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Alignvest Capital Management Inc.
Headnote
National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from the mutual fund conflict of interest restrictions and reporting requirements in the Securities Act (Ontario) and the self-dealing prohibition in National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations to allow pooled funds to invest in securities of underlying funds under common management -- relief subject to certain conditions.
Applicable Legislative Provisions
Securities Act (Ontario) R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(3), 113.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a), 15.1.
May 9, 2014
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 ALIGNVEST 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 behalf of each of the Filer, Alignvest Opportunities Fund Trust, Alignvest Income Fund Trust (collectively, the Initial Top Funds) or any other investment fund which is not a reporting issuer under the Securities Act (Ontario) (the Legislation) established, advised or managed by the Filer after the date hereof (the Future Top Funds and, together with the Initial Top Funds, the Top Funds), which invests its assets in any of Alignvest Opportunities Fund LP and Alignvest Income Fund LP (collectively, the Initial Underlying Funds) or any other investment fund which is not a reporting issuer under the Legislation established, advised or managed by the Filer after the date hereof (the Future Underlying Funds and, together with the Initial Underlying Funds, the Underlying Funds):
(a) for an order pursuant to section 113 of the Legislation exempting the Filer and the Top Funds from the restriction contained in paragraphs 111(2)(b) and (c) and subsection 111(3) of the Legislation which prohibits:
(i) 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 mutual funds, is a substantial security holder;
(ii) a mutual fund from knowingly making an investment in an issuer in which:
(A) any officer or director of the mutual 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 mutual fund, its management company or its distribution company,
has a significant interest; and
(iii) a mutual fund, its management company or its distribution company from knowingly holding an investment described in paragraphs (i) and (ii) above
(the "Related Issuer Relief"); and
(b) for an order under the securities legislation (the "Legislation") of the Jurisdictions (as defined below) pursuant to section 15.1 of National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103") exempting the Filer from the restriction in paragraph 13.5(2)(a) of NI 31-103 prohibiting a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as adviser, to invest in the securities of any issuer in which a responsible person or an associate of a responsible person is a partner, officer or director, unless the fact is disclosed to the client and the written consent of the client to the investment is obtained before the purchase (the "Consent Relief");
(collectively, the "Requested Relief").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission is the principal regulator for this application; and
2. 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 and Nova Scotia.
Interpretation
Unless expressly defined herein, terms in this application 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. The Related Issuer Relief is only required in the provinces of Ontario and Alberta. The Consent Relief is required in Ontario and Nova Scotia.
2. The Filer is registered as an investment fund manager in Ontario and is, or will be, the manager of the Top Funds and the Underlying Funds. The Filer is also registered as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer in the Provinces of Ontario and Nova Scotia.
3. The Filer is, or will be, responsible for managing the assets of the Top Funds and the Underlying Funds (collectively, the Funds), has complete discretion to invest and reinvest the Funds' assets, and is responsible for executing all portfolio transactions. Furthermore, the Filer assists, or will assist, in the marketing of the Funds and, subject to compliance with applicable securities laws may act as a distributor of securities of the Funds not otherwise sold through another registered dealer.
4. The Filer is a wholly-owned subsidiary of Alignvest Management Corporation (AMC).
5. Neither the Filer or AMC is a reporting issuer in any jurisdiction of Canada and is not in default of securities legislation of any jurisdiction of Canada.
The Top Funds
6. The Top Funds are, or will be, formed as trusts under the laws of Ontario by a trust agreement.
7. Each of the Top Funds is, or will be, sold pursuant to prospectus exemptions in accordance with National Instrument 45-106 -- Prospectus and Registration Exemptions (NI 45-106).
8. Pursuant to separate trust agreements each dated as of January 1, 2014 (the Trust Agreements), Caledon Trust Company acts as the trustee of each of the Initial Top Funds (the Trustee). Pursuant to each of the Trust Agreements, the Filer has been appointed as the manager of each of the Initial Top Funds and has authority to manage the business and affairs of each of the Initial Top Funds and to bind each of the Initial Top Funds.
9. The investment objective of the Alignvest Opportunities Fund Trust is to seek to generate attractive long-term growth in net asset value with low volatility and low correlation to capital markets by gaining exposure to the returns of the Alignvest Opportunities Fund LP.
