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Bridgeport Asset Management Inc.
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 prohibitions in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to permit fund-on-fund structure involving between 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, s. 13.5(2)(a).
July 8, 2015
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 BRIDGEPORT ASSET MANAGEMENT INC. (the Filer) AND IN THE MATTER OF THE TOP FUNDS (as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on its behalf and on behalf of Bridgeport Small and Mid Cap Equity Fund, Bridgeport U.S. Equity Fund, and Bridgeport Canadian Equity Fund (the Initial Top Funds) and any other investment fund which is not a reporting issuer under the Legislation that is advised or managed by the Filer, or an affiliate, after the date hereof (the Future Top Funds, and together with the Initial Top Funds, the Top Funds), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), exempting the Top Funds and the Filer 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 investment fund, alone or together with one or more related investment funds, is a substantial securityholder;
(b) the restriction in the Legislation which prohibits an investment fund from knowingly making an investment in an issuer in which any of the following has a significant interest:
(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; 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 Related Issuer Relief); and
(d) the restrictions contained in subsection 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which prohibit a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase a security 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 purchase is obtained before the purchase
(the Consent Relief, and together with the Related Issuer Relief, 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 in respect of the Related Issuer Relief.
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 Passport System (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:
Filer
1. The Filer is a corporation incorporated under the laws of the Province of Ontario and has 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 Quebec, and in the category of portfolio manager in British Columbia and Manitoba.
3. The Filer is not a reporting issuer in any jurisdiction and is not in default of securities legislation of any jurisdiction of Canada.
4. The Filer is the investment fund manager and portfolio adviser of the Initial Top Funds. The Filer, or an affiliate of the Filer, will be the investment fund manager and portfolio manager of the Future Top Funds.
5. The Filer is the investment fund manager and portfolio adviser of Bridgeport Small and Mid Cap Equity LP, Bridgeport U.S. Equity LP, and Bridgeport Canadian Equity LP (collectively, the Initial Underlying Funds). The Filer, or an affiliate of the Filer, will be the investment fund manager and portfolio manager of any other investment funds that may be established by the Filer or an affiliate after the date hereof (the Future Underlying Funds and together with the Initial Underlying Funds, the Underlying Funds).
6. As the Filer will be the portfolio adviser for the Initial Top Funds and the Initial Underlying Funds, the Filer would be considered to be a "responsible person" within the meaning of the applicable provisions of NI 31-103.
The Top Funds
7. Each Initial Top Fund is, and each Future Top Fund will be, a "mutual fund" for the purposes of the Legislation.
8. Each Initial Top Fund is an open-ended trust established pursuant to a first amended and restated master trust agreement with Valiant Trust Company dated June 5, 2015, as may be amended from time to time. Each Future Top Fund will be an open-ended trust established under the laws of the Province of Ontario or another jurisdiction of Canada.
9. Each Initial Top Fund is not a reporting issuer under the Legislation and no Future Top Fund will be a reporting issuer under the Legislation. Securities of each Top Fund will be offered for sale in any jurisdiction in Canada pursuant to prospectus exemptions under National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) or in other jurisdictions subject to available prospectus and registration exemptions and applicable laws.
10. The investment objectives of each Initial Top Fund contemplate the investment of all or substantially all of each fund's assets in the corresponding Initial Underlying Funds. The investment objectives of each Future Top Fund will contemplate the investment of all or substantially all of each fund's assets in one or more Underlying Funds.
The Underlying Funds
11. Each Initial Underlying Fund is, and each Future Underlying Fund will be, a "mutual fund" for the purposes of the Legislation.
12. Each Initial Underlying Fund is an open-ended limited partnership formed under the laws of the Province of Ontario. Any Future Underlying Fund will also be an open-ended limited partnership formed under the laws of the Province of Ontario or another jurisdiction of Canada.
