The Securities Commission granted an exemption to alternative mutual funds from certain short selling restrictions outlined in National Instrument 81-102 Investment Funds (NI 81-102). The exemption allows these funds to short sell index participation units (IPUs) of one or more IPU issuers up to a maximum of 100% of the fund’s net asset value (NAV) at the time of sale. This decision overrides the standard restrictions that limit short sales of a single issuer to 10% of the fund’s NAV and aggregate short sales to 50% of the fund’s NAV.
The Commission’s decision is based on the understanding that IPUs represent diversified and liquid investment vehicles that track a broad market index, thus mitigating the concentration risk typically associated with short selling a single issuer. The Commission acknowledged that short selling highly liquid IPU issuers can provide a more efficient and flexible means for funds to achieve diversification and hedge against market risk compared to using derivatives or short selling multiple IPU issuers.
The exemption is subject to several conditions, including that the funds must still comply with other applicable requirements for alternative mutual funds in sections 2.6.1 and 2.6.2 of NI 81-102, including maintaining the 50% NAV limit on cash borrowing and short selling non-IPU securities. Additionally, the funds’ aggregate exposure to short selling, cash borrowing, and specified derivatives transactions must not exceed the Aggregate Limit of 300% of the fund’s NAV.
The funds must also ensure that short sales are consistent with their investment objectives and strategies, maintain appropriate internal controls, and provide adequate disclosure of their short selling activities in their prospectus, including the terms of this exemption.
The decision was made under section 19.1 of NI 81-102 and relies on section 4.7(1) of Multilateral Instrument 11-102 Passport System for application in Canadian provinces and territories outside Ontario.