Orbit Canadian Equity Fund et al. - MRRS Decision

MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- certain mutual funds granted exemptions from 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, ss. 2.6(a), 2.6(c), 6.1(1), 19.1.

February 17, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA,

ONTARIO and QUÉBEC

(the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

ORBIT CANADIAN EQUITY FUND

ORBIT NORTH AMERICAN EQUITY FUND

ORBIT WORLD FUND

(the "Funds")

AND

IN THE MATTER OF

FRONTIERALT ALL TERRAIN CANADA FUND

FRONTIERALT ALL TERRAIN WORLD FUND

FRONTIERALT ALL TERRAIN BOND FUND

(the "Anticipated Funds")

AND

FRONTIERALT ORBIT FUNDS MANAGEMENT LIMITED

(the "Filer" and "Manager")

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filer, on behalf of the Funds and the Anticipated Funds, for a decision under the securities legislation of the Jurisdictions (the "Legislation") exempting the Funds and the Anticipated Funds from the following requirements of the Legislation, subject to certain terms and conditions:

(a) the requirement contained in subsection 2.6(a) of National Instrument 81-102 Mutual Funds ("81-102") prohibiting a mutual fund from providing a security interest over a mutual fund's assets;

(b) the requirement contained in subsection 2.6(c) of NI 81-102 prohibiting a mutual fund from selling securities short; and

(c) the requirement contained in subsection 6.1(1) of NI 81-102 prohibiting a mutual fund from depositing any part of a mutual fund's assets with an entity other than the mutual fund's custodian,

(the "Requested Relief").

Under the Mutual Reliance Review System for Exemptive Relief Applications:

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

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

1. Each Fund and Anticipated Fund is or will be an open-end mutual fund trust established under the laws of Ontario of which the Manager is both the trustee and manager. Each Fund and Anticipated Fund is currently or will be a reporting issuer in those Jurisdictions whose securities legislation contemplates such status and distributes its securities under a simplified prospectus and annual information form dated March 22, 2005 and August 8, 2005 or will distribute its securities under a simplified prospectus and annual information form.

2. The investment practices of each Fund and Anticipated Fund comply or will comply in all respects with the requirements of Part 2 of NI 81-102 except for the Requested Relief.

3. Each short sale made by a Fund or Anticipated Fund will be subject to compliance with the investment objective of such Fund or Anticipated Fund.

4. In order to effect a short sale, a Fund or Anticipated Fund will 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.

5. Each Fund and Anticipated Fund will implement the following controls when conducting a short sale:

(a) securities will be sold short for cash, with the Fund or Anticipated 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 or Anticipated 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" in that:

(i) the securities will be listed and posted for trading on a stock exchange, and

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

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

or

the securities will be bonds, debentures or other evidences of indebtedness of or guaranteed by:

(i) the Government of Canada or any province or territory of Canada; or

(ii) the Government of the United States of America;

(e) at the time securities of a particular issuer are sold short by a Fund or Anticipated Fund:

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

(ii) the Fund or Anticipated Fund will place a "stop-loss" order with a dealer to immediately purchase for the Fund or Anticipated 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 or Anticipated Fund will deposit Fund or Anticipated Fund assets with the Borrowing Agent as security in connection with the short sale transaction;

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

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

(i) the Fund or Anticipated 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.

6. At a meeting of the unitholders held on December 22, 2005 (the "Meeting"), the unitholders approved a contemplated future merger of Orbit Canadian Equity Fund and Orbit North American Equity Fund and continuation under the new name "frontierAlt All Terrain Canada Fund". The unitholders further approved a contemplated future change of name of Orbit World Fund to "frontierAlt All Terrain World Fund". Furthermore, it is anticipated that a prospectus establishing the new "frontierAlt All Terrain Bond Fund" will be filed with the securities regulators early in 2006. The Manager will continue to act as manager for these Anticipated Funds.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met. The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that:

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

2. the Fund or Anticipated Fund holds "cash cover" (as defined in NI 81-102) in an amount, including the Fund or Anticipated 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 or Anticipated Fund on a daily marked-to-market basis;

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

4. the Fund or Anticipated 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 sale made by a Fund or Anticipated Fund is subject to compliance with the investment objectives of the Fund or Anticipated Fund;

6. for short sale transactions in Canada, every dealer that holds Fund or Anticipated Fund assets as security in connection with short sale transactions by the Fund or Anticipated 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;

7. for short sale transactions outside of Canada, every dealer that holds Fund or Anticipated Fund assets as security in connection with short sale transactions by the Fund or Anticipated 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 CDN$50 million determined from its most recent audited financial statements that have been made public;

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

9. the security interest provided by the Fund or Anticipated Fund over any of its assets that is required to enable the Fund or Anticipated 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;

10. prior to conducting any short sales, the Fund or Anticipated Fund discloses in its simplified prospectus a description of: (a) short selling, (b) how the Fund or Anticipated 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 or Anticipated Fund's strategy and this exemptive relief;

11. prior to conducting any short sales, the Fund or Anticipated Fund discloses in its annual information form the following information:

(a) that 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;

(b) 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;

(c) the trading limits and other controls on short selling and who is responsible for authorizing the trading and placing limits or other controls on the trading;

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

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

12. whenever the Fund or Anticipated Fund prepares financial statements, the following information is included:

(a) the statement of net assets of the Fund or Anticipated Fund records the securities sold short as a liability with the Fund's or Anticipated Fund's assets deposited as security with Borrowing Agents for securities sold short recorded as an asset; and

(b) 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 or Anticipated Fund; and

13. the Requested 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.

"Leslie Byberg "
Manager, Investment Funds
Ontario Securities Commission