Securities Law & Instruments

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- fund on fund structure -- mutual fund granted exemptions to permit investment in securities of another mutual fund which has the same investment objectives and investment strategies but engages in short selling -- mutual fund 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.

Rules Cited

National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.2(1), 2.5(2)(a) and (c), 2.6(a) and (c), 6.1(1), 19.1.

November 27, 2007

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

MANITOBA, ONTARIO, NEW BRUNSWICK,

NOVA SCOTIA, PRINCE EDWARD ISLAND,

NEWFOUNDLAND AND LABRADOR,

YUKON TERRITORY, NORTHWEST TERRITORIES

AND NUNAVUT TERRITORY

(the Jurisdictions)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

LAWRENCE ASSET MANAGEMENT INC.

(the Filer)

AND

IN THE MATTER OF

LAWRENCE INDIA FUND

(the Top Fund)

 

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 Top Fund, for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting the Top Fund from the following requirements of the Legislation, subject to certain terms and conditions:

(a) the requirement contained in subsection 2.1(1) of National Instrument 81-102 Mutual Funds (NI 81-102) prohibiting a mutual fund from purchasing a security of an issuer if immediately after the purchase, more than 10 percent of the net assets of the mutual fund, taken at market value at the time of the purchase, would be invested in securities of any issuer;

(b) the requirement contained in subsection 2.2(1) of NI 81-102 prohibiting a mutual fund from:

i. purchasing a security of an issuer if immediately after the purchase, the mutual fund would hold securities representing more than 10 percent of the outstanding voting or equity securities of that issuer; or

ii. purchasing a security of an issuer for the purpose of exercising control over or management of the issuer;

(c) the requirements contained in subsections 2.5(2)(a) and (c) of NI 81-102 prohibiting a mutual fund from purchasing or holding a security of another mutual fund unless:

i. the other mutual fund is subject to 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure; and

ii. the securities of the mutual fund and the securities of the other mutual fund are qualified for distribution in the local jurisdiction.

(d) the requirement contained in subsection 2.6(a) of NI 81-102 prohibiting a mutual fund from providing a security interest over a mutual fund's assets;

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

(f) 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 Fund on Fund Relief.

Paragraphs (d), (e) and (f) together shall be referred to as the Short Selling Relief.

The Fund on Fund Relief, together with the Short Selling Relief, shall be referred to as the Requested Relief.

Under the Mutual Reliance Review System for Exemptive Relief Applications (MRRS):

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

(ii) 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:

The Top Fund

1. The Top Fund will be established under the laws of Ontario pursuant to a declaration of trust. The head office of the Top Fund will be located in Toronto, Ontario.

2. The Filer will be the manager and trustee of the Top Fund. The head office of the Filer is located in Toronto, Ontario.

3. The Top Fund has filed a preliminary prospectus (the Preliminary Prospectus) dated August 17, 2007 in each of the Jurisdictions under SEDAR #1144094.

4. The Top Fund will be a reporting issuer in each of the Jurisdictions.

5. The investment objectives of the Top Fund are to seek long-term superior growth of capital by investing primarily in equity securities of companies located in India through a "fund-on-fund" arrangement with Lawrence India (Mauritius) Fund (the Bottom Fund, and together with the Top Fund, the Funds). The balance of the Top Fund's assets will be invested in Canadian equity securities with a focus on companies doing business in India, debt securities of Canadian issuers, derivatives (futures, options and forward contracts), cash or cash equivalents (Non-Bottom Fund Component).

6. The Top Fund will invest between 87.5% to 92.5% of its net assets in the Bottom Fund.

7. The Top Fund will invest between 7.5% to 12.5% of its net assets in the Non-Bottom Fund Component.

The Bottom Fund

8. There are significant tax and investment restrictions imposed by Indian regulatory authorities applicable to foreign investors such as a Canadian mutual fund. The Bottom Fund will be created by the Filer to serve principally as an investment conduit for the Top Fund for purposes of obtaining exposure to India's capital markets in a tax-efficient manner.

9. The Bottom Fund will be an open-end investment trust organized under the laws of Mauritius pursuant to a trust deed.

10. The Filer will also be the manager and trustee of the Bottom Fund.

11. The Bottom Fund will not a reporting issuer in any of the Jurisdictions and accordingly, will not be governed by NI 81-102. However, the Bottom Fund shall adopt and comply with the investment restrictions and practices of NI 81-102, except to the extent that the Bottom Fund deviates from subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102 to engage in short selling in accordance with the conditions of the Short Selling Relief described herein.

