Horizons ETFs Management (Canada) Inc. et al.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of exchange traded mutual fund reorganization pursuant to section 5.5(1)(b) of NI 81-102 required because the reorganization does not meet criteria for pre-approval -- reorganization from mutual fund trust structure to multi-class mutual fund corporation structure -- certain of the existing funds will not be wound up upon completion of the reorganization -- ETF facts, financial statements of the continuing funds will not be available as the continuing funds are newly established funds -- continuing funds to have same investment objectives, investment strategies, management fees as the existing Funds -- reorganization to otherwise comply with pre-approval criteria, including securityholder vote, IRC approval -- securityholders provided with timely and adequate disclosure regarding the reorganization.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.7(1)(b) and 19.1(2).

October 24, 2019

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 HORIZONS ETFS MANAGEMENT (CANADA) INC. (the Filer) AND HORIZONS S&P/TSX 60TM INDEX ETF HORIZONS S&P 500® INDEX ETF HORIZONS S&P 500 CAD HEDGED INDEX ETF HORIZONS S&P/TSX CAPPED ENERGY INDEX ETF HORIZONS S&P/TSX CAPPED FINANCIALS INDEX ETF HORIZONS CDN SELECT UNIVERSE BOND ETF HORIZONS NASDAQ-100® INDEX ETF HORIZONS EURO STOXX 50® INDEX ETF HORIZONS CDN HIGH DIVIDEND INDEX ETF HORIZONS US 7-10 YEAR TREASURY BOND ETF HORIZONS US 7-10 YEAR TREASURY BOND CAD HEDGED ETF HORIZONS LADDERED CANADIAN PREFERRED SHARE INDEX ETF HORIZONS INTL DEVELOPED MARKETS EQUITY INDEX ETF HORIZONS EQUAL WEIGHT CANADA REIT INDEX ETF HORIZONS EQUAL WEIGHT CANADA BANKS INDEX ETF HORIZONS GOLD ETF HORIZONS SILVER ETF HORIZONS CRUDE OIL ETF HORIZONS NATURAL GAS ETF BETAPRO GOLD BULLION 2X DAILY BULL ETF BETAPRO GOLD BULLION -2X DAILY BEAR ETF BETAPRO CRUDE OIL 2X DAILY BULL ETF BETAPRO CRUDE OIL -2X DAILY BEAR ETF BETAPRO NATURAL GAS 2X DAILY BULL ETF BETAPRO NATURAL GAS -2X DAILY BEAR ETF BETAPRO SILVER 2X DAILY BULL ETF BETAPRO SILVER -2X DAILY BEAR ETF BETAPRO S&P/TSX 60TM 2X DAILY BULL ETF BETAPRO S&P/TSX 60TM -2X DAILY BEAR ETF BETAPRO S&P/TSX CAPPED FINANCIALSTM 2X DAILY BULL ETF BETAPRO S&P/TSX CAPPED FINANCIALSTM -2X DAILY BEAR ETF BETAPRO S&P/TSX CAPPED ENERGYTM 2X DAILY BULL ETF BETAPRO S&P/TSX CAPPED ENERGYTM -2X DAILY BEAR ETF BETAPRO NASDAQ-100® 2X DAILY BULL ETF BETAPRO NASDAQ-100® -2X DAILY BEAR ETF BETAPRO S&P 500® 2X DAILY BULL ETF BETAPRO S&P 500® -2X DAILY BEAR ETF BETAPRO CANADIAN GOLD MINERS 2X DAILY BULL ETF BETAPRO CANADIAN GOLD MINERS -2X DAILY BEAR ETF BETAPRO MARIJUANA COMPANIES 2X DAILY BULL ETF BETAPRO MARIJUANA COMPANIES INVERSE ETF BETAPRO S&P/TSX 60TM DAILY INVERSE ETF BETAPRO S&P 500® DAILY INVERSE ETF BETAPRO S&P 500 VIX SHORT-TERM FUTURESTM ETF (the Horizons ETFs)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Horizons ETFs, for a decision under the securities legislation of the Jurisdiction (the Legislation) for approval under clause 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) of the proposed reorganization (the Proposed Reorganization) of each of the Horizons ETFs (the Existing Funds) into a corresponding class of shares (the Continuing Funds) of a new mutual fund corporation (the Approval 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 (Principal Regulator); and

(b) the Filer has provided notice that section 4.7(1)(c) 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 Canadian Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions (NI 14-101), MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

The Filer and the Horizons ETFs

1. The Filer is a corporation existing under the laws of Canada, with its head office located in Toronto, Ontario. The Filer is a wholly-owned subsidiary of Mirae Asset Global Investments Co., Ltd.

