Securities Law & Instruments

Headnote

 

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted to mutual funds subject to National Instrument 81-101 Mutual Fund Prospectus Disclosure that seeks to engage in alternative investment strategies not otherwise permitted by National Instrument 81-102 Investment Funds – Relief to permit funds to invest up to 20% of net assets in securities of a single issuer – Relief from cash cover and designated rating requirement in respect of use of derivatives – Relief to permit funds to borrow cash for investment purposes and to grant a security interest over assets in connection with such borrowing – Relief to permit funds to engage in short selling in excess of 20% of the net assets of the fund and to use proceeds from short sales to enter into a long position in a security – Relief to permit funds to enter into incentive fee arrangements – Borrowing and short selling subject to a combined maximum limit of 50% of the fund's net asset value – Aggregate gross exposure of the fund (long positions, short positions and notional value of derivatives positions) subject to maximum limit of 3 times the net asset value of the fund – Relief subject to certain limitations on distribution of securities of the funds – Relief subject to the inclusion of certain required disclosures in the simplified prospectus, annual information form, fund facts document and continuous disclosure documents.

 

Applicable Legislative Provisions

 

National Instrument 81-102 Investment Funds, subsections 2.1(1), 2.6.1(1)(c), 2.6.1(2), (3), 2.7(1), (2), (3) and sections 2.6, 2.8, 2.11, 6.8, 7.1, 19.1.

 

August 14, 2018

 

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

EDGEHILL PARTNERS

(the Filer)

 

AND

 

IN THE MATTER OF

EHP GUARDIAN ALTERNATIVE FUND,

EHP ADVANTAGE ALTERNATIVE FUND,

EHP GUARDIAN INTERNATIONAL

ALTERNATIVE FUND,

EHP ADVANTAGE INTERNATIONAL

ALTERNATIVE FUND,

EHP SELECT ALTERNATIVE FUND AND

EHP GLOBAL ARBITRAGE FUND

(collectively, the Funds)

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), exempting each Fund from the following provisions of NI 81-102:

 

(a)           subsection 2.1(1) of NI 81-102, to permit each Fund to invest more than 10% of the net asset value of each Fund in the securities of a single issuer (Single Issuer Relief);

 

(b)           to permit each Fund to purchase, sell or use specified derivatives and/or debt-like securities other than in compliance with subsections 2.7(1), (2) and (3), section 2.8 and section 2.11 of NI 81-102 (Specified Derivatives Relief);

 

(c)           section 2.6 of NI 81-102, to permit each Fund to borrow cash to use for investment purposes in excess of the limits set out in subsection 2.6(a) of NI 81-102 and to grant a security interest of its assets in connection therewith (Cash Borrowing Relief);

 

(d)           subsections 2.6.1(1)(c) and 2.6.1(2) and (3) of NI 81-102, to permit each Fund to borrow securities from a borrowing agent to sell securities short whereby: (i) the aggregate market value of all securities of the issuer of the securities sold short by each Fund may exceed 5% of the net asset value of such Fund; (ii) the aggregate market value of all securities sold short by each Fund may exceed 20% of the net asset value of such Fund; (iii) each Fund is not required to hold cash cover in connection with short sales of securities by such Fund; and (iv) each Fund is permitted to use the cash from a short sale to enter into a long-position in a security (Short Selling Relief);

 

(e)           section 6.8 of NI 81-102, to permit each Fund to deposit with its lender, assets over which it has granted a security interest in connection with the Cash Borrowing Relief (Cash Borrowing Custody Relief); and

 

(f)            subsection 7.1 of NI 81-102, to permit each Fund to pay, or enter into arrangements that would require it to pay, a fee that is determined by the performance of the Fund that is based on the cumulative total return of the Fund for the period that began immediately after the last period for which such fee was paid (Incentive Fee Relief),

 

(collectively, the Requested Relief).

 

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

 

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

 

(ii)           the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (the Other Jurisdictions).

 

Interpretation

 

Terms defined in NI 81-102, National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), 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:

 

Background

 

1.             The Filer will be the trustee, the investment fund manager and the portfolio manager of each Fund. The Filer is registered as an investment fund manager, portfolio manager and exempt market dealer in Ontario, Québec and Newfoundland and Labrador. The Filer is also registered as a portfolio manager and exempt market dealer in British Columbia, Alberta, Saskatchewan, Manitoba and New Brunswick. The head office of the Filer is in Toronto, Ontario.

