Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – filer granted relief from self-dealing provisions in s. 111 of the Securities Act in order to implement fund of fund structure for pooled funds 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), (2)(c) , 111(3), 113.

November 28, 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
AYAL CAPITAL ADVISORS LIMITED
(the “Filer”)

AND

IN THE MATTER OF
AYAL CAPITAL ADVISORS CANADIAN FEEDER LP
(the “Initial Top Fund”)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of each of the Filer, the Initial Top Fund, and any other mutual fund which is not a reporting issuer under the Securities Act (Ontario) (the “Act”), that is established, advised or managed by the Filer, or its affiliate, after the date hereof (the “Future Top Funds” and together with the Initial Top Fund, the “Top Funds”), which invests its assets in AYAL Capital Advisors Fund LP (the “Initial Underlying Fund”) or any other investment fund which is not a reporting issuer under the Act and may be established, advised or managed by the Filer, or its affiliate, in the future (the “Future Underlying Funds” and together with the Initial Underlying Fund, the “Underlying Funds”), for a decision under the securities legislation of the Jurisdiction (the “Legislation”) exempting the Filer and the Top Funds from:

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

(b)           the restriction in the Legislation which prohibits an investment fund from knowingly making an investment in an issuer in which:

(i)            any officer or director of the investment fund, its management company or distribution company or an associate of any of them, or

(ii)           any person or company who is a substantial securityholder of the investment fund, its management company or its distribution company,

has a significant interest; and


(c)           the restriction in the Legislation which prohibits an investment fund, its management company or its distribution company, from knowingly holding an investment described in paragraph (a) or (b) 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 Alberta.

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:

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 in the categories of investment fund manager, portfolio manager and exempt market dealer in Ontario and as an exempt market dealer in Alberta.

3.             The Filer is the investment fund manager and portfolio adviser of the Initial Top Fund and the Initial Underlying Fund. The Filer, or an affiliate of the Filer, will be the investment fund manager and portfolio adviser of the Future Top Funds and Future Underlying Funds.

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

The Top Funds

5.             The Initial Top Fund is a limited partnership established under the laws of the Province of Ontario on August 7, 2013. The Future Top Funds will be structured as limited partnerships, trusts or corporations under the laws of Ontario or another jurisdiction of Canada.

6.             The general partner of the Initial Top Fund is AYAL Capital Advisors GP (Ontario) Inc., an affiliate of the Filer. The general partner of each Future Top Fund that is structured as a limited partnership will be an affiliate of the Filer.

7.             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.

8.             The investment objective of the Initial Top Fund is to invest substantially all of its assets in the Initial Underlying Fund. It currently holds over 80% of the outstanding securities of the Initial Underlying Fund.

9.             The Future Top Funds will seek to achieve their investment objectives by investing substantially all of their assets in one or more Future Underlying Funds.

10.          Securities of each of the Top Funds, are, or will be, sold pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”).

11.          Securities of the Initial Top Fund have been issued to shareholders of the Filer and may only be redeemed on the anniversary of the original date of issuance provided the securityholder has held the securities for more than two years and the Initial Top Fund has received 90 days prior written notice of the securityholder’s redemption request.

12.          The Initial Top Fund intends to issue a new class of securities (the New Units) that will be redeemable by a securityholder of the Initial Top Fund on the last business day of each fiscal quarter, provided it has received 90 days’ prior written notice of a securityholder’s redemption request. It may also issue additional classes of securities in the future.

13.          Upon issuing the New Units, the Initial Top Fund will become a mutual fund for the purposes of the Act.

14.          Each of the Future Top Funds will be a mutual fund for the purposes of the Act.

15.          The Initial Top Fund is not in default of securities legislation of any jurisdiction in Canada.

The Underlying Funds

16.          The Initial Underlying Fund is a limited partnership established under the laws of the Province of Ontario on August 30, 2013.

