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MacDougall Investment Counsel Inc and Sui Generis Canada Partners LP
Headnote
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), 111(2)(c), 111(4), 113.
January 30, 2015
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 MACDOUGALL INVESTMENT COUNSEL INC. (the Filer) AND IN THE MATTER OF SUI GENERIS CANADA PARTNERS LP (the Initial Top Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of each of the Filer, 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 Sui Generis Investment Partners Master LP (the Initial Underlying Fund) or any other investment fund which is not a reporting issuer under the Legislation 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 the Legislation exempting the Filer and the Top Funds from:
(a) the restriction in the Legislation which prohibits 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) the restriction in the Legislation which prohibits 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 securityholder of the investment fund, its management company or its distribution company;
and
(c) the restriction in the Legislation which prohibits an investment fund, its management company or its distribution company, from knowingly holding an investment described in paragraph (a) or (b) 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.
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:
The Filer
1. The Filer is a corporation existing under the laws of Canada with its head office in Montreal, Québec. The Ontario Securities Commission is the principal regulator for this application as certain management personnel of the Filer are located in Ontario while none are located in Alberta.
2. The Filer is registered as an investment fund manager and portfolio manager in Quebec, Ontario, British Columbia, Alberta, Manitoba, New Brunswick and Nova Scotia.
3. The Filer is not a reporting issuer in any jurisdiction in Canada and is not in default of securities legislation of any jurisdiction in Canada.
4. The Filer is or will be the portfolio adviser for the Top Funds and the Underlying Funds.
5. The Filer will be the investment fund manager of the Initial Top Fund and of the Initial Underlying Fund. The Filer, or an affiliate of the Filer, will be the investment fund manager of the Future Top Funds and of Underlying Funds established under the laws of Ontario or another jurisdiction of Canada. For Future Underlying Funds established under the laws of a foreign jurisdiction, either the Filer, an affiliate of the Filer, or the entity itself where appropriate (for example, a corporation acting through its board of directors), will act as the investment fund manager.
Top Funds
6. Each of the Top Funds is, or will be, a mutual fund for the purposes of the Legislation.
7. The Initial Top Fund will be a limited partnership established under the laws of the Province of Ontario. The Future Top Funds will be structured as limited partnerships, trusts or corporations under the laws of Ontario or another jurisdiction of Canada.
8. The Initial Top Fund is not a reporting issuer under the Act nor is it in default of securities legislation of any jurisdiction of Canada. None of the Future Top Funds will be a reporting issuer under the Act.
9. Securities of a Top Fund will be sold in Canada pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).
10. The Initial Top Fund intends to invest substantially all of its assets in units of the Initial Underlying Fund.
11. Similar to the Initial Top Fund, each Future Top Fund will invest substantially all of its assets in a Future Underlying Fund.
12. 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 the common management by the Filer or its affiliate.
Underlying Funds
13. Each of the Underlying Funds will be a mutual fund for purposes of the Act.
14. To the extent offered in Canada, securities of an Underlying Fund will be sold pursuant to available prospectus exemptions in accordance with NI 45-106.
15. The Initial Underlying Fund will be a limited partnership organized under the laws of the Cayman Islands. The Future Underlying Funds will be structured as limited partnerships, trusts or corporations under the laws of Ontario, another jurisdiction of Canada or a foreign jurisdiction.
16. Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.
17. The portfolio of each Underlying Fund will consist 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)). An investment by a Top Fund in an Underlying Fund will be effected based on an objective NAV of the Underlying Fund.
18. The Initial Underlying Fund is not a reporting issuer under the Legislation nor is it in default of securities legislation of any jurisdiction of Canada. None of the Future Underlying Funds will be a reporting issuer under the Legislation.
19. An initial securityholder of the Initial Underlying Fund will be a limited partnership organized under the laws of Ontario (Incentive LP). The limited partners of Incentive LP will include the Filer or the sole shareholder of the Filer.
20. The Filer is entitled to receive management fees with respect to certain classes of securities of the Initial Underlying Fund that have a management fee. Incentive LP will be entitled to receive a share of profits through special incentive distributions (that will be calculated based on increases in the NAV of the Initial Underlying Fund or of certain classes of securities of the Initial Underlying Fund) with respect to the class of securities of the Initial Underlying Fund held by Incentive LP. Each limited partner of Incentive LP will pay a nominal amount to acquire its interest in Incentive LP, and Incentive LP will pay a nominal amount to acquire its interest in the Initial Underlying Fund.
