MRRS Decision -- Certain mutual funds exemptedfrom the short selling prohibition in National Instrument 81-102Mutual Funds to engage in short selling of securities up to10% of net assets, subject to certain conditions and requirements.
National Instrument 81-102 Mutual Funds, subsections2.6(a) and (c), 6.1(1) and section 19.1.
October 17, 2003
McCarthy Tétrault LLP
Attention: John T. Kruk
Dynamic Mutual Funds Ltd.
MRRS Application under National Instrument81-102 Mutual Funds ("NI 81-102"), SEDAR ProjectNo. 485829, Ontario App. No. 908/02
By letter dated October 10, 2002 and supplementedby letters dated March 26, 2003 and May 29, 2003 (together,the "Application"), Dynamic Mutual Funds Ltd. (the"Manager") applied to the regulator or the securitiesregulatory authority in each province and territory of Canada(collectively, the "Decision Makers") on behalf ofDynamic Power Canadian Growth Fund, Dynamic Power American GrowthFund and Dynamic Power Balanced Fund and the Dynamic Power CanadianGrowth Class, Dynamic Power European Growth Class and DynamicPower International Growth Class of Dynamic Global Fund Corporation(collectively, the "Funds") for an exemption fromthe requirements in subsections 2.6(a), 2.6(c) and 6.1(1) ofNI 81-102 to permit the Funds to sell securities short, providea security interest over Fund assets in connection with theshort sales and deposit Fund assets with dealers as securityin connection with such transactions.
The Manager has represented to the DecisionMakers that:
1) Each Fund is either an open-end mutualfund trust established under the laws of Ontario or a classof shares of a mutual fund corporation.
2) Each Fund also is currently a reportingissuer in all of the provinces and territories of Canada anddistributes its securities pursuant to a simplified prospectusand annual information form dated December 5, 2002, as amended.
3) The investment objective of each Fund generallyinvolves investing to a large extent in equity securities.The investment practices of each Fund comply in all respectswith the requirements of Part 2 of NI 81-102.
4) The Manager proposes that each Fund beauthorized to engage in a limited, prudent and disciplinedamount of short selling. The Manager is of the view that theFunds could benefit from the implementation and executionof a controlled and limited short selling strategy. This strategywould operate as a complement to the Funds' current primarydiscipline of buying securities with the expectation thatthey will appreciate in market value.
5) At a special meeting of securityholdersheld on June 21, 2002, the securityholders of each Fund votedby a majority in favour of permitting the Funds to conducta limited amount of short selling, subject to regulatory approval.
6) In order to effect a short sale, a Fundwill borrow securities from either its custodian or a dealer(in either case, the "Borrowing Agent"), which BorrowingAgent may be acting either as principal for its own accountor as agent for other lenders of securities;
7) Each Fund will implement the followingcontrols when conducting a short sale:
a) securities will be sold short for cash,with the Fund assuming the obligation to return to the BorrowingAgent the securities borrowed to effect the short sale;
b) the short sale will be effected throughmarket facilities through which the securities sold shortare normally bought and sold;
c) the Fund will receive cash for the securitiessold short within normal trading settlement periods forthe market in which the short sale is effected;
d) the securities sold short will be liquidsecurities and a "liquid security" is a securitywhich satisfies both of the following conditions:
i) the security is listed and posted fortrading on a stock exchange; and
ii) the issuer of the security has a marketcapitalization of not less than $500 million at the timethe short sale is effected;
e) at the time securities of a particularissuer are sold short:
i) the aggregate market value of all securitiesof that issuer sold short by the Fund will not exceed2% 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 Fundan equal number of the same securities if the tradingprice of the securities exceeds 108% (or such lesser percentageas the Manager may determine) of the price at which thesecurities were sold short;
f) the Fund will deposit Fund assets withthe Borrowing Agent as security in connection with the shortsale transaction;
g) the Fund will keep proper books and recordsof all short sales and Fund assets deposited with BorrowingAgents as security;
h) the Fund will develop written policiesand procedures for the conduct of short sales prior to conductingany short sales; and
i) the Fund will provide disclosure in itsprospectus of the short selling strategies and the detailsof this exemptive relief prior to implementing the shortselling strategy.
