Securities Law & Instruments

 

 

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief from the conflict of interest restrictions in the Securities Act (Ontario) to permit fund-of-fund structures between pooled funds under common management subject to conditions.

 

Applicable Legislative Provisions

 

Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(4), 113.

 

November 3, 2017

 

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

CGOV ASSET MANAGEMENT

(the Filer)

 

AND

 

IN THE MATTER OF

THE TOP FUNDS

(as defined below)

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of each of the Filer, CGOV Balanced Fund (the Initial Top Fund), and one or more investment funds which are not reporting issuers under the securities legislation of the principal regulator (the Legislation) and which are established, advised or managed by the Filer in the future (the Future Top Funds, and together with the Initial Top Fund, the Top Funds) for a decision under the Legislation in respect of the Fund-of-Fund Structure (as defined below) exempting the Filer and the Top Funds from:

 

(a)           the restriction in the Legislation that prohibits an investment fund from knowingly making an investment in any person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder; and

 

(b)           the restriction in the Legislation that prohibits an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) (collectively, the Investment Restrictions),

 

to permit the Filer to cause the Top Funds to invest in the Underlying Funds (as defined below) (the Requested Relief).

 

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

 

a)            the Ontario Securities Commission (the “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 respect of the Requested Relief in Alberta.


Interpretation

 

Unless otherwise defined herein, terms in this decision have the respective meanings given to them in National Instrument 14-101 Definitions, National Instrument 81-101 Mutual Fund Prospectus Disclosure, National Instrument 81-102 Investment Funds and Multilateral Instrument 11-102 Passport System.

 

Representations

 

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

 

The Filer

 

1.             The Filer is a partnership formed under the laws of Ontario with its head office in Toronto, Ontario.

 

2.             The Filer is registered with the OSC in the categories of investment fund manager, portfolio manager and exempt market dealer. The Filer is also registered as: (i) a portfolio manager in Alberta, British Columbia, Manitoba, Nova Scotia and Saskatchewan, and (ii) a portfolio manager and investment fund manager in Québec.

 

3.             The Filer is not a reporting issuer in any jurisdiction and is not in default of securities legislation of any jurisdiction of Canada, except as noted in paragraphs 13 and 16 below.

 

Top Funds

 

4.             The Initial Top Fund is organized under the laws of Ontario as a trust. Each Future Top Fund will be organized as a trust under the laws of Ontario or another jurisdiction in Canada.

 

5.             Each Top Fund is or will be a "mutual fund" for the purposes of the Legislation.

 

6.             The Initial Top Fund is not, and each Future Top Fund will not be, a reporting issuer in any province or territory of Canada.

 

7.             The Filer is, or will be, the investment fund manager and the portfolio manager of the Initial Top Fund and each of the Future Top Funds.

 

8.             RBC Investor Services Trust acts as the trustee for the Initial Top Fund. RBC Investor Services Trust or another qualified third party will act as trustee of a Top Fund.

 

9.             Securities of the Initial Top Fund and each Future Top Fund are, or will be, offered on a private placement basis to qualified investors pursuant to available exemptions from the prospectus requirements under Canadian securities legislation.

 

10.          The investment objective of the Initial Top Fund is to preserve capital over the long-term and provide moderate interest income and capital growth. To achieve this objective the Initial Top Fund’s strategy includes investing in a diversified portfolio of primarily Canadian and non-Canadian based equities and fixed income securities and in other types of securities including mutual and/or pooled funds, or holding the assets of the Initial Top Fund uninvested in cash or cash equivalents if economic, monetary or investment conditions indicate that the Initial Top Fund’s objectives are more likely to be met through such investments or such holding..

 

11.          The allowable range of investment in the fixed-income asset class for the Initial Top Fund is 15% to 60% of its portfolio assets.

 

12.          The Initial Top Fund is not in default of securities legislation in any province or territory of Canada, except as noted in paragraphs 13 and 166.

 

13.          On January 5, 2005, the Filer established CGOV Fixed Income Fund and on June 22, 2015, the CGOV Short Term Fixed Income Fund (the Initial Underlying Funds). The Filer decided it was in the best interest of the Initial Top Fund to replace the Initial Top Fund’s fixed-income portion of the portfolio from individual securities to investments in the Initial Underlying Funds, also managed by the Filer, and thereby inadvertently made an investment in each of the Initial Underlying Funds which required the Requested Relief. The investment by the Initial Top Fund in the Initial Underlying Funds was also in the best interest of each of the Initial Underlying Funds as the increase size of the Initial Underlying Funds gave each Fund the ability to access better investment opportunities for the benefit of their respective Unitholders.