2. The Filer is registered as (a) an investment fund manager in Newfoundland and Labrador, Ontario and Québec, (b) a portfolio manager in Alberta, British Columbia, Ontario and Québec (c) a dealer in the category of exempt market dealer in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec and Saskatchewan, (d) a commodity trading adviser in Ontario and (e) a commodity trading manager in Ontario.

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

4. The Filer is the manager and trustee of the Horizons ETFs.

5. The Filer's primary business is to act as manager and investment manager for the Horizons ETFs and other exchange traded funds in Canada.

6. Each of the Horizons ETFs is an exchange traded mutual fund or alternative mutual fund established under the laws of the Province of Ontario.

7. Securities of the Horizons ETFs are distributed in each of the Canadian Jurisdictions under long form prospectuses and ETF facts documents prepared in accordance with the requirements of NI 41-101 and NI 81-102, as applicable.

8. Each Horizons ETF is a reporting issuer under the applicable securities legislation of each of the Canadian Jurisdictions.

9. The Horizons ETFs are subject to, among other laws and regulations, NI 81-102, National Instrument 81-106 Investment Fund Continuous Disclosure and National Instrument 81-107 Independent Review Committee for Investment Funds.

10. Neither the Filer nor the Horizons ETFs are in default of applicable securities legislation in any of the Canadian Jurisdictions.

Reason for Approval Sought

11. The Filer and the Existing Funds require regulatory approval of the Proposed Reorganization because they cannot rely on section 5.6(1) of NI 81-102 for the following reasons:

(a) contrary to section 5.6(1)(c), certain of the Existing Funds will not be wound-up after the Proposed Reorganization because the Filer believes that leaving the Existing Funds and their assets in place may be necessary to defer the unnecessary realization of taxable income or gains that might otherwise occur on a wind-up of an Existing Fund, and it may otherwise be beneficial to such Existing Funds' unitholders not to wind them up. The Existing Funds that are not wound up following the effective date of the Proposed Reorganization will retain their current unit trust structure but will not be offered to the public and their continued existence will confer no direct benefit on the Filer; and

(b) contrary to sections 5.6(1)(f)(ii) and 5.6(1)(f)(iii)(A)(IV) and (V), the most recently filed ETF facts document, the most recently filed annual financial statements and interim financial reports and the most recently filed annual and interim management reports of fund performance for the Continuing Funds will not be sent to unitholders of the Existing Funds, since that information will not be available for the Continuing Funds as each Continuing Fund is newly created. Instead, the Filer will make available to each unitholder of an Existing Fund the Circular containing information and documents necessary for investors of the Existing Funds to consider the Proposed Reorganization, including a full description of the Proposed Reorganization, the income tax considerations of the Proposed Reorganization to unitholders, the investment objectives and investment strategies of the Existing Funds and the Continuing Funds, as well as a summary of the decision of the Independent Review Committee (the IRC) with respect to the Proposed Reorganization.

12. Except for sections 5.6(1)(c), 5.6(1)(f)(ii) and 5.6(1)(f)(iii)(A)(IV) and (V), the Proposed Reorganization would satisfy the other criteria in section 5.6(1) for pre-approved reorganizations and transfers.

The Proposed Reorganization

13. In a press release issued on August 23, 2019 and a material change report filed on August 30, 2019, the Filer announced the Proposed Reorganization and that special meetings of unitholders of the Horizons ETFs (the Meetings) would be held to approve the Proposed Reorganization.

