Friedberg Global-Macro Hedge Fund (Re), 2008 CanLII 35711

Mutual Reliance Review System for Exemptive Relief Applications – 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.

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

National Instrument 81-104 Commodity Pools, section 1.1.

July 10, 2008

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction)

AND

IN THE MATTER OF FRIEDBERG GLOBAL-MACRO HEDGE FUND (the Fund)

AND

TORONTO TRUST MANAGEMENT LTD. (the Filer)

Background

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Fund, for a decision under the securities legislation of the principal regulator (the Legislation):

(a) revoking the MRRS decision dated August 21, 2006 (the Prior Decision) under which the Fund was granted 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 the Fund to sell short up to 20% of its net assets, provide a security interest over the Fund’s assets in connection with short sales and deposit Fund assets with borrowing agents; and

(b) exempting the Fund from sections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102 to permit the Fund to sell short up to 40% of its net assets, provide a security interest over the Fund’s assets in connection with short sales and deposit Fund assets with Borrowing Agents (as defined below) as security for such transactions (the Requested Relief).

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

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

(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 each province and territory of Canada, other than Quebec.

Interpretation

Terms defined 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.

Representations

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

The Fund is an open-end mutual fund trust established under the laws of Ontario on September 5, 2006.
The Fund is a “commodity pool” for purposes of National Instrument 81-104 Commodity Pools (NI 81-104) and its units are offered pursuant to a long form prospectus, as required by NI 81-104. The Fund’s current prospectus is dated August 27, 2007.
The Fund is a multi-strategy fund whose investment objective is to seek significant total investment returns, consisting of a combination of interest income, currency gains and capital appreciation by investing in the following four discrete groups of investments: (i) long positions in fixed income securities; (ii) long and short positions in equity securities; (iii) currency forwards and futures contracts and options thereon (Currency Futures Instruments); and (iv) commodity forwards and futures contracts, options thereon and other over-the-counter traded derivative instruments (Commodity Futures Instruments).

In order to achieve its investment objective, and subject to obtaining the Requested Relief, the Fund will generally invest:

(a) a minimum of 10% and a maximum of 75% of its assets in long positions in fixed income investments denominated in various currencies and may hedge its currency exposure in respect thereof,

(b) a minimum of 5% and a maximum of 40% (the current cap is 20%) of its assets in “market neutral” long and short positions in equity securities and up to 40% of its assets through trading and investing across global markets in long and/or short positions in equity securities (provided that, taken together, short positions in equity securities will not exceed 40% of the Fund’s net assets (the current cap is 20%)),

(d) up to 15% of its assets in Commodity Futures Instruments.

Although the Fund is a “commodity pool” for purposes of NI 81‑104, a significant portion of the assets of the Fund are invested in securities other than Currency Futures Instruments and Commodity Futures Instruments. As such, while Section 2.1 of NI 81‑104 provides exemptions from certain investment restrictions in NI 81‑102 in respect of Currency Futures Instruments and Commodity Futures Instruments such that the Requested Relief is not required (and the Prior Decision was not required) in respect of the Fund’s investments in Currency Futures Instruments and Commodity Futures Instruments, the Filer requests the Requested Relief to permit the Fund to increase its short selling of securities.
The investment practices of the Fund comply in all respects with the requirements of Part 2 of NI 81‑102 except (i) for the exemptive relief granted under the Prior Decision; and (ii) in respect of investing in Currency Futures Instruments and Commodity Futures Instruments based on the exemptions provided in NI 81‑104 as described above and, subject to the Requested Relief being granted, will continue to comply with the foregoing, as modified by the Requested Relief.
Each short sale made by the Fund will continue to be subject to compliance with the investment objective of the Fund.
In order to effect short sales of securities, the Fund will continue to 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.
The Fund has implemented the following controls when conducting short sales of securities:

(a) securities are 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 are effected through market facilities through which the securities sold short are normally bought and sold;

(c) the Fund receives 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 are 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) 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 does not exceed 2% of the net assets of the Fund; and

(ii) the Fund places 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 deposits Fund 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 Fund 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 and the exemptive relief related to the Prior Decision, and prior to engaging in short selling in excess of that permitted under the Prior Decision the unitholders of the Fund (the Unitholders) will be notified of the Requested Relief and a press release will be issued;

(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 board of directors or trustee 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 contained in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Prior Decision is revoked and the Requested Relief is granted provided that:

(a) the aggregate market value of all securities sold short by the Fund does not exceed 40% of the net assets of the Fund on a daily marked-to-market basis;

(b) 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;

(c) 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;

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

(e) any short sale made by the Fund is subject to compliance with the investment objective of the Fund;

(f) 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;

(g) 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:

(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;

(h) 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 transactions of the Fund, exceed 10% of the net assets of the Fund, taken at market value as at the time of the deposit;

(i) 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; and

(j) prior to conducting any short sales in excess of that permitted under the Prior Decision, the Unitholders will be notified of the Requested Relief and a press release will be issued detailing the granting of the Requested Relief.

“Vera Nunes” _

Vera Nunes, Assistant Manager

Investment Funds Branch

Ontario Securities Commission

SEDAR Project No.: 1232616