 

14.          There was no duplication in fees between the Initial Top Fund and the Initial Underlying Funds.

 

15.          The offering memorandum for the Initial Top Fund currently discloses that the Initial Top Fund’s exposure to fixed income securities is expected to be achieved through its indirect investment in the wide range of broadly diversified holdings held by CGOV Fixed Income Fund and the CGOV Short Term Fixed Income Fund.

 

16.          The need for the Requested Relief was recognized when the Filer was conducting an internal compliance review of its operations. As soon as the requirement to seek the Requested Relief came to the Filer’s attention, the Filer initiated the process of seeking the Requested Relief and has strengthened its internal control systems to ensure future compliance with applicable laws and regulations.

 

Underlying Funds

 

17.          The Initial Underlying Funds are not, and each investment fund that is established, managed, or advised by the Filer in the future (the Future Underlying Funds, and together with the Initial Underlying Funds, the Underlying Funds) will not be, a reporting issuer in any province or territory of Canada.

 

18.          Each Initial Underlying Fund is organized as a trust under the laws of the Province of Ontario. Each Initial Underlying Fund is a “mutual fund” for the purposes of the Legislation.

 

19.          The investment objective of the CGOV Fixed Income Fund is to provide regular income while maintaining security of capital. The investment objective of the CGOV Short Term Fixed Income Fund is also to provide regular income while maintaining security of capital. The Initial Underlying Funds both attempt to achieve their investment objective by investing in fixed-income securities issued by corporations and governments.

 

20.          Each Future Underlying Fund will be organized as a trust under the laws of the Province of Ontario or another jurisdiction in Canada. Each Future Underlying Fund will be organized as a "mutual fund" for the purposes of the Legislation.

 

21.          Securities of each Underlying Fund will be offered to qualified investors resident in Canada, including the Top Funds, on a private placement basis pursuant to available exemptions from the prospectus requirements under Canadian securities legislation.

 

22.          The Filer is the investment fund manager and portfolio manager of the Initial Underlying Funds and will be the investment manager and the portfolio manager of each of the Future Underlying Funds.

 

23.          Based on the current net asset value (NAV) of the Initial Top Fund and each of the Initial Underlying Funds, the Initial Top Fund is currently a substantial security holder of each of the Initial Underlying Funds. The holdings of each of the Initial Underlying Funds by the Initial Top Fund fluctuates according to market conditions and investment opportunities which are at the discretion of Filer as portfolio manager of the Initial Top Fund.

 

24.          The Underlying Funds will primarily hold publicly traded securities and will not hold greater than 10% of their assets in “illiquid assets”, as defined in National Instrument 81-102 Investment Funds (NI 81-102).

 

Fund-of-Fund Structure

 

25.          The Top Funds will invest directly in a portfolio of securities that is consistent with each Top Funds’ investment strategy, however, the Filer may determine it would be in the best interest of a Top Fund to invest a portion of its portfolio in an Underlying Fund to achieve its investment objective on a more cost effective basis instead of directly purchasing individual securities (the Fund-of-Fund Structure). The Filer believes that the Fund-of-Fund Structure provides an efficient and cost-effective manner of achieving the investment objective and asset mix allocation on behalf of the Top Funds rather than through the direct purchase of individual securities and will not be detrimental to the interests of other securityholders of the Underlying Funds.

 

26.          No Underlying Fund will be a Top Fund.

 

27.          In the case of the Initial Top Fund, the Filer believes that investing in the Initial Underlying Funds in order to satisfy the fixed income securities portion of the Initial Top Fund is an efficient and cost-effective manner of achieving the investment objective and asset mix allocation of the Initial Top Fund, is in the best interest of the Initial Top Fund and is not detrimental to the interests of the other securityholders of the Initial Underlying Funds.

 

28.          An investment in an Underlying Fund by a Top Fund will be effected at an objective price. According to the Filer’s policies and procedures, an objective price for this purpose, will be the NAV per security of the applicable class or series of the applicable Underlying Fund, calculated in accordance with section 14.2 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106).

 

29.          The amounts invested, from time to time, in an Underlying Fund by one or more of the Top Funds, may exceed 20% of the outstanding voting securities of any single Underlying Fund. Accordingly, each Top Fund could, either alone or together with Future Top Funds, become a substantial securityholder of an Underlying Fund.

