Horizons ETFs Management (Canada) Inc.
National Policy 11-203 -- Process for Exemptive Relief applications in Multiple Jurisdictions -- Mutual funds granted relief from the restriction in National Instrument 81-102 Mutual Funds on securities lending transactions on the 50% limit on lending -- National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, s. 2.12(1)12.
March 19, 2021
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 MARIJUANA LIFE SCIENCES INDEX ETF (the Fund)
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 of the principal regulator (the Legislation), pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), exempting the Fund from section 2.12(1)12 of NI 81-102 to permit the Fund to enter into securities lending transactions in which the aggregate market value of all securities loaned by the Fund exceeds 50% of the net asset value of the Fund (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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (the Other Jurisdictions).
Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer.
1. The Filer is the trustee, investment fund manager and portfolio manager of the Fund. The Filer is registered as an investment fund manager, portfolio manager, exempt market dealer, commodity trading manager and commodity trading adviser in Ontario. The head office of the Filer is in Toronto, Ontario.
2. The Fund is an open-end exchange traded mutual fund established under the laws of the Province of Ontario, pursuant to a declaration of trust. The Fund is governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.
3. The Filer and the Fund are not in default of securities legislation in any jurisdiction.
4. Units of the Fund are listed on the Toronto Stock Exchange (the TSX).
5. The investment objective of the Fund is to seek to replicate, to the extent possible, the performance of the North American Marijuana Index, net of expenses. The North American Marijuana Index is designed to provide exposure to the performance of a basket of North American publicly listed companies with significant business activities in the marijuana industry.
6. To achieve the Fund's investment objectives, the Fund invests and holds the equity securities of the constituent issuers of its underlying index in substantially the same proportion as its underlying index. The Fund employs a passive investment strategy that is not actively managed, and the equity holdings in the portfolio are designed to maintain their same relative portfolio weightings between rebalancing dates. The North American Marijuana Index is rebalanced on a quarterly basis only.
7. In order to earn additional returns for the Fund, the Filer proposes to enter into securities lending transactions on behalf of the Fund for which the aggregate market value of securities loaned by the Fund may represent up to 100% of the net asset value of the Fund to be lent to one or more borrowers through an agent, which agent is not the Fund's custodian or sub-custodian.
8. The securities lending agent of the Fund maintains appropriate internal controls, procedures, and records for securities lending transactions in compliance with the requirements of subsection 2.16(3) of NI 81-102.
9. The Filer believes that the equity securities held in the Fund are well suited for securities lending above the 50% of net asset value limitation set out in NI 81-102 because the Fund employs a passive investment strategy and the equity securities held in the portfolio are considered to be liquid by the Filer.
10. The Filer has ensured that the agent through which the Fund lends securities maintains appropriate internal controls, procedures and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.
11. Securities in the Fund's portfolio have been loaned only to borrowers that have been considered acceptable to the Fund as contemplated by subsection 2.16(2) of NI 81-102.
12. The Fund has the rights set forth in subsections 2.12(1)8, 2.12(1)9 and 2.12(1)11 of NI 81-102, including the right to keep any collateral on deposit in the event of default by a borrower.
13. The collateral received by the Fund in respect of a securities lending transaction is in the form of cash, Government of Canada bonds and close equivalents, and provincial bonds and close equivalents subject to minimum credit rating criteria and/or other collateral permitted by NI 81-102.
14. On a daily mark-to-market basis, the Fund receives collateral worth at least 102% of the value of the loaned securities, as required under NI 81-102. In respect of securities lending transactions in which the aggregate market value of securities loaned by the Fund represents in excess of 50% of net asset value, the Fund will only enter such securities lending transactions if it receive securities lending collateral with a market value equal to at least 110% of the market value of any securities that are to be loaned at or prior to the term of the loan.
15. The collateral received by the Fund in respect of a securities lending transaction is not re-invested in any other types of investment products.
16. The prospectus of the Fund will contain disclosure specifying that the Fund may, pursuant to exemptive relief granted by Canadian securities regulatory authorities, enter into securities lending transactions for which the aggregate market value of securities loaned by the Fund may represent up to 100% of the net asset value of the Fund.
17. Other than as set forth herein, any securities lending transactions entered into by the Fund are and will be conducted in accordance with the provisions of NI 81-102.
18. The Manager submits that it is in the best interests of the Fund to be permitted to enter into securities lending transactions in which the aggregate market value of securities loaned by the Fund represents up to 100% of the net asset value of the Fund, and that it would not be prejudicial to the public interest to grant the Exemption Sought.
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 the Fund, in connection with a securities lending transaction:
(1) receives the collateral that
(A) is prescribed by paragraphs 2.12(1)3 to 6 of NI 81-102, other than collateral described in subsection 2.12(1)6(d) or in paragraph (b) of the definition of "qualified security"; and
(B) is marked to market on each business day in accordance with paragraph 2.12(1)7 of NI 81-102;
(2) has the rights set forth in paragraphs 2.12(1)8, 2.12(1)9 and 2.12(1)11 of NI 81-102;
(3) complies with paragraph 2.12(1)10 of NI 81-102; and
(4) lends its securities only to borrowers that are acceptable to the Fund.