Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to permit a non-redeemable investment fund converting into a mutual fund from certain new mutual fund requirements: the seed capital requirement and the prohibition against reimbursement of organization costs -- the fund is an existing fund expected to have assets in excess of $500,000 on becoming available for sale as a conventional mutual fund -- relief also granted to allow mutual fund 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) & (c), 3.1, 3.3, 6.1(1), 19.1.

May 25, 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

ASTON HILL ASSET MANAGEMENT INC.

(the Filer)

AND

ASTON HILL CAPITAL GROWTH FUND

(the Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting exemptive relief to the Fund from the following provisions of National Instrument 81-102 Mutual Funds (NI 81-102):

(a) section 3.1 to permit the Fund, at the time it becomes a mutual fund subject to NI 81-102, to rely on its existing net assets;

(b) section 3.3 to permit the costs of preparing and filing the Fund's preliminary and initial simplified prospectus and annual information form to be borne by the Fund (paragraphs (a) and (b), collectively, the Conversion Relief);

(c) subsections 2.6(a), 2.6(c) and 6.1(1) in order to permit the Fund 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 Short Selling Relief),

(the Conversion Relief and the Short Selling Relief, collectively, the Requested Relief).

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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the provinces of Canada other than the Jurisdiction.

Interpretation

Terms defined in NI 81-102, 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:

The Filer and the Fund

1. The Filer is a corporation under the laws of the Province of Ontario and is registered in Ontario as a portfolio manager, investment fund manager and exempt market dealer. The Filer is the trustee and manager of the Fund.

2. Prior to May 11, 2011, the Fund was a non-redeemable investment fund that was created as a trust under the laws of Ontario on September 29, 2003. The Fund currently is existing pursuant to an amended and restated master declaration of trust dated May 11, 2011 (as further amended from time to time, the Declaration of Trust). The Fund is a reporting issuer in all the provinces of Canada. Securities of the Fund previously were listed and posted for trading on the Toronto Stock Exchange and were delisted from the Toronto Stock Exchange on May 5, 2011.

3. The head office of the Filer and the Fund is located in Ontario. To the best of the Filer's knowledge, the Filer and the Fund are not in default of the securities legislation in any of the provinces of Canada applicable to them.

The Conversion

4. At special meetings (the Special Meetings) of the securityholders of the Fund held on April 21, 2011, securityholders of the Fund approved, among other matters, converting the Fund from a closed-end investment fund to an open-end mutual fund (the Conversion). The Conversion was implemented on May 11, 2011. The Conversion will provide securityholders of the Fund with enhanced liquidity and an opportunity for the Fund to raise additional capital.

5. The Fund has filed a preliminary simplified prospectus and annual information form with the securities administrators in all the provinces of Canada except Québec and will file the final version of such simplified prospectus and annual information form (collectively, the Final Prospectus). The Fund will commence distributing securities to the public as soon as possible pursuant to the Final Prospectus.

6. After Conversion, the Fund will be subject to regulation under NI 81-102.

7. The net asset value (NAV) of the Fund as at May 11, 2011 was approximately $20,737,798. The Filer expects the NAV of the Fund to be above $500,000 when units of the Fund become available for sale under the Final Prospectus.

8. On Conversion, the Fund became a North American equity fund whose investment objectives are to seek to achieve returns that are not highly correlated with the Canadian Equity markets. The Fund will invest primarily in a diversified portfolio of equity securities of North American issuers and proposes, from time to time, to take short positions in such securities.

Short Selling

9. The Filer proposes that the Fund be authorized to engage in a limited, prudent and disciplined amount of short selling. The Filer is of the view that the Fund could benefit from the implementation and execution of a controlled and limited short selling strategy. 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.

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

11. In order to effect a short sale, the 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.

12. The Fund will implement the following controls, policies and procedures 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, and not "illiquid assets" as such term is defined in NI 81-102, and will be securities that either:

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

(A) the issuer of which has a market capitalization of not less than C$100 million, or the equivalent thereof, of such security at the time the short sale is effected; or

(B) the Fund 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 any issuer;

(e) the aggregate market value of all securities of an issuer sold short by the Fund will not exceed 5% of the net assets of the Fund on a daily marked-to-market basis;

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

(g) no proceeds from short sales by the Fund will be used by the Fund to purchase long positions in securities other than cash cover;

(h) the Fund will hold cash cover 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;

(i) the Fund will deposit Fund assets with the Borrowing Agent as security in connection with the short sale transaction;

(j) the security interest provided by the Fund over any of its assets that is required to enable the Fund to effect short sale transactions will be made in accordance with industry practice for that type of transaction and will relate only to obligations arising under such short sale transactions;

(k) for short sale transactions in Canada, every dealer that holds Fund assets as security in connection with short sale transactions by the Fund will 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;

(l) for short sale transactions outside of Canada, every dealer that holds Fund assets as security in connection with short sale transactions by the Fund will:

(i) be a member of a stock exchange and, as a result, be subject to a regulatory audit; and

(ii) have a net worth in excess of the equivalent of C$100 million determined from its most recent audited financial statements that have been made public;

(m) 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 will 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; and

(n) the Fund will maintain appropriate internal controls regarding its short sales including written policies and procedures, risk management controls and proper books and records.

13. The Fund's initial simplified prospectus and each renewal thereof will include 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; and

14. The Fund's initial annual information form and each renewal thereof will include disclosure summarizing:

(a) whether 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 manager 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.

15. The management information circular dated March 23, 2011 mailed to securityholders of the Fund in connection with the Special Meetings described the Fund's intention to seek relief to engage in short selling on substantially the terms of the Short Selling Relief.

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 Conversion Relief is granted.

The decision of the principal regulator under the Legislation is that the Short Selling Relief is granted provided that:

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 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;

6. 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;

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

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 net 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. 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;

14. 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;

15. 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 by the Fund's simplified prospectus and annual information form as outlined in paragraphs 13 and 14 above; and

16. the Short Selling 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.

"Darren McKall"
Manager, Investment Funds Branch
Ontario Securities Commission