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Guardian Capital LP
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 structures involving pooled funds under common management subject to conditions.
Applicable Legislative Provisions
Securities Act (Ontario), RSO 1990, c. S.5, as am., ss. 111(2)(b), 111(2)(c), 111(3), 111(4) and 113.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a), 15.1.
July 16, 2019
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
GUARDIAN CAPITAL LP
(Guardian)
AND
THE TOP FUNDS
(as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from Guardian, on behalf of Guardian and its affiliates (collectively, the Filer), Guardian Managed Yield Portfolio and GEM Balanced Pool (collectively, the Initial Top Funds) and any other existing or future mutual fund that is not or will not be, a reporting issuer, and that is, or will be, managed by the Filer in the future (the Future Top Funds, and together with the Initial Top Funds, the Top Funds) for a decision under the securities legislation of the Jurisdiction (the Legislation) in respect of the Fund-on-Fund Structure (as defined below) exempting the Filer and the Top Funds from:
(a) the restriction in the Legislation that prohibits an investment fund from knowingly making an investment in any 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 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 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 the 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 (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 (i) this fact is disclosed to the client and (ii) 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),
to permit the Filer to cause the Top Funds to invest in the Underlying Funds (as defined below).
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 is intended to be relied upon in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Québec, Prince Edward Island, Saskatchewan and Yukon (together with Ontario, the Jurisdictions).
Interpretation
Unless otherwise defined herein, terms 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:
Guardian
1. Guardian is a limited partnership formed under the laws of Ontario with its head office in Toronto, Ontario.
2. Guardian is registered as an investment fund manager in each of Ontario, Québec and Newfoundland and Labrador, as a portfolio manager and an exempt market dealer in each province of Canada, and as a commodity trading manager and a commodity trading counsel in Ontario.
3. Guardian is not a reporting issuer in any jurisdiction. The Filer is not currently in default of securities legislation in any Jurisdiction, except for breaches that occurred when the Initial Top Funds invested in the Initial Underlying Funds (as defined below), resulting in the inadvertent non-compliance with sections 111(2)(b), 111(2)(c), 111(3) and 111(4) of the Securities Act (Ontario) and paragraph 13.5(2)(a) of NI 31-103. Upon issuance of this decision, the Filer will not be in default of securities legislation of any jurisdiction of Canada.
Top Funds
4. Each Initial Top Fund is organized under the laws of Ontario as a trust. Each Future Top Fund will be organized under the laws of Ontario as a trust or a class of shares of a corporation.
5. Each Top Fund is or will be a “mutual fund” for the purposes of the Legislation.
6. None of the Top Funds is, or has current plans to become, a reporting issuer in any province or territory of Canada.
7. The Filer is the investment fund manager of Guardian Managed Yield Portfolio and GEM Balanced Pool. The Filer is, or will be, the portfolio manager of each Top Fund. A third party is the trustee of the Initial Top Funds. The Filer or a third party will act as trustee of each Future Top Fund.
8. Securities of the Initial Top Funds and each Future Top Fund are, or will be, offered on a private placement basis to qualified investors pursuant to available exemptions from the prospectus requirements under Canadian securities legislation. Each investor is, or will be, responsible for making its own investment decisions regarding its purchases and/or redemptions of securities of a Top Fund.
9. Guardian Managed Yield Portfolio was created on April 30, 2015 pursuant to a trust agreement made as of May 27, 2013, GEM Balanced Pool was created on December 29, 2005 pursuant to an amended and restated trust agreement made as of January 27, 2017.
10. The Initial Top Funds invest in units of the Initial Underlying Funds (as defined below).
11. In addition to the Initial Top Funds, each Top Fund may also invest in units of one or more Underlying Funds (as defined below), which investment or investments will be consistent with the Top Fund’s investment objectives and strategies.
