Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from the investment fund conflict of interest investment restrictions in securities legislation to permit pooled funds to invest in related underlying pooled funds and to permit a one-time in-specie transaction between related pooled funds in connection with implementing master/feeder, fund-on-fund structures, subject to 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.

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

April 17, 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 BLOOMBERGSEN 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, its affiliates, BloombergSen Partners Offshore Fund, to be renamed BloombergSen Offshore Fund (the Offshore Fund), BloombergSen American Dollar Fund LP (the Initial Canadian Top Fund, and together with the Offshore Fund, the Initial Top Funds), and any other top 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 an affiliate of the Filer, in the future (the Future Top Funds, and together with the Initial Top Funds, the Top Funds), for a decision:

1) exempting the Top Funds that are subject to them (the Canadian Top Funds) from the restrictions in securities legislation which prohibit them from knowingly doing any of the following, to permit the Canadian Top Funds to invest in BloombergSen Master Fund LP (the Initial Underlying Fund), and any other underlying investment fund which is not a reporting issuer under securities legislation that is established, advised or managed by the Filer, or an affiliate of the Filer, in the future (the Future Underlying Funds, and together with the Initial Underlying Fund, the Underlying Funds; the Underlying Funds together with the Top Funds, the Funds), as further described below:

(a) 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) 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;

2) exempting the Canadian Top Funds, the Filer and its affiliates from the restrictions in securities legislation which prohibit them from holding an investment described in paragraphs 1(a) and (b) above (together with the exemption described in 1 above, collectively, the Related Issuer Relief); and

3) exempting the Filer, and its affiliates, from the restrictions contained in subsections 13.5(2)(a)(ii) and 13.5(2)(b)(iii) of National Instrument 31-103 Registration Requirements (NI 31-103) which prohibit a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to do any of the following, to permit the following activities, as further described below:

(a) purchase a security of an issuer in which a responsible person or an associate of a responsible person is a partner, officer or director, unless this fact is disclosed to the client and the written consent of the client to the purchase is obtained before the purchase, to permit the Filer, or its affiliate, to cause the Top Funds to invest in the Underlying Funds (the Consent Relief); and

(b) purchase or sell a security from or to the investment portfolio of an investment fund for which a "responsible person" acts as an adviser, to permit the Filer to effect the Reorganization (as defined below) by exchanging portfolio securities of the Offshore Fund for securities of the Initial Underlying Fund (the In specie Relief, and together with the Consent Relief and the Related Issuer Relief, 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 in respect of the Related Issuer Relief.

Interpretation

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.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1. The Filer is a corporation incorporated under the laws of the Province of Ontario and has its head office in Toronto, Ontario.

2. The Filer is registered in the categories of investment fund manager, portfolio manager and exempt market dealer in Ontario, in the categories of investment fund manager and exempt market dealer in Québec, and in the category of exempt market dealer in Alberta, British Columbia, Manitoba, and New Brunswick.

3. The Filer is not a reporting issuer in any jurisdiction, and is not in default of the securities legislation of any jurisdiction, of Canada.

4. The Filer is the investment fund manager and portfolio adviser of the Initial Top Funds and will be the investment fund manager and portfolio adviser of a Future Top Fund to be established under the laws of the United States (the US Feeder Fund) and the Initial Underlying Fund.

5. The Filer, or an affiliate of the Filer, will be the investment fund manager and portfolio adviser of any other Future Top Funds and the Future Underlying Funds.

The Reorganization

6. The Filer wishes to transfer the investment portfolio of the Offshore Fund to the Initial Underlying Fund (the Reorganization) with the intention that the Initial Underlying Fund become the master fund of a master/feeder, fund-on-fund structure in which the Offshore Fund, the Initial Canadian Top Fund and the US Feeder Fund are, and other Future Top Funds may be, feeder funds, as further described below. In the future, the Filer intends to set up substantially similar master/feeder, fund-on-fund structures in which a Future Underlying Fund is the master fund and Future Top Funds are feeder funds.

