Vision Capital Corporation (Re), 2020 CanLII 19522

February 21, 2020

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 VISION CAPITAL CORPORATION (the Filer)

AND

IN THE MATTER OF VISION MARKET NEUTRAL ALTERNATIVE FUND (the Proposed Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Proposed Fund, and such alternative mutual funds as may be established in the future and for which the Filer or an affiliate of the Filer acts as investment fund manager (the Future Funds and together with the Proposed Fund, the Funds, and each a Fund), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), exempting the Funds from the following provisions of NI 81-102:

(i) to permit the Funds to short sell securities up to 100% of a 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 all securities sold short by the fund exceeds 50% of the fund’s NAV; and

(B) section 2.6.2, which prohibits an alternative mutual fund from borrowing cash or selling 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 all securities sold short by the investment fund would exceed 50% of the fund’s NAV (collectively, the Short Selling Relief);

(ii) subsection 9.3(1), to permit a Fund to process purchase orders for its units, as described in its simplified prospectus and fund facts, on a monthly basis at their class net asset value per unit calculated as at the last Valuation Date (as defined below) of the calendar month in which the purchase order for such units is received (Purchase Relief);

(iii) subsection 10.3(1), to permit a Fund to process redemption orders for its units, as described in its simplified prospectus and fund facts:

(A) initially, on a Valuation Date that is no more than 6 months after the date on which the receipt was issued for its initial prospectus (the Initial Redemption Date). Redemption orders for units received at least 20 business days prior to the Initial Redemption Date will be redeemed at their class net asset value per unit determined on the Initial Redemption Date; and

(B) following the date referred to in (A) above, and on at least 20 business days prior written notice, on a monthly basis, redeeming such units at their class net asset value per unit calculated on the last Valuation Date of each calendar month in which the redemption order for such units is received (Redemption Relief)

(collectively, the Requested Relief).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(i) the Ontario Securities Commission is the principal regulator for this application; and

(ii) 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 each of the British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador and Yukon (the Other Jurisdictions and together with the Jurisdiction, the Jurisdictions).

Interpretation

Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 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:

Background

1. The Filer is registered as a portfolio manager, investment fund manager and exempt market dealer in the provinces of Ontario, British Columbia, Alberta and Manitoba, and as an investment fund manager and exempt market dealer in the Province of Quebec, and as an investment fund manager in the Province of Newfoundland and Labrador. The Filer's head office is in Toronto, Ontario.

2. The Filer will be the investment fund manager, portfolio manager, trustee and promoter of the Proposed Fund and the Filer or an affiliate of the Filer, will be the investment fund manager, portfolio manager and trustee of the Future Funds. The Filer is not in default of applicable securities legislation in any of the Jurisdictions.

3. The Funds will be alternative mutual funds established under the laws of the Province of Ontario and will be governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

4. Units of the Funds will be offered by simplified prospectus filed in all of the provinces of Canada and Yukon and, accordingly, the Funds will be reporting issuers in all of the provinces of Canada and Yukon.

5. The investment objective of the Proposed Fund is to generate consistent long-term capital appreciation and to provide investors with an attractive risk-adjusted rate of return with low downside volatility and drawdown, while maintaining a low correlation to the overall equity market through low equity and sectoral market exposure. The Proposed Fund will attempt to meet its objectives by employing alternative investment strategies that generally maintain long and short exposures that results in relatively low net exposures through investments in securities with a principal focus on real estate-based securities.

6. The Filer will manage the relative weightings of the Proposed Fund’s long and short positions to achieve the Proposed Fund’s investment objective. The Proposed Fund’s gross exposure and net exposure will depend on the Filer’s research and portfolio construction techniques along with the hedging of the general market exposure, which may contemplate short selling in excess of 50% of the Proposed Fund’s net asset value.

7. The proposed investment objective for each Future Fund will differ, but in each case, a core investment strategy as stated in the simplified prospectus will make the extensive use of short selling an investment strategy that is available to the portfolio manager in order to achieve the investment objectives of the applicable Fund and the portfolio manager's desired combination of long and short positions.

8. The Funds’ net asset values will be calculated at the close of regular trading, normally 4:00 p.m. (Eastern Time), on a day the Toronto Stock Exchange is open (a Valuation Date).

9. The Filer will determine each Fund’s risk rating using 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 (the Risk Methodology). Given that the Funds do not have an established ten-year track record, the Filer will determine the risk rating based on the standard deviation of a reference index selected in accordance with Item 5 of the Risk Methodology (the Reference Index). The Filer will assess the reasonableness of using the Reference Index on at least a quarterly basis. This will include monitoring the correlation between the Funds and the 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 a Fund.

