Lysander Funds Limited, 2020 CanLII 31691

April 24, 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

LYSANDER FUNDS LIMITED

(the Filer) DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds (as defined below) for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting:

1. LCCOF (as defined below) from:

(a) subsection 9.3(1) of National Instrument 81-102 Investment Funds (NI 81-102) to permit LCCOF to process purchase orders for its units, as described in its simplified prospectus and fund facts, on a monthly basis at their series 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 or deemed to be received (the Purchase Relief);

(b) subsection 10.3(1) of NI 81-102, to permit LCCOF to process redemption orders for its units, as described in its simplified prospectus and fund facts, on a monthly basis, with the deadline of receiving the redemption notice by the 15^th day of each month (or, if the 15^th day is not a Valuation Date (as defined below), the next Valuation Date immediately following such 15^th day), and redeeming such units at their series net asset value per unit calculated on the last Valuation Date of each month in which the redemption order for such units is received or deemed to be received (the Redemption Relief);

(c) sections 15.3(2), 15.6(1)(a)(i) and 15.6(1)(d) of NI 81-102 to permit LCCOF to include performance data in sales communications notwithstanding that such performance data relates to a period prior to LCCOF offering its securities under a simplified prospectus; and LCCOF has not distributed its securities under a simplified prospectus for 12 consecutive months;

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(d) section 2.1 of National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81­101) for the purposes of relief requested herein from Form 81-101F3 Contents of Fund Facts Document (Form 81-101F3);

(e) Items 5(2), 5(3) and 5(4) and Instructions (1) and (5) of Part I of Form 81-101F3 in respect of the requirement to comply with sections 15.3(2), 15.6(1)(a)(i) and 15.6(1)(d) of NI 81­102 to permit LCCOF to include in its fund facts the past performance data of LCCOF notwithstanding that such performance data relates to a period prior to LCCOF offering its securities under a simplified prospectus; and LCCOF has not distributed its securities under a simplified prospectus for 12 consecutive months;

(the exemption sought under the above paragraphs (c), (d) and (e) is collectively referred to as the Performance Data Relief);

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

(a) subparagraph 2.6.1(1)(c)(v) of NI 81-102, which restricts a Short Selling Fund from selling a security short if, at the time, the aggregate market value of the securities sold short by the Short Selling Fund exceeds 50% of the Short Selling Fund’s NAV; and

(b) section 2.6.2 of NI 81-102, which states that a Short Selling 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 Short Selling Fund would exceed 50% of the Short Selling Fund’s NAV

(the Short Selling Relief); and

3. each Fund from the requirement set out in subsection 6.1(1) of NI 81-102 that provides that, except as provided in section 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 exceed 25% of the NAV of the Fund at the time of deposit (the Custodial Relief)

(collectively, 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 subsection 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 other than the Jurisdiction (together with the Jurisdiction, the Jurisdictions).

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Interpretation In this decision:

Funds means LCCOF, any other alternative mutual fund established and managed by the Filer or an affiliate of the Filer (including Lysander-Triasima All Country Long/Short Equity Fund) and any alternative mutual fund established in the future and managed by the Filer or an affiliate of the Filer and a Fund means any one of the Funds. For greater certainty, Funds include the Short Selling Funds as defined herein.

LCCOF means Lysander-Canso Credit Opportunities Fund.

Short Selling Funds means LCCOF and any alternative mutual fund established in the future and managed by the Filer or an affiliate of the Filer that may short sell government securities concurrently with investing in long positions in corporate fixed income securities and a Short Selling Fund means any one of the Short Selling Funds.

In addition, unless expressly defined herein, terms in this decision have the respective meanings given to them in MI 11-102, National Instrument 15-101 Definitions, NI 81-101 and NI 81-102.

Representations

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

The Filer and the Funds

1. The Filer is a corporation incorporated under the Business Corporations Act (Ontario) with its head office located in Toronto, Ontario.

2. The Filer is registered as an investment fund manager in Ontario, Quebec, and Newfoundland and Labrador and as an exempt market dealer in Ontario.

3. The Filer is or will be the trustee and investment fund manager of each Fund.

4. LCCOF is an alternative mutual fund established under the laws of Ontario that will operate under the provisions of NI 81-102 applicable to alternative mutual funds. Each Fund will be an alternative mutual fund under NI 81-102.

5. The Filer is not in default of securities legislation in any of the Jurisdictions.

6. The securities of each Fund will be qualified for distribution to the public in some or all of the Jurisdictions pursuant to a simplified prospectus, annual information form and fund facts prepared and filed in accordance with NI 81-101. Each Fund will be governed by NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

7. Each Fund may: (i) take both long and short positions in foreign currencies in order to hedge currency exposure of the Fund; (ii) invest in a variety of derivatives and take both long and short positions; and/or (iii) use leverage through a combination of one or more of the following: (A) borrowing cash for investment purposes; (B) physical short sales of equity securities, fixed-income securities or other portfolio assets; and/or (C) through the use of specified derivatives.