7. The Filer wishes to transfer the investment portfolio of the Offshore Fund, which is structured as a Cayman exempted company, to the Initial Underlying Fund, which is structured as a Cayman exempted limited partnership, to accommodate, for Canadian tax purposes, the Initial Canadian Top Fund's investment, while also accommodating the Offshore Fund's continued investment in a cost efficient manner. The Filer believes a larger master fund with more than one feeder fund will provide the Offshore Fund with the benefits of economies of scale and greater diversification.

The Top Funds

8. The Initial Canadian Top Fund is a limited partnership established under the laws of the Province of Ontario.

9. The Offshore Fund is an exempted company established under the laws of the Cayman Islands.

10. Any Future Top Funds will be formed as limited partnerships, trusts or corporations under the laws of the Province of Ontario, another jurisdiction of Canada, or a foreign jurisdiction.

11. The Top Funds are, or will be, investment funds for the purposes of the Legislation.

12. No Top Fund is, or will be, a reporting issuer in any jurisdiction of Canada. Securities of the Top Funds will be offered for sale in Canada solely pursuant to available prospectus exemptions under National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).

13. The Initial Canadian Top Fund will invest all of its assets in the Initial Underlying Fund.

14. The investment objective of the Initial Underlying Fund will be the same as the current investment objective of the Offshore Fund and, pursuant to the Reorganization, the Offshore Fund will invest all of its assets in the Initial Underlying Fund.

15. Each of the Future Top Funds will similarly also invest all of its assets in one Underlying Fund.

16. The Initial Top Funds are not in default of the securities legislation of any jurisdiction of Canada.

The Underlying Funds

17. The Initial Underlying Fund will be an open-ended exempted limited partnership established under the laws of the Cayman Islands. Any Future Underlying Funds will be formed as limited partnerships, trusts or corporations under the laws of the Province of Ontario, another jurisdiction of Canada, or a foreign jurisdiction.

18. The Underlying Funds will be investment funds for the purposes of the Legislation.

19. No Underlying Fund will be a reporting issuer in any jurisdiction of Canada. Securities of the Underlying Funds will be offered for sale in Canada solely pursuant to available prospectus exemptions under NI 45-106.

20. The Filer will be entitled to receive management fees with respect to one or more classes of securities of the Initial Underlying Fund. An affiliate of the Filer intends to form another limited partnership (the Holdings LP) which will hold a limited partnership interest in the Initial Underlying Fund that entitles it to receive performance distributions with respect to one or more classes of securities of the Initial Underlying Fund. The performance distributions generally will be calculated based on increases in the net asset value (NAV) of certain classes of securities of the Initial Underlying Fund. Each limited partner of the Holdings LP will pay a nominal amount to acquire its interest in the Holdings LP and the Holdings LP will pay a nominal amount to acquire its interest in the Initial Underlying Fund. The general partner of the Initial Underlying Fund will be entitled to receive 0.001% of profits of the Initial Underlying Fund. The fee arrangements for the Future Underlying Funds will be substantially similar.

21. The shareholders, directors and certain officers of the Filer will (indirectly through their holding companies) be the limited partners of Holdings LP.

22. Each Underlying Fund will have separate investment objectives, strategies and restrictions.

23. An investment in an Underlying Fund by a Top Fund will be effected at an objective price. The portfolio of each Underlying Fund will consist primarily of publicly traded securities. Each Underlying Fund will not hold more than 10% of its NAV in illiquid assets (as defined in National Instrument 81-102 Investment Funds (NI 81-102).

Fund-on-Fund Structure

24. A Top Fund allows investors to obtain exposure to the investment portfolio of the Underlying Fund and its strategies through direct investment by the Top Fund in securities of the Underlying Fund (the Fund-on-Fund Structure).

