Passport 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.
Application Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.6(a), 2.6(c), 6.1(1), 19.1.
December 14, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
O'LEARY CANADIAN EQUITY YIELD FUND,
O'LEARY CANADIAN BALANCED YIELD FUND,
O'LEARY CANADIAN BOND YIELD FUND,
O'LEARY GLOBAL EQUITY YIELD FUND,
O'LEARY GLOBAL BALANCED YIELD FUND,
O'LEARY GLOBAL BOND YIELD FUND,
O'LEARY GLOBAL INFRASTRUCTURE YIELD FUND,
O'LEARY STRATEGIC YIELD FUND AND
O'LEARY STRATEGIC YIELD CLASS
(the "New Funds")
O'LEARY FUNDS MANAGEMENT LP
The securities regulatory authority or regulator in each of the Jurisdictions (the "Decision Maker") has received an application from the Filer, on behalf of each of the New Funds and any other mutual fund managed by the Filer or any affiliate of the Filer (the "Future Funds" and together with the New Funds, the "Funds"), for a decision under the securities legislation of the Jurisdictions (the "Legislation") pursuant to section 19.1 of National Instrument 81-102 -- Mutual Funds ("NI 81-102") to exempt the Funds from the following requirements of the Legislation:
a) the requirement contained in subsection 2.6(a) of NI 81-102 prohibiting a mutual fund from providing a security interest over its 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 that mutual fund's custodian.
(collectively, the "Exemption Sought")
Under the Process for Exemptive Relief Application in Multiple Jurisdictions (for a dual application):
a) the Autorité des marchés financiers is the principal regulator for this application;
b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador; and
c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Defined terms contained in National Instrument 14-101 - Definitions and MI 11-102 have the same meaning in this decision unless they are otherwise defined in this decision.
This decision is based on the following facts represented by the Filer:
1. The Filer filed a preliminary simplified prospectus and annual information form dated November 19, 2009 on November 20, 2009 with the securities regulatory authority in every province of Canada to qualify the distribution of the securities of a new family of mutual funds which include the New Funds.
2. Each of the Funds will be a reporting issuer in all of the provinces of Canada upon the issuance of a receipt for the final simplified prospectus and annual information form.
3. The investment practices of each of the Funds will comply in all respects with the requirements of Part 2 of NI 81-102, except to the extent that any of the Fund receives an exemption from the Decision Makers to deviate from these practices.
4. The Filer proposes that each Fund be authorized to engage in a limited, prudent and disciplined amount of short selling. The Filer is of the view that the Funds could benefit from the implementation and execution of a controlled and limited short selling strategy. This strategy would complement the Funds' current primary discipline of buying securities with the expectation that they will appreciate in market value.
5. In order to effect a short sale, a Fund will borrow securities from either its custodian or a dealer (a "Borrowing Agent"), which Borrowing Agent may be acting either as principal for its own account or as agent for other lenders of securities.
6. 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" 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$100 million, or the equivalent thereof, at the time the short sale is effected; or
B. the Fund's portfolio 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 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 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 and annual information form 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 decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that for each Fund:
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 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. 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;
6. any short sale made by the Fund is subject to compliance with the investment objective of the 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 sub-custodian, or the Fund's custodian or sub-custodian holds the security for the Borrowing Agent, 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;
9. 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;
10. prior to conducting any short sales, the Fund discloses in its simplified prospectus 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, each 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 of the Filer in the risk management process;
c) 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;
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 Exemption Sought does not apply to a Fund that is classified as a money market fund or a short-term income fund.
The Exemption Sought 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.