17.          The Future Underlying Funds will be structured as limited partnerships, trusts or corporations under the laws of Ontario, another jurisdiction of Canada or a foreign jurisdiction.

18.          AYAL Capital Advisors GP (Cayman) Inc., a Cayman Island company, is the general partner of the Initial Underlying Fund and an affiliate of the Filer. The general partner of each Future Underlying Fund that is structured as a limited partnership will be an affiliate of the Filer.

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

20.          The Initial Underlying Fund’s investment objective is to preserve capital and achieve a high level of positive returns on select investments with low volatility over five and ten-year horizons, by investing primarily in North American debt and equity securities of companies across a range of industry sectors.

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

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

23.          Securities of the Initial Underlying Fund may be redeemed at any time on receipt of no less than 90 days’ prior written notice of the securityholder’s redemption request.

24.          The Initial Underlying Fund is a mutual fund for the purposes of the Act and the Future Underlying Funds will mutual funds for purposes of the Act.

25.          The Initial Underlying Fund is not in default of securities legislation of any jurisdiction of Canada.

The Fund-on-Fund Structure

26.          The Top Funds will allow investors to obtain exposure to the investment portfolios of the Underlying Funds and their respective investment strategies through direct investments by the Top Funds in securities of the Underlying Funds (the “Fund-on-Fund Structure”).

27.          An investment by a Top Fund in an Underlying Fund is, or will be, compatible with the investment objectives of the Top Fund. 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.

28.          There will be no duplication of management fees or incentive fees in respect of an investment in an Underlying Fund by a Top Fund pursuant to the Fund-on-Fund Structure.

29.          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.

30.          Prior to the time of purchase of securities of a Top Fund, an investor will be provided with an offering memorandum or other similar document of the Top Fund that contains disclosure about the relationships and potential conflicts of interest between the Top Fund and the Underlying Funds.

31.          The offering memorandum or other similar document of each Top Fund will describe the Top Funds' intent, or ability, to invest in securities of the Underlying Funds and that the Underlying Funds are also managed and advised by the Filer or its affiliate.

32.          Each of the Top Funds and the Underlying 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, as applicable.

33.          Securityholders of a Top Fund will receive, on request, a copy of such Top Fund's audited annual financial statements and interim unaudited financial statements. The financial statements of each Top Fund will disclose its holdings of securities of the applicable Underlying Funds.

34.          Securityholders of a Top Fund will receive, on request, a copy of the offering memorandum of an Underlying Fund, or other similar document, if available, and the annual and interim financial statements of any Underlying Fund in which the Top Fund invests.

35.          The Filer, or its affiliate, will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of any Underlying Fund, except that the Filer, or its affiliate, may arrange for the securities of the Underlying Fund held by a Top Fund to be voted by the beneficial holders of the securities of the Top Fund.

36.          The custodian of the assets of each Top Fund and each Underlying Fund is, or will be, one or more financial institutions and/or their affiliates, or such third party or parties as may be appointed by the Filer or its affiliate. The custodian of each Top Fund and each Underlying Fund meets, or will meet, the qualifications for an investment fund custodian set out in subsection 6.2 of National Instrument 81-102 Investment Funds (NI 81-102), or for fund assets held outside of Canada, subsection 6.3 of NI 81-102.

37.          The Initial Top Fund and the Initial Underlying Fund have matching valuation dates and are valued as of the last business day of each month.

38.          Each Future Underlying Fund will be valued no less frequently than its applicable Top Fund(s).

39.          Each Underlying Fund’s securities will be redeemable no less frequently than its applicable Top Fund(s)’.

40.          The investment portfolio of the Initial Underlying Fund is considered to be liquid. While the Underlying Funds are not prohibited from purchasing and holding “illiquid assets” (as defined in NI 81-102), the Filer, or its affiliate, manages or will manage the portfolios of each Underlying Fund to ensure there is sufficient liquidity to provide for redemptions of securities by securityholders of the Top Funds.

