but which is not received by the Fund, shall be paid to it.

34. The Custodian Agreement provides that if the Fund suffers a loss as a result of any act or omission of a subcustodian, or of any other agent appointed by the Custodian (rather than appointed by the Manager) and if such loss is directly attributable to the failure of such agent to comply with its standard of care in the provision of any service to be provided by it under the Custodian Agreement, then the Custodian shall assume liability for such loss directly, and shall reimburse the Fund accordingly.

Arrangements From and After a Conversion

35. From and after a Conversion:

(a) Common Units may only be subscribed for or purchased directly from the Fund by Underwriters or Designated Brokers and orders may only be placed for Common Units in the Prescribed Number of Common Units (or an integral multiple thereof) on any day when there is a trading session on the Exchange. Under Designated Broker and Underwriter agreements, the Designated Brokers and Underwriters agree to offer Common Units for sale to the public only as permitted by applicable Canadian securities legislation, which requires a prospectus to be delivered to purchasers buying Common Units as part of a distribution. Therefore, first purchasers of Common Units in the distribution on the Exchange will receive a prospectus from the Designated Brokers and Underwriters.

(b) The Fund will appoint Designated Brokers to perform certain functions which include standing in the market with a bid and ask price for Common Units of the Fund for the purpose of maintaining liquidity for the Common Units.

(c) For each Prescribed Number of Common Units issued, a Designated Broker or Underwriter must deliver payment consisting of, in the Filer's discretion as manager of the Fund, (i) one basket of physical silver bullion (where a "basket of silver bullion" represents a preset amount of silver bullion that the Manager will determine and publish on its website following the close of business on each trading day) and cash in an amount sufficient so that the value of the physical silver bullion and the cash received is equal to the NAV of the Common Units next determined following the receipt of the subscription order; (ii) cash in an amount equal to the NAV of the Common Units next determined following the receipt of the subscription order; or (iii) a different combination of physical silver bullion than is represented by a basket of physical silver bullion and cash, as determined by the Manager, in an amount sufficient so that the value of the physical silver bullion and cash received is equal to the NAV of the Common Units next determined following the receipt of the subscription order.

(d) The net asset value per Common Unit of the Fund will be calculated and published daily and the investment portfolio of the Fund will be made available daily on the Filer's website.

(e) Upon notice given by the Filer from time to time and, in any event, not more than once quarterly, a Designated Broker will subscribe for Common Units in cash in an amount not to exceed 0.3% of the NAV of the Fund, or such other amount established by the Filer and disclosed in the prospectus of the Fund, next determined following delivery of the notice of subscription to that Designated Broker.

(f) Neither the Underwriters nor the Designated Brokers will receive any fees or commissions in connection with the issuance of Common Units to them. The Filer may, at its discretion, charge an administration fee on the issuance of Common Units to the Designated Brokers or Underwriters.

(g) Except as described in subparagraphs (a) through (e) above, Common Units may not be purchased directly from the Fund. Investors are generally expected to purchase Common Units through the facilities of the Exchange. However, Common Units may be issued directly to Unitholders upon the reinvestment of distributions of income or capital gains and in accordance with the distribution reinvestment plan of the Fund, as disclosed in the Fund's prospectus.

(h) Unitholders that wish to dispose of their Common Units may generally do so by selling their Common Units on the Exchange, through a registered broker or dealer, subject only to customary brokerage commissions. A Unitholder that holds a Prescribed Number of Common Units or an integral multiple thereof may exchange such Common Units for baskets of physical silver bullion and cash at an exchange price equal to the NAV per Common Unit on the effective day of the exchange request. Unitholders may also redeem their Common Units for cash at a redemption price equal to 95% of the closing price of the Common Units on the Exchange on the date of redemption.

(i) As manager, the Filer receives a fixed annual fee from the Fund. Such annual fee is calculated as a fixed percentage of the NAV of the Fund. As manager, the Filer is responsible for all costs and expenses of the Fund except the management fee, any expenses related to the implementation and on-going operation of an independent review committee under National Instrument 81-107, brokerage expenses and commissions, silver settlement fees, income taxes and withholding taxes and extraordinary expenses.

(j) Unitholders will have the right to vote at a meeting of Unitholders in respect of the Fund in certain circumstances, including prior to any change in the investment objective of the Fund, any change to their voting rights and prior to any increase in the amount of fees payable by the Fund.

Decision

The principal regulator is satisfied that the decision meets the tests 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:

(a) The prospectus of the Fund contains disclosure regarding the unique risks associated with an investment in the Fund, including the risk that direct purchases of silver by the Fund may generate higher transaction and custody costs than other types of investments, which may impact the performance of the Fund;

(b) In respect of the relief granted from subsection 9.4(2), the acceptance of any physical silver bullion as payment for the issue price of Common Units is made in accordance with paragraph 9.4(2)(b);

(c) In respect of the relief granted from section 14.1, the Fund complies with applicable TSX requirements in setting the record date for payment of distributions;

(d) In respect of the relief granted from sections 6.1(2), 6.1(3)(b), 6.2 and 6.3, the Fund and the Custodian are limited to using The Brinks Company and Via Mat International Ltd. and their subsidiaries as sub-custodians for the silver bullion of the Fund which will be held only in Canada, London and New York; and

(e) In respect of the compliance reports to be prepared by the Custodian pursuant to sections 6.7(1)(b), 6.7(1)(c)(ii) and 6.7(2)(c), as such sections will not be applicable given the nature of the relief granted herein, the Custodian shall include a statement in such reports in respect of the completion of the Custodian's review process for the sub-custodian of the Fund and that the Custodian is of the view that such sub-custodians continue to be appropriate entities for the safekeeping of the Fund's silver bullion.

"Vera Nunes"
Assistant Manager, Investment Funds
Ontario Securities Commission