Picton Mahoney Asset Management (Re), 2018 CanLII 90821

September 17, 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 Picton Mahoney Asset Management (the Filer)

And

Picton Mahoney Fortified Active Extension Alternative Fund, Picton Mahoney Fortified Market Neutral Alternative Fund, AND Picton Mahoney Fortified Multi-Strategy Alternative Fund (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 (the Legislation) for an exemption:

(a) from section 2.6 of National Instrument 81-102 Investment Funds (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 with such borrowings (the Cash Borrowing Relief);

(b) from 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 the Fund may exceed 5% of the net asset value of the Fund; (ii) the aggregate market value of all securities sold short by each Fund may exceed 20% of the net asset value of the Fund; (iii) each Fund is not required to hold cash cover in connection with short sales of securities by the Fund; and (iv) each Fund is permitted to use the cash from a short sale to enter into a long-position in a security (the Short Sale Relief);

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

(d) from sections 6.2 and 6.3 of NI 81-102, to permit each Fund to appoint as sub-custodians for assets held in Canada or outside of Canada an entity that complies with sections 6.2 or 6.3 of NI 81-102 except that where the entity is an entity described in sections 6.2(3) or 6.3(3) of NI 81-102, the audited financial statements may not be made public (the Sub-Custodian Relief); and

(e) section 7.1(a) of NI 81-102, to permit each Fund to pay, or enter into arrangements that would require it to pay, and permit securities of each Fund to be sold on the basis that an investor would be required to pay, a fee that is determined by the performance of the Fund where the payment of the fee 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 (the Incentive Fee Relief, and together with the Cash Borrowing Relief, Short Sale Relief, Specified Derivatives Relief, and Sub-Custodian Relief, 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 each of the other provinces and territories of Canada (the Other Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Active Extension Fund means Picton Mahoney Fortified Active Extension Alternative Fund;

Alternative Funds Framework means the proposed amendments set out in the CSA Notice and Request for Comment – Modernization of Investment Fund Product Regulation – Alternative Funds (2016), 39 OSCB 8051 dated September 22, 2016 including the amendment of NI 81-101, NI 81-102 and other applicable Legislation in order to provide a framework for alternative funds to adopt fundamental investment objectives that permit the funds to invest in asset classes or adopt investment strategies that are otherwise prohibited, but for prescribed exemptions from the investment restrictions in Part 2 of NI 81-102;

Hedge Funds means investment funds managed by the Filer which are offered on a private placement basis pursuant to exemptions from the prospectus requirements of the Legislation;

IIROC means the Investment Industry Regulatory Organization of Canada;

Market Neutral Fund means Picton Mahoney Fortified Market Neutral Alternative Fund;

Multi-Strategy Fund means Picton Mahoney Fortified Multi-Strategy Alternative Fund;

Non-Alternative Top Funds means the Top Funds other than the Funds;

Prime Broker means a dealer which qualifies as a “borrowing agent” as defined in NI 81-102, which, alone or together with one or more of its affiliates, provides the Fund with certain prime brokerage services, which may include: custody of cash and securities, trade settlement, financing of long positions consisting of margin loans, financing of short sales consisting of delivering securities on behalf of the Fund pursuant to a margin agreement or securities lending agreement, asset servicing and daily reporting;

Prior Decision means the decision granted by the principal regulator on September 30, 2015 to the Filer granting exemptive relief to permit the Top Funds to invest up to 10% of their respective net asset value in Underlying ETFs that would be considered ‘alternative funds’ under the Alternative Funds Framework;

Risk Methodology means 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;

Reference Index means a reference index selected in accordance with Item 5 of the Risk Methodology;

Top Funds means investment funds managed by the Filer which are qualified for distribution to the public under NI 81-102 and which seek to invest in one or more Funds;

Underlying ETFs has the same meaning as defined in the Prior Decision; and

Underlying Funds means investments funds managed by the Filer, an affiliate of the Filer or a third party, other than the Funds, which:

(a) are qualified for distribution to the public under NI 81-102; or

(b) upon the coming into force of the Alternative Funds Framework, comply with the provisions of NI 81-102 applicable to alternative funds or non-redeemable investment funds.

Representations

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

The Filer and the Funds

1. The Filer is the manager, portfolio advisor, trustee and promoter of the Funds. The Filer is registered as a portfolio manager in Ontario, as an investment fund manager in Ontario, Newfoundland and Labrador and Quebec and as an exempt market dealer in Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Ontario, Prince Edward Island, Quebec and Saskatchewan. The head office of the Filer is located in Toronto, Ontario.

2. Each Fund is, or will be:

(a) a mutual fund established under the laws of the Province of Ontario;

(b) governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities;

(c) offered by way of simplified prospectus in Ontario and the Other Jurisdictions; and

(d) a reporting issuer in Ontario and the Other Jurisdictions.

3. Neither the Filer nor any of the Funds is in default of securities legislation in any of Ontario or the Other Jurisdictions.

4. The proposed investment objective of the Active Extension Fund is to provide long-term capital appreciation and to provide unitholders with an attractive risk-adjusted rate of return with similar volatility to the traditional equity market by taking long and short investment positions in an actively-managed portfolio comprised primarily of Canadian equity securities. To achieve its investment objective, the Active Extension Fund will be structured so that it generally possesses 100% net equity market exposure. On average, over time, the Filer expects that for every $100 invested, the Active Extension Fund’s portfolio shall include $130 stock bought long and $30 stock sold short, resulting in a gross market exposure of 160%. The Filer may alter the gross market exposure of the Active Extension Fund depending on the Filer’s expectations of the overall equity markets up to 200% of gross market exposure. On a position-by-position basis, margin requirements of the applicable exchange will be adhered to by the Active Extension Fund.

5. The proposed investment objective of the Market Neutral Fund is to provide consistent long-term capital appreciation and to provide unitholders with an attractive risk-adjusted rate of return with less volatility than traditional equity markets and low correlation to major equity markets. To achieve its investment objective, the Market Neutral Fund will be structured so that it generally possesses minimal equity market exposure. That is, on average, over an entire market cycle, the Portfolio Advisor expects the Market Neutral Fund will possess +/- 20% net long exposure. The Filer expects that the Market Neutral Fund will invest up to 50% of its market value in short positions. The Market Neutral Fund will also invest in specified derivatives. On a position-by-position basis, margin requirements of the applicable exchange will be adhered to by the Market Neutral Fund.

6. The proposed investment objective of the Multi-Strategy Fund is to provide consistent long-term capital appreciation and to provide unitholders with an attractive risk-adjusted rate of return. To achieve its investment objective, the Multi-Strategy Fund will invest in various international capital markets, including emerging markets, in an actively-managed portfolio of securities and other financial instruments across a variety of asset classes including equities, government and corporate fixed income, foreign exchange, commodity derivatives and volatility-related securities and instruments. The Multi-Strategy Fund will take long positions in securities and instruments identified as attractive investment candidates, and short positions in securities and instruments identified as unattractive investment candidates, in each case based on the Filer’s layered investment process described in the prospectus of the Multi-Strategy Fund. If the aggregate market value of all securities sold short by the Multi-Strategy Fund, or the aggregate value of cash borrowed combined with aggregate market value of securities sold short by the Multi-Strategy Fund, exceeds 50% of the net asset value of the Multi-Strategy Fund, it will, as quickly as commercially reasonable, take all necessary steps to reduce the aggregate value of its short positions, or its combined cash borrowings and short positions, to 50% or less of the net asset value of the Multi-Strategy Fund. On a position-by-position basis, margin requirements of the applicable exchange will be adhered to by the Multi-Strategy Fund. The Multi-Strategy Fund may seek to achieve its investment objective by investing in Underlying Funds.

7. 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 (together, the Leverage Strategies).

8. The proposed investment strategies 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:

(a) 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 Sale 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.

9. The Filer created the Funds to provide retail investors with opportunities to invest in funds which use the Leverage Strategies, which are widely used alternative investment strategies that have been offered by the Filer and other alternative investment managers in Canada and globally for many years, and which are currently utilized by certain Hedge Funds. As such, the Funds have proposed investment objectives and strategies that are substantially similar to the investment objectives and strategies of certain Hedge Funds.

10. The investment practices of the Funds will comply in all respects with the requirements of Part 2 of NI 81-102, except to the extent that exemptive relief has been obtained, including the Exemption Sought.

11. The Filer has developed the investment objectives and strategies of the Funds with the expectation that the Funds will become “alternative mutual funds” upon the coming into force of the Alternative Funds Framework. The Filer intends for the investment objectives and strategies of the Funds to be compliant with the Alternative Funds Framework.

