National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from the investment fund self-dealing restrictions in the Securities Act (Ontario) 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) and (c), 111(4), 113.
December 16, 2014
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
STEPHENSON & COMPANY CAPITAL MANAGEMENT INC.
IN THE MATTER OF
THE TOP FUNDS
(as defined below)
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of each of the Filer, Stephenson & Company North American Opportunity 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) that is established, advised or managed by the Filer, or its affiliate, after the date hereof (the Future Top Funds and together with the Initial Top Fund, the Top Funds), which invests its assets in Stephenson & Company North American Opportunity Fund LP (the Initial Underlying Fund) or any other investment fund which is not a reporting issuer and may be established, advised or managed by the Filer or its affiliate in the future (the Future Underlying Funds and together with the Initial Underlying Fund, the Underlying Funds), for a decision under section 113 of the Legislation exempting the Filer and the Top Funds from the restrictions contained in paragraphs 111(2)(b) and (c) and subsection 111(4) of 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 any of the following has a significant interest:
(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 security holder of the investment fund, its management company or its distribution company; and
c) an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraphs (i) and (ii) 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.
Unless expressly defined herein, terms in this decision have the respective meanings given to them in National Instrument 14-101 Definitions and MI 11-102.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of Canada and has its head office in Toronto, Ontario.
2. The Filer is registered in Ontario in the categories of investment fund manager, portfolio manager and exempt market dealer, and in Alberta and British Columbia in the category of exempt market dealer.
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 assets of the Funds, and is responsible for executing all portfolio transactions. Furthermore, the Filer, 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 not a reporting issuer in any jurisdiction and is not in default of securities legislation of any jurisdiction of Canada.
The Top Funds
5. The Top Funds will be formed as trusts under the laws of Ontario.
6. Securities of the Top Funds will be offered for sale in any jurisdiction in Canada pursuant to prospectus exemptions under National Instrument 45-106 – Prospectus and Registration Exemptions (NI 45-106).
7. The Top Funds will be mutual funds for the purposes of the Legislation but no Top Fund will be a reporting issuer in any jurisdiction of Canada.
8. The Initial Top Fund intends to invest substantially all of its assets in the Initial Underlying Fund. A Future Top Fund may invest all of its assets in one or more Future Underlying Funds.
The Underlying Funds
9. The Initial Underlying Fund is a limited partnership formed under the Limited Partnerships Act (Ontario). Any Future Underlying Funds will also be structured as limited partnerships under the laws of Ontario or another jurisdiction of Canada.
10. The general partner of the Initial Underlying Fund is Stephenson & Company North American Opportunity GP Inc. (the General Partner). The General Partner is a corporation incorporated under the laws of Canada and is an affiliate of the Filer. The General Partner of any Future Underlying Fund that is structured as a limited partnership will also be an affiliate of the Filer.
11. Securities of the Underlying Funds are, or will be, offered for sale in any jurisdiction in Canada pursuant to prospectus exemptions under NI 45-106.
12. 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.
13. Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.
14. The Initial Underlying Fund is not in default of securities legislation of any jurisdiction of Canada.
15. The Top Funds allow its investors to obtain indirect exposure to the investment portfolio of the Underlying Funds and their respective investment strategies through, primarily direct investments by the Top Funds in securities of the Underlying Funds (the Fund-on-Fund Structure).
16. Unlike the Initial Underlying Fund, which is a limited partnership, the Initial Top Fund will be organized as a trust, to access 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.
17. 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.
18. The limited partnership structure of the Initial Underlying Fund provides for distributions to the General Partner in respect of incentive allocations. An incentive allocation is common with limited partnership structures but cannot be replicated with a mutual fund trust structure on a tax-efficient basis.
19. The Fund-on-Fund Structures involving Future Top Funds and Future Underlying Funds will be similarly structured.
20. 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.
21. An investment in an Underlying Fund by a Top Fund will be effected at an objective price. The portfolio of each Underlying Fund consists primarily of publicly traded securities. Each Underlying Fund will not hold more than 10% of its net asset value (NAV) in illiquid assets (as defined in National Instrument 81-102 Investment Funds (NI 81-102)).
22. The Top Funds and the Underlying Funds have, or will have, matching valuation dates. The Initial Top Fund and the Initial Underlying Fund are valued monthly.
23. Securities of the Top Funds and the Underlying Funds have, or will have, matching redemption dates. The Initial Underlying Fund is redeemable monthly.
24. 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.
25. No Underlying Fund will be a Top Fund.
26. The assets of the Top Funds and Underlying Funds are, or will be, held in the custody of a trust company incorporated, and licensed or registered, under the laws of Canada or a jurisdiction, or a bank listed in Schedule I, II or III of the Bank Act (Ontario) or a qualified affiliated of such bank or trust company.
27. The Top Funds are, or will be, related mutual funds (under applicable securities legislation) by virtue of the common management by the Filer. The amounts invested from time to time in an Underlying Fund by a Top Fund, either alone or together with other Top Funds, 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.
28. 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 security holder of the Top Fund or the Filer has a significant interest.
29. In the absence of the Requested Relief, each Top Fund would be precluded from purchasing and holding securities of an Underlying Fund due to the investment restrictions contained in the Legislation.
30. A Top Fund's investments in an Underlying Fund represent the business judgment of a responsible person uninfluenced by considerations other than the best interests of the investment funds concerned.
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 in NI 45-106;
b) the investment by a Top Fund in an Underlying Fund is compatible with the investment objectives of the Top Fund;
c) at the time of the purchase of securities of an Underlying Fund, the Underlying Fund holds no more than 10% of its NAV in securities of other investment 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;
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 Filer 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 or other similar disclosure document of a Top Fund will be provided to investors in a Top Fund prior to the time of investment and will disclose:
(i) that the Top Fund may purchase securities of the Underlying Funds;
(ii) that the Filer is the investment fund manager of both the Top Funds and the Underlying Funds;
(iii) the approximate or maximum percentage of net assets of the Top Fund that is intended to be invested in securities of the Underlying Funds;
(iv) each officer, director or substantial security holder of the Filer or of a Top Fund that also has a significant interest in an Underlying Fund, the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of the NAV of the Underlying Fund, and the potential conflicts of interest which may arise from such relationships;
(v) the fees and expenses payable by the Underlying Fund(s) that the Top Fund may invest in, including the incentive fees;
(vi) that the investor may 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; and
(vii) that the investor may receive from the Filer, on request and free of charge, the annual or semi-annual financial statements relating to each Underlying Fund in which the Top Fund may invest its assets.
“Sarah B. Kavanagh”
Ontario Securities Commission
“Catherine E. Bateman”
Ontario Securities Commission