Securities Law & Instruments


Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from the investment fund self-dealing restrictions in the Securities Act (Ontario) and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to allow existing pooled funds to implement a multi-tier fund-of-fund structure involving investments in pooled funds under common management – Two existing pooled funds domiciled in Canada being reorganized into four-tier and three-tier fund-on-fund structures, respectively, providing exposure to the investment portfolio of a Cayman Master Fund under common management domiciled in the Cayman Islands – Relief granted to permit one-time In Specie subscriptions between pooled funds under common management in order to transfer the investment portfolio of a Canadian pooled fund to a Cayman Master Fund under common management.

Applicable Legislative Provisions

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

November 16, 2018

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
NEWGEN ASSET MANAGEMENT LIMITED
(the Filer)

AND

IN THE MATTER OF
NEWGEN EQUITY LONG-SHORT FUND RRSP,
NEWGEN EQUITY LONG-SHORT FUND LP AND
NEWGEN (OFFSHORE) LP

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on its behalf and on behalf of the NewGen Equity Long-Short Fund RRSP, formerly the NewGen Trading Fund RRSP, (the Canadian RRSP Fund), the NewGen Equity Long-Short Fund LP, formerly the NewGen Trading Fund LP, (the Canadian LP) and the NewGen (Offshore) LP (the Cayman LP), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation),

(a)           exempting the Canadian RRSP Fund, the Canadian LP, the Cayman LP and the Filer, as applicable, from:

(i)            the restriction in the Securities Act (Ontario) (the Act) 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; and

(ii)           the restriction in the Act which prohibits an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (i) above (together with the restriction in paragraph (i) above, the Related Issuer Relief);

(iii)           the restriction contained in subparagraph 13.5(2)(a)(ii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which prohibits 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

(iv)          the restriction contained in subsection 13.5(2)(b)(iii) of NI 31-103 which prohibits a registered adviser from knowingly causing an investment portfolio managed by it to purchase or sell a security from or to the investment portfolio of an investment fund for which the responsible person acts as an adviser (the In Specie Trade Relief, and together with the Related Issuer Relief and the Consent Relief, the Requested Relief); and

(b)           revoking a decision of the Filer obtained from the principal regulator dated July 28, 2015 granting the Related Issuer Relief and the Consent Relief (the Original Decision).

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 Requested Relief.

Interpretation

Unless expressly defined herein, terms in this decision have the respective meanings given to them in National Instrument 14-101 Definitions and MI 11-102.

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; investment fund manager and exempt market dealer in Newfoundland and Labrador and in Québec; portfolio manager and exempt market dealer in Alberta; and exempt market dealer in British Columbia and Saskatchewan.

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 Canadian RRSP Fund, the Canadian LP, the Cayman LP, and the portfolio adviser of the NewGen Equity Long/Short Fund (the Cayman Master Fund), described below. The President of the Filer, David Dattels, is a director of the board of the Cayman Master Fund.

5.             As the Filer is the portfolio adviser for the Canadian RRSP Fund, the Canadian LP, the Cayman LP and the Cayman Master Fund (individually a Fund, and collectively, the Funds), the Filer is a “responsible person” within the meaning of the applicable provisions of NI 31-103.

6.             The Filer has complete discretion to invest the assets of the Funds and is responsible for executing all portfolio transactions. Furthermore, the Filer, subject to compliance with applicable securities laws, may act as a distributor of securities of the Funds not otherwise sold through another registered dealer.

7.             The Funds are not reporting issuers in any jurisdiction of Canada. Securities of the Canadian RRSP Fund, the Canadian LP and the Cayman LP may be offered for sale in any jurisdiction in Canada pursuant to prospectus exemptions under National Instrument 45-106 Prospectus Exemptions (NI 45-106) or in other jurisdictions subject to available prospectus exemptions and applicable laws. Except for the classes of shares sold by the Cayman Master Fund to the Cayman LP, which can only be purchased by the Cayman LP, all of the other classes of shares of the Cayman Master Fund are sold outside of Canada pursuant to available prospectus exemptions and applicable laws.

