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ICPP Funds Ltd.
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) to permit fund-on-fund structures involving 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.
April 12, 2019
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
(the Jurisdiction)
AND
IN THE MATTER OF
ICPP FUNDS LTD.
(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 ICPP Payout Fund (the Initial Top Fund) and any other investment fund which is not a reporting issuer under the securities legislation of the principal regulator (the Legislation) and 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), which invests its assets in ICPP Accumulation Fund (the Initial Underlying Fund) or any other investment fund which is not a reporting issuer under the Legislation 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 Legislation exempting the Filer and the Top Funds from the restriction in the Legislation which prohibits:
(a) 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 security holder;
(b) 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) 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).
Interpretation
Unless otherwise defined herein, terms used in this decision have the respective meanings given to them in National Instrument 14-101 Definitions.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation established under the laws of Ontario with its head office located in Oakville, Ontario.
2. The Filer is registered with the Ontario Securities Commission as an adviser in the category of portfolio manager, as an exempt market dealer and as an investment fund manager.
3. 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.
Top Funds
4. The Initial Top Fund is a trust established under the laws of Ontario pursuant to a master declaration of trust dated as of December 31, 2016. The Future Top Funds will be structured as trusts, limited partnerships or corporations under the laws of Ontario or another jurisdiction of Canada.
5. Each of the Top Funds will be an "investment fund" as defined in securities legislation of the jurisdictions in which the Top Funds are distributed.
6. The Filer is or will be the portfolio manager and the investment fund manager for the Top Funds established under the laws of Ontario, or another jurisdiction of Canada. The Filer is also the trustee of the Initial Top Fund. The Filer or a third party will act as trustee of Future Top Funds which are structured as trusts. The Filer may also act as a distributor of the securities of the Top Funds not otherwise sold through another registered dealer.
7. The Filer currently has no intention of filing a prospectus on behalf of any of the Top Funds or of having any Top Fund become a reporting issuer in any Canadian jurisdiction. Securities of each Top Fund are, or will be, offered on a private placement basis to qualified investors pursuant to available prospectus exemptions under National Instrument 45-106 Prospectus Exemptions. (NI 45-106).
8. Units of the Initial Top Fund are sold by offering memorandum to institutional clients, including registered pension plans and segregated fund trusts of insurance companies.
9. The investment objectives of the Initial Top Fund are to provide long-term capital growth and income. The Initial Top Fund intends to achieve its investment objectives by investing in the Initial Underlying Fund and iShares Canadian Universe Bond Index ETF. The Initial Top Fund intends to invest approximately 50% of its assets in the Initial Underlying Fund and approximately 50% of its assets in iShares Canadian Universe Bond Index ETF.
10. The Initial Top Fund is not, and each Future Top Fund will not be, a reporting issuer in any jurisdiction of Canada. The Initial Top Fund is not in default of securities legislation of any jurisdiction of Canada.
Underlying Funds
11. The Initial Underlying Fund is a trust established under the laws of Ontario pursuant to a master declaration of trust dated as of December 31, 2016. The Future Underlying Funds will be structured as limited partnerships, trusts or corporations under the laws of Ontario, or another jurisdiction of Canada.
12. Each of the Underlying Funds will be an "investment fund" as defined in securities legislation of the jurisdictions in which the Top Funds are distributed.
13. The Filer is or will be the portfolio manager and the investment fund manager for the Underlying Funds established under the laws of Ontario, or another jurisdiction of Canada. The Filer is also the trustee of the Initial Underlying Fund. The Filer or a third party will act as trustee of Future Underlying Funds which are structured as trusts. The Filer may also act as a distributor of the securities of the Underlying Funds not otherwise sold through another registered dealer.
14. Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.
15. The investment objectives of the Initial Underlying Fund are to provide long-term capital growth and income. The Initial Underlying Fund intends to achieve its investment objectives by investing predominantly in large capitalization stocks listed on major Canadian and U.S. stock exchanges.
16. The Filer currently has no intention of filing a prospectus on behalf of any of the Underlying Funds or of having any Underlying Fund become a reporting issuer in any Canadian jurisdiction. Securities of each Underlying Fund are, or will be, offered on a private placement basis to qualified investors pursuant to available prospectus exemptions under NI 45-106.
17. The Initial Underlying Fund is not, and each Future Underlying Fund will not be, a reporting issuer in any jurisdiction of Canada. The Initial Underlying Fund is not in default of securities legislation of any jurisdiction of Canada.
18. Each Underlying Fund has, or is expected to have, other investors in addition to the Top Fund.
Fund-on-Fund Structure
19. The Initial Top Fund has been, and the Future Top Funds will be, created by the Filer to allow investors in a Top Fund to obtain indirect exposure to the investment portfolio of an Underlying Fund and its investment strategies through, primarily, direct investments by the Top Fund in securities of the Underlying Fund (the Fund-on-Fund Structure). Rather than operating the investment portfolio of the Initial Top Fund as a separate pool, the Filer wishes to make use of economies of scale by managing only one investment pool, in the Initial Underlying Fund.
20. 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.
21. An investment by a Top Fund in an Underlying Fund provides greater diversification for a Top Fund in particular asset classes on a more cost efficient basis than a Top Fund would be able to achieve on its own.
22. 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.
