Headnote
Mutual fund in Ontario (non-reporting issuer) exempt from naming the issuer of certain short positions in its portfolio - must provide alternative portfolio disclosure.
Statutes Cited
National Instrument 81-106 Investment Fund Continuous Disclosure, s. 3.5(1) and s. 17.1.
August 1, 2008
IN THE MATTER OF
NATIONAL INSTRUMENT 81-106
INVESTMENT FUND CONTINUOUS DISCLOSURE (N1 81-106)
AND
IN THE MATTER OF
CORMARK SECURITIES INC.
(the Applicant)
AND
IN THE MATTER OF
CORMARK SECURITIES INVESTMENT FUND (the Fund)
ORDER
Background
The Ontario Securities Commission (the OSC) received an application from the Applicant for a decision pursuant to section 17.1 of NI 81-106 exempting the Fund and future mutual funds managed by the Applicant or an affiliate which are not reporting issuers (together with the Fund, hereinafter referred to collectively, as the Cormark Funds and individually as a Cormark Fund) from the requirement in paragraph 3.5(1)1 of NI 81-106 to include in the statements of investment portfolio prepared for the Cormark Funds the name of the issuer of the securities sold short by the Cormark Funds (the Statement of Investment Portfolio Requirement).
Representations
This Order is based on the following facts represented by the Applicant:
The Applicant is a corporation incorporated under the laws of the Province of Ontario. The Applicant is the manager of the Fund and will be the manager of any future Cormark Funds. The Applicant is, or will be, responsible for the day-to-day management and administration of the Cormark Funds, including management of each Cormark Fund’s investment portfolio.
The Applicant is registered as a dealer in the categories of broker and investment dealer (or the equivalent) in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, Nova Scotia and New Brunswick. The Applicant is engaged in institutional sales and trading, investment banking and research.
Each of the Cormark Funds is, or will be, an open-ended unincorporated mutual fund trust or a limited partnership established under the laws of the Province of Ontario. Each of the Cormark Funds is not, or will not be, a reporting issuer.
Units of the Fund are only available to purchasers who qualify under an exemption from the prospectus and registration requirements in accordance with applicable securities legislation in an offering jurisdiction.
The Fund entitles its unitholders to redeem units monthly on a valuation date, with at least seven days prior written notice. The Applicant may, in its discretion, impose an early redemption fee of 5% of the net asset value of the redeemed units which is payable by a unitholder to the Fund if units are redeemed within 180 days of their purchase. Given these redemption features, the Fund is a “mutual fund” as defined under the securities legislation of Ontario.
As at May 30, 2008, the Fund had an aggregate of 216 unitholders with $35,917,313 of assets.
As part of its investment strategy, the Fund makes extensive use of a short selling strategy pursuant to which securities which are deemed by the Applicant to be overvalued with respect to a particular company’s business and growth prospects, and which may face financial distress, competitive pressure, or other adverse conditions, are sold short. The Fund will generally enter into short sale transactions to attempt to increase the Fund’s total return and may also make short sales to hedge against a decline in the market price of securities that it holds or intends to buy. There is no limit on the Fund’s ability to enter into short sale transactions or on the ratio of its short positions to long positions. However, the Applicant will monitor the Fund’s obligations under short sale agreements to attempt to ensure that they do not exceed the assets of the Fund available to satisfy its short sale obligations.
The Fund employs a “buy and hold” strategy with respect to its investments, meaning it does not trade in and out of positions at a high rate. Due to the Fund’s short selling and “buy and hold” strategies, there is a possibility that a portion of the short positions disclosed in the statement of portfolio assets of the Fund may remain open when the financial statements are distributed, notwithstanding the 90 day and 60 day delay in distribution of the annual and interim financial statements.
Paragraph 1 of subsection 3.5(1) of NI 81-106 will require that the name of the issuer of each portfolio asset sold short be disclosed in the Cormark Funds’ statements of investment portfolio.
The Applicant is concerned that the Statement of Investment Portfolio Requirement could cause harm to the Cormark Funds because publishing information on short positions increases the risk of predatory marketing practices, such as short squeeze initiating trades, which could cause losses to the Cormark Funds. This is especially a concern for the Fund given its size and the number of its unitholders and the buy and hold element of the Fund’s short selling strategy. Once a short squeeze has been initiated, the Applicant has limited options to protect the Cormark Funds from harm and therefore believes that relief from the Statement of Investment Portfolio Requirement as requested is the best option to protect the Cormark Funds from harm.
Order
The OSC is satisfied that it would not be prejudicial to the public interest to grant the requested relief and orders that the Cormark Funds are exempt from the Statement of Investment Portfolio Requirement provided that for each Cormark Fund:
(i) the statement of investment portfolio discloses short positions by industry;
(ii) the statement of investment portfolio shows the average cost and market value of each industry category;
(iii) the statement of investment portfolio shows the percentage of net assets represented by short positions for each industry category;
(iv) the name of the issuer is disclosed for short positions that exceed 5% of a Cormark Fund’s net assets;
(v) the financial statements for the Cormark Funds disclose the particulars of this exemption;
(vi) the offering memorandum (if any) of the Cormark Funds disclose the particulars of this exemption; and
(vii) this order terminates upon the coming into force of any legislation or rule of the OSC dealing with paragraph 3.5(1)1 of NI 81-106 or any matters relating to the disclosure of short positions by investment funds.
Darren McKall
Darren McKall
Assistant Manager, Investment Funds Branch
Ontario Securities Commission