September 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
PROVISUS WEALTH MANAGEMENT LIMITED
(the Filer)
AND
PROVISUS NORTH AMERICAN EQUITY CORPORATE CLASS
PROVISUS GLOBAL EQUITY CORPORATE CLASS
PROVISUS TOTAL EQUITY CORPORATE CLASS
PROVISUS BALANCED CORPORATE CLASS
(the Initial Top Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on its behalf and on behalf of the Initial Top Funds and any other investment fund which is not a reporting issued under the Securities Act (Ontario) (the Act) established, advised or managed by the Filer after the date hereof (the Future Top Funds and, together with the Initial Top 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 subsection 111(3) of the Act which prohibit the following:
(i) 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, and
(ii) a mutual fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) above; and
(the Related Issuer Restriction Relief)
- the restriction in
(i) 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 31-103 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 is intended to be relied upon in Alberta, British Columbia, Manitoba, Nova Scotia, Quebec and Saskatchewan (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 Business Corporations Act (Ontario) with its head office located in Toronto, Ontario.
The Filer is registered as an investment fund manager in Ontario and as an adviser in the category of portfolio manager in the Provinces of Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan.
The Filer is, or will be, responsible for managing the assets of the Top Funds and the Underlying Funds (defined below) (together the Funds), has complete discretion to invest and reinvest the Funds' assets, and is responsible for executing all portfolio transactions.
The Filer is, or will be, the investment fund manager of each Top Fund and of each Underlying Fund (as defined below).
The Filer is not a reporting issuer in any jurisdiction of Canada.
The Funds are available only to persons who are clients of, and have a discretionary separately managed account which is managed by, the Filer.
Other than as set forth in paragraphs 25 and 26 below, the Filer is not in default of securities legislation in any jurisdiction of Canada.
Top Funds
The Top Funds are, or will be, sold pursuant to prospectus exemptions through registered dealers in accordance with National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106), and are not and will not be reporting issuers in any jurisdiction of Canada.
Each Initial Top Fund is a class of shares of Provisus Fund Services Corporation (PFSC), a corporation subsisting under the laws of Canada.
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.
Pursuant to management and advisory agreements, the Filer is responsible for managing the day-to-day undertaking and business of each of the Initial Top Funds as well as the investment activities of each of the Initial Top Funds.
The offering memorandum in respect of the Initial Top Funds (the Initial Top Fund Offering Memorandum) describes, and the offering memoranda in respect of any Future Top Funds (together, with the Initial Top Fund Offering Memorandum, the Offering Memorandum) will describe, the investment objectives and investment restrictions applicable to the Top Fund and also describes the fees, compensation and expenses payable by a Top Fund, the calculation of net asset value, distributions, the powers and duties of the Filer and all other matters material to each Top Fund, including the fact that in pursuing its investment objectives, the Top Fund may invest all, or a certain portion, of their assets in other investment funds established and managed by the Filer, or an affiliate of the Filer (the Underlying Funds) as an investment strategy. The Offering Memorandum provides, and will provide, similar information in respect of each of the Underlying Funds.
The offering memoranda of the Underlying Funds is and will be incorporated into the Offering Memorandum.
Other than as set forth in paragraphs 25 and 26 below, the Top Funds are not in default of securities legislation in any jurisdiction of Canada.
Underlying Funds
Each of the Underlying Funds is a class of shares of PFSC, a corporation subsisting under the laws of Canada.
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.
Securities of the Underlying Funds are, or will be, issued pursuant to prospectus exemptions through registered dealers in accordance with NI 45-106.
Each of the Underlying 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 Underlying Funds is, or will be, a reporting issuer in any jurisdiction of Canada.
Other than as set forth in paragraphs 25 and 26 below, the Underlying Funds are not in default of securities legislation in any jurisdiction of Canada.
Fund on Fund Structure
The Top Funds allow investors in the Top Funds to obtain exposure to the investment portfolios of the Underlying Funds and their investment strategies through, primarily, direct investments by the Top Funds in securities of the Underlying Funds (the "Fund-on-Fund Structure").
Securities of an Underlying Fund are, or will be, acquired by a Top Fund under an exemption from the prospectus requirement in accordance with NI 45-106.
Through inadvertence, certain of the Initial Top Funds currently are, alone or together with the other Initial Top Funds, substantial security holders of one or more Underlying Funds contrary to the provisions of the Act referred to above.