 

30.          Each Underlying Fund has, or is expected to have, other investors in addition to the Top Funds.

 

31.          Securities of the Top Funds and their corresponding Underlying Funds have, or will have, matching daily redemption dates and matching daily valuation dates.

 

32.          The Top Funds and Underlying Funds will prepare annual audited financial statements and interim financial reports in accordance with NI 81-106 and will otherwise comply with the requirements of NI 81-106.

 

33.          In the absence of the Requested Relief, the Top Funds would be precluded by the Investment Restrictions from implementing the Fund-of-Fund Structure. Specifically, a Top Fund would be prohibited from becoming a substantial security holder of an Underlying Fund, either alone or together with related investment funds

 

34.          The Fund-of-Fund Structure represents the business judgment of responsible persons as of the date hereof, uninfluenced by considerations other than the best interests of the Top Funds. The “responsible persons” of the Filer with respect to the Fund-of-Fund Structure are the executive committee of the Filer, which includes the lead portfolio managers for the applicable Top Fund(s) and Underlying Fund(s).

 

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 Requested Relief is granted provided that:

 

(a)           securities of a Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirement under applicable securities legislation;

 

(b)           an investment by a Top Fund in an Underlying Fund is consistent with the fundamental investment objectives and strategy of the Top Fund;

 

(c)           an investment in an Underlying Fund by a Top Fund will be effected at an objective price, calculated in accordance with section 14.2 of NI 81-106;

 

(d)           a Top Fund will not invest in an Underlying Fund, unless the Underlying Fund complies with the provisions of NI 81-106 that apply to a “mutual fund in Ontario” as defined in the Securities Act (Ontario);

 

(e)           no Top Fund will purchase or hold a security of an Underlying Fund unless at the time of purchasing securities of the Underlying Fund, the Underlying Fund holds no more than 10% of its NAV in securities of other mutual funds, unless the Underlying Fund:

 

(i)            is a clone fund (as defined in NI 81-102);

 

(ii)           purchases or holds securities of a ‘money market fund’ (as defined in NI 81-102); or

 

(iii)          purchases or holds securities that are “index participation units” (as defined by NI 81-102) issued by an investment fund;

 

(f)            no management fees or incentive fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service;

 

(g)           no sales fee or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund that, to a reasonable person, would duplicate a fee payable by an investor in the Top Fund, other than brokerage fees incurred for the purchase or sale of an index participation unit issued by an investment fund;

 

(h)           the Filer does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the holders of such securities, except that the Filer may arrange for the securities the Top Fund holds in the Underlying Fund to be voted by the beneficial owners of the securities of the Top Fund, who are not the Filer or an officer, director or substantial security holder of the Filer;

 

(i)            when purchasing and/or redeeming securities of an Underlying Fund, the Filer shall, as investment fund manager of the applicable Top Fund and Underlying Fund, act honestly, in good faith and in the best interests of the Top Fund and the Underlying Fund, respectively, and shall exercise the care and diligence that a reasonably prudent person would exercise in comparable circumstances;

 

(j)            a disclosure document, including an offering memorandum where available, of a Top Fund shall be provided to each investor in a Top Fund prior to the time of the investor’s investment, and shall disclose:

 

(i)            that the Top Fund may purchase securities of an applicable, identified Underlying Fund and that if the Top Fund decides to purchase securities of an Underlying Fund that is not identified in the disclosure document, the Top Fund will notify investors of the Top Fund at the time of the purchase;

 

(ii)           that the Filer is the investment fund manager and portfolio manager of both the Top Fund and the Underlying Fund;

 

(iii)          the approximate or maximum percentage of net assets of the Top Fund that is intended be invested in securities of Underlying Funds;

 

(iv)          the fees, expenses and any performance or special incentive distributions payable by an Underlying Fund in which the Top Fund invests;

 

(v)           the process or criteria used to select an Underlying Fund;

 

(vi)          that investors are entitled to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of each Underlying Fund, if available;

 

(vii)         that investors are entitled to receive from the Filer, on request and free of charge, the annual audited financial statements and interim financial reports relating to each Underlying Fund in which the Top Fund invests; and

 

(k)           the Filer shall annually inform investors in a Top Fund of their right to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of each Underlying Fund, if available, and the annual audited financial statements and interim financial reports relating to each Underlying Fund in which the Top Fund invests.

