Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from the mutual fund self-dealing restrictions in the Securities Act (Ontario) and the conflicts of interest provisions in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to allow pooled funds to invest in underlying pooled funds including limited partnerships under common management - relief subject to certain conditions.

Applicable Legislative Provisions

Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(2)(c), 111(3), 113.

National Instrument 31-103 -- Registration Requirements, Exemptions, and Ongoing Registrant Obligations, ss. 13.5(2)(a), 15.1.

August 30, 2011

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

AND

IN THE MATTER OF

VENATOR CAPITAL MANAGEMENT LTD.

AND

VENATOR INVESTMENT TRUST

DECISION

Background

The Ontario Securities Commission (the Commission) has received an application from Venator Capital Management Ltd. (the Manager) on behalf of each of the Manager, Venator Investment Trust (the Initial Top Fund) and any other investment fund which is not a reporting issuer under the Securities Act (Ontario) (the Act) established, advised or managed by the Manager after the date hereof (the Future Top Funds and, together with the Initial Top Fund, the Top Funds) for a decision under the securities legislation of Ontario (the Legislation), exempting:

(a) the Manager and the Top Funds, in respect of the Top Funds investment in any of the Venator Founders Fund (the Initial Underlying Fund) or any other investment fund which is not a reporting issuer under the Act, established, advised or managed by the Manager after the date hereof (the Future Underlying Funds and, together with the Initial Underlying Fund, the Underlying Funds), from the restriction in paragraph 111(2)(b), subparagraphs 111(2)(c)(i) and (ii) and subsection 111(3) of the Act that prohibits a mutual fund from knowingly making or holding an investment in:

(i) a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder; or

(ii) an issuer in which, (A) an officer or director of the mutual fund, its management company or distribution company or an associate of any of them, or (B) any person or company who is a substantial security holder of the mutual fund, its management company or its distribution company,

has a significant interest (the Related Issuer Relief); and

(b) the Manager with respect to each of the Top Funds that invests its assets in an Underlying Fund, from the restriction in sub-clause 13.5(2)(a)(ii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) from the restriction prohibiting a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as adviser, to invest in the securities of any issuer in which a responsible person or an associate of a responsible person is a partner, officer or director, unless the fact is disclosed to the client and the written consent of the client to the investment is obtained before the purchase (the Consent Requirement Relief).

together, the Requested Relief.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision, unless otherwise defined.

Representations

The decision is based on the following facts represented by the Manager:

Manager

1. The Manager is a corporation incorporated under the laws of the Province of Ontario and has its head office in Toronto, Ontario.

2. The Manager is registered as a portfolio manager, an exempt market dealer and an investment fund manager in Ontario.

3. Pursuant to separate management agreements (the Management Agreements), the Manager is the manager of the Initial Top Fund and will be the manager of the Future Top Funds and is, or will be, responsible for managing the assets of the Top Funds and has, or will have, complete discretion to invest and reinvest or to arrange for the investment and reinvestment of the Top Funds' assets, and is, or will be, responsible for executing or arranging for the execution of all portfolio transactions in respect of the Top Funds.

4. Pursuant to the Management Agreements, the Manager has the power and authority to appoint an investment adviser to manage the investment portfolios of the Initial Top Funds and will have the power and authority to appoint investment advisers to manage the investment portfolios of the Future Top Funds.

5. The Manager is also the trustee and manager of the Initial Underlying Fund and will be the trustee and manager of the Future Underlying Funds and is, or will be, responsible for managing the assets of the Underlying Funds and has, or will have, complete discretion to invest and reinvest or to arrange for the investment and reinvestment of the Underlying Funds' assets, and is, or will be, responsible for executing or arranging for the execution of all portfolio transactions for the Underlying Funds.

6. The Manager is not a reporting issuer in any jurisdiction of Canada and is not in default of securities legislation of any jurisdiction of Canada.

Underlying Funds

7. The Initial Underlying Fund is a limited partnership formed and organized under the laws of Ontario by a declaration dated January 13, 2006.

