Yorkville Asset Management Inc.

August 22, 2018

Decision

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Existing relief from paragraphs 2.3(f) and (h), 2.5(a), (b) and (c) of National Instrument 81-102 Mutual Funds (as it then was) to invest in gold ETFs, silver ETFs, gold/silver ETFs and silver revoked and replaced – additional relief granted to invest in Leveraged ETFs, Inverse ETFs and Leveraged Gold ETFs subject to investment limits applied to the existing and additional relief collectively.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, paragraphs 2.3(1)(f), 2.3(1)(h), 2.5(2)(a), 2.5(2)(c) and section 19.1.

August 22, 2018

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
YORKVILLE ASSET MANAGEMENT INC.
(the Filer)

AND

IN THE MATTER OF
THE FUNDS
(as defined below)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of each existing and future mutual fund for which the Filer acts or may act as investment fund manager (each, a Fund and collectively, the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):

(a) revoking and replacing the Previous Decision (as defined below); and

(b) exempting the Funds from the prohibitions contained in sections 2.3(1)(f), 2.3(1)(h), 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 Investment Funds (NI 81-102) to permit each Fund to invest in the following:

(i) silver, Permitted Silver Certificates (as defined below) and Silver Derivatives (as defined below) (collectively, Silver); and

(ii) the Underlying ETFs (as defined below)

(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 Alberta, British Columbia, Manitoba, Québec and Saskatchewan.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms have the following meanings:

ETF means an exchange-traded fund.

Gold Derivative means a specified derivative the underlying interest of which is gold on an unlevered basis.

IPU means an “index participation unit” as defined by NI 81-102.

Permitted Silver Certificate means a certificate that represents silver that is:

(a) available for delivery in Canada, free of charge, to or to the order of the holder of the certificate;

(b) of a minimum fineness of 999 parts per 1,000;

(d) in the form of either bars or wafers; and

(e) if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a province or territory of Canada.

Silver Derivative means a specified derivative the underlying interest of which is silver on an unlevered basis.

Underlying ETFs means ETFs traded on a stock exchange in Canada or the United States whose securities are not IPUs and that seek to:

(a) replicate (i) the performance of gold on an unlevered basis; or (ii) the value of a Gold Derivative (Gold ETFs);

(b) replicate (i) the performance of silver on an unlevered basis; or (ii) the value of a Silver Derivative (Silver ETFs);

(c) replicate (i) the performance of gold and silver on an unlevered basis; or (ii) the value of a specified derivative the underlying interest of which are gold and silver on an unlevered basis (Gold/Silver ETFs);

(d) provide daily results that replicate the daily performance of a specified widely-quoted market index (the Underlying Index) by a multiple of up to 200% (Leveraged Bull ETFs) or an inverse multiple of up to 200% (Leveraged Bear ETFs, which, together with Leveraged Bull ETFs, are collectively referred to as Leveraged ETFs);

(e) provide daily results that replicate the daily performance of their Underlying Index by an inverse multiple of up to 100% (Inverse ETFs); and

(f) seek to provide daily results that replicate the daily performance of gold or the value of a Gold Derivative (the ETF's Underlying Gold Interest), by a multiple of up to 200% (Leveraged Gold ETFs).

Representations

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

The Filer and the Funds

1. The Filer is a corporation incorporated under the laws of the Province of Ontario. The head office of the Filer is located in Toronto, Ontario.

2. The Filer is registered as an exempt market dealer and portfolio manager in Alberta, British Columbia and Ontario and as an investment fund manager in Ontario.

3. The Filer acts, or will act, as the investment fund manager of each of the Funds. The Filer acts as the portfolio manager of each of the existing Funds and will act as the portfolio manager of, or will appoint a portfolio manager for, each of the future Funds.

4. Each Fund is, or will be, a mutual fund governed by the laws of Canada or the laws of a province or territory of Canada and a reporting issuer under the laws of one or more of the provinces and territories of Canada.

5. Neither the Filer nor the Funds are in default of securities legislation in any of the provinces or territories of Canada.

6. Securities of each Fund are or will be qualified for distribution in some or all of the provinces and territories of Canada under a simplified prospectus, annual information form and fund facts prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure. Each Fund is, or will be, governed by NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

The Previous Decision

15. Except as described in the Previous Decision, none of the Funds currently has relief from sections 2.3(1)(f) and 2.3(1)(h) of NI 81-102.

16. The Filer obtained a decision dated June 21, 2011 (the Previous Decision) exempting the Funds from sections 2.3(1)(f), 2.3(1)(h), 2.5(2)(a), 2.5(2)(b) and 2.5(2)(c) of NI 81-102 to permit each Fund to invest up to 10% of its total net assets, taken at market value at the time of the transaction, in (i) Gold ETFs, (ii) Silver ETFs, (iii) Gold/Silver ETFs, and (iv) Silver.

17. Since the Previous Decision did not permit the Funds to invest in securities of Leveraged ETFs, Inverse ETFs and Leveraged Gold ETFs, the Filer has requested that the Previous Decision be revoked and replaced by this decision in order to permit the Funds to also invest in Leveraged ETFs, Inverse ETFs and Leveraged Gold ETFs.

18. The Filer has determined that it would be in the best interests of the Funds to receive the Exemption Sought and replace the Previous Decision with this decision for the reasons further set out below.

19. As of the date of this decision, the Filer will no longer rely on the Previous Decision.

The Underlying ETFs

20. Each Underlying ETF is, or will be, a “mutual fund” as such term is defined under the Securities Act (Ontario).

21. The securities of each Underlying ETF trade, or will trade, on a stock exchange in Canada or the United States.

22. Each Leveraged ETF will be generally rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed +/-200% of the corresponding daily performance of its Underlying Index.

23. Each Inverse ETF will be generally rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed -100% of the corresponding daily performance of its Underlying Index.

24. Each Leveraged Gold ETF will be generally rebalanced daily to ensure that its performance and exposure to its Underlying Gold Interest will not exceed +200% of the corresponding daily performance of its Underlying Gold Interest. Each Leveraged Gold ETF will provide a Fund with market value exposure to gold that is two times the net asset value of the ETF on a daily basis.

Investments in the Underlying ETFs

25. The Funds propose to have the ability to invest in the Underlying ETFs, the securities of which are not IPUs.

26. Each Fund is, or will be, permitted, in accordance with its investment objectives and investment strategies, to invest in securities of the Underlying ETFs.

27. Any regulatory concerns, such as undue risk, liquidity concerns or lack of transparency, in connection with investing in the Underlying ETFs are mitigated by the following facts:

(a)           The Underlying ETFs trade on a Canadian or U.S. exchange and are generally relatively liquid. The Underlying ETFs will either be “registered” investment companies in the United States or reporting issuers in one or more of the jurisdictions of Canada, which means that there will be clear disclosure about the Underlying ETFs readily available in the marketplace.

(b)           The amount of loss that can result from an investment by a Fund in an Underlying ETF will be limited to the amount invested by the Fund in securities of the Underlying ETF.

(c)           Investments by the Funds in Underlying ETFs will be very limited. In accordance with the investment strategies of the Funds, no more than 10% of the net asset value of a Fund will be invested in securities of Underlying ETFs taken at market value at the time of purchase.

(d)           The simplified prospectus of the Funds will disclose: (i) in the investment strategy section: (A) that the Fund has obtained relief to invest in securities of the Underlying ETFs; (B) an explanation of what each type of Underlying ETF is; and (C) to the extent the Fund may invest in securities of a Leveraged Gold ETF, that the Fund may indirectly invest in gold; and (ii) the risks associated with such investments and strategies.

Silver and Gold

28. In addition to having the ability to invest in gold as permitted under NI 81-102, the Filer wishes for the Funds to have the ability to invest in silver and Permitted Silver Certificates directly, and in silver and gold indirectly by investing in Silver Derivatives and Leveraged Gold ETFs.

29. Each Fund is, or will be, permitted, in accordance with its investment objectives and investment strategies, to invest in Silver and/or gold.

30. NI 81-102 allows mutual funds to invest in gold, permitted gold certificates or Gold Derivatives on the basis that gold is a fairly liquid commodity.

31. The Filer believes that the markets in both gold and silver are highly liquid, and that there are no liquidity concerns with permitting a Fund to invest in silver and Permitted Silver Certificates directly, and in silver and gold indirectly by investing in Silver Derivatives, Gold Derivatives and Leveraged Gold ETFs.

32. Permitting a Fund to invest in silver and Permitted Silver Certificates directly, and in silver and gold indirectly by investing in Silver Derivatives, Gold Derivatives and Leveraged Gold ETFs, will provide the portfolio manager of a Fund with additional flexibility to increase gains for the Fund in certain market conditions, which may have otherwise caused the Fund to have significant cash positions and therefore prohibit the Fund from achieving its investment objective.

General

33. In the absence of the Exemption Sought, the Funds would not be permitted to invest in Silver and/or Underlying ETFs because:

(a)           sections 2.3(1)(f) and (h) of NI 81-102 would prohibit the Funds from investing in Silver or in securities of Underlying ETFs;

(b)           section 2.5(2)(a) of NI 81-102 would prohibit the Funds from investing in securities of Underlying ETFs because the Underlying ETFs are not subject to NI 81-101 and may not be subject to NI 81-102; and

(c)           section 2.5(2)(c) of NI 81-102 would prohibit the Funds from investing in securities of some Underlying ETFs because some Underlying ETFs are not qualified for distribution in the local jurisdiction.

34. An investment by a Fund in Silver or in securities of an Underlying ETF will represent the business judgment 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 under the Legislation is that the Exemption Sought is granted, provided that:

(a) the investment by a Fund in Silver and in securities of an Underlying ETF is in accordance with the fundamental investment objectives of the Fund;

(b) the securities of the Underlying ETFs are traded on a stock exchange in Canada or the United States;

(c) a Fund does not purchase securities of an Underlying ETF if, immediately after the transaction, more than 10% of the net asset value of the Fund, taken at market value at the time of the transaction, would consist of securities of Underlying ETFs;

(d) a Fund does not purchase securities of Inverse ETFs or securities of Leveraged Bear ETFs or sell any securities short if, immediately after the transaction, the Fund’s aggregate market value exposure represented by all such securities purchased and securities sold short would exceed 20% of the net asset value of the Fund, taken at market value at the time of the transaction;

(e) immediately after entering into a purchase, derivative or other transaction providing exposure to one or more physical commodities, the Fund’s market value exposure (whether direct or indirect, including through Underlying ETFs) to all physical commodities (including (i) Gold ETFs; (ii) Silver ETFs; (iii) Gold/Silver ETFs; (iv) Leveraged Gold ETFs; (v) silver; (vi) gold; (vii) Permitted Silver Certificates; (viii) permitted gold certificates; and (ix) specified derivatives the underlying interest of which is silver or gold on a levered or unlevered basis) does not exceed 10% of the net asset value of the Fund, taken at market value at the time of the transaction; and

(f) the simplified prospectus of each existing Fund discloses, or will disclose the next time it is renewed, and the simplified prospectus of each future Fund will disclose:

(i)            in the investment strategy section:

A.            that the Fund has obtained relief to invest in Silver and in securities of the Underlying ETFs;

B.            an explanation of what each type of Underlying ETFs is; and

C.            to the extent the Fund may invest in securities of a Gold ETF, Silver ETF, Gold/Silver ETF or Leveraged Gold ETF, that the Fund may indirectly invest in gold and/or silver; and

(ii)           the risks associated with such investments and strategies.

“Darren McKall”
Investment Funds and Structured Products Branch
Ontario Securities Commission