Gryphon Investment Counsel Inc. and Gryphon Balanced Fund

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from the Act to permit top fund to invest in a bottom fund in a fund-on-fund structure -- bottom fund managed by an associate of the manager of the top fund -- relief subject to standard conditions for fund-on-fund-structures.

Applicable Legislative Provisions

Securities Act (Ontario), ss. 111(2)(b), 111(3), 113.

October 29, 2010

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

GRYPHON INVESTMENT COUNSEL INC.

(the Filer)

AND

GRYPHON BALANCED FUND

(the Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer, on its behalf and on behalf of the Fund, for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Fund and the Filer from the restrictions in the Legislation which prohibit the following:

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

(b) a mutual fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) above

(collectively, 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 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 British Columbia, Alberta, Saskatchewan, New Brunswick, Nova Scotia and Newfoundland and Labrador.

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.

Representations

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

1. The Filer is a corporation incorporated under the laws of Canada and has its head office in Toronto, Ontario. The Filer is the manager and portfolio manager of the Fund. The Filer is registered as an adviser in all provinces of Canada.

2. The Fund is an open-end mutual fund established under the laws of Ontario and is a mutual fund as defined under securities legislation in Ontario and Alberta.

3. The Fund is not a reporting issuer in any province or territory of Canada.

4. The Filer provides discretionary portfolio management services to clients pursuant to investment management agreements between the clients and the Filer. The Filer has full discretion and authority to provide portfolio management services to clients, including investing clients in mutual or pooled funds for which the Filer or any of its affiliates or associates is the portfolio manager and for changing those funds as the Filer determines in accordance with the mandate of the clients. Units of the Fund are offered for sale only on a private placement basis pursuant to available prospectus exemptions in each of the provinces of Canada.

5. Investment in the Fund is limited to discretionary clients of the Filer.

6. Gryphon International Investment Corporation (Gryphon International), an associate of the Filer, acts as manager and portfolio manager of Gryphon Europac Fund (the Underlying Fund).

7. The Underlying Fund is an open-end mutual fund established under the laws of Ontario and is a mutual fund as defined under Ontario securities legislation.

8. The Underlying Fund is not a reporting issuer in any province or territory of Canada.

9. Gryphon International also provides discretionary portfolio management services to clients pursuant to investment management agreements with its clients. In the case of the Fund, units of the Underlying Fund are sold on an exempt basis to the Fund without entering into an investment management agreement with the Fund or the Filer.

10. Neither the Fund nor the Underlying Fund has an offering memorandum (or other similar document). If the Fund or the Underlying Fund has an offering memorandum (or other similar document) in the future, the Fund unitholders may obtain a copy of the Fund's or Underlying Fund's disclosure documents free of charge upon request to the Filer.

11. The Fund unitholders are provided with a copy of the Underlying Fund's annual or semi-annual financial statements free of charge.

12. The actual weighting of the investment by the Fund in the Underlying Fund will be reviewed on a regular basis and adjusted to ensure that the investment weightings continue to be appropriate for the Fund's investment policy.

13. The Filer will actively manage the Fund's investments in the Underlying Fund with discretion to buy and sell units of the Underlying Fund, selected in accordance with the Fund's investment objective, as well as alter its holdings in the Underlying Fund.

14. Through investing in the Underlying Fund, the Fund will achieve greater diversification at a lower cost than investing directly in the securities held by the Underlying Fund. This investment structure will also allow investors with smaller investments to have access to a larger variety of investments than would otherwise be available.

15. Investment by the Fund in the Underlying Fund will increase the asset base of the Underlying Fund, enabling the Underlying Fund to further diversify its portfolio to the benefit of all its investors. The larger asset base will also benefit investors in the Underlying Fund through achieving favourable pricing and transaction costs on portfolio trades, increased access to investments where there is a minimum subscription or purchase amount and economies of scale through greater administrative efficiency.

16. No sales fees or redemption fees will be payable in connection with the purchases or redemptions by the Fund of units of the Underlying Fund.

17. No management or other fee will be payable by the Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service.

18. Where a matter relating to the Underlying Fund requires a vote of unitholders of the Underlying Fund, the Filer will not cause the units of the Underlying Fund held by the Fund to be voted at such meeting.

19. There are no duplication of management fees since no management fees are payable by the Fund in respect of its investment in the Underlying Fund.

20. The valuation frequency of the Fund and the Underlying Fund is daily.

21. The amounts invested from time to time in the Underlying Fund by the Fund may exceed 20% of the outstanding voting securities of the Underlying Fund. Accordingly, the Fund could become a substantial security holder of the Underlying Fund. In the absence of this Decision, the Fund would be prohibited from knowingly making and holding an investment in the Underlying Fund if the Fund, alone or together with one or more related mutual funds, would be a substantial security holder of the Underlying Fund.

22. An investment by the Fund in units of the Underlying Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

23. The Filer is not a reporting issuer in any jurisdiction and is not in default of securities legislation in any province or territory of Canada. The Fund and the Underlying Fund are not in default of securities legislation in any province or territory of Canada.

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:

(a) units of the Fund are sold in each of the provinces of Canada solely pursuant to exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions;

(b) the investment by the Fund in the Underlying Fund is compatible with the fundamental investment objective of the Fund;

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

(d) no sales or redemption fees are payable by the Fund in relation to its purchases or redemptions of the units of the Underlying Fund;

(e) the Filer does not vote the units of the Underlying Fund that are held by the Fund; and

(f) if an offering memorandum (or other similar document) is made available from the Fund, such offering memorandum (or other similar document) of the Fund will disclose:

(i) that the Fund may purchase units of the Underlying Fund;

(ii) the fact that the Fund is managed by the Filer and the Underlying Fund is managed by an associate of the Filer; and

(iii) the approximate or maximum percentage of net assets of the Fund that is dedicated to investment in units of the Underlying Fund.