8. The general partner of the Initial Underlying Fund is Venator GenPar Ltd., an affiliate of the Manager, and has delegated to the Manager the responsibility of managing the ongoing business and administrative affairs of the Initial Underlying Fund. The general partner of the Future Underlying Funds will be an affiliate of the Manager.

9. Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.

10. Securities of the Initial Underlying Fund are offered on a private placement basis in each of the provinces and territories of Canada pursuant to available exemptions from the prospectus requirement in accordance with National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).

11. The Initial Underlying Fund is a mutual fund in Ontario but is not a reporting issuer.

12. The Initial Underlying Fund is not in default of securities legislation in any of the provinces and territories of Canada.

Top Funds

13. The Initial Top Fund is an open-end trust established under the laws of the Province of Ontario by a declaration of trust dated June 28, 2007 as amended and restated on September 25, 2009. The Manager also acts as trustee of the Initial Top Fund.

14. Each of the Top Funds is, or will be, a mutual fund for the purposes of the Act.

15. Securities of each of the Top Funds, are, or will be, sold pursuant to available prospectus exemptions in accordance with NI 45-106.

16. The investment objective of the Initial Top Fund is to provide long-term capital growth. To achieve its objective, the Initial Top Fund will invest in Underlying Funds that may employ a variety of strategies including (i) taking long and short positions in equities, debt, derivatives, and (ii) investing in special situations including event-driven situations such as corporate restructurings, mergers, hostile takeovers or bankruptcies. The Initial Top Fund's investments will include, but not be limited to, Underlying Funds. The Underlying Funds may invest in a wide range of equity and debt securities and other financial instruments that may be either listed on recognized stock exchanges or unlisted. The Underlying Funds may employ leverage and short selling to enhance returns and use a combination of cash, short positions, options, futures, swaps and other derivative instruments to increase, moderate or eliminate their exposure to market direction.

17. The only Underlying Fund in which the Initial Top Fund is invested is the Initial Underlying Fund, and the Manager does not currently intend to invest in any Underlying Fund other than the Initial Underlying Fund, however the Initial Top Fund may in the future purchase securities of Venator Income Fund or Venator Catalyst Fund, two other investment funds currently managed by the Manager.

18. The Initial Top Fund is not a reporting issuer under the Act. None of the Future Top Funds will be a reporting issuer under the Act.

Fund-on-Fund Structure

19. The Top Funds allow investors in the Top Funds to obtain exposure to the investment portfolios of the Underlying Funds and their respective investment strategies through, primarily, direct investments by the Top Funds in securities of the Underlying Funds (the "Fund-on-Fund Structure"). The Manager believes that the Fund-on-Fund Structure provides an efficient and cost-effective manner of pursuing portfolio diversification on behalf of the Top Funds rather than through the direct purchase of securities.

20. Purchasers of securities of a Top Fund may subscribe for securities of the Top Funds pursuant to a subscription agreement (the "Subscription Agreement").

21. Prior to the execution of the Subscription Agreement, the purchaser will be provided with a copy of the Top Fund's offering memorandum or, if no offering memorandum is prepared in respect of the Top Fund, will be provided with details about the Top Fund and given disclosure respecting relationships and potential conflicts of interest between the Top Fund and the applicable Underlying Funds.

22. Where an offering memorandum is prepared for a Top Fund, the offering memorandum will disclose that the Top Fund may purchase securities of the Underlying Funds, the fact that the Underlying Funds are also managed and/or advised by the Manager, the approximate or maximum percentage of net assets of the Top Fund that is intended to be invested in securities of the Underlying Fund and the process or criteria used to select the Underlying Funds.

23. Prior to the time of investment, securityholders of a Top Fund will be provided with disclosure with respect to each person, if any, that has a significant interest in the Underlying Fund through investments made in securities of such Underlying Fund. Investors in a Top Fund will also be advised of the potential conflicts of interest which may arise from such relationships. The foregoing disclosure will be contained in any offering memorandum prepared in connection with a distribution of securities of the Top Fund or, if no offering memorandum is prepared, in the subscription agreement for securities of the Top Fund.

24. Each of the Top Funds will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 Investment Fund Continuous Disclosure ("NI 81-106") and will otherwise comply with the requirements of NI 81-106 applicable to them. Each of the Underlying Funds which are subject to NI 81-106 will prepare annual audited financial statements and interim unaudited financial statements. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund.