 

2.             The Funds will be mutual funds created under the laws of the Province of Ontario and will be governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

 

3.             Units of each Fund will be offered by simplified prospectus, subject to NI 81-101, filed in all of the provinces and territories in Canada and, accordingly, each Fund will be a reporting issuer in each of the provinces and territories of Canada.

 

4.             The proposed investment objective differs for each Fund, but in each case, a core objective is to provide positive total returns, regardless of market conditions or general market direction, by employing disciplined, long/short, predominantly quantitative strategies.

 

5.             The proposed investment objective of EHP Guardian Alternative Fund and EHP Guardian International Alternative Fund (the Guardian Funds) is to provide a positive total return, regardless of market conditions or general market direction, with low correlation to applicable equity markets. The Guardian Funds will use alternative investment strategies including equity long/short, equity market neutral and credit long/short, by investing in North American equities, fixed income ETFs, equity ETFs and treasury futures derivative contracts as a part of implementing these strategies. The Guardian Funds may invest up to 100% or more of its net assets in foreign securities. The Guardian Funds will engage in physical short sales and/or borrowing for investment purposes.

 

6.             The proposed investment objective of EHP Advantage Alternative Fund and EHP Advantage International Alternative Fund (the Advantage Funds) is to generate superior risk adjusted investment returns over the long-term by utilizing a multi-strategy approach consisting of diversified quantitative and systematic investment strategies. The Advantage Funds will use alternative investment strategies including equity long/short, equity market neutral and credit long/short, by investing in equities, fixed income ETFs, equity ETFs and treasury futures derivative contracts as a part of implementing these strategies. The Advantage Funds may invest up to 100% or more of its net assets in foreign securities. The Advantage Funds will engage in physical short sales and/or borrowing for investment purposes. The Advantage Funds will also seek to preserve capital and mitigate risk through the application of portfolio and risk management tools.

 

7.             The proposed investment objective of EHP Select Alternative Fund (the Select Fund) is to provide a better risk-adjusted return than the S&P TSX Composite Index, regardless of market conditions or general market direction. The Select Fund targets a volatility that is approximately equal to the S&P TSX Composite Index, but with lower correlation to the index and with lower peak-to-trough drawdowns. The Select Fund will use an equity long/short alternative investment strategy, by investing in Canadian equities and ETFs as a part of implementing this strategy. The Select Fund will engage in physical short sales and/or borrowing for investment purposes.

 

8.             The proposed investment objective of EHP Global Arbitrage Alternative Fund (the Global Arbitrage Fund) is to provide a positive total return over a market cycle, regardless of market conditions or general market direction, with low correlation to equity markets. The Global Arbitrage Fund will use alternative investment strategies including merger arbitrage, equity long/short, convertible arbitrage and credit long/short, by investing in global developed-market equities, fixed income securities, convertible securities, fixed income ETFs, equity ETFs, Special Purpose Acquisition Corps (the SPACs) and treasury futures derivative contracts as a part of implementing these strategies. The Global Arbitrage Fund may invest up to 100% or more of its net assets in foreign equities. The Global Arbitrage Fund will engage in physical short sales and/or borrowing for investment purposes.

 

9.             The proposed investment strategy of each Fund provides that the Fund’s aggregate gross exposure, to be calculated as the sum of the following, must not exceed three times the Fund’s net asset value: (i) the aggregate market value of the Fund’s long positions; (ii) the aggregate market value of physical short sales on equities, fixed income securities or other portfolio assets; and (iii) the aggregate notional value of the Fund’s specified derivatives positions excluding any specified derivatives used for hedging purposes.

 

10.          Each Fund may take both long and short positions in foreign currencies in order to hedge currency exposure of the Fund, its investment portfolio or a particular class of units.

 

11.          Each Fund is expected to invest in a variety of derivatives and may take both long and short positions. Each Fund’s use of derivatives may include futures (including index futures, equity futures, bond futures and interest rate futures), currency forwards, options and swaps (including equity swaps, swaps on index futures, total return swaps, and interest rate swaps). In its use of derivatives, each Fund will aim to contribute to the target return and the volatility objectives of such Fund.

 

12.          The Funds may use leverage through a combination of one or more of the following: (i) borrowing cash for investment purposes; (ii) physical short sales on equity securities, fixed-income securities or other portfolio assets; and/or (iii) through the use of specified derivatives.