13. Each Initial Underlying Fund is not a reporting issuer under the Legislation and no Future Underlying Fund will be a reporting issuer under the Legislation. Securities of each Underlying Fund will be offered for sale in any jurisdiction in Canada pursuant to prospectus exemptions under NI 45-106 or in other jurisdictions subject to available prospectus and registration exemptions and applicable laws.
14. The general partners of the Initial Underlying Funds are Bridgeport Small and Mid Cap Equity GP Inc., Bridgeport U.S. Equity GP Inc., and Bridgeport Canadian Equity GP Inc., respectively (the General Partners). The General Partners are incorporated under the laws of the Province of Ontario and are affiliates of the Filer. The general partner of any Future Underlying Fund that is structured as a limited partnership will be an affiliate of the Filer.
15. The Filer will be entitled to receive management fees with respect to one or more classes of securities of the Initial Underlying Funds.
16. The General Partners, or other affiliates of the Filer, will be entitled to receive incentive allocations with respect to one or more classes of securities of the Initial Underlying Funds. The incentive allocations will be equal to 20% of the increase in unit value in excess of a 10% annual hurdle rate subject to a high water mark, which will be reset each year.
17. Each Underlying Fund will have separate investment objectives, strategies and/or restrictions.
18. The investment objectives of the Initial Underlying Funds are as follows:
(a) Bridgeport Small and Mid Cap Equity LP will seek to generate capital appreciation by investing primarily in publicly traded equities issued by North American small and mid-cap companies.
(b) Bridgeport U.S. Equity LP will seek to generate capital appreciation by investing primarily in publicly traded equities issued by U.S. large cap companies.
(c) Bridgeport Canadian Equity LP will seek to generate capital appreciation by investing primarily in publicly traded equities issued by Canadian large cap companies.
19. An investment in an Underlying Fund by a Top Fund will be effected at an objective price. The portfolio of each Underlying Fund will consist primarily of publicly traded securities. No Underlying Fund will hold more than 10% of its net asset value (NAV) in "illiquid" assets (as defined in National Instrument 81-102 Investment Funds (NI 81-102). An investment by a Top Fund in an Underlying Fund will be effected based on an objective NAV of the Underlying Fund.
Fund-on-Fund Structure
20. Each Initial Top Fund has been 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 for tax or other considerations. Rather than operating the Initial Top Funds' and the Initial Underlying Funds' investment portfolios as separate pools, the Filer wishes to make use of economies of scale by managing only three investment pools.
21. The Top Funds will allow investors to obtain exposure to the investment portfolio of the corresponding Underlying Funds and their strategies through direct investment by the Top Funds in securities of the Underlying Funds. Such fund-on-fund structure will increase the asset base of the Underlying Funds, which is expected to provide additional benefits to security holders of the Top Funds and 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.
22. 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 security holders of the Underlying Funds.
23. Investors will have the option of investing directly in the Underlying Funds and/or investing indirectly in the Underlying Funds through the Top Funds.
24. The assets of each Underlying Fund are or will be (and the assets of each Top Fund, to the extent a Top Fund holds securities other than securities of an Underlying Fund, are or will be) held by a custodian that meets the qualifications of section 6.2 of NI 81-102 (for assets held in Canada) or a custodian that meets the qualifications of section 6.3 of NI 81-102 (for assets held outside Canada) except that such custodian's financial statements may be not be publicly available.
25. Each of the Top Funds and the Underlying Funds that are subject to National Instrument 81-106 Investment Funds Continuous Disclosure (NI 81-106) will prepare annual audited financial statements and interim unaudited financial statements in accordance with NI 81-106 and will otherwise comply with the requirements of NI 81-106 as applicable. The holdings of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund.
26. The Top Funds and the corresponding Underlying Funds will have matching valuation dates. The Initial Top Funds and the Initial Underlying Funds will be valued no less frequently than on a monthly basis.
