The Securities Commission has granted alternative mutual funds managed by NewGen Asset Management Limited (NewGen) exemptions from certain restrictions under National Instrument 81-102 Investment Funds (NI 81-102). The exemptions allow these funds to engage in physical short selling and cash borrowing up to 100% of their net asset value (NAV), exceeding the usual 50% limit. Additionally, the funds are permitted to appoint multiple custodians and clarify that short sale proceeds are excluded when calculating non-custodial borrowing agent collateral limits under section 6.8.1 of NI 81-102.
The decision is based on the rationale that these strategies are integral to the funds’ investment objectives, which may include market-neutral, offsetting, inverse, or shorting strategies. The Commission recognized that physical short selling and cash borrowing can be more cost-effective and flexible than using derivative instruments for the same exposure, and that the funds’ risk management policies are adequate to address the associated risks.
The exemptions are subject to conditions ensuring that the funds comply with the leverage limit of 300% of NAV for combined exposure to short selling, cash borrowing, and specified derivatives, and that the funds’ prospectuses disclose the ability to engage in these activities beyond the standard limits.
The decision also allows funds to deposit portfolio assets with a borrowing agent not acting as the fund’s custodian or sub-custodian, provided the value of these assets does not exceed 25% of the fund’s NAV. Furthermore, funds can appoint additional custodians qualified under NI 81-102, enhancing operational efficiency and potentially increasing revenues from securities lending activities.
The exemptions are contingent on the funds maintaining proper reconciliation of portfolio assets among custodians, and the additional custodians acting only for the portion of portfolio assets transferred to them. The decision was made under the securities legislation of Ontario and relies on Multilateral Instrument 11-102 for application in other Canadian jurisdictions.