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) and 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(4), 113.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a), 15.1.
July 28, 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 NEWGEN ASSET MANAGEMENT LIMITED (the Filer) AND IN THE MATTER OF THE TOP FUNDS (as defined below)
The principal regulator in the Jurisdiction has received an application from the Filer on its behalf and on behalf of NewGen Trading Fund RRSP (the Initial Top Fund) and any other investment fund which is not a reporting issuer under the Legislation that is advised or managed by the Filer, or an affiliate, after the date hereof (the Future Top Funds, and together with the Initial Top Funds, the Top Funds), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), exempting the Top Funds and the Filer from:
(a) the restriction in the Securities Act (Ontario) (the Act) 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 securityholder; and
(b) the restriction in the Act which prohibits an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) above
(the Related Issuer Relief); and
(c) the restrictions contained in subsection 13.5(2)(a)(ii)of National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which 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 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 the fact is disclosed to the client and the written consent of the client to the purchase 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, in respect of the Requested Relief.
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 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; investment fund manager and exempt market dealer in Newfoundland and Labrador and in Quebec; portfolio manager and exempt market dealer in Alberta; and exempt market dealer in British Columbia and Saskatchewan.
3. The Filer is not a reporting issuer in any jurisdiction and is not in default of securities legislation of any jurisdiction of Canada.
4. The Filer intends to be the investment fund manager and portfolio adviser of the Top Funds.
5. The Filer is the investment fund manager and portfolio adviser of NewGen Trading Fund LP (the Initial Underlying Fund). The Filer will be the investment fund manager and portfolio manager of other investment funds that may be advised or managed by the Filer or an affiliate after the date hereof (collectively, the Future Underlying Funds and together with the Initial Underlying Fund, the Underlying Funds).
6. As the Filer is the portfolio adviser for the Initial Top Fund and the Initial Underlying Fund, the Filer is a "responsible person" within the meaning of the applicable provisions of NI 31-103.
7. The Filer will have complete discretion to invest the assets of the Top Funds and the Underlying Funds (collectively, the Funds), and will be 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 Top Funds and Underlying Funds not otherwise sold through another registered dealer.
The Top Funds
8. The Initial Top Fund will be established as a mutual fund trust, pursuant to a declaration of trust effective on or about August 1, 2015. The Filer will act as trustee of the Initial Top Fund, pursuant to the approval under the Loan and Trust Corporations Act (Ontario) granted by the OSC to the Filer on December 21, 2012.
9. Future Top Funds may be formed as mutual fund trusts under the laws of the Province of Ontario or another jurisdiction of Canada.
10. 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 Exemptions (NI 45-106) or in other jurisdictions subject to available prospectus exemptions and applicable laws, including to managed accounts advised by the Filer.
11. The Initial Top Fund will be a mutual fund and all Top Funds will be investment funds for the purposes of the Legislation but no Top Fund will be a reporting issuer in any jurisdiction of Canada.
12. The investment objective of the Initial Top Fund will be to invest all or substantially all of its assets in the Initial Underlying Fund. The investment objective of each of the Future Top Funds will be to invest all or substantially all of their assets in one of the Underlying Funds.
The Underlying Funds
13. The Initial Underlying Fund is an open-ended limited partnership established under the laws of the Province of Ontario.
14. Future Underlying Funds will be structured as limited partnerships under the laws of the Province of Ontario or another jurisdiction of Canada.
15. The general partner of the Initial Underlying Fund is NewGen Trading Fund GP Limited (the General Partner). The General Partner is incorporated under the laws of the Province of Ontario and is an affiliate of the Filer. The general partner of any Future Underlying Fund that is structured as a limited partnership is also expected to be an affiliate of the Filer.
16. The Filer will be entitled to receive management fees with respect to one or more classes of securities of the Initial Underlying Fund.
17. The General Partner, or other affiliates of the Filer, will be entitled to receive incentive allocations with respect to one or more classes of securities of the Initial Underlying Fund.
18. Securities of the Underlying Funds may be offered for sale in any jurisdiction in Canada pursuant to prospectus exemptions under NI 45-106 or in other jurisdictions subject to available prospectus exemptions and applicable laws.
