Counsel Portfolio Services Inc.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from section 2.6 and 6.1 of NI 81-102 to allow mutual funds to short sell 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), 6.1(1), 19.1.

December 12, 2011

IN THE MATTER OF

THE SECURITIES LEGISLATION OF ONTARIO

(THE "JURISDICTION")

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATION IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

COUNSEL PORTFOLIO SERVICES INC.

("COUNSEL" or the "FILER")

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") granting an exemption relieving the mutual funds of which Counsel is, or in the future becomes, the manager (the "Funds") from:

(a) the requirement contained in subsection 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) the requirement contained in subsection 2.6(c) of NI 81-102 prohibiting a mutual fund from selling securities short; and

(c) the requirement contained in subsection 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 that mutual fund's custodian;

(collectively, the "Requested Relief").

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

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

(b) Counsel 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, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon (the Other Jurisdictions).

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 Filers:

1. The Filer is a corporation governed by the laws of Ontario and is registered as a Portfolio Manager and Exempt Market Dealer in each Canadian jurisdiction and has applied for registration in Ontario as an investment fund manager.

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 Ontario, managed by The Filer. Each Fund currently is, or will be subject to NI 81-102 and a reporting issuer in all of the provinces and territories of Canada, except Quebec.

3. Neither the Filer nor any of the Funds of which the Filer is currently the manager is in default of securities legislation in Ontario or any of the Other Jurisdictions.

4. 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 permission from the applicable securities regulatory authority to deviate therefrom.

5. 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.

6. Short sales will be made consistent with each Fund's investment objectives and investment strategies.

7. In order to effect a short sale, a Fund will borrow securities from its custodian, sub-custodian or a dealer (in each 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.

8. The simplified prospectus and annual information form of a Fund will disclose the proposed use of short selling by a Fund, the specific risks related to short selling and details of this exemptive relief prior to the implementation of the short selling strategy by the Fund.

9. Each Fund will implement the following requirements and 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 shall not be any of the following:

(i) a security that the Fund is not otherwise permitted to purchase at the time of the short sale transaction;

(ii) a security of an investment fund unless the security is an index participation unit;

e. 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) bond, debentures or other evidences of indebtedness of, or guaranteed by, any issuer;

f. at the time the securities of a particular issuer are sold short:

(i) the Fund will have borrowed or arranged to borrow from a Borrowing Agent the securities that are to be sold under the short sale transaction;

(ii) 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

(iii) the aggregate market value of all securities sold short by the Fund will not exceed 20% of the net asset value of the Fund;

g. the Fund will deposit Fund assets with the Borrowing Agent as security in connection with the short sale transaction ("Collateral");

h. the Fund will hold cash cover, including Collateral, in an amount 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;

i. a Fund will not use the cash from a short sale transaction to enter into a long position in a security other than a security that is cash cover;

j. where the Borrowing Agent is a dealer,

(i) if a Fund deposits Collateral, the aggregate amount of Collateral held by the Borrowing Agent may not exceed 10% of the net asset value of the Fund at the time of deposit;

(ii) a Fund may not deposit Collateral with a dealer in Canada unless the dealer is registered in a jurisdiction of Canada and is a member of IIROC; and

(iii) a Fund may not deposit Collateral with a dealer outside Canada unless that dealer (a) is a member of a stock exchange that requires the dealer to be subjected to a regulatory audit; and (b) has a net worth determined from its most recent audited financial statements that have been made public, in excess of the equivalent of CDN $50 million;

k. the Fund will maintain appropriate internal controls regarding short sales prior to conducting any short sales, including written policies and procedures and risk management controls; and

l. 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 Requested Relief is granted provided that:

(a) short sales are made consistent with each Fund's investment objectives and investment strategies;

(b) the Requested Relief does not apply to a Fund that is classified as a money market fund;

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

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

(e) the short sales are effected through market facilities through which the securities sold short are normally bought and sold;

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

(g) the securities sold short are not any of the following:

a. a security that the Fund is not otherwise permitted to purchase at the time of the short sale transaction;

b. an illiquid asset; or

c. a security of an investment fund unless the security is an index participation unit;

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

a. the Fund has borrowed or arranged to borrow from a Borrowing Agent the securities that are to be sold under the short sale transaction;

b. the aggregate market value of all securities of that issuer sold short by the Fund does not exceed 5% of the total net assets of the Fund on a daily marked to market basis; and

c. 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;

(i) the Fund deposits Fund assets with the Borrowing Agent as security in connection with the short sale transaction ("Collateral");

(j) the Fund holds cash cover, including Collateral, in an amount 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;

(k) a Fund does not use the cash from a short sale transaction to enter into a long position in a security other than a security that is cash cover;

(l) where the Borrowing Agent is a dealer,

a. if a Fund deposits Collateral, the aggregate amount of Collateral held by the Borrowing Agent does not exceed 10% of the total net assets of the Fund, taken at market value at the time of deposit;

b. a Fund does not deposit Collateral with a dealer in Canada unless the dealer is registered in a jurisdiction of Canada and is a member of IIROC; and

c. a Fund does not deposit Collateral with a dealer outside Canada unless that dealer (a) is a member of a stock exchange that requires the dealer to be subjected to a regulatory audit; and (b) has a net worth determined from its most recent audited financial statements that have been made public, in excess of the equivalent of CDN $50 million;

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

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

(o) 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;

(p) 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 Filer in the risk management process;

c. whether there are 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;

(q) prior to conducting any short sales, (i) the Fund provides to its securityholders not less than 60 days' written notice that discloses both 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 (o) and (p) above, or (ii) the Fund's initial simplified prospectus and annual information form and each renewal thereof has included such disclosure; and

(r) the Requested Relief terminates 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.

"Chantal Mainville"
Acting Manager
Investment Funds Branch
Ontario Securities Commission