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LCCOF

8. LCCOF is an open-ended mutual fund trust created under the laws of Ontario on August 14, 2008. LCCOF currently has Series C and Series F units issued and outstanding. Units of LCCOF were first issued on December 19, 2008. Subsequently and prior to any Series F units being issued, all units of LCCOF that were then issued and outstanding were redesignated as Series C units. Accordingly, the inception date for Series C units (which is also the inception date of LCCOF) is December 19, 2008 (LCCOF Inception Date). The inception date for Series F units is March 31, 2014.

9. The investment objective of LCCOF is to seek to achieve long term capital growth through a diversified portfolio composed primarily of debt and money market securities. LCCOF will use alternative investment strategies such as engaging in short sales and purchasing securities on margin or with borrowed funds.

10. LCCOF seeks to achieve its investment objective by investing in or obtaining exposure to primarily corporate bonds of Canadian and foreign issuers.

11. Since the respective inception date of each series of LCCOF, units of each series of LCCOF have only been distributed to investors on a prospectus-exempt basis in accordance with National Instrument 45-106 Prospectus Exemptions (NI 45-106) in the Jurisdictions in which units of LCCOF have been distributed.

Subscriptions and Redemptions of Units of LCCOF

12. Currently, the NAV of LCCOF and of each series of LCCOF is determined after the close of markets in Toronto, Ontario on the last business day of each month.

13. Currently, units of LCCOF can be purchased monthly. Subscriptions received by the Filer by 4:00 p.m. (Eastern time) on the 15^th day of a month (or, if the 15^th day of the month is not a business day, then the next business day following the 15^th day of the month) (LCCOF Monthly Subscription Submission Date) will be processed on the last business day of the same month at the series net asset value per unit calculated on that day.

14. Currently, units of LCCOF are redeemable monthly. Redemption notices received by the Filer by 4:00 p.m. (Eastern time) on the 15^th day of a month (or, if the 15^th day of the month is not a business day, then the next business day following the 15^th day of the month) will be processed on the last business day of the same month at the series net asset value per unit calculated on that day.

15. Concurrently with LCCOF becoming a reporting issuer:

(a) the NAV of LCCOF and of each series of LCCOF will be determined after the close of markets in Toronto, Ontario on each day that the Toronto Stock Exchange is open for trading (each a Valuation Date), in accordance with the requirement in section 14.2 of Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106);

(b) subject to LCCOF obtaining the Purchase Relief and as it will be described in LCCOF’s simplified prospectus and fund facts, the LCCOF Monthly Subscription Submission Date will be changed from the 15^th day of a month (or, if the 15^th day of the month is not a business day, then the next business day following the 15^th day of the month) to the last business day of the month; and

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(c) subject to LCCOF obtaining the Redemption Relief and as it will be described in LCCOF’s simplified prospectus and fund facts, units of LCCOF will continue to be redeemable monthly, with the same notice period as it currently requires. Specifically and for greater certainty redemption notices received by the Filer by 4:00 p.m. (Eastern time) on the 15th day of a month (or, if the 15th day of the month is not a business day, then the next business day following the 15th day of the month) will be processed on the last business day of the same month at the series net asset value per unit calculated on that day.

16. 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 NAV per security next determined after receipt by the fund of the purchase order and redemption order, respectively.

17. The Filer wishes to preserve and continue the subscription and redemption frequencies currently offered to investors by LCCOF. Considering the investment strategies of LCCOF which include short selling and use of leverage, the Filer has determined that effecting purchases and redemptions on a monthly basis strikes the appropriate 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 the Fund.

18. The Filer believes that monthly redemptions mitigate excessive portfolio turnover. To the extent that LCCOF must unwind some of its portfolio positions to honour redemption requests, monthly redemptions, compared to daily redemptions, provide LCCOF with more time to unwind its positions in an orderly manner, thereby reducing the risk that LCCOF will have to unwind certain of its positions at less than ideal times or during potentially challenging market conditions, and reducing the potential harm to the remaining unitholders.

Performance Data of LCCOF

19. Series C is charged a management fee at a rate of 0.50% per annum.

20. Series F is charged a management fee at a rate of 1.00% per annum. Series F is also subject to a performance fee (the Series F Performance Fee).

21. The Filer intends to qualify for distribution under a prospectus Series A and Series F units of LCCOF, but not Series C. Series A units will be a new series with a start date approximately the same as the date of the final prospectus.