10. The investment objective of the Alignvest Income Fund Trust is to seek to generate attractive long-term growth in net asset value with low volatility and low correlation to capital markets by gaining exposure to the returns of the Alignvest Income Fund LP.
11. The Trust Agreement of each of the Initial Top Funds describes the investment objectives and investment restrictions applicable to the Initial Top Funds and also describes the fees, compensation and expenses payable by the Initial Top Funds, the calculation of net asset value, distributions, the powers and duties of the investment fund manager and all other matters material to each of the Initial Top Funds, including the fact that in pursuing its investment objectives, the Initial Top Funds may invest in one or more Underlying Funds as an investment strategy.
12. The Top Funds are, or will be, mutual funds for the purposes of the Legislation but no Top Fund is, or will not be, a reporting issuer in any jurisdiction of Canada.
13. The Initial Top Funds are not in default of securities legislation of any jurisdiction of Canada.
The Underlying Funds
14. Each of the Initial Underlying Funds are limited partnerships formed under the Limited Partnerships Act (Ontario).
15. The general partner of the Alignvest Opportunities Fund LP is Alignvest Opportunities Fund GP LP and the general partner of the Alignvest Income Fund LP is Alignvest Income Fund GP LP (collectively, the General Partners). Each of the General Partners is a limited partnership formed under the Limited Partnerships Act (Ontario) and is an affiliate of the Filer.
16. The General Partners, on behalf each of the Initial Underlying Funds have entered into a management and advisory agreement with the Filer, pursuant to which, the Filer has been delegated the obligations of each of the General Partners to direct the affairs of the applicable Initial Underlying Fund and provide day-to-day management services to the applicable Initial Underlying Fund, including management of the applicable Initial Underlying Fund's investment portfolio on a discretionary basis and distribution of the limited partnership units of the applicable Initial Underlying Fund, and such other services as may be required from time to time. The Filer may delegate certain of these duties from time to time.
17. Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.
18. Each of the Underlying Funds will calculate its net asset value and offer redemptions at the same frequency as the applicable Top Fund.
19. The investment objective of the Alignvest Opportunities Fund LP is to seek to generate attractive long-term growth in net asset value with low volatility and low correlation to capital markets. The Alignvest Opportunities Fund LP seeks to achieve its investment objective primarily though investments in equity and equity-related securities both long and short.
20. The investment objective of the Alignvest Income Fund LP is to seek to generate attractive long-term growth in net asset value with low volatility and low correlation to capital markets. The Alignvest Income Fund LP seeks to achieve its investment objective primarily though investments in income-generating securities including common shares, preferred shares and credit instruments both long and short.
21. Securities of the Underlying Funds are, or will be, offered and issued pursuant to prospectus exemptions in accordance with NI 45-106.
22. Persons or companies who are officers or directors of the Manager 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.
23. The Underlying Funds are, or will be, mutual funds for the purposes of the Legislation but no Underlying Fund is, or will be, a reporting issuer in any jurisdiction of Canada.
24. The Initial Underlying Funds are not in default of securities legislation of any jurisdiction of Canada.
Fund-on-Fund Structure
25. The Top Funds allow investors in such investment funds to obtain exposure to the investment portfolios of the Underlying Funds and their respective investment strategies primarily through direct investments by the Top Funds in securities of the Underlying Funds (theFund-on-Fund Structure). The Filer believes that the Fund-on-Fund Structure provides an efficient and cost-effective manner of pursuing portfolio diversification on behalf of the Top Funds rather than through the direct purchase of securities.
26. Purchasers of securities of a Top Fund may subscribe for securities of the Top Funds pursuant to a subscription agreement (the Subscription Agreement).
27. Prior to executing a Subscription Agreement, 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 details about the Top Fund and disclosure respecting relationships and potential conflicts of interest between the Top Fund and the applicable Underlying Fund.
28. The investments held by the Initial Underlying Funds are considered to be liquid. To the extent illiquid securities are held by a Top Fund or an Underlying Fund, such illiquid securities will only comprise an immaterial portion of the portfolio of the applicable Top Fund or Underlying Fund. Where a Top Fund or Underlying Fund holds illiquid securities, the remainder of such Top Fund's or Underlying Fund's portfolio will be managed to provide sufficient liquidity to fund redemptions in the ordinary course.