8.             Subject to the terms of this Decision, the Filer, or an affiliate of the Filer, is entitled to receive management fees and incentive allocations with respect to one or more classes of securities of the Canadian RRSP, the Canadian LP, the Cayman LP and/or the Cayman Master Fund.

Canadian RRSP Fund

9.             The Canadian RRSP Fund was established as a mutual fund trust under the laws of the Province of Ontario, pursuant to a declaration of trust effective as of August 1, 2015. The Filer acts as trustee of the Canadian RRSP Fund pursuant to the approval under the Loan and Trust Corporations Act (Ontario) granted by the principal regulator to the Filer on December 21, 2012.

10.          The investment objective of the Canadian RRSP Fund is to invest all or substantially all of its assets in the Canadian LP.

11.          Securities of the Canadian RRSP Fund are 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). The Canadian RRSP Fund is designed to be a clone fund of the Canadian LP (described below) that allows the Filer to access those investors that seek to hold their fund investments in TFSAs and Tax Deferred Plans.

12.          The Original Decision granted Related Issuer Relief and Consent Relief to allow the Canadian RRSP Fund to invest in the Canadian LP.

13.          The Filer now proposes to reorganize the Canadian RRSP Fund and the Canadian LP, respectively, into multi-fund structures comprised of four tiers and three tiers, respectively (the Reorganization), each ultimately providing exposure to the investment portfolio of the Cayman Master Fund, as described below.

Canadian LP

14.          The Canadian LP is an open-ended limited partnership established under the laws of the Province of Ontario pursuant to a Declaration of Limited Partnership under the Limited Partnerships Act (Ontario) dated January 19, 2010.

15.          The general partner of the Canadian LP is NewGen Trading Fund GP Limited (the General Partner). The General Partner is incorporated under the laws of the Province of Ontario and is an affiliate of the Filer.

16.          The investment objective of the Canadian LP is to, directly or indirectly, achieve superior absolute returns through an opportunistic trading strategy designed to exploit short-term market inefficiencies. The Canadian LP invests, directly or indirectly, (long and short) primarily in listed equities, but also has the flexibility to invest in a wide range of instruments to balance risk and/or enhance returns including, but not limited to, currencies, commodities (cash-settled only), futures (including index futures), credit default swaps, options and warrants.

17.          The portfolio of the Canadian LP consists primarily of publicly-traded securities. The Canadian LP does not, directly or indirectly, hold more than 10% of its net asset value in “illiquid” assets (as defined in National Instrument 81-102 Investment Funds (NI 81-102)).

18.          The Canadian LP is a flow-through vehicle for Canadian tax purposes. Its securities are not eligible for investment by TFSAs and Tax Deferred Plans.

Cayman Master Fund

19.          The Cayman Master Fund was incorporated in the Cayman Islands as an exempted company on August 29, 2011.

20.          The investment objective of the Cayman Master Fund is to achieve superior absolute returns through an opportunistic trading strategy designed to exploit short-term market inefficiencies. The Cayman Master Fund invests (long and short) primarily in listed equities, but also has the flexibility to invest in a wide range of instruments to balance risk and/or enhance returns including, but not limited to, currencies, commodities (cash-settled only), futures (including index futures), credit default swaps, options and warrants.

21.          The Cayman Master Fund does not, directly or indirectly, hold more than 10% of its net asset value in “illiquid” assets (as defined in NI 81-102).

22.          Securities of the Cayman Master Fund are not eligible for TFSAs and Tax Deferred Plans.

Multi-Fund Structure

23.          The Canadian RRSP 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 for tax considerations. Rather than managing the Canadian RRSP Fund’s and the Canadian LP’s investment portfolios as separate pools, the Filer wanted to use economies of scale by managing a single investment pool within the Canadian LP and causing the Canadian RRSP Fund to invest indirectly in that pool by investing directly in the Canadian LP.

24.          The Filer now wants to achieve further economies of scale by consolidating the pool of assets held by the Canadian LP with the similar pool of assets held by the Cayman Master Fund, while maintaining the Canadian LP and the Cayman Master Fund as separate legal structures.