27. Securities of the Top Funds and the relevant Underlying Funds will have matching redemption dates. The Initial Top Funds and the Initial Underlying Fund will be redeemable no less frequently than on a monthly basis.
28. No Underlying Fund will be a Top Fund.
29. The Top Funds will be related mutual funds (under applicable securities legislation) by virtue of the common management by the Filer. The amounts invested from time to time in an Underlying Fund by a Top Fund, either alone or together with other Top Funds, may exceed 20% of the outstanding voting securities of an 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.
30. In addition, the fund-on-fund structure may result in a Top Fund investing in an Underlying Fund in which an officer or director of the Filer has a significant interest and/or a Top Fund investing in an Underlying Fund in which a person or company who is a substantial securityholder of the Top Fund or the Filer has a significant interest.
31. Currently, an officer, director and substantial securityholder of the Filer holds a significant interest in each Initial Underlying Fund. It is expected that other investors, including employees of the Filer, may become substantial securityholders of one or more Top Funds and hold a significant interest in one or more Underlying Funds.
Generally
32. 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.
33. In the absence of the Related Issuer Relief, each Top Fund would be precluded from purchasing and holding securities of an Underlying Fund due to the investment restrictions contained in the Legislation. Specifically, the Top Funds would be prohibited from becoming substantial security holders of the corresponding Underlying Funds. In addition, the Initial Top Funds would be prohibited from investing in the Initial Underlying Funds because an officer or director of the Filer may have a significant interest in the Underlying Funds, as a beneficial owner of the respective General Partners and as a limited partner of each of the Initial Underlying Funds.
34. In the absence of the Consent Relief, the Top Funds may be precluded from investing in their corresponding Underlying Funds, unless the specific fact is disclosed to security holders of the Top Fund and the written consent of the security holders of the Top Fund to the investment is obtained prior to the purchase, since an officer and/or director of the Filer, who may be considered a "responsible person" (as defined by section 13.5 of NI 31-103) or an associate of a responsible person, may also be a partner, officer and/or director of the applicable Underlying Fund, including a partner, officer and/or director of the general partner of an Underlying Fund where the Underlying Fund is a limited partnership.
35. A Top Fund's investments in an Underlying Fund represent the business judgment of a responsible person uninfluenced by considerations other than the best interests of the investment funds concerned.
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:
1. In respect of the Related Issuer Relief and the Consent Relief:
a) securities of each 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 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 not 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); or
ii. 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 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) the term sheet, or other similar disclosure document of a Top Fund, will be provided to investors in a Top Fund prior to the time of investment and will disclose:
i. that the Top Fund may purchase securities of the Underlying Fund;
ii. that the Filer, or its affiliate, as the case may be, is the investment fund manager and/or portfolio adviser of both the Top Fund and the Underlying Fund;
iii. that the Top Fund will invest substantially all of its assets in the Underlying Fund;
iv. each officer, director or substantial securityholder of the Filer, or its affiliate, or of a Top Fund that also has a significant interest in the Underlying Fund, the approximate amount of the significant interest they hold, on an aggregate basis, expressed as percentage of the NAV of the Underlying Fund, and the potential conflicts of interest which may arise from such relationships;
v. the fees and expenses payable by the Underlying Fund that the Top Fund invests in, including any incentive fees or profit allocations or other allocations;
vi. that investors are entitled to receive from the Filer, or its affiliate, on request and free of charge, a copy of the term sheet or other similar disclosure document of the Underlying Fund, if available; and
vii. that investors are entitled to receive from the Filer, or its affiliate, on request and free of charge, the annual and interim financial statements relating to the Underlying Fund in which the Top Fund invests its assets, if available.
The Consent Relief
"Raymond Chan"
Manager, Investment Funds & Structured Products Branch
Ontario Securities Commission
The Related Issuer Relief:
"Janet Leiper"
Commissioner
Ontario Securities Commission
"William J. Furlong"
Commissioner
Ontario Securities Commission