14. Each Continuing Fund will be structured as a separate class of shares of a new mutual fund corporation, to be incorporated under the laws of a jurisdiction of Canada, for purposes of implementing the Proposed Reorganization. As a result:

(a) the unitholders of the Existing Funds will have rights as shareholders of the Continuing Funds that are substantially similar in all material respects to the rights they had as unitholders of the Existing Funds;

(b) the unitholders of the Existing Funds will become holders of a corresponding class of shares of the relevant Continuing Fund, with the same aggregate net asset value immediately after the Proposed Reorganization as they held immediately before the Proposed Reorganization as unitholders of the relevant Existing Fund;

(c) the Proposed Reorganization is not expected to be a taxable event for Canadian income tax purposes for unitholders of the Existing Funds provided that, in the case of Canadian resident unitholders who hold units of the Existing Funds in taxable accounts (Section 85 Eligible Holders), such unitholders make a joint election with the new mutual fund corporation under section 85 of the Income Tax Act (Canada) (the Tax Act) to defer recognition of any gain that may otherwise arise for Canadian income tax purposes on the exchange of their units of an Existing Fund for shares of a class of the Continuing Fund;

(d) the Continuing Funds will have fundamental investment objectives, as well as investment strategies, that are substantially similar in all material respects to the fundamental investment objectives and investment strategies of the corresponding Existing Funds;

(e) the Continuing Funds will have fee structures and valuation procedures that are substantially similar to the fee structures and valuation procedures of the corresponding Existing Funds; and

(f) The Filer will continue to be the investment fund manager of the Continuing Funds,

all as will be further described in an information circular that will be made available to unitholders of the Existing Funds (the Circular).

15. The Continuing Funds will be managed in a manner which is substantially similar to the manner in which the Existing Funds have been managed, and will be managed, to the effective date of the Proposed Reorganization.

16. It is anticipated that substantially all of the assets of each Existing Fund will be transferred to the corresponding Continuing Fund in connection with the implementation of the Proposed Reorganization and/or may be left in the Existing Fund for the exclusive benefit of the corresponding Continuing Fund.

17. The Proposed Reorganization is expected to be completed before the end of 2019, subject to receiving all necessary unitholder, regulatory and other third party approvals.

18. As a result of the Proposed Reorganization, all material agreements regarding the administration of the Horizons ETFs will either be amended to include the Continuing Funds, or the Continuing Funds will enter into new agreements with the relevant service provider, as required.

19. The securityholders of each Existing Fund immediately before the Proposed Reorganization will be the securityholders of the corresponding Continuing Fund immediately after the Proposed Reorganization.

20. The Filer filed preliminary prospectuses and preliminary ETF facts documents with respect to the Continuing Funds on October 15, 2019.

21. The Continuing Funds will be reporting issuers under the applicable securities legislation of each province and territory of Canada.

22. The Existing Funds have operated, and the Continuing Funds will operate, in accordance with NI 81-102, except for any exemptive relief that has been previously obtained.

23. It is expected that the sole unitholder of each Existing Fund following the Proposed Reorganization will be the mutual fund corporation, on behalf of the applicable corresponding Continuing Fund and its shareholders (which shall be the same holders of units of such Existing Fund immediately prior to the Proposed Reorganization).

24. The Horizons ETFs' IRC has reviewed the conflicts of interests matters associated with the Proposed Reorganization, including the process to be followed in connection with such Proposed Reorganization and the preservation of some or all of the Existing Funds for the benefit of the holders of the Continuing Funds, and after reasonable inquiry has advised the Filer that, in its determination, if implemented, the Proposed Reorganization achieves a fair and reasonable result for each of the Existing Funds.

25. In addition to the press release mentioned above and the corresponding material change report, which were issued and filed on the System for Electronic Document Analysis and Retrieval (SEDAR), investors in the Horizons ETFs have been made aware of the Proposed Reorganization through amendments to the final prospectuses of the Horizons ETFs, which were filed on SEDAR.

26. Pursuant to NI 81-102, the Meetings will be held on or about November 12, 2019. At the Meetings, unitholders of the Existing Funds will be asked to approve the Proposed Reorganization.

