Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief from the conflict of interest restrictions in the Securities Act (Ontario) and the self-dealing prohibition in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to allow pooled funds to invest in securities of underlying pooled funds under common management subject to conditions.

Applicable Legislative Provisions

Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(2)(c), 111(4), 113.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a), 15.1.

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
RCM PARTNERS INC. (the Filer)

AND

RCM VALUE OPPORTUNITIES TRUST
(the Initial Top Fund)

AND

RCM SPECIAL SITUATIONS FUND
(the Initial Underlying Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Filer, its affiliates, the Initial Top Fund and any other mutual fund that is not a reporting issuer in any jurisdiction of Canada that may be established, advised or managed by the Filer or its affiliate in the future (the “Future Top Funds” and, together with the Initial Top Fund, the “Top Funds”) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) exempting the Filer, its affiliates and the Top Funds, as applicable, in respect of the Top Funds’ investment in the Initial Underlying Fund or any other mutual fund that is not a reporting issuer in any jurisdiction of Canada that 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”) from:

(a)           the restriction in securities legislation that prohibits an investment fund from knowingly making an investment in a person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial securityholder;

(b)           the restriction in securities legislation that 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;

(c)           the restriction in securities legislation that prohibits an investment fund, its management company or its distribution company, from knowingly holding an investment described in paragraph (a) or (b) above (the “Related Issuer Relief”); and

(d)           the restriction in paragraph 13.5(2)(a) of National Instrument 31-103 Registration Requirements prohibiting a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to invest in the securities of an 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”);

(collectively, the “Exemption Sought”).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

1.             the Ontario Securities Commission is the principal regulator for this application; and

2.             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 (i) in respect of the Related Issuer Relief, in Alberta and (ii) in respect of the Consent Requirement Relief, in Alberta, British Columbia, Manitoba, Québec and Nova Scotia.

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 incorporated under the Business Corporations Act (Ontario) on June 23, 2008 and has its head office in Toronto, Ontario.

2.             The Filer is registered as an adviser in the category of portfolio manager and as an investment fund manager in Ontario.

3.             The Filer is also registered as a dealer in the category of exempt market dealer under applicable securities legislation in the provinces of Alberta, British Columbia, Manitoba, Québec, Ontario and Nova Scotia.

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

5.             The Filer is the investment fund manager and portfolio adviser of the Initial Underlying Fund and will be the investment fund manager and portfolio adviser of the Initial Top Fund. The Filer, or an affiliate of the Filer, will be the investment fund manager and portfolio adviser of the Future Top Funds and the Future Underlying Funds. Subject to obtaining any necessary regulatory approvals, the Filer will also act as trustee of any Top Fund and Future Underlying Fund structured as a trust.

6.             The Filer may also act as distributor of securities of the Top Funds and Underlying Funds not otherwise sold through another registered dealer.

7.             Mr. Michael Ruscetta, the founder and an officer and director of the Filer, is also a substantial securityholder of the Filer and has a significant interest in the Initial Underlying Fund by virtue of currently owning approximately a 20% interest in the Initial Underlying Fund. In the future, Mr. Ruscetta, and other officers and/or directors and/or substantial securityholders of the Filer and/or a Top Fund may also have a significant interest in an Underlying Fund.

Top Funds

8.             Each of the Top Funds will be a mutual fund for the purposes of the Legislation.

9.             The Initial Top Fund will be a mutual fund trust established under the laws of Ontario in or around the third calendar quarter of 2014 and will be governed by a declaration of trust.

10.          Any Future Top Funds may be structured as limited partnerships, trusts or corporations under the laws of Ontario or another jurisdiction of Canada. The general partner of each Future Top Fund that is structured as a limited partnership will be an affiliate of the Filer.

11.          Securities of each of the Top Funds will be sold to investors solely on a private placement basis pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”).

12.          The investment objective of the Initial Top Fund will be to generate superior risk-adjusted returns while preserving capital by investing substantially all of its assets in securities of the Initial Underlying Fund.

13.          The investment objective of each Future Top Fund will be to invest substantially all of its assets in securities of one or more Underlying Funds.

14.          Securities of the Initial Top Fund are expected to be eligible for investments by tax-free savings accounts (“TFSAs”) and trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans, defined profit sharing plans and registered disability savings plans (collectively, “Tax Deferred Plans”), each as defined in the Income Tax Act (Canada).