Fund Disclosure of Alternative Strategies

10. The Filer proposes to file a simplified prospectus in respect of each Fund that:

(a) identifies each Fund as an alternative mutual fund;

(b) discloses within each Fund’s investment objectives, the asset classes and strategies used which are outside the scope of the existing NI 81-102;

(c) discloses within each Fund’s investment objectives and strategies the maximum amount of leverage to be employed;

(d) discloses within each Fund’s investment strategies the maximum amount each Fund may borrow, together with a description of how borrowing will be used in conjunction with each Fund’s other strategies and a summary of each Fund’s borrowing arrangements; and

(e) discloses, in connection with each Fund’s investment strategies that may be used that are outside the scope of the existing NI 81-102, how such strategies may affect investors’ chance of losing money on their investment in each Fund.

11. The Filer proposes to file an annual information form in respect of each Fund that:

(a) identifies each Fund as an alternative mutual fund; and

(b) discloses 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 manager of each Fund.

12. The Filer proposes to file a fund facts documents in respect of each Fund that:

(a) identify each Fund as an alternative mutual fund; and

(b) include cover page text box disclosure to highlight how each Fund differs from other mutual funds in terms of its investment strategies and the assets it is permitted to invest in.

13. The Filer will include within each Fund’s financial statements and management reports of fund performance disclosure regarding actual use of leverage within each Fund for the applicable period referenced therein.

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

Short Selling Relief

15. The investment strategies of each Fund will clearly disclose the short selling strategies of each Fund that are outside the scope of NI 81-102, including that the aggregate market value of all securities sold short by each Fund may exceed 50% of the net asset value of each Fund. The prospectus will also contain appropriate risk disclosure, alerting investors of any material risks associated with such investment strategies.

16. The investment strategies of each Fund will permit it to sell securities short, provided that at the time each Fund sells a security short (a) the aggregate market value of securities of any one issuer (other than “government securities” as defined in NI 81-102) sold short by each Fund does not exceed 10% of the net asset value of each Fund, and (b) the aggregate market value of all securities sold short by each Fund does not exceed 100% of its net asset value.

17. The investment strategies of each Fund will permit each Fund to enter into a cash borrowing or short selling transaction, provided that the aggregate value of cash borrowed combined with the aggregate market value of the securities sold short by each Fund does not exceed 100% of each Fund’s net asset value (the Total Borrowing and Short Sales Limit). If Total Borrowing and Short Sales Limit is exceeded, each Fund shall, as quickly as commercially reasonable, take all necessary steps to reduce the aggregate value of cash borrowed combined with the aggregate value of market value of securities sold short to be within the Total Borrowing and Short Sales Limit.

18. The investment strategies of each Fund will permit each Fund to borrow cash, enter into specified derivative transactions or sell securities short, provided that immediately after entering into a cash borrowing, specified derivative or short selling transaction, the aggregate value of cash borrowed combined with the aggregate market value of all securities sold short by each Fund and the aggregate notional amount of each Fund’s specified derivatives positions (other than positions held for hedging purposes, as defined in NI 81-102) would not exceed three times each Fund’s net asset value (the Leverage Limit). If the Leverage Limit is exceeded, each Fund shall, 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 and aggregate notional amount of each Fund’s specified derivatives position to be within the Leverage Limit.

19. Any short position entered into by each Fund will be consistent with the investment objective and strategies of each Fund.

20. The Filer maintains internal controls regarding physical short sales including written policies and procedures, risk management controls and proper books and records

21. Each Fund will implement the following controls when conducting a short sale:

(a) Each Fund will assume the obligation to return to the borrowing agent the securities borrowed to effect the short sale;

(b) Each 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 each Fund at least as frequently as daily;

(d) The security interest provided by each Fund over any of its assets that is required to enable each Fund to effect a short sale transaction is made in accordance with section 6.8.1 of Nl 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) Each 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 each Fund will keep proper books and records of short sales and all of its assets deposited with borrowing agents as security.

22. Where deemed appropriate and in the best interest of each Fund, the Filer is seeking latitude to enter into physical short positions rather than the use of synthetic short positions in order to achieve the investment objective and strategies of each Fund.

23. The Filer believes that since the underlying investment exposure between a physical short position and a synthetic short position is the same, each Fund will not be subject to any additional risks by entering into a physical short position versus a synthetic short position.

24. The Filer believes there is a greater number of options to borrow securities to short compared to a single counterparty for synthetic shorts resulting in lower borrowing costs to each Fund. As well, with a greater number of options to borrow securities to short, each Fund will be exposed to less counterparty risk than with a synthetic short position (e.g. counterparty default, counterparty insolvency, and premature termination of derivatives).

25. The Short Selling Relief will provide the Filer with the necessary flexibility to make timely trading decisions between physical short and synthetic short positions based on what is in the best interest of each Fund. The Filer, as a registrant and a fiduciary, is in the best position to determine whether each Fund should enter into a physical short position or a synthetic short position, depending on the surrounding circumstances. Accordingly, the Short Selling Relief will permit the Filer to engage in the most effective portfolio management available for the benefit of each Fund and its unitholders.