21. As a limited partner of Incentive LP or as the sole shareholder of a limited partner of Incentive LP, as the case may be, the sole shareholder of the Filer may initially have a significant interest in the Initial Underlying Fund. Once other investors, including the Initial Top Fund, invest in the Initial Underlying Fund, the interest held by Incentive LP in the Initial Underlying Fund will be significantly diluted such that it will no longer hold a significant interest in the Initial Underlying Fund.
22. In the future, for the purpose of receiving a share of profits through special incentive distributions from the Underlying Funds, officers and directors of the Filer and the sole shareholder of the Filer may be, directly or indirectly, limited partners of other limited partnerships that may be the initial securityholders in Future Underlying Funds. As limited partners of such limited partnerships, directly or indirectly, such officers and directors of the Filer and the sole shareholder of the Filer may have a significant interest in Future Underlying Funds. Once other investors, including a Top Fund, invest in a Future Underlying Fund, any interest held indirectly by officers and directors of the Filer and the sole shareholder of the Filer in such Future Underlying Fund will be significantly diluted such that they will no longer hold a significant interest in such Underlying Fund.
23. The Filer expects that the assets of the Initial Top Fund (to the extent it holds securities other than securities of the Initial Underlying Fund) and the Initial Underlying Fund will be held by BMO Nesbitt Burns Inc.
Fund-on-Fund Structure
24. The Top Funds allow investors to obtain exposure to the investment portfolios of the Underlying Funds and their respective investment strategies through direct investments by the Top Funds in securities of the Underlying Funds (the Fund-on-Fund Structure). The purpose of a Fund-on-Fund structure is to allow a portfolio manager to manage a single portfolio of assets in a single investment vehicle (commonly referred to as a master fund) while raising capital from investors in different jurisdictions through different investment vehicles (commonly referred to as feeder funds) that are designed to address the specific tax, securities and other laws of each separate jurisdiction or type of investor.
25. Managing a single pool of assets provides economies of scale and allows the Top Funds to achieve their investment objectives in a cost efficient manner and will not be detrimental to the interests of other securityholders of the Underlying Funds.
26. An investment by a Top Fund in an Underlying Fund can provide greater diversification for a Top Fund in particular asset classes on a basis that is not materially more expensive than investing directly in the securities held by the applicable Underlying Fund.
27. 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.
28. Non-Canadian investors may invest directly in the Initial Underlying Fund in the Cayman Islands, or indirectly through a feeder fund established outside of Canada solely for the purpose of investing in the Initial Underlying Fund. Canadian investors will invest indirectly in the Initial Underlying Fund through the Initial Top Fund.
29. Each of the Top Funds and the Underlying Funds that are subject to National Instrument 81-106 -- Investment Funds Continuous Disclosure (NI 81-106) will prepare annual audited financial statements and interim unaudited financial statements in accordance with NI 81-106 and will otherwise comply with the requirements of NI 81-106, as applicable.
30. A Top Fund will have the same valuation and redemption dates as its Underlying Fund.
31. No Underlying Fund will be a Top Fund.
32. In the absence of the Requested Relief, a Top Fund would be precluded from purchasing and holding securities of an Underlying Fund due to the investment restrictions contained in the Legislation.
33. Each investment by a Top Fund in an Underlying Fund represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of the 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 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 fundamental investment objectives of the 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 its net assets in securities of other mutual funds, unless the Underlying Fund:
(i) purchases or holds securities of a "money market fund" (as defined by NI 81-102), or
(ii) 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 fees 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, or its affiliate, does not cause the securities of the Underlying Fund held by a Top Fund to be voted at any meeting of holders of such securities, except that the Filer, or its affiliate, may arrange for the securities the Top Fund holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;
(g) the offering memorandum, where available, or other 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 Fund;
(ii) that the Filer, or its affiliate, is the investment fund manager and/or portfolio adviser 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 Fund;
(iv) each officer, director or substantial securityholder of the Filer that has a significant interest in the Underlying Fund for the purpose of receiving a share of profits through special incentive distributions from the Underlying Fund, the nature of the significant interest, and the potential conflicts of interest which may arise from such relationships;
(v) the fees, expenses and any special incentive distributions payable by the Underlying Fund that the Top Fund invests in;
(vi) that investors are entitled to receive from the Filer, or its affiliates, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of the Underlying Fund (if available);
(vii) that investors are entitled to receive from the Filer, or its affiliates, on request and free of charge, the annual and semi-annual financial statements relating to the Underlying Fund in which the Top Fund invests its assets.
"Mary Condon"
Commissioner
Ontario Securities Commission
"Anne Marie Ryan"
Commissioner
Ontario Securities Commission