22. Since the LCCOF Inception Date, LCCOF has prepared annual and interim financial statements in accordance with NI 81-106.

23. Since the LCCOF Inception Date, LCCOF has not deviated from the investment restrictions contained in NI 81-102, other than: (i) the short selling of government securities, which is done in accordance with the requested Short Selling Relief; and (ii) from time to time, where there was temporary cash borrowing, which did not exceed a period of 30 days.

24. LCCOF will be managed substantially similarly after it becomes a reporting issuer as it was prior to becoming a reporting issuer. As a result of LCCOF becoming a reporting issuer:

(a) LCCOF’s investment objectives will not change, other than to provide additional detail as required by NI 81-101;

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(b) The management fee charged to LCCOF in respect of Series F units will decrease from 1.00% to 0.75%;

(c) The day-to-day administration of LCCOF will not change, other than to comply with the additional regulatory requirements associated with being a reporting issuer (none of which will impact the portfolio management of LCCOF); and

(d) The management expense ratio of Series F units of LCCOF (excluding performance fees) is not expected to increase by more than 0.10%, which is an immaterial amount.

25. The Filer proposes to present the performance data of Series F units of LCCOF for the time period since the LCCOF Inception Date in sales communications. For the period from the LCCOF Inception Date to March 30, 2014 (i.e., the period during which LCCOF only had Series C units issued and outstanding but before any Series F units were issued), the performance data of Series F presented would be data generated by doing the following:

(a) Using the performance data of Series C, first “undo” the Series C management fee;

(b) Expenses would be left un-touched;

(c) Apply the Series F management fee (at the rate of 1.00%) and Series F Performance Fee to the data.

26. Without the Performance Data Relief, sales communications pertaining to LCCOF cannot include performance data of LCCOF that relate to a period prior to it becoming a reporting issuer.

27. Without the Performance Data Relief, sales communications pertaining to LCCOF would not be permitted to include performance data until LCCOF has distributed securities under a simplified prospectus for 12 consecutive months.

28. As a reporting issuer, LCCOF will be required under NI 81-101 to prepare and file fund facts.

29. The Filer proposes to include in the fund facts for Series F units of LCCOF past performance data in the disclosure required by Items 5(2), 5(3) and 5(4) under the sub- headings “Year-by-year returns”, “Best and worst 3-month returns” and “Average return”, respectively, related to periods prior to LCCOF becoming a reporting issuer in any of the Jurisdictions.

30. Without the Performance Data Relief, the fund facts for Series F units of LCCOF cannot include performance data of Series F that relate to a period prior to LCCOF becoming a reporting issuer.

31. The performance data and other financial data of LCCOF for the time period before it became a reporting issuer is significant and meaningful information for existing and prospective investors in making an informed decision on whether to purchase units of LCCOF.

32. In the absence of the Performance Data Relief, investors in LCCOF following LCCOF becoming a reporting issuer will have no information about LCCOF’s past performance or financial highlights on which to base their investment decision.

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Short Selling of Government Securities

33. An important investment strategy expected to be used by the Short Selling Funds will be 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 Hedging Strategy). The Short Hedging Strategy is effective because there a high degree of correlation between the movement of government and corporate fixed income securities caused by changes in interest rates, creating a hedge against losses in the value of the long corporate position. This relationship is a fundamental part of the fixed-income market such that dealers quote the price of corporate bond based on the incremental yield of the corporate bonds over an equivalent term government bond.

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

35. The only securities proposed to be sold short by the Short Selling Funds in excess of 50% of a Short Selling Fund’s NAV will be “government securities” as such term is defined in NI 81-102. The Short Selling 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.

36. NI 81-102 otherwise permits the Short Selling Funds to obtain the additional leveraged short exposure through the use of specified derivatives, up to an aggregate exposure of 300% of the Short Selling Fund’s NAV.

37. The Filer is of the view that it would be in each Short Selling Fund’s best interest to permit the Short Selling Funds to physically short sell government securities up to 300% of the Short Selling Fund’s NAV, instead of being limited to achieving 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 the Short Hedging Strategy up to 300% of a Short Selling Fund’s NAV, the use of derivatives is less effective, is more complex, and is riskier than the Short Hedging Strategy. Derivatives typically provide credit exposure that is less targeted than the Short Hedging Strategy with a longer duration that increases risk, often without commensurately higher returns. In addition, implementing derivatives strategies necessitates incremental transactional steps. These steps increase both operational risk and counterparty risk, as well as cost.

(b) The risk of covering short government securities positions in a rising market is largely mitigated by several factors: (i) the strong correlation between the government security sold short and the corporate fixed income security held long by a Short Selling Fund which provides a hedge against short cover risk; (ii) government securities are highly liquid and more than one issuance of government securities can be used to hedge interest rate risk; (iii) government securities have markedly lower price volatility than equity securities; (iv) unlike equity securities, government securities have an effective upper value limit; and (v) financial institutions that facilitate short selling are regulated and implement effective risk controls on short sellers.

