Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from the mutual fund self-dealing restrictions in the Securities Act (Ontario) and the conflicts of interest provisions in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to allow pooled funds to invest in securities of underlying funds under common management – relief subject to certain conditions.
Applicable Legislative Provisions
Securities Act (Ontario) R.S.O. 1990, c. S.5, as amended, sections 111(2)(b), 111(2)(c), 111(3), 113, 117(1)(a), 117(1)(d) and 117(2). National Instrument 31–103 – Registration Requirements, Exemptions, and Ongoing Registrant Obligations, sections 13.5(2)(a), 15.1.
November 30, 2011
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
SEAMARK ASSET MANAGEMENT INC.
(the Filer)
AND
IN THE MATTER OF
SEAMARK POOLED MONEY MARKET FUND, SEAMARK POOLED BALANCED FUND, SEAMARK POOLED CANADIAN BOND FUND, SEAMARK POOLED CANADIAN EQUITY FUND, SEAMARK POOLED U.S. EQUITY FUND, SEAMARK POOLED INTERNATIONAL EQUITY FUND, SEAMARK POOLED FOREIGN EQUITY FUND AND SEAMARK POOLED CANADIAN SMALL CAP FUND
(the Pooled Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on its own behalf and on behalf of the Pooled Funds, and any other investment fund which is not a reporting issuer under the Securities Act (Ontario) (the Act) established and managed by the Filer after the date hereof (the Future Pooled Funds, together with the Pooled Funds, the Top Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption (the Exemption Sought) from:
- the restriction contained in paragraphs 111(2)(b) and 111(2)(c) and subsection 111(3) of the Act that prohibits a mutual fund in Ontario from knowingly making and holding an investment:
(i) 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, or
(ii) 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,
(the Related Issuer Restriction Relief);
the reporting requirements contained in sub-paragraphs 117(1)(a) and 117(1)(d) of the Act that requires the filing of a report relating to a purchase or sale of securities between a mutual fund and any related person or company, or any transaction in which, by arrangement other than an arrangement relating to insider trading in portfolio securities, a mutual fund is a joint participant with one or more of its related persons or companies, in respect of each mutual fund to which it provides services or advice, within 30 days after the end of a month in which it occurs (the Reporting Requirement Relief); and
the restriction in sub-clause 13.5(2)(a)(ii) of National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that 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 securities of an issuer in which a responsible person or an associate of the responsible person is a partner, officer or director unless the fact is disclosed to the client and written consent of the client to the purchase is obtained before the purchase (the Consent Restriction 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia and Newfoundland and Labrador (the Non-Principal Passport Jurisdictions).
Representations
The decision is based on the following facts represented by the Filer:
The Filer
The Filer is a corporation incorporated under the laws of Canada. The Filer is a wholly-owned subsidiary of Matrix Asset Management Inc. (Matrix), a reporting issuer. The common shares of Matrix are listed on The Toronto Stock Exchange.
The head office of the Filer is located in Nova Scotia. The Filer has selected Ontario as the principal regulator because the Related Issuer Restriction Relief and the Reporting Requirement Relief is only required in Ontario. The Consent Restriction Relief is required in all the Non-Principal Passport Jurisdictions.
The Filer is registered as an investment fund manager in Nova Scotia and a portfolio manager and exempt market dealer in each of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador.
The Filer is not a reporting issuer in any jurisdiction of Canada and is not in default of securities legislation in any province or territory of Canada.
The Filer or an affiliate is, or will be, the manager and portfolio manager for the Top Funds and the Underlying Funds (defined below).
Top Funds
Each of the Top Funds is, or will be, a trust under the laws of the Province of Ontario, the securities of which are, or will be, offered for sale on a private placement basis pursuant to available prospectus exemptions under National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106). Currently, the only Top Funds are the Pooled Funds.
Each of the Top Funds is, or will be, a “mutual fund” as defined in securities legislation of the jurisdictions in which the Top Funds are distributed.
None of the Top Funds is, or will be, a reporting issuer in any jurisdiction of Canada.
None of the Top Funds is in default of any securities legislation of any jurisdiction in Canada.
