Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions - exemptions granted from the mutual fund conflict of interest investment restrictions of the Securities Act (Ontario) and self-dealing prohibition of National Instrument 31-103 Registration Requirements and Exemptions to permit pooled funds to invest with fund-on-fund structure in other pooled funds, including limited partnerships.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c.S.5, as am., sections 111(2)(b), 111(2) (c) (i) and (ii) , 111(3) and 113. National Instrument 31-103 Registration Requirements and Exemptions – section 13.5(2)(a) and 15.1 111(3) and 113.
October 26, 2010
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 Seven Seas Capital Management Inc. (the Filer)
AND
SEVEN SEAS CAPITAL APPRECIATION FUND
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer on its behalf and on behalf of Seven Seas Capital Appreciation Fund (the First Top Fund) and other mutual funds to be established by the Filer from time to time (together with the First Top Fund, the Top Funds), none of which are reporting issuers, that will invest their assets in the Seven Seas Capital Appreciation Fund LP (the First Underlying Fund) and other investment funds which are not reporting issuers, established, advised and managed by the Filer after the date hereof (together with the First Underlying Fund, the Underlying Funds), for a decision under the securities legislation of the Jurisdiction 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 or holding 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;
(b) the restriction in the Legislation which prohibits a mutual fund from knowingly making or holding an investment in an issuer in which any officer or director of the mutual fund, its management company or distribution company or an associate of any of them has a significant interest;
(c) the restriction in the Legislation which prohibits a mutual fund from knowingly making or holding an investment in an issuer in which any person or company who is a substantial security holder of the mutual fund, its management company or its distribution company has a significant interest; and
(d) 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 an officer or a director unless the specific fact is disclosed to the client and the written consent to the investment is obtained before the purchase.
(Paragraphs (a), (b) and (c) together are referred to as the Related Issuer Relief; paragraph (d) is 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;
(b) in respect of the Related Issuer Relief, 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; and
(c) in respect of the Related Party Relief, Filer has provided notice that Subsection 4.7(1) of MI 11-102 is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon Territory (together with the Jurisdiction, the Relief Jurisdictions).
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 Manager
The Filer is a corporation incorporated under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
The Filer is registered as a portfolio manager, exempt market dealer and investment fund manager in the Province of Ontario and has applied for registration as an exempt market dealer in the Provinces of British Columbia, Alberta and Québec.
The Filer will be the portfolio manager for the Top Funds and the Underlying Funds (together, the Funds) and, as such, will be responsible for making investment decisions on behalf of the Funds. Furthermore, the Filer assists or will assist in the marketing of the Funds and acts, or will act, as a distributor of securities of the Funds not otherwise sold through another registered dealer.
The Filer will be the investment fund manager of each Top Fund and of each Underlying Fund.
The Top Funds
Each of the Top Funds is or will be organized under the laws of Ontario and is or will be a “mutual fund in Ontario” under the Ontario Act and a “mutual fund” under the Securities Act (Alberta).
The Top Funds will not be reporting issuers in any Jurisdiction. Securities of each of the Top Funds will only be distributed pursuant to exemptions from the prospectus requirement.
None of the Filer, the Top Funds nor the Underlying Funds is or will be in default of securities legislation in any Jurisdiction.
The Fund-on-Fund Structure
Each Top Fund will allow investors in the Top Fund to obtain indirect exposure to the investment portfolio of one or more Underlying Funds and its investment strategies primarily through direct investments by the Top Fund in securities of the Underlying Fund or Funds.
Each Top Fund will manage its investments in an Underlying Fund with discretion to buy and sell securities of the Underlying Fund, selected in accordance with the Top Fund’s investment objective, as well as to alter its holdings in any Underlying Fund in which it invests.
Investing in the Underlying Funds will allow the Top Funds to achieve their investment objectives in the most cost-effective way. Such an investment can provide greater diversification for a Top Fund in particular asset classes, on a less expensive basis, than investing directly in the securities held by the applicable Underlying Fund. This investment structure will also allow investors with smaller investments to have access to a larger variety of investments than might otherwise be available.
Securities of an Underlying Fund will be acquired by a Top Fund under an exemption from the prospectus requirement and the Filer will act as the dealer in respect of the trade.
The investment objectives and restrictions applicable to a Top Fund will be described in the declaration of trust or trust agreement of the Top Fund, as it may be amended or restated from time to time (the Declaration of Trust).
The Declaration of Trust will also describe the fees, compensation and expenses payable by a Top Fund, the calculation of net asset value, distributions, the powers and duties of the investment fund manager and all other matters material to the Top Fund, including the fact that in pursuing its investment objectives, the Top Fund may invest in one or more Underlying Funds as an investment strategy.
