Groundlayer Management Inc., Goundlayer Capital Inc. and the Alpha Fit Fund - MRRS Decision

Headnote

Relief granted from the mutual fund conflict of interest investment prohibitions, management company reporting requirements and self dealing restrictions of the Securities Act (Ontario) to permit a pooled fund to invest in a related pooled fund.

Statutes Cited:

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(3), 113, 117(1)(a), 117(1)(d), 117(2), 118(2), 121(2)(a)(ii).

April 27, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA AND ONTARIO

(THE "JURISDICTIONS")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

GROUNDLAYER MANAGEMENT INC.,

GROUNDLAYER CAPITAL INC. AND

THE ALPHA FIT FUND

(COLLECTIVELY, THE "FILER")

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in the Jurisdictions has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the "Legislation") for an exemption from the restrictions or requirements, as the case may be, contained in the Legislation:

1. which prohibits a mutual fund from knowingly making or holding an investment in: (i) a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial securityholder; and (ii) an issuer in which a significant interest is held by an officer or director of the mutual fund, its management company or distribution company (or an associate of any one of them) or any person or company who is a substantial security holder of the mutual fund, its management company or its distribution company;

2. that requires a management company to file a report of every transaction of purchase or sale of securities between a mutual fund it manages and any related person or company and any transaction in which, by arrangement other than an arrangement relating to insider trading in portfolio securities, a mutual fund is a joint participant with one or more of its related persons or companies; and

3. that prohibits a portfolio manager from knowingly causing an investment portfolio managed by it to invest in securities of an issuer in which a responsible person is an officer or director unless the specific fact is disclosed to the client, if applicable, and the written consent of the client to the investment is obtained before the purchase,

(collectively, the "Requested Relief").

Under the Mutual Reliance Review System for Exemptive Relief Applications:

(a) The Ontario Securities Commission is the principal regulator for this application; and

(b) This MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

General Partner

1. The General Partner is a corporation established under the laws of the Province of Ontario. The head office of the General Partner is in Ontario.

2. The General Partner is the general partner of the Underlying Fund and is seized with the power and exclusive authority to carry on the business and activities of the Underlying Fund under the terms of limited partnership agreement dated September 12, 2002.

3. The General Partner will be the general partner of the Top Fund and will be seized with the power and exclusive authority to carry on the business and activities of the Top Fund under a limited partnership agreement anticipated to be signed April 28, 2006.

Portfolio Manager

4. The Portfolio Manager, an affiliate of the General Partner, is a corporation established under the laws of Ontario and is registered with the Ontario Securities Commission ("OSC") as an adviser in the category of investment counsel and portfolio manager and as a dealer in the category of limited market dealer.

5. The Portfolio Manager is the portfolio manager for of the Underlying Fund under the terms of an investment management agreement dated September 12, 2002.

6. The Portfolio Manager will be the portfolio manager for the Top Fund under the terms of an investment management agreement anticipated to be signed April 28, 2006.

Underlying Fund

7. The Underlying Fund is a limited partnership established under the laws of Ontario on September 12, 2002.

8. The Underlying Fund was formed for the purpose of generating long-term capital gains primarily by investing in equity and equity-based securities primarily through long positions.

9. The Underlying Fund is sold in Canada's private placement markets in accordance with National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106").

10. The Underlying Fund is not a reporting issuer in any of the Jurisdictions and is not in default under relevant securities legislation of the Jurisdictions.

Top Fund

11. The Top Fund will be a limited partnership established under the laws of Ontario on or about April 28, 2006.

12. The Top Fund will be sold in Canada's private placement markets in accordance with NI 45-106 and will not be a reporting issuer in any Jurisdiction and is not in default under relevant securities legislation of the Jurisdictions.

13. The Top Fund will be formed for the purpose of generating long-term capital gains which will be achieved primarily by investing all of the Top Fund's assets in units of the Underlying Fund.

Fund-on-Fund Structure

14. The initial offering price for the Underlying Fund in September 2002 was $100,000 per Class A unit.

15. Over the past 12 months, the Underlying Fund's net asset value per Class A unit ("NAVPU") was in excess of $200,000.

16. In January 2006, the General Partner sought to list the Underlying Fund on the electronic transaction processing system maintained and supported by FundSERVE Inc. ("FundSERVE") in order to expand the pool of potential investors.

17. FundSERVE advised the General Partner that for purposes of listing investment funds, the maximum numerical NAVPU that its electronic transaction system could support was (including cents) six (6) digits (or $9,999.99). On this basis, FundSERVE advised the General Partner that the Underlying Fund could not be listed on FundSERVE.

18. Therefore, in order to list an investment fund on FundSERVE having the same investment mandate as the Underlying Fund, the General Partner intends to create the Top Fund which will be managed by the General Partner to maintain a less-than-6-digit NAVPU and will otherwise seek to replicate the returns of the Underlying Fund (less the FundSERVE listing costs) by investing 100% of its net assets in units of the Underlying Fund (the "Fund-on-Fund Structure").

19. For purposes of implementing the Fund-on-Fund Structure, the General Partner shall ensure that:

a) there will be compatible dates for the calculation of net asset values for purposes of the issue and redemption of units of the Top Fund and the Underlying Fund;

b) the annual financial statements of the Top Fund, which is made available to investors in the Top Fund in accordance with securities legislation, together with an auditors report, will include summary disclosure of the securities held by the Underlying Fund;

c) the offering memorandum of the Top Fund will contain information about how Top Fund investors may obtain a copy of the Underlying Fund offering memorandum and annual or semi-annual financial statements, which will be sent to them free of charge;

d) the arrangements between, or in respect of, the Top Fund and the Underlying Fund are such as to avoid the duplication of management fees or incentive fees; and

e) the General Partner will not vote the securities of the Underlying Fund held by the Top Fund at any meeting of such holders of such securities.

Generally

20. In the absence of this Decision, the Top Fund would be precluded from implementing the Fund-on-Fund Structure due to certain investment restrictions contained in the Legislation.

21. The Fund-on-Fund Structure represents the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Top Fund.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met.

The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that:

1. the annual financial statements of the Top Fund discloses:

(a) the intent of the Top Fund to invest in the Underlying Fund;

(b) the manager of the Underlying Fund; and

(c) the name of the Underlying Fund;

2. the offering document of the Top Fund discloses:

(a) the intent of the Top Fund to invest in the Underlying Fund;

(b) the manager of the Underlying Fund;

(c) the name of the Underlying Fund; and

(d) the investment objectives, investments strategies, risks and restrictions of the Underlying Fund;

3. the arrangements between, or in respect of, the Top Fund and the Underlying Fund are such as to avoid the duplication of management fees or incentive fees;

4. no sales fees or redemption fees are payable by the Top Fund in relation to its purchases or redemptions of securities of the Underlying Fund;

5. the General Partner does not vote the securities of the Underlying Fund held by the Top Fund at any meeting of holders of such securities;

6. the offering memorandum of the Top Fund will contain information about how the Top Fund investor may obtain a copy of the Underlying Fund offering memorandum or annual or semi-annual financial statements, which will be sent to them free of charge; and

7. in addition to receiving the annual and the semi-annual financial statements of the Top Fund, investors in the Top Fund have received appropriate summary disclosure in respect to the Top Fund's holdings of securities of the Underlying Fund in the financial statements of the Top Fund.