eadnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions– relief granted from the mutual fund conflict of interest restrictions in the Securities Act(Ontario) to allow pooled funds to make and hold an investment from time to time in more than 20% of the outstanding voting securities of an underlying fund – 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(3) and 113.
Oct 11, 2013
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 KINGWEST & COMPANY. (the Filer)
AND
THE KINGWEST HIGH INCOME PORTFOLIO (the First Top Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on its behalf and on behalf of the First Top Fund and any mutual fund which is not a reporting issuer and may be established and managed by the Filer in the future (together with the First Top Fund, the Top Funds), which invests its assets in The Kingwest U.S. Equity Portfolio or the Kingwest Canadian Equity Portfolio (the First Underlying Funds) or any other investment fund which is not a reporting issuer under the Securities Act (Ontario) and may be established, advised and managed by the Filer in the future (together with the First Underlying Funds, 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 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, its management company or its distribution company from knowingly holding an investment described in paragraph (a) above.
(collectively, 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.
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:
Filer
The Filer is a partnership established under the laws of Ontario with its head office located in Toronto, Ontario.
The Filer is registered as an investment fund manager and investment dealer in Ontario and as an investment dealer in British Columbia, Alberta, Manitoba, Quebec, New Brunswick and Nova Scotia.
The Filer is or will be the investment fund manager and portfolio manager for the Underlying Funds. The Filer assists or will assist in the marketing of the Underlying Funds and acts or will act as a distributor of the securities of the Underlying Funds. Any future Underlying Funds will be structured as trusts under the laws of Ontario and governed by the same trust agreement and declaration of trust, as may be amended from time to time and the Filer will act as the investment fund manager of any such funds