Halcyon Fund Management Inc. et al. - MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- Approvals granted for change of manager, for merger, and for change of custodian - Exemptions granted to allow mutual funds to engage in short selling up to 20% of net assets, subject to certain conditions.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.6(a), 2.6(c), 5.5(1)(a), 5.5(1)(b), 5.5(1)(c), 5.7(1)(a), 5.7(1)(b), 5.7(1)(c), 6.1(1), 19.1.

November 6, 2007

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

MANITOBA, ONTARIO, QUEBEC, NEW BRUNSWICK,

NOVA SCOTIA, PRINCE EDWARD ISLAND,

NEWFOUNDLAND AND LABRADOR, YUKON

TERRITORY AND NORTHWEST TERRITORIES

(the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

HALCYON FUND MANAGEMENT INC. (the "Filer")

AND

IN THE MATTER OF

HALCYON HIRSCH OPPORTUNISTIC CANADIAN FUND

HALCYON HIRSCH OPPORTUNISTIC TACTICAL ALLOCATION FUND

HALCYON CANADIAN DEMOGRAPHIC FUND

AND

BLUMONT CAPITAL CORPORATION ("BluMont")

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filer on behalf of Halcyon Hirsch Opportunistic Canadian Fund (the "Canadian Fund"), Halcyon Hirsch Opportunistic Tactical Allocation Fund (the "Tactical Allocation Fund") and Halcyon Canadian Demographic Fund (the "Demographic Fund", and together with the Canadian Fund and Tactical Allocation Fund, the "Existing Funds"), for decisions under the securities legislation of the Jurisdictions (the "Legislation") for:

(a) approval of the proposed change of manager of Canadian Fund and Tactical Allocation Fund from the Filer to BluMont under paragraph 5.5(1)(a) of National Instrument 81-102 Mutual Funds ("NI 81-102") (the "Change of Manager Approval");

(b) approval of the merger of Demographic Fund into the Canadian Fund (the "Merger") under paragraph 5.5(1)(b) of NI 81-102 (the "Merger Approval");

(c) approval of the change of custodian of Canadian Fund and Tactical Allocation Fund under paragraph 5.5(1)(c) of NI 81-102 (the "Change of Custodian Approval"); and

(d) exemptions from restrictions on engaging in short-selling by mutual funds as set out in subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102 with respect to Canadian Fund (post Merger), Tactical Allocation Fund and each mutual fund for which Blumont hereafter becomes the manager (the "Future Funds", together with the Existing Funds, the "Funds")(the "Short-Selling Relief").

Under the Mutual Reliance Review System ("MRRS") for Exemptive Relief Applications:

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

(f) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 -- Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

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

1. Each Fund is or will be an open-end investment trust governed by a declaration of trust under the laws of the province of Ontario. The Filer is the trustee and manager of each of the Existing Funds and its affiliate, Burgeonvest Securities Limited ("Burgeonvest") is the portfolio advisor and principal distributor of the Existing Funds.

2. Each of the Funds is or will be a reporting issuer in all the provinces and territories of Canada (other than Nunavut) and is separate and distinct from the other Funds in all respects, including as to its assets and liabilities.

3. Units of the Canadian Fund and the Tactical Allocation Fund are being offered in all provinces and territories (other than Nunavut) under a combined simplified prospectus and annual information form each dated June 11, 2007, as amended by Amendment No. 1 dated August 23, 2007.

4. The investment practices of each Fund comply or will comply in all respects with the requirements of NI 8l -102, except to the extent that the Funds have received exemptions from the Decision Makers to deviate from those requirements.

Application for Change of Manager Approval

5. On August 13, 2007, the Filer and BluMont entered into an agreement to transfer the administrative management agreements (the "Management Agreements") of the Canadian Fund and the Tactical Allocation Fund from the Filer back to BluMont, subject to regulatory and unitholder approval.

6. BluMont was incorporated on June 2, 2000 under the Business Corporations Act (Ontario), and its head office address is 70 University Avenue, Suite 1200, Toronto, Ontario M5J 2M4. BluMont manages and distributes alternative investment products to Canadian retail investors designed to provide enhanced diversification and return potential outside of traditional equity and fixed income investments. As at August 31, 2007, BluMont had over $690 million in assets under management.

