Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions - Relief granted from NI 31-103 to permit pooled top and bottom funds managed by the same manager to participate in a fund-on-fund structure – Each Top Fund is a class of a corporation and each bottom fund is a limited partnership – the general partner of each underlying fund is an affiliate of the portfolio adviser of the top and bottom funds – each Top Fund will invest all of its assets in a separate Underlying Fund - relief subject to standard conditions for fund-on-fund-structures.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements – section 13.5(2)(a) and 15.1
November 30, 2009
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 GENUITY FUND MANAGEMENT INC.
(the Filer)
AND
GFM 130/30 FUND CLASS
AND
GFM MARKET NEUTRAL FUND CLASS
DECISION
Background
The principal regulator in the Jurisdiction (the Decision Maker) has received an application from the Filer on its behalf and on behalf of GFM 130/30 Fund Class and GFM Market Neutral Fund Class (together, the First Top Funds) and other mutual fund share classes of Genuity Fund Corp. to be established by the Filer from time to time (together with the First Top Funds, the Top Funds), which will invest their assets in GFM 130/30 Fund L.P. and GFM Market Neutral Fund L.P. (together, the First Underlying Funds) and other limited partnerships which are not reporting issuers established, advised or managed by the Filer after the date hereof (together with the First Underlying Funds, the Underlying Funds), for a decision under the securities legislation of the principal regulator (the Legislation) exempting the Top Funds and the Filer from:
(a) the restriction in the Legislation which prohibits a mutual fund from knowingly making an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder (the Related Issuer Relief);
(b) the restriction in the Legislation which prohibits a mutual fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) above (also the Related Issuer Relief); and
(c) the restriction in the Legislation which prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase a security of an issuer in which a responsible person or an associate of a responsible person is a partner, officer or director unless this fact is disclosed to the client, and the written consent of the client to the purchase is obtained before the purchase (the Related Party 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) in respect of the Related Issuer Relief, 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:
Manager
The Filer is a corporation established under the laws of Ontario with its head office located in Toronto, Ontario.
The Filer is registered with the Ontario Securities Commission as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer.
The Filer will be the investment fund manager and portfolio manager for the Underlying Funds under the terms of one or more management agreements (the Management Agreements).
The Filer will be the investment fund manager and portfolio manager for the Top Funds. As such, the Filer will be responsible for managing the business and affairs of the Top Funds and for making investment decisions on behalf of the Top Funds. Furthermore, the Filer will assist in the marketing of the Top Funds, and will act as a distributor of securities of the Top Funds not otherwise sold through another registered dealer.
The Filer is not a reporting issuer in any jurisdiction and is not in default of securities legislation in any province or territory of Canada. The Top Funds and the Underlying Funds are not in default of securities legislation in any province or territory of Canada.
Underlying Funds
Each Underlying Fund will be a limited partnership established under the laws of Ontario by a declaration of limited partnership. Each Underlying Fund’s sole limited partner will be a Top Fund.
The general partner of each Underlying Fund (each, a General Partner and together, the General Partners) will be an affiliate of, or otherwise related to, the Filer and will delegate to the Filer responsibility for managing the ongoing business and administrative affairs of the respective Underlying Fund pursuant to the Management Agreements. One or more of the officers and directors of the Filer will also be an officer and director of each general partner of an Underlying Fund.
Each of the Underlying Funds will have a separate investment objective, strategies and/or restrictions.
Securities of the Underlying Funds will be issued pursuant to prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions. Securities of the Underlying Funds will only be held by the Top Funds.
The Underlying Funds will not be reporting issuers in any jurisdiction of Canada.
Top Funds
The Top Funds will be sold in private placement markets pursuant to prospectus exemptions and each Top Fund will not be a reporting issuer in any jurisdiction.
Each Top Fund will be a class of shares of Genuity Fund Corp., a mutual fund corporation to be incorporated under the laws of Ontario in or around December, 2009.
Genuity Fund Corp. will be formed for the purpose of providing shareholders with the opportunity to invest in different investment strategies by the purchase of shares in one or more Top Funds, and the ability to switch their investments in whole or in part from time to time from one strategy to another. Each separate strategy will be offered through the offering of a separate Top Fund. The assets in each Top Fund will be held in a separate Underlying Fund.
Fund-on-Fund Structure
The Top Funds will allow investors to obtain indirect exposure to the investment portfolios of the Underlying Funds and their investment strategies through, primarily, direct investments by a Top Fund in securities of an Underlying Fund (the “Fund-on-Fund Structure”). The Fund-on-Fund Structure is being created so that the different investment strategies will be implemented through separate limited partnerships. In this way, the potential liabilities associated with each investment strategy within a limited partnership will be kept separate from the other investment strategies within the other limited partnerships.
Genuity Fund Corp. is being formed as a mutual fund corporation for the purpose of accessing a broad base of investors, including registered retirement savings plans, and to allow investors the ability to switch their investments in whole or in part from time to time from one strategy to another in a tax-efficient manner.
For the purpose of implementing the Fund-on-Fund Structure, the Filer shall ensure that:
a. the arrangements between or in respect of the Top Funds and the Underlying Funds are such as to avoid the duplication of management fees or incentive fees;
b. 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;
c. since a Top Fund will be the sole owner of units of an Underlying Fund, the Filer will arrange for the securities of the Underlying Fund held by a Top Fund to be voted by the beneficial owners of securities of the Top Fund (the Shareholders);
d. the offering memorandum of the Top Funds will describe the Top Funds’ intent, or ability, to invest in securities of the Underlying Funds and that the Filer is the investment adviser for the Underlying Funds; and
e. financial information which investors would be given if they were invested directly in the Underlying Funds will be provided by the Top Funds.
- Because a Top Fund will be the sole limited partner of each Underlying Fund, such Top Fund will become a substantial security holder of the Underlying Fund.
Generally
In the absence of this Decision, the Top Funds would be precluded from implementing the Fund-on-Fund Structure due to certain investment restrictions contained in the Legislation.
The Fund-on-Fund Structure represents the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Top Funds.
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 Related Party Relief is granted provided that, in connection with the Top Funds:
(a) securities of the Top Funds are distributed in Canada solely pursuant to exemptions from the prospectus requirements;
(b) the investment by the Top Funds in the Underlying Funds is compatible with the fundamental investment objectives of the Top Funds;
(c) 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;
(d) 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;
(e) the Filer will arrange for the securities of the Underlying Fund held by a Top Fund to be voted by the Shareholders; and
(f) if available, the offering memorandum (or other similar document) of the Top Funds will disclose:
(i) that the Top Funds may purchase units of the Underlying Funds;
(ii) the fact that the Filer is the investment adviser to both the Top Funds and the Underlying Funds; and
(iii) that substantially all of the net assets of the Top Funds will be invested in securities of Underlying Funds.
The Related Party Relief
“Darren McKall”
___________________________
Darren McKall
Assistant Manager, Investment Funds
Ontario Securities Commission
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions - Relief granted from NI 31-103 to permit pooled top and bottom funds managed by the same manager to participate in a fund-on-fund structure – Each Top Fund is a class of a corporation and each bottom fund is a limited partnership – the general partner of each underlying fund is an affiliate of the portfolio adviser of the top and bottom funds – each Top Fund will invest all of its assets in a separate Underlying Fund - relief subject to standard conditions for fund-on-fund-structures.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements – section 13.5(2)(a) and 15.1