December 9, 2019

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 RP INVESTMENT ADVISORS LP (the Filer)

Decision

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of RP Alternative Global Bond Fund (the Existing Alternative Mutual Fund), any alternative mutual fund established in the future and managed by the Filer or an affiliate of the Filer (each, a Future Alternative Mutual Fund, and together with the Existing Alternative Mutual Fund, the Alternative Mutual Funds), RP Strategic Income Plus Fund (the Existing Mutual Fund), and any mutual fund, that is not an alternative mutual fund, established in the future and managed by the Filer or an affiliate of the Filer (each, a Future Mutual Fund, and together with the Existing Mutual Fund, the Mutual Funds, and together with the Alternative Mutual Funds, the Funds, and each, a Fund) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting:

(a) each Alternative Mutual Fund from the following provisions (the Short Selling Limits) of National Instrument 81-102 Investment Funds (NI 81-102) in order to permit each Alternative Mutual Fund to short sell “government securities” (as defined in NI 81-102) up to a maximum of 300% of the Alternative Mutual Fund’s net asset value (NAV):

a. subparagraph 2.6.1(1)(c)(v), which restricts an Alternative Mutual Fund from selling a security short if, at the time, the aggregate market value of the securities sold short by the Alternative Mutual Fund exceeds 50% of the Alternative Mutual Fund’s NAV; and

b. section 2.6.2, which states that an Alternative Mutual Fund may not borrow cash or sell securities short 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 the securities sold short by the Alternative Mutual Fund would exceed 50% of the Alternative Mutual Fund’s NAV

(together, the Short Selling Relief); and

(b) each Fund from the requirement set out in subsection 6.1(1) of NI 81-102 that provides that, except as provided in sections 6.8, 6.8.1 and 6.9, all portfolio assets of an investment fund must be held under the custodianship of one custodian that satisfies the requirements of section 6.2 (the Custodial Restriction) in order to permit a Fund to deposit portfolio assets with a borrowing agent that is not the Fund’s custodian or sub-custodian as security in connection with a short sale of securities, provided that the aggregate market value of the portfolio assets held by the borrowing agent after such deposit, excluding the aggregate market value of the proceeds from outstanding short sales of securities held by the borrowing agent, does not:

a. in the case of each Mutual Fund, exceed 10% of the NAV of the Mutual Fund at the time of deposit; and

b. in the case of each Alternative Mutual Fund, exceed 25% of the NAV of the Alternative Mutual Fund at the time of deposit

(together, the Custodial 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 the application, and

(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in all of the provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, the Canadian 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. In addition, terms defined in NI 81-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

The Filer and the Funds

1. The Filer is a limited partnership established under the laws of the Province of Ontario. The general partner of the Filer is RP Investment Advisors GP Inc., a corporation incorporated under the laws of the Province of Ontario. The Filer’s head office is located in Toronto, Ontario.

2. The Filer is registered as (i) an investment fund manager in Ontario, Quebec and Newfoundland and Labrador; (ii) a portfolio manager in Ontario, Quebec and British Columbia; (iii) an exempt market dealer in each of the Canadian Jurisdictions; and (iv) a commodity trading manager in Ontario.

3. The Filer or an affiliate of the Filer is, or will be, the investment fund manager of each of the Funds.

4. The Existing Alternative Mutual Fund is an alternative mutual fund established under the laws of Ontario that operates under the provisions of NI 81-102 applicable to alternative mutual funds. Each Future Alternative Mutual Fund will be an alternative mutual fund established under the laws of a Canadian Jurisdiction that operates under the provisions of NI 81-102.

5. The Existing Mutual Fund is a mutual fund, that is not an alternative mutual fund, established under the laws of Ontario that operates under the provisions of NI 81-102 applicable to mutual funds. Each Future Mutual Fund will be a mutual fund, that is not an alternative mutual fund, established under the laws of a Canadian Jurisdiction that operates under the provisions of NI 81-102.

6. Each of the Funds is, or will be, a reporting issuer in each of the Canadian Jurisdictions, and distributes, or will distribute, its units to the public pursuant to disclosure documents prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.

7. None of the Filer, the Existing Alternative Mutual Fund or the Existing Mutual Fund is in default of securities legislation in any Canadian Jurisdiction.

8. The Existing Alternative Mutual Fund’s investment objective is to generate attractive risk-adjusted returns with an emphasis on capital preservation by investing primarily in investment grade debt and debt-like securities of corporations and financial institutions.