15.          None of the Top Funds will be a reporting issuer in any jurisdiction in Canada.

Underlying Funds

16.          The Initial Underlying Fund is, and each of the Future Underlying Funds will be, a mutual fund for the purposes of the Legislation.

17.          The Initial Underlying Fund is a limited partnership formed under the laws of Ontario by a declaration of limited partnership dated August 28, 2009.

18.          Any Future Underlying Funds may be structured as limited partnerships, trusts or corporations under the laws of Ontario or another jurisdiction of Canada.

19.          RCM General Partner Inc. (the “General Partner”), an affiliate of the Filer, acts as the general partner of the Initial Underlying Fund. The general partner of each Future Underlying Fund that is structured as a limited partnership will be an affiliate of the Filer.

20.          The Initial Underlying Fund is not, and will not be, a reporting issuer in any jurisdiction in Canada. None of the Future Underlying Funds will be a reporting issuer in any jurisdiction in Canada. In Canada, securities of the Initial Underlying Fund are, and securities of the Future Underlying Funds will be, sold to investors solely on a private placement basis pursuant to available prospectus exemptions in accordance with NI 45-106.

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

22.          The Initial Underlying Fund has, and the Future Underlying Funds will have, separate investment objectives, strategies and/or restrictions.

23.          The investment objective of the Initial Underlying Fund is to generate superior risk-adjusted returns while preserving capital by investing in, among other things, common equities, warrants, preferred shares, trust units, bank loans, debt securities, futures and other derivative instruments and other securities, including the selling short of such securities and the use of leverage against such long and short positions.

24.          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. The Initial Underlying Fund and its investments are, and the Future Underlying Funds and their investments will be, considered liquid. To the extent illiquid assets (as defined in National Instrument 81-102 Investment Funds (NI 81-102)) are held by a Top Fund or an Underlying Fund, such illiquid assets will only comprise an immaterial portion of the applicable Top Fund or Underlying Fund.

25.          The Filer acts as the investment fund manager and portfolio adviser of the Initial Underlying Fund pursuant to the terms of a management agreement.

Fund-on-Fund Structure

26.          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 for each Top Fund and each Underlying Fund meets, or will meet, the qualifications for a custodian set out in section 6.2 of NI 81-102, other than that audited financial statements may not have been made public for the purpose of section 6.2 3(a) of NI 81-102.

27.          The Initial Top Fund is being, and any Future Top Funds will be, created by the Filer to allow investors in the Top Funds to obtain exposure to the investment portfolios of the Underlying Funds and their investment strategies through direct investments by the Top Funds in securities of the Underlying Funds (the “Fund-on-Fund Structure”).

28.          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.

29.          Unlike the Initial Underlying Fund, which is a limited partnership, the Initial Top Fund will be formed as a trust for the purpose of providing access to the Initial Underlying Fund to a broader base of investors, including investors who hold their investments in TFSAs and Tax Deferred Plans and other investors who may not or wish not to invest directly in a limited partnership. As unlisted limited partnership interests, the securities of the Initial Underlying Fund are not a qualified investment under the TFSAs and Tax Deferred Plans.

30.          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.

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

32.          The Filer, or its affiliate, will ensure that no management 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. No performance fee or incentive allocation will be paid by Top Funds where a performance fee or incentive allocation is paid by corresponding Underlying Funds. The Filer and its affiliates will not charge any management fee or incentive fee to the Initial Top Fund.

33.          No sales fees or redemption fees will be payable by a Top Fund in relation to its purchases, dispositions or redemptions of securities of an Underlying Fund.

34.          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 (a) is a “clone fund” (as defined by NI 81-102); (b) purchases or holds securities of a “money market fund” (as defined by NI 81-102) or (c) purchases or holds securities that are “index participation units” (as defined by NI 81-102) issued by an investment fund.

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

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

(b)           the fact that the Filer, or its affiliate, is the investment fund manager and portfolio manager of both the Top Funds and the Underlying Funds;

(c)           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

(d)           the process or criteria used to select the Underlying Funds.

36.          Each of the Top Funds and the Underlying Funds prepares, or 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 otherwise complies, or will otherwise comply, with the requirements of NI 81-106, as applicable.

