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 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(4), 113.

July 26, 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
GRYPHON INVESTMENT COUNSEL 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 Gryphon Balanced Fund and Gryphon Total Equity Fund (the Existing Top Funds) and any other investment fund which is not a reporting issuer under the securities legislation of the Jurisdiction (the Legislation) and that is managed by the Filer (the Future Top Funds, and together with the Existing Top Funds, the Top Funds) which invests its assets in securities of Gryphon EuroPac Fund (the Existing Underlying Fund) and any other investment fund which is not a reporting issuer under the Legislation and that is managed by the Filer or its associate (Future Underlying Funds and together with the Existing Underlying Fund, the Underlying Funds), for a decision under the Legislation:

1. to revoke and replace the Prior Relief (as defined below); and

2. to exempt the Filer and the Top Funds from:

(a)           the restriction in the Legislation that 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 security holder; and

(b)           the restriction in the Legislation that prohibits an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) 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 incorporated under the laws of Canada with its head office in Toronto, Ontario.

2.             The Filer is registered as an investment fund manager in Ontario and Quebec and as a portfolio manager in all provinces of Canada.

3.             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.

4.             The Filer provides discretionary portfolio management services to clients pursuant to managed account agreements (the MAA) with clients.

5.             Pursuant to the MAA, the Filer has full discretion and authority to provide portfolio management services to clients, including investing clients in mutual or pooled funds for which the Filer or its associate is the investment fund manager and portfolio manager and for changing those funds as the Filer determines in accordance with the mandate of the client.

6.             Either the MAA includes a provision that refers to the possibility of a Top Fund investing in an Underlying Fund or the client has been notified to that effect.

7.             Pursuant to the MAA, clients pay management fees directly to the Filer in relation to the carrying out of the client investment mandate, whether by direct investment in securities or indirectly through investment in one or more Top Funds. These fees are independently negotiated between the client and the Filer. 

8.             The Filer is the investment fund manager and portfolio manager of the Existing Top Funds.

9.             The Filer will be the investment fund manager and portfolio manager of Future Top Funds established under the laws of Ontario.

10.          Investment in the Top Funds is limited to fully discretionary clients. The Existing Top Funds do not have an offering memorandum nor does the Existing Underlying Funds.

Top Funds

11.          Each of the Existing Top Funds is an open-ended mutual fund established as trusts under the laws of Ontario.

12.          The Future Top Funds will be open-ended mutual funds under the laws of Ontario.

13.          None of the Top Funds is or will be a reporting issuer in any jurisdiction of Canada.

14.          Each of the Top Funds is or will be a “mutual fund” for the purposes of the Legislation.

15.          The units of a Top Fund are purchased by the Filer for its managed accounts pursuant to an available exemption from the prospectus requirements under National Instrument 45-106 Prospectus Exemptions (NI 45-106) or the Legislation.   

16.          The assets of the Existing Top Funds are held by CIBC Mellon Trust Company. The assets of the Future Top Funds will be held in the custody of a trust company incorporated, and licensed or registered, under the laws of Canada or a jurisdiction, or a bank listed in Schedule I, II or III of the Bank Act (Canada) or a qualified affiliate of such bank or trust.

17.          The Filer has and will have complete discretion to invest and reinvest all or part of a Top Fund’s assets, and is or will be responsible for executing or arranging for the execution of all portfolio transactions in respect of a Top Fund.

18.          No additional management fees are payable by the Top Fund or in respect of the investment in the Top Funds by clients of the Filer.

19.          None of the Existing Top Funds are in default of securities legislation.

20.          Existing Top Funds invest in an Existing Underlying Fund and an Existing Top Fund or a Future Top Fund may invest its assets in one or more Underlying Funds.

Underlying Funds

21.          The Existing Underlying Fund is a mutual fund which is established as a trust under the laws of Ontario.

22.          The Future Underlying Funds will be mutual funds which will be established under the laws of Ontario.

23.          The Existing Underlying Fund is  not a reporting issuer in any jurisdiction of Canada and no Future Underlying Fund will be a reporting issuer in any jurisdiction of Canada.

24.          The Existing Underlying Fund is not in default of securities legislation.

25.          Units of each Underlying Fund will be sold to investors in Canada solely pursuant to available exemptions from the prospectus requirements under NI 45-106 or the Legislation.

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

27.          Either the Filer or its associate is or will be the investment fund manager and portfolio manager of an Underlying Fund.

28.          Each of the Underlying Funds calculates and will calculate its net asset value (NAV) and offer redemptions at least at the same frequency as the applicable Top Fund.

29.          An investment by a Top Fund in an Underlying Fund will be effected based on an objective NAV of the Underlying Fund.

30.          To the extent illiquid assets (as defined in National Instrument 81-102 Investment Funds (NI 81-102)) are held by an Underlying Fund, such illiquid assets will comprise less than 10% of the NAV of such Underlying Fund.

Fund-on-Fund Structure.

31.          Each Existing Top Fund currently invests only a portion of its assets in an Existing Underlying Fund and may invest a portion of its assets in a Future Underlying Fund.  In the future, a Top Fund may invest portions of its assets in more than one Underlying Fund either managed by the Filer or by its associate, depending upon the Filer's view of the best method by which to obtain the desired investment exposure for the asset class, as identified by the Filer from time to time.

