National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- commodity pool subject to National Instrument 81-104 -- Commodity Pools granted an exemption from National Instrument 81-102 -- Mutual Funds to borrow an amount up to 35% of net assets, subject to certain conditions and requirements.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.6(a), 19.1.
National Instrument 81-104 Commodity Pools.
July 23, 2014
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 PURPOSE INVESTMENTS INC. (the Filer) AND IN THE MATTER OF PURPOSE ENHANCED US EQUITY FUND (the Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund, which is a separate class of shares of Purpose Fund Corp., for a decision under the securities legislation of the Jurisdiction (the Legislation) granting the Fund relief from subsection 2.6(a) of National Instrument 81-102 -- Mutual Funds (NI 81-102) (the Requested Relief) to permit the Fund to borrow an amount not exceeding 35% of the Fund's net asset value (NAV).
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 Ontario (together with Ontario, the Jurisdictions).
Terms defined in National Instrument 14-101 -- Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
(a) Basket means, in relation to the ETF Shares (defined herein), a group of securities or assets representing the constituents of the Fund.
(b) Dealer means a dealer (that may or may not be a Designated Broker) that enters into a continuous distribution agreement with the Filer or an affiliate of the Filer on behalf of the Fund, pursuant to which the Dealer may subscribe for and purchase ETF Shares from the Fund.
(c) Designated Broker means a dealer that enters into an agreement with the Filer or an affiliate of the Filer on behalf of the Fund to perform certain duties in relation to the ETF Shares of the Fund.
(d) Exchange means the Toronto Stock Exchange (TSX) or another stock exchange recognized by the Ontario Securities Commission.
(e) Prescribed Number of ETF Shares means, in relation to the Fund, the number of ETF Shares of the Fund determined from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.
(f) Shareholder means a holder of one or more ETF Shares or Mutual Fund Shares of the Fund.
Unless otherwise specified, all references to money amounts are to the lawful currency of Canada.
This decision is based on the following facts represented by the Filer.
1. The Filer is a corporation incorporated under the laws of the Jurisdiction.
2. The registered office of the Filer is located at 77 King Street West, TD North Tower, 21st Floor, Toronto, Ontario.
3. The Filer is registered as an investment fund manager, portfolio manager and an exempt market dealer under the Securities Act (Ontario).
4. The manager of the Fund will be the Filer or an affiliate thereof.
5. The Fund is a separate class of shares of Purpose Fund Corp. and is divided into seven series which consists of exchange-traded shares (ETF shares), non-currency hedged exchange-traded shares (Non-Currency Hedged ETF Shares and together with the ETF shares, the ETF Shares) and Series A, Series F, Series I, Series D, Series XA and Series XF mutual fund shares (together, the Mutual Fund Shares).
6. The Filer is not in default of securities legislation in any of the Jurisdictions.
7. The Fund will be a mutual fund governed by the laws of Ontario and a reporting issuer under the laws of all of the Jurisdictions.
8. The Fund is a commodity pool and will be subject to and comply with the relevant provisions of National Instrument 81-104 -- Commodity Pools (NI 81-104).
9. The Fund seeks to provide shareholders with long-term capital appreciation and a superior risk adjusted return relative to the broad U.S. equity markets. The Fund aims to provide returns in excess of the broad U.S. equity markets by investing in a portfolio of U.S. listed equities while maintaining a similar level of volatility as the broad U.S. equity markets. The Fund will employ leverage to increase its long portfolio exposure and to hedge the increased market risk associated with the leveraged portion of the portfolio. The Fund will implement its hedging strategy through the use of derivative instruments including by selling market index futures contracts. The Fund will borrow up to a maximum of 35% of its net assets, of which up to a maximum of 30% will be used for additional investment in its long portfolio, and up to a maximum of 5% will be used as margin in connection with the Fund's hedging strategy.
10. The Filer will use a multi-factor, fundamental rules-based portfolio selection strategy to select portfolio securities from a universe of North American equities. The selection strategy will emphasize factors that have shown to be effective at differentiating between strong and weak performing stocks including: fundamental change, valuation, growth and quality.
11. The use of leverage is fundamental to the Fund's investment strategies and integral to achieving the Fund's investment objective. Accordingly, the Fund's prospectus cover page will include warning language in bold regarding the use of leverage.
12. The Fund proposes to borrow up to a maximum of 35% of the Fund's NAV. The Fund proposes to use up to a maximum of 30% of the Fund's net asset value from such borrowings to acquire additional portfolio investments. As a result, the Fund will hold a portfolio of securities with a value not exceeding 130% of the Fund's NAV.
13. In order to reduce the market risk associated with the leveraged portion of the portfolio, the Fund will hedge up to 30% of its market exposure such that the net market exposure of the Fund will generally be targeted at 100% of the NAV of the Fund. The Fund's investment strategy is intended to enable the Fund to take advantage of the expected value (or alpha) associated with the Fund's individual portfolio investments while maintaining a level of risk similar to the overall market. As a result, over time, it is expected that for every $100 invested, the portfolio will be constructed as $130 in long equity security positions and $30 in short market index risk, resulting in a portfolio that generally has 100% net equity market exposure.