27. The Notice-and-Access Document and voting instruction forms or forms of proxy, as applicable, in respect of the Meetings (the Meeting Materials) describing the Proposed Reorganization was sent to unitholders of the Existing Funds on or about October 11, 2019 and copies thereof will be filed on SEDAR following the mailing in accordance with applicable securities legislation and exemptive relief obtained by the Filer on November 4, 2016 permitting the Horizons ETFs to use Notice-and-Access to send proxy-related materials to beneficial unitholders.

28. The Meeting Materials contain a detailed description of the Proposed Reorganization, information about the Existing Funds and the Continuing Funds, income tax considerations for unitholders of the Horizons ETFs applicable to the Proposed Reorganization and the material differences between being a unitholder of a trust and a shareholder of a corporation.

29. The Meeting Materials contain sufficient information regarding the business, management and operations of the Horizons ETFs and all information necessary to allow unitholders to make an informed decision about the Proposed Reorganization. All other required information and documents necessary to comply with applicable proxy solicitation requirements of securities legislation for the Meetings will be mailed to applicable unitholders of the Horizons ETFs.

30. At each Meeting, the affirmative vote of not less than a majority of the votes cast by unitholders of the applicable Existing Fund present in person or represented by proxy at that Meeting is required for approval of the Proposed Reorganization. It is expected that the Proposed Reorganization will be implemented if approved by the unitholders of the applicable Existing Fund, regardless of whether the Proposed Reorganization is approved by unitholders of the other applicable Existing Funds.

31. Subject to receipt of unitholder and regulatory approvals, the Proposed Reorganization will occur as soon as reasonably practicable following receipt of all required unitholder and regulatory approvals, subject to the discretion of the Filer to not proceed with the Proposed Reorganization for one or more Existing Funds if considered in the best interests of the Existing Funds. It is currently anticipated that the Proposed Reorganization will occur before the end of 2019.

32. The reasons for the Proposed Reorganization are as follows:

(a) The Proposed Reorganization follows a lengthy and extensive review by the Filer of the activities and current tax positions of the Existing Funds, upon which the Filer has determined that it would be in the best interests of the unitholders of the Existing Funds, currently structured as trusts, to merge into a single multi-class mutual fund corporation, which would permit the Continuing Funds to improve operational efficiency and aggregate all future gains and losses of the Continuing Funds be they on income or capital account.

(b) The Existing Funds currently incur significant annual expenses to maintain their status as separate mutual fund trusts, each of which is treated as a flow-through entity for tax purposes, but each of which is also required to separately comply with the tax rules applicable thereto. The Filer has determined that significant operational efficiencies can be achieved by combining the Existing Funds into a single mutual fund corporation rather than incurring the foregoing duplicative annual expenses.

(c) Upon completion of the Proposed Reorganization, the Continuing Funds are expected to be on a level playing field with the tax and operational efficiencies currently enjoyed by other mutual fund corporations.

(d) Following completion of the Proposed Reorganization, the Continuing Funds are expected to preserve all of the benefits offered by the Existing Funds, which primarily use derivative arrangements in order to achieve their investment objectives, under their synthetic investment strategies.

33. No commission or other fee will be charged to unitholders of an Existing Fund on the issue or exchange of securities of the applicable Continuing Fund.

34. The steps for implementing the Proposed Reorganization are substantially as follows:

(a) The declaration of trust governing each Existing Fund will be amended to, among other matters: (i) require that every unitholder of each Existing Fund transfer each of his or her units of such Existing Fund to a new mutual fund corporation (Horizons MFC), to be incorporated under the laws of a jurisdiction of Canada, in return for an equivalent number of shares of an equivalent series of the corresponding Continuing Fund, (ii) otherwise facilitate the Proposed Reorganization and the implementation of the steps and transactions involved as described in the Circular, and (iii) authorize the Filer, as manager and trustee of each Existing Fund, to execute all such instruments as may be necessary or desirable to give effect to the Proposed Reorganization.

(b) Horizons MFC will be incorporated under the laws of a jurisdiction of Canada and is expected to qualify as a "mutual fund corporation" within the meaning of the Tax Act from inception.

(c) Each Existing Fund will settle all or part of its outstanding swaps, forwards or other derivatives.

