Lionguard Capital Management Inc.

Decision

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 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.

March 27, 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 LIONGUARD CAPITAL 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 LionGuard Opportunities Trust 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 and managed by the Filer in the future (together with the Initial Top Fund, the Top Funds), which invests its assets in LionGuard Opportunities Fund LP (the Initial Underlying Fund) or any other investment fund which is not a reporting issuer and may be managed by the Filer in the future (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).

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.

Interpretation

Terms defined in National Instrument 14-101 Definitions and 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:

The Filer

1. The Filer is a corporation existing under the laws of Canada with its head office in Montreal, Québec.

2. The Filer is registered under the Ontario Act (and under the Securities Act (Québec)) as an adviser in the category of portfolio manager, as an exempt market dealer and as an investment fund manager. The Filer is also registered as an adviser in the category of portfolio manager and as an exempt market dealer under the securities legislation of British Columbia and Alberta.

3. The Ontario Securities Commission has been chosen as principal regulator for purposes of the application, pursuant to Subsection 3.6(8) of National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions (NP 11-203) and Section 4.5 of MI 11-102. The Requested Relief is only required in Ontario and Alberta, but is not required in Québec, even though the Filer's head office is located there. Pursuant to the factors outlined in Paragraph 3.6(10)(d) of NP 11-203, Ontario is the jurisdiction with which the Filer has the most significant connection as the Initial Top Fund is formed under the laws of Ontario and it is anticipated that many more investors in the Initial Top Fund will be resident in Ontario than in Alberta.

4. 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.

5. The Filer is or will be the portfolio adviser and the investment fund manager for the Top Funds and the Underlying Funds. Each of the Top Funds and the Underlying Funds is or will be established under the laws of Ontario, Québec or another jurisdiction of Canada. The Filer also acts as the exempt market dealer for the distribution of securities of the Top Funds and the Underlying Funds.

6. An officer and director of the Filer owns over 20% of the voting securities of the Filer and accordingly is a "substantial securityholder" (as those words are defined in s. 110(2)(b) of the Ontario Act and s. 184(1)(c) of the Alberta Act) of the Filer. In addition, such individual also owns over 20% of the voting securities of the general partner of the Initial Underlying Fund and accordingly is a "substantial securityholder" of the Initial Underlying Fund. It is anticipated a similar ownership structure would be used for Future Underlying Funds. Officers and directors of the Filer are now also holders of certain limited partnership units in the Initial Underlying Fund, and, in the future, officers and directors of the Filer may also be, directly or indirectly, limited partners of other limited partnerships that may be the Future Underlying Funds. As limited partners of such limited partnerships, such officers and directors of the Filer may have a significant interest in the Underlying Funds.

Top Funds

7. The Initial Top Fund is an investment trust that was established under the laws of Ontario on March 8, 2018. The future Top Funds will be structured as trusts under the laws of Ontario or another jurisdiction of Canada.

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

9. The securities of each Top Fund are or will be sold solely to investors pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 Prospectus Exemptions (NI 45-106).

10. Each of the Top Funds will be a "mutual fund" as defined in securities legislation of the jurisdictions in which the Top Funds are distributed.

11. An investment by a Top Fund in an Underlying Fund is, or will be, compatible with the investment objectives of the Top Fund. The investment strategy for a Top Fund will be to invest substantially all of its assets in an Underlying Fund.

12. The investment objective of the Initial Top Fund is to seek to maximize returns on its capital. The investment strategy for the Initial Top Fund is to invest substantially all of its assets in the Initial Underlying Fund.

13. None of the Top Funds will be a reporting issuer in any jurisdiction of Canada.

Underlying Funds

14. The Initial Underlying Fund is a limited partnership established under the laws of Québec by an agreement dated June 20, 2014. The future Underlying Funds will be structured as limited partnerships under the laws of Québec or another jurisdiction of Canada.

15. The general partner of the Initial Underlying Fund is LionGuard Opportunities GP Inc., an affiliate of the Filer. The general partner of each future Underlying Fund will be an affiliate of the Filer.

16. Each of the Underlying Funds has, or will have, separate investment objectives and investment strategies. The investment objective of the Initial Underlying Fund is to generate attractive total absolute returns through investments in mainly small and medium capitalization North American companies. In order to achieve investment objectives of the Initial Underlying Fund, the Filer employs investment strategies which include managing an investment portfolio of mainly long and short equity positions of publicly-traded securities.