12. The investment objectives and investment strategies of the Bottom Fund will be the same as the Top Fund.

13. The Bottom Fund meets the definition of mutual fund under the Legislation such that units of the Bottom Fund will be redeemable on demand.

14. Units of the Bottom Fund will only be sold to the Top Fund.

Short Selling by the Funds

15. The investment practices of the Funds 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.

16. Each short sale made by the Funds will be subject to compliance with the investment objectives of such Fund.

17. In order to effect a short sale, a 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.

18. 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

I. 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

II. 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 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 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.

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 in respect of each Fund (unless otherwise indicated):

1. in respect of the Fund on Fund Relief:

(a) units of the Top Fund may not be sold to any mutual fund which is subject to NI 81-102;

(b) the investment objectives and investment strategies of the Bottom Fund will be the same as the Top Fund;

(c) the Bottom Fund shall adopt and comply with the investment restrictions and practices of NI 81-102, except to the extent that the Bottom Fund deviates from subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102 to engage in short selling in accordance with the conditions of the Short Selling Relief described herein;

(d) any changes in the provisions of the material contracts of the Bottom Fund which would delete or amend the requirements of conditions 1.(b) and 1.(c) above, will require the prior approval of the Manager and the Decision Makers of the Jurisdictions;

(e) the Top Fund will redeem its investment in the Bottom Fund in the event that the contractual provisions in 1.(d) are breached;

(f) the simplified prospectus of the Top Fund will disclose conditions 1.(b) to 1.(e) above and the annual and interim management report of fund performance of the Top Fund and the quarterly portfolio disclosure of the Top Fund will disclose the top 25 holdings of the Bottom Fund;

(g) the calculation of the net asset value (NAV) of the units of the Top Fund and the Bottom Fund will be identical and have compatible dates for the calculation of NAV for purposes of the issue and redemption of units of these Funds;

(h) the annual and semi-annual financial statements of the Top Fund shall be provided together with the financial statements of the Bottom Fund, including their respective portfolio holdings, and be available upon request by a unitholder of the Top Fund, and this fact will be disclosed in the simplified prospectus of the Top Fund;

(i) the books and records of the Bottom Fund will be examined by the Manager and audited by local affiliates of the auditors of the Top Fund at least once per year;

(j) no sales charges will be payable by the Top Fund in relation to a purchase of units of the Bottom Fund;

(k) no redemption fees or other charges will be charged by the Bottom Fund in respect of a redemption by the Top Fund of units of the Bottom Fund;

(l) no trailer or other fees or other charges will be paid by the Manager, the Top Fund, and the Bottom Fund or by any affiliate or associate of any of the foregoing entities to anyone in respect of the investment by the Top Fund in the Bottom Fund; and

(m) there are arrangements between or in respect of the Top Fund and the Bottom Fund to avoid the duplication of management fees.

2. in respect of the Short Selling Relief:

(a) the aggregate market value of all securities sold short by the Top Fund does not exceed 20% of the net assets of the Non-Bottom Fund Component of the Top Fund on a daily marked-to-market basis;

(b) the aggregate market value of all securities sold short by the Bottom Fund does not exceed 20% of the net assets of the Bottom Fund on a daily marked-to-market basis;

(c) the Fund holds "cash cover" (as defined in NI 81-102) in an amount, including the Fund assets deposited with the 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;

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

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

(f) any short sales made by the Fund are subject to compliance with the investment objectives of the Fund;

(g) for short sale transactions of the Fund 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;

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

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

(ii) 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;

(i) 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 net assets of the Fund, taken at market value as at the time of the deposit;

(j) 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;

(k) prior to conducting any short sales by the Top Fund and the Bottom Fund, the Top Fund discloses in its simplified prospectus or an amendment thereto a description of: (i) short selling, (ii) how the Fund intends to engage in short selling, (iii) the risks associated with short selling, and (iv) in the Investment Strategy section of the simplified prospectus, the Fund's strategy and this exemptive relief;

(l) prior to conducting any short sales by the Top Fund and the Bottom Fund, the Top Fund discloses in its annual information form or an amendment thereto the following information in respect of both the Top Fund and the Bottom Fund:

(i) 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;

(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) the 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;

(m) prior to conducting any short sales by the Top Fund and the Bottom Fund, the Top Fund has provided to its existing 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 Top Fund's simplified prospectus and annual information form as outlined in paragraphs 2.(k) and 2.(l) above or the Top Fund's initial simplified prospectus and each renewal thereof has included such disclosure;

(n) this Short Selling 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"
Acting Director
Ontario Securities Commission