7. BluMont (and its affiliate, Integrated Investment Management Inc. ("IIMI") prior to January 12, 2001) was previously the trustee and manager of the Existing Funds from the inception date of each Existing Fund to December 1, 2001, on which date Blumont transferred trusteeship and management of the Funds to Burgeonvest. On December 1, 2004, Burgeonvest then transferred ownership and management of the Funds to its affiliate, the Filer. Throughout this period and subsequent to the transfer to Burgeonvest, BluMont or its affiliate IIMI, provided investment advisory and management services to the Existing Funds pursuant to sub-advisory agreements entered into between its predecessor iPerformance Fund Corp. and each of Burgeonvest and the Filer.

8. BluMont is a wholly owned subsidiary of BluMont Capital Inc., which in turn is whole-owned by Toronto based Integrated Asset Management Corp. ("IAM"), a Canadian public company, the outstanding shares of which trade on the Toronto Stock Exchange.

9. IAM is a leading Canadian alternative asset investment management company. As of June 30, 2007, IAM had approximately $3.0 billion in assets and committed capital under management in private corporate debt, private equity, managed futures, real estate investment management, property management and, through BluMont, alternative retail investments including internally managed hedge funds and structured products.

10. BluMont is registered under the Securities Act (Ontario) as an advisor in the categories of investment counsel and portfolio manager and as a mutual fund dealer.

11. Except for the following proposed changes, BluMont intends to administer Canadian Fund and Tactical Allocation Fund in substantially the same manner as has the Filer:

(a) Subject to unitholder approval and the granting of the Change of Manager Approval under this decision, the transfer of the Management Agreements to BluMont will result in the concurrent assignment of the applicable Funds' declaration of trust by the Filer to BluMont, as successor manager and successor trustee, and will result in BluMont becoming the trustee and administrative manager of each of Canadian Fund and Tactical Allocation Fund;

(b) The distribution agreements relating to each of the Funds will either be terminated or assigned to BluMont;

(c) The existing investment management agreement with Burgeonvest will be terminated. BluMont will become the portfolio manager of Canadian Fund and Tactical Allocation Fund and will enter into a new investment advisory agreement pursuant to which BluMont will provide investment advisory and management services to the Funds;

(d) Subject to the granting of the Change of Custodian Approval under this decision, the existing custodial services agreements between each of Canadian Fund and Tactical Allocation Fund with CIBC Mellon Trust Company ("CIBC"), as custodian, will be terminated, and each will enter into new custodial services agreements with BMO Nesbitt Burns Inc. ("BMO Nesbitt");

(e) Subject to the granting of the Merger Approval under this decision, the Demographic Fund will be merged into Canadian Fund;

(f) BluMont will make the following name changes:

• Canadian Fund to become "BluMont Canadian Fund", and

• Tactical Allocation Fund to become "BluMont North American Fund";

(g) The head office of the Funds will change to 70 University Avenue, Suite 1200, P.O. Box 16, Toronto, Ontario M5J 2M4;

(h) Subject to unitholder approval, the auditors of the Canadian Fund and Tactical Allocation Fund will be changed from BDO Dunwoody to PricewaterhouseCoopers LLP;

(i) Subject to unitholder approval, BluMont will change the fundamental investment objective of Tactical Allocation Fund. The present investment objective of the Tactical Allocation Fund is to achieve consistent high overall investment returns through the allocation of assets among primarily Canadian equities, fixed income and money market instruments. BluMont proposes to change the investment objective of the Tactical Allocation Fund to achieve superior capital appreciation over both short and long-term horizons primarily by investing in North American equity securities.