38. Each Short Selling Fund’s aggregate exposure to short selling, cash borrowing and specified derivatives transactions will not exceed 300% of the Short Selling Fund’s NAV, in compliance with subsection 2.9.1 of NI 81-102 (the Aggregate Exposure Limit).

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39. Each Short Selling Fund will implement the following controls when conducting a short sale:

(a) The Short Selling 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 Short Selling 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 cause the portfolio manager of the Short Selling Fund to monitor the short positions of the Short Selling Fund at least as frequently as daily and the Filer, as investment fund manager, will monitor the short positions of the Short Selling Fund at least as frequently as monthly;

(d) The security interest provided by the Short Selling Fund over any of its assets that is required to enable the Short Selling 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 Short Selling 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 will cause the portfolio manager of the Short Selling Fund, on behalf of the Short Selling Fund, to keep proper books and records of short sales and all of the Fund’s assets deposited with borrowing agents (as defined in NI 81-102) as security and the Filer, on behalf of the Short Selling Fund, will have access to such books and records.

40. Each Short Selling Fund’s prospectus will contain adequate disclosure of the Short Selling Fund’s short selling activities, including material terms of the Short Selling Limits.

Custodial Restriction

41. 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, the entity that acts as, among other things, a borrowing agent (the Prime Broker) to it. If a 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 such Fund at the time of deposit.

42. A Prime Broker may not wish to act as borrowing agent for a Fund that wants to sell short securities having an aggregate market value of up to 50% of such Fund’s NAV (300% in the case of the Short Selling Funds) 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 Fund.

43. Effective as of January 3, 2019, NI 81-102 was amended to include alternative mutual funds. 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

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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.

44. 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.

45. Given the collateral requirements that Prime Brokers impose on their customers that engage in the short sale of securities, if the 25% of NAV limitation set out in section 6.8.1 of NI 81-102 applies, 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.

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. In the case of the Purchase Relief, LCCOF:

(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 series 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 LCCOF is only suitable for investors who can accept the Purchase Processing Frequency.

2. In the case of the Redemption Relief, LCCOF:

(a) processes, and discloses in its simplified prospectus and in the “Quick Facts” section of its fund facts that it processes redemption orders for its units on a monthly basis, that for redemption orders to redeem units received by the 15^th day of each month (or, if the 15^th day is not a Valuation Date, the Valuation Date immediately following such 15^th day), such units are redeemed at their series net asset value per unit calculated on the last Valuation Date of the same month (the Redemption 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 Redemption Processing Frequency and that LCCOF is only suitable for investors who can accept the Redemption Processing Frequency.

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3. In the case of the Performance Data Relief:

(a) any sales communication and any fund facts that contain performance data of LCCOF

relating to a period prior to when LCCOF was a reporting issuer discloses:

(i) that LCCOF was not a reporting issuer during such period;

(ii) that the expenses of LCCOF would have been higher during such period had LCCOF been subject to the additional regulatory requirements applicable to a reporting issuer;

(iii) performance data of LCCOF for 10, 5, 3 and one year periods;

(b) the information contained under the heading “Fund Expenses Indirectly Borne by Investors” in Part B of the simplified prospectus of LCCOF based on the management expense ratio (MER) for LCCOF for the financial year ended December 31, 2020 be accompanied by disclosure that:

(i) the information is based on the MER of LCCOF for its last completed financial year when its units were offered privately during part of such financial year;

(ii) the MER of LCCOF may increase as a result of LCCOF offering its units under the simplified prospectus;

(c) the Filer posts the financial statements of LCCOF for the past 10 years on LCCOF’s website and makes those financial statements available to investors upon request.

4. In the case of the Short Selling Relief:

(a) the only securities which a Short Selling Fund will sell short in an amount that exceeds 50% of the Short Selling 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 a Short Selling 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 81­102;

(c) a Short Selling Fund’s aggregate exposure to short selling, cash borrowing and specified derivatives will not exceed the Aggregate Exposure Limit;

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

(e) a Short Selling Fund’s prospectus will disclose that the Short Selling Fund is able to short sell “government securities” (as defined in NI 81-102) in an amount up to 300% of the Short Selling Fund’s NAV, including the material terms of this decision.

5. In the case of the Custodial Relief, provided that the Funds otherwise comply with subsections 6.8.1(2) and (3) of NI 81-102.

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“Darren Mckall”

Darren McKall, Manager

Investment Funds and Structured Products Branch

Ontario Securities Commission

Application No. 2020/0099 SEDAR Project No. 3019916

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