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Man Investments Canada Corp. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to commodity pools from paragraphs 2.5(2)(a), (b) and (c) of National Instrument 81-102 Mutual Funds to permit existing commodity pools to invest, or continue investing, in underlying assets without using a forward agreement in response to adverse tax regulation -- Relief granted to commodity pools to gain exposure to a portfolio of assets by way of a second commodity pool, subject to certain conditions -- the second commodity pool has filed a non-offering long form prospectus and is a reporting issuer subject to National Instrument 81-106 Investment Fund Continuous Disclosure, and operates in accordance with National Instrument 81-102 Mutual Funds, as modified by National Instrument 81-104 Commodity Pools -- Each commodity pool has no non-cash investment other than the second commodity pool -- second commodity pool has no investor other than the commodity pools -- investment in the third portfolio limited to 10% of the net assets of the commodity pool -- the relief will cease to be effective with respect to one of the commodity pool upon the earlier of the completion of the merger of that commodity pool to other commodity pool and December 31, 2014.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.5(2)(a), 2.5(2)(b), 2.5(2)(c), 19.1.
May 30, 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 MAN INVESTMENTS CANADA CORP. (the Filer) AND IN THE MATTER OF MAN CANADA AHL ALPHA FUND (the AHL Alpha Fund) AND IN THE MATTER OF MAN CANADA AHL DP INVESTMENT FUND (the AHL DP Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the AHL Alpha Fund and the AHL DP Fund (collectively, the Top Funds and individually each a Top Fund), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):
(i) to revoke and replace the Previous Decisions (as defined below); and
(ii) to grant exemptive relief pursuant to Part 19 of National Instrument 81-102 Mutual Funds (NI 81-102), from subsections 2.1(1), 2.2(1) and 2.5(2)(a), (b) and (c) of NI 81-102 to permit the Top Funds:
a. to purchase and hold securities of Man AHL DP Limited (the Bottom Fund), which has adopted the investment restrictions contained in NI 81-102 and is managed in accordance with these restrictions, except as otherwise permitted by National Instrument 81-104 Commodity Pools (NI 81-104), and in accordance with any exemptions therefrom obtained by the Top Fund, and
b. to gain exposure to the AHL Evolution Programme (as defined herein) through securities of AHL Evolution Limited (as defined herein) to be held in the portfolio of the Bottom Fund,
(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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (collectively, with Ontario, the Jurisdictions).
Interpretation
Unless expressly defined herein, terms in this application have the respective meanings given to them in NI 81-102, National Instrument 14-101 Definitions and MI 11-102.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under the Canada Business Corporations Act and is the trustee and manager of the Top Fund.
2. The Filer is registered as an Investment Fund Manager in Ontario, Québec and Newfoundland and Labrador, as an adviser in the category of Portfolio Manager in Ontario and Alberta and as a dealer in the category of Exempt Market Dealer in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia.
3. The Filer's head office is located in Toronto, Ontario.
4. None of the Filer, the Top Funds or Bottom Fund is in default of any securities legislation in any of the Jurisdictions.
The Top Funds and the Previous Decisions
5. Each Top Fund is a mutual fund to which NI 81-102 applies. Each Top Fund is also a commodity pool as such term is defined in NI 81-104, in that each Top Fund has adopted fundamental investment objectives that permit each Top Fund to gain exposure to or use or invest in specified derivatives in a manner that is not permitted under NI 81-102.
6. The AHL Alpha Fund a reporting issuer in each of the Jurisdictions and the units of the AHL Alpha Fund (the Alpha Units) are not currently in continuous distribution.
7. The AHL DP Fund is a reporting issuer in each of the Jurisdictions and the units of the AHL DP Fund (the DP Units, and together with the Alpha Units, the Units) are currently qualified for distribution in each of the Jurisdictions under the current prospectus of the AHL DP Fund dated November 9, 2012.
8. Each Top Fund's investment objective is to provide investors with the opportunity to realize capital appreciation through investment returns that have a low correlation to traditional forms of stock and bond securities. Accordingly, each Top Fund is intended to provide added diversification and enhance the risk/reward profile of conventional investment portfolios.
9. The AHL Alpha Fund has been created to obtain exposure to the returns of a diversified portfolio of financial instruments across a range of global markets including currencies, bonds, stocks, energy, metals, agriculturals and interest rates (the Alpha Underlying Assets) managed by AHL Partners LLP (the Investment Manager) using a multi-strategy trading program (the AHL Alpha Programme).
10. The AHL DP Fund has been created to obtain exposure to the returns of a diversified portfolio of financial instruments across a range of global markets including, without limitation, stocks, bonds, currencies, short-term interest rates, energy, metals and agricultural commodities (the DP Underlying Assets, and together with the Alpha Underlying Assets, the Underlying Assets) managed by the Investment Manager using a predominantly trend-following trading program (the AHL Diversified Programme).
