Gluskin Sheff + Associates Inc. et al.

Decision

Headnote

NP 11-203 -- Relief granted from mutual fund conflict of interest restrictions, self-dealing prohibitions and self-interest prohibition to allow a reorganization of pooled funds and managed account client investments -- Relief is necessary because prior relief granted to the filer does not contemplate a momentary three-tier fund-of-fund structure -- Top funds' manager will bear all costs associated with the reorganization.

Applicable Legislative Provisions

Securities Act (Ontario), ss. 111(2)(b), 111(3), 113, 118(2)(b), 121(2)(a)(ii), 147.

Regulations under the Securities Act (Ontario), ss. 105, 115(6).

December 16, 2008

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

GLUSKIN SHEFF + ASSOCIATES INC.

(the Manager)

AND

GS+A HIGH YIELD LONG/SHORT TRUST

GS+A INCOME LONG/SHORT TRUST

GS+A SHORT TRUST

GS+A EQUITY LONG/SHORT TRUST

GS+A QUANTITATIVE LONG/SHORT TRUST

(the Trust Funds)

AND

GS+A HIGH YIELD LONG/SHORT FUND

GS+A INCOME LONG/SHORT FUND

GS+A SHORT FUND

GS+A EQUITY LONG/SHORT FUND

GS+A QUANTITATIVE LONG/SHORT FUND

(the Existing Underlying Funds and collectively with

the Trust Funds and the Manager, the Filers)

 

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from:

(a) the requirement that no mutual fund in Ontario shall knowingly make an investment in any person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial securityholder;

(b) the requirement that no mutual fund in Ontario shall knowingly hold an investment described in (a) above;

(c) the requirement that a portfolio manager shall not knowingly cause any investment portfolio managed by it to purchase or sell the securities of any issuer from or to the account of a responsible person, any associate of a responsible person or the portfolio manager; and

(d) the requirement prohibiting a purchase or sale of a security in which an investment counsel or any associate of an investment counsel has a direct or indirect beneficial interest from or to any other portfolio managed by the investment counsel

in order to effect the one-time transaction described below (the Exemption Sought).

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

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) the Filers have 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 British Columbia, Alberta, Quebec, New Brunswick and Nova Scotia.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. In addition:

Continuing Funds shall mean GS+A Equity Long/Short Trust and GS+A Quantitative Long/Short Trust.

Funds shall mean the Trust Funds and the Existing Underlying Funds.

Reorganization shall mean the transaction described in this decision.

Terminating Funds shall mean GS+A High Yield Long/Short Trust, GS+A Income Long/Short Trust and GS+A Short Trust.

Top Funds shall mean the Top LPs and the Top Trusts.

Top LPs shall mean GS+A Balanced Multi-Strategy Fund and GS+A Multi-Strategy Opportunities Fund, which are investments funds, organized as limited partnerships, to be created and managed by the Manager.

Top Trusts shall mean the Continuing Funds following the transaction described below.

Underlying Funds means the Existing Underlying Funds and any other future investment fund managed by the Manager and organized under the laws of Ontario that is not a reporting issuer under the Act.

Representations

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

1. The Manager is a corporation incorporated under the laws of Ontario and the registered head office is located in Toronto, Ontario.

2. The Manager is registered as an investment counsel and portfolio manager in each of Ontario, British Columbia, Alberta, Quebec, Manitoba, New Brunswick, Nova Scotia and Northwest Territories, and as a limited market dealer and mutual fund dealer in Ontario.

3. The Manager offers discretionary portfolio management services to individuals, corporations and other entities (each a Client) seeking wealth management or related services through a managed account (Managed Account). Pursuant to a written agreement between the Manager and each Client, the Manager makes investment decisions for each Managed Account and has full discretionary authority to trade in securities for each Managed Account without obtaining the specific consent of the applicable Client to the trade.

4. Each Client of the Manager either meets the definition of an "accredited investor" under National Instrument 45-106 Prospectus and Registration Exemptions or qualifies to purchase units of the Funds under an exemption from the prospectus and registration requirements.