Purchase Relief and Redemption Relief

26. The Filer will calculate the NAV for each Fund on a daily basis in order to meet its obligations under NI 81-106 regarding the use of derivatives, including the obligation to daily mark-to-market the value of its derivatives.

27. Subsections 9.3(1) and 10.3(1) of NI 81-102 require that the purchase price and redemption price of a security of a mutual fund to which a purchase order and redemption order pertains, respectively, be the net asset value per security next determined after receipt by each Fund of the purchase order and redemption order, respectively.

28. As will be described in each Fund’s simplified prospectus and fund facts, each Fund will:

(a) process purchase orders for its units on a monthly basis at their class net asset value per unit calculated as at the last Valuation Date of the calendar month in which the purchase order for such units is received; and

(b) process redemption orders for its units:

(i) initially, on the Initial Redemption Date. Redemption orders for units received at least 20 business days prior to the Initial Redemption Date will be redeemed at their class net asset value per unit determined on the Initial Redemption Date; and

(ii) following the date referred to in (i) above, and on at least 20 business days prior written notice, on a monthly basis, redeeming such units at their class net asset value per unit calculated on the last Valuation Date of each calendar month in which the redemption order for such units is received.

29. Each Fund will pay the redemption proceeds for units that are the subject of a redemption order no later than 15 business days after the Valuation Date on which the redemption price was calculated.

30. The Filer has structured its mutual fund operations so that it can consolidate all purchase orders into one efficient monthly processing transaction and all redemption orders into one efficient monthly transaction. The Filer has determined that effecting such purchases and redemptions on a monthly basis, strikes the best balance between the needs of a unitholder to invest or access its assets in a timely and orderly manner, and the need to minimize the impact of such transactions on other unitholders in each Fund.

31. The Filer believes that monthly redemptions will mitigate excessive portfolio turnovers to boost each Fund’s net asset value due to lower transaction costs in the form of brokerage commissions and the bid-ask spread. Further, it has determined that monthly redemptions will protect each Fund from having to reduce positions at less than ideal times during potentially challenging market conditions. This will ensure that all unitholders of each Fund will be treated fairly in instances where a Fund is not able to unwind its portfolio holdings in an orderly manner to honour the redemption requests at the time.

Decision

The decision of the principal regulator under the Legislation is that the Requested Relief is granted provided that:

1. In the case of the Short Selling Relief:

(a) each Fund may sell a security short or borrow cash only if, immediately after the transaction:

(i) the aggregate market value of all securities sold short by each Fund does not exceed 100% of each Fund’s net asset value;

(ii) the aggregate value of cash borrowing by each Fund does not exceed 50% of each Fund’s net asset value; and

(iii) the aggregate market value of securities sold short by each Fund combined with the aggregate value of cash borrowing by each Fund does not exceed 100% of each Fund’s net asset value.

(b) each short sale made by each Fund will otherwise comply with all of the short sale requirements applicable to alternative mutual funds under section 2.6.1 and 2.6.2 of NI 81-102;

(c) each Fund’s aggregate exposure to short selling, cash borrowing and specified derivatives will not exceed the Leverage Limit;

(d) each short sale will be made consistent with each Fund’s investment objectives and strategies; and

(e) each Fund will disclose in its offering documents that each Fund can short sell securities up to 10% of each Fund’s NAV, including the material terms of this decision.

2. In the case of the Purchase Relief, each Fund:

(a) processes, and discloses in its simplified prospectus and in the “Quick Facts” section of its fund facts that it processes, purchase orders for its units on a monthly basis at their class net asset value per unit calculated as at the last Valuation Date of the calendar month in which the purchase order for such units is received (the Purchase Processing Frequency); and

(b) discloses in the “Who should invest in the Fund?” section of the Part B of its simplified prospectus and in the “Who is this Fund for?” section of its fund facts, the Purchase Processing Frequency and that the Fund is only suitable for investors who can accept the Purchase Processing Frequency.

3. In the case of the Redemption Relief, the Funds:

(a) process, and disclose in its simplified prospectus and in the “Quick Facts” section of its fund facts that it processes, redemption orders for its units as follows (the Redemption Processing Frequency):

(i) initially, on the Initial Redemption Date. Redemption orders for units received at least 20 business days prior to the Initial Redemption Date will be redeemed at their class net asset value per unit determined on the Initial Redemption Date; and

(ii) following the date referred to in (i) above, and on at least 20 business days prior written notice, on a monthly basis, redeeming such units at their class net asset value per unit calculated on the last Valuation Date of each calendar month in which the redemption order for such units is received; and

(b) discloses in the “Who should invest in the Fund?” section of the Part B of its simplified prospectus and in the “Who is this Fund for?” section of its fund facts, the Redemption Processing Frequency and that each Fund is only suitable for investors who can accept the Redemption Processing Frequency.

“Darren McKall”

Darren McKall Manager, Investment Funds and Structured Products Branch

Ontario Securities Commission

Application # 2020/0021