11. Neither of the Top Funds intend to list the Units on any stock exchange.
12. The Filer obtained a previous decision dated April 30, 2009 (the Previous AHL Decision) exempting the AHL Alpha Fund from subsections 2.5(2)(a) and (c) of NI 81-102 to permit the Top Fund to obtain exposure to the Class C AHL Alpha CAD Notes (AHL SPC -- Class C) through one or more specified derivatives.
13. The Previous AHL Decision provided that the Top Fund will obtain exposure to the economic returns of the AHL SPC -- Class C through one or more forward agreements (each, a Forward Agreement) entered into with one or more Canadian chartered banks and/or their affiliates (the Counterparty). The final settlement of the Forward Agreement with the Counterparty is May 27, 2014 (the Forward Date). The character conversion measure announced in the Federal Government's Economic Action Plan 2013 (the May 2013 Tax Proposals) prevents investment funds, including the AHL Alpha Fund, from extending the term of existing derivative forward agreements, including the Forward Agreement, after March 20, 2013.
14. After the Forward Date, the AHL Alpha Fund will not be able to obtain exposure to the securities of either the Bottom Fund or the AHL SPC -- Class C through a Forward Agreement or other specified derivative.
15. The Filer obtained a previous decision dated November 22, 2013 (the Previous DP Decision) exempting the AHL DP Fund from subsections 2.5(2)(a) and (c) of NI 81-102 to permit the AHL DP Fund to directly purchase and hold securities of the Bottom Fund in order to obtain exposure to the Underlying Assets. The May 2013 Tax Proposals effectively prevented investment funds, including the AHL DP Fund, from increasing the notional amount of existing derivative forward agreements, including the AHL DP Fund's forward agreements, after March 20, 2013. Accordingly, in order to issue additional units, the Filer obtained the Previous DP Decision to permit the AHL DP Fund to purchase and hold securities of the Bottom Fund to obtain exposure to the DP Underlying Assets.
16. The Filer obtained a previous decision dated January 16, 2014 (the Prior Evolution Decision, and together with the Previous AHL Decision and Previous DP Decision, thePrevious Decisions) exempting the Top Funds from subsections 2.5(2)(a), (b) and (c) of NI 81-102 to permit each of the AHL Alpha Fund and AHL DP Fund to gain exposure of up to 10% of their respective net asset value to the AHL Evolution Programme through securities of AHL Evolution Limited held by AHL SPC -- Class C and the Bottom Fund, respectively.
17. The Requested Relief is required; (a) to permit the AHL DP Fund to continue, and permit the AHL Alpha Fund to commence, to directly purchase and hold securities of the Bottom Fund in order to obtain exposure to the Underlying Assets after the Forward Date; and (b) to permit the AHL Alpha Fund and the AHL DP Fund to continue to gain exposure of up to 10% of the Top Funds net asset value to the AHL Evolution Programme (as defined below) through AHL Evolution Limited held in the Bottom Fund, as similarly prescribed under the Prior Evolution Exemption.
18. The AHL Alpha Fund issued a press release and will issue a material change report as soon as practicable with respect to the final settlement of the Forward Agreement and its intention to purchase and hold securities of the Bottom Fund in order to obtain exposure to the Alpha Underlying Assets.
19. Subject to obtaining the requisite securityholder approvals, it is anticipated that the AHL Alpha Fund and the AHL DP Fund will complete a merger, consolidation or other reorganization on or before December 31, 2014.
The Bottom Fund and the Underlying Assets
20. The Bottom Fund is an exempted company with limited liability incorporated in the Cayman Islands on September 5, 2013 that will acquire and maintain the Underlying Assets. The return to the Top Funds will be based on the performance of the Bottom Fund, which, in turn, will be based on the performance of the Underlying Assets.
21. Man Fund Management (Guernsey) Limited (the AHL DP Manager) is the manager and services manager of the Bottom Fund. The Underlying Assets will be actively managed by the Investment Manager. The Investment Manager is authorized and regulated in the United Kingdom by the Financial Conduct Authority and is a member of Man Group plc (Man Group).
22. The Bottom Fund was formed to provide investment funds managed by the Filer, including the Top Funds, with exposure to investment programs offered by the Investment Manager.
23. The Bottom Fund is a reporting issuer under the Securities Act (Ontario) and the Securities Act (Québec) and subject to the continuous disclosure requirements of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106). Accordingly, the financial statements and other reports required to be filed by the Bottom Fund are available through SEDAR.
24. The Bottom Fund is a mutual fund because holders of its securities will be entitled to receive, on demand, an amount computed by reference to the NAV of the Bottom Fund. However, the Bottom Fund will not distribute any securities under its non-offering prospectus. Accordingly, the Bottom Fund will be a mutual fund to which NI 81-106 applies, but will not be subject to the requirements of either NI 81-102 or NI 81-104.
