PenderFund Capital Management Ltd. et al.

Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 81-102 Mutual Funds -- Relief to allow short selling -- A group of mutual funds seeks relief under section 19.1 of NI 81-102 from the requirements in NI 81-102 prohibiting short selling -- The funds will operate primarily by investing in long positions in securities that they expect to increase in value; the funds wish to be able to use a limited amount of short selling, such that the market value of the securities sold short will not exceed 5% the net asset value of the fund; the principal risk of short selling is that it can lead to unlimited losses, since the shorted security can increase in value without limit; the funds will mitigate this risk by imposing a stop-loss limit -- if the security increases in value by more than 20%, the security will be repurchased and the position closed; short selling also involves borrowing, since the shorted security has to be borrowed from a borrowing agent; borrowing can create leverage, which exposes a fund to greater volatility; the funds will eliminate this risk by maintaining the short selling proceeds as cash cover rather than investing it in additional securities; in order to borrow the securities to be shorted, the fund will have to post security with the borrowing agent.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, s. 19.1.

May 26, 2009

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

IN THE MATTER OF

PENDER SMALL CAP OPPORTUNITIES FUND AND

PENDER CORPORATE BOND FUND

(individually, a Fund and collectively, the Funds)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting the Funds from the following requirements:

(a) section 2.6(a) of National Instrument 81-102 Mutual Funds (NI 81-102) prohibiting a mutual fund from providing a security interest over a mutual fund' s assets;

(b) 2.6(c) of NI 81-102 prohibiting a mutual fund from selling securities short; and

(c) section 6.1(1) of NI 81-102 prohibiting a mutual fund from depositing any part of a mutual fund's assets with an entity other than the mutual fund's custodian,

(together, the Exemption Sought).

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 section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, Saskatchewan, and Manitoba, and

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

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.

Representations

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

1. the Filer is a company incorporated under the laws of British Columbia and is the manager of the Funds;

2. each Fund is a mutual fund trust established under the laws of British Columbia;

3. neither the Filer nor the Funds are in default of the Legislation;

4. the Funds have filed a preliminary simplified prospectus dated April 15, 2009 with the Decision Makers;

5. the investment practices of each Fund will comply in all respects with the requirements of Part 2 of NI 81-102, except to the extent that the Fund has received the Exemption Sought;

6. the Filer proposes that each Fund be authorized to engage in a limited, prudent and disciplined amount of short selling;

7. the Filer is of the view that each Fund could benefit from the implementation and execution of a controlled and limited short selling strategy;

8. this strategy would operate as a complement to the Fund's primary discipline of buying securities with the expectation that they will appreciate in market value;

9. any short sales made by a Fund will be subject to compliance with the investment objectives of such Fund;

10. 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; and

11. 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 on 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 in that:

i. the securities will be listed and posted for trading on a stock exchange, and

(A) the issuer of the security will have a market capitalization of not less than $100 million, or the equivalent, at the time the short sale is effected; or

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

or

ii. the securities will be fixed-income securities, bonds, debentures 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 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 trading price of the securities exceeds 120% (or such lesser percentage as the portfolio advisor of the Fund may determine) of the price at which the securities were sold short;

f. the Fund may deposit Fund assets with the Borrowing Agent as security for 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 prospectus or annual information form of the short selling strategies and the details of this exemptive relief prior to implementing the short selling strategy.

Decision

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

2. 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;

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

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

5. any short sale made by the Fund is subject to compliance with the investment objective of the Fund;

6. the short selling relief does not apply if the Fund is a money market fund;

7. for short sale transactions in Canada, every dealer that holds assets of the Fund 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;

8. for short sale transactions outside of Canada, every dealer that holds Fund assets as security in connection with short sale transactions by the Fund:

a. is a member of a stock exchange and, as a result, be subject to a regulatory audit; and

b. has a net worth in excess of the equivalent of $50 million determined from its most recent audited financial statements that have been made public;

9. 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;

10. 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;

11. prior to conducting any short sales, the Fund discloses in its simplified prospectus or annual information form 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 prospectus, the Fund's strategy and this exemptive relief;

12. prior to conducting any short sales, the Fund discloses in its simplified prospectus or annual information form the following information:

a. 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;

b. 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 the board of directors or trustee in the risk management process;

c. 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;

d. whether there are individuals or groups that monitor the risks independent of those who trade; and

e. whether risk measurement procedures or simulations are used to test the portfolio under stress conditions; and

13. this decision shall terminate upon the coming into force of any legislation or rule of the principal regulator dealing with the matter referred to in sections 2.6(a), 2.6(c), and 6.1(1) of NI 81-102.