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VWK Capital Management Inc. and VWK Partners Fund Trust
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 a pooled fund to invest in securities of an underlying fund 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.
August 23, 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 VWK CAPITAL MANAGEMENT INC. (the Filer) AND IN THE MATTER OF VWK PARTNERS FUND TRUST (the Top Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Top Fund, which invests its assets in VWK Partners Fund LP (the Underlying Fund), for a decision under the securities legislation of the principal regulator (the Legislation) exempting the Top Fund 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; and
(b) an investment fund from knowingly holding an investment described in paragraph (a) above
(collectively, 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(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.
3. The Filer is the investment fund manager of the Top Fund and the Underlying Fund (the Funds).
4. The Filer is the portfolio manager for the Funds with complete discretion to invest and reinvest the assets of the Funds, and with responsibility 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.
Top Fund
6. The Top Fund is an open-ended investment trust established under the laws of Ontario pursuant to a trust agreement dated as of April 9, 2015.
7. The securities of the Top Fund are sold solely to investors pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 Prospectus Exemptions (NI 45-106).
8. The Top Fund is an "investment fund" as defined in securities legislation of the jurisdictions in which the Top Fund is distributed.
9. The Top Fund currently invests, and intends to continue to invest, substantially all of its assets in the Underlying Fund.
10. The Top Fund is not and will not be a reporting issuer in any jurisdiction of Canada.
11. The Top Fund is not in default of securities legislation of any jurisdiction of Canada.
Underlying Fund
12. The Underlying Fund is an open-ended limited partnership established under the laws of Ontario by declaration dated May 17, 2010 and governed by a limited partnership agreement dated as of January 4, 2011, as amended.
13. The general partner of the Underlying Fund is VWK Partners Fund GP, an affiliate of the Filer.
14. The Underlying Fund has separate investment objectives and investment strategies.
15. In Canada, securities of the Underlying Fund are sold solely to investors pursuant to exemptions from the prospectus requirements in accordance with NI 45-106.
16. The Underlying Fund is an "investment fund" as defined in securities legislation of the jurisdictions in which the Underlying Fund is distributed.
17. The Underlying Fund has other investors in addition to the Top Fund.
18. The Underlying Fund is not and will not be a reporting issuer in any jurisdiction of Canada.
19. The 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 Underlying Fund are not qualified investments under the Income Tax Act (Canada) for registered plans and tax-free savings accounts.
21. The Top Fund allows its investors to obtain indirect exposure to the investment portfolio of the 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 Underlying Fund, which is a limited partnership, the Top Fund is organized as a trust for the purpose of accessing a broader base of investors, including owners of registered plans, owners of tax-free savings accounts, and other investors who may not wish to invest directly in a limited partnership.
23. Any investment by the Top Fund in the Underlying Fund will be aligned with the investment objectives, investment strategy, risk profile and other principal terms of the Top Fund.
24. The portfolio of the Underlying Fund consists primarily of publicly traded securities. The 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 the Top Fund in the 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.
25. The Underlying Fund will not invest all or substantially all of its assets in any other investment fund, except as permitted in condition (c) below.
26. Each current investor in the Top Fund has received disclosure in writing of the following:
(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 to 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) the fees, expenses and any performance or incentive distributions payable by the Underlying Fund that the Top Fund invests in; and
(e) that investors are entitled to receive from the Filer, on request, a copy of the offering memorandum or other similar disclosure document of the Underlying Fund (if available)
(collectively, the Previous Fund-on-Fund Disclosure).
27. Securityholders of the Top Fund have received, and will continue to receive, on request and free of charge, a copy of the Top Fund's annual audited and interim unaudited financial statements. Such financial statements disclose, and will continue to disclose, the Top Fund's holdings of securities of the Underlying Fund.
28. Securityholders of the Top Fund will receive, on request and free of charge, a copy of any then current disclosure document of the Underlying Fund, if available, and a copy of the annual audited financial statements and interim financial statements of the Underlying Fund.
29. The Top Fund and the Underlying Fund will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and will otherwise comply with the requirements of NI 81-106, as applicable.
30. The Top Fund has the same valuation and redemption dates as the Underlying Fund. The NAV of each Fund is determined, and redemptions may be made, on the last business day of each month (or such other days as the Filer may permit).
31. The assets of the Underlying Fund (and the assets of the Top Fund only if the Top Fund holds securities other than securities of the Underlying Fund) are 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.
Generally
32. The amounts invested from time to time in the Underlying Fund by the Top Fund may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, the Top Fund could become a substantial security holder of the Underlying Fund.
33. In the absence of the Exemption Sought, the Top Fund would be precluded from purchasing and holding more than 20% of the outstanding voting securities of the Underlying Fund due to the investment restrictions contained in the Legislation.
34. The Top Fund's investments in the 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 Exemption Sought is granted provided that:
(a) securities of the Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106;
(b) the investment by the Top Fund in the Underlying Fund is compatible with the investment objectives of the Top Fund;
(c) the Top Fund will not purchase or hold securities of the Underlying Fund unless, at the time of the purchase of securities of the Underlying Fund, the Underlying Fund hold 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 the Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service;
(e) no sales fees or redemption fees are payable by the Top Fund in relation to its purchases or redemptions of securities of the Underlying Fund;
(f) the Filer will not cause the securities of the Underlying Fund held by the 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 the Top Fund, will be provided to investors in the Top Fund prior to the time of investment and will disclose the following (collectively, the New Fund-on-Fund Disclosure):
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 to 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. the fees, expenses and any performance or incentive distributions payable by the Underlying Fund that the Top Fund invests in;
e. 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
f. 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; and
(h) the Filer sends to each current securityholder of the Top Fund, within one month from the date of this decision, the New Fund-on-Fund Disclosure to the extent that it is different from the Previous Fund-on-Fund Disclosure.
"Christopher Portner"
Commissioner
Ontario Securities Commission
"Timothy Moseley"
Commissioner
Ontario Securities Commission