23. A Top Fund will invest in one or more Underlying Funds. This Fund-on-Fund Structure will be used where the Filer determines that the investment objective of a Top Fund is best achieved by investing in either one Underlying Fund, or through exposure to different investment styles and broader diversification provided by investing in multiple Underlying Funds, either alongside other securities or not. One or more of such Underlying Funds may be changed to other Underlying Funds from time to time depending on whether the Filer concludes that different Underlying Funds would better achieve the investment objective of a Top Fund. The amounts invested from time to time in any Underlying Fund by one or more Top Funds may exceed 20% of the outstanding voting securities of the Underlying Fund.
24. Each of the Underlying Funds and their investments are considered to be liquid. While the Underlying Funds are not restricted from purchasing and holding "illiquid assets" (as defined in National Instrument 81-102 Investment Funds (NI 81-102)), the Filer 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. No Underlying Fund will hold more than 10% of its net asset value (NAV) in illiquid assets (as defined in NI 81-102).
25. An investment in an Underlying Fund by a Top Fund will be effected at an objective price. According to the Filer's policies and procedures, an objective price for this purpose will be the NAV per security of the applicable class or series of the applicable Underlying Fund.
26. The Top Funds and the Underlying Funds have, or will have, matching valuation dates. The Initial Top Fund and the Initial Underlying Fund are valued monthly.
27. Prior to the time of purchase of securities of a Top Fund, an investor will be provided with additional disclosure concerning the Top Fund that contains disclosure about the relationships and potential conflicts of interest between the Top Fund and the Underlying Fund.
28. Such additional disclosure of each Top Fund will describe the Top Funds' intent, or ability, to invest some or all of its assets in securities of the Underlying Funds and that the Underlying Funds are also managed and advised by the Filer or its affiliate.
29. An Underlying Fund will be valued no less frequently than a Top Fund.
30. An Underlying Fund will be redeemable no less frequently than a Top Fund.
31. No Underlying Fund will be a Top Fund.
32. Each of the Top Funds and the Underlying Funds are subject to those provisions of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) applicable to investment funds that are not reporting issuers and 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.
33. In the absence of the Requested Relief, the Top Funds would be constrained by the investment restrictions in Canadian securities legislation in terms of the degree to which they could implement the Fund-on-Fund Structure. Specifically, the Top Funds would be prohibited from: (i) becoming a substantial securityholder of the Underlying Funds, either alone or together with related investment funds; and (ii) 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.
34. The Fund-on-Fund Structure represents the business judgement of responsible persons 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:
(a) securities of the Top Funds are distributed in Canada solely pursuant to exemptions from the prospectus requirements under Canadian securities legislation;
(b) the investment by a Top Fund in an Underlying Fund is compatible with the investment objectives of the Top Fund;
(c) an investment in an Underlying Fund by a Top Fund will be effected at an objective price, calculated in accordance with section 14.2 of NI 81-106
(d) a Top Fund will not invest in an Underlying Fund, unless the Underlying Fund complies with the provisions of NI 81-106 that apply to a "mutual fund in Ontario" as defined in the Securities Act (Ontario);
(e) no Top Fund will purchase or hold a security 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 NAV in securities of other mutual 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;
(f) 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;
(g) no sales fee or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund that, to a reasonable person, would duplicate a fee payable by an investor in the Top Fund other than brokerage fees incurred for the purchase or sale of an index participation unit issued by an investment fund;
(h) the Filer 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 may arrange for the securities the Top Fund holds of an Underlying Fund to be voted by the beneficial owners of securities of the Top Fund who are not the Filer or an officer, director or substantial securityholder of the Filer;
(i) when purchasing and/or redeeming securities of an Underlying Fund, the Filer shall, as investment fund manager of the applicable Top Fund and Underlying Fund, act honestly, in good faith and in the best interests of the Top Fund and Underlying Fund, respectively, and shall exercise the care and diligence that a reasonably prudent person would exercise in comparable circumstances;
(j) the offering memorandum, where available, or other 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 applicable Underlying Fund;
(ii) that the Filer is the investment fund manager and/or portfolio manager of both the Top Fund and the Underlying Fund;
(iii) that the Top Fund may invest all, or substantially all, of its assets in securities of an Underlying Fund;
(iv) the fees, expenses and any performance or special incentive distributions payable by an Underlying Fund in which a Top Fund invests;
(v) the process or criteria used to select the Underlying Fund, if applicable;
(vi) for each officer, director and/or substantial securityholder of the Filer, or of a Top Fund, that has a significant interest in an applicable Underlying Fund, and officers and directors and substantial securityholders who together in aggregate hold a significant interest in an applicable Underlying Fund, the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of the applicable Underlying Fund's NAV, and the potential conflicts of interest which may arise from such relationship;
(vii) that investors are entitled to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of the Underlying Fund (if available); and
(viii) that investors are entitled to receive from the Filer, on request and free of charge, the annual audited financial statements and interim financial reports relating to the Underlying Fund in which the Top Fund invests; and
(k) the Filer shall annually inform investors in a Top Fund of their right to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of each Underlying Fund, if available, and the annual audited financial statements and interim financial reports relating to each Underlying Fund in which the Top Fund invests.
"Grant Vingoe"
Vice-Chair
"Heather Zordel"
Commissioner