Subject to obtaining the Exemption Sought, the Top Funds may invest (Fund-on-Fund Investing) all, or a certain portion, of their assets in other investment funds established and managed by the Manager, or an affiliate of the Manager, to which National Instrument 81-102 – Mutual Funds (NI 81-102) applies (the Underlying NI 81-102 Funds) or the Pooled Funds (the Underlying Pooled Funds, together with the NI 81-102 Funds, the Underlying Funds).
Underlying Funds
Each of the Underlying NI 81-102 Funds is, or will be, an open-ended mutual fund trust established under the laws of the Province of Ontario or of Canada or a mutual fund corporation established under the laws of the Province of Ontario or of Canada. The securities of the Underlying NI 81-102 Funds are offered for sale pursuant to a simplified prospectus and annual information form. Currently, the only Underlying NI 81-102 Funds are the Matrix group of mutual funds.
Each of the Underlying NI 81-102 Funds is, or will be, subject to NI 81-102, including restrictions with respect to investing in other mutual funds.
Each of the Underlying Pooled Funds is, or will be, a trust under the laws of the Province of Ontario, the securities of which are, or will be, offered for sale on a private placement basis pursuant to available prospectus exemptions under NI 45-106. Currently, the only Underlying Pooled Funds are the Pooled Funds.
Each of the Underlying Pooled Funds is, or will be, a “mutual fund” as defined in the securities legislation of the jurisdictions in which the Underlying Pooled Funds are distributed.
Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.
The Underlying Funds will invest primarily in publicly traded equity securities, fixed income securities or cash equivalent securities, as applicable pursuant to their investment objectives, strategies and/or restrictions.
Each of the Underlying NI 81-102 Funds is, or will be, a reporting issuer in each of the provinces of Canada. None of the Underlying Pooled Funds is, or will be, a reporting issuer in any jurisdiction of Canada.
None of the Underlying Funds is in default of any securities legislation of any jurisdiction in Canada.
Fund on Fund Investing
Investing in an Underlying Fund will allow the Top Funds to achieve their investment objectives in the most cost efficient way and will not be detrimental to the interests of other securityholders of the Underlying Funds.
An investment by a Top Fund in an Underlying Fund 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.
An investment by a Top Fund in an Underlying Fund is, or will be, compatible with the investment objectives of the Top Fund.
The amounts invested from time to time in an Underlying Fund by a Top Fund may exceed 20% of the outstanding voting securities of the Underlying Fund. 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 to the Underlying Funds by virtue of the common management by the Filer or an affiliate or related party of the Filer.
Since the Pooled Funds do not offer their securities under a simplified prospectus, they are not subject to NI 81-102 and therefore the Pooled Funds are unable to rely upon the exemption codified under sub-section 2.5(7) of NI 81-102.
The investments held by the Underlying Pooled Funds are considered to be liquid.
The Top Funds and the Underlying Funds have matching valuation dates and are valued daily.
Securities of both the Top Funds and the Underlying Funds can be redeemed on any valuation date.
A Top Fund will not purchase or hold securities of an Underlying Fund unless:
(a) at the time of the purchase of securities of the Underlying Fund, the Underlying Fund holds no more than 10% of the market value of its net assets in securities of other mutual funds, or
(b) the Underlying Fund:
(i) links its performance to the performance to one other mutual fund, i.e. a clone fund,
(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 and issued by a mutual fund.
The Filer will ensure that the arrangements between or in respect of a Top Fund and an Underlying Fund in respect of Fund-on-Fund Investing avoid the duplication of management fees and incentive fees. The Filer and its affiliates do not charge, and will not charge, any management fee or incentive fee to the Top Funds. Each client of the Filer that invests in any of the Top Funds enters into an agreement under which the client pays a fee to the Filer directly in respect of all assets of the client under management by the Filer.
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.
Prior to time of purchase of securities of a Top Fund, a purchaser will be provided with a copy of the Top Fund’s offering memorandum, where available, as well as disclosure about the relationships and potential conflicts of interest between the Top Fund and the Underlying Funds.
