Mutual fund in Ontario (non-reporting issuer) granted 90 day extension of the annual financial statement filing and delivery deadlines -- fund originally planned in 2013 -- fund not a mutual fund in Ontario when it launched -- fund manager part of experienced group of U.S. fund of hedge fund managers with established track record of delivering audited annual financial statements and unmodified auditor reports within 180 days of financial year end under U.S. law -- fund a fund of funds that primarily invests in underlying entities that are subject to U.S. regulatory requirement to deliver audited annual financial statements within 120 days of financial year end.
Applicable Legislative Provisions
National Instrument 81-106 Investment Fund Continuous Disclosure, ss. 2.2, 5.1(2), 17.1.
March 10, 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 ENTRUST FOCUS PARTNERS LP (the Filer) AND IN THE MATTER OF ENTRUST 49 FOCUS FUND (the Fund)
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Fund for a decision under the securities legislation of the Jurisdiction (the "Legislation") exempting the Filer and the Fund from:
a. the requirement in section 2.2 of NI 81-106 that the Fund file its audited annual financial statements and auditor's report on or before the 90th day after the Fund's most recently completed financial year (the "Annual Filing Deadline"); and
b. the requirement in paragraph 5.1(2)(a) of NI 81-106 that the Fund deliver its audited financial statements by the Annual Filing Deadline (the "Annual Delivery Requirement")
(the "Exemption Sought").
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 of Multilateral Instrument 11-102 -- Passport System ("MI 11-102") is intended to be relied upon in each of the provinces and territories of Canada except Alberta, British Columbia, Manitoba and Newfoundland and Labrador, (together with the Jurisdiction, the "Jurisdictions").
Terms defined in National Instrument 14-101 -- Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.
This decision is based on the following facts represented by the Filer.
1. The Filer is a limited partnership established in Delaware, United States and registered with the U.S. Securities and Exchange Commission (SEC) as an investment advisor. The Filer's principal office is located in New York, United States.
2. The Filer is registered in the categories of investment fund manager and portfolio manager in Ontario, and in the category of investment fund manager in Quebec.
3. The Filer is not a reporting issuer in any Jurisdiction and is not in default of securities legislation in any Jurisdiction.
4. The Filer acts as the portfolio manager and investment fund manager of the Fund.
5. The Filer is a commonly owned and controlled affiliate of EnTrust Partners LLC, EnTrust Capital Management LP and EnTrust Partners Offshore LP, all of whom are registered with the SEC as investment advisers.
6. The Filer first contemplated and began planning the Fund during the month of December, 2013. The Fund was established as an open-ended investment fund under the laws of the Province of Ontario pursuant to a trust agreement dated July 16, 2014, as amended and restated on April 20, 2015 between the Filer and Computershare Company of Canada as the trustee (the "Trust Agreement"). The Fund was not a mutual fund in Ontario when it was created because its investors were not entitled at that time to receive, on demand, a proportionate interest in the Fund's net assets.
7. Securities of the Fund are offered for sale on a continuous basis to qualified investors in all provinces and territories of Canada other than Newfoundland and Labrador pursuant to exemptions from the prospectus requirements under National Instrument 45-106 -- Prospectus and Registration Exemptions.
8. Units of the Fund are only distributed in Canada pursuant to exemptions from the prospectus requirement in accordance with NI 45-106.
9. The Fund is not a reporting issuer in any Jurisdiction and is not in default of securities legislation in any Jurisdiction.
10. The Fund currently holds approximately $5 million in assets and has approximately 30 investors.
11. The Fund has a financial year-end of December 31.
12. The Filer is a "fund of funds" manager, more specifically a manager of hedge funds and the Fund is a fund of hedge funds. The Fund's investment objective is to achieve long-term capital growth by investing the majority of its assets in a diversified portfolio of private investment entities managed by independent managers selected by the Filer (each, an "Underlying Entity").
13. The Filer engages in an extensive due diligence process when selecting an Underlying Entity for the Fund, which includes: (a) a scoring process based on the Filer's proprietary due diligence procedures; (b) a review of critical documents of the manager of the prospective Underlying Entity; and (c) a background check on, and an on-site visit with, the manager and key back office personnel of the prospective Underlying Entity.
14. The Fund imposes an initial lock-up period of twelve (12) months from the date of an investor's subscription (the "Initial Lock-Up Period"). With the expiry of the Initial Lock-Up Period, the Fund's securities are redeemable upon a ninety (90) days' prior written notice to the Filer. Accordingly, on the expiry of the Initial Lock-Up Period for the Fund's first subscriber (January 1, 2016), the Fund may be considered to be a mutual fund in Ontario and thus subject to NI 81-106 as of such date.
15. The Filer believes that investing in the Underlying Entities offers benefits not available through a direct investment in the companies, other issuers or assets held by the Underlying Entities.
16. Securities of the Underlying Entities are typically redeemable at various intervals. As the Fund has a long-term investment horizon, the Fund is able to manage its own liquidity requirements taking into consideration the frequency at which the securities of the Underlying Entities may be redeemed.
