Securities Law & Instruments

Headnote

Certain mutual funds exempted from the short selling prohibition in National Instrument 81-102 Mutual Funds to engage in short selling of securities up to 10% of net assets, subject to certain conditions and requirements.

Rules Cited

National Instrument 81-102 Mutual Funds, subsections 2.6(a) and (c), 6.1(1) and section 19.1.

IN THE MATTER OF

NATIONAL INSTRUMENT 81-102 -- MUTUAL FUNDS

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

CI MUTUAL FUNDS, CLARICA MUTUAL FUNDS AND

SIGNATURE INCOME & GROWTH CORPORATE CLASS

June 20, 2005

McCarthy Tétrault LLP
Box 48, Suite 4700
Toronto Dominion Bank Tower
Toronto, ON M5K 1E6
 
Attention:
Katherine Gurney

Dear Sirs/Mesdames:

Re:
CI Mutual Funds
Clarica Mutual Funds
Signature Income & Growth Corporate Class
MRRS Application pursuant to Section 19.1 of National Instrument 81-102 ("NI 81-102") for Exemptions from Sections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102
SEDAR Project No. 748587
Application #175/05

By letter dated March 10, 2005 and supplemented by letter dated April 8, 2005 (together the "Application"), CI Mutual Funds Inc. (the "Manager") applied to the regulator or the securities regulatory authority in each province and territory of Canada (collectively, the "Decision Makers") on behalf of:

(a) each of the funds listed at Appendix "A" hereto (the "Existing CI Funds"),

(b) the funds listed at Appendix "B" hereto (the "Existing Clarica Funds"),

(c) the Signature Income & Growth Corporate Class (the "Signature Fund") to be established pursuant to a simplified prospectus filed on March 4, 2005,

(d) each mutual fund hereinafter created and managed by the Manager or an affiliate of the Manager (the "Future Funds" and together with the Existing Funds and the Signature Fund, the "Funds" and individually, a "Fund"), and

(e) the funds listed at Appendix "C" hereto (the "Prior Funds") in respect of which the Decision Makers issued a decision on June 30, 2004 (the "Prior Decision")

for a decision of the Decision Makers that: (i) notwithstanding sections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102, each Fund be permitted to sell securities short, provide a security interest over the Fund assets in connection with short sales and deposit fund assets with Borrowing Agents (as defined below) as security for such transactions, subject to the conditions set out herein; and (ii) the Prior Decision (defined below) in respect of the Prior Funds be amended to reflect the representations set out in subparagraphs 7(d) and 7(e) herein.

The Manager has represented to the Decision Makers that:

1. Each Fund is or will be an open-end mutual fund trust or a class of shares of a mutual fund corporation established under the laws of Ontario of which the Manager (or an affiliate of the Manager) is the manager and, in the case of the mutual fund trusts, the trustee. Each Fund is currently or will be a reporting issuer in all of the provinces and territories of Canada.

2. The investment practices of each Fund comply or will comply in all respects with the requirements of Part 2 of NI 81-102, except to the extent that the Funds have received permission from the Decision Makers to deviate therefrom.

3. On June 30, 2004, the Decision Makers issued a decision in respect of the Prior Funds granting the Prior Funds permission to engage in a limited amount of short selling, subject to the conditions set out in the Prior Decision. The Prior Funds would like the Prior Decision amended to provide more flexibility when engaging in short selling as further described below in paragraph 7.

4. The Manager proposes that, in addition to the Existing Funds, each Future Fund be authorized to engage in a limited, prudent and disciplined amount of short selling. The Manager is of the view that the Future Funds could benefit from the implementation and execution of a controlled and limited short selling strategy. This strategy would operate as a complement to the Future Funds' primary discipline of buying securities with the expectation that they will appreciate in market value.

5. Any short sales made by a Fund will be subject to compliance with the investment objectives of such Fund.

6. In order to effect a short sale, a Fund would borrow securities from either its custodian or a dealer (in either case, the "Borrowing Agent"), which Borrowing Agent may be acting either as principal for its own account or as agent for other lenders of securities.

7. Each Fund will implement the following controls when conducting a short sale:

(a) securities will be sold short for cash, with the Fund assuming the obligation to return to the Borrowing Agent the securities borrowed to effect the short sale;

(b) the short sale will be effected through market facilities through which the securities sold short are normally bought and sold;

(c) the Fund will receive cash for the securities sold short within normal trading settlement periods for the market in which the short sale is effected;

(d) the securities sold short will be liquid securities that:

(i) are listed and posted for trading on a stock exchange, and

A. the issuer of the security has a market capitalization of not less than CDN$300 million, or the equivalent thereof, of such security at the time the short sale is effected; or

B. the investment advisor has pre-arranged to borrow for the purposes of such short sale;

or

(ii) are bonds, debentures or other evidences of indebtedness of or guaranteed by the Government of Canada or any province or territory of Canada or the Government of the United States of America;

(e) at the time securities of a particular issuer are sold short:

(i) the aggregate market value of all securities of that issuer sold short by the Fund will not exceed 2% of the total net assets of the Fund; and

(ii) the Fund will place a "stop-loss" order with a dealer to immediately purchase for the Fund an equal number of the same securities if the trading price of the securities exceeds 115% (or such lesser percentage as the Manager may determine) of the price at which the securities were sold short;

(f) the Fund will deposit Fund assets with the Borrowing Agent as security in connection with the short sale transaction;

(g) the Fund will keep proper books and records of all short sales and Fund assets deposited with Borrowing Agents as security;

(h) the Fund will develop written policies and procedures for the conduct of short sales prior to conducting any short sales; and

(i) the Fund will provide disclosure in its simplified prospectus of the short selling strategies and the details of this exemptive relief prior to implementing the short selling strategy.

This letter confirms that, based on the information and representations contained in the Application and in this letter, and for the purposes described in the Application, the Decision Makers hereby:

(i) exempt each Fund from the requirements in subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102 to permit each Fund to sell securities short, provide a security interest over the Fund assets in connection with short sales and deposit fund assets with Borrowing Agents as security for such transactions, subject to the conditions set out in paragraph 7 above; and

(ii) amend the Prior Decision in respect of the Prior Funds to reflect the conditions set out in subparagraphs 7 (d) and (e) above,

provided that:

1. the aggregate market value of all securities sold short by the Fund does not exceed 10% of the total net assets of the Fund on a daily marked-to-market basis;

2. the Fund holds "cash cover" (as defined in NI 81-102) in an amount, including the Fund assets deposited with Borrowing Agents as security in connection with short sale transactions, that is at least 150% of the aggregate market value of all securities sold short by the Fund on a daily marked-to-market basis;

3. no proceeds from short sales by the Fund are used by the Fund to purchase long positions in securities other than cash cover;

4. the Fund maintains appropriate internal controls regarding its short sales including written policies and procedures, risk management controls and proper books and records;

5. any short sales made by a Future Fund will be subject to compliance with the investment objectives of the Future Fund;

6. the short selling relief will not apply to a Future Fund that is classified as a money market fund or a short-term income fund;

7. for short sale transactions in Canada, every dealer that holds Fund assets as security in connection with short sale transactions by the Fund shall be a registered dealer in Canada and a member of a self-regulatory organization that is a participating member of the Canadian Investor Protection Fund;

8. for short sale transactions outside of Canada, every dealer that holds Fund assets as security in connection with short sale transactions by the Fund shall:

(a) be a member of a stock exchange and, as a result, be subject to a regulatory audit; and

(b) have a net worth in excess of the equivalent of $50 million determined from its most recent audited financial statements that have been made public;

9. except where the Borrowing Agent is the Fund's custodian, when the Fund deposits Fund assets with a Borrowing Agent as security in connection with a short sale transaction, the amount of Fund assets deposited with the Borrowing Agent does not, when aggregated with the amount of Fund assets already held by the Borrowing Agent as security for outstanding short sale transactions of the Fund, exceed 10% of the total net assets of the Fund, taken at market value as at the time of the deposit;

10. the security interest provided by a Fund over any of its assets that is required to enable the Fund to effect short sale transactions is made in accordance with industry practice for that type of transaction and relates only to obligations arising under such short sale transactions;

11. prior to conducting any short sales, the Fund discloses in its simplified prospectus or an amendment thereto a description of: (a) short selling, (b) how the Fund intends to engage in short selling, (c) the risks associated with short selling, and (d) in the Investment Strategy section of the simplified prospectus, the Fund's strategy and this exemptive relief;

12. prior to conducting any short sales, the Fund discloses in its annual information form or an amendment thereto the following information:

(i) whether there are written policies and procedures in place that set out the objectives and goals for short selling and the risk management procedures applicable to short selling;

(ii) who is responsible for setting and reviewing the policies and procedures referred to in the preceding paragraph, how often the policies and procedures are reviewed, and the extent and nature of the involvement of the board of directors or trustee in the risk management process;

(iii) whether there are trading limits or other controls on short selling in place and who is responsible for authorizing the trading and placing limits or other controls on the trading;

(iv) whether there are individuals or groups that monitor the risks independent of those who trade; and

(v) whether risk measurement procedures or simulations are used to test the portfolio under stress conditions;

13. prior to conducting any short sales, each Fund has provided to its securityholders not less than 60 days' written notice that discloses the Fund's intent to begin short selling transactions and the disclosure required in the Fund's simplified prospectus and annual information form as outlined in paragraphs 11 and 12 above;

14. whenever the top ten holdings are disclosed in the simplified prospectus for a Fund, the top ten long holdings and the top ten short holdings are shown separately, provided that only short positions with a market exposure exceeding 1% of the net asset value of the Fund need be disclosed;

15. whenever a Fund prepares financial statements, the following information is included:

(i) the Statement of Net Assets of the Fund records the securities sold short as a liability with the Fund's assets deposited as security with Borrowing Agents for securities sold short recorded as an asset;

(ii) the dividends and other income received on borrowed securities in connection with securities sold short are shown as an expense on the Statement of Operations of the Fund; and

(iii) the Statement of Investment Portfolio of the Fund records the long portfolio separate from the short portfolio.

16. This relief shall terminate upon the coming into force of any legislation or rule of the Decision Makers dealing with matters referred to in subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102.

Yours truly,

"Leslie Byberg"
Manager, Investment Funds

 

Appendix "A"

CI Mutual Funds

Equity Funds

BPI American Equity Fund
BPI American Equity Corporate Class
BPI Global Equity Fund
BPI Global Equity Corporate Class
BPI International Equity Fund
BPI International Equity Corporate Class
CI Alpine Growth Equity Fund (formerly Clarica Alpine Growth Equity Fund)
CI American Managers™ Corporate Class
CI American Small Companies Fund
CI American Small Companies Corporate Class
CI American Value Fund
CI American Value Corporate Class
CI Asian Dynasty Fund
CI Canadian Investment Fund
CI Canadian Investment Corporate Class
CI Canadian Small Cap Fund
CI Canadian Small/Mid Cap Fund (formerly Clarica Small/Mid Cap Fund)
CI Emerging Markets Fund
CI Emerging Markets Corporate Class
CI European Fund
CI European Corporate Class
CI Explorer Fund
CI Explorer Corporate Class
CI Global Fund
CI Global Corporate Class
CI Global Biotechnology Corporate Class
CI Global Consumer Products Corporate Class
CI Global Energy Corporate Class
CI Global Financial Services Corporate Class
CI Global Health Sciences Corporate Class
CI Global Managers® Corporate Class
CI Global Small Companies Fund
CI Global Small Companies Corporate Class
CI Global Science & Technology Corporate Class
CI Global Value Fund
CI Global Value Corporate Class
CI International Fund
CI International Corporate Class
CI International Value Fund
CI International Value Corporate Class
CI Japanese Corporate Class
CI Pacific Fund
CI Pacific Corporate Class
CI Value Trust Corporate Class
Harbour Fund
Harbour Corporate Class
Harbour Foreign Equity Corporate Class
Signature Canadian Small Cap Class (formerly called Synergy Canadian Small Cap Class)
Synergy American Fund (formerly called Landmark American Fund)
Synergy American Corporate Class (formerly called Landmark American Sector Fund)
Synergy Canadian Corporate Class (formerly called Landmark Canadian Sector Fund)
Synergy Canadian Value Class
Synergy Extreme Canadian Equity Fund
Synergy Extreme Global Equity Fund
Synergy Global Corporate Class
Synergy Global Style Management Corporate Class

Balanced Funds

CI Canadian Asset Allocation Fund
CI Global Boomernomics® Corporate Class
CI International Balanced Fund
CI International Balanced Corporate Class
Harbour Foreign Growth & Income Corporate Class
Harbour Growth & Income Fund
Signature Canadian Income Fund

Income Funds

CI Canadian Bond Fund
CI Canadian Bond Corporate Class
CI Long-Term Bond Fund
CI Global Bond Fund
CI Global Bond Corporate Class
Signature Corporate Bond Fund
Signature Corporate Bond Corporate Class
Signature Dividend Fund
Signature Dividend Corporate Class
Signature High Income Fund
Signature High Income Corporate Class
Synergy Canadian Short-Term Income Class

 

Appendix "B"

Clarica Mutual Funds

Clarica Premier Bond Fund
Clarica Summit Growth and Income Fund
Clarica Canadian Equity Fund
Clarica Summit Canadian Equity Fund
Clarica Summit Dividend Growth Fund
Clarica Summit Foreign Equity Fund
Clarica Premier International Fund
Clarica US Small Cap Fund

 

Appendix "C"

Prior Funds

Clarica Alpine Canadian Resources Fund
Clarica Canadian Blue Chip Fund
Clarica Canadian Diversified Fund
Signature Canadian Resource Fund
Signature Canadian Resource Corporate Class
Signature Select Canadian Fund
Signature Select Canadian Corporate Class
Signature Canadian Balanced Fund
Signature Income and Growth Fund
Synergy Canadian Class (formerly Synergy Canadian Momentum Class)
Synergy Canadian Style Management Class
Synergy Canadian Tactical Asset Allocation Fund
Synergy Global Momentum Class
Synergy Global Style Management Class