12. The Filer maintains investment risk management processes in connection with the Leverage Strategies and other alternative investment strategies, including automated trading and position limits, daily portfolio reviews and periodic portfolio stress testing.

13. The Filer will determine the Funds’ risk ratings using the Risk Methodology. Given that the Funds do not have an established ten-year track record, the Filer will determine the risk rating of each Fund based on the standard deviation of a Reference Index. The Filer will assess the reasonableness of using the Reference Index of each Fund on at least a quarterly basis. This will include monitoring the correlation between each Fund and its 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 each Fund.

14. A Non-Alternative Top Fund may seek to invest up to 10% of its net assets in the Funds provided that such investment is consistent with the Non-Alternative Top Fund’s investment objectives.

15. Pursuant to the Prior Decision, the Filer obtained exemptive relief to permit the Top Funds to invest up to 10% of their respective net asset value in Underlying ETFs. Each Non-Alternative Top Fund will reduce the maximum permitted exposure to the Funds by the amount of any investment in an Underlying ETF.

16. Prior to allowing a Non-Alternative Top Fund to invest in a Fund, the Filer will implement policies and procedures to monitor such Non-Alternative Top Fund’s compliance with any investment limits that would apply to a Non-Alternative Top Fund’s investment in a Fund.

17. 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 Alternative Funds Framework. The Filer will take steps to ensure that the Funds are only distributed through dealers that are registered with IIROC or to Top Funds, including by verifying IIROC membership in representations under its existing dealer agreements or on the IIROC web site.

Disclosure of Alternative Strategies

18. The Filer will 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 objectives 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 investment 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 scope of the existing NI 81-102, how such strategies may affect investors’ chance of losing money on their investment in the Fund.

19. The Filer will 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.

20. The Filer will 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.

21. 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.

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

Cash Borrowing Relief

23. The Leverage Strategies will permit each of the Funds to borrow cash in excess of the limits currently described in section 2.6 of NI 81-102.

24. The Funds may engage in cash borrowing at any time, in the discretion of the Portfolio Manager.

25. 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.

26. The Alternative Funds Framework gives alternative funds the ability to borrow up to 50% of their net asset value to use for investment purposes in order to facilitate a wider array of investment strategies.

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

Short Sale Relief

28. The Leverage Strategies will permit each of the Funds to:

(a) sell securities short, provided the aggregate market value of securities 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.

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

30. Under the current limits, 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.

31. 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 Alternative Funds Framework.

Specified Derivatives Relief

32. The Leverage Strategies used by each Fund contemplate flexible use of specified derivatives for hedging and/or non-hedging purposes. In particular, the Funds expect to enter into specified derivatives for the purpose of adding leverage to their investment portfolios, in accordance with their investment strategies. Such specified derivatives may include listed and over-the-counter options, swaps, futures and forward contracts and/or other derivatives.

33. 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.

34. The Filer is seeking to have the operational flexibility to deal with a variety of Prime Brokers and other counterparties to over-the-counter derivative transactions, 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 is expected to provide more competitive pricing and give each of the Funds access to a wider variety of over-the-counter products.

35. The Filer submits that any increased credit risk which may arise due to an exemption from the Designated Rating Requirement is counterbalanced given 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.

36. 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).

37. Commodity pools, the predecessor to alternative funds, are not subject to the Option and Cover Requirements. The Filer submits that each of the Funds should also be exempt from the Option and Cover Requirements.

Sub-Custodian Relief

38. The custodian of the Funds will be a bank listed in Schedule I of the Bank Act (Canada).

39. The Funds expect to trade in global securities and specified derivatives, and therefore require access to services from Prime Brokers which have strong trading capabilities in, and access to, global securities and specified derivatives, or otherwise specialize in the Leverage Strategies.

40. The Filer intends to appoint as sub-custodians for assets held in Canada or outside Canada one or more Prime Brokers, each of which complies with sections 6.2 or 6.3 of NI 81-102, as applicable, except that where the Prime Broker is an entity described in sections 6.2(3) or 6.3(3) of NI 81-102, the audited financial statements may not be made public.

Incentive Fee Relief

41. Each Fund will be permitted to pay, or enter into arrangements that would require it to pay, an incentive fee 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.

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

43. Alternative funds will be permitted to pay such incentive fees upon the coming into force of the Alternative Funds Framework.