Each Top Fund will also have an offering memorandum (Offering Memorandum) that describes the investment objectives and restrictions, fees, compensation and expenses payable by the Top Fund, the calculation of net asset value, distributions, the powers and duties of the investment fund manager, the relationship that the investment fund manager has with the Top Fund and each Underlying Fund, and all other matters material to the Top Fund, including the fact that in pursuing its investment objectives a Top Fund may invest in one or more Underlying Funds as an investment strategy.
Purchasers of securities of a Top Fund are expected to subscribe for securities of the Top Funds pursuant to a subscription agreement (the Subscription Agreement). From time to time, purchasers of securities of a Top Fund may instead enter into an investment management agreement (the IMA) with the Filer that provides authority to the Filer to invest the purchaser’s assets in one or more Top Funds and to rebalance such investment, when there is an investment in more than one Top Fund, from time to time.
If a purchaser invests in securities of a Top Fund under an IMA, then prior to the execution of the IMA, the purchaser will be provided with details about the Top Fund and disclosure respecting relationships and potential conflicts of interest, as well as fees that are charged at the managed account level and those charged to the Funds, and advised that a copy of the Declaration of Trust or other constating document is available on request.
If a purchaser invests in securities of a Top Fund pursuant to a Subscription Agreement, then prior to the execution of Subscription Agreement, the purchaser will be provided with a copy of the Offering Memorandum or, if no offering memorandum is prepared in respect of the Top Fund, will be provided with details about the Top Fund and given disclosure respecting relationships and potential conflicts of interest, as well as fees that are charged at the managed account level and those charged to the Funds, and advised that a copy of the Declaration of Trust or other constating document is available on request.
Clients who hold securities of a Top Fund will receive an account statement, prepared and delivered in accordance with National Instrument 31-103 Registration Requirements and Exemptions, showing the client’s holdings of securities of a Top Fund.
Each of the Top Funds 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 applicable to them. Each of the Underlying Funds will prepare annual audited financial statements and interim unaudited financial statements. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund.
Security holders of a Top Fund will receive, on request, a copy of the offering memorandum of the Underlying Funds, if available, and the audited annual financial statements and interim unaudited financial statements of any Underlying Fund in which the Top Fund invests.
There will be no sales fees or redemption fees payable by a Top Fund in respect of an acquisition, disposition or redemption of securities of an Underlying Fund by the Top Fund other than brokerage fees incurred on the purchase or disposition of securities of an Underlying Fund that are purchased or disposed of in the secondary market.
The Filer will ensure that the arrangements between or in respect of a Top Fund and an Underlying Fund are such as to avoid the duplication of management fees or incentive fees.
The investment fund manager of a Top Fund will not cause the securities of an Underlying Fund held by the Top Fund to be voted at any meeting of the security holders of an Underlying Fund, unless the Top Fund is the sole owner of the securities of the Underlying Fund at the time of the meeting or the effective date of the written resolution.
A Top Fund may become a substantial security holder of an Underlying Fund in a number of circumstances, including where the Underlying Fund is an appropriate investment for the Top Fund for tax, cost and administrative reasons. In the absence of the Decision, a Top Fund may be prohibited from investing in such Underlying Fund.
An officer or director of the Filer or of a Top Fund (or an associate of any of them), or a person who is a substantial security holder of the Filer or of a Top Fund, may have a significant interest in an Underlying Fund in a number of circumstances, including if such a person provides the seed capital for an Underlying Fund or an Underlying Fund is an appropriate investment for such a person as principal. In the absence of the Decision, a Top Fund may be prohibited from investing in such Underlying Fund.
The Fund-on-Fund Structure may also result in a situation where one or more officers and/or directors of the Filer (considered a ‘responsible person’ within the meaning of the Legislation) is or may also be an officer and/or director of the Underlying Fund, including, for greater certainty, an officer and/or director of the general partner of the Underlying Fund where the Underlying Fund is a limited partnership.
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 judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund.
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 Issuer Relief and the Related Party Relief is granted provided that, in connection with each Top Fund:
(a) securities of the Top Fund are distributed in Canada’s private placement markets solely pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions;
(b) the investment by the Top Fund in each Underlying Fund is compatible with the fundamental investment objectives of the relevant Top Fund;
(c) no management fees or incentive fees are payable by the 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 the Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund;
(e) each Top Fund will not vote any of the securities it holds of an Underlying Fund, except that the Top Fund may, if the Filer so chooses, arrange for the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Top Fund; and
(f) the offering memorandum (or other similar document) of the Top Fund will disclose:
(i) that the Top Fund may purchase units of the Underlying Funds;
(ii) the fact that the Filer is the portfolio manager to both the Top Fund and the Underlying Fund; and
(iii) the approximate or maximum percentage of net assets of the Top Fund that is intended be invested in securities of the Underlying Fund.
The Related Party Relief
_”Vera Nunes”
Vera Nunes, Assistant Manager, Investment Funds Branch Ontario Securities Commission
The Related Issuer Relief
“Kevin J. Kelly” “Wes. M. Scott”
Commissioner Commissioner Ontario Securities Commission Ontario Securities Commission