9. The Existing Mutual Fund’s investment objective is to generate stable risk-adjusted absolute returns consisting of dividends, interest income and capital gains by investing primarily in investment grade corporate debt and debt-like securities, with a focus on capital preservation.

Short Selling Relief

10. An important investment strategy used by the Existing Alternative Mutual Fund is to enter into long positions in corporate bonds while hedging the interest rate risk of those bonds by taking short positions in government bonds. The short positions in the government bonds can be achieved either through short selling government bonds or by entering into specified derivatives (e.g. short positions in government bond futures).

11. The Future Alternative Mutual Funds will employ an investment strategy similar to the Existing Alternative Mutual Fund in that each Future Alternative Mutual Fund will contemplate short selling government securities concurrently with investing in long positions in corporate bonds for rate-hedging purposes.

12. The Short Selling Limits would restrict the Alternative Mutual Funds to short selling government securities to no more than 50% of the Alternative Mutual Fund’s NAV.

13. NI 81-102 otherwise permits the Alternative Mutual Funds to obtain the additional leveraged short exposure through the use of specified derivatives, up to an aggregate exposure of 300% of the Alternative Mutual Fund’s NAV, in compliance with section 2.9.1 of NI 81-102 (the Aggregate Exposure Limit).

14. The Filer is of the view that it would be in the Alternative Mutual Funds’ best interest to permit the Alternative Mutual Funds to physically short sell government securities up to 300% of the Alternative Mutual Fund’s NAV, instead of being limited to achieve the same degree of leverage through either specified derivatives alone, or a combination of physical short selling and specified derivatives, for the following reasons:

(a) While derivatives can be used to create similar investment exposure as short selling up to 300% of each Alternative Mutual Fund’s NAV, the use of derivatives is, in the Filer’s experience, generally more complex, more expensive and riskier than short selling. Implementing derivatives necessitates incremental transactional steps and expense to each of the Alternative Mutual Funds.

(b) There is a potential mismatch between the corporate bond and government security futures contract, which makes the use of derivatives less efficient than short selling government securities. The futures contract has standard terms set by the exchange on which it trades and is not directly linked to one particular government security. This makes it more difficult to determine whether the interest rate exposure of the government security futures contract is a good match for the interest rate exposure of the corporate bond it is meant to hedge. On the other hand, the short position in a government security that the market pairs with a corporate bond has been selected due to its proven effectiveness in hedging the interest rate exposure of the corresponding corporate bond.

15. The only securities sold short by the Alternative Mutual Funds in excess of 50% of an Alternative Mutual Fund’s NAV will be “government securities” as such term is defined in NI 81-102. The Alternative Mutual Funds will otherwise comply with the provisions governing short selling by an alternative mutual fund under sections 2.6.1 and 2.6.2 of NI 81-102.

16. Each short sale transaction made by an Alternative Mutual Fund will be consistent with the Alternative Mutual Fund’s investment objectives and investment strategies.

17. Each Alternative Mutual Fund’s aggregate exposure to short selling, cash borrowing and specified derivatives transactions will not exceed 300% of the Alternative Mutual Fund’s NAV, in compliance with the Aggregate Exposure Limit.

18. Each Alternative Mutual Fund will implement the following controls when conducting a short sale:

(a) the Alternative Mutual Fund will assume the obligation to return to the borrowing agent (as defined in NI 81-102) the securities borrowed to effect the short sale;

(b) the Alternative Mutual Fund will receive cash for the securities sold short within normal trading settlement periods for the market in which the short sale is effected;

(c) the Filer will monitor the short positions of the Alternative Mutual Fund at least as frequently as daily;

(d) the security interest provided by the Alternative Mutual Fund over any of its assets that is required to enable the Fund to effect a short sale transaction is made in accordance with section 6.8.1 of NI 81-102 and will otherwise be made in accordance with industry practice for that type of transaction and relates only to obligations arising under such short sale transaction;

(e) the Alternative Mutual Fund will maintain appropriate internal controls regarding short sales, including written policies and procedures for the conduct of short sales, risk management controls and proper books and records; and

(f) the Filer and the Alternative Mutual Fund will keep proper books and records of short sales and all of its assets deposited with borrowing agents as security.

19. Each Alternative Mutual Fund’s prospectus (the Prospectus) will contain adequate disclosure of the Alternative Mutual Fund’s short selling activities, including material terms of the Short Selling Relief.

20. The Filer submits that it would not be prejudicial to the public interest to grant the Short Selling Relief.

Custodial Relief

21. In connection with, among other things, the short sale of securities that the Funds will or may engage in, each Fund is permitted to grant a security interest in favour of, and deposit pledged portfolio assets with, an entity that acts as, among other things, a borrowing agent to the Fund (a Prime Broker).