 

13.          The Filer will determine each Fund’s risk rating using the CSA’s Mutual Fund Risk Classification Methodology For Use In Fund Facts and ETF Facts as set out in Appendix F of NI 81-102 (the Risk Methodology). Given that the Funds do not have an established ten-year track record, the Filer will determine the risk rating based on the standard deviation of a reference index selected in accordance with Item 5 of the Risk Methodology (the Reference Index). The Filer will assess the reasonableness of using the Reference Index on at least a quarterly basis. This will include monitoring the correlation between each Funds and the applicable Reference Index over time. In conducting this analysis, the Filer will also consider whether it is appropriate to exercise the discretion accorded by the Risk Methodology to increase the risk rating of the particular Fund.

 

14.          The Filer and its affiliates will also manage future mutual funds and non-redeemable investment funds that will be subject to NI 81-102 (collectively the Top Funds). A Top Fund may seek to invest a portion its net assets in the Funds provided that such investment is consistent with the Top Fund’s investment objectives and the requirements of NI 81-102.

 

15.          Prior to allowing a Top Fund managed by the Filer to invest in the Fund, the Filer will implement policies and procedures to monitor a Top Fund’s compliance with the investment limits that will apply to a Top Fund’s investment in the Funds (the Top Fund Policies). To the extent that a Top Fund is managed by an affiliate of the Filer, the Filer will obtain an undertaking from the affiliate confirming that it has also implemented Top Fund Policies and that the affiliate will monitor and adhere to the restrictions on Top Fund investments that are set out in this decision (the Undertaking).

 

16.          The Filer acknowledges that additional guidance regarding proficiency for the distribution of alternative funds has not been finalized at this time and will accompany the final publication of the proposed amendments to NI 81-102 (the Proposed Alternative Fund Investment Restrictions) and NI 81-101 (the Proposed Alternative Fund Disclosure) (the Proposed Alternative Fund Investment Restrictions and the Proposed Alternative Fund Disclosure, collectively, the Proposed Alternative Fund Rules), which were contemplated within the CSA Notice and Request for Comment – Modernization of Investment Fund Product Regulation – Alternative Funds (2016), 39 OSCB 8051 dated September 22, 2016. The Filer will take steps to ensure the Funds are only distributed through dealers that are registered with the Investment Industry Regulatory Organization of Canada (IIROC) or to Top Funds managed by the Filer or its affiliates. In order to be eligible to distribute the Funds, each dealer will be required to sign an agreement with the Filer confirming its registration status with IIROC.

 

Fund Disclosure of Alternative Strategies

 

17.          The Filer proposes to file a simplified prospectus in respect of each Fund that:

 

(a)           identifies the Fund as an alternative fund;

 

(b)           discloses within the Fund’s investment objectives, the asset classes and strategies used which are outside the scope of the existing NI 81-102;

 

(c)           disclose within the Fund’s investment objective the maximum amount of leverage to be employed;

 

(d)           disclose within the Fund’s investment strategies the maximum amount the Fund may borrow, together with a description of how borrowing will be used in conjunction with the Fund’s other strategies and a summary of the Fund’s borrowing arrangements; and

 

(e)           disclose, in connection with the Fund’s investment strategies that may be used which are outside the current scope of NI 81-102, how such strategies may affect investors’ chance of losing money on their investment in the Fund.

 

18.          The Filer proposes to file an annual information form in respect of each Fund that:

 

(a)           identifies the Fund as an alternative fund; and

 

(b)           discloses the name of each person or company that has lent money to the Fund including whether such person or company is an affiliate or associate of the manager of the Fund.

 

19.          The Filer proposes to file a fund facts document in respect of each Fund that:

 

(a)           identifies the Fund as an alternative fund; and

 

(b)           includes cover page text box disclosure to highlight how the Fund differs from other mutual funds in terms of its investment strategies and the assets it is permitted to invest in.

 

20.          The Filer will include within each Fund’s financial statements and management reports of fund performance disclosure regarding actual use of leverage within the Fund for the applicable period referenced therein.

 

21.          The Filer will ensure that the proposed disclosure in respect of each Fund shall accurately describes its investment strategies while emphasizing the particular strategies which are outside the current scope of NI 81-102.

 

Single Issuer Relief

 

22.          Each Fund’s investment strategies will allow it to invest up to 20% of its net asset value in securities of an issuer.