12. The investment objective of Guardian Managed Yield Portfolio is to provide a conservative balanced portfolio that emphasizes income with some level of growth through diversified investments in equity or equity-related securities and in fixed-income securities, either long term or short term. To achieve its investment objective, this Initial Top Fund invests in securities of other mutual funds or pooled funds managed by the Filer and, potentially, in third-party exchange-traded funds.
13. The investment objective of GEM Balanced Pool is to achieve a balance between long-term growth of capital and reasonable income through diversified investments in equity or equity-related securities and in fixed-income securities, either long term or short term, and to provide a portfolio that meets the socially responsible investment (SRI) standards set by this Existing Top Fund’s SRI advisor. To achieve its investment objective, this Initial Top Fund invests in the Underlying GEM Pools (as defined below).
Underlying Funds
14. Each of GEM Canadian Equity Pool, GEM Fixed Income Pool and GEM Global Equity Pool (collectively, the Underlying GEM Pools) is sold solely to investors on a private placement basis pursuant to available exemptions from the prospectus requirements under Canadian securities legislation. Each investor is responsible for making its own investment decisions regarding its purchases and/or redemptions of securities of the Underlying GEM Pools.
15. The other existing Guardian Capital underlying funds are sold to investors under the Guardian Capital Funds prospectus (the Guardian Capital Funds Prospectus), currently dated April 18, 2019 (together with the Underlying GEM Pools, the Initial Underlying Funds).
16. Any future underlying investment fund that is, or will be, managed by the Filer and that is, or will be, invested in by a Top Fund (each, a Future Underlying Fund and, together with the Initial Underlying Funds, the Underlying Funds) will be sold to investors either pursuant to a prospectus qualified in one or more of the Jurisdictions or pursuant to an available exemption from the prospectus requirement under Canadian securities legislation.
17. Each Initial Underlying Fund is a trust created under the laws of Ontario.
18. The investment objectives of the Underlying GEM Pools are as follows:
- GEM Canadian Equity Pool – to achieve long-term growth of capital through the investment in common shares or other equity-related securities issued by Canadian companies and Canadian income trusts, and to provide a portfolio that meets the SRI standards set by its SRI advisor.
- GEM Fixed Income Pool – to provide a high level of current interest income while, at the same time, preserving capital and seeking opportunities for capital appreciation through investment in bonds, debentures, notes or other evidence of indebtedness, and to provide a portfolio that meets the SRI standards set by its SRI advisor.
- GEM Global Equity Pool – to provide long-term capital appreciation through security selection in global markets, and to provide a portfolio that meets the SRI standards set by its SRI advisor.
19. The investment objectives of the other Initial Underlying Funds are set out in the Guardian Capital Funds Prospectus.
20. Each Future Underlying Fund will be structured as a trust or as a class of shares of a corporation governed by the laws of a jurisdiction of Canada. Each Initial Underlying Fund is, and each Future Underlying Fund will be, a “mutual fund” for the purposes of the Legislation.
21. The Filer is the investment fund manager of the the Initial Underlying Funds. The Filer is, or will be, the portfolio manager of each of the Future Underlying Funds.
Fund-on-Fund Structure
22. The Initial Top Funds were, and Future Top Funds will be, created by the Filer to allow investors in the Top Funds to obtain indirect exposure to the investment portfolio of the Initial Underlying Funds or Future Underlying Funds and their investment strategies through, primarily, direct investments by the Top Funds in securities of the Underlying Funds (the Fund-on-Fund Structure).
23. The Fund-on-Fund Structure permits the Filer to manage a single portfolio of assets for both a Top Fund and each Underlying Fund that the Top Fund holds in a single investment vehicle structure.
24. Managing a single pool of assets provides economies of scale, allows the Top Funds to achieve their investment objectives in a cost-efficient manner and is not detrimental to the interest of other securityholders of an Underlying Fund.
