RP Investment Advisors LP and the Funds

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted to mutual funds from short selling issuer concentration restrictions in subsection 2.6.1(1), and cash cover requirements in subsection 2.6.1(2) of NI 81-102 -- relief restricted to short sales of "government securities" as defined in NI 81-102 to facilitate interest rate risk hedging strategy in fixed income funds -- decision includes revocation of prior relief from short selling issuer concentration restriction granted only to prior existing fund.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.6.1(1)(c)(ii), 2.6.1(2) and 19.1.

Securities Act, R.S.O. 1990, c. S.5, as am., s. 144.

June 6, 2022

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 RP INVESTMENT ADVISORS LP (the Filer) AND THE FUNDS (AS DEFINED BELOW)

DECISION

1. Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer, on behalf of RP Strategic Income Plus Fund (the Existing Fund), and any mutual funds subject to National Instrument 81-102 investment funds (NI 81-102) (other than "alternative mutual funds" as defined in NI 81-102) that may be established in the future and for which the Filer acts as investment fund manager (the Future Funds and, collectively with the Existing Fund, the Funds or individually, a Fund) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):

(1) revoking the Current Decision (as defined below) (the Revocation); and

(2) replacing the Current Decision with a decision pursuant to section 19.1 of NI 81-102 exempting the Funds:

(a) from paragraph 2.6.1(1)(c)(ii) of NI 81-102 to permit the Funds to increase the limit on aggregate short sale exposure to "government securities" (as defined below) of a single issuer to 20% of the NAV (as defined below) of the applicable Fund (the Short Sale Single Issuer Relief); and

(b) from Subsection 2.6.1(2) of NI 81-102 which requires a mutual fund, other than an alternative mutual fund, that sells securities short to hold cash cover in an amount that, together with portfolio assets deposited with borrowing agents as security in connection with short sales of securities by the mutual fund, is at least 150% of the aggregate market value of the securities sold short by the mutual fund on a daily market-to-market basis with respect to short sales of "government securities" (as defined below) by a Fund (the Cash Cover Relief);

(the Short Sale Single Issuer Relief and the Cash Cover Relief are collectively referred to as the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:

A. the Ontario Securities Commission is the principal regulator for this Application, and

B. the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 -Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (together with the Jurisdiction, the Jurisdictions).

2. Interpretation

Terms defined in MI 11-102, National Instrument 14-101 -- Definitions, NI 81-102, NI 81-107 and NI 31-103 have the same meaning if used in this decision, unless otherwise defined. The following terms have the following meanings:

Current Decision means In the Matter of RP Investment Advisors LP and In the Matter of RP Strategic Income Plus Fund dated May 18, 2018;

government securities has the meaning set out in NI 81-102; and

NAV means net asset value.

2. Representations

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

The Filer

(i) The Filer is a limited partnership formed under the laws of the Province of Ontario with its head office located in Toronto, Ontario.

(ii) The Filer is registered as (i) an investment fund manager in Ontario, Québec and Newfoundland and Labrador; (ii) an adviser in the category of portfolio manager in, British Columbia, Ontario and Québec; (iii) a dealer in the category of exempt market dealer in British Columbia Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon; and (iv) a commodity trading manager in Ontario.

(iii) The Filer is the investment fund manager and portfolio manager of the Existing Fund and the Filer will be the investment fund manager of the Future Funds.

(iv) the Filer is not in default of the securities legislation of any of the Jurisdictions.

The Funds

(v) The Existing Fund is an open-end mutual fund trust established under the laws of Ontario and is a reporting issuer in each of the Jurisdictions. The Existing Fund is a mutual fund subject to NI 81-102, but is not an "alternative mutual fund" as defined in NI 81-102. The Future Funds will be mutual funds that are reporting issuers in one or more Jurisdictions and will be subject to NI 81-102, but will not be "alternative mutual funds" under NI 81-102.

(vi) The investment objective of the Existing Fund is to generate stable, risk-adjusted absolute returns consisting of dividend, interest income and capital gains by investing primarily in investment grade corporate debt and debt-like securities, with a focus on capital preservation.

(vii) The investment objective of the Future Funds will seek to produce risk-adjusted returns primarily through investments in debt and debt-like securities.

(viii) The Existing Fund is not in default of the securities legislation of any of the Jurisdictions.

Interest Rate Hedging Strategy

(ix) Each of the Funds invests, or will invest, in fixed income instruments and seeks, or will seek, to hedge its interest rate exposure by using a short selling hedging strategy. Since the value of fixed income securities is influenced by interest rate changes (i.e. bond prices usually decrease as interest rate increase while bond prices usually increase as interest rate decrease), interest rate volatility can adversely affect a Fund's performance and impede its ability to achieve stable risk-adjusted returns in a manner that is consistent with its investment objectives.

(x) In order to hedge against interest rate risk in the investment portfolios of the Funds, the Filer enters into, or will enter into, short selling arrangements relating to liquid fixed income securities that are government securities at the same time that the Funds invest, or will invest, in long positions in corporate fixed income securities.

The Revocation and the Short Sale Single Issuer Relief

(xi) The Current Decision exempts the Existing Fund from paragraph 2.6.1(1)(c)(ii) of NI 81-102 which restricts a mutual fund, other than an alternative mutual fund, from short selling more than 5% of the NAV of the mutual fund in respect of the securities of any one issuer and permits the Existing Fund to short sell up to 20% of its NAV in government securities of a single issuer, in order to assist the Filer in reducing risk and to more effectively hedge against interest rate risk by enabling it to better correlate the underlying interest rate characteristics of the particular corporate fixed income securities held by the Existing Fund with corresponding government securities.