(j) Subject to unitholder approval of the change of investment objective of the Tactical Allocation Fund, BluMont will change the investment strategies of the Tactical Allocation Fund so that the fund may seek to achieve its objective primarily by investing in equity securities of North American companies, which BluMont believes to have the potential for exceptional returns, encompassing mainly mid to smaller capitalized companies;

(k) Subject to being granted Short-Selling Relief under this decision, the investment strategies of the Tactical Allocation Fund and the Canadian Fund will be changed to allow each of those funds to take short positions, mostly in equity securities, in total not exceeding 20% of the net asset value of the fund; and

(l) Subject to unitholder approval, and consistent with the proposed change in investment objective and investment strategies set out in paragraphs (i) and (j) above, the performance fee benchmark of the Tactical Allocation Fund will be changed from a weighting of 45% of the S&P/TSX Total Return Index Value, 45% of the Scotia Capital Markets Universe Bond Index and 10% of the S&P 500's Total Return Index, to a weighting of 50% of the S&P/TSX Small Cap Index and 50% of the S&P MidCap 400.

Application for Merger Approval

11. Subject to unitholder approval and the granting of the Merger Approval under this decision, the Demographic Fund will be merged into the Canadian Fund. The Merger is expected to occur on or about November 2, 2007. The cost of effecting the Merger (consisting primarily of legal, proxy solicitation, printing, mailing and regulatory fees) will be borne by both the Filer and BluMont, and not by either of Demographic Fund or Canadian Fund.

12. The Merger will be structured as follows:

(i) it is anticipated that, immediately prior to the date of the Merger, all of the security positions of Demographic Fund will be sold and converted to cash or cash equivalents. In this limited circumstance, Demographic Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objective for a brief period of time prior to the Merger;

(ii) Canadian Fund will not assume the liabilities of Demographic Fund, and Demographic Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the Merger;

(iii) Demographic Fund's remaining assets will be valued and determined and Canadian Fund will acquire the remaining assets in exchange for units of Canadian Fund which will be issued at the applicable class net asset value per unit as of the close of business on the effective date of the Merger;

(iv) Demographic Fund will declare payable and distribute to its unitholders a sufficient amount of its net income and net realized capital gains such that it will not be subject to tax under Part I of the Income Tax Act (Canada) (the "Tax Act") for its current taxation year;

(v) the units of Canadian Fund received by Demographic Fund under the Merger will be distributed to Unitholders of Demographic Fund on a dollar-for-dollar basis in exchange for their units in Demographic Fund;

(vi) as soon as reasonably possible following the Merger, the liabilities of Demographic Fund will be satisfied and Demographic Fund will be wound up.

13. Unitholders will continue to have the right to redeem units of Demographic Fund held by them and the right to switch their investment to other mutual funds offered and managed by the Filer until the close of business on the business day before the effective date of the Merger.

14. The Merger will eliminate the administrative and regulatory costs of operating Demographic Fund as a separate mutual fund, which because of its small size (net assets of $646,693.00 as at the opening of business on September 11, 2007), will no longer be economically viable to operate on a stand alone basis. Unitholders of Demographic Fund will enjoy increased economies of scale as part of the larger continuing Canadian Fund (net assets of $18,590,479.13 as at the opening of business on September 11, 2007).

15. Prior to completion of the Merger, the Demographic Fund has 38 unitholders, the majority of whom are either employees of the Filer or Blumont, or relatives of such employees.

16. Approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 in the following ways:

(i) the fundamental investment objective of Demographic Fund is not substantially similar to the fundamental investment objective of Canadian Fund. Although both Demographic Fund and Canadian Fund invest primarily in Canadian securities, Canadian Fund invests in a broad range of sectors and has an expected portfolio turnover rate of at least 100%;

(ii) the Merger will not qualify as a "qualifying exchange" under the Tax Act; and

(iii) the meeting materials sent to the unitholders of Demographic Fund on September 12, 2007 did not include the current simplified prospectus and the most recent annual and interim financial statements of Canadian Fund. Those documents were not sent to unitholders of Demographic Fund having regard to the fact set out in paragraph 15 above. Instead of sending those documents, the Filer prominently disclosed in the information circular sent to unitholders of Demographic Fund that copies of those documents can be obtained by contacting the Filer at Suite 1100, Box 65, 21 King Street West, Hamilton, Ontario L8P 4W7, Tel: (905) 528-0064 or toll free: 1 (888) 317-3133, by faxing a request to the Filer at (905) 528-3540, or visiting www.sedar.com.