 

“Mark J. Sandler”                                                                “Frances Kordyback”

Commissioner                                                                     Commissioner

Ontario Securities Commission                                       Ontario Securities Commission

 


ween pooled funds under common management subject to conditions.

 

Applicable Legislative Provisions

 

Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(4), 113.

 

November 3, 2017

 

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

CGOV ASSET MANAGEMENT

(the Filer)

 

AND

 

IN THE MATTER OF

THE TOP FUNDS

(as defined below)

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of each of the Filer, CGOV Balanced Fund (the Initial Top Fund), and one or more investment funds which are not reporting issuers under the securities legislation of the principal regulator (the Legislation) and which are established, advised or managed by the Filer in the future (the Future Top Funds, and together with the Initial Top Fund, the Top Funds) for a decision under the Legislation in respect of the Fund-of-Fund Structure (as defined below) exempting the Filer and the Top Funds from:

 

(a)           the restriction in the Legislation that prohibits an investment fund from knowingly making an investment in any person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder; and

 

(b)           the restriction in the Legislation that prohibits an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) (collectively, the Investment Restrictions),

 

to permit the Filer to cause the Top Funds to invest in the Underlying Funds (as defined below) (the Requested Relief).

 

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

 

a)            the Ontario Securities Commission (the “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 respect of the Requested Relief in Alberta.


Interpretation

 

Unless otherwise defined herein, terms in this decision have the respective meanings given to them in National Instrument 14-101 Definitions, National Instrument 81-101 Mutual Fund Prospectus Disclosure, National Instrument 81-102 Investment Funds and Multilateral Instrument 11-102 Passport System.

 

Representations

 

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

 

The Filer

 

1.             The Filer is a partnership formed under the laws of Ontario with its head office in Toronto, Ontario.

 

2.             The Filer is registered with the OSC in the categories of investment fund manager, portfolio manager and exempt market dealer. The Filer is also registered as: (i) a portfolio manager in Alberta, British Columbia, Manitoba, Nova Scotia and Saskatchewan, and (ii) a portfolio manager and investment fund manager in Québec.

 

3.             The Filer is not a reporting issuer in any jurisdiction and is not in default of securities legislation of any jurisdiction of Canada, except as noted in paragraphs 13 and 16 below.

 

Top Funds

 

4.             The Initial Top Fund is organized under the laws of Ontario as a trust. Each Future Top Fund will be organized as a trust under the laws of Ontario or another jurisdiction in Canada.

 

5.             Each Top Fund is or will be a "mutual fund" for the purposes of the Legislation.

 

6.             The Initial Top Fund is not, and each Future Top Fund will not be, a reporting issuer in any province or territory of Canada.

 

7.             The Filer is, or will be, the investment fund manager and the portfolio manager of the Initial Top Fund and each of the Future Top Funds.

 

8.             RBC Investor Services Trust acts as the trustee for the Initial Top Fund. RBC Investor Services Trust or another qualified third party will act as trustee of a Top Fund.

 

9.             Securities of the Initial Top Fund and each Future Top Fund are, or will be, offered on a private placement basis to qualified investors pursuant to available exemptions from the prospectus requirements under Canadian securities legislation.

 

10.          The investment objective of the Initial Top Fund is to preserve capital over the long-term and provide moderate interest income and capital growth. To achieve this objective the Initial Top Fund’s strategy includes investing in a diversified portfolio of primarily Canadian and non-Canadian based equities and fixed income securities and in other types of securities including mutual and/or pooled funds, or holding the assets of the Initial Top Fund uninvested in cash or cash equivalents if economic, monetary or investment conditions indicate that the Initial Top Fund’s objectives are more likely to be met through such investments or such holding..

 

11.          The allowable range of investment in the fixed-income asset class for the Initial Top Fund is 15% to 60% of its portfolio assets.

 

12.          The Initial Top Fund is not in default of securities legislation in any province or territory of Canada, except as noted in paragraphs 13 and 166.

 

13.          On January 5, 2005, the Filer established CGOV Fixed Income Fund and on June 22, 2015, the CGOV Short Term Fixed Income Fund (the Initial Underlying Funds). The Filer decided it was in the best interest of the Initial Top Fund to replace the Initial Top Fund’s fixed-income portion of the portfolio from individual securities to investments in the Initial Underlying Funds, also managed by the Filer, and thereby inadvertently made an investment in each of the Initial Underlying Funds which required the Requested Relief. The investment by the Initial Top Fund in the Initial Underlying Funds was also in the best interest of each of the Initial Underlying Funds as the increase size of the Initial Underlying Funds gave each Fund the ability to access better investment opportunities for the benefit of their respective Unitholders.

