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 – each top fund is sole investor in corresponding underlying fund – 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 11, 2017
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
HILLMOUNT CAPITAL MANAGEMENT INC.
IN THE MATTER OF
HILLMOUNT MORTGAGE FUND
(the Initial Top Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of each of the Filer, 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) which is advised or managed by the Filer, or its affiliate, after the date hereof (the Future Top Funds and, together with the Initial Top Fund, the Top Funds) for a decision under the Legislation in respect of the Fund-on-Fund Structure (as defined below) exempting the Filer and the Top Funds from:
(a) the restriction in the Legislation which prohibits an investment fund from knowingly making an investment in any 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 Legislation which 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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation established under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
2. The Filer is registered with the Ontario Securities Commission as an investment fund manager, adviser in the category of portfolio manager and dealer in the category of exempt market dealer.
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 Initial Top Fund is an investment trust established under the laws of the Province of Ontario. Each Future Top Fund will be organized as a trust established under the laws of the Province of Ontario or of another jurisdiction of Canada.
5. Each Top Fund will be a “mutual fund” for the purposes of the Legislation.
6. None of the Top Funds will be a reporting issuer in any jurisdiction of Canada.
7. The Filer is, or will be, the investment fund manager and the portfolio manager of each Top Fund.
8. The Filer will be the trustee of the Initial Top Fund. The Filer or a third party will act as trustee of a Top Fund.
9. Securities of the Top Funds will be offered on a private placement basis to qualified investors pursuant to available exemptions from the prospectus requirements under Canadian securities legislation.
10. The Initial Top Fund will invest all or substantially all of its assets in Hillmount Mortgage Fund LP (the Initial Underlying Fund).
11. Each Future Top Fund will also invest all or substantially all of its assets in an Underlying Fund (as defined below).
12. The investment objective of each Top Fund will be the same as the current investment objective of its corresponding Underlying Fund and the strategy for each Top Fund will be to invest substantially all of its assets in its Underlying Fund.
13. The Initial Top Fund is not in default of securities legislation in any province or territory of Canada.
14. The Initial Underlying Fund is not, and no investment fund that is managed or advised by the Filer in the future that serves as an underlying fund for a Top Fund (the Future Underlying Funds, and together with the Initial Underlying Fund, the Underlying Funds) will be, a reporting issuer in any province or territory of Canada.
15. The Filer is, or will be, the investment fund manager and the portfolio manager of the Initial Underlying Fund and each of the Future Underlying Funds.
16. Each Underlying Fund will be a “mutual fund” for the purposes of the Legislation.
17. Each Underlying Fund will be an open-ended limited partnership established under the laws of the Province of Ontario or of another jurisdiction of Canada.
18. The investment objective of the Initial Underlying Fund is to generate monthly interest income through investments in short-term, low- to mid-yield mortgages on real property located in Canada.
19. Securities of each Underlying Fund will be sold solely to its corresponding Top Fund pursuant to available exemptions from the prospectus requirements under Canadian securities legislation.
20. The Initial Underlying Fund will not have any investors other than the Initial Top Fund. Each Future Underlying Fund will not have any investors other than its applicable Top Fund. No offering memorandum or other similar disclosure document will be prepared for an Underlying Fund.
21. The sole general partner of the Initial Underlying Fund will be an affiliate of the Filer. Each Future Underlying Fund will have one general partner, which will be an affiliate of the Filer. The general partner of each Underlying Fund, including the Initial Underlying Fund, will have only a nominal investment in the Underlying Fund. A nominal investment is required to be made by the general partner to satisfy the requirements of the organization of the Underlying Funds as limited partnerships.
22. Each Underlying Fund will have separate investment objectives, strategies and/or restrictions.
23. No management fee or incentive fee is payable by an Underlying Fund to the Filer or to the general partner of the Underlying Fund.
24. As a limited partnership, securities of the Initial Underlying Fund are not qualified investments for 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).
25. The Top Funds will be formed as trusts for the purpose of accessing a broader base of investors, including TFSAs, Tax Deferred Plans and other investors that may not wish to or be able to invest directly in a limited partnership. The Initial Underlying Fund will hold mortgage investments and the Initial Top Fund will invest all or substantially all of its assets in the Initial Underlying Fund so that it will remain eligible to be held by Tax Deferred Plans.
26. Each Top Fund will be created by the Filer to allow investors in the Top Fund to obtain indirect exposure to the investment portfolio of the applicable Underlying Fund and its investment strategies through investing all or substantially all of the assets of the Top Fund directly in securities of the Underlying Fund (the Fund-on-Fund Structure).
27. The Fund-on-Fund Structure will also permit the Filer to manage a single portfolio of assets for investors who wish to invest through TFSAs or Tax Deferred Plans and those who do not.
28. Managing a single pool of assets provides economies of scale, allowing the Top Funds to achieve their investment objectives in a cost efficient manner.
