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Donville Kent Asset Management Inc. and DKAM Capital Ideas Trust
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions-- relief granted from the mutual fund conflict of interest restrictions in the Securities Act (Ontario) to allow pooled funds to make and hold an investment from time to time in more than 20% of the outstanding voting securities of an underlying fund -- 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(3), 113.
January 17, 2014
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
DONVILLE KENT ASSET MANAGEMENT INC.
(the Filer)
AND
DKAM CAPITAL IDEAS TRUST
(the Initial Top Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on its own behalf, and on behalf of the Initial Top Fund and any other mutual fund which is not a reporting issuer under the Securities Act (Ontario) and may be established and managed by the Filer in the future (together with the Initial Top Fund, the Top Funds), for a decision under the securities legislation of the Jurisdiction (the Legislation), exempting the Filer and the Top Funds from the restriction in the Legislation which prohibits:
(a) a mutual fund from knowingly making 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 security holder; and
(b) a mutual fund, its management company or distribution company from knowingly holding an investment described in paragraph (a) above
(collectively, the Requested Relief).
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 each of the provinces and territories of Canada.
Interpretation
Unless otherwise defined herein, terms defined in National Instrument 14-101 Definitions, MI 11-102, NI 81-101 Mutual Fund Prospectus Disclosure and NI 81-102 Mutual Funds (NI 81-102) have the same meaning in this decision.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation existing under the laws of Canada with its head office in Toronto, Ontario.
2. The Filer is registered with the Ontario Securities Commission in the categories of investment fund manager, portfolio manager and exempt market dealer. The Filer is also registered as an exempt market dealer in Alberta, British Columbia and Saskatchewan and as an 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.
Top Funds and Underlying Funds
4. Each Top Fund is or will be organized under the laws of Ontario as an investment fund and is or will be a "mutual fund" for the purposes of the Legislation but is not or will not be a reporting issuer in any province or territory of Canada. Securities of the Top Funds are or will be offered on a private placement basis to qualified investors pursuant to available exemptions from the prospectus requirements in accordance with National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).
5. The Initial Top Fund was created pursuant to a declaration of trust dated January 2, 2013.
6. The investment objective of the Initial Top Fund is to invest substantially all of its assets in DKAM Capital Ideas Fund LP (the Initial Underlying Fund), a limited partnership established under the laws of Ontario by a declaration dated September 29, 2008. The investment objective of the Initial Underlying Fund is to maximize returns on investments. The Initial Underlying Fund invests in a concentrated portfolio, primarily in equities from any sector and capitalization scale.
7. The Initial Top Fund and the Initial Underlying Fund are not in default of securities legislation in any Jurisdiction of Canada.
8. Securities of the Initial Underlying Fund are not eligible for investment by tax-free savings accounts (TFSAs) and trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans, deferred profit sharing plans and registered disability savings plans (collectively, Tax Deferred Plans), each as defined in the Income Tax Act (Canada).
9. The Initial Top Fund was formed as a trust for the purpose of accessing a broader base of investors, including TFSAs, Tax Deferred Plans and other investors that may not wish to invest directly in a limited partnership. Rather than running the Initial Top Fund's and the Initial Underlying Fund's investment portfolios as separate pools, the Filer wishes to make use of economies of scale by managing only one investment pool in the Initial Underlying Fund.
10. The Initial Underlying Fund is, and any other investment fund established and managed by the Filer or an affiliate or associate of the Filer in the future and in which a Top Fund may invest (together, the Underlying Funds) will be, created under the laws of Ontario, or another jurisdiction in Canada, and is or will be a "mutual fund" for the purposes of the Legislation but is not or will not be a reporting issuer in any province or territory of Canada. Securities of the Underlying Funds will be offered on a private placement basis to qualified investors, including the Top Funds pursuant to available exemptions from the prospectus requirements in accordance with NI 45-106. Each Underlying Fund will be structured as a trust, a limited partnership and/or a class of a mutual fund corporation.
11. Each of the Underlying Funds has, or will have, separate investment objectives and investment strategies.
12. The Filer is or will be the investment manager and the portfolio manager of each of the Top Funds and Underlying Funds.
Fund-on-Fund Structure
13. The Initial Top Fund was, and other Top Funds may be, created by the Filer to allow investors in the Top Funds to obtain indirect exposure to the investment portfolio of the Initial Underlying Fund or other Underlying Funds and their investment strategies through, primarily, direct investments by the Top Funds in securities of the Underlying Funds (the Fund-on-Fund Structure).
14. The Fund-on-Fund Structure will increase the asset base of the Underlying Funds, which is expected to provide additional benefits to unitholders of the Underlying Funds, including more favourable pricing and transaction costs on portfolio trades, increased access to investments whether there is a minimum subscription or purchase amount and better economies of scale through greater administrative efficiency.
15. The investment by a Top Fund in an Underlying Fund is or will be compatible with the fundamental investment objectives of the Top Fund.
16. The Top Funds and the Underlying Funds have or will have matching redemption dates. The Initial Top Fund and the Initial Underlying Fund are redeemable monthly.
17. 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 other Top Funds, become a substantial securityholder of an Underlying Fund.
18. In connection with the proposed Fund-on-Fund Structure, the Filer will ensure that:
(a) the investments by a Top Fund in an Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;
(b) no Top Fund will purchase or hold securities 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 net asset value in securities of other mutual funds, unless the Underlying Fund:
(i) links its performance to the performance of another mutual fund,
(ii) purchases or holds securities of a "money market fund" (as defined by NI 81-102), or
(iii) purchases or holds securities that are "index participation units" (as defined by NI 81-102) issued by a mutual fund;
(c) 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;
(d) no sales fees 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;
(e) the Filer does not cause the securities of an Underlying Fund held by the Top Fund to be voted at any meeting of the securityholders of the Underlying Fund except that the Top Fund may arrange for the securities it holds of an Underlying Fund to be voted by the beneficial holders of the securities of the Top Fund;
(f) each investor in a Top Fund will be provided with an offering memorandum, where available, or other disclosure document of the Top Fund that discloses:
(i) that a Top Fund may purchase securities of the Underlying Fund(s);
(ii) that the Filer is the investment adviser and manager of both the Top Fund and the Underlying Fund(s);
(iii) the approximate or maximum percentage of net assets of the Top Fund that is intended to be invested in securities of the Underlying Fund(s); and
(iv) the process or criteria used to select the Underlying Fund(s).
19. Prior to the time of purchase of securities of a Top Fund, an investor will be provided with a copy of the Top Fund's offering memorandum, where available, or other disclosure document as well as disclosure about the relationships and potential conflicts of interest between the Top Fund and Underlying Funds.
20. Securityholders of a Top Fund will receive, on request, a copy of the Top Fund's audited annual and unaudited interim financial statements.
21. 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 unaudited interim financial statements of any Underlying Fund in which the Top Fund invests.
22. Since the Top Funds and the Underlying Funds do not offer their securities under a simplified prospectus, they are not subject to NI 81-102 and therefore the Top Funds and the Underlying Funds are unable to rely upon the exemption codified under subsection 2.5(7) of NI 81-102.
23. In the absence of the Requested Relief, the Top Funds would be constrained by the investment restrictions in the Legislation in terms of the degree to which they could implement the Fund-on-Fund Structure.
24. The Fund-on-Fund Structure represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of the prospective investors in the Top Funds.
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 NI 45-106;
(b) the investments by a Top Fund in an Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;
(c) no Top Fund will purchase or hold securities 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 net asset value in securities of other mutual funds, unless the Underlying Fund:
(i) links its performance to the performance of another mutual fund,
(ii) purchases or holds securities of a "money market fund" (as defined by NI 81-102), or
(iii) purchases or holds securities that are "index participation units" (as defined by NI 81-102) issued by a mutual fund;
(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 fees 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;
(f) the Filer does not cause the securities of an Underlying Fund held by the Top Fund to be voted at any meeting of the securityholders of the Underlying Fund except that the Top Fund may arrange for the securities it holds of an Underlying Fund to be voted by the beneficial holders of the securities of the Top Fund;
(g) each investor in a Top Fund will be provided with an offering memorandum, where available, or other disclosure document of the Top Fund that discloses:
(i) that a Top Fund may purchase securities of the Underlying Fund(s);
(ii) that the Filer is the investment adviser and manager of both the Top Fund and the Underlying Fund(s);
(iii) the approximate or maximum percentage of net assets of the Top Fund that is intended to be invested in securities of the Underlying Fund(s); and
(iv) the process or criteria used to select the Underlying Fund(s); and
(h) investors in each Top Fund are entitled to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other disclosure document(s) and the annual and interim financial statements of any Underlying Fund(s) in which the Top Fund invests its assets.
"Sarah B. Kavanagh"
Commissioner
Ontario Securities Commission
"Deborah Leckman"
Commissioner
Ontario Securities Commission