 

14.          There was no duplication in fees between the Initial Top Fund and the Initial Underlying Funds.

 

15.          The offering memorandum for the Initial Top Fund currently discloses that the Initial Top Fund’s exposure to fixed income securities is expected to be achieved through its indirect investment in the wide range of broadly diversified holdings held by CGOV Fixed Income Fund and the CGOV Short Term Fixed Income Fund.

 

16.          The need for the Requested Relief was recognized when the Filer was conducting an internal compliance review of its operations. As soon as the requirement to seek the Requested Relief came to the Filer’s attention, the Filer initiated the process of seeking the Requested Relief and has strengthened its internal control systems to ensure future compliance with applicable laws and regulations.

 

Underlying Funds

 

17.          The Initial Underlying Funds are not, and each investment fund that is established, managed, or advised by the Filer in the future (the Future Underlying Funds, and together with the Initial Underlying Funds, the Underlying Funds) will not be, a reporting issuer in any province or territory of Canada.

 

18.          Each Initial Underlying Fund is organized as a trust under the laws of the Province of Ontario. Each Initial Underlying Fund is a “mutual fund” for the purposes of the Legislation.

 

19.          The investment objective of the CGOV Fixed Income Fund is to provide regular income while maintaining security of capital. The investment objective of the CGOV Short Term Fixed Income Fund is also to provide regular income while maintaining security of capital. The Initial Underlying Funds both attempt to achieve their investment objective by investing in fixed-income securities issued by corporations and governments.

 

20.          Each Future Underlying Fund will be organized as a trust under the laws of the Province of Ontario or another jurisdiction in Canada. Each Future Underlying Fund will be organized as a "mutual fund" for the purposes of the Legislation.

 

21.          Securities of each Underlying Fund will be offered to qualified investors resident in Canada, including the Top Funds, on a private placement basis pursuant to available exemptions from the prospectus requirements under Canadian securities legislation.

 

22.          The Filer is the investment fund manager and portfolio manager of the Initial Underlying Funds and will be the investment manager and the portfolio manager of each of the Future Underlying Funds.

 

23.          Based on the current net asset value (NAV) of the Initial Top Fund and each of the Initial Underlying Funds, the Initial Top Fund is currently a substantial security holder of each of the Initial Underlying Funds. The holdings of each of the Initial Underlying Funds by the Initial Top Fund fluctuates according to market conditions and investment opportunities which are at the discretion of Filer as portfolio manager of the Initial Top Fund.

 

24.          The Underlying Funds will primarily hold publicly traded securities and will not hold greater than 10% of their assets in “illiquid assets”, as defined in National Instrument 81-102 Investment Funds (NI 81-102).

 

Fund-of-Fund Structure

 

25.          The Top Funds will invest directly in a portfolio of securities that is consistent with each Top Funds’ investment strategy, however, the Filer may determine it would be in the best interest of a Top Fund to invest a portion of its portfolio in an Underlying Fund to achieve its investment objective on a more cost effective basis instead of directly purchasing individual securities (the Fund-of-Fund Structure). The Filer believes that the Fund-of-Fund Structure provides an efficient and cost-effective manner of achieving the investment objective and asset mix allocation on behalf of the Top Funds rather than through the direct purchase of individual securities and will not be detrimental to the interests of other securityholders of the Underlying Funds.

 

26.          No Underlying Fund will be a Top Fund.

 

27.          In the case of the Initial Top Fund, the Filer believes that investing in the Initial Underlying Funds in order to satisfy the fixed income securities portion of the Initial Top Fund is an efficient and cost-effective manner of achieving the investment objective and asset mix allocation of the Initial Top Fund, is in the best interest of the Initial Top Fund and is not detrimental to the interests of the other securityholders of the Initial Underlying Funds.

 

28.          An investment in an Underlying Fund by a Top Fund will be effected at an objective price. According to the Filer’s policies and procedures, an objective price for this purpose, will be the NAV per security of the applicable class or series of the applicable Underlying Fund, calculated in accordance with section 14.2 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106).

 

29.          The amounts invested, from time to time, in an Underlying Fund by one or more of the Top Funds, may exceed 20% of the outstanding voting securities of any single Underlying Fund. Accordingly, each Top Fund could, either alone or together with Future Top Funds, become a substantial securityholder of an Underlying Fund.