17. In Canada, securities of each Underlying Fund are, or will be, sold solely to investors pursuant to exemptions from the prospectus requirements in accordance with NI 45-106.

18. Each of the Underlying Funds is, or will be, a "mutual fund" as defined in securities legislation of the jurisdictions in which the Top Funds are distributed.

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

20. None of the Underlying Funds is, or will be, a reporting issuer in any jurisdiction of Canada.

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

Fund-on-Fund Structure

22. As a limited partnership, securities of the Initial Underlying Fund are not qualified investments under the Income Tax Act (Canada) for registered plans and tax-free savings accounts.

23. A Top Fund will allow its investors to obtain indirect exposure to the investment portfolio of an Underlying Fund and its respective investment strategies through, primarily direct investments by the Top Fund in securities of the Underlying Fund (the Fund-on-Fund Structure).

24. Unlike the Initial Underlying Fund, which is a limited partnership, the Initial Top Fund is organized as a trust for the purpose of accessing a broader base of investors, including registered plans and tax-free savings accounts, and other investors that may not wish to invest directly in a limited partnership.

25. The Fund-on-Fund Structures involving Future Top Funds and Future Underlying Funds will be similarly structured.

26. Any investment 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.

27. An investment in an Underlying Fund by a Top Fund will be effected at an objective price and on the same basis as other investments in the Underlying Fund. 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.

28. Each Underlying Fund will not hold more than 10% of its NAV in illiquid assets (as defined in National Instrument 81-102 Investment Funds (NI 81-102)). The Underlying Funds will primarily hold publicly-traded securities.

29. The amounts invested, from time to time, in an Underlying Fund by one or more of the Top Funds may exceed 20% of the outstanding voting securities of any single Underlying Fund. Accordingly, each Top Fund could, either alone or together with Future Top Funds, become a substantial securityholder of an Underlying Fund.

30. Upon inception, the Initial Top Fund will not be a substantial securityholder of the Initial Underlying Fund, however, as the assets of the Initial Top Fund grow and it subscribes for more units of the Initial Underlying Fund, it is expected that the Initial Top Fund will become a substantial securityholder of the Initial Underlying Fund.

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

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

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

34. In all cases, the Filer manages, or will manage, the liquidity of each 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.

35. 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.

36. Prior to the time of investment, securityholders of a Top Fund will be provided with disclosure with respect to each officer and/or director of the Filer, if any, that has a significant interest in the Underlying Funds through investments made in securities of such Underlying Funds (due to the provision of seed capital and/or ongoing investments from time to time) and that such officer and/or director of the Filer, if any, is also a substantial securityholder of the Filer. Securityholders in a Top Fund will also be advised of the potential conflicts of interest which may arise from such relationships. The foregoing disclosure will be contained in any offering memorandum prepared in connection with a distribution of securities of the Top Fund, or if no offering memorandum is prepared, in another document provided to investors of the Top Fund.

37. Each of the Top Funds and the Underlying 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, as applicable.

Generally

38. The Filer expects that the assets of each Underlying Fund (and the assets of each Top Fund only if such Top Fund holds securities other than securities of an Underlying Fund) are, or will be, held by an entity that meets the qualifications of section 6.2 of NI 81-102 (for assets held in Canada) or an entity that meets the qualifications of section 6.3 of NI 81-102 (for assets held outside Canada) except that its financial statements may not be publicly available.

39. It is expected that the Top Funds, will only hold cash in a bank account with a bank that meets the qualifications of Part 6 of NI 81-102, and uncertificated securities of the applicable Underlying Fund registered in the name of the relevant Top Fund. To the extent a Top Fund holds assets other than the applicable Underlying Fund, those assets will be held by an entity that meets the qualifications of Part 6 of NI 81-102.

40. 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 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.

41. A Top Fund's investments in an Underlying Fund represent the business judgement 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:

(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 securities 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 the 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 the 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 the 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 the Underlying Fund in which the 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.

"W.M. Furlong"
"M. Sandler"
Commissioner
Commissioner
Ontario Securities Commission
Ontario Securities Commission