44. The proposed incentive fee calculation is consistent with the types of incentive fees payable by the Hedge Funds which engage in strategies similar to the Funds.

45. 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 Alternative Funds Framework.

46. For the reasons provided above, the Filer respectfully submits that it would not be prejudicial to the public interest to grant the Exemption Sought.

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:

1. the Filer will file a standalone simplified prospectus, annual information form and fund facts documents 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 in each Fund’s investment objectives of the asset classes that the Fund may invest in and the investment strategies that the Fund may engage in pursuant to the Exemption Sought 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 of 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 Exemption Sought which are outside the scope of NI 81-102 may affect investors’ chance of losing money on their investment in the Fund;

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

(g) within each fund facts document, the Filer will include text box disclosure above Item 2 of Part I of Form 81-101F3 identifying the 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 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 Cash Borrowing Relief:

(a) each Fund may only borrow from an entity that meets the definition of a sub-custodian as described in condition 7(a) or (b) below;

(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 National Instrument 81-107 Independent Review Committee for Investment Funds;

(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 the Fund’s net asset value;

4. in the case of the Short Sale 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;

5. 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;

(ii) the aggregate market value of securities sold short by the Fund pursuant to the Short Sale Relief; and

(iii) 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 5(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 5(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 5(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;

6. in the case of the Cash Borrowing Relief and the Short Sale Relief:

(a) each Fund must not borrow cash pursuant to the Cash Borrowing Relief or sell securities short pursuant to the Short Sale 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;

7. in the case of the Sub-Custodian Relief:

(a) if portfolio assets are held in Canada by a sub-custodian, the sub-custodian must be one of the following:

(i) a bank listed in Schedule I, II or III of the Bank Act (Canada);

(ii) a trust company that is incorporated under the laws of Canada or a jurisdiction of Canada and licensed or registered under the laws of Canada or a jurisdiction of Canada, and that has equity, as reported in its most recent audited financial statements, of not less than $10,000,000;

(iii) a company that is incorporated under the laws of Canada or a jurisdiction of Canada, and that is an affiliate of a bank or trust company referred to in paragraph (i) or (ii), if either of the following applies:

(A) the company has equity, as reported in its most recent audited financial statements, of not less than $10,000,000;

(B) the bank or trust company has assumed responsibility for all of the custodial obligations of the company for the Fund;

(b) if portfolio assets are held outside of Canada by a sub-custodian, the sub-custodian must be one of the following:

(i) an entity referred to in section 6.2 of NI 81-102;

(ii) an entity that

(A) is incorporated or organized under the laws of a country, or a political subdivision of a country, other than Canada;

(B) is regulated as a banking institution or trust company by the government, or an agency of the government, of the country under the laws of which it is incorporated or organized, or a political subdivision of that country; and

(C) has equity, as reported in its most recent audited financial statements, of not less than the equivalent of $100,000,000;

(iii) an affiliate of an entity referred to in paragraph (i) or (ii), if either of the following applies:

(A) the affiliate has equity, as reported in its most recent audited financial statements, of not less than $100,000,000;

(B) the entity referred to in paragraph (i) or (ii) has assumed responsibility for all of the custodial obligations of the affiliate for the Fund;

8. in the case of the Incentive Fee Relief, each Fund must not pay, or enter into arrangements that would require it to pay, and securities of each Fund must not be sold on the basis that an investor would be required to pay, a 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 is described in the simplified prospectus in respect of each Fund;

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

10. the Filer will not distribute securities of the Funds to other investment funds other than the Top Funds and the Hedge Funds;

11. the Filer will ensure that Non-Alternative Top Funds will not purchase securities of a Fund if, immediately after the transaction, either:

(a) more than 10% of the net asset value of the Non-Alternative Top Fund, taken at market value at the time of the transaction, would consist of securities of the Funds; or

(b) the aggregate value of securities of the Funds and the Underlying ETFs, taken at market value at the time of transaction, would exceed 10% of the net asset value of the Non-Alternative Top Fund; and

12. this decision shall expire upon the earlier of:

(a) the coming into force of the Alternative Funds Framework or substantially similar rules; and

(b) five years from the date of this decision.

"Darren McKall"

Darren McKall

Manager, Investment Funds and Structured Products Branch

Ontario Securities Commission

Application #2018/0412