5. The Manager is the manager, trustee and portfolio manager of each of the Trust Funds.

6. The Trust Funds are mutual funds organized under the laws of Ontario pursuant to a master declaration of trust. The Trust Funds are not reporting issuers in any jurisdiction.

7. The Manager is also the manager and portfolio manager of the Underlying Funds, which are, or will be, mutual funds that are structured as limited partnerships under the laws of Ontario. The Existing Underlying Funds are not reporting issuers in any jurisdiction.

8. Each of the Filers is not in default of securities legislation in any jurisdiction.

9. From time to time, the Manager may invest a portion of certain Managed Accounts in units of the Funds, where such investment is appropriate for the particular Client's investment objectives and risk tolerance.

10. Currently, the investment objective of each Trust Fund is to invest its assets solely in securities of a particular Existing Underlying Fund. Each Existing Underlying Fund has an investment objective of generating long term positive absolute returns by investing its assets in accordance with a particular alternative investment strategy.

11. Because units of the Existing Underlying Funds are not qualified investments for registered plans under the Income Tax Act (Canada) (the ITA), the Manager created the Trust Funds in order to be able to provide those Clients who had assets in a registered plan and Clients who are foundations with exposure to the alternative investment strategies of the Existing Underlying Funds.

12. In order to diversify its Clients' exposure to alternative investment strategies and simplify its fund administration, the Manager has determined that it wishes to create two alternative investment strategy mandates. These two mandates will be exposed to a mix of different underlying alternative investment strategies, as chosen by the Manager.

13. For each Managed Account that the Manager has determined should have some exposure to alternative investment strategies, the Manager will decide what proportion of the Client's alternative investment strategy allocation should be exposed to each of the mandates, depending upon each Client's particular risk tolerance and investment objectives.

14. As a result of having Clients with assets held in both registered plans and non-registered plans, the Manager proposes to offer the two mandates using both a limited partnership structure (by creating the Top LPs) and using a trust structure (using the Top Trusts).

15. Each of the Top Funds will be exposed to a mix of alternative investment strategies primarily by investing in securities of various Underlying Funds, each of which is managed in accordance with a particular alternative investment strategy.

16. In order to achieve its objective of offering the Top Funds, while minimizing the impact to Clients currently invested in the Funds, the Manager proposes to implement the Reorganization.

17. The following steps will occur in respect of the Existing Underlying Funds effective on or about December 31, 2008:

(a) the Top LPs will be created as two new limited partnerships before December 31, 2008;

(b) Clients in each of the Existing Underlying Funds (other than the Trust Funds and certain Clients that choose to remain in the Existing Underlying Funds) will make a purchase of units of the Top LPs by transferring their units of the Existing Underlying Funds in specie to the Top LPs in exchange for units of the Top LPs;

(c) the value of each Existing Underlying Fund and Top LP will be determined immediately prior to the in specie transfer in accordance with the constating documents of each Existing Underlying Fund;

(d) the units of each Top LP received by investors in exchange for their units of each applicable Existing Underlying Fund will have an aggregate net asset value equal to the total value of the Existing Underlying Fund units being transferred and will be issued at the net asset value per unit of the applicable Top LP determined immediately prior to the transfer;

(e) as a result of the in specie transfer, investors in the Existing Underlying Funds (other than the Trust Funds) will become investors in the Top LPs and the Top LPs will hold units of the Existing Underlying Funds.

18. The following steps will occur in respect of the Trust Funds effective on or about February 28, 2009:

(a) after providing investors with 60 days' prior written notice, the declaration of trust of the Continuing Funds will be amended to create the Top Trusts by (i) changing the names of the Continuing Funds and (ii) changing their investment objectives in order to permit the Continuing Funds to invest in securities of each of the Underlying Funds;

(b) the Terminating Funds will make a purchase of units of the Top Trusts by transferring their units of the Existing Underlying Funds in specie to the Top Trusts in exchange for units of the Top Trusts;

(c) the value of each Terminating Fund and each Top Trust will be determined immediately prior to the in specie transfer in accordance with the constating documents of each Trust Fund;

(d) the units of each Top Trust received by each applicable Terminating Fund will have an aggregate net asset value equal to the total value of the Terminating Fund units being transferred and will be issued at the net asset value per unit of the applicable Top Trust determined immediately prior to the transfer;

(e) each Terminating Fund will declare, pay and automatically reinvest a distribution to its unitholders of net capital gain and income (if any) so that it will not be subject to tax under Part I of the ITA for its taxation year, which includes the date of the transfer;

(f) immediately thereafter, each Terminating Fund will distribute its portfolio assets (which would consist solely of units of the Top Trusts) to its unitholders on a dollar-for-dollar basis so that the unitholders of the Terminating Funds will become direct unitholders of the Top Trusts; and

(g) forthwith, each Terminating Fund will be wound up.

