Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from the conflict of interest investment 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 pooled funds to invest in investment funds under common management, that are governed by the laws of a jurisdiction of Canada, or governed by the laws of the Cayman Islands, Barbados, Bahamas or the British Virgin Islands, subject to certain 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) and 113.

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a) and 15.1.

October 2, 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 CORTON CAPITAL 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 behalf of each of the Filer, the Corton Global Timber Fund (the Initial Top Fund) and one or more investment funds that are not reporting issuers under the securities legislation of the principal regulator (the Legislation) and which are established or managed by the Filer in the future (the Future Top Funds and, together with the Initial Top Fund, the Top Funds) for a decision under the Legislation in respect of the Fund on Fund Structure (as defined below):

(A) exempting the Filer and the Top Funds from the restriction in the Legislation which prohibits

(1) 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;

(2) an investment fund from knowingly making an investment in an issuer in which:

(a) any officer or director of the investment fund, its management company or distribution company or an associate of any of them, or

(b) any person or company who is a substantial security holder of the investment fund, its management company or its distribution company,

has a significant interest; and

(3) an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (i) or (ii) above

(collectively, the Related Issuer Relief); and

(B) exempting the Filer from the restrictions in paragraph 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 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 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 the purposes of 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

a. in respect of the Related Issuer Relief, in the Province of Alberta; and

b. in respect of the Consent Relief, in the provinces of Alberta, British Columbia, New Brunswick and Nova Scotia,

(together with Ontario, the Jurisdictions).

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. The Filer has its head office in Toronto, Ontario.

2. The Filer is registered with the Ontario Securities Commission in the categories of investment fund manager, portfolio manager and exempt market dealer. The Filer is also registered as a portfolio manager and an exempt market dealer in Alberta, British Columbia, New Brunswick and Nova Scotia.

3. The Filer is, or will be, a "responsible person" of the Top Funds and the Underlying Funds, as that term is defined in NI 31-103.

4. A person or company who is a substantial security holder of the Filer or a Top Fund may have a significant interest in an Underlying Fund from time to time.

5. An officer and/or director of the Filer may also be an officer and/or director of an Underlying Fund or may have a significant interest in an Underlying Fund from time to time.

6. The Filer is not a reporting issuer in any jurisdiction of Canada and is not, to the knowledge of the Filer, in default of securities legislation of any jurisdiction of Canada.

The Top Funds

7. The Initial Top Fund is organized under the laws of the Province of Ontario as a trust pursuant to a master declaration of trust (the Trust Declaration). Each Future Top Fund will be organized as a trust under the laws of Ontario or another jurisdiction of Canada.

8. Each Top Fund is or will be a "mutual fund" for the purposes of the Legislation.

9. Securities of the Initial Top Fund 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.

10. The Filer acts as the trustee of the Initial Top Fund. The Filer or a third party will act as trustee of a Top Fund.

11. The Filer is, or will be, the investment fund manager and portfolio manager of the Initial Top Fund and each of the Future Top Funds.

12. The investment objective of the Initial Top Fund is to provide capital appreciation by investing in a diversified portfolio of global timber companies operating in the plantation and management of forests and the processing, production and distribution of timber and related wood products by investing all or substantially all of its assets in the Initial Underlying Fund.

13. In addition to the Initial Top Fund, each Top Fund will also invest all or substantially all of its assets in one or more Underlying Funds.

14. The Trust Declaration of the Initial Top Fund describes the investment objectives and investment restrictions applicable to the Initial Top Fund and also describes the fees, compensation and expenses payable by the Initial Top Fund, the calculation of net asset value, distributions, the powers and duties of the investment fund manager and all other matters material to the Initial Top Fund, including the fact that in pursuing its investment objectives, the Initial Top Fund may invest in one or more Underlying Funds as an investment strategy.

15. The Initial Top Fund is not, and each Future Top Fund will not be, a reporting issuer in any jurisdiction in Canada.

16. The Initial Top Fund is not in default of securities legislation of any province or territory of Canada.

The Underlying Funds

17. The Corton Global Timber Fund L.P, (the Initial Underlying Fund) is not, and each investment fund that is established, managed and advised by the Filer in the future (the Future Underlying Funds, and together with the Initial Underlying Fund, the Underlying Funds) will not be, a reporting issuer in any province or territory of Canada.

18. The Initial Underlying Fund is a limited partnership formed under the Limited Partnerships Act (Ontario).

19. The Filer is the investment fund manager and portfolio manager of the Initial Underlying Fund and will be the investment fund manager and the portfolio manager of each of the Future Underlying Funds.

20. Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.

21. The investment objective of the Initial Underlying Fund is to provide capital appreciation by investing in a diversified portfolio of global timber companies operating in the plantation and management of forests and the processing, production and distribution of timber and related wood products. The Initial Underlying Fund seeks to achieve its investment objective primarily from applying a conservative valuation framework to security selection and a prudent approach to portfolio construction.