 

23.          Subsection 2.1(1) of NI 81-102, does not permit an investment fund to purchase a security of an issuer, enter into a specified derivatives transaction or purchase index participation units if, immediately after the transaction, more than 10% of its net asset value would be invested in securities of any issuer.

 

24.          The Filer believes that it is in the best interests of each Fund to be permitted to invest up to 20% of its net assets in one issuer, as such investments will allow each Fund to fully express the convictions of the Fund’s portfolio managers.

 

Specified Derivatives and Debt-Like Security Relief

 

25.          The investment strategies of each Fund contemplate flexible use of specified derivatives for hedging and/or non-hedging purposes. Each Fund has the ability to opportunistically use options, swaps, futures and forward contracts and/or other derivatives under different market conditions.

 

26.          Under subsections 2.7(1), (2) and (3) of NI 81-102, a mutual fund cannot purchase an option (other than a clearing corporation option) or a debt-like security or enter into a swap or a forward contract unless, at the time of the transaction, the option, debt-like security, swap or contract has a designated rating or the equivalent debt of the counterparty or of a person or company that has fully and unconditionally guaranteed the obligations of the counterparty in respect of the option, debt-like security, swap or contract, has a designated rating (the Designated Rating Requirement). The policy rationale behind this is to address, at least in part, a mutual fund’s counterparty credit risk by ensuring that counterparties that enter into certain types of derivatives with mutual funds meet a minimum credit rating.

 

27.          The Filer is seeking to have the operational flexibility to deal with a variety of over-the-counter derivative counterparties, including scenarios where at the time of the transaction, the specified derivative or equivalent counterparty (or its guarantor) will not have a designated rating. The Filer submits that this flexibility will provide more competitive pricing and give the Funds access to a wider variety of over-the-counter products.

 

28.          The Filer submits that, any increased credit risk which may arise due to an exemption from the Designated Rating Requirements is counterbalanced by the fact that each Fund’s mark-to-market exposure to any specified derivatives counterparty (other than for positions in cleared specified derivatives) must not exceed 10% of its net asset value for a period of 30 days or more.

 

29.          Under section 2.8 of NI 81-102, a mutual fund must not purchase a debt-like security that has an options component, unless, immediately after the purchase, not more than 10% of its net asset value would be made up of those instruments held for purposes other than hedging. Section 2.8 also imposes a series of requirements for mutual funds to cover their specified derivatives positions for purposes other than hedging, using a combination of cash, cash equivalents, the underlying interest of the specified derivative and/or the right to acquire the underlying interest of the specified derivative (the Option and Cover Requirements).

 

30.          Commodity pools, the predecessor to alternative funds, are not subject to the Option and Cover Requirements or to section 2.11 of NI 81-102. The Filer submits that the Funds should also be exempt from the Designated Rating Requirement, the Option and Cover Requirements and from section 2.11 of NI 81-102.

 

Cash Borrowing Relief

 

31.          The investment strategies of the Fund will permit the Fund to borrow cash and purchase securities on margin in excess of the limits currently described in section 2.6 of NI 81-102.

 

32.          Each Fund’s investment strategy has the ability to borrow cash and purchase securities on margin in excess of the limits currently described in section 2.6 of NI 81-102 and the Filer’s current expectation is that each Fund may engage in cash borrowing at launch.

 

33.          Subsection 2.6(a) of NI 81-102 restricts investment funds from borrowing cash or providing a security interest over portfolio assets unless the transaction is a temporary measure to accommodate redemptions, the security interest is required to enable the investment fund to effect a specified derivative transaction or short sale under NI 81-102, the security interest secures a claim for the fees and expenses of the custodian or sub-custodian of the investment fund, or, in the case of an exchange-traded mutual fund, the transaction is to finance acquisition of its portfolio securities and the outstanding amount of all borrowings is repaid on the closing of its initial public offering.

 

34.          The Proposed Alternative Fund Investment Restrictions give investment funds the ability to borrow, and purchase securities on margin, up to 50% of their net asset value to use for investment purposes in order to facilitate a wider array of investment strategies.

 

35.          The Filer believes that it is in the best interests of each Fund to be permitted to borrow cash and purchase securities on margin to meet its investment objectives and strategies.

 

Short Sale Relief

 

36.          The investment strategies of each Fund will permit it to:

(a)           sell securities short, provided the aggregate market value of securities of any one issuer sold short by the Fund does not exceed 10% of the net asset value of the Fund, and the aggregate market value of all securities sold short by the Fund does not exceed 50% of its net asset value;

 

(b)           sell a security short without holding cash cover; and

 

(c)           sell a security short and use the cash from a short sale to enter into a long position in a security, other than a security that qualifies as cash cover.

 

37.          Each Fund may engage in physical short sales from time to time.

 

38.          Subsection 2.6.1 of NI 81-102 requires that a fund may only sell a security short if, at the time the fund sells the security short, the fund has borrowed or arranged to borrow the security to be sold under the short sale, if the aggregate market value of all securities of the issuer of the securities sold short by the fund does not exceed 5% of the net asset value of the fund, and if the aggregate market value of all securities sold short by the fund does not exceed 20% of the net asset value of the fund.

 

39.          The Filer believes that it is in the best interests of each Fund to be permitted to sell securities short in excess of the current limits, in a manner that is consistent with the Proposed Alternative Fund Investment Restrictions.

 

Incentive Fee Relief

 

40.          Each Fund will be permitted to pay, or enter into arrangements that would require it to pay, an incentive fee that is determined by the performance of the Fund that is based on the cumulative total return of the Fund for the period that began immediately after the last period for which such incentive fee was paid.

 

41.          The method of calculating the incentive fee payable by each Fund shall be described in the simplified prospectus in respect of each Fund.

 

42.          The Filer believes that the proposed incentive fee structure for the Funds aligns the interests of the manager or portfolio advisor with that of the investors.

 

43.          The Filer believes that it is in the best interests of each Fund to be permitted to pay, or enter into arrangements that would require it to pay, a fee that is determined by the performance of the Fund in a manner that is consistent with the Proposed Alternative Fund Investment Restrictions.

 

44.          The Filer is not, and the Funds will not be, in default of the securities legislation in any of the Jurisdictions.

 

45.          For the reasons provided above, the Filer respectfully submits that it would not be prejudicial to the public interest to grant the Requested Relief.

 

Decision

 

The decision of the principal regulator under the Legislation is that the Requested Relief is granted provided that:

 

1.             the Filer will file a standalone simplified prospectus, annual information form and fund facts document for the Funds, which will include the following disclosure:

 

(a)           the simplified prospectus and annual information form will indicate on the cover page that each Fund is an alternative fund;

 

(b)           within the simplified prospectus, the Filer will include disclosure within each Fund’s investment objectives on the asset classes that the Fund may invest in and the investment strategies that the Fund may engage in pursuant to the Requested Relief and which are outside the scope of NI 81-102;

 

(c)           within the simplified prospectus, the Filer will include disclosure in each Fund’s investment objectives describing the maximum amount of leverage to be employed by the Fund;

 

(d)           within the simplified prospectus, the Filer will include disclosure in each Fund’s investment strategies on the maximum amount of borrowing and short selling that the Fund may engage in, together with a description of how borrowing and short selling will be used in conjunction with the Fund’s other strategies;

 

(e)           within the simplified prospectus, the Filer will include disclosure in each Fund’s investment strategies explaining how the investment strategies that the Fund may engage in pursuant to the exemptive relief which are outside the scope of may affect investors’ chance of losing money on their investment in the Fund;

 

(f)            the annual information form will disclose under Item 10 of Form 81-101F2 the name of each person or company that has lent money to the Fund including whether such person or company is an affiliate or associate of the Filer; and

 

(g)           the fund facts document will include text box disclosure above Item 2 of Part I of Form 81-101F3 identifying each Fund as an alternative fund and highlighting how the Fund differs from other mutual funds in terms of its investment strategies and the assets it is permitted to invest in.

 

2.             The Filer will disclose in each Fund’s annual and interim financial statements and each Fund’s Management Report of Fund Performance:

 

(a)           the lowest and highest level of leverage experienced by the Fund in the reporting period covered by the financial statements;

 

(b)           a brief explanation of the sources of leverage used (e.g. borrowing, short selling or use of derivatives);

 

(c)           a description of how the Fund calculates leverage; and

 

(d)           the significance to the Fund of the lowest and highest levels of leverage.

 

3.             In the case of the Single Issuer Relief, the Fund must not purchase a security of an issuer, enter into a specified derivatives transaction or purchase an index participation unit if, immediately after the transaction, more than 20% of its net asset value would be invested in securities of any one issuer, provided, however, this limitation shall not apply in respect of (i) a government security; (ii) a security issued by a clearing corporation; (iii) a security issued by an investment fund if the purchase is made in accordance with the requirements of section 2.5 of NI 81-102; or (iv) an index participation unit that is a security of an investment fund.

 

4.             In the case of the Specified Derivatives Relief:

 

(a)           each Fund’s aggregate gross exposure calculated as the sum of the following, must not exceed three times the Fund’s net asset value: (i) the aggregate market value of the Fund’s long positions; (b) the aggregate market value of securities sold short by the Fund pursuant to the Short Selling Relief; and (c) the aggregate notional value of the Fund’s specified derivatives positions excluding any specified derivatives used for “hedging purposes” as defined in NI 81-102;

 

(b)           in determining each Fund’s compliance with the restriction contained in 4(a) above, the Fund must also include in its calculation its proportionate shares of securities of any underlying investment funds for which a similar calculation is required;

 

(c)           each Fund must determine its compliance with the restriction contained in 4(a) above, as of the close of business of each day on which the Fund calculates a net asset value; and

 

(d)           if a Fund’s aggregate gross exposure as determined in subsection 4(a) above exceeds three times the Fund’s net asset value, the Fund must, as quickly as is commercially reasonable, take all necessary steps to reduce the aggregate gross exposure to three times the Fund’s net asset value or less.

 

5.             In the case of the Cash Borrowing Relief:

 

(a)           each Fund may only borrow from an entity described in section 6.2 of NI 81-102, except that the requirement set out in subsection 6.2(3)(a) of NI 81-102 will be satisfied if the company has equity, as reported in its most recent audited financial statements that have been made public or that will be made available to the Fund and its custodian upon request, of not less than $10,000,000;

 

(b)           if the lender is an affiliate of the Filer, the independent review committee must approve the applicable borrowing agreement under subsection 5.2(2) of NI 81-107;

 

(c)           the borrowing agreement entered into is in accordance with normal industry practice and on standard commercial terms for the type of transaction; and

 

(d)           the total value of cash borrowed must not exceed 50% of each Fund’s net asset value.

 

6.             In the case of Short Selling Relief:

 

(a)           the aggregate market value of all securities sold short by each Fund does not exceed 50% of the net asset value of the Fund; and

 

(b)           the aggregate market value of all securities of the issuer of the securities sold short by each Fund does not exceed 10% of the net asset value of the Fund.

 

7.             In the case of Incentive Fee Relief:

 

Each Fund must not pay, or enter into arrangements that would require it to pay, an incentive fee that is determined by the performance of the Fund unless:

 

(a)           the payment of the incentive fee is based on the cumulative total return of the Fund for the period that began immediately after the last period for which such incentive fee was paid; and

 

(b)           the method of calculating the incentive fee payable by each Fund shall be described in the simplified prospectus in respect of each Fund.

 

8.             In the case of the Cash Borrowing Relief and the Short Selling Relief:

 

(a)           each Fund must not borrow cash pursuant to the Cash Borrowing Relief or sell securities short pursuant to the Short Selling Relief, if immediately after entering into a cash borrowing or short selling transaction, the aggregate value of cash borrowed combined with the aggregate market value of all securities sold short by the Fund would exceed 50% of the Fund’s net asset value; and

 

(b)           if the aggregate value of cash borrowed combined with the aggregate market value of all securities sold short by each Fund exceeds 50% of the Fund’s net asset value, the Fund must, as quickly as commercially reasonable take all necessary steps to reduce the aggregate value of cash borrowed combined with the aggregate market value of securities sold short to 50% or less of the Fund’s net asset value.

 

Distribution

 

9.             The Filer will ensure each Fund is only distributed through dealers that are registered with IIROC.

 

10.          The Filer will not distribute securities of the Fund to other mutual funds other than the Top Funds.

 

11.          In the case of Top Funds managed by the Filer, the Filer will ensure that such Top Funds will not purchase securities of the Funds if, immediately after the transaction, more than 10% of the net asset value of the Top Fund, taken at market value at the time of the transaction, would consist of securities of the Funds.

 

12.          For Top Funds managed by an affiliate of the Filer, the Filer will obtain the Undertaking from its affiliate affirming that the affiliate will ensure that the Top Funds it manages will abide by the investment limits set out in condition 11 above.