Application for Change of Custodian Approval

17. The change of custodian from CIBC to BMO Nesbitt will permit each of Canadian Fund and Tactical Allocation Fund to have the same Borrowing Agent (as defined below) and custodian, facilitating and making more operationally efficient their engaging in short-selling. This would also comply with the requirement in subsection 6.1(1) of NI 81-102 prohibiting a mutual fund from depositing a mutual fund's assets with any entity other than the mutual fund's custodian, which would be the case if the Borrowing Agent and custodian were separate entities.

18. BMO Nesbitt is duly qualified to act as the custodian of the assets of each of Canadian Fund and Tactical Allocation Fund for their assets held in Canada pursuant to section 6.2 of NI 81-102, and the custodial agreements and arrangements to be entered into between Canadian Fund and Tactical Allocation Fund and BMO Nesbitt will be in compliance with Part 6 of NI 81-102.

19. Details of

(i) the proposed change of manager and trustee of Canadian Fund and Tactical Allocation Fund from the Filer to BluMont;

(ii) the Merger,

(iii) the change of investment objectives of Tactical Allocation Fund,

(iv) the change of the performance fee benchmark for Tactical Allocation Fund, and

(v) the change of auditor of Canadian Fund and Tactical Allocation Fund from BDO Dunwoody LLP to PricewaterhouseCoopers LLP,

have been disclosed to unitholders in the notice of meeting and management information circular dated September 12, 2007 sent to unitholders of the Existing Funds and filed on SEDAR under Project Number 01160842. A special meeting of unitholders of the Existing Funds was called for October 12, 2007 to approve the above proposed changes.

Application for Short-Selling Relief

20. Subject to the Change of Manager Approval being granted under this decision, Blumont proposes that the Funds be authorized to engage in a limited, prudent and disciplined amount of short-selling. The aggregate market value of all securities sold short by a Fund will not exceed 20% of the net assets of the Fund on a daily marked-to-market basis. Blumont is of the view that permitting the Funds to short-sell on a limited basis would operate as a complement to those Fund's primary discipline of buying securities with the expectation that they will appreciate in market value, yet would provide those Funds with an opportunity to control volatility and enhance performance in declining or volatile markets.

21. Each short sale made by a Fund will be subject to compliance with the investment objectives of such Fund.

22. In order to effect a short sale, a Fund will borrow securities from either its custodian or a dealer (in either case, the "Borrowing Agent"), which Borrowing Agent may be acting either as principal for its own account or as agent for other lenders of securities.

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

(a) securities will be sold short for cash, with the Fund assuming the obligation to return to the Borrowing Agent the securities borrowed to effect the short sale;

(b) the short sale will be effected through market facilities through which the securities sold short are normally bought and sold;

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

(d) the securities sold short will be liquid securities and a "liquid" security is a security which satisfies one of the following conditions:

(i) the security is listed and posted for trading on a stock exchange, and

(A) the issuer of the security has a market capitalization of not less than CDN$300 million, or the equivalent thereof, at the time the short sale is effected; or

(B) the investment advisor has pre-arranged to borrow for the purposes of such short sale;

or

(ii) the security is a bond, debenture or other evidences of indebtedness of or guaranteed by the Government of Canada or any province or territory of Canada or the Government of the United States of America;

(e) at the time securities of a particular issuer are sold short:

(i) the aggregate market value of all securities of that issuer sold short by the Fund will not exceed 5% of the total net assets of the Fund; and

(ii) the Fund will place a "stop-loss" order with a dealer to immediately purchase for the Fund an equal number of the same securities if the 10 day moving average trading price of the securities exceeds 120% (or such lesser percentage as Blumont may determine) of the price at which the securities were sold short;

(f) the Fund will deposit Fund assets with the Borrowing Agent as security in connection with the short sale transaction;

(g) the Fund will keep proper books and records of all short sales and Fund assets deposited with Borrowing Agents as security;

(h) the Fund will develop written policies and procedures for the conduct of short sales prior to conducting any short sales; and

(i) the Fund will provide disclosure in its simplified prospectus of the short selling strategies and the details of this exemptive relief prior to implementing the short selling strategy.