17. The net asset value of the Fund ("NAV") is calculated on a monthly basis, as of the last business day of each month (the "Valuation Date"). Investors of the Fund are provided with NAV on a monthly basis no later than sixty (60) days of each Valuation Date.
18. The holdings by the Fund of securities of the Underlying Entities will be disclosed in the financial statements.
19. Section 2.2 and subsection 5.1(2)(a) of NI 81-106 require the Fund to file and deliver its annual audited financial statements by the Annual Filing Deadline. As the Fund's financial year-end is December 31, it has a filing and delivery deadline of March 31.
20. In order to formulate an opinion on the financial statements of the Fund, the Fund's auditors require audited financial statements of the Underlying Entities. The auditors of the Fund have advised the Fund that they will be unable to complete an audit of the Fund's annual financial statements without examining the audited financial statements of the Underlying Entities.
21. The Underlying Entities are domiciled in the Caymans or the U.S. and all of the Underlying Entities are subject to U.S. law that requires their financial statements to be delivered within 120 days of their financial year ends. All of the Underlying Entities have financial reporting periods that end on December 31 of each year. Under the Trust Agreement, the Fund must deliver its financial statements to investors within 180 days of financial year end.
22. The Filer was aware of the Annual Filing Deadline at the time it began planning and organizing the Fund, but was advised that the principal regulator had issued some decisions granting an extension to the Annual Filing Deadline to permit annual audited financial statements to be filed and delivered for funds of hedged funds within 180 days of financial year end under circumstances similar to the Fund. The Filer filed its application requesting the Exemption Sought on September 15, 2015.
23. The Filer believes that apart from the timing challenges imposed by producing financial statements within 90 days of year-end, the delivery of any financial statements prepared within that time frame could be detrimental to investors as such statements would necessarily be based entirely on estimates which are subject to change and therefore could be materially inaccurate. In the Filer's view, investors are better served by having financial statements free of material inaccuracies delivered at 180 days following year end than by having financial statements based on estimates and containing possible inaccuracies delivered 90 days following year end.
24. The Filer offers funds of hedge funds to a large number of clients in other jurisdictions including the United States. Under U.S. law, investment advisers to funds of hedge funds must deliver annual audited financial statements for their funds of hedge funds within 180 days of financial year end. Staff of the SEC issued a no action letter to the American Bar Association dated August 10, 2006 regarding the delivery of annual audited financial statements within 180 days from financial year end for funds investing in third party hedge funds.
25. The Filer and its affiliates are experienced investment advisors in the U.S. with approximately $12 billion under management through funds that follow a substantially similar strategy as the Fund. The SEC registered investment advisory affiliates of the Filer provide audited financial statements for the dozens of other investment vehicles they manage to approximately 500 investors within the 180 day period, and these affiliates have done so for investors every year for the last 13 years since the inception of the Filer's fund of funds business. None of the audit opinions provided with these financial statements contained a qualification.
26. The offering memorandum provided to investors regarding the Fund disclosed that annual audited financial statements for the Fund would be filed and delivered within 180 days of financial year end.
27. The Filer does not anticipate that it will receive any complaints from security holders of the Fund in connection with the 90 day delay in delivering its annual audited financial statements under the Exemption Sought.
28. The Filer will notify its security holders that it has received and intends to rely on relief from the Annual Filing Deadline and Delivery Requirement.
29. The offering memorandum for the Fund will be amended to disclose that the Fund has received and intends to rely on relief from the Annual Filing Deadline and Delivery Requirement.
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 Exemption Sought is granted provided that:
1. The Fund's investment objective is to achieve long-term capital growth by investing the majority of its assets in a diversified portfolio of private investment entities managed by independent managers and these private investment entities have financial reporting periods that end on December 31 of each year and are subject to U.S. law that requires their financial statements to be delivered within 120 days of their financial year ends.
2. The offering memorandum provided to investors regarding the Fund discloses that annual audited financial statements for the Fund will be filed and delivered within 180 days of financial year end.
3. The Fund notifies its existing unitholders that the Fund has received and intends to rely on relief from the filing and delivery requirements under section 2.2 and subsection 5.1(2)((a) of NI 81-106.
4. The Fund is not a reporting issuer and the Filer is a limited partnership established in Delaware, United States and registered with the SEC as an investment advisor.
a) The audited annual financial statements of the Fund are filed on or before the 180th day after the Fund's most recently completed financial year; or
b) the conditions in section 2.11 of NI 81-106 are met, except for subsection 2.11(b), and the annual audited financial statements are delivered to securityholders in accordance with Part 5 of NI 81-106 on or before the 180th day after the Fund's most recently completed financial year.
6. The audited annual financial statements of the Fund are delivered to securityholders in accordance with Part 5 of NI 81-106 on or before the 180th day after the Fund's most recently completed financial year.
7. The Exemption Sought terminates within one year of the coming into force of any amendment to NI 81-106 or other rule that modifies how the Annual Filing Requirement or Annual Delivery Requirement applies in connection with mutual funds in Ontario.