41.          No Underlying Fund will be a Top Fund.

42.          No Top Fund will purchase or hold securities of an Underlying Fund unless, at the time of the purchase, the Underlying Fund holds no more than 10% of its net assets in securities of other investment funds unless the Underlying Fund:

(i)            purchases or holds securities of a “money market fund” (as defined in NI 81-102);

(ii)           purchases or holds securities that are “index participation units” (as defined in NI 81-102) issued by an investment fund; or

(iii)          is a “clone fund” (as defined in NI 81-102).

43.          In addition to the holdings in the Initial Underlying Fund by the Initial Top Fund, the amounts invested from time to time in an Underlying Fund by a Future 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 Filer or its affiliate.

44.          In addition, officers and/or directors of the Filer may be substantial security holders of a Top Fund and have a significant interest in an Underlying Fund.


Generally

45.          In the absence of the Requested Relief, the Initial Top Fund would be prohibited from making additional investments in the Initial Underlying Fund once the New Units are issued. In addition, it would be required to redeem a significant portion of its holdings in the Initial Underlying Fund.

46.          In the absence of the Requested Relief, the ability of the Future Tops Funds to invest in Underlying Funds in accordance with their investment objectives under the Fund-on-Fund Structure would be severely restricted.

47.          Since the Top Funds and the Underlying Funds do not and will not offer their securities under a prospectus and are not and will not be reporting issuers, 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.

48.          Investing in the Underlying Funds will allow the Top Funds to achieve their investment objectives in a cost efficient manner and will not be detrimental to the interests of other securityholders of the Underlying Funds.

49.          An investment by a Top Fund in an Underlying Fund can provide greater diversification for a Top Fund in particular asset classes on a basis that is not materially more expensive than investing directly in the securities held by the applicable Underlying Fund.

50.          Each investment by a Top Fund in an Underlying Fund under the Fund-on-Fund Structure represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund.

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 sought is granted provided that:

(a)           securities of the Top Funds 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 investment objectives of the Top Fund;

(c)           no Top Fund will purchase or hold securities of an Underlying Fund unless, at the time of the purchase of securities of the Underlying Fund, the Underlying Fund holds no more than 10% of its net assets in securities of other investment funds unless the Underlying Fund:

(i)            purchases or holds securities of a “money market fund” (as defined by NI 81-102);

(ii)           purchases or holds securities that are “index participation units” (as defined by NI 81-102) issued by an investment fund; or

(iii)          is a “clone fund” (as defined by NI 81-102);

(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;

(f)            the Filer, or its affiliate, does not cause the securities of the Underlying Fund held by a Top Fund to be voted at any meeting of holders of such securities, except that the Filer, or its affiliate, may arrange for the securities the Top Fund holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;

(g)           investors in a Top Fund will be provided with an offering memorandum where available or other similar disclosure document for the Top Fund that will disclose:

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

(ii)           the fact that the Filer is the investment fund manager and portfolio adviser of both the Top Funds and the Underlying Funds;

(iii)          the approximate or maximum percentage of net assets of the Top Fund that the Top Fund intends to invest in securities of the Underlying Funds; and

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

(h)           investors in each Top Fund will be informed that they are entitled to receive from the Filer, or its affiliates, on request and free of charge, a copy of (i) the offering memorandum or other disclosure documents, if available, and (ii) the annual or semi-annual financial statements, relating to all Underlying Funds in which the Top Fund may invest its assets; and

(i)            prior to the time of investment, securityholders of a Top Fund will be provided with disclosure with respect to each officer and director of the Filer, if any, that has a significant interest in the Underlying Fund through investments made in securities of such Underlying Fund and that such officer and/or director of the Filer is also a substantial securityholder of the Filer. Securityholders 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 another similar document provided to investors of the Top Fund.

“Mary G. Condon”
Commissioner
Ontario Securities Commission

“Judith N. Robertson”

Commissioner Ontario Securities Commission