Decisions

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decisions has been met.

The decision of the Decision Makers under the Legislation is that:

1. The Change of Manager Approval, the Merger Approval and the Change of Custodian Approval are granted;

2. The Short-Selling Relief is granted to the Funds provided that in respect of each Fund:

(a) the aggregate market value of all securities sold short by the Fund does not exceed 20% of the total net assets of the Fund on a daily marked-to-market basis;

(b) the Fund holds cash cover (as defined in NI 81-102) in an amount, including the Fund assets deposited with Borrowing Agents as security in connection with short sale transactions, that is at least 150% of the aggregate market value of all securities sold short by the Fund on a daily marked-to-market basis;

(c) no proceeds from short sales by the Fund are used by the Fund to purchase long positions in securities other than cash cover;

(d) the Fund maintains appropriate internal controls regarding its short sales including written policies and procedures, risk management controls and proper books and records;

(e) any short sale made by a Fund is subject to compliance with the investment objectives of the Fund;

(f) the Short-Selling Relief will not apply to a Fund that is classified as a money market fund or a short-term income fund;

(g) for short sale transactions in Canada, every dealer that holds Fund assets as security in connection with short sale transactions by the Fund shall be a registered dealer in Canada and a member of a self-regulatory organization that is a participating member of the Canadian Investor Protection Fund;

(h) for short sale transactions outside of Canada, every dealer that holds Fund assets as security in connection with short sale transactions by the Fund shall:

(i) be a member of a stock exchange and, as a result, be subject to a regulatory audit; and

(ii) have a net worth in excess of the equivalent of CDN$50 million determined from its most recent audited financial statements that have been made public;

(i) except where the Borrowing Agent is the Fund's custodian, when the Fund deposits Fund assets with a Borrowing Agent as security in connection with a short sale transaction, the amount of Fund assets deposited with the Borrowing Agent does not, when aggregated with the amount of Fund assets already held by the Borrowing Agent as security for outstanding short sale transactions of the Fund, exceed 10% of the total net assets of the Fund, taken at market value as at the time of the deposit;

(j) the security interest provided by the Fund over any of its assets that is required to enable the Fund to effect short sale transactions is made in accordance with industry practice for that type of transaction and relates only to obligations arising under such short sale transactions;

(k) prior to conducting any short sales, the Fund discloses in its simplified prospectus or an amendment thereto a description of: (a) short selling, (b) how the Fund intends to engage in short selling, (c) the risks associated with short selling, and (d) in the Investment Strategy section of the simplified prospectus, the Fund's strategy and this exemptive relief;

(l) prior to conducting any short sales, the Fund discloses in its annual information form or an amendment thereto the following information:

(i) that there are written policies and procedures in place that set out the objectives and goals for short selling and the risk management procedures applicable to short selling;

(ii) who is responsible for setting and reviewing the policies and procedures referred to in the preceding paragraph, how often the policies and procedures are reviewed, and the extent and nature of the involvement of BluMont's investment management committee or the Fund's trustee in the risk management process;

(iii) the trading limits or other controls on short selling in place and who is responsible for authorizing the trading and placing limits or other controls on the trading;

(iv) whether there are individuals or groups that monitor the risks independent of those who trade; and

(v) whether risk measurement procedures or simulations are used to test the portfolio under stress conditions;

(m) prior to conducting any short sales, the Fund has provided to its securityholders not less than 60 days' written notice that discloses the Fund's intent to begin short selling transactions and the disclosure required in the Fund's simplified prospectus and annual information form as outlined in paragraphs (k) and (l) above, or the Fund's initial simplified prospectus and annual information form and each renewal thereof has included such disclosure; and

(n) the Short-Selling Relief shall terminate upon the coming into force of any legislation or rule of the Decision Makers dealing with matters referred to in subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102.