(d) Each unitholder of an Existing Fund will transfer each of his or her units of that Existing Fund to Horizons MFC in exchange for an equivalent number of shares of an equivalent series of the corresponding Continuing Fund.

(e) Subsequent to the transfer of all the units of a particular Existing Fund to Horizons MFC per paragraph (d) above, such Existing Fund will transfer to Horizons MFC (for the benefit of the applicable Continuing Fund), as a return of capital or otherwise, all or part of its assets, and Horizons MFC will assume the Existing Fund's remaining liabilities, if any.

(f) Once an Existing Fund has transferred all of its assets to Horizons MFC, per paragraph (e) above, that Existing Fund will be wound up. Assets retained within an Existing Fund following the Proposed Reorganization, if any, will be held for the exclusive benefit of the corresponding Continuing Fund and its shareholders.

35. The Filer, as manager of the Existing Funds, has determined that the Proposed Reorganization, including the steps necessary to effect the Proposed Reorganization, is in the best interests of the unitholders of the Existing Funds.

36. The Existing Funds are being reorganized with, or their assets are being transferred to, the Continuing Funds to which NI 81-102 shall apply, that are managed by the Filer, that will have substantially similar fundamental investment objectives, valuation procedures and fee structure as the Existing Funds, that will not be in default of any requirement of securities legislation and will become reporting issuers upon receipt of a final prospectus for the Continuing Funds prior to effecting the Proposed Reorganization.

37. The Proposed Reorganization is expected not to be subject to Canadian income tax for non-Section 85 Eligible Holders, and in the case of Section 85 Eligible Holders will be a tax-deferred transaction under section 85 of the Tax Act, provided that such unitholders make a joint election with Horizons MFC under section 85 of the Tax Act to have the exchange of their existing trust units for shares of a Continuing Fund take place at the unitholder's tax cost plus any reasonable costs of distribution. The Filer is establishing a process to provide assistance to unitholders in taking the necessary steps to file the joint election, which will be free of charge.

38. The portfolio assets of the Existing Funds to be acquired by the Continuing Funds may be acquired in compliance with NI 81-102 and are acceptable to the Filer, in its capacity as investment manager, of the Continuing Funds and are consistent with the investment objectives of the applicable Continuing Fund.

39. The Proposed Reorganization will only be implemented in respect of a particular Existing Fund if it is approved by unitholders at the special meeting of that Existing Fund.

40. The Circular that is or will be made available to unitholders of the Existing Funds provides sufficient information about the Proposed Reorganization to permit securityholders to make an informed decision about the Proposed Reorganization, including a full description of the Proposed Reorganization, the income tax considerations of the Proposed Reorganization, information about the investment objectives and investment strategies of the Existing Funds and the Continuing Funds, as well as a summary of the IRC's decision with respect to the Proposed Reorganization.

41. None of the costs and expenses associated with the Proposed Reorganization will be borne by the Existing Funds. All such costs will be borne by the Filer. There are no charges payable by unitholders of the Existing Funds who acquire securities of the corresponding Continuing Funds as a result of the Proposed Reorganization.

42. Unitholders of the Existing Funds will vote on the Proposed Reorganization after receiving detailed information about the Proposed Reorganization in the Meeting Materials and may redeem their units in accordance with the declaration of trust of the Existing Funds or sell their units on the Toronto Stock Exchange prior to the effective date of the Proposed Reorganization should they wish to do so.

43. The value per share of the corresponding class of shares of the Continuing Funds to be received by unitholders of the corresponding Existing Funds will have a value that is equal to the net asset value per unit of the corresponding Existing Funds calculated on the date of the Proposed Reorganization.

44. The Proposed Reorganization is not expected to have any material adverse impact on the business, operations or affairs of the Existing Funds or the unitholders of the Existing Funds.

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 Approval Sought is granted, provided that before implementing the Proposed Reorganization in respect of a particular Horizons ETF, the Filer obtains the prior approval of the securityholders of that Horizons ETF at a special meeting held for that purpose.

"Darren McKall"
Investment Funds and Structured Products
Ontario Securities Commission