25. Though not subject to NI 81-104, the Bottom Fund will be a commodity pool as such term is defined in NI 81-104 in that the Bottom Fund has adopted fundamental investment objectives that permit it to use specified derivatives in a manner that is not permitted under NI 81-102.
26. In managing the Underlying Assets, the Investment Manager will employ the AHL Alpha Programme and the AHL Diversified Programme. The Bottom Fund has adopted and is subject to the investment restrictions contained in NI 81-102. The Underlying Assets are managed in accordance with these restrictions, except as otherwise permitted by NI 81-104 and subject to receipt of any exemptions therefrom obtained by the Bottom Fund or the Top Funds.
27. The Investment Manager will monitor the Bottom Fund's compliance with its investment restrictions for the Underlying Assets.
28. As a complementary investment strategy, the Top Funds currently have exposure of up to 10% of their respective net asset value in the AHL Evolution Programme (as defined below) through the Bottom Fund and AHL SPC -- Class C. The Prior Evolution Decision permitted each Top Fund to indirectly gain exposure to the AHL Evolution Programme through AHL Evolution Limited, provided that, among other things, the exposure to AHL Evolution Limited in the respective underlying fund did not in the aggregate represent more than 10% of the net asset value of the each Top Fund.
29. The investment by each Top Fund in securities of the Bottom Fund will constitute more than 10% of the NAV of each Top Fund. Other than cash and cash equivalents, the Top Funds will not have any investments other than direct or indirect exposure to the Bottom Fund. Each of the Top Funds will have substantially the same investment objectives as the Bottom Fund in that they obtain exposure to a trading program that invests in a portfolio of futures, forward contracts, swaps and other financial derivative instruments both on and off exchange that is implemented and managed by the Investment Manager and held by the Bottom Fund. The Investment Manager uses cash investments to manage the Fund's leverage.
30. The Bottom Fund issues redeemable non-voting participating shares (theAHL DP Shares) from time to time in reliance on exemptions from applicable prospectus requirements. The AHL DP Shares are issued in separate classes and are referable to the same portfolio of assets. Other than with respect to the management fee of the Investment Manager, the rights and attributes of the classes of AHL DP Shares are identical. The return of the AHL DP Shares will depend on the Underlying Assets.
31. The Bottom Fund currently issues AHL DP Shares of three classes: Class A CAD Shares, Class B CAD Shares and Class C CAD Shares. The return to the holders of Units of the AHL DP Fund is referable to the Class A CAD Shares and Class B CAD Shares issued by Bottom Fund. The return to the holders of Units of the AHL Alpha Fund is referable to the Class C CAD Shares issued by Bottom Fund.
32. Each Top Fund complies, and will comply, with the requirements under NI 81-106 relating to the top 25 positions portfolio holdings disclosure in its management reports of fund performance as if each Top Fund were investing directly in the Underlying Assets.
33. The fees and expenses payable by the Top Fund or holders of Units in respect for the same service will not be duplicated as a result of the investment by the Top Funds in securities of the Bottom Fund.
The AHL Evolution Programme
34. The AHL Evolution Programme (the AHL Evolution Programme) is a trading program that invests in a portfolio of futures, forward contracts, swaps and other financial derivative instruments both on and off exchange. The markets covered include both developed and emerging markets. The AHL Evolution Programme is implemented and managed by the Investment Manager.
35. Trading in the AHL Evolution Programme may focus upon inefficiencies in a whole range of markets including, but not limited to, markets for bonds, commodities, credit, stocks and currencies. Strategies capitalizing on these inefficiencies include price momentum and relative value. In addition, non-directional trading strategies may be added from time to time. The AHL Evolution Programme trades in a number of markets not accessed by the AHL Alpha Programme and the AHL Diversified Programme. These markets may be accessed directly or indirectly and include, without limitation, credit indices, cash bonds, interest rate swaps, electricity and emerging market currencies and stock indices.
36. In order to access the AHL Evolution Programme, a portion of the assets of each AHL Portfolio will be invested in a class or series of redeemable non-voting participating shares (the AHL Evolution Shares) issued by AHL Evolution Limited (AHL Evolution Limited), which invests its assets in accordance with the AHL Evolution Programme.
37. AHL Evolution Limited is subsisting as an exempted company with limited liability in Bermuda under the provisions of the Companies Act 1981 of Bermuda and is an open-ended mutual fund authorized as an institutional investment fund by the Bermuda Monetary Authority in Bermuda and regulated under the Investment Funds Act 2006 of Bermuda.
