Invesco Trimark Ltd. (Re), 2010 CanLII 79911

Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted to allow mutual fund to short sell up to 20% of net assets, subject to certain conditions – National Instrument 81-102 Mutual Fund.

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

December 31, 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 Invesco Trimark Ltd. (the “Filer”)

and

In the Matter of Trimark ENERGY CLASS (the “Fund”)

DECISION

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 Jurisdiction of the principal regulator (the “Legislation”) exempting the Fund from the following requirements of the Legislation:

(a) the requirement contained in subsection 2.6(a) of National Instrument 81-

102 Mutual Funds (“NI 81-102”) prohibiting a mutual fund from providing a security interest over a mutual fund’s 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

(paragraphs (a), (b) and (c) together shall be referred to as the “Exemption

Sought”).

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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (together with the Jurisdiction, referred to as the “Jurisdictions”).

Interpretation

Defined terms contained in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 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:

1. The Filer is a corporation amalgamated under the laws of Ontario with its head office based in Toronto, Ontario.
2. The Filer manages a number of retail mutual funds that are qualified for distribution to investors in each province and territory in Canada. Securities of the Fund are distributed by participating dealers.
3. The Fund will be a class of shares of a mutual fund corporation, established under the laws of the Province of Ontario, of which the Filer will be the manager. The Fund will be a reporting issuer in all of the provinces and territories in Canada. The Fund will not be classified as a money market fund.
4. The investment practices of the Fund will comply in all respects with the requirements of Part 2 of NI 81-102, except to the extent that the Fund has received permission from the applicable securities regulatory authorities to deviate therefrom.
5. The Filer and the Fund are not in default of securities legislation in any of the Jurisdictions.
6. Any short sales by the Fund will be subject to compliance with the investment objectives and strategies of the Fund.
7. In order to effect a short sale, the Fund will 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.
8. The simplified prospectus and annual information form for the Fund will disclose the proposed use of short selling by the Fund, the specific risks related to short selling and details of this exemptive relief prior to implementing the short selling strategy.
9. The Fund will implement the following requirements and 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, and “liquid securities” are securities that satisfy either (i) or (ii) below:

i. the securities 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 $100 million, or the equivalent thereof, at the time the short sale is effected; or

b) the Fund's portfolio advisor has pre-arranged to borrow the securities for the purpose of such sale; or

ii. the securities are fixed-income securities, 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 the Fund sells a security short:

i. the aggregate market value of all securities of the issuer of the securities sold short by the Fund will not exceed 5% of the net asset value 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 Manager 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; and

h. the Fund will maintain appropriate internal controls regarding short sales prior to conducting any short sales, including developing written policies and procedures and risk management controls for the conduct of short sales.

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 in respect of the Fund:

1. the aggregate market value of all securities sold short by the Fund does not exceed 20% of the total 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. any short sales made by the Fund will be subject to compliance with the investment objectives of the Fund
5. the Fund maintains appropriate internal controls regarding its short sales including written policies and procedures, risk management controls and proper books and records;
6. 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 an organization that is a participating member of the Canadian Investor Protection 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:
   1. be a member of a stock exchange and, as a result, be subject to a regulatory audit; and
   2. have a net worth in excess of the equivalent of $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, 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 total net assets of the Fund, taken at market value as at the time of the deposit;
9. 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;
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, the Fund discloses in its annual information form or an amendment thereto the following information:
    1. 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;
    2. 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;
    3. 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;
    4. whether there are individuals or groups that monitor the risks independent of those who trade; and
    5. whether risk measurement procedures or simulations are used to test the portfolio under stress conditions.

This relief shall terminate upon the coming into force of any legislation or rule of the principal regulator dealing with matters referred to in subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102.

“Darren McKall”

Darren McKall

Assistant Manager, Investment Funds Branch

ONTARIO SECURITIES COMMISSION

SEDAR PROJECT #1666569

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted to allow mutual fund to short sell up to 20% of net assets, subject to certain conditions – National Instrument 81-102 Mutual Funds.

Applicable Legislative Provisions

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