29. The portfolio of the Initial Underlying Fund will consist primarily of illiquid assets (as defined in NI 81-102) as the Initial Underlying Fund will predominantly invest in short-term mortgages. The Initial Top Fund’s redemption provisions include a 60 day notice period which will provide the Filer with sufficient time to generate the proceeds needed to fund redemptions of the Initial Underlying Fund. In addition, the Filer has the ability to hold back funds from maturing mortgages rather than renewing or reinvesting such mortgages, as required, to meet redemption needs. As such, while the assets of the Initial Top Fund are considered “illiquid assets” under NI 81-102, the short-term nature of the mortgages held by the Initial Underlying Fund (along with the additional steps noted above that may be taken by the Filer) makes the portfolio of the Initial Underlying Fund sufficiently liquid to fund redemptions of the Initial Top Fund.
30. Future Underlying Funds may invest in various assets, including mortgages and assets that are “illiquid assets” under NI 81-102. In all cases, the Filer will manage the portfolio of each Underlying Fund having regard to the redemption features of the corresponding Top Fund to ensure that there is sufficient liquidity to meet redemption requests from securityholders of the Top Fund.
31. The amounts invested, from time to time, in an Underlying Fund by its corresponding Top Fund will exceed 20% of the outstanding voting securities of the applicable Underlying Fund. Accordingly, each Top Fund will be a substantial securityholder of an Underlying Fund.
32. No Underlying Fund will be a Top Fund in a Fund-on-Fund Structure.
33. Securities of the Top Funds and their corresponding Underlying Funds will have matching monthly redemption dates and matching monthly valuation dates.
34. The Fund-on-Fund Structures involving Future Top Funds and Future Underlying Funds will be similarly structured to that of the Initial Top Fund and Initial Underlying Fund in that (a) future structures will also reflect trust-on-limited-partnership arrangements, where a Future Top Fund, formed as a trust, invests all or substantially all of its assets in an Underlying Fund that is a Canadian entity formed as a limited partnership; (b) there will be no investors in a Future Underlying Fund other than its corresponding Future Top Fund; and (c) there will be only one general partner of a Future Underlying Fund holding a nominal interest in the Future Underlying Fund.
35. The Top Funds and Underlying Funds will prepare annual audited financial statements and interim financial reports 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 applicable to a “mutual fund in Ontario”, as defined in the Securities Act (Ontario).
36. The assets of each Underlying Fund will be, and the assets of each Top Fund (to the extent a Top Fund holds securities other than securities of an Underlying Fund) will be held by a custodian that meets the qualifications of section 6.2 of NI 81-102 (for assets held in Canada) or a custodian that meets the qualifications of section 6.3 of NI 81-102 (for assets held outside Canada) except that such custodian’s financial statements may not be publicly available.
37. In the absence of the Requested Relief, each Top Fund would be prohibited from becoming a substantial securityholder of its Underlying Fund.
38. Each investment by a Top Fund in an Underlying Fund represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund. The “responsible persons” of the Filer with respect to the Fund-on-Fund Structure include the registered advising representatives of the Filer and the executive officers of the Filer.
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 a Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirement under applicable securities legislation;
(b) the investment by a Top Fund in an Underlying Fund is consistent with the fundamental investment objectives of the Top Fund;
(c) a Top Fund is the sole limited partner of an Underlying Fund;
(d) the general partner of an Underlying Fund has no more than a nominal investment in the Underlying Fund;
(e) an Underlying Fund complies with the provisions of NI 81-106 that apply to a “mutual fund in Ontario” as defined in the Securities Act (Ontario);
(f) an Underlying Fund does not purchase or hold securities of other investment funds;
(g) 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;
(h) no sales fee or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund;
(i) the Filer does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the holders of such securities, and will instead arrange for the securities the Top Fund holds of an Underlying Fund to be voted by the beneficial owners of the securities of the Top Fund, who are not the Filer or an officer, director or substantial securityholder of the Filer ;
(j) a disclosure document, including an offering memorandum where available, of a Top Fund will be provided to each investor in a Top Fund prior to the time of the investor’s investment, and will disclose:
(i) that the Top Fund will purchase securities of an applicable identified Underlying Fund;
(ii) that the Top Fund will invest all, or substantially all, of its assets in securities of the Underlying Fund;
(iii) that the Filer is the investment fund manager and portfolio manager of each of the Top Fund and the Underlying Fund;
(iv) the fees, expenses and any performance or special incentive distributions payable by the Underlying Fund and the Top Fund; and
(v) that investors are entitled to receive from the Filer, on request and free of charge, the annual audited financial statements and interim financial reports relating to the Underlying Fund in which the Top Fund invests; and
(k) the Filer shall annually inform investors in a Top Fund of their right to receive from the Filer, on request and free of charge, the annual audited financial statements and interim financial reports relating to the Underlying Fund in which the Top Fund invests.
Ontario Securities Commission
Ontario Securities Commission