38. The AHL Evolution Shares provide exposure to the AHL Evolution Programme which invests in, or gains exposure to, the same financial instruments that, in accordance with the fundamental investment objectives and restrictions of each Top Fund and of the Bottom Fund and with NI 81-102, as modified by NI 81-104, the Bottom Fund could acquire directly. The AHL Evolution Shares are attractive investments for the Bottom Fund as they provide an efficient and cost effective method of achieving exposure to the AHL Evolution Programme.
39. The Investment Manager also serves as the investment manager of AHL Evolution Limited. There are no management fees or incentive fees paid to the Investment Manager by AHL Evolution Limited in connection with the investment management services provided by the Investment Manager in respect of the assets of AHL Evolution Limited.
40. The Top Funds exposure to the AHL Evolution Shares in the portfolio of the Bottom Fund will not in the aggregate represent more than 10% of the net asset value of the Top Funds. The Investment Manager will manage the investments of the Bottom Fund to ensure that the Bottom Fund's exposure to the AHL Evolution Shares will not be more than 10% of the net asset value of the Top Funds.
41. The Investment Manager will monitor the investment restrictions of each Bottom Fund and AHL Evolution Limited. If the Investment Manager becomes aware of any breach of the investment restrictions, appropriate action and notification to the directors and manager of the Bottom Fund will be taken to bring the Bottom Fund back within the investment restrictions as soon as practicable.
42. In the absence of the Exemption Sought being granted, the Top Funds would not be permitted to gain exposure to the AHL Evolution Programme by means of the AHL Evolution Shares in the Bottom Fund. The investment by each Top Fund in securities of the Bottom Fund will comply with the requirements of section 2.5 of NI 81-102, except that, contrary to subsections 2.5(2)(a), (b) and (c) of NI 81-102, the Bottom Fund is a mutual fund that:
(a) is not subject to NI 81-102 and will never have offered securities under a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Distributions;
(b) holds more than 10% of its net asset value in securities of other mutual funds; and
(c) will not be a reporting issuer in any jurisdiction that each Top Fund is a reporting issuer in except Ontario and Quebec.
43. The investment by each Fund in securities of the Bottom Fund represents the business judgement of responsible persons uninfluenced by considerations other than the best interest of the Top Fund and the holders of Units, respectively.
44. As of the date that the Requested Relief is granted, the Filer will no longer rely on the Previous Decisions.
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) each Top Fund is a commodity pool subject to NI 81-102 and NI 81-104;
(b) the Bottom Fund has adopted and is subject to the investment restrictions and practices contained in NI 81-102 and is managed in accordance with these restrictions and practices, except as otherwise permitted by NI 81-104 and any exemptive relief obtained by the Top Funds;
(c) the exposure of the Top Funds to securities of the Bottom Fund is in accordance with the fundamental investment objectives of the Top Funds;
(d) the fundamental investment objective of each Top Fund, as disclosed in the next filed prospectus, discloses the name of the Bottom Fund and provides that the Top Fund will obtain exposure to the Underlying Assets by investing in the securities of the Bottom Fund;
(e) the current prospectus of the each Top Fund discloses, and any annual information form filed will disclose, that each Top Fund will invest in securities of the Bottom Fund and the risks associated with such an investment;
(f) the Bottom Fund is a reporting issuer subject to National Instrument 81-106 -- Investment Fund Continuous Disclosure;
(g) no securities of the Bottom Fund are distributed in Canada other than to the AHL Alpha Fund and AHL DP Fund;
(h) other than cash and cash equivalents, the Top Funds will not have any investments other than direct investment in securities of the Bottom Fund;
(i) the investment by each Top Fund in securities of the Bottom Fund is made in compliance with each provision of paragraph 2.5 of NI 81-102, except paragraphs 2.5(a), (b) and (c) of NI 81-102;
(j) the exposure of the Fund to the AHL Evolution Shares in the portfolio of the Bottom Fund do not in the aggregate represent more than 10% of the net asset value of the Top Funds;
(k) the AHL Evolution Shares provide exposure to the same financial instruments that, in accordance with the fundamental investment objectives and restrictions of each of the Top Funds and the Bottom Funds and with NI 81-102, as modified by NI 81-104, the Bottom Fund could acquire directly;
(l) the Bottom Fund provides disclosure regarding its investment in the AHL Evolution Shares and exposure to the AHL Evolution Programme, in its annual information form and other applicable continuous disclosure documents that it will file on SEDAR;
(m) financial statements of AHL Evolution Limited are provided to any securityholder of each Top Fund that requests them from the Filer; and
(n) the Requested Relief will cease to be effective in the Jurisdictions with respect to the AHL Alpha Fund upon the earlier of the completion of the merger, consolidation or other reorganization between the AHL Alpha Fund and the AHL DP Fund and December 31, 2014.
"Raymond Chan"
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission