Securities Law & Instruments

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) and (c), 111(4), 113.

March 15, 2016

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 HGC INVESTMENT MANAGEMENT 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 its behalf and on behalf of HGC Arbitrage Fund Trust (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) and may be established and managed by the Filer in the future (together with the Initial Top Fund, the Top Funds), which invests its assets in HGC Arbitrage Fund LP (the Initial Underlying Fund) or any other investment fund which is not a reporting issuer and may be managed by the Filer in the future (together with the Initial Underlying Fund, the Underlying Funds), for a decision under the Legislation exempting the Filer and the Top Funds from the restriction in 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:

(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,

has a significant interest; and

(c) 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 established under the laws of Ontario with its head office located in Toronto, Ontario.

2. The Filer is registered as an investment fund manager, portfolio manager and exempt market dealer in Ontario, as an investment fund manager and exempt market dealer in Québec, and as an exempt market dealer in British Columbia, Alberta and Manitoba.

3. The Filer is or will be the investment fund manager of the Top Funds. The Filer is or will be the investment fund manager of the Initial Underlying Fund and future Underlying Funds formed under the laws of Ontario or another jurisdiction of Canada. For future Underlying Funds formed under the laws of a foreign jurisdiction, either the Filer, an affiliate of the Filer or the Fund itself, if a corporation (acting through its board of directors), will act as the investment fund manager.

4. The Filer is or will be the portfolio manager for the Top Funds and the Underlying Funds (the Funds), has complete discretion to invest and reinvest the assets of the Funds, and is responsible for executing all portfolio transactions while being subject to applicable securities laws. Furthermore, the Filer may also act as a distributor of the securities of the Funds not otherwise sold through another registered dealer.

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

6. An officer and director of the Filer, who is also a substantial security holder of the Filer, currently has a significant interest in the Initial Underlying Fund. In the future, officers and/or directors of the Filer may be substantial security holders of the Filer or a Top Fund and have a significant interest in an Underlying Fund.

Top Funds

7. The Initial Top Fund will be an investment trust established under the laws of Ontario. The future Top Funds will be structured as trusts under the laws of Ontario or another jurisdiction of Canada.

8. The securities of each Top Fund are or will be sold solely to investors pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 Prospectus Exemptions (NI 45-106).

9. Each of the Top Funds will be an "investment fund" as defined in securities legislation of the jurisdictions in which the Top Funds are distributed.

10. The Initial Top Fund intends to invest substantially all of its assets in the Initial Underlying Fund. A Future Top Fund may invest substantially all of its assets in a Future Underlying Fund.

11. None of the Top Funds will be a reporting issuer in any jurisdiction of Canada.

Underlying Funds

12. The Initial Underlying Fund is a limited partnership established under the laws of Ontario. The future Underlying Funds will be structured as limited partnerships.

13. The general partner of the Initial Underlying Fund is HGC Arbitrage Fund GP LP, an affiliate of the Filer. The general partner of each future Underlying Fund will be an affiliate of the Filer.

14. Each of the Underlying Funds has, or will have, separate investment objectives and investment strategies.

15. In Canada, securities of each Underlying Fund are, or will be, sold solely to investors pursuant to exemptions from the prospectus requirements in accordance with NI 45-106.

16. Each of the Underlying Funds is, or will be, an "investment fund" as defined in securities legislation of the jurisdictions in which the Top Funds are distributed.

17. Each Underlying Fund has, or is expected to have, other investors in addition to the Top Fund.

18. None of the Underlying Funds is, or will be, a reporting issuer in any jurisdiction of Canada.

19. The Initial Underlying Fund is not in default of securities legislation of any jurisdiction of Canada.

Fund-on-Fund Structure

20. 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.

21. A Top Fund will allow its investors to obtain indirect exposure to the investment portfolio of an Underlying Fund and its respective investment strategies through, primarily direct investments by the Top Fund in securities of the Underlying Fund (the Fund-on-Fund Structure).

22. Unlike the Initial Underlying Fund, which is a limited partnership, the Initial Top Fund will be organized as a trust for the purpose of accessing 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.

23. The Fund-on-Fund Structures involving Future Top Funds and Future Underlying Funds will be similarly structured.

24. 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.

25. 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 and on the same basis as other investments in the Underlying Fund.

26. Prior to the time of investment, securityholders of a Top Fund will be provided with disclosure with respect to each officer and/or director of the Filer, if any, that has a significant interest in the Underlying Funds through investments made in securities of such Underlying Funds (due to the provision of seed capital and/or ongoing investments from time to time) and that such officer and/or director of the Filer, if any, is also a substantial securityholder of the Filer. Securityholders in a Top Fund will also be advised of the potential conflicts of interest which may arise from such relationships. The foregoing disclosure will be contained in any offering memorandum prepared in connection with a distribution of securities of the Top Fund, or if no offering memorandum is prepared, in another document provided to investors of the Top Fund.

27. Each of the Top Funds and the Underlying Funds that are 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, as applicable.

28. No Underlying Fund will be a Top Fund.

29. A Top Fund will have the same valuation and redemption dates as its Underlying Fund.

Generally

30. The Filer expects that the assets of each Underlying Fund (and the assets of each Top Fund only if such Top Fund holds securities other than securities of an Underlying Fund) are, or will be, held by an entity that meets the qualifications of section 6.2 of NI 81-102 (for assets held in Canada) or an entity 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.

31. 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.

32. 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 securityholder of the Top Fund or the Filer has a significant interest.

33. 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.

34. A Top Fund's investments in an Underlying Fund represent the business judgement of a responsible person uninfluenced by considerations other than the best interests of the investment funds concerned.

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 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 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 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 will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of the Underlying Fund 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, where available, or other disclosure document of a Top Fund, will be provided to investors in the Top Fund prior to the time of investment and will disclose:

a. that the Top Fund may, or is expected to, (as the case may be) purchase securities of the Underlying Fund;

b. the approximate or maximum percentage of net assets of the Top Fund that is intended be invested in securities of the Underlying Fund;

c. that the Filer is the investment fund manager and/or portfolio manager of both the Top Fund and the Underlying Fund;

d. each officer, director or substantial security holder of the Filer or of a Top Fund that 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;

e. the fees, expenses and any performance or incentive distributions payable by the Underlying Fund that the Top Fund invests in;

f. that investors are entitled to 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 (if available); and

g. that investors are entitled to receive from the Filer, 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.

"Judith Robertson"
Commissioner
Ontario Securities Commission
 
"William J. Furlong"
Commissioner
Ontario Securities Commission