14. In order to implement its hedging strategy, the Fund will use derivative instruments in compliance with NI 81-102 and NI 81-104 including by selling market index futures contracts. The Fund will need to post margin to enter into such futures contracts and, in order to remain invested in portfolio securities in an amount equal to 130% of the Fund's NAV, the Fund will need to borrow an additional amount, not to exceed 5% of the Fund's NAV, to use as margin for such futures contracts.
15. The Filer has applied to list the ETF Shares of the Fund on the TSX. The Filer will not file a final prospectus for the Fund in respect of the ETF Shares until the TSX or another recognized stock exchange has conditionally approved the listing of ETF Shares.
16. Mutual Fund Shares will not be listed and may be subscribed for or purchased directly from the Fund through qualified financial advisors and brokers registered to sell securities of mutual funds which are subject to NI 81-104 in accordance with the requirements of Part 4 of that Instrument.
17. ETF Shares may be subscribed for or purchased directly from the Fund by Dealers or Designated Brokers and orders may be placed for ETF Shares in the Prescribed Number of ETF Shares or an integral multiple thereof.
18. The Fund will appoint one or more Designated Brokers to perform certain functions, which include standing in the market with a bid and ask price for ETF Shares for the purpose of maintaining liquidity for ETF Shares.
19. Each Dealer or Designated Broker that subscribes for ETF Shares will deliver, in respect of each Prescribed Number of ETF Shares to be issued, a Basket or cash in an amount sufficient so that the value of the Basket or cash delivered is equal to the NAV of the ETF Shares next determined following the receipt of the subscription order.
20. Neither the Dealers nor the Designated Brokers will receive any fees or commissions in connection with the issuance of ETF Shares to them. On the issuance of ETF Shares, an administrative fee may be charged to a Dealer or Designated Broker to offset the expenses (including any applicable TSX additional listing fees) incurred in issuing the ETF Shares.
21. Except as described above, ETF Shares may not generally be purchased directly from the Fund. Investors will generally be expected to purchase ETF Shares through the facilities of the applicable Exchange. ETF Shares may be issued directly to Shareholders upon a reinvestment of dividends or switch from the ETF Shares of one exchange-traded fund of Purpose Fund Corp. to the ETF Shares of another exchanged-traded fund of Purpose Fund Corp.
22. Shareholders that wish to dispose of their ETF Shares will generally be able to do so by selling their ETF Shares on the applicable Exchange, through a registered dealer, subject only to customary brokerage commissions. A Shareholder that holds a Prescribed Number of ETF Shares of the Fund or an integral multiple thereof will be able to exchange such ETF Shares with the Fund for cash and/or Baskets. A Shareholder will also be able to redeem ETF Shares for cash at a redemption price equal to 95% of the closing price of the ETF Shares on the applicable Exchange on the date of redemption.
23. The Mutual Fund Shares of the Fund will only be purchased by investors through registered brokers and dealers registered to sell securities of mutual funds which are subject to NI 81-104 in accordance with the requirements of Part 4 of that Instrument.
24. The ETF Shares will be redeemable at the option of the holder at any time.
25. As the Fund will be listed on the TSX, holders of ETF Shares will have the opportunity to trade their shares on the TSX and as such do not have to rely on the redemption features of the Fund to provide liquidity for their shares.
26. The Fund will comply with certain restrictions and practices contained in Canadian securities legislation, including NI 81-102 and will be managed in accordance with these restrictions, except as otherwise permitted by NI 81-104, subject to receipt of any exemptions therefrom obtained by the Fund.
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 Requested Relief is granted, provided that:
(a) the Fund is a commodity pool, as defined by NI 81-104, and complies with NI 81-102, except as otherwise permitted by NI 81-104, subject to receipt of any exemptions therefrom obtained by the Fund;
(b) the Fund does not borrow an amount exceeding 35% of the Fund's NAV on a daily mark-to-market basis, of which up to a maximum of 30% of the Fund's NAV will be used to invest in portfolio securities and up to a maximum of 5% of the Fund's NAV will be used as margin in connection with its hedging activities to offset the increased market risk associated with the leveraged portion of the portfolio such that the net market exposure of the Fund will generally be targeted at 100% of the NAV of the Fund;
(c) in the event that the borrowed amount exceeds 35% of the Fund's NAV, the Fund's portfolio will be rebalanced within 3 business days to bring it back within the borrowing limits;
(d) the Fund borrows from a "Canadian financial institution", as defined by National Instrument 45-106 -- Prospectus and Registration Exemptions, to implement the Requested Relief;
(e) the Fund's use of leverage complies with its investment objectives including employing leverage to increase its long portfolio exposure and to hedge the increased market risk associated with the leveraged portion of the portfolio;
(f) the Fund maintains appropriate internal controls regarding its use of leverage, including written policies and procedures, risk management controls, and proper books and records; and
(g) in addition to any disclosure required by NI 81-104, the Fund includes in its long form prospectus (a) textbox disclosure regarding the Fund's use of leverage and this decision on the cover page, in accordance with paragraph 11 above (b) disclosure regarding this decision under the heading "Exemptions and Approvals" and (c) a risk factor regarding the use of leverage.