22. Each of the Future Underlying Funds will be structured as a limited partnership under the laws of the Province of Ontario or another jurisdiction of Canada or as an entity organized under the laws of the Cayman Islands, Barbados, Bahamas or the British Virgin Islands (each, an Offshore Jurisdiction). In its home jurisdiction, each Underlying Fund will either be distributed pursuant to a prospectus or a prospectus exemption.

23. The Initial Underlying Fund and each of the Future Underlying Funds will be a "mutual fund" for the purposes of the Legislation.

24. Securities of the Underlying Funds offered in Canada will be sold to qualified investors, including the Top Funds, on a private placement basis pursuant to available exemptions from the prospectus requirements under Canadian securities legislation.

25. Persons or companies who are officers or directors of the Filer or substantial security holders of the Top Funds or the Filer may acquire or hold a significant interest in one or more Underlying Funds from time to time.

26. No Underlying Fund is, or will be, a reporting issuer in any jurisdiction of Canada.

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

Fund-on-Fund Structure

28. The Initial Top Fund has been, and the 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 Fund 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).

29. The Fund-on-Fund Structure will permit the Filer to manage a single portfolio of assets for both a Top Fund and an Underlying Fund in a single investment vehicle structure.

30. Managing a single pool of assets provides economies of scale, allows the Top Funds to achieve their investment objectives in a cost-effective manner and will not be detrimental to the interests of other securityholders of an Underlying Fund.

31. The Fund-on-Fund Structure is expected to increase the asset base of the Underlying Funds, which is expected to result in additional benefits to unitholders of the Underlying Funds, including more favorable pricing and transaction costs on portfolio trades, increased access to investments when there is a minimum subscription or purchase amount, and better economies of scale through overall greater administrative efficiency.

32. Securities of the Initial Underlying Fund, structured as a limited partnership, are not qualified investments for 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).

33. The Initial Top Fund has been, and the Future top Funds will be, formed as trusts 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 or an entity formed in an Offshore Jurisdiction. Rather than operating investment portfolios of the Initial Top Fund and the Initial Underlying Fund as separate pools, the Filer wishes to make use of economies of scale by managing only one pool of assets in the Initial Underlying Fund.

34. There are tax advantages for non-Canadian unitholders to invest directly in Future Underlying Funds structured as entities under the laws of an Offshore Jurisdiction. Accordingly, the Filer expects non-Canadian investors to invest directly in the Future Underlying Funds which are structured under the laws of an Offshore Jurisdiction. However, since similar tax advantages are not available to Canadian resident investors, the Filer expects Canadian resident investors to invest directly in a Top Fund in order to obtain indirect exposure to the related Underlying Fund.

35. 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 net asset value (NAV) per security of the applicable class or series of the applicable Underlying Fund.

36. 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).

37. No Underlying Fund will be a Top Fund in a Fund-on-Fund Structure.

38. Each Underlying Fund has, or is expected to have, other investors in addition to the Top Funds.

39. Securities of the Top Funds and their corresponding Underlying Funds have, or will have, matching monthly redemption dates and matching monthly valuation dates.

40. 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.

41. The Fund-on-Fund Structures involving Future Top Funds and Future Underlying Funds will be similarly structured to that of the Initial Top Fund and the Initial Underlying Fund in that future structures will also reflect trust on limited partnership arrangements, where a Future Top Fund as a trust, invests in an Underlying Fund(s) that is a Canadian entity, formed as a limited partnership. The Filer also expects future Fund-on-Fund Structures to resemble that of the Initial Top Fund and the Initial Underlying Fund to the extent that they involve a Future Top Fund, formed as a trust, which invests in an Underlying Fund(s) formed in an Offshore Jurisdiction.

42. 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.

43. Prior to purchasing securities of a Top Fund, the purchaser will be provided with a copy of the Top Fund's offering memorandum or, if no offering memorandum is prepared in respect of the Top Fund, the purchaser will be provided with another disclosure document that contains details about the Top Fund and disclosure respecting relationships and potential conflicts of interest between the Top Fund and the applicable Underlying Fund.

44. The amounts invested from time to time in an Underlying Fund by one or more Top Fund may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, a Top Fund could either alone or together with other Top Funds, become a substantial security holder of an Underlying Fund. The Top Funds are, or will be, related mutual funds by virtue of common management by the Filer.

45. In the absence of the Requested Relief, each of the Top Funds would be precluded from investing in an Underlying Fund since an officer and/or director of the Filer (considered a responsible person within the meaning of the applicable provisions of NI 31-103) will also be an officer and/or director of the Filer of the Underlying Fund.

46. 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.

47. 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 a 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 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.

48. 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.

49. The Fund-on-Fund Structure represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of the prospective 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 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 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 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) 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 related allocations 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.

The Consent Relief

"Neeti Varma"
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission

The Related Issuer Relief

"Ray Kindiak"
"Cecilia Williams"
Commissioner
Commissioner
Ontario Securities Commission
Ontario Securities Commission