25.          The Canadian LP and the Cayman Master Fund have the same investment objectives and strategies, hold similar types of securities, and are currently being managed by the Filer in parallel in two different jurisdictions. By bringing the investment portfolios of the Canadian LP and the Cayman Master Fund together into one portfolio managed entirely within the Cayman Master Fund, the Filer expects to increase the asset base of the Cayman Master Fund and achieve operational and administrative efficiencies associated with managing a single investment pool.

26.          To achieve this reorganization, the Filer proposes to cause the Canadian RRSP Fund to adopt a multi-fund structure with four tiers under which it will invest all or substantially all of its assets in the Canadian LP, which will in turn invest all or substantially all of its assets in a class of shares of the Cayman Master Fund through the intermediary of the Cayman LP, described below. Correspondingly, the Canadian LP will adopt a multi-fund structure with three tiers under which it will invest all or substantially all of its assets in the Cayman Master Fund, through the intermediary of the Cayman LP, described below.

27.          The Cayman LP is a limited partnership flow-through vehicle established in the Cayman Islands that will be interposed between the Canadian LP and the Cayman Master Fund for tax reasons. The only investor in the Cayman LP will be the Canadian LP. The Cayman LP will not be sold to other investors. The purpose of the Cayman LP is to preserve certain aspects of the tax treatment to Canadian investors that is currently available through investments in the Canadian RRSP Fund and the Canadian LP, and therefore ensure that the Canadian investors will not experience any negative impact from a Canadian tax perspective before and after the proposed multi-fund structure is in place.

28.          The Filer expects that the increased economies of scale that may be achieved through the multi-fund structure may provide additional benefits to security holders of the Canadian RRSP Fund, the Canadian LP and the Cayman Master Fund, including more favourable pricing and transaction costs on portfolio trades and increased access to investments where there is a minimum subscription or purchase amount.

29.          The multi-fund structure will enable the Filer to maintain the Canadian RRSP Fund, the Canadian LP and the Cayman Master Fund as separate legal structures for tax and marketing reasons. The Cayman Master Fund allows the Filer to access foreign investors and offer them an investment vehicle in a form that is familiar to them, while the Canadian RRSP Fund and the Canadian LP allow the Filer to access Canadian investors seeking certain Canadian tax advantages or treatments.

30.          To initially effect the Reorganization of the Canadian RRSP Fund and the Canadian LP into the proposed multi-fund structures, the Filer proposes to transfer the investment portfolio of the Canadian LP to the Cayman Master Fund on an in specie basis through the intermediary of the Cayman LP. Accordingly, the Canadian LP will transfer its investment portfolio to the Cayman LP on an in specie basis in exchange for securities of the Cayman LP, which will subsequently transfer the investment portfolio on an in specie basis to the Cayman Master Fund in exchange for shares of the Cayman Master Fund.

31.          The multi-fund structure will allow the Canadian RRSP Fund and the Canadian LP to achieve their investment objectives in a cost-efficient manner and will not be detrimental to the interests of their security holders or of those of the Cayman Master Fund.

32.          The assets of the Funds will be held by a custodian that meets or will meet the qualifications set out in subsections 6.2 and 6.3 of NI 81-102, other than that audited financial statements may not have been made public for the purpose of subsections 6.2 3(a) and 6.3 2(c) of NI 81-102.

33.          The Funds that are subject to National Instrument 81-106 Investment Fund 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 applicable to them.

34.          The Funds will have matching valuation dates and will be valued no less frequently than on a monthly basis.

35.          Securities of the Funds will have matching redemption dates and will be redeemable no less frequently than on a monthly basis.

36.          An investment by the Canadian RRSP Fund, the Canadian LP and the Cayman LP, respectively, in the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively, will be effected at an objective price. An objective price for this purpose will be the net asset value (NAV) per security of the applicable class or series of the applicable Fund.

The Requested Relief

37.          The Funds will be related mutual funds (under applicable securities legislation) by virtue of the common management by the Filer. The amounts invested by the Canadian RRSP Fund in the Canadian LP, by the Canadian LP in the Cayman LP, and by the Cayman LP in the Cayman Master Fund, may exceed 20% of the outstanding voting securities of the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively. As a result, the Canadian RRSP Fund, the Canadian LP and the Cayman LP could become a substantial security holder of the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively.