25. Securityholders of a Top Fund will receive, on request, a copy of the offering document of the Underlying Funds, if available, and the audited annual financial statements and interim unaudited financial statements of any Underlying Fund in which the Top Fund invests.

26. There will be no sales fees or redemption fees payable by a Top Fund in respect of an acquisition, disposition or redemption of securities of an Underlying Fund by the Top Fund other than brokerage fees incurred on the purchase or disposition of securities of an Underlying Fund that are purchased or disposed of in the secondary market.

27. The Manager will ensure that the arrangements between or in respect of a Top Fund and an Underlying Fund are such as to avoid the duplication of management fees and incentive fees.

28. The Manager will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of an Underlying Fund, unless the Top Fund is the sole owner of the securities of the Underlying Fund at the time of the meeting or the effective date of the resolution, in which case the Manager will arrange for all the securities the Top Fund holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund.

29. The amounts invested from time to time in an Underlying Fund by a Top Fund may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, each Top Fund could, either alone or together with other Top Funds, become a substantial security holder of an Underlying Fund. The Top Funds are, or will be, related mutual funds by virtue of the common management by the Manager.

30. Although no officer, director or substantial security holder of the Manager currently has a significant interest in the Initial Underlying Fund, an officer, director or substantial security holder of the Manager may, at the time of the establishment of a Future Underlying Fund, acquire a significant interest in such Future Underlying Fund as a result of investing seed capital.

Generally

31. In the absence of the Related Issuer Relief, the Top Funds would be precluded from implementing the Fund-on-Fund Structure due to certain investment restrictions in the Legislation.

32. In the absence of the Consent Requirement Relief, each Top Fund would be precluded from investing in an Underlying Fund, unless the consent of each investor in the Top Fund is obtained, since the Manager or, an officer and/or director of the Manager (considered a responsible person within the meaning of the applicable provisions of NI 31-103) may also be an officer and/or director of, or may perform a similar function for or occupy a similar position with, the Underlying Fund.

33. Any investment made by a Top Fund in an Underlying Fund will be aligned with the investment objectives, investment strategy, risk profile and other principal terms of the Top Fund.

34. A Top Fund's investments in the Underlying Funds represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the funds concerned.

Decision

The Commission is satisfied that the decision meets the test set out in the Legislation for the Commission to make the decision.

The decision of the Commission under the Legislation is that the Requested Relief is granted, provided that the Manager ensures that:

(a) securities of a Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106;

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

(c) no Top Fund will invest in an Underlying Fund unless the Underlying Fund invests less than 10% of its net assets in other mutual funds other than mutual funds that are money market funds or that issue index participation units;

(d) 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;

(e) 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;

(f) the Manager will not vote the securities of the Underlying Fund held by the Top Funds at any meeting of holders of such securities, except that a Top Fund may arrange for the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;

(g) the offering memorandum, if available, or similar document of a Top Fund will disclose:

(i) that a Top Fund may purchase securities of the Underlying Funds;

(ii) that the Underlying Funds are managed and/or advised by the Manager or an affiliate of the Manager;

(iii) that substantially all of the net assets (or the percentage of net assets) of the Top Funds will be invested in securities of the Underlying Funds; and

(iv) the process or criteria used to select the Underlying Fund; and

(h) prior to the time of investment, securityholders of a Top Fund will be provided with disclosure with respect to each person, if any, that has a significant interest in the Underlying Fund through investments made in securities of such Underlying Fund. Investors in a Top Fund will also be advised of the potential conflicts of interest which may arise from such relationships. The foregoing disclosure will be contained in any offering memorandum prepared in connection with a distribution of securities of the Top Fund or, if no offering memorandum is prepared, in the subscription agreement for securities of the Top Fund.

The Consent Requirement Relief

"Raymond Chan"
Manager, Investment Funds
Ontario Securities Commission

The Related Issuer Relief

"Kevin J. Kelly"
Commissioner
Ontario Securities Commission
 
"Wes M. Scott"
Commissioner
Ontario Securities Commission