PenderFund Capital Management Ltd. and Pender Alternative Absolute Return Fund

Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 81-102 Investment Funds Relief granted from short selling and cash borrowing restrictions in NI 81-102 to permit alternative mutual funds to conduct physical short sales and cash borrowing up to a combined aggregate limit of 100% of the fund's net asset value, subject to conditions.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.6, 2.6.1, 2.6.2 and 19.1.

May 9, 2022

IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF PENDERFUND CAPITAL MANAGEMENT LTD. (the Filer) AND PENDER ALTERNATIVE ABSOLUTE RETURN FUND (the Fund)

DECISION

Background

¶ 1 The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer, on behalf of the Fund for an exemption under securities legislation of the Jurisdictions (the Legislation) from the following provisions in National Instrument 81-102 Investment Funds (NI 81-102) (together, the Exemption Sought):

(a) subparagraph 2.6.1(1)(c)(v) of NI 81-102, which restricts the 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 (together with (c) below, the Short Selling Limit);

(b) subparagraph 2.6(2)(c) of NI 81-102, which restricts the Fund from borrowing cash if the value of cash borrowed, when aggregated with the value of all outstanding borrowing by the Fund, exceeds 50% of the Fund's NAV (together with (c) below, the Cash Borrowing Limit); and

(c) section 2.6.2 of NI 81-102, which restricts the 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 Fund (the Combined Aggregate Value) would exceed 50% of the Fund's NAV and which requires a Fund, if the Combined Aggregate Value exceeds 50% of the Fund's NAV, as quickly as commercially reasonably, to take all steps necessary to reduce the Combined Aggregate Value to 50% or less of the Fund's NAV -- (a) and (c) together, the Short Selling Relief, and (b) and (c) together, the Cash Borrowing Relief, and collectively the Requested Relief).

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

(a) the British Columbia Securities Commission is the principal regulator for this application;

(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 Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut; and

(c) the decision is a decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

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

Representations

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

The Filer

1. the Filer is a corporation incorporated under the laws of British Columbia on May 28, 2003;

2. the head office of the Filer is located in Vancouver, British Columbia;

3. the Filer is registered as an investment fund manager in British Columbia, Ontario, Québec and Newfoundland and Labrador; a portfolio manager in British Columbia and Ontario; and an exempt market dealer in British Columbia, Alberta, Manitoba, Ontario and Québec;

4. the Filer is the investment fund manager, portfolio manager and trustee of the Fund;

5. the Filer is not a reporting issuer in any of the Jurisdictions and is not in default of the Legislation in any of the Jurisdictions;

The Fund

6. the Fund is an alternative mutual fund to which NI 81-102 applies and is organized under and governed by the laws of British Columbia;

7. the Fund distributes its securities pursuant to a simplified prospectus (the Prospectus) prepared in accordance with NI 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and Form 81-101F1 Contents of Simplified Prospectus;

8. securities of the Fund are qualified for distribution in each Jurisdiction;

9. the Fund is a reporting issuer in each Jurisdiction and the Fund is not in default of the Legislation in any of the Jurisdictions;

10. the investment objective of the Fund is to maximize absolute returns over a complete market cycle by providing long-term capital growth and income, with low volatility of returns; the Fund's key investment strategies include (a) the use of absolute return, offsetting, inverse or shorting strategies requiring the use of short selling in excess of the Short Selling Limit, and/or (b) the use of cash borrowing to provide additional investment exposure in connection with the investment strategies of the Fund in excess of the Cash Borrowing Limit; the Fund invests primarily in a portfolio of North American fixed income securities but may also invest in foreign and other securities;

11. the Fund is permitted to invest in asset classes such as physical commodities and specified derivatives, and, among other things:

(a) invests up to 20% of its NAV in securities of a single issuer (rather than 10% for conventional mutual funds);

(b) borrows cash of up to 50% of its NAV to use for investment purposes;

(c) sells securities short (provided that the aggregate market value of the securities of the issuer of the securities sold short, other than government securities, does not exceed 10% of its NAV and the aggregate market value of the securities sold short does not exceed 50% of its NAV); and

(d) uses leverage through the use of cash borrowing, short selling and specified derivatives;

12. the combined level of cash borrowing and short selling of the Fund is currently limited to 50% of its NAV in aggregate and the maximum aggregate exposure to the foregoing sources of leverage, as calculated in accordance with section 2.9.1 of NI 81-102, cannot exceed 300% of the Fund's NAV (the Leverage Limit);

13. the Filer has determined that it is in the best interests of the Fund to borrow cash and sell securities short up to 100% of NAV;

Reasons for the Requested Relief

14. the Prospectus, annual information form, and fund facts, as applicable, comply with the applicable requirements of NI 81-101 and Form 81-103F3 Content of Fund Facts Document (the Fund Facts) for alternative mutual funds, and will include disclosure in a text box on the cover page of the Fund Facts to highlight how the Fund differs from other mutual funds and alternative mutual funds and to emphasize that the short selling and cash borrowing strategies and increased ability to engage in short selling and cash borrowing permitted for the Fund are outside the scope of the restrictions in NI 81-102 applicable to alternative mutual funds;

15. the Filer does not consider that any activities it would engage in in reliance on the Short Selling Relief and Cash Borrowing Relief would constitute either a fundamental or material change for the Fund under NI 81-102 or Part 11 of National Instrument 81-106 -- Investment Fund Continuous Disclosure;

16. the Filer determines the risk rating for the Fund using the Investment Risk Classification Methodology as set out in Appendix F of NI 81-102; the Filer does not anticipate that the current risk rating of the Fund would change if the Short Selling and Cash Borrowing Relief were granted;

17. the Filer has comprehensive risk management policies or procedures that address the risks associated with short selling and cash borrowing in connection with the implementation of the investment strategies of the Fund;

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

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

(b) 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;

(c) the Filer will monitor the short positions within the constraints of the Short Selling Relief and the Cash Borrowing Relief as least daily;

(d) on an annual basis, the Filer is responsible for setting and reviewing written policies and procedures for the conduct of short sales, risk management controls and proper books and records, including what is described in paragraph 17;

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

(f) any short sale by the Fund will comply with the investment objectives of the Fund; and

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

Decision

¶ 4 Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:

1. the Fund may sell a security short or borrow cash only if, immediately after the cash borrowing or short selling transaction:

(a) the aggregate market value of all securities sold short by the Fund does not exceed 100% of the Fund's NAV;

(b) the aggregate value of all cash borrowing by the Fund does not exceed 100% of the Fund's NAV;

(c) the aggregate market value of securities sold short by the Fund combined with the aggregate value of cash borrowing by the Fund does not exceed 100% of the Fund's NAV; and

(d) the Fund's aggregate exposure to short selling, cash borrowing and specified derivatives does not exceed the Leverage Limit;

2. in the case of a short sale, the short sale:

(a) otherwise complies with all of the short sale requirements applicable to alternative mutual funds under sections 2.6.1 and 2.6.2 of NI 81-102; and

(b) is consistent with the Fund's investment objectives and strategies;

3. in the case of a cash borrowing transaction, the transaction:

(a) otherwise complies with all of the cash borrowing requirements applicable to alternative mutual funds under sections 2.6 and 2.6.2 of NI 81-102; and

(b) is consistent with the Fund's investment objectives and strategies;

4. the Prospectus under which securities of the Fund are offered:

(a) discloses that the Fund can sell securities short or borrow cash up to, and subject to, the limits described in condition 1 above; and

(b) describes the material terms of this decision.