25. An investment in an Underlying Fund by a Top Fund is, or will be, effected at an objective price. In the case of an Underlying Fund that is not a reporting issuer, the Filer’s policies and procedures provide that an objective price, for this purpose, is the net asset value (NAV) of that Underlying Fund. In the case of an Underlying Fund that is a reporting issuer, the objective price is the NAV of the applicable securities.
26. The portfolio of each Underlying Fund consists, or will consist, primarily of publicly traded securities, debt instruments and derivatives. No Underlying Fund holds, or will hold, more than 10% of its NAV in “illiquid assets” (as defined in National Instrument 81-102 – Investment Funds (NI 81-102)).
27. The amounts invested, from time to time, in an Underlying Fund by one or more of the Top Funds or other related investment funds may exceed 20% of the outstanding voting securities of that Underlying Fund. Accordingly, each Top Fund could, either alone or together with one or more funds managed by the Filer, become a substantial securityholder of an Underlying Fund.
28. The Initial Top Funds are, either alone or together with one or more funds managed by the Filer, currently substantial securityholders of certain of the Initial Underlying Funds.
29. No Underlying Fund will be a Top Fund in a Fund-on-Fund Structure.
30. Each Underlying Fund has, or may have, other investors in addition to the Top Funds. GEM Balanced Pool is currently the sole investor in GEM Global Equity Pool.
31. Securities of the Top Funds and the corresponding Underlying Funds are valued and redeemable daily.
32. In all cases, the Filer manages, or will manage, the liquidity of each Top Fund having regard to the redemption features of the corresponding Underlying Fund(s) to ensure that it can meet redemption requests from investors of the Top Funds.
33. In addition, the Fund-on Fund structure may result in a Top Fund investing in an Underlying Fund (i) in which an officer or director of the Top Fund, of the Filer or of any associate of them, has a significant interest, and/or (ii) where a person or company who is a substantial securityholder of the Top Fund or the Filer, has a significant interest.
34. Currently, there is no officer or director of any Top Fund, such Top Fund’s management company, or its distribution company, or any associate of them, who has a significant interest in an Initial Underlying Fund, however, there may be circumstances in the future which may cause them to have a significant interest.
35. The Top Funds and Underlying Funds 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.
36. In the absence of the Related Issuer 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 substantial securityholders 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 Top Fund’s management company 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 Top Fund’s management company, has a significant interest.
37. In the absence of the Consent Relief, each Top Fund would be precluded from investing in one or more Underlying Funds unless the specific fact is disclosed to securityholders of the Top Fund and the written consent of the securityholders 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 per 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.
38. The Fund-on-Fund Structure represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of the investors in the Top Funds.
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 a Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirement under Canadian securities legislation;
(b) the investment by a Top Fund in an Underlying Fund is compatible with the fundamental 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 purchasing 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 in NI 81-102);
(ii) purchases or holds securities of a “money market fund” (as defined in 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 fees 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 the 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 the 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 the 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 the statement of investment policies and procedures, relationship disclosure documents or other similar 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 a Top Fund may purchase securities of one or more applicable Underlying Funds;
(ii) that the Filer is the investment fund manager and portfolio manager of both the Top Fund and the Underlying Funds;
(iii) that the Top Fund may invest all, or substantially all, of its assets in securities of Underlying Funds;
(iv) the fees, expenses and any performance or special incentive distributions payable by the Underlying Funds in which a Top Fund invests;
(v) the process or criteria used to select the Underlying Funds, 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 for the 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 prospectus, offering memorandum, statement of investment policies and procedures or other similar disclosure document of the Underlying Funds, 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 Funds 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, as applicable, on request and free of charge, a copy of the offering memorandum, statement of investment policies and procedures 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.
The Consent Relief:
“Darren McKall”
Manager,
Investment Funds and Structured Products Branch
Ontario Securities Commission
The Related Issuer Relief:
“Poonam Puri”
Commissioner
Ontario Securities Commission
“Raymond Kindiak”
Commissioner