Through inadvertence, certain Top Funds are currently investing in Underlying Funds contrary to sub-clause 13.5(2)(a)(ii) of NI 31-103 since certain officers of the Filer (considered a responsible person within the meaning of the applicable provisions of NI -103) are also officers and/or directors of the Underlying Funds.
The Filer believes that the Fund-on-Fund Structure provides an efficient and cost-effective manner of pursuing portfolio diversification on behalf of the Top Funds, rather than through the direct purchase of securities.
The Fund-on-Fund Structure will allow investors with smaller investments to have access to a larger variety of investments than would otherwise be available.
Investments by the Top Funds in the Underlying Funds will increase the asset base of the Underlying Funds, enabling the Underlying Funds to further diversify their portfolios to the benefit of all their investors. The larger asset base will also benefit investors in the Underlying Funds through achieving favourable pricing and transaction costs on portfolio trades, increased access to investments where there is a minimum subscription or purchase amount, and economies of scale through greater administrative efficiency.
The investments held by the Underlying Funds are considered to be liquid.
The Top Funds and the Underlying Funds have matching valuation dates and are valued weekly.
Securities of both the Top Funds and the Underlying Funds can be redeemed on any valuation date.
Each of the Top Funds has and 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 in accordance with NI 81-106. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund.
The Top Funds are, or will be, related mutual funds by virtue of common management by the Filer.
For the purpose of implementing the Fund-on-Fund Structure, the Filer shall ensure that:
(a) the arrangements between or in respect of each Top Fund and an Underlying Fund are such as to avoid the duplication of management fees and incentive fees;
(b) no sales fees or redemption fees are payable by a Top Fund in relation to its acquisitions, dispositions or redemptions of securities of an Underlying Fund;
(c) 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;
(d) the Filer will not vote the securities of an Underlying Fund held by a Top Fund at any meeting of holders of such securities, 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 thereof, being the holders of securities of the Top Fund; and
(e) security holders of a Top Fund will receive, on request, a copy of the offering memorandum, the audited annual financial statements and interim unaudited financial statements of any Underlying Fund in which it invests.
The actual weightings of the investment by a Top Fund in an Underlying Fund will be reviewed and adjusted by the Filer to ensure that the investment weighting continues to be appropriate for the Top Fund's investment objectives.
Any investment made by a Top Fund in an Underlying Fund will be aligned with the investment objectives, investment strategy, risk profile and other principal terms of the Top Fund.
A Top Fund's investments in the Underlying Funds represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Funds and the Underlying Funds.
Prior to the time of purchase of securities of a Top Fund, a purchaser will be provided with a copy of the Offering Memorandum as well as disclosure about the relationships and potential conflicts of interest between the Top Fund and the Underlying Funds.
The Offering Memorandum sets out and will set out:
(a) the intent of the Top Funds to invest their assets in securities of one or more Underlying Funds;
(b) that the Underlying Funds are managed by 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.
In the absence of the Related Issuer Restriction Relief, the Top Funds would be precluded from implementing the Fund-on-Fund Structure due to certain investment restrictions in the Legislation. Since the Top Funds do not offer their securities under a simplified prospectus, they are not subject to National Instrument 81-102 and therefore the Top Funds are unable to rely upon the exemption codified under sub-section 2.5(7) of National Instrument 81-102.
In the absence of the 31-103 Relief, each Top Fund would be precluded from investing in an Underlying Fund since the Filer or an officer and/or director of the Filer (considered a responsible person with the meaning of the applicable provisions of NI 31-103) may also be an officer and/or director of, or may be a person with 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 of 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 securities of a Top Fund in an Underlying Fund, but the Filer may, if it chooses, arrange for all of the securities of the Underlying Funds held by the Top Funds to be voted by the beneficial owners thereof, being the beneficial owners of units of the Top Funds;
(g) the Offering Memorandum will disclose:
(i) the intent of the Top Fund to invest its assets in securities of one or more 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.
“Vera Nunes”
Vera Nunes
Manager, Investment Funds Branch
Ontario Securities Commission
“Edward P. Kerwin” “Sarah B. Kavanagh”
Name: Edward P. Kerwin Name: Sarah B. Kavanagh
Title: Commissioner Title: Commissioner
Ontario Securities Commission Ontario Securities Commission