37.          The securityholders of a Top Fund will receive, on request and free of charge, a copy of such Top Fund’s annual audited and interim unaudited financial statements. The financial statements of each Top Fund will disclose its holdings of securities of the applicable Underlying Funds.

38.          The securityholders of a Top Fund will receive, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of any Underlying Fund in which the Top Fund invests, and a copy of the annual audited and interim unaudited financial statements of any Underlying Fund in which the Top Fund invests.

39.          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 securities of the Top Fund.

40.          The Initial Top Fund and the Initial Underlying Fund will have matching valuation dates. The Initial Underlying Fund and its securities are, and the Initial Top Fund and its securities will be, valued monthly.

41.          The securities of the Initial Top Fund and the Initial Underlying Fund will have matching redemption dates. Securities of the Initial Underlying Fund are, and securities of the Initial Top Fund will be, redeemable monthly.

42.          An Underlying Fund and its securities will be valued no less frequently than a Top Fund and its securities.

43.          Securities of an Underlying Fund will be redeemable no less frequently than securities of a Top Fund.

44.          No Underlying Fund will be a Top Fund.

45.          The Filer is entitled to receive monthly management fees, payable in arrears, with respect to certain classes of securities of the Initial Underlying Fund. The General Partner, an affiliate of the Filer, is also entitled to receive a performance fee in the form of an incentive allocation of realized and unrealized profits in respect of certain classes of securities of the Initial Underlying Fund. No performance fee or incentive allocation will be paid by Top Funds where a performance fee or incentive allocation is paid by corresponding Underlying Funds.

46.          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 securityholder of an Underlying Fund. The Top Funds will be related mutual funds by virtue of common management by the Filer or its affiliate.

47.          Prior to the time of investment, securityholders of a Top Fund will be provided with disclosure with respect to each officer, director, and/or substantial securityholder of the Filer and/or the Top Fund that also has a significant interest in an Underlying Fund and the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of net asset value (NAV) of the Underlying Fund. 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 document provided to investors of the Top Fund.

Generally

48.          The Fund-on-Fund Structure may result in a Top Fund investing in an Underlying Fund in which an officer, director or substantial securityholder of the Filer or the Top Fund has a significant interest.

49.          The Exemption Sought is required in part because the Top Funds will not offer their securities under a simplified prospectus. Consequently, they will not be subject to NI 81-102 and therefore the Top Funds will be unable to rely upon the exemption codified under section 2.5(7) of NI 81-102.

50.          In the absence of the Exemption Sought, a Top Fund would be precluded from purchasing and holding securities of an Underlying Fund due to the investment restrictions contained in the Legislation.

51.          In the absence of the Consent Requirement Relief, the Initial Top Fund would be precluded from investing in the Initial Underlying Fund, unless the consent of each investor in the Initial Top Fund is obtained, since Mr. Ruscetta will be an officer and director of the Filer and also an officer and director of the General Partner. In the future, other officers and directors of the Filer may also be officers and directors of the General Partner and/or of Underlying Funds structured as a corporation.

52.          A Top Fund’s investments in the Underlying Funds will represent the business judgement 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 Exemption Sought is granted provided that:

(a)           securities of the Top Funds are distributed in Canada solely on a private placement basis pursuant to available prospectus exemptions in accordance with NI 45-106;

(b)           the investment by a Top Fund in an Underlying Fund is compatible with the 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)            is a clone fund (as defined by NI 81-102),

(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 an investment 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;

(f)            the Filer, or its affiliate, does not cause the securities of an 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)           the offering memorandum or other similar disclosure document of a Top Fund, will be provided to investors in a Top Fund and will disclose:

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

(ii)           the fact that the Filer, or its affiliate, 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 affiliate, on request and free of charge, a copy of the offering memorandum or other similar disclosure document and 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, director, and/or substantial securityholder of the Filer and/or the Top Fund that also has a significant interest in an Underlying Fund and the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of the NAV of the Underlying Fund. 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 document provided to investors of the Top Fund.

The Consent Requirement Relief

“Raymond Chan”
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission

The Related Issuer Relief

“Judith N. Robertson”
Commissioner
Ontario Securities Commission

“Mary G. Condon”
Commissioner
Ontario Securities Commission