22. If a Mutual Fund engages as its Prime Broker an entity that is not its custodian or sub-custodian, then it may, under section 6.8.1 of NI 81-102, only deliver to its Prime Broker portfolio assets having a market value, in the aggregate, of not more than 10% of the NAV of the Mutual Fund at the time of deposit. If an Alternative Mutual Fund engages as its Prime Broker an entity that is not its custodian or sub-custodian, then it may, under section 6.8.1 of NI 81-102, only deliver to its Prime Broker portfolio assets having a market value, in the aggregate, of not more than 25% of the NAV of the Alternative Mutual Fund at the time of deposit.

23. A Prime Broker may not wish to act as borrowing agent for a Mutual Fund that wants to sell short securities having an aggregate market value of up to 20% of the Mutual Fund’s NAV if the Prime Broker is only permitted to hold, as security for such transactions, portfolio assets, including the proceeds from the short sale, having an aggregate market value that is not in excess of 10% of the NAV of the Mutual Fund.

24. The issue is even greater in the context of an Alternative Mutual Fund, as a Prime Broker will not act as borrowing agent for an Alternative Mutual Fund that wants to sell short securities having an aggregate market value of up to 50% of the Alternative Mutual Fund’s NAV if the Prime Broker is only permitted to hold, as security for such transactions, portfolio assets, including the proceeds from the short sale, having an aggregate market value that is not in excess of 25% of the NAV of the Alternative Mutual Fund.

25. Effective as of January 3, 2019, NI 81-102 was amended to include alternative mutual funds. Prior to and since that date, a number of investment fund managers have either launched alternative mutual funds or are planning to do so. The ability of alternative mutual funds to borrow cash and to sell short securities more extensively than other investment funds governed by NI 81-102 has led to the increased involvement of Prime Brokers in the operations of these alternative mutual funds. While the prime brokerage model works well in the exempt investment fund space, the prime brokerage community and investment fund managers are experiencing greater difficulties in applying that model to alternative mutual funds and other investment funds under NI 81-102.

26. The prime brokerage operational and pricing models in the context of short selling are premised on the ability of the Prime Broker to retain, as collateral for the obligations of the applicable Fund, the proceeds from the short sales, whether such proceeds are cash or are used by the Fund to purchase other portfolio assets. These models are also based on the ability of the Prime Broker to hold additional assets of the Fund as collateral for those obligations.

27. Given the collateral requirements that Prime Brokers impose on their customers that engage in the short sale of securities, if the 10% and 25% of NAV limitations set out in section 6.8.1 of NI 81-102 apply, then the Funds will need to retain two, or more, Prime Brokers in order to sell short securities to the extent permitted under section 2.6.1 of NI 81-102. This would result in inefficiencies for the Funds and would increase their costs of operations.

28. While the collateral limits for the short sale of securities is currently topical in the context of alternative mutual funds, there is no policy reason to differentiate between Alternative Mutual Funds and Mutual Funds to the extent that Mutual Funds also engage in the short selling of securities.

29. The requirement for additional Prime Brokers increases costs for the Fund, which will reduce returns and negatively impact investors.

30. The Filer submits that it would not be prejudicial to the public interest to grant the Custodial Relief.

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:

1. the Short Selling Relief is granted provided that:

a) the only securities which an Alternative Mutual Fund will sell short in an amount that exceeds 50% of the Alternative Mutual Fund’s NAV will be securities that meet the definition of “government security” as such term is defined in NI 81-102;

b) each short sale by an Alternative Mutual Fund will otherwise comply with all of the short sale requirements applicable to alternative mutual funds in sections 2.6.1 and 2.6.2 of NI 81-102;

c) an Alternative Mutual Fund’s aggregate exposure to short selling, cash borrowing and specified derivatives will not exceed the Aggregate Exposure Limit;

d) each short sale made by an Alternative Mutual Fund will be consistent with the Alternative Mutual Fund’s investment objectives and investment strategies; and

e) each Alternative Mutual Fund’s Prospectus will disclose that the Alternative Mutual Fund is able to short sell “government securities” (as defined in NI 81-102) in an amount up to 300% of the Alternative Mutual Fund’s NAV, including the material terms of this decision; and

2. the Custodial Relief is granted provided that the Funds otherwise comply with subsections 6.8.1(2) and (3) of NI 81-102.

“Neeti Varma”

Neeti Varma Manager Investment Funds and Structured Products Branch Ontario Securities Commission

Application No. 2019/0543

SEDAR Project No. 2982231