19. No Underlying Fund will be a reporting issuer in any jurisdiction of Canada.
20. Each Underlying Fund will have separate investment objectives, strategies and/or restrictions.
21. The investment objective of the Initial Underlying Fund is to achieve superior absolute returns through an opportunistic trading strategy designed to exploit short-term market inefficiencies. The Initial Underlying Fund invests (long and short) primarily in listed equities, but also has the flexibility to invest in a wide range of instruments to balance risk and/or enhance returns including, but not limited to, currencies, commodities (cash-settled only), futures (including index futures), credit default swaps, options and warrants.
22. 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 in "illiquid" assets (as defined in National Instrument 81-102 Investment Funds (NI 81-102)).
23. Securities of the Initial Underlying Fund will not be eligible for investment by tax-free savings accounts (TFSAs) and trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans, deferred profit sharing plans and registered disability savings plans (collectively, Tax Deferred Plans), each as defined in the Income Tax Act (Canada).
24. The Initial Top Fund will be formed as a trust for the purpose of accessing a broader base of investors, including TFSAs, Tax Deferred Plans and other investors that may not wish to invest directly in a limited partnership for tax considerations. Rather than running the Initial Top Fund's and the Initial Underlying Fund's investment portfolios as separate pools, the Filer wishes to make use of economies of scale by managing a single investment pool.
25. The Top Funds will allow investors to obtain exposure to the investment portfolio of the corresponding Underlying Funds and their strategies through direct investment by the Top Funds in securities of the Underlying Funds. Such fund-on-fund structure will increase the asset base of the Underlying Funds, which is expected to provide additional benefits to security holders of the Top Funds and Underlying Funds, including more favourable pricing and transaction costs on portfolio trades, increased access to investments whether there is a minimum subscription or purchase amount and better economies of scale through greater administrative efficiency.
26. Investing in the Underlying Funds will allow 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. The assets of the Top Funds and Underlying Funds will be held by a custodian that meets or will meet the qualifications set out in subsection 6.2 of NI 81-102, other than that audited financial statements may not have been made public for the purpose of subsection 6.2 3(a) of NI 81-102.
28. Each of the Top Funds, if such fund 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. Each Underlying Fund, if such fund is subject to NI 81-106, will prepare annual audited financial statements and interim unaudited financial statements.
29. The Top Funds and the corresponding Underlying Funds will have matching valuation dates. The Initial Top Fund and the Initial Underlying Fund will be valued no less frequently than on a monthly basis.
30. Securities of the Top Funds and the relevant Underlying Funds will have matching redemption dates. The Initial Top Fund and the Initial Underlying Fund will be redeemable no less frequently than on a monthly basis.
31. The Top Funds 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 may exceed 20% of the outstanding voting securities of an Underlying Fund. As a result, each Top Fund could become a substantial security holder of an Underlying Fund.
32. In the absence of the Related Issuer 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. Specifically, the Top Funds would be prohibited from becoming substantial security holders of the corresponding Underlying Funds.
33. Since the Top Funds and the Underlying Funds do not offer their securities under a simplified prospectus, they are not subject to NI 81-102 and therefore the Top Funds and the Underlying Funds are unable to rely upon the exemption codified under subsection 2.5(7) of NI 81-102.
34. In the absence of the Consent Relief, the Top Funds may be precluded from investing in their corresponding Underlying Funds, 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 the Filer is a "responsible person" (as defined by section 13.5 of NI 31-103) and the Filer's associate will be a general partner of the applicable Underlying Fund.
35. 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 Top Fund.
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 Top Fund will invest all or substantially all of its assets in an Underlying 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 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 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, or other disclosure document of a Top Fund, will disclose:
(i) that the Top Fund will invest all or substantially all of its assets in the Underlying Fund;
(ii) that the Filer is the investment fund manager and/or portfolio adviser of both the Top Fund and the Underlying Fund;
(iii) the fees, expenses and any performance or special incentive distributions payable by the Underlying Fund that the Top Fund invests in;
(iv) 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; and
(v) that, if available, 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.
With respect to the Related Issuer Relief:
"Christopher Portner"Commissioner"Sarah B. Kavanagh"Commissioner
With respect to the Consent Relief:
"Vera Nunes"Manager, Investment Funds and Structured Products