25. The primary purpose of the Fund-on-Fund Structure is to permit the Filer, or its affiliate, to manage a single portfolio of assets in a single investment vehicle (commonly referred to as a master fund) on a more efficient basis while accepting investments from both Canadian investors and investors in several foreign jurisdictions, through one or more 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.

26. Managing a single pool of assets provides economies of scale and allows a Top Fund to achieve its investment objectives in a cost efficient manner, can provide greater diversification for the Top Fund in particular asset classes, and will not be detrimental to the interests of other security holders of the Underlying Funds.

27. Non-Canadian investors may invest indirectly in the Initial Underlying Fund through the Offshore Fund or the US Feeder Fund, and Canadian investors may invest indirectly in the Initial Underlying Fund through the Initial Canadian Top Fund.

28. The Top Funds (and the Holdings LP or an entity formed for a purpose substantially similar to that of the Holdings LP) will be the only investors in the Underlying Funds. Securities of the Underlying Funds will only be available for investment by the Top Funds and will not be offered directly to investors other than the Top Funds.

29. 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.

30. Each of the Funds that is subject to National Instrument 81-106 Investment Fund 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 applicable to them.

31. A Top Fund will have the same valuation and redemption dates as the corresponding Underlying Fund.

32. No Underlying Fund will be a Top Fund.

33. The Filer expects that the assets of the Initial Underlying Fund (and the assets of the Initial Top Funds only if the Initial Top Funds hold securities other than securities of the Initial Underlying Fund) will be held by a custodian that meets the qualifications of section 6.2 of NI 81-102 (for assets held in Canada) or a custodian that meets the qualifications of section 6.3 of NI 81-102 (for assets held outside Canada) except that its financial statements may not be publicly available.

34. The Canadian Top Funds will be related investment funds (under applicable securities legislation) by virtue of the common management by the Filer or its affiliate. The amounts invested from time to time in an Underlying Fund by a Canadian Top Fund, either alone or together with other Canadian Top Funds, may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, each Canadian Top Fund could, either alone or together with other Canadian Top Funds, become a substantial security holder of an Underlying Fund.

35. As a result of the Offshore Fund's investment in the Initial Underlying Fund pursuant to the Reorganization, the shareholders, officers and directors of the Filer are not expected through the Holdings LP to have a significant interest in the Initial Underlying Fund at the time the Initial Canadian Top Fund invests in the Initial Underlying Fund.

36. However, in the future, for the purpose of receiving performance distributions, or otherwise receiving a share of profits through special incentive distributions, from Future Underlying Funds, the Filer expects that shareholders, officers and directors of the Filer may be, directly or indirectly, limited partners of Holdings LP or of other limited partnerships that may be the initial security holder in the Future Underlying Funds. As limited partners of such limited partnerships, directly or indirectly, such shareholders, officers and directors of the Filer may have a significant interest in a Future Underlying Fund at the time of investment by a Canadian Top Fund. Once other investors, including other Top Funds, invest in the Future Underlying Fund, any interest held indirectly by shareholders, officers and directors of the Filer in such Future Underlying Fund will likely be diluted such that they will no longer hold a significant interest in such Underlying Fund.

37. In the absence of the Related Issuer Relief, each Canadian Top Fund may be precluded from purchasing and holding securities of an Underlying Fund due to the investment restrictions contained in the Legislation.

38. In the absence of the Consent Relief, a Top Fund may be precluded from investing in an Underlying Fund, unless the specific fact is disclosed to security holders of the Top Fund and the written consent of the security holders of the Top Fund to the investment is obtained prior to the purchase, since an officer and/or director of the Filer, who may be considered a "responsible person" (as defined by section 13.5 of NI 31-103) or an associate of a responsible person may also be a partner, officer and/or director of the applicable Underlying Fund.

39. 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.

Reorganization via In specie Transaction

40. The Filer wishes to effect the Reorganization by way of an In specie transaction pursuant to which the Offshore Fund will purchase securities of the Initial Underlying Fund and, as payment for the securities, make good delivery to the Initial Underlying Fund of all of its portfolio securities and other assets (the In specie Transaction).

41. In the circumstances, instead of the Offshore Fund disposing of portfolio securities and the Initial Underlying Fund purchasing the same portfolio securities and incurring unnecessary brokerage costs, the portfolio securities would, pursuant to the In specie Transaction, be acquired by the Initial Underlying Fund.

42. The Filer considers the In specie Transaction to be the most efficient and cost effective way for the Initial Underlying Fund to acquire the portfolio securities and for the Offshore Fund to dispose of the portfolio securities.

43. In addition, the In specie Transaction allows the Filer to maintain within its control larger blocks of securities that would otherwise have to be broken up and then re-assembled.

44. The shareholders of the Offshore Fund will receive a notice (the Notice) describing the Reorganization, the reasons for, and benefits of, the Reorganization and changes being made to the Offshore Fund as a result of the Reorganization, such as the change in name of the Offshore Fund, a change in the registered office of the Offshore Fund and registration with the Cayman Islands Monetary Authority. The shareholders of the Offshore Fund will also receive a copy of the revised offering memorandum for the Offshore Fund along with the Notice.

45. The Filer understands that, as a matter of Cayman Islands law, the prior approval of the shareholders in the Offshore Fund is not required for the In specie Transaction on the basis that the class rights of such shareholders will not be varied or abrogated by the In specie Transaction. As a result of certain changes to the Offshore Fund's offering memorandum and constating documents (such as lowering the quorum for shareholder meetings), the Offshore Fund will be seeking approval from its shareholders. The changes that require shareholder approval will be set out in the Notice that will be delivered to the shareholders of the Offshore Fund. Investors will have at least 14 days from the date the Notice is sent to consider the changes, as the Filer understands is required under Cayman Islands law.

46. The Notice will indicate that any activities of the Offshore Fund that were previously subject to a shareholder vote and, after the Reorganization, will become activities of the Initial Underlying Fund and therefore subject to a vote by the Offshore Fund will not be voted on by the Offshore Fund and that, instead, the Board of Directors of the Offshore Fund may choose to flow these voting rights up to the shareholders of the Offshore Fund.

47. No redemption fees, sales charges, or other fees or commissions will be payable by shareholders of the Offshore Fund in connection with the Reorganization. The Offshore Fund will waive redemption fees for redemptions that are requested subsequent to the Notice being sent to shareholders of the Offshore Fund and prior to the Reorganization. No sales or brokerage charges will be payable by the Offshore Fund or the Initial Underlying Fund in connection with the acquisition by the Offshore Fund of securities of the Initial Underlying Fund or in connection with the acquisition by the Initial Underlying Fund of the portfolio securities and other assets of the Offshore Fund.

48. All costs of the Reorganization will be borne by the Filer.

49. There will be no changes to the investment objective and strategies of the Offshore Fund as a result of the Reorganization, other than that the Offshore Fund will seek to achieve its investment objective by investing through the Initial Underlying Fund rather than directly. The portfolio assets of the Offshore Fund to be acquired by the Initial Underlying Fund pursuant to the Reorganization and In specie Transaction will be acceptable to the portfolio adviser of the Initial Underlying Fund and consistent with the investment objective of the Initial Underlying Fund.

50. There will be no increases in the fees, including management fees, to which the Offshore Fund or its shareholders are directly or indirectly subject as result of the Reorganization. The fees will remain the same except they will be paid at the level of the Initial Underlying Fund instead of at the level of the Offshore Fund. Similar to the other feeder funds of the Initial Underlying Fund (including the Initial Canadian Top Fund and the US Feeder Fund), and as described in the Notice, the Offshore Fund will bear its pro rata portion of the ongoing expenses of the Initial Underlying Fund, which will not be duplicative of the expenses that are charged by the Offshore Fund to its shareholders.

51. There will be no changes to the frequency of subscriptions, valuations, and redemptions of the Offshore Fund. Shareholders of the Offshore Fund will be able to redeem their shares at all redemption dates both prior to and after the Reorganization.

52. The transfer of the portfolio assets of the Offshore Fund to the Initial Underlying Fund will not adversely impact the liquidity of the Offshore Fund.

53. The Offshore Fund is an exempted company resident in the Cayman Islands and is not subject to income tax in the Cayman Islands. Accordingly, it is anticipated there will be no tax consequences resulting from the Reorganization.

54. It is anticipated that the Reorganization and In specie Transaction will be executed by the Filer. The Filer will not receive any compensation in respect of the Reorganization or In specie Transaction.

55. It is anticipated that the proposed Reorganization and In specie Transaction will be completed as soon as possible following receipt of investor approval and the granting of the Requested Relief (the Effective Date).

56. The units of the Initial Underlying Fund that the Offshore Fund receives in exchange for its portfolio assets will have an aggregate value equal to the value of the portfolio assets of the Offshore Fund determined as at the close of business on the Effective Date in accordance with the valuation policies and procedures outlined in the offering memorandum of the Offshore Fund.

57. The portfolio assets of the Offshore Fund will be transferred from the Offshore Fund to the Initial Underlying Fund as described in this decision. Because the transfer of the portfolio assets will take place at a value determined by common valuation procedures between the Offshore Fund and the Initial Underlying Fund and the issue of units will be based upon the relative NAV of the portfolio assets received by the Initial Underlying Fund from the Offshore Fund, it is the Filer's submission that any potential conflict of interest has been adequately addressed, and as a result, there is no conflict of interest for the Filer in effecting the Reorganization and In specie Transaction.

58. The Offshore Fund holds no more than 10% of its NAV in illiquid assets (as defined in NI 81-102). It is anticipated that there will not be any illiquid assets at the time of the In specie Transaction.

59. The In specie Transaction will be subject to compliance with written policies and procedures of the Filer that are consistent with applicable securities legislation and the oversight of the Filer's Compliance Department to ensure that the In specie Transaction represents the business judgment of the Filer acting in its discretionary capacity with respect to the Offshore Fund and the Initial Underlying Fund, uninfluenced by considerations other than the best interests of the Offshore Fund and the Initial Underlying Fund.

60. The Filer will keep a written record of the In specie Transaction reflecting the details of the portfolio securities and other assets delivered to the Initial Underlying Fund, the value assigned to same and to the limited partnership units of the Initial Underlying Fund received by the Offshore Fund in exchange for a period of at least five years after the In specie Transaction, the first two years in a reasonably accessible place.

61. In the absence of the In specie Relief, the Filer would be prohibited from engaging in the In specie Transaction.

62. The Reorganization and In specie Transaction represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Offshore Fund and the Initial Underlying 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:

1. In respect of the Related Issuer Relief and the Consent Relief:

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) 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 investment 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 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 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, including prior to the Reorganization in respect of the Offshore Fund, 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 Fund and the Underlying Fund;

(iii) that the Top Fund will invest all of its assets in the Underlying Fund;

(iv) each officer, director or substantial security holder of the Filer or its affiliate that has a significant interest in the Underlying Fund for the purpose of receiving performance distributions or otherwise 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 performance or 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 affiliate, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of the Underlying Fund (if available); and

(vii) that investors are entitled to receive from the Filer, or its affiliate, on request and free of charge, the annual and interim financial statements relating to the Underlying Fund in which the Top Fund invests its assets (if available).

2. In respect of the In specie Relief to permit the In specie Transaction, prior to effecting the In specie Transaction, the board of directors of the Filer determines that the Reorganization and In specie Transaction are in the best interests of the Offshore Fund and the Initial Underlying Fund.

The Consent Relief and In specie Relief

"Raymond Chan"
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission

The Related Issuer Relief

"Edward P. Kerwin"
Commissioner
Ontario Securities Commission
 
"Judith N. Robertson"
Commissioner
Ontario Securities Commission