19. No sales charges will be payable for the transfer of units of the Underlying Funds to the Top LPs or for the transfer of units of the Terminating Funds to the Top Trusts and the Manager will bear all the costs of the Reorganization.

20. Unitholders of the Existing Underlying Funds and the Trust Funds will receive notice of the proposed Reorganization. They will be entitled, without cost, to cause the redemption of units of the Existing Underlying Funds up to the end of business on December 31, 2008 and/or units of the Trust Funds up to the end of business on February 28, 2009.

21. The Funds are "related mutual funds" as a result of being managed by the Manager and, once created, the Top LPs will be related mutual funds. As a consequence of implementing the Reorganization:

(a) the Top LPs and the Top Trusts will become substantial securityholders of the Existing Underlying Funds; and

(b) for a brief period of time prior to the wind-up of the Terminating Funds, one or more of the Terminating Funds will become substantial securityholders of each Top Trust (each of which in turn may be a substantial securityholder of each Existing Underlying Fund).

Without the Exemption Sought, the Manager would be prohibited from implementing the Reorganization.

22. The Manager is or will be a "responsible person" as a result of being the portfolio manager for the Funds, the Top LPs and the Managed Accounts.

23. The general partner to each of the Top LPs will be controlled, directly or indirectly, by Ira Gluskin and Gerald Sheff. In addition, Ira Gluskin and Gerald Sheff control, directly or indirectly, the Manager. As a result, the Manager and the general partner to each Top LP will be affiliates. Both Ira Gluskin and Gerald Sheff will participate in the formulation of, or have access prior to implementation to, investment decisions made on behalf of or the advice given to each of the Managed Accounts and the Top LPs.

24. The Trust Funds are associates of the Manager as a result of the fact that the Manager is the trustee of the Trust Funds.

25. As a consequence of implementing the Reorganization, the Manager will cause:

(a) the Terminating Funds to purchase units of the Top Trusts in exchange for units of the Existing Underlying Funds; and

(b) the Managed Accounts to purchase units of the Top LPs in exchange for units of the Existing Underlying Funds.

In the absence of the Exemption Sought, such activity would be prohibited.

26. Although the Manager has exemptive relief to permit in specie transfers between the Managed Accounts and the Continuing Funds, such relief does not cover the scenarios discussed above for the Reorganization. In addition, a condition of such relief is that the consent of each affected Client be obtained prior to the transfer, which is a significant burden on the Manager, given the large number of Clients affected by the Reorganization.

27. Using the discretionary authority granted to it by each Client, the Manager could achieve the desired end result of the Reorganization, without obtaining Client consent, by redeeming the units of the Existing Underlying Funds and Terminating Funds in each Client's account and using the proceeds to purchase the units of the applicable Top LP or Continuing Fund.

28. The proposed steps to the Reorganization attempt to move the Clients from being investors in the Funds and transfer them to the appropriate Top Fund in a manner which minimizes the tax impact to the Funds and to the Clients.

29. In the opinion of the Manager, the Reorganization will be in the best interests of its Clients as it will allow Clients greater portfolio diversification, create a more simple-to-understand investment portfolio for its Clients and will reduce portfolio transaction costs and tax impact associated with rebalancing each Client's portfolio.

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 Exemption Sought is granted provided that during the course of the Reorganization the arrangements between or in respect of a Top Fund and an Underlying Fund avoid the duplication of management and performance fees.

"Margot C. Howard"
Commissioner
Ontario Securities Commission
 
"Suresh Thakrar"
Commissioner
Ontario Securities Commission