38.          In the absence of the Related Issuer Relief, the Canadian RRSP Fund, the Canadian LP and the Cayman LP, respectively, would be precluded from purchasing and holding securities of the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively, due to the investment restrictions contained in the Legislation. Specifically, the Canadian RRSP Fund, the Canadian LP and the Cayman LP would be prohibited from becoming substantial security holders of the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively.

39.          Since the Funds do not offer their securities under a simplified prospectus and are therefore not subject to NI 81-102, they are unable to rely on the Related Issuer Relief codified for retail fund-on-fund investments under subsection 2.5(7) of NI 81-102 and accordingly seek the Related Issuer Relief under this decision.

40.          In the absence of the Consent Relief, the Canadian RRSP Fund, the Canadian LP and the Cayman LP, respectively, would be precluded from investing in the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively, unless the specific fact is disclosed to security holders of the Canadian RRSP Fund, the Canadian LP and the Cayman LP and their written consent is obtained prior to the purchase, as the Filer is a “responsible person” (as defined in section 13.5 of NI 31-103) in respect of the Funds.

41.          In the absence of the In Specie Trade Relief, the Canadian LP would be precluded from selling its investment portfolio to the Cayman LP in exchange for securities of the Cayman LP, and the Cayman LP would in turn be precluded from then selling the investment portfolio to the Cayman Master Fund in exchange for securities of the Cayman Master Fund, as the Filer is a “responsible person” (as defined in section 13.5 of NI 31-103) in respect of the Funds.

42.          The direct and indirect investments, as applicable, of the Canadian RRSP Fund, the Canadian LP and the Cayman LP in a Fund will represent the business judgment of a responsible person uninfluenced by considerations other than the best interests of the Canadian RRSP Fund, the Canadian LP and the Cayman LP.

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 Original Decision is revoked and the Requested Relief is granted provided that:

(a)           securities of the Funds are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106;

(b)           the Canadian RRSP Fund, the Canadian LP and the Cayman LP, respectively, will invest all or substantially all of their assets in the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively;

(c)           the investment by the Canadian RRSP Fund, the Canadian LP and the Cayman LP, respectively, in the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively, is compatible with the fundamental investment objectives of the Canadian RRSP Fund, the Canadian LP and the Cayman LP, respectively;

(d)           an investment by the Canadian RRSP Fund, the Canadian LP and the Cayman LP, respectively, in the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively, will be effected at an objective price, calculated in accordance with section 14.2 of NI 81-106;

(e)           the Canadian RRSP Fund, the Canadian LP and the Cayman LP, respectively, will not purchase or hold securities of the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively, unless, at the time of the purchase of securities of the applicable Fund, the Cayman Master Fund holds no more than 10% of its net assets in securities of other investment funds, which must be managed by a party at arm’s length with the Filer and any affiliate;

(f)            the Canadian RRSP Fund, the Canadian LP and the Cayman LP, respectively, will not invest in the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively, unless the Canadian LP, the Cayman LP and the Cayman Master Fund comply with the provisions of NI 81-106 that apply to a “mutual fund in Ontario” as defined in the Act, to the extent such requirements apply to it;

(g)           no management fees or incentive fees are payable by the Canadian RRSP Fund, the Canadian LP and the Cayman LP that, to a reasonable person, would duplicate a fee payable for the same service by any Fund in which each of them directly or indirectly invests its assets;

(h)           no sales fees or redemption fees are payable by the Canadian RRSP Fund, the Canadian LP and the Cayman LP, respectively, in relation to their purchases or redemptions of securities of the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively;

(i)            the Filer does not cause the securities of the Canadian LP, the Cayman LP and the Cayman Master Fund, respectively, held by the Canadian RRSP Fund, the Canadian LP and the Cayman LP, respectively, to be voted at any meeting of holders of such securities, except that the Filer may arrange for such securities to be voted by the beneficial holders of securities of the Canadian RRSP Fund, the Canadian LP and the Cayman LP, as applicable, who are not the Filer or its affiliate, or an officer, director or substantial securityholder of the Filer or its affiliate;

