Mutual Reliance Review System for Exemptive Relief Applications -- a mutual fund is granted exemptions from National Instrument 81-102 Mutual Funds to engage in short selling of securities up to 20% of net assets, subject to certain conditions and requirements.
National Instrument 81-102 Mutual Funds, ss. 2.6(a) and (c), 6.1(1), 19.1.
November 7, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUÉBEC, NEW BRUNSWICK,
NOVA SCOTIA, NEWFOUNDLAND AND LABRADOR,
PRINCE EDWARD ISLAND, THE NORTHWEST
TERRITORIES, THE YUKON AND NUNAVUT
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
LAWRENCE INCOME & GROWTH FUND
LAWRENCE ASSET MANAGEMENT INC.
MRRS DECISION DOCUMENT
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 Fund, for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting the 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 (NI 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.
Paragraphs (a), (b) and (c) together shall be referred to as the Requested Relief.
Under the Mutual Reliance Review System (MRRS) 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.
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation established under the laws of Ontario and is the trustee and manager of the Fund.
2. The Fund is a mutual fund trust established under the laws of Ontario and a reporting issuer in the Jurisdictions.
3. The Fund is the result of a conversion of a closed-end fund, Lawrence Payout Ratio Trust, to an open-ended mutual fund.
4. The Fund has filed a preliminary prospectus dated September 18, 2007 in each of the Jurisdictions under SEDAR #1159971.
5. Except for specific exemptions or approvals granted by the relevant Decision Makers, the investment practices of the Fund comply in all respects with the requirements of Part 2 of NI 81-102.
6. Notice of the Fund's intention to engage in short selling was provided to unitholders in the management information circular dated August 7, 2007 which was sent to unitholders in connection with the conversion from a closed-end fund to an open-ended mutual fund.
7. Each short sale made by the Fund will be subject to compliance with its investment objective.
8. In order to effect a short sale of securities, the 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.
9. The Fund will implement the following controls when conducting a short sale of securities:
(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" and:
(i) the securities will be listed and posted for trading on a stock exchange, and
A. the issuer of the security will have either (I) a market capitalization of not less than CDN$300 million, or the equivalent thereof, at the time the short sale is effected, or (II) a market capitalization of less than CDN$300 million and not less than CDN$50 million, or the equivalent thereof, at the time the short sale is effected, and the aggregate (calculated at the time of the short sale) of the securities sold short by the Fund of that issuer shall not exceed the average daily trading volume of the securities sold short over the five days immediately preceding the date on which the short sale is effected; or
B. the investment advisor will have pre-arranged to borrow for the purposes of such short sale; or
(ii) the securities will be bonds, debentures or other evidences of indebtedness of or guaranteed by:
A. the Government of Canada or any province or territory of Canada; or
B. the Government of the United States of America;
(e) at the time securities of a particular issuer are sold short by the Fund:
(i) the aggregate market value of all securities of that issuer sold short by the Fund will not exceed 5% of the 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 120% (or such lesser percentage as the Filer 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.
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 does not exceed 20% of the 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 of securities 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 sale made by the Fund is subject to compliance with the investment objective of the Fund;
6. 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;
7. 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 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 custodian or a sub-custodian thereof, 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 of securities transactions of the Fund, exceed 10% of the net assets of the Fund, taken at market value as at the time of the deposit;
9. the security interest provided by the 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;
10. 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;
11. prior to conducting any short sales, the Fund discloses in its annual information form, or an amendment thereto, 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 of the Fund in the risk management process;
(c) the trading limits and other controls on short selling in place 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. 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.