National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted from the requirements of paragraphs 2.2(1)(a), 2.5(2)(a), and 2.5(2)(c) of National Instrument 81-102 Mutual Funds to allow a mutual fund subject to NI 81-102 to invest up to 10% of its assets in a bottom pooled fund managed by the same fund manager. Exemption granted on the basis that bottom fund will comply with Parts 2, 4 and 6 of NI 81-102, disclosure about the underlying pooled fund to be provided upon request, to retail investors in the mutual fund as well as to accredited investors, and investors in the mutual fund pursuant to capital accumulation plans (CAPs), among other conditions.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.5(2)(a), 2.5(2)(c), 2.2(1(a).
May 2, 2013
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
INTEGRA EQUITY FUND
IN THE MATTER OF
INTEGRA CAPITAL LIMITED
(Integra or the Manager)
The principal regulator in the Jurisdiction has received an application from Integra, in its capacity as investment fund manager (Manager) of the Fund, on behalf of the Fund, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for exemptive relief (the Requested Relief) from paragraphs 2.2(1)(a), 2.5(2)(a) and (c) of National Instrument 81-102 -- Mutual Funds (NI 81-102) to permit the Fund to invest up to 10% of its net assets in units of Principal U.S. Value Equity Fund (the Underlying Fund).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application),
(a) the Ontario Securities Commission (the Commission or OSC) is the principal regulator for this application; and
(b) Integra, on behalf of the Fund, 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador (the Non-Principal Jurisdictions).
Terms defined in National Instrument 14-101 -- Definitions and MI 11- 102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by Integra on behalf of the Fund:
1. Integra is a corporation incorporated under the laws of Ontario and has its head office in the City of Oakville. Integra is the trustee, portfolio manager and investment fund manager of the Fund. Integra is also the trustee and investment fund manager of the Underlying Fund.
2. Integra is registered as a portfolio manager and exempt market dealer in each of the Province of Canada ("Jurisdictions"), as a commodity trading manager in Ontario, and as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador.
3. Integra has retained Principal Global Investors LLC, (PGI) to manage the portfolio of the Underlying Fund. PGI acts as a sub-advisor to the Underlying Fund pursuant to the exemption under the exemption in section 7.3 of Ontario Securities Commission (OSC) Rule 35-502 Non-Resident Advisers.
4. Each of the Fund and the Underlying Fund is an open-end mutual fund established under the laws of Ontario.
5. The Fund is a reporting issuer under the securities laws of each of the Jurisdictions. The Fund was offered by simplified prospectus in the Jurisdictions but Integra permitted the Fund's prospectus to lapse on August 25, 2007. The Fund's prospectus was permitted to lapse as Integra decided to withdraw from the retail market.
6. Since August 25, 2007, units of the Fund have been offered only to (a) accredited investors pursuant to the exemption in National Instrument 45-106 Prospectus Exempt Distributions, (b) to participants in capital accumulation plans (CAP Plans) pursuant to a blanket exemption by the securities regulatory authorities in certain provinces and territories (CAP Plan Blanket Relief) (c) to participants in CAP Plans pursuant to specific relief granted in decisions dated October 17, 2006 and November 17, 2009 and issued by the OSC as principal regulator of the Fund in respect of CAP Plans (CAP Relief) or (d) pursuant to other specific granted by the OSC in decisions dated September 11, 2009 and January 12, 2010, to permit other investors to invest in the Fund (the Prior OSC Relief).
7. The CAP Plan Blanket Relief and the CAP Relief contemplate investments in the Fund by participants in CAP Plans, where the plan sponsor of the CAP Plan selects the Fund as one of the investment options for the CAP Plan. The Prior OSC Relief contemplates (a) continued investments in the Fund by former members of one CAP Plan who maintained their investment in the Fund when they transferred their assets to a locked-in retirement account or (b) investments in the Fund by participants in CAP Plans who also invest in the Fund within non-tax assisted savings plans directly related to their CAP Plans.
8. Apart from retail investors who invested in the Fund prior to August 25, 2007, the only investors in the Fund are accredited investors, investors in CAP Plans and other investors pursuant to the Prior OSC Relief.
