Canadian Imperial Bank of Commerce and CIBC Asset Management Inc. - MRRS Decision

MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- certain mutual funds granted exemptions from National Instrument 81-102 Mutual Funds to engage in short selling of securities up to 10% of net assets, subject to certain conditions and requirements.

Rules Cited

National Instrument 81-102 Mutual Funds, ss. 2.6(a) and (c), 6.1(1), 19.1.

March 9, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

MANITOBA, ONTARIO, QUEBEC, NEWBRUNSWICK,

NOVA SCOTIA, PRINCE EDWARD ISLAND,

NEWFOUNDLAND AND LABRADOR, NORTHWEST

TERRITORIES, YUKON AND NUNAVUT

(THE JURISDICTIONS)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

CANADIAN IMPERIAL BANK OF COMMERCE

AND

CIBC ASSET MANAGEMENT INC.

(collectively the Filers)

AND

THE FUNDS LISTED IN APPENDIX "A"

(the Existing Funds)

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filers, on behalf of the Existing Funds and each mutual fund hereinafter created and managed by a Filer or any of the affiliates of the Filers (the Future Funds and together with the Existing Funds, the Funds), for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting the Funds from the following requirements of the Legislation, subject to certain terms and conditions:

(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 the mutual fund's custodian.

(paragraphs (a), (b) and (c) together shall be referred to as the Requested Relief)

Under the Mutual Reliance Relief for Exemption Applications:

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

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

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

1. 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 of which one of the Filers (or an affiliate of the Filers) is the manager. Each Fund is currently or will be a reporting issuer in all of the provinces and territories of Canada.

2. The investment practices of each Fund comply or will comply in all respects with the requirements of Part 2 of NI 81-102, except to the extent that the Funds have received permission from the Decision Makers to deviate therefrom.

3. Any short sales made by a Fund will be subject to compliance with the investment objectives of such Fund.

4. 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.

5. 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 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 will be liquid securities that:

(i) are listed and posted for trading on a stock exchange, and

(A) the issuer of the security has a market capitalization of not less than CDN$300 million, or the equivalent thereof, of such security at the time the short sale is effected; or

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

(ii) are 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 2% 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 Fund an equal number of the same securities if the trading price of the securities exceeds 115% (or such lesser percentage as the Filers may determine) of the price at which the securities were sold short;

(f) the Fund will deposit fund assets with the Borrowing Agent as security in connection with 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 simplified prospectus and 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 test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met. The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that:

1. the aggregate market value of all securities sold short by the Fund does not exceed 10% of the total 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 sales made by a Fund will be subject to compliance with the investment objectives of the Fund;

6. the short selling relief will not apply to a Future Fund that is classified as a money market fund or a short-term income fund;

7. 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;

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 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;

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 a 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 an amendment thereto 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 simplified prospectus, the Fund's strategy and this exemptive relief;

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

i. 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;

ii. 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;

iii. 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;

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

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

13. prior to conducting any short sales, each 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 11 and 12 above;

14. this relief 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.

"Leslie Byberg"
Manager, Investment Funds Branch
Ontario Securities Commission

 

APPENDIX "A"

FUND NAMES BY FAMILY OF FUNDS
 
Renaissance Talvest Mutual Funds
CIBC Mutual Funds
 
Renaissance Canadian Bond Fund
CIBC International Small Companies Fund
Renaissance Canadian Real Return Bond Fund
CIBC Financial Companies Fund
Renaissance Canadian High Yield Bond Fund
CIBC Canadian Resources Fund
Renaissance Canadian Balanced Fund
CIBC Energy Fund
Renaissance Canadian Balanced Value Fund
CIBC Canadian Real Estate Fund
Renaissance Tactical Allocation Fund
CIBC Precious Metals Fund
Renaissance Canadian Income Trust Fund
CIBC Canadian Bond Fund
Renaissance Canadian Income Trust Fund II
CIBC North American Demographics Fund
Renaissance Canadian Dividend Income Fund
CIBC Monthly Income Fund
Renaissance Canadian Core Value Fund
CIBC Global Technology Fund
Renaissance Canadian Growth Fund
CIBC Global Bond Fund
Renaissance Canadian Small Cap Fund
CIBC Canadian Bond Index Fund
Renaissance U.S. Equity Value Fund
CIBC Balanced Fund
Renaissance U.S. Equity Growth Fund
CIBC Global Bond Index Fund
Renaissance U.S. Index Fund
CIBC Diversified Income Fund
Renaissance International Growth Fund
CIBC Balanced Index Fund
Renaissance International Index Fund
CIBC Dividend Fund
Renaissance Global Growth Fund
CIBC Canadian Index Fund
Renaissance Global Opportunities Fund
CIBC Core Canadian Equity Fund
Renaissance Global Sectors Fund
CIBC U.S. Equity Index Fund
Renaissance Euro Fund
Canadian Imperial Equity Fund
Renaissance Developing Capital Markets Fund
CIBC U.S. Index RRSP Fund
Renaissance Global Technology Fund
CIBC Capital Appreciation Fund
Talvest Income Fund
CIBC International Index Fund
Talvest Bond Fund
CIBC Canadian Small Companies Fund
Talvest High Yield Bond Fund
CIBC International Index RRSP Fund
Talvest Global Bond Fund
CIBC Canadian Emerging Companies Fund
Talvest Cdn. Asset Allocation Fund
CIBC European Index Fund
Talvest Global Asset Allocation Fund
CIBC U.S. Small Companies Fund
Talvest Millennium High Income Fund
CIBC European Index RRSP Fund
Talvest Dividend Fund
CIBC Global Equity Fund
Talvest Cdn. Equity Value Fund
CIBC Japanese Index RRSP Fund
Talvest Cdn. Multi Management Fund
CIBC European Equity Fund
Talvest Cdn. Equity Growth Fund
CIBC Emerging Markets Index Fund
Talvest Millennium Next Generation Fund
CIBC Japanese Equity Fund
Talvest Small Cap Cdn. Equity Fund
CIBC Asia Pacific Index Fund
Talvest U.S. Equity Fund
CIBC Emerging Economies Fund
Talvest International Equity Fund
CIBC Nasdaq Index Fund
Talvest Global Equity Fund
CIBC Far East Prosperity Fund
Talvest Global Markets Fund
CIBC Nasdaq Index RRSP Fund
Talvest Global Small Cap Fund
CIBC Latin American Fund
Talvest Global Multi Management Fund
Talvest European Fund
Talvest Asian Fund
Talvest China Plus Fund
Talvest Global Health Care Fund
Talvest Global Resource Fund
Talvest Global Science & Technology Fund
 
Frontiers Pools
Imperial Pools
 
Frontiers Canadian Fixed Income Pool
Imperial Canadian Bond Pool
Frontiers Canadian Monthly Income Pool
Imperial Canadian Income Trust Pool
Frontiers Canadian Equity Pool
Imperial International Bond Pool
Frontiers U.S. Equity Pool
Imperial Canadian Dividend Income Pool
Frontiers International Equity Pool
Imperial Canadian Dividend Pool
Frontiers Emerging Markets Equity Pool
Imperial Canadian Equity Pool
Frontiers Global Bond Pool
Imperial Registered U.S. Equity Index Pool
Imperial U.S. Equity Pool
Imperial Registered International Equity Index Pool
Imperial International Equity Pool
Imperial Overseas Equity Pool
Imperial Emerging Economies Pool