The Filer will provide to investors in a Top Fund written disclosure (which may include disclosure in an offering memorandum, where available, or other disclosure document of a Top Fund) which sets out:
(a) the intent of the Top Fund to invest its assets in securities of the Underlying Funds;
(b) that the Underlying Funds are managed by the Filer or an affiliate of the Filer;
(c) the approximate percentage of net assets of the Top Fund that the Top Fund intends to invest in securities of the Underlying Funds; and
(d) the process or criteria used to select the Underlying Funds.
Each of the Pooled Funds and the Underlying NI 81-102 Funds will prepare annual 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. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements.
The securityholders of a Top Fund will receive, on request, a copy of the prospectus, offering memorandum or other similar document, if available, and the audited financial statements and interim financial statements of any Underlying Fund in which the Top Fund invests.
The Filer will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders 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 resolution, in which case the Filer will arrange for all the securities the Top Fund holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund.
Any investment by a Top Fund in securities of an Underlying Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund and the Underlying Fund.
In the absence of the Related Issuer Restriction Relief, the Top Funds would be precluded from implementing Fund-on-Fund Investing. Since the Pooled Funds do not offer their securities under a simplified prospectus, they are not subject to NI 81-102 and therefore the Pooled Funds are unable to rely upon the exemption codified under sub-section 2.5(7) of NI 81-102.
Unless the Reporting Requirement Relief is granted, to the extent that a Top Fund would be a “related person or company” of an Underlying NI 81-102 Fund, the Filer would have to report to the regulator every sale of securities made from that Underlying NI 81-102 Fund to the Top Fund.
In the absence of the Consent Restriction Relief, each Top Fund would be precluded from investing in an Underlying Fund, unless the consent of each investor in the Top Fund is obtained, since the Filer or an officer and/or director of the Filer (considered a responsible person within the meaning of the applicable provisions of NI 31-103) may also be an officer and/or director of, or may person a similar function for or occupy a similar position with the Underlying 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 Exemption Sought is granted provided that:
(a) securities of the Top Funds are distributed in Canada only under an exemption from the prospectus requirements in NI 45-106;
(b) the investment by a Top Fund in an Underlying Fund is compatible with the fundamental objectives of the Top Fund;
(c) no management fees or incentive fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service;
(d) no sales or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of the securities of the Underlying Funds;
(e) a Top Fund will not purchase or hold securities of an Underlying Fund unless:
(i) at the time of the purchase of securities of the Underlying Fund, the Underlying Fund holds no more than 10% of the market value of its net assets in securities of other mutual funds, or
(ii) the Underlying Fund:
A. links its performance to the performance to one other mutual fund, i.e. a clone fund,
B. purchases or holds securities of a “money market fund” as defined by NI 81-102, or
C. purchases or holds securities that are “index participation units” as defined by NI 81-102 and issued by a mutual fund.
(f) the Filer does not vote any of the securities a Top Fund holds in an Underlying Fund, but the Filer may, if it chooses, arrange for all of the securities of the Underlying Funds held by Top funds to be voted by the beneficial owners of units of the Top Funds;
(g) the offering memorandum, where available, or other disclosure document of a Top Fund will disclose:
(i) the intent of the Top Fund to invest its assets in securities of the Underlying Funds;
(ii) that the Underlying Funds are managed by the Filer or an affiliate of the Filer;
(iii) the approximate percentage of net assets of the Top Fund that the Top Fund intends to invest in securities of the Underlying Funds; and
(iv) the process or criteria used to select the Underlying Funds;
(h) prior to the time of investment, securityholders of a Top Fund will be provided with disclosure with respect to each person, if any, that has a significant interest in the Underlying Fund through investments made in securities of such Underlying Fund. Securityholders in a Top Fund will also be advised of the potential conflicts of interest which may arise from such relationships. The foregoing disclosure will be contained in any offering memorandum prepared in connection with a distribution of securities of the Top Fund, or if no offering memorandum is prepared, in another document provided to investors of the Top Fund.
“Darren McKall”
Darren McKall Manager, Investment Funds Branch Ontario Securities Commission
“Vern Krishna”
“James E.A. Turner”
Name: Vern Krishna Title: Commissioner Ontario Securities Commission
Name: James E.A. Turner Title: Vice-Chair Ontario Securities Commission