9. The Underlying Fund was created by declaration of trust dated July 19, 2012. The Underlying Fund is not, and does not intend to become, a reporting issuer in any of the Jurisdictions.
10. As a mutual fund in Ontario, the Underlying Fund is subject to aspects of securities legislation in the Jurisdictions.
11. Except as noted in paragraph 26, none of the Fund, Integra or the Underlying Fund is in default of any requirements of applicable securities legislation in any of the Jurisdictions.
12. The investment objective of the Fund is:
"to generate both capital appreciation (growth) and income, while maintaining a relatively low level of risk".
13. The investment objective of the Underlying Fund is:
"to provide investors with long-term growth of capital. The Fund will focus stock selection within segments of the U.S. market offering below average valuations across the size spectrum".
14. Integra created the Underlying Fund to serve as an investment option for Integra's institutional clients as well as a possible underlying fund for the Fund.
15. The Underlying Fund will generally invest:
(a) in US value equity securities, an investment strategy that emphasizes buying equity securities that appear to be undervalued; and
(b) at least 80% of its net assets in equity securities of companies with large market capitalizations (those with market capitalizations similar to companies in the Russell 1000 Value Index) at the time of purchase.
16. The Underlying Fund complies with the restrictions on investments in Part 2 of NI 81-102.
17. Commencing in September 2008, the Fund has invested only in underlying funds to achieve its investment objective. Between September 2008 and August 19, 2012, the underlying funds in which the Fund invested and the maximum investment in each underlying fund was: Integra Canadian Value Growth Fund (70%); Integra International Equity Fund (10%), NWQ U.S. Large Cap Value Fund (NWQ Fund) (10%) and Integra Newton Global Equity Fund (10%). Each of these underlying funds is or, in the case of NWQ Fund was, a reporting issuer in each of the Jurisdictions whose units were most recently qualified for distribution under National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) pursuant to a simplified prospectus dated August 23, 2011 in the case of Integra Canadian Value Growth Fund, Integra International Equity Fund and Integra Newton Global Equity Fund, and dated August 25, 2006 in the case of the NWQ Fund. As of August 24, 2012, none of these funds currently offers its units by prospectus due to Integra's decision to withdraw from the retail market.
18. The investment objective of NWQ Fund was to achieve long-term investment returns through a portfolio of U.S. equities, which are sufficiently diversified to minimize investment risk through investments in equities of medium to large capitalized companies based in the United States.
19. On August 20, 2012, Integra terminated the NWQ Fund with the prior approval of its unitholders.
20. Prior to the time when NWQ Fund was terminated with the prior approval of its unitholders, Integra considered whether the former unitholders of NWQ Fund, such as the Fund, should invest in Integra U.S. Value Growth Fund (US Value Growth Fund), another fund managed by Integra and subject to NI 81-102, whose units were qualified by simplified prospectus.
21. Integra determined, however, that US Value Growth Fund was not an appropriate substitute for NWQ Fund as it has only a 50% bias towards U.S. value equity securities whereas the Underlying Fund is 100% biased to U.S. value equity securities. With respect to the Fund, Integra accordingly determined the Underlying Fund to be the more appropriate fund in which the Fund should invest because the investment objective of the Underlying Fund was, in Integra's view, most similar to that of NWQ Fund and more closely aligned with the investment objective of the Fund.
22. Upon termination of the NWQ Fund with the prior approval of its unitholders, including the Fund, the assets of NWQ Fund were then liquidated and investors' investments in NWQ Fund, including investments of the Fund in NWQ Fund, were redeemed. Except for three investors, all other investors in the NWQ Fund, including the Fund, agreed to the investment of their redemption proceeds in units of the Underlying Fund.
23. As at March 1, 2013, the Fund had approximately $21 million in net assets. As at March 1, 2013, institutional investors, other accredited investors and CAP Plan investors held units of the Fund comprising 94% of the Fund's net assets.
24. Once the determination was made to invest the Fund in units of the Underlying Fund, institutional investors in the Fund, other accredited investors, and CAP Plan sponsors were informed in writing by letter from Integra that the Fund would be investing 10% of its net assets in the Underlying Fund. CAP Plan investors were further informed of this by way of a revised Fund profile sheet subsequent to August 2012 in accordance with the disclosure requirements of the CAP Plan Blanket Relief or the conditions of the Prior OSC Relief.
25. The remaining 6% of investors in the Fund have been informed of this investment through:
(a) disclosure in the Management Report of Fund Performance of the Fund filed March 27, 2013 on SEDAR for the period ending December 31, 2012 ;
(b) the 2013 Annual Information Form of the Fund filed on SEDAR on March 27, 2013, and;
(c) the Statement of Investment Policies and Procedures of the Integra Family of Funds which is posted on Integra's website.
26. At the time Integra commenced investments by the Fund in the Underlying Fund on August 20, 2012, through oversight, Integra failed to apply for the Requested Relief to permit such investment as (a) the Underlying Fund did not qualify its units by prospectus as required by section 2.5(2)(a) of NI 81-102 and (b) the Underlying Fund is not a reporting issuer as required by section 2.5(2)(c) of NI 81-102. Consequently, the Fund and Integra are in default of securities legislation in the Jurisdictions with respect to these requirements.
27. As well, as of March 1, 2013, the Fund owned 10.83% of the outstanding voting securities of the Underlying Fund. This investment complied with the control restrictions in section 2.2(1)(a) of NI 81-102 at the time of purchase in August 2012, but has exceeded the 10% restriction in s. 2.2(1)(a) of NI 81-102 since that time due to market fluctuations after the time of purchase.
28. Consequently, depending on the relative sizes of the Fund and the Underlying Fund in the future, the Fund's investment in units of the Underlying Fund could result in the Fund holding more than 10% of the outstanding units of the Underlying Fund which may not be compliant with the requirements of section 2.2(1)(a) of NI 81-102.
29. Accordingly, the Fund and Integra require the Requested Relief to enable the Fund to maintain its position in the Underlying Fund, to allow the Fund to invest up to 10% of its net assets in the Underlying Fund in accordance with section 2.1 of NI 81-102, and to allow the Fund to exceed the control restrictions in section 2.2(1)(a) of NI 81-102 in circumstances where an investment of up to 10% of the Fund's net assets in the Underlying Fund results in the Fund holding more than 10% of the outstanding units of the Underlying Fund.
30. The same dates are used for the calculation of the net asset value of the Fund and the Underlying Fund for the purpose of the issue and redemption of the units of such mutual funds. An investor can redeem an investment in the Underlying Fund on each trading day, namely, any day the Toronto Stock Exchange is open for trading.
31. The Fund will not invest more than 10% of its net assets in the Underlying Fund in accordance with the requirements of s. 2.1(1) of NI 81-102.
32. There will be no duplication of management fees or incentive fees since no management fees or incentive fees are payable by the Fund in respect of its investment in the Underlying Fund.
33. Where a matter relating to the Underlying Fund requires a vote of unitholders of the Underlying Fund at a meeting of unitholders, Integra will not cause the units of the Underlying Fund held by the Fund to be voted at such meeting except that the Fund may, if Integra so chooses, arrange for all units it holds of the Underlying Fund be voted by the beneficial holders of units of the Fund.
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) the Fund's investments in securities of the Underlying Fund are made in compliance with each provision of section 2.5 of NI 81-102, except for sections 2.5(2)(a) and 2.5(2)(c);
(b) the Fund will not purchase securities of the Underlying Fund if, immediately after the purchase, more than 10% of its net assets taken at market value at the time of the purchase would consist of investments in the Underlying Fund;
(c) the Underlying Fund will comply with the provisions of Part 2, 4 and 6 of N1 81-102 and Part 14 of National Instrument 81-106 Investment Fund Continuous Disclosure at all times;
(d) unitholders of the Fund may obtain, upon request and free of charge, a copy of the offering memorandum of the Underlying Fund, if any, and the audited annual financial statements and semi-annual financial statements of the Underlying Fund. The Fund will disclose this information in its Management Report of Fund Performance;
(e) there are compatible dates for the calculation of the net asset value of the Fund and the Underlying Fund for the purpose of the issue and redemption of securities of such mutual funds; and
(f) the name of the Underlying Fund will be disclosed in the Fund's Annual Information Form and its interim and annual Management Report of Fund Performance as long as the Fund holds a position in the Underlying Fund.