29. For the purpose of implementing the Fund-on-Fund Structure, the Filer shall ensure that:
(a) securities of the Top Funds are distributed in Canada solely pursuant to exemptions from the prospectus requirements in accordance with NI 45-106;
(b) the investment by a Top Fund in an Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;
(c) the arrangements between or in respect of each of the Top Funds and the applicable Underlying Funds are such as to avoid the duplication of management fees and incentive fees paid to the Filer and its affiliates;
(d) no sales fees or redemption fees are payable by the Top Fund in relation to its purchases, dispositions or redemptions of securities of the Underlying Funds;
(e) the Filer will not vote the securities of the applicable Underlying Fund held by the Top Funds at any meeting of holders of such securities except that the Top Fund may, if the Filer so chooses, arrange for all of the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of a Top Fund to the extent the matter being voted on would have required approval of such beneficial holders had it occurred at the Top Fund level;
(f) the offering memorandum, where available, or other disclosure document, of each of the Top Funds will be provided to all investors of the applicable Top Funds and will disclose:
(i) that the Top Fund may purchase securities of an Underlying Fund;
(ii) that the Filer, or an affiliate of the Filer, is the investment fund Filer and portfolio Filer of both the Top Funds and the Underlying Funds;
(iii) the approximate or maximum percentage of net assets of the Top Fund that the Top Fund intends to invest in securities of the Underlying Funds; and
(iv) the process or criteria used to select the Underlying Funds;
(g) prior to the time of investment, security holders of a Top Fund will be provided with disclosure with respect to each person, if any, that has a significant interest in the Underlying Fund through investments made in securities of such Underlying Fund. Investors 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 the subscription agreement for securities of the Top Fund.
(h) each of the Top Funds will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 -- Investment Fund Continuous Disclosure (NI 81-106) and will otherwise comply with the requirements of NI 81-106 applicable to them. Each of the Underlying Funds which is subject to NI 81-106 will prepare annual audited financial statements and interim unaudited financial statements. The holdings of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund; and
(i) the investors in each of the Top Funds can obtain a copy of each Underlying Fund's offering documents (if available) and its financial statements.
30. The Filer is entitled to receive monthly management fees, payable in arrears with respect to the Initial Top Funds and the General Partners are entitled to receive a general partner allocation in respect of each of the Initial Underlying Funds.
31. The amounts invested from time to time in an Underlying Fund by a Top Fund may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, each 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.
32. 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.
33. 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.
34. A Top Fund's investments in the Underlying Funds represent the business judgment of a responsible person uninfluenced by considerations other than the best interests of the investment funds concerned.
Decision
The decision of the principal regulator under the Legislation is that the Requested Relief is granted, provided that the Filer ensures that:
(a) securities of a Top Funds are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106;
(b) the investment by a Top Fund in an Underlying Fund is compatible with the fundamental objectives of a Top Fund;
(c) 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 the market value of its net assets in securities of other mutual funds other than a mutual fund that:
(i) links its performance to the performance to one other mutual fund, i.e. a clone fund,
(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 a mutual fund;
(d) 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;
(e) 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;
(f) the Manager will not vote the securities of the Underlying Fund held by the Top Funds at any meeting of holders of such securities, except that a Top Fund may arrange for the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;
(g) the offering memorandum, if available, or similar document of a Top Fund will disclose:
(i) that a Top Fund may purchase securities of the Underlying Funds;
(ii) that the Underlying Funds are managed and/or advised by the Manager or an affiliate of the Manager;
(iii) that substantially all of the net assets (or the percentage of net assets) of the Top Funds will be invested in securities of the Underlying Funds; and
(iv) the process or criteria used to select the Underlying Fund;
(h) Investors in each Top Fund will be informed that they are entitled to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other disclosure documents, or the annual or semi-annual financial statements relating to all Underlying Funds in which the Top Fund may invest its assets; and
(i) prior to the time of investment, securityholders of a Top Fund will be provided with disclosure with respect to each person, if any, that has a significant interest in the Underlying Fund through investments made in securities of such Underlying Fund. Investors 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 the subscription agreement for securities of the Top Fund.
The Consent Requirement Relief
"Raymond Chan"
Manager, Investment Funds
Ontario Securities Commission
The Related Issuer Relief
"Vern Krishna"
Commissioner
Ontario Securities Commission
"Judith N. Robertson"
Commissioner
Ontario Securities Commission