Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemptions granted from the mutual fund conflict of interest investment restrictions of the Securities Act (Ontario) and self-dealing prohibition of National Instrument 31-103 Registration Requirements and Exemptions to permit pooled funds to invest with fund-on-fund structure in limited partnerships.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(3), 113.

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

January 5, 2010

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

HIGHWATER CAPITAL MANAGEMENT CORP.

(the Filer)

AND

HIGHWATER DIVERSIFIED TRUST FUND

(the First Top Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on its behalf and on behalf of the First Top Fund and any mutual fund which is not a reporting issuer and may be established, advised or managed by the Filer in the future (together with the First Top Fund, the Top Funds), which invests its assets in Highwater Diversified Trust Fund (the First Underlying Fund) or any other investment fund which is not a reporting issuer and may be established, advised or managed by the Filer in the future (together with the First Underlying Fund, the Underlying Funds), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Top Funds and the Filer from:

(a) the restriction in the Legislation which prohibits a mutual fund from knowingly making an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder;

(b) the restriction in the Legislation which prohibits a mutual fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) above; and

(c) the restriction in the Legislation which prohibits 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 an officer or a director unless the specific fact is disclosed to the client and the written consent to the investment is obtained before the purchase.

(Paragraphs (a) and (b) together are referred to as the Related Issuer Relief; paragraph (c) is the Related Party 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) in respect of the Related Issuer Relief, 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:

Manager

1. The Filer is a corporation established under the laws of Ontario with its head office located in Toronto, Ontario.

2. The Filer is registered with the Ontario Securities Commission as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer under the Securities Act (Ontario) and as a commodity trading manager under the Commodity Futures Act (Ontario).

3. The Filer is or will be the investment manager for the Underlying Funds. The Filer assists or will assist in the marketing of the Underlying Funds and acts or will act as a distributor of the securities of the Underlying Funds not otherwise sold through another registered dealer.

4. The Filer will be the manager and trustee for the Top Funds and will be responsible for managing the business and affairs of the Top Funds. The Filer will also be responsible for making investment decisions on behalf of the Top Funds, assisting in the marketing of the Top Funds, and acting as a distributor of securities of the Top Funds not otherwise sold through another registered dealer.

5. The Filer is not a reporting issuer in any jurisdiction and is not, to its knowledge, in default of securities legislation in any jurisdiction.

Underlying Fund

6. The First Underlying Fund is a limited partnership established under the laws of Ontario by declaration dated December 19, 2007. The future Underlying Funds will be structured as limited partnerships under the laws of Ontario.

7. The general partner of the First Underlying Fund is Highwater GenPar Ltd., an affiliate of the Filer, and has delegated to the Filer responsibility for managing the ongoing business and administrative affairs of the First Underlying Fund. The general partner of the future Underlying Funds will be an affiliate of the Filer.

8. The First Underlying Fund was formed for the purpose of achieving consistent absolute returns throughout various market conditions by investing primarily in the equity securities of mid and large capitalization entities listed on major securities exchanges in Canada and the United States. The First Underlying Fund does not invest in other investment entities managed by the Filer or its affiliates.

9. Securities of each Underlying Fund are or will be sold under the terms and provisions of an offering memorandum in Canada's private placement markets in accordance with National Instrument 45-106 Prospectus and Registration Exemptions.

10. The First Underlying Fund is not a reporting issuer in any jurisdiction and is not, to its knowledge, in default of securities legislation of any jurisdiction.

Top Funds

11. The Top Funds will be sold in Canada's private placement markets pursuant to prospectus exemptions and will not be reporting issuers in any jurisdiction.

12. The First Top Fund will be an investment trust established under the laws of Ontario in or around January, 2010.

13. The First Top Fund will be formed for the purpose of achieving consistent absolute returns throughout various market conditions, which will be achieved primarily by investing in securities of the Underlying Fund.

Fund-on-Fund Structure

14. The First Top Fund is being, and other Top Funds may be, created by the Filer to allow investors in the Top Funds to obtain indirect exposure to the investment portfolio of the Underlying Funds and its investment strategies through, primarily, direct investments by the Top Funds in securities of the Underlying Funds (the Fund-on-Fund Structure). Unlike the First Underlying Fund, which is a limited partnership, the First Top Fund is being formed as a trust for the purpose of accessing a broader base of investors, including registered retirement savings plans and other investors that may not or wish not to invest directly in a limited partnership. Rather than running the First Top Fund's and each Underlying Fund's investment portfolios as separate pools, the Filer wishes to make use of economies of scale by managing only one investment pool, in the Underlying Funds.

15. For the purpose of implementing the Fund-on-Fund Structure, the Filer shall ensure that:

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

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

c. each Top Fund will not vote any of the securities it holds of an Underlying Fund except that the Top Fund may, if the Filer so chooses, arrange for all the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;

d. the offering memorandum of each Top Fund will describe the Top Fund's intent, or ability, to invest in securities of the Underlying Funds and that the Filer is the investment adviser for the Underlying Funds; and

e. the offering memorandum of each Top Fund will contain information about how the investors in such Top Fund may obtain a copy of each Underlying Fund's offering memorandum or its annual or semi-annual financial statements.

16. Because of the proposed size of the investment by the Top Funds in the Underlying Funds, each Top Fund could, either alone or together with the other Top Funds, become a substantial security holder of the Underlying Funds.

Generally

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

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

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 Related Issuer Relief and the Related Party Relief is granted provided that, in connection with each Top Fund:

(a) securities of the Top Fund are distributed in Canada's private placement markets pursuant to exemptions from the prospectus requirements;

(b) the investment by the Top Fund in each Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;

(c) no investment management fees or incentive fees are payable by the Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service;

(d) no sales fees or redemption fees are payable by the Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund;

(e) each Top Fund will not vote any of the securities it holds of an Underlying Fund except that the Top Fund may, if the Filer so chooses, arrange for all the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Top Fund; and

(f) if available, the offering memorandum (or other similar document) of a Top Fund will disclose:

a. that the Top Fund may purchase units of the Underlying Funds;

b. the fact that the Filer is the investment adviser to both the Top Fund and the Underlying Funds; and

c. the approximate or maximum percentage of net assets of the Top Fund that it is intended be invested in securities of the Underlying Funds.

The Related Party Relief

"Rhonda Goldberg"
Manager, Investment Funds Branch
Ontario Securities Commission

The Related Issuer Relief

"David L. Knight"
Commissioner
Ontario Securities Commission
 
"Mary Condon"
Commissioner
Ontario Securities Commission