(j)            when purchasing and/or redeeming securities of the Cayman Master Fund, the Filer will, as portfolio adviser of the Funds, act honestly, in good faith and in the best interests of the Funds, and will exercise the care and diligence that a reasonably prudent person would exercise in comparable circumstances;

(k)           the interim and annual financial statements of the Canadian RRSP Fund and the Canadian LP will disclose the top 25 positions of the Cayman Master Fund, each expressed as a percentage of NAV of the Cayman Master Fund as at the end of the financial reporting period;

(l)            the offering memorandum, where available, or other disclosure document of the Canadian RRSP Fund and the Canadian LP, respectively, will be provided to investors in the Canadian RRSP Fund and the Canadian LP, as applicable, prior to the time of investment, and will disclose:

(i)            that the Canadian RRSP Fund or the Canadian LP, as applicable, will indirectly invest all or substantially all of its assets in the Cayman Master Fund through the intermediary of the Cayman LP;

(ii)           that the Filer is the investment fund manager and/or portfolio adviser of each Fund in the multi-fund structure of the Canadian RRSP Fund and the Canadian LP, as applicable;

(iii)          the investment objective and investment strategies of the Cayman Master Fund;

(iv)          the fees, expenses and any performance or special incentive distributions payable by any of the Funds in which the Canadian RRSP Fund and Canadian LP, as applicable, directly or indirectly invest their assets;

(v)           that investors 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 of each Fund in which the Canadian RRSP Fund and the Canadian LP, as applicable, directly or indirectly invest their assets;

(vi)          that investors are entitled to receive from the Filer or its affiliate, on request and free of charge, the annual and interim financial statements of the Cayman Master Fund;

(m)          each existing securityholder of the Canadian RRSP Fund and the Canadian LP receives, within one month from the date of this decision, the offering memorandum or disclosure document providing the disclosure contemplated in paragraph (l);

(n)           the Filer will annually inform investors in the Canadian RRSP Fund and the Canadian LP, respectively, of their right to receive from the Filer, on request and free of charge, a copy of the offering memorandum, where available, or other similar disclosure document, and the annual and interim financial statements, of each Fund in which the Canadian RRSP Fund and the Canadian LP directly or indirectly invest their assets; and

(o)           the In Specie Trade Relief is limited to the trades required to initially transfer the investment portfolio of the Canadian LP to the Cayman Master Fund and effect the Reorganization, and such trades comply with the following requirements:

(i)            in the case of an in specie transaction that involves the purchase by the Canadian LP and the Cayman LP (each a Transferor), respectively, of securities of the Cayman LP and the Cayman Master Fund (each, a Transferee), respectively,

a.             the Transferee would at the time of payment be permitted to purchase the portfolio securities delivered in specie by the transferor;

b.             the portfolio securities are acceptable to the portfolio adviser of the Transferee, and consistent with the investment objective of the Transferee;

c.             the portfolio securities transferred by the Transferor as purchase consideration will be valued: (i) on the same valuation day on which the purchase price of the Transferee’s securities is determined; and (ii) at a value equal to the amount at which those portfolio securities were valued in calculating the net asset value used to establish the purchase price of the Transferee’s securities, as if the portfolio securities were assets of the Transferee and as if the Transferee was subject to subparagraph 9.4(2)(b)(iii) of NI 81-102;

d.             should the in specie transaction involve the transfer of illiquid portfolio securities, the portfolio adviser will obtain independent pricing determined on the basis of reasonable inquiry immediately before effecting the in specie transaction; and

e.             each of the Transferor and Transferee will keep written records of an in specie transaction in a financial year of the Transferor and the Transferee, as applicable, reflecting details of the portfolio securities delivered to the Transferee, and the value assigned to such portfolio securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place; and

(ii)           the Filer does not receive any compensation in respect of any In Specie transaction and, in respect of any delivery of portfolio securities further to an In Specie transaction, the only charge paid by the applicable Fund is the commission charged by the dealer executing the trade.

With respect to the Related Issuer Relief:

 

“Mark Sandler”                                                 “Deborah Leckman”
Commissioner                                                   Commissioner
Ontario Securities Commission                        Ontario Securities Commission

With respect to the Consent Relief and the In Specie Trade Relief:

“Neeti Varma”
Acting Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission