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East West Investment Management Corporation et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted in connection with a change of manager to revoke previous relief from the investment fund conflict of interest investment restrictions in securities legislation and replace it with similar relief permitting pooled funds to invest in related underlying pooled funds, 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), 15.1.
May 19, 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 EAST WEST INVESTMENT MANAGEMENT CORPORATION (the Filer) AND SW8 ASSET MANAGEMENT INC. (SW8) AND IN THE MATTER OF SW8 STRATEGY TRUST (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 Filer's affiliates, SW8, 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 may be 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) for a decision under the Legislation, as of the closing of the Proposed Transaction (as defined below), revoking the Previous Decision (as defined below) and replacing it with this decision granting the following exemptions in respect of the Top Funds' investment in SW8 Strategy Fund LP or East West Canada Fund LP (each, an Initial Underlying Fund) or any other investment fund which is not a reporting issuer under the Legislation that may be advised or managed by the Filer, or its affiliate, after the date hereof (the Future Underlying Funds and, together with the Initial Underlying Funds, the Underlying Funds):
(a) An exemption from:
(i) the restriction in the Legislation which prohibits an investment fund from knowingly making an investment in any person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder;
(ii) 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:
A. any officer or director of the investment fund, its management company or distribution company or an associate of any of them, or
B. any person or company who is a substantial securityholder of the investment fund, its management company or its distribution company; and
(iii) the restriction in the Legislation which prohibits an investment fund or its management company or its distribution company from knowingly holding an investment if the investment is an investment described in paragraph (i) or (ii) above
(the Related Issuer Relief); and
(b) An exemption from the restriction in clause 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an 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, and together with 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.
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 and SW8:
The Previous Decision and the Reorganization
1. SW8 is the current adviser, distributor and investment fund manager of the Initial Top Fund and of SW8 Strategy Fund LP. SW8 previously obtained relief in respect of the Initial Top Fund's investment in SW8 Strategy Fund LP in a decision dated December 10, 2010 (the Previous Decision). SW8 is in the process of resigning as the adviser, distributor and investment fund manager of the Initial Top Fund and of SW8 Strategy Fund LP and transferring all such functions to the Filer (the Proposed Transaction). The Filer requests the Requested Relief in connection with seeking to become the adviser and investment fund manager of the Initial Top Fund and of SW8 Strategy Fund LP and manage the Initial Top Fund and SW8 Strategy Fund LP as a fund-on-fund structure.
2. A joint press release was issued by the Filer and SW8 on December 11, 2014 in respect of the Proposed Transaction and investors in the Initial Top Fund and SW8 Strategy Fund LP were sent notice dated February 12, 2015 in respect of the Proposed Transaction. Investors of both the Initial Top Fund and SW8 Strategy Fund have been and are able to continue to surrender securities of these Funds for redemption pursuant to the standard redemption terms of these funds with no applicable redemption fees.
3. There are no changes that would materially impact investors contemplated, operations are expected to be the same and there are no changes to fees contemplated at this time. The costs of the Proposed Transaction will not be borne by the Top Funds or the Underlying Funds or their investors.
4. By way of separate application, the Filer sought approval to act as the trustee of the Top Funds which approval was granted in an approval letter dated April 21, 2015.
The Filer
5. The Filer is a corporation existing under the laws of Canada with its head office in Toronto, Ontario.
6. The Filer is currently registered as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager in Ontario, as well as an exempt market dealer in each of British Columbia and Manitoba (where it is also registered as an adviser under the Commodity Futures Act (Manitoba)).
7. 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.
8. The Filer is the portfolio manager and investment fund manager of East West Canada Fund LP. Pursuant to the Proposed Transaction, the Filer will be the portfolio manager and investment fund manager of the Initial Top Fund and SW8 Strategy Fund LP.
9. The Filer, or an affiliate of the Filer, will be the portfolio manager and investment fund manager of the Future Top Funds and of the Future Underlying Funds.
Top Funds
10. The Initial Top Fund is, and each Future Top Fund will be, a "mutual fund" for the purposes of the Legislation.
11. The Initial Top Fund is an open-ended trust established under the laws of the Province of Ontario. Each Future Top Fund will be an open-ended trust established under the laws of the Province of Ontario or of another jurisdiction of Canada.
12. The Initial Top 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 Top Funds will be a reporting issuer under the Legislation.
13. To the extent offered in Canada, securities of a Top Fund will be sold pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus Exemptions (NI 45-106).
14. The Initial Top Fund invests substantially all of its assets in units of SW8 Strategy Fund LP. The Filer intends to launch a Future Top Fund that will invest substantially all of its assets in units of East West Canada Fund LP. Each other Future Top Fund will invest substantially all of its assets in one Underlying Fund.
Underlying Funds
15. Each Initial Underlying Fund is, and each Future Underlying Fund will be, a "mutual fund" for the purposes of the Legislation.
16. Each Initial Underlying Fund is, and each Future Underlying Fund will be, an open-ended limited partnership established under the laws of the Province of Ontario or of another jurisdiction of Canada.
17. Neither Initial Underlying Fund is 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.
18. 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.
19. The general partner of SW8 Strategy Fund LP is an affiliate of SW8. The general partner of East West Canada Fund LP is an affiliate of the Filer. The general partner of each Future Underlying Fund will be an affiliate of the Filer.
20. Each Initial Underlying Fund has, and each Future Underlying Fund will have, separate investment objectives, strategies and/or restrictions.
21. 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. No Underlying Fund will 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.
22. The Filer is entitled to receive management fees with respect to certain classes of securities of each Initial Underlying Fund that have a management fee. The general partner of SW8 Strategy Fund LP is entitled to share up to 20% in the profits of SW8 Strategy Fund LP based on increases in the NAV of certain classes of securities of SW8 Strategy Fund LP. The general partner of East West Canada Fund LP is entitled to share up to 20% in the profits of East West Canada Fund LP, based on increases in the NAV of certain classes of securities of East West Canada Fund LP. It is anticipated that Future Underlying Funds will have substantially similar fee arrangements.
Fund-on-Fund Structure
23. The assets of each Underlying Fund are or will be (and the assets of each Top Fund to the extent a Top Fund holds securities other than securities of an Underlying Fund are or 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 such custodian's financial statements may not be publicly available.
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).
25. The purpose of the Fund-on-Fund Structure is to access a broader base of investors than are permitted to (or wish to) invest directly in the Initial Underlying Fund. Unlike the Initial Underlying Funds, each of which is organized as a limited partnership, the Initial Top Fund is, and each Future Top Fund will be, organized as a trust, securities of which are a qualified investment under the Income Tax Act (Canada) for certain types of accounts, such as tax-free savings accounts (TFSAs) and registered retirement savings plans, registered retirement income funds, registered education savings plans, defined profit sharing plans and registered disability savings plans (collectively, Tax Deferred Plans), each as defined in the Income Tax Act (Canada). As unlisted limited partnership interests, securities of the Initial Underlying Funds are not, and securities of the Future Underlying Funds will not be, qualified investments under the Income Tax Act (Canada) for TFSAs and Tax Deferred Plans.
26. 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 security holders of the Underlying Funds.
27. Any investment made by a Top Fund in an Underlying Fund will be aligned with the investment objectives, investment strategies, risk profile and other principal terms of the Top Fund.
28. 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.
29. The Initial Top Fund and SW8 Strategy Fund LP have the same valuation and redemption dates and each Future Top Fund will have the same or less frequent valuation and redemption dates as the applicable Future Underlying Fund.
30. No Underlying Fund will be a Top Fund.
31. The Top Funds will be related investment funds under the 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 Top Fund, alone or together with one or more other Top Funds, may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, each Top Fund could become a substantial security holder of an Underlying Fund.
32. Currently, an officer, director and substantial security holder of the Filer holds a significant interest in East West Canada Fund LP that was originally made for the purpose of establishing and increasing the assets of East West Canada Fund LP and is maintained for the purpose of investing alongside investors to demonstrate confidence in the strategies of East West Canada Fund LP. The nature and purpose of any other significant interest held by any party contemplated by the Legislation (including an officer, director or substantial security holder of the Filer, or its affiliate, or of a Top Fund) in an Underlying Fund will be substantially similar. It is expected that any such interest would be diluted over time as other investments in the applicable Underlying Fund grow.
33. 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. In the case of the Initial Top Fund's investment in SW8 Strategy Fund LP, this is so because, pursuant to the Proposed Transaction, a portfolio manager of the Filer, who may be considered a "responsible person" (as defined by section 13.5 of NI 31-103) by virtue of being an employee of the Filer who participates in investment decisions on behalf of the Initial Top Fund, is also an officer and director of the general partner of SW8 Strategy Fund LP. In the future it is expected that other parties who may similarly be considered a "responsible person" of the Filer or its affiliate (as defined by section 13.5 of NI 31-103) or an associate of a responsible person of the Filer or its affiliate, may also be a partner, officer and/or director of the applicable Underlying Fund.
34. 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.
35. 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) the Previous Decision will no longer be relied on once this Decision is relied on;
(b) securities of each Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106;
(c) the investment by a Top Fund in an Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;
(d) 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;
(e) 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;
(f) 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;
(g) 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;
(h) the offering memorandum, where available, 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 Fund;
(ii) that the Filer, or its affiliate, as the case may be, is the investment fund manager and/or portfolio manager of both the Top Fund and the Underlying Fund;
(iii) that the Top Fund will invest substantially all of its assets in the Underlying Fund;
(iv) each officer, director or substantial security holder of the Filer, or its affiliate, or of a Top Fund that also has a significant interest in the 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 that the Top Fund invests in, including any incentive fees or profit allocations or other allocations;
(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 semi-annual financial statements relating to the Underlying Fund in which the Top Fund invests its assets, if available.
The Consent Relief
"Vera Nunes"
Manager, Investment Funds and Structured Products
Ontario Securities Commission
The Related Issuer Relief
"Christopher Portner"
Commissioner
Ontario Securities Commission
"Deborah Leckman"
Commissioner
Ontario Securities Commission