This letter confirms that, based on the informationand representations contained in the Application and in thisletter, and for the purposes described in the Application, theDecision Makers hereby exempt each Fund from the requirementsin subsections 2.6(a), 2.6(c) and 6.1(1) of NI 81-102 to permiteach Fund to sell securities short, provide a security interestover Fund assets in connections with the short sales and depositFund assets with Borrowing Agents as security for such transactionsprovided that:
1) the aggregate market value of all securitiessold short by the Fund does not exceed 10% of the total netassets of the Fund on a daily marked-to-market basis;
2) the Fund holds "cash cover" (asdefined in NI 81-102) in an amount, including the Fund assetsdeposited with Borrowing Agents as security in connectionwith short sale transactions, that is at least 150% of theaggregate market value of all securities sold short by theFund on a daily marked-to-market basis;
3) no proceeds from short sales by the Fundare used by the Fund to purchase long positions in securitiesother than cash cover;
4) the Fund maintains appropriate internalcontrols regarding its short sales including written policiesand procedures, risk management controls and proper booksand records;
5) for short sale transactions in Canada,every dealer that holds Fund assets as security in connectionwith short sale transactions by the Fund shall be a registereddealer in Canada and a member of a self-regulatory organizationthat is a participating member of the Canadian Investor ProtectionFund;
6) for short sale transactions outside ofCanada, every dealer that holds Fund assets as security inconnection with short sale transactions by the Fund shall:
a) be a member of a stock exchange, and,as a result, is subject to a regulatory audit; and
b) have a net worth in excess of the equivalentof $50 million determined from its most recent audited financialstatements that have been made public;
7) except where the Borrowing Agent is theFund's custodian, when the Fund deposits Fund assets witha Borrowing Agent as security in connection with a short saletransaction, the amount of Fund assets deposited with theBorrowing Agent does not, when aggregated with the amountof Fund assets already held by the Borrowing Agent as securityfor outstanding short sale transactions of the Fund, exceed10% of the total net assets of the Fund, taken at market valueas at the time of the deposit;
8) the security interest provided by a Fundover any of its assets is required to enable the Fund to effectshort sale transactions, is made in accordance with industrypractice for that type of transaction and relates only toobligations arising under such short sale transactions;
9) prior to conducting any short sales, theFund discloses in its simplified prospectus a descriptionof: (a) short selling, (b) how the Fund intends to engagein short selling, (c) the risks associated with short selling,and (d) in the Investment Strategy section of the simplifiedprospectus, the Fund's strategy and this exemptive relief;
10) prior to conducting any short sales, theFund discloses in its annual information form the followinginformation:
a) whether there are written policies andprocedures in place that set out the objectives and goalsfor short selling and the risk management procedures applicableto short selling;
b) who is responsible for setting and reviewingthe policies and procedures referred to in paragraph 10(a),how often the policies and procedures are reviewed, andthe extent and nature of the involvement of the board ofdirectors or trustee in the risk management process;
c) whether there are trading limits or othercontrols on short selling in place and who is responsiblefor authorizing the trading and placing limits or othercontrols on the trading;
d) whether there are individuals or groupsthat monitor the risks independent of those who trade; and
e) whether risk measurement procedures orsimulations are used to test the portfolio under stressconditions;
11) prior to conducting any short sales, theFund has provided to its securityholders not less than 60days written notice that discloses the Fund's intent to beginshort selling transactions and the disclosure required inthe Fund's simplified prospectus as outlined in paragraph9;
12) whenever the top ten holdings are disclosedin the simplified prospectus for the Fund, the top ten longholdings and the top ten short holdings are shown separately,provided that only short positions with a market value exceeding1% of the net asset value of the Fund need be disclosed;
13) whenever the Fund prepares financial statements,the following information is included:
a) the Statement of Net Assets of the Fundrecords the securities sold short as a liability with theFund's assets deposited as security with Borrowing Agentsfor securities sold short recorded as an asset;
b) the dividends and other income receivedon borrowed securities in connection with securities soldshort are shown as an expense on the Statement of Operationsof the Fund; and
c) the Statement of Investment Portfolioof the Fund records the long portfolio separate from theshort portfolio.