Headnote NP 11-203 – Process for Exemptive Relief Application in Multiple Jurisdictions – Relief granted to commodity pools from s. 3.2(2)(a) of NI 81-104 – manager permitted to redeem seed capital investment in pool under conditions including that pool has received subscriptions from investors totalling at least $5 million.
Applicable Legislative Provisions
National Instrument 81-104 Commodity Pools, sections 3.2(2)(a) and 10.1.
October 10, 2012
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 ONE Financial Corporation (the Filer)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of each open-end commodity pool hereafter created and managed by the Filer (the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Funds from the requirements of section 3.2(2)(a) of National Instrument 81-104 – Commodity Pools (NI 81-104) to permit a Fund to redeem the required initial investment of $50,000 (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 section 4.7(1) of Multilateral Instrument 11-102 – Passport System (MI 11-102) is intended to be relied upon in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia the Northwest Territories, Nunavut, Prince Edward Island, Québec, Saskatchewan and the Yukon.
Interpretation
Terms defined in National Instrument 14-101 – Definitions have the same meaning if used in this decision, unless otherwise defined.
Representations
The Filer has launched the Funds, each of which is a class of shares of ONE Financial All-Weather Profit Family Inc. (the Mutual Fund Corporation), a mutual fund corporation incorporated pursuant to the laws of the province of Ontario, pursuant to a preliminary long form prospectus dated December 29, 2011 as amended and restated on July 13, 2012 (the Prospectus).
The Filer will be appointed manager of the Funds pursuant to a management agreement between the Filer and the Mutual Fund Corporation. The Filer is a corporation incorporated under the laws of the province of Ontario having its head office in Toronto, Ontario. The Filer is registered as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager under applicable Ontario securities laws. The Filer is not a reporting issuer in any province or territory of Canada.
None of the Filer, the Mutual Fund Corporation, any of the Funds or any of the Investment Pools (as defined below) is in default under any applicable securities legislation in any of the provinces or territories of Canada.
The Filer has filed the Prospectus in all of the provinces and territories of Canada pursuant to which it will offer various series (each, a Series) of shares of the Funds (the Offering). No securities of the Mutual Fund Corporation, the Funds or the Investment Pools will be listed for trading on a stock exchange.
The Funds will be mutual funds subject to the requirements of National Instrument 81-102 – Mutual Funds (NI 81-102). As the respective investment objectives and strategies of each of the Funds will permit it to use or invest in specified derivatives in a manner not permitted by NI 81-102, each Fund will be a commodity pool under applicable securities legislation.
With the exception of certain other requested relief, the investment practices of each of the Funds will comply with the requirements of Part 2 of NI 81-102, as modified by NI 81-104.
It is proposed that each Fund will initially seek to achieve its investment objectives by investing in the units of an investment pool trust (each, an Investment Pool and collectively, the Investment Pools), but may in the future seek exposure to the Investment Pools by way of a forward agreement (each, a Forward Agreement). Each Investment Pool will invest either:
(a) directly in a portfolio of securities; or
(b) in the case of the ONE Financial All-Weather Profit Growth & Income Balanced Investment Pool (the Growth & Income Balanced Investment Pool) and the ONE Financial All-Weather Conservative Growth 2022 Protected Investment Pool and the ONE Financial All-Weather Profit Monthly ROC Income 2022 Protected Investment Pool (together, the Protected Investment Pools), in the units of certain other Investment Pools.
The Funds and, where applicable the Investment Pools, will subscribe for units of the applicable Investment Pools on a private placement basis. Each Investment Pool will file a non-offering prospectus and as a result will be a reporting issuer in Ontario and Québec. As a result of this structure, each Fund would gain direct or indirect exposure to the investment return of one or more Investment Pools.
In addition, each Fund may use a portion of its assets to enter into one or more Forward Agreements with a Canadian chartered bank (each, a Counterparty). The Counterparty under each Forward Agreement may use the amount received from the Fund to subscribe for units of an Investment Pool. As a result of this structure, each Fund would gain indirect exposure to the investment return of one or more Investment Pools.
Each of the Investment Pools will be a trust established pursuant to a declaration of trust governed by the laws of the province of Ontario (the Declaration of Trust) and the Filer will be the trustee of each of the Investment Pools. The Filer will also be the manager of the Investment Pools pursuant to the Declaration of Trust. Except as described below, each of the Investment Pools will invest the proceeds from its sale of units in accordance with the investment objectives and strategies of the applicable Investment Pool or Investment Pools, as will be described in the final Prospectus. Certain of the Investment Pools, namely the Growth & Income Balanced Investment Pool and the Protected Investment Pools, will invest, in part, in units of certain other Investment Pools in accordance with the investment objectives and strategies of the applicable Investment Pool, as will be described in the final Prospectus.
Although the Investment Pools are not subject to NI 81-104, each Investment Pool will be a commodity pool as such term is defined in s. 1.1 of NI 81-104 in that each Investment Pool has adopted fundamental investment objectives that permit it to use specified derivatives in a manner that is not permitted under NI 81-102.
With the exception of certain other requested relief, the investment practices of each of the Investment Pools will comply with the requirements of Part 2 of NI 81-102, as modified by NI 81-104, other than, in respect of the Growth & Income Balanced Investment Pool and the Protected Investment Pools, sections 2.1(1), 2.2(1)(a), and 2.5(2)(a) to (c).
The Filer understands that when NI 81-104 came into force and replaced OSC Policy 11.4 - Commodity Pool Programs the requirements with respect to seed capital were designed to “encourage promoters to ensure that the commodity pool is properly run for the benefit of investors by requiring that the promoter or a related party will be an investor”. The Filer is able to ensure that the Funds will be properly managed for the benefit of investors for the following reasons:
(a) as the manager of the Funds, the Filer will be obliged in accordance with applicable law to at all times act honestly and in good faith, and in the best interests of the Funds, and exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances; and
(b) as discussed above, the Filer is registered as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager under applicable Ontario securities laws.
Having regard to the Filer’s fiduciary obligation as set out in the paragraphs above, not having $50,000 invested in a Fund at all times will not change how the Filer manages the Fund. The Filer will manage the Fund in accordance with all applicable legal and contractual requirements.
If the Funds were governed exclusively by the provisions of NI 81-102, the Filer would be allowed to redeem its seed capital investment in a Fund upon the Fund having received subscriptions totalling not less than $500,000 from investors other than the persons or companies referred to in section 3.1(1)(a) of NI 81-102.
Although the Funds are commodity pools and can be differentiated from conventional mutual funds by the investment strategies that can be used, it would not be prejudicial to the public interest or to investors to permit the Filer to redeem its initial investment of $50,000 from a Fund in the same manner as a manager may redeem its initial investment in a conventional mutual fund pursuant to section 3.1(2) of NI 81-102.
The Filer wishes to redeem the seed capital invested in the Funds subject to the conditions set out in this decision.
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 Requested Relief is granted, provided that:
(a) the Filer may not redeem any of its initial investment of $50,000 in any Fund until $5 million has been received by the Fund from persons or companies other than the persons and companies referred to in section 3.2(l)(a) of NI 81-104;
(b) the basis on which the Filer may redeem any of its initial investment of $50,000 in any Fund will be disclosed in the Prospectus;
(c) if, after the Filer redeems its initial investment of $50,000 in a Fund in accordance with condition (a) above, the value of the securities subscribed for by investors other than the persons and companies referred to in section 3.2(l)(a) of NI 81-104 drops below $5 million for more than 30 consecutive days, the Filer will, unless the Fund is in the process of being dissolved or terminated, invest $50,000 in the Fund and maintain that investment until condition (a) is again satisfied; and
(d) the Filer, as investment fund manager, will at all times maintain excess working capital of a minimum of $100,000 or any higher amount that may be required in compliance with National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
“Signed”
Sonny Randhawa
Manager, Investment Funds
Ontario Securities Commission
Headnote
NP 11-203 – Process for Exemptive Relief Application in Multiple Jurisdictions – Relief granted to commodity pools from s. 3.2(2)(a) of NI 81-104 – manager permitted to redeem seed capital investment in pool under conditions including that pool has received subscriptions from investors totalling at least $5 million.
Applicable Legislative Provisions
National Instrument 81-104 Commodity Pools, sections 3.2(2)(a) and 10.1.