Securities Law & Instruments

Headnote

NP 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- a commodity pool subject to National Instrument 81-104 Commodity Pools granted exemptions from National Instrument 81-102 Mutual Funds to engage in short selling of securities up to 40% of net assets, subject to certain conditions and requirements.

Rules Cited

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

National Instrument 81-104 Commodity Pools.

July 28, 2010

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

BLUMONT CAPITAL CORPORATION

(the Filer)

AND

IN THE MATTER OF

EXEMPLAR CANADIAN FOCUS PORTFOLIO,

EXEMPLAR GLOBAL OPPORTUNITIES PORTFOLIO,

EXEMPLAR DIVERSIFIED PORTFOLIO AND

EXEMPLAR LEADERS PORTFOLIO

(the Existing Funds)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer, the manager of the Existing Funds for a decision under the securities legislation of the Jurisdiction (the Legislation) for exemptive relief from sections 2.6(a), 2.6(c) and 6.1(1) of National Instrument 81-102 Mutual Funds (NI 81-102), to permit each Existing Fund and each "commodity pool" mutual fund for which the Filer or an affiliate of the Filer becomes the manager (the Future Funds, together with the Existing Funds, the Funds) to sell securities short, provided the aggregate market value of all securities sold short by a Fund does not exceed 40% of the net assets of the Fund on a daily marked-to-market basis, except as otherwise permitted by National Instrument 81-104 Commodity Pools (NI 81-104), to provide a security interest over the Fund's assets in connection with such short sales and to deposit the Fund's assets with Borrowing Agents (as defined below) as security for such transactions (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

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

2. 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 each other province and territory of Canada.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

1. Each Fund is or will be a mutual fund established under the laws of Ontario .

2. Each Fund is or will be a "commodity pool" for purposes of NI 81-104 and its securities are or will be offered pursuant to a long form prospectus as required by NI 81-104.

3. The Filer or an affiliate is or will be the manager of the Funds. The head office of the Filer is located in Toronto, Ontario.

4. Neither the Filer nor a Fund is in default of securities legislation in any of the provinces or territories of Canada.

5. The Filer or an affiliate is or will be the investment adviser of the Funds. The Filer has retained or may retain the services of a sub-advisor for some or all of the Funds.

6. A long form prospectus dated April 23, 2010 for each of the Existing Funds has been receipted by the securities regulatory authority or regulator in each province and territory of Canada, except Nunavut. As a result, each Existing Fund is a reporting issuer in all of the provinces and territories of Canada, except Nunavut.

7. Relief has previously been granted by the Canadian securities regulatory authorities in Halcyon Fund Management Inc. (November 6, 2007) (the Existing Relief) pursuant to which mutual funds managed by the Filer, including the Funds, may currently engage in short selling securities of any one issuer up to 5% of the net assets of the mutual fund, and in securities in aggregate up to a maximum of 20% of the net assets of the mutual fund on a daily marked-to-market basis. The Filer will no longer rely on the Existing Relief in respect of any short selling engaged in by the Funds.

8. As a commodity pool, in addition to its investment options under NI 81-104 which will allow it to invest in currency and commodity forwards, future contracts, options and other over-the-counter derivatives in a manner that a conventional mutual fund cannot, each Fund wants to have the ability to engage in short selling securities of any one issuer up to 10% of the net assets of the Fund, and in securities in aggregate up to a maximum of 40% of the net assets of the Fund on a daily marked-to-market basis, except as otherwise permitted by NI 81-104.

9. The investment practices of the Funds will, except to the extent that exemptive relief has been obtained or as permitted by NI 81-104, comply in all respects with the requirements of Part 2 of NI 81-102.

10. Each short sale made by a Fund will comply with its investment objective.

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

12. A Fund will implement the following controls when conducting short sales 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 sales will be effected through market facilities through which the securities sold short would normally be bought and sold;

(c) the Fund will receive cash for 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) the Filer will monitor the short positions of the Fund at least as frequently as daily;

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

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

(h) the Fund has developed written policies and procedures for the conduct of short sales;

(i) the Fund has disclosed in its prospectus a description of (i) short selling, (ii) how the Fund engages in short selling, (iii) the risks associated with short selling, and (iv) in the investment strategy section of the prospectus, the Fund's strategy with respect to short selling and the exemptive relief obtained with respect to such short selling;

(j) the Fund has disclosed in its prospectus the following information:

(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 Filer or other applicable parties in the risk management process;

(iii) 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;

(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.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:

1. the aggregate market value of all securities sold short by a Fund does not exceed 40% of the net assets of the Fund on a daily marked-to-market basis, except as otherwise permitted by NI 81-104;

2. at the time securities of a particular issuer are sold short, the aggregate market value of all short positions of the Fund in that issuer, whether direct short positions or indirect short positions through specified derivatives, will not exceed 10% of the net assets of the Fund;

3. despite condition 2, the Fund shall not include in the determination referred to in condition 2 a security or an instrument that is a component of, but that represents less than 10% of,

(i) a stock or bond index that is the underlying interest of a specified derivative; or

(ii) the securities held by the issuer of an index participation unit;

4. the Fund holds "cash cover" (as defined in NI 81-102) in an amount, including the Fund's 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 equity securities sold short by the Fund on a daily marked-to-market basis;

5. no proceeds from short sales of securities by the Fund will be used by the Fund to purchase long positions in securities other than cash cover;

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

7. any short sale made by the Fund will be subject to compliance with its investment objective;

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

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

(i) be a member of a stock exchange that requires the dealer to be subject to 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;

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

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

"Darren McKall"
Assistant Manager, Investment Funds
Ontario Securities Commission