 

30.          Each Underlying Fund has, or is expected to have, other investors in addition to the Top Funds.

 

31.          Securities of the Top Funds and their corresponding Underlying Funds have, or will have, matching daily redemption dates and matching daily valuation dates.

 

32.          The Top Funds and Underlying Funds will prepare annual audited financial statements and interim financial reports in accordance with NI 81-106 and will otherwise comply with the requirements of NI 81-106.

 

33.          In the absence of the Requested Relief, the Top Funds would be precluded by the Investment Restrictions from implementing the Fund-of-Fund Structure. Specifically, a Top Fund would be prohibited from becoming a substantial security holder of an Underlying Fund, either alone or together with related investment funds

 

34.          The Fund-of-Fund Structure represents the business judgment of responsible persons as of the date hereof, uninfluenced by considerations other than the best interests of the Top Funds. The “responsible persons” of the Filer with respect to the Fund-of-Fund Structure are the executive committee of the Filer, which includes the lead portfolio managers for the applicable Top Fund(s) and Underlying Fund(s).

 

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 Requested Relief is granted provided that:

 

(a)           securities of a Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirement under applicable securities legislation;

 

(b)           an investment by a Top Fund in an Underlying Fund is consistent with the fundamental investment objectives and strategy of the Top Fund;

 

(c)           an investment in an Underlying Fund by a Top Fund will be effected at an objective price, calculated in accordance with section 14.2 of NI 81-106;

 

(d)           a Top Fund will not invest in an Underlying Fund, unless the Underlying Fund complies with the provisions of NI 81-106 that apply to a “mutual fund in Ontario” as defined in the Securities Act (Ontario);

 

(e)           no Top Fund will purchase or hold a security of an Underlying Fund unless at the time of purchasing securities of the Underlying Fund, the Underlying Fund holds no more than 10% of its NAV in securities of other mutual funds, unless the Underlying Fund:

 

(i)            is a clone fund (as defined in NI 81-102);

 

(ii)           purchases or holds securities of a ‘money market fund’ (as defined in NI 81-102); or

 

(iii)          purchases or holds securities that are “index participation units” (as defined by NI 81-102) issued by an investment fund;

 

(f)            no management fees or incentive fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service;

 

(g)           no sales fee or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund that, to a reasonable person, would duplicate a fee payable by an investor in the Top Fund, other than brokerage fees incurred for the purchase or sale of an index participation unit issued by an investment fund;

 

(h)           the Filer does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the holders of such securities, except that the Filer may arrange for the securities the Top Fund holds in the Underlying Fund to be voted by the beneficial owners of the securities of the Top Fund, who are not the Filer or an officer, director or substantial security holder of the Filer;

 

(i)            when purchasing and/or redeeming securities of an Underlying Fund, the Filer shall, as investment fund manager of the applicable Top Fund and Underlying Fund, act honestly, in good faith and in the best interests of the Top Fund and the Underlying Fund, respectively, and shall exercise the care and diligence that a reasonably prudent person would exercise in comparable circumstances;

 

(j)            a disclosure document, including an offering memorandum where available, of a Top Fund shall be provided to each investor in a Top Fund prior to the time of the investor’s investment, and shall disclose:

 

(i)            that the Top Fund may purchase securities of an applicable, identified Underlying Fund and that if the Top Fund decides to purchase securities of an Underlying Fund that is not identified in the disclosure document, the Top Fund will notify investors of the Top Fund at the time of the purchase;

 

(ii)           that the Filer is the investment fund manager and portfolio manager of both the Top Fund and the Underlying Fund;

 

(iii)          the approximate or maximum percentage of net assets of the Top Fund that is intended be invested in securities of Underlying Funds;

 

(iv)          the fees, expenses and any performance or special incentive distributions payable by an Underlying Fund in which the Top Fund invests;

 

(v)           the process or criteria used to select an Underlying Fund;

 

(vi)          that investors are entitled to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of each Underlying Fund, if available;

 

(vii)         that investors are entitled to receive from the Filer, on request and free of charge, the annual audited financial statements and interim financial reports relating to each Underlying Fund in which the Top Fund invests; and

 

(k)           the Filer shall annually inform investors in a Top Fund of their right to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of each Underlying Fund, if available, and the annual audited financial statements and interim financial reports relating to each Underlying Fund in which the Top Fund invests.

 

“Mark J. Sandler”                                                                “Frances Kordyback”

Commissioner                                                                     Commissioner

Ontario Securities Commission                                       Ontario Securities Commission