Sprott Asset Management L.P. and the Mutual Funds Listed in Schedule A
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to allow mutual fund to short sell up to 20% of net assets, subject to certain conditions -- National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.6(a), 2.6(c), 6.1(1), 19.1(2).
April 15, 2011
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
SPROTT ASSET MANAGEMENT L.P.
(the Filer)
AND
THE MUTUAL FUNDS
LISTED IN SCHEDULE A HERETO
(the Existing Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption relieving the Existing Funds and any future mutual funds managed by the Filer or an affiliate of the Filer that are subject to National Instruments 81-101 Mutual Fund Distributions (NI 81-101) and 81-102 Mutual Funds (NI 81-102) (the Future Funds) (the Existing Funds and the Future Funds, respectively, together, the Funds and individually, a Fund) from the requirements in subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102 in order to permit each of the Funds to (a) sell securities short; (b) provide a security interest over the Fund's assets in connection with the short sales; and (c) deposit assets of the Fund with a dealer as security in connection with the short sales (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for the application; and
(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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland & Labrador, Northwest Territories, Yukon and Nunavut (the Passport Jurisdictions).
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
The decision is based on the following facts represented by the Filer:
The Filer and the Funds
1. The Filer is a limited partnership established under the laws of the Province of Ontario and is registered as an adviser in the category of portfolio manager in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Newfoundland and Labrador and as an exempt market dealer in Ontario. The Filer is not in default of securities legislation in any province or territory of Canada.
2. Each Fund is, or will be, an open-end mutual fund trust or a class of shares of a mutual fund corporation established under the laws of the Province of Ontario of which the Filer, or an affiliate of the Filer, is or will be the manager.
3. Each Fund is, or will be, a reporting issuer in all of the provinces and territories of Canada subject to NI 81-102 and distributes or will distribute securities under a simplified prospectus and annual information form prepared and filed in accordance with NI 81-101. Each of the Existing Funds is not in default of securities legislation in any province or territory of Canada.
4. In July 2010, the Filer qualified for sale, pursuant to a simplified prospectus, a fixed-income fund known as Sprott Diversified Yield Fund. The Filer may, in the future, create and manage other mutual funds the investment objectives of which will include investments in fixed-income securities.
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 exemptive relief from the applicable securities regulatory authorities or regulators to deviate therefrom.
The Previous Short Selling Relief
6. In a decision document dated April 28, 2005, Sprott Growth Fund, Sprott Canadian Equity Fund, Sprott Gold and Precious Minerals Fund and Sprott Energy Fund were granted relief from the requirements in subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102 allowing such Funds to sell securities short, provide a security interest over assets of such Funds in connection with the short sales and deposit assets of such Funds with dealers as security in connection with such transactions (the 2005 Short Selling Relief).
7. In a decision document dated May 8, 2007, Sprott Global Equity Fund and each mutual fund thereafter created and managed by the Filer or any of the affiliates of the Filer were also granted relief from the requirements in subsection 2.6(a), 2.6(c) and 6.1(1) of NI 81-102 allowing such Funds to sell securities short, provide a security interest over the assets of such Funds in connection with the short sales and deposit assets of such Funds with dealers as security in connection with such transactions (the 2007 Short Selling Relief) (collectively, the 2005 Short Selling Relief and the 2007 Short Selling Relief is the Previous Short Selling Relief).
8. The Filer is seeking the Exemption Sought in this new decision to vary the Previous Short Selling Relief by updating it. This decision updates the Previous Short Selling Relief by conforming the representations and conditions to that of a more recent decision which has granted exemptive relief similar to the Exemption Sought.
9. The representations of the Previous Short Selling Relief do not apply to the Funds and the Funds will not rely on the Previous Short Selling Relief, which as of the date of this decision will be considered succeeded by this decision.
Short Selling
10. The Filer proposes that each Fund be authorized to engage in a limited, prudent and disciplined amount of short selling. The Filer is of the view that the Funds could benefit from the implementation and execution of a controlled and limited short selling strategy. This strategy would complement the Funds' primary discipline of buying securities with the expectation that they will appreciate in market value.
11. Short sales will be made consistent with each Fund's investment objectives and strategies.
12. 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.
13. The Fund will be required to deposit Fund assets with the Borrowing Agent as security in connection with the short sale transaction in accordance with usual industry practice.
14. All short sales will be effected through market facilities through which the securities sold short are normally bought and sold and will be sold short within normal trade settlement periods for the market in which the short sale is effected. Securities will be sold short for cash only with the Fund assuming the obligation to return to the Borrowing Agent the securities borrowed to effect the short sale transaction.
15. The securities sold short will not be "illiquid assets" as such term is defined in NI 81-102, and will be securities that are either:
(a) listed and posted for trading on a stock exchange and
(i) the issuer of the security has a market capitalization of not less than CDN $100 million, or the equivalent thereof, at the time the short sale is effected, or
(ii) the Fund's portfolio advisor has pre-arranged to borrow the securities for the purpose of such sale; or
(b) bonds, debentures or other evidences of indebtedness of, or guaranteed by, any issuer.
16. Each Fund will hold cash cover (as defined in NI 81-102) to cover its obligations in relation to the short sale.
17. The Fund will maintain appropriate internal controls regarding its short sales prior to conducting any short sales, including written policies and procedures and risk management controls; and
18. The Fund will keep proper books and records of all short sales and Fund assets deposited with Borrowing Agents as security.
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, in respect of each Fund:
1. any short sales made by the Fund will be subject to compliance with the investment objectives of the Fund;
2. any short sales will be effected through market facilities through which the securities sold short are normally bought and sold;
3. securities will be sold short for cash only;
4. no proceeds from short sales by the Fund will be used by the Fund to purchase long positions in securities other than cash cover;
5. the Exemption Sought will not apply to a Future Fund that is classified as a money market fund or a short-term income fund;
6. the aggregate market value of all securities sold short by the Fund will not exceed 20% of the total net assets of the Fund on a daily marked-to-market basis;
7. the aggregate market value of all securities of an issuer that are sold short by the Fund will not exceed 5% of the total net assets of the Fund on a daily marked-to-market basis;
8. the Fund will hold "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;
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 assets of the Fund, taken at market value as at the time of the deposit;
10. 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;
11. 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:
(a) be a member of a stock exchange and, as a result, be subject to a regulatory audit; and
(b) have a net worth in excess of the equivalent of $50 million determined from its most recent audited financial statements that have been made public;
12. 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;
13. the Fund will maintain appropriate internal controls regarding its short sales including written policies and procedures, risk management controls and proper books and records;
14. prior to conducting any short sales, the Fund discloses in its simplified prospectus a description of: (i) short selling, (ii) how the Fund intends to engage in short selling, (iii) the risks associated with short selling, and (iv) in the Investment Strategy section of the simplified prospectus, the Fund's strategy and this exemptive relief;
15. prior to conducting any short sales, the Fund discloses in its 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 of the manager 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;
16. 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 14 and 15 above, or the Fund's initial simplified prospectus and annual information form and each renewal thereof has included such disclosure; and
17. the Exemption Sought 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.
SCHEDULE A
LIST OF EXISTING FUNDS