32.          No management fees are or will be payable, and no incentive fees which may be charged in the future will be payable, by the Top Fund in respect of its investment in an Underlying Fund.

33.          No sales fees or redemption fees will be payable in connection with the purchases or redemptions by a Top Fund of units of an Underlying Fund.

34.          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).

35.          The purpose of a Fund-on-Fund Structure is to provide an efficient and cost-effective manner of pursuing portfolio diversification on behalf of the Top Funds rather than through the direct purchase of securities. Managing a single pool of assets provides economies of scale and allows the Filer to meet the investment objective of each Top Fund in the most efficient manner.

36.          An investment by a Top Fund in an Underlying Fund provides greater diversification for a Top Fund in particular asset classes on a more cost efficient basis than a Top Fund would be able to achieve on its own.

37.          An investment by a Top Fund in an Underlying Fund is, or will be, compatible with the investment objectives of the Top Fund. Any investment made 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.

38.          Where a Top Fund invests in an Underlying Fund managed by the Filer or its associate, the Filer will not cause the Top Fund to vote the units of such Underlying Fund at any meeting of the unitholders of the Underlying Fund.   Instead, the Filer may arrange for the securities of such Underlying Fund to be voted by the beneficial holders of securities of the Top Fund.

Generally

39.          On or prior to the time of investing a client in a Top Fund, the client will be provided with disclosure about any relationships and potential conflicts of interest between a Top Fund and the Underlying Fund or Funds.

40.          An offering memorandum, if any, of a Top Fund will describe the Top Fund's intent, or ability, to invest some of its assets in securities of the Underlying Funds and that the Underlying Funds are also managed and advised by an associate of the Filer.

41.          Each of the Top Funds and any Underlying Fund that is 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. The financial statements of each Top Fund will disclose its holdings of securities of the applicable Underlying Fund(s).

42.          Each Underlying Fund will have other investors in addition to the Top Fund. The Underlying Funds are available for investment by investors that do not have an investment management relationship with the Filer but have an investment management relationship with the associate of the Filer.

43.          The amounts invested from time to time in an Underlying Fund by one or more Top Funds may exceed 20% of the outstanding voting securities of the Underlying Fund.

44.          As a result, each Top Fund could, either alone or together with other Top Funds, become a substantial securityholder of an Underlying Fund. The Top Funds are, or will be, related mutual funds by virtue of the common management by the Filer.

45.          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.

46.          The Fund-on-Fund Structure represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of each Top Fund.

Prior Relief

47.          Under a decision dated October 29, 2010 (the Prior Relief), the Filer and Gryphon Balanced Fund (the Prior Relief Top Fund) were granted relief to permit the Prior Relief Top Fund to invest in Gryphon EuroPac Fund that was established, managed and advised by a related company of the Filer after the date thereof (the Prior Relief Underlying Fund).

48.          The Filer now seeks relief to include a recently established fund, Gryphon Total Equity Fund,  Future Top Funds, and Future Underlying Funds to engage in fund-on-fund investing. Therefore, the Filer is seeking to revoke and replace the Prior Relief with the Requested Relief.

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:

1.             The Prior Relief is revoked;

2.              the Requested Relief is granted provided that:

(a)           the investment by a Top Fund in an Underlying Fund is compatible with the investment objectives of the Top Fund;

(b)           at the time of the purchase of securities of an Underlying Fund by a Top Fund, the Underlying Fund holds no more than 10% of its NAV in securities of other investment funds, unless:

(i)            the Underlying Fund is a “clone fund” (as defined by NI 81-102) or the Top Fund is a “clone fund” of that Underlying Fund,

(ii)           the Underlying Fund purchases or holds securities of a “money market fund” (as defined by NI 81-102), or

(iii)          the Underlying Fund purchases or holds securities that are “index participation units” (as defined by NI 81-102) issued by an investment fund;

(c)           securities of the Top Funds are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106 or the Legislation;

(d)           no management fees are or will be payable, and no incentive fees will be payable, by a Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund;

(e)           no sales 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 managed by the Filer or its associate and held by a Top Fund to be voted at any meeting of the unitholders of the Underlying Fund, except that the Filer may arrange for the securities of such 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 if any, will be provided to new investors in a Top Fund prior to the time of investment, or to existing investors of a Top Fund promptly following the grant of the Requested Relief, and will disclose:

(i)            that a Top Fund may purchase securities of an Underlying Fund;

(ii)           that the Filer is the investment fund manager and portfolio manager of the Top Funds and the Filer or its associate is also the investment fund manager and portfolio manager of the Underlying Funds and there are potential conflicts of interests relating to such relationship;

(iii)          the approximate or maximum percentage of net assets of each Top Fund that such Top Fund intends to invest in securities of the Underlying Funds;

(iv)          the process or criteria used to select the Underlying Funds;

(v)           the expenses payable by the Underlying Funds that the Top Fund may invest in; and

(vi)          that investors in each Top Fund are entitled to receive, on written request and free of charge, a copy of the offering memorandum or other similar disclosure document of the Underlying Funds, if any, and the annual and semi-annual financial statements of the Underlying Funds in which the Top Fund invests its assets; and

(h)           no Underlying Fund will be invested in a Top Fund that is already invested in securities of such Underlying Fund.

“Janet Leiper”
Commissioner
Ontario Securities Commission

“William Furlong”
Commissioner
Ontario Securities Commission