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, sections 2.6(a), 2.6(c), 6.1(1) and 19.1(2)
November 21, 2011
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 SCOTIA ASSET MANAGEMENT L.P. (SAM)
AND
THE FUNDS LISTED IN SCHEDULE A (the Existing Funds) (collectively with SAM, the Filers)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from SAM on behalf of the Funds, as defined below, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Existing Funds and any future mutual funds managed by SAM or an affiliate of SAM that are subject to National Instruments 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and 81-102 Mutual Funds (NI 81-102) (the Future Funds, together with the Existing Funds, the Funds) from subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102 to permit each Fund to (i) sell securities short; (ii) provide a security interest over the Fund's assets in connection with the short sales; and (iii) deposit Fund assets with a dealer as security in connection with the short sales (collectively, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for the application; and
(b) the Filers have 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, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (the Passport Jurisdictions, and together with Ontario, the Jurisdictions).
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
The decision is based on the following facts represented by the Filers:
The Filers
1SAM is a limited partnership established under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
2SAM is registered as a portfolio manager, investment fund manager, exempt market dealer and commodity trading manager in Ontario; as a portfolio manager and exempt market dealer in British Columbia, Alberta, Manitoba, Quebec, New Brunswick, Nova Scotia, and Newfoundland and Labrador; and as a portfolio manager in Saskatchewan, Prince Edward Island and Yukon.
3The general partner of SAM is Scotia Asset Management G.P. Inc. (SAM G.P.).
4SAM is the manager of each of the Existing Funds, and will be the manager of each of the Future Funds. SAM is the portfolio manager or has appointed the portfolio manager of each of the Existing Funds, and will be the portfolio manager of, or will appoint a portfolio manager for, each of the Future Funds.
5Each Existing Fund is, and each Future Fund will be: (a) an open-end mutual fund trust or a class of shares of a mutual fund corporation established under the laws of Ontario, (b) a reporting issuer under the laws of some or all of the Jurisdictions, and (c) governed by the provisions of NI 81-102.
6Securities of each Existing Fund are, and securities of each Future Fund will be, qualified for distribution in some or all of the Jurisdictions under one or more simplified prospectus(es) and annual information form(s) prepared in accordance with NI 81-101 and filed with and receipted by the securities regulators in the applicable Jurisdiction(s).
7The investment objective and strategies of each Fund will be set out in the Fund’s simplified prospectus(es).
8None of the Filers is in default of applicable securities legislation in the Jurisdictions.
Short Sales
9SAM proposes that each Fund be authorized to engage in a limited, prudent and disciplined amount of short selling. SAM is of the view that the Funds could benefit from the implementation and execution of a controlled and limited short selling strategy. This strategy would operate as a complement to the Funds’ current primary discipline of buying securities with the expectation that they will appreciate in market value.
10Short sales will be made only if they are consistent with each Fund’s investment objectives and strategies.
11In order to effect a short sale, a Fund will borrow securities, prior to effecting the short sale, 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.
12A Fund will be required to deposit Fund assets with the Borrowing Agent as security in connection with the short sale transaction in accordance with usual industry practice.
13All short sales will be effected through market facilities through which the securities sold short are normally bought and sold and will be sold short within normal trade settlement periods for the market in which the short sale is effected. Securities will be sold short for cash only with a Fund assuming the obligation to return to the Borrowing Agent the securities borrowed to effect the short sale transaction.
14The securities sold short will not be “illiquid assets” as such term is defined in NI 81-102, and will be securities that are either:
(a) listed and posted for trading on a stock exchange; and
(i) 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
(ii) a Fund’s portfolio manager has pre-arranged to borrow the securities for the purpose of such sale; or
(b) bonds, debentures or other evidences of indebtedness of, or guaranteed by, any issuer.
15Each Fund will hold "cash cover" (as defined in NI 81-102) to cover its obligations in relation to the short sale.
16Each Fund will maintain appropriate internal controls regarding its short sales prior to conducting any short sales, including written policies and procedures and risk management controls.
17Each Fund will keep proper books and records of all short sales and Fund assets deposited with Borrowing Agents as security.
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 each Fund:
any short sales made by the Fund will be subject to compliance with the investment objectives of the Fund;
any short sales will be effected through market facilities through which the securities sold short are normally bought and sold;
securities will be sold short for cash only;
no proceeds from short sales by the Fund will be used by the Fund to purchase long positions in securities other than cash cover;
the Requested Relief does not apply to any Fund that is classified as a money market fund;
the aggregate market value of all securities sold short by the Fund will not exceed 20% of the total net assets of the Fund on a daily marked-to-market basis;
the aggregate market value of all securities of an issuer that are sold short by the Fund will not exceed 5% of the total net assets of the Fund on a daily marked-to-market basis;
the Fund will hold "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;
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;
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;
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:
(a) be a member of a stock exchange and, as a result, be subject to a regulatory audit; and
(b) 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;
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;
the Fund will maintain appropriate internal controls regarding its short sales including written policies and procedures, risk management controls and proper books and records;
prior to conducting any short sales, the Fund discloses in its simplified prospectus(es) a description of: (i) short selling, (ii) how the Fund intends to engage in short selling, (iii) the risks associated with short selling, and (iv) in the Investment Strategy section of the simplified prospectus(es), the Fund's strategy and this exemptive relief;
prior to conducting any short sales, the Fund discloses in its annual information form(s) the following information:
(a) 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;
(b) 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 of SAM G.P. in the risk management process;
(c) 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;
(d) whether there are individuals or groups that monitor the risks independent of those who trade; and
(e) whether risk measurement procedures or simulations are used to test the portfolio under stress conditions.
prior to conducting any short sales, the Fund has provided to its securityholders not less than 60 days' written notice that discloses the Fund's intent to begin short selling transactions and the disclosure required in the Fund's simplified prospectus(es) and annual information form(s) as outlined in paragraphs 14 and 15 above, or the Fund's initial simplified prospectus(es) and annual information form(s) and each renewal thereof has included such disclosure.
the Exemption Sought shall terminate upon the coming into force of any legislation or rule dealing with the matters referred to in subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102.
“Darren McKall”
Name: Darren McKall
Title: Manager
Ontario Securities Commission
SEDAR Project Numbers 1815340 and 1815364
SCHEDULE A THE EXISTING FUNDS
Scotia Short Term Bond Fund
Scotia Private Short-Mid Government Bond Pool
Scotia Mortgage Income Fund
Scotia Bond Fund
Scotia Canadian Income Fund
Scotia Private Canadian Corporate Bond Pool
Scotia U.S. $ Bond Fund
Scotia Global Bond Fund
Scotia Private Advantaged Income Pool
Scotia Diversified Monthly Income Fund
Scotia Canadian Balanced Fund
Scotia Canadian Dividend Income Fund
Scotia Canadian Tactical Asset Allocation Fund
Scotia Global Balanced Fund
Scotia U.S. $ Balanced Fund
Scotia Income Advantage Fund
Scotia Canadian Dividend Fund
Scotia Canadian Blue Chip Fund
Scotia Private Canadian Equity Pool
Scotia Canadian Growth Fund
Scotia Canadian Small Cap Fund
Scotia Resource Fund
Scotia Private North American Equity Pool
Scotia Private Cyclical Opportunities Pool
Scotia Private U.S. Equity Pool
Scotia U.S. Blue Chip Fund
Scotia U.S. Value Fund
Scotia Private International Core Equity Pool
Scotia International Value Fund
Scotia European Fund
Scotia Pacific Rim Fund
Scotia Latin American Fund
Scotia Global Dividend Fund
Scotia Global Growth Fund
Scotia Global Small Cap Fund
Scotia Global Opportunities Fund
Scotia Global Climate Change Fund
Scotia Canadian Bond Index Fund
Scotia Canadian Index Fund
Scotia U.S. Index Fund
Scotia CanAm Index Fund
Scotia Nasdaq Index Fund
Scotia International Index Fund