(xii) The Filer is of the view that the Existing Fund has benefitted from the Current Decision and that Funds would benefit from the Single Issuer Relief permitting it to short sell government securities for hedging purposes in an amount greater than 5% of a Fund's NAV per issuer for the following reasons:

(a) The Filer believes that short-selling government securities may reduce interest rate risk across a Fund's portfolio of fixed income securities, as the underlying interest rate characteristics of the corporate fixed income securities held by the Fund trade relative to government securities;

(b) The most effective interest rate hedge occurs where the government debt securities selected by the Filer for hedging purposes most closely correlate to the underlying interest rate characteristics of the particular corporate fixed income securities held by a Fund and, as a result, the Filer cannot remain within the 5% single issuer restriction by using different government debt securities and still achieve an optimal hedge for the Fund.

(c) The market for government securities is highly liquid and debt securities issued by the federal governments of Canada and the U.S. and the Canadian provinces and/or territories generally exhibit greater liquidity than high-quality corporate issues; and

(d) While derivatives can be used to manage interest rate risk, the use of a derivatives hedging strategy is more inefficient, more complex, and risker than the Filer's strategy of short-selling government securities.

(xiii) The Funds implement, or will implement, the following controls when conducting a short sale:

(a) the Fund assumes the obligation to return to the borrowing agent (as defined in NI 81-102) the securities borrowed to effect the short sale;

(b) the Fund receives cash for the securities sold short within normal trading settlement periods for the market in which the short sale is effected;

(c) the Filer monitors the short positions of the Fund at least as frequently as daily;

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

(e) the Fund maintains appropriate internal controls regarding short sales, including written policies and procedures for the conduct of short sales, risk management controls and proper books and records; and

(f) The Filer and the Fund keep proper books and records of short sales and all of its assets deposited with Borrowing Agents as security.

(xiv) The Filer wishes to extend the Short Sale Single Issuer Relief granted to the Existing Fund under the Current Decision to the Future Funds by revoking the Current Decision and replacing it with the relief granted under this decision document.

The Cash Cover Relief

(xv) Subsection 2.6.1(2) of NI 81-102 requires a mutual fund, other than an alternative investment fund, that sells securities short to hold cash cover in an amount that, together with portfolio assets deposited with borrowing agents (as defined in NI 81-102) as security in connection with short sales of securities by the mutual fund, is at least 150% of the aggregate market value of the securities sold short by the mutual fund on a daily market-to-market basis.

(xvi) This means that if a Fund utilizes its ability to enter into short sale transactions up to 20% of the Fund's NAV as permitted under paragraph 2.6.1(c)(iii), it would be required to hold on behalf of the Fund cash equal to 150% of the aggregate market value of such securities, effectively meaning that up to an additional 30% of the Fund's NAV would need to be held in cash and could not be utilized by the Filer in making investments on behalf of the Fund in furtherance of its investment objectives.

(xvii) The purpose of the cash cover requirements for mutual funds in subsection 2.6.1(2) of NI 81-102 is to mitigate the risk of a mutual fund having to rapidly liquidate large portions of its investment portfolio (at potentially lower prices) in the event that the trading price of the security sold short increases, thereby requiring the mutual fund to repurchase the securities at a higher price in order to satisfy its obligations under the short sale transaction to deliver the securities to the borrowing agent.

(xviii) The markets for government securities are highly liquid and the trading price of government securities on such markets is not subject to significant price volatility as may be the case with equity securities from time to time.

(xix) Unlike the short selling of equity securities, the total possible loss when short selling government securities is quantifiable at time of trade. The total exposure to loss on the short sale of a government security is the sum of all future coupon payments on the security, plus the difference between the trade price and par value of the security. As a result, the Funds are not (or will not be) exposed to the risk of significant losses by engaging in the short selling of government securities.

(xx) Exempting the Funds from the cash cover requirements in subsection 2.6.1(2) of NI 81-102 in relation to government securities would significantly enhance the ability of the Funds to deploy their assets to: (i) further mitigate risk to the portfolio as a result of greater flexibility to make strategic investments, increase diversification and engage in portfolio rebalancing; and (ii) maximize returns to security holders.

(xxi) The Funds will be required to provide collateral to the borrowing agent in respect of all short sale transactions in accordance with industry practice.

(xxii) The Filer believes that the investment objective and short selling hedging strategies of the Funds represent important investment diversification tools for Canadian investors and that the Cash Cover Relief would enable the Filer to maximize the amount of assets of the Funds that can be deployed in furtherance of their investment objectives without materially increasing the risk to the Funds relating to the ability to settle such short sale transactions.

(xxiii) The Filer has experience managing the strategies proposed in the Funds as well as in existing publicly offered NI 81-102 alternative mutual funds and privately offered investment funds under its management.

4. 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:

A. The Revocation is granted; and

B. The Exemption Sought is granted provided that:

(a) Each short sale will be made consistent with each Fund's investment objectives and investment strategies;

(b) the Short Sale Single Issuer Relief will only apply to short sales of government securities;

(c) the Cash Cover Relief will only apply to short sales of government securities as part of a Fund's short selling hedging strategies;

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

(e) Each short sale made by a Fund will otherwise comply with the mutual fund short sale requirements in section 2.6.1 of NI 81-102;

(f) the Filer monitors the short positions of the Funds at least as frequently as daily;

(g) the Funds maintain appropriate internal controls regarding short sales, including written policies and procedures for the conduct of short sales, risk management controls and proper books and records;

(h) the Filer and the Funds keep proper books and records of short sales and all assets of the Funds deposited with borrowing agents as security; and

(i) The prospectus of the Funds will disclose the material terms and conditions of the Exemption Sought including its restricted application to short sales of government securities.

"Darren McKall"

Manager, Investment Funds and Structured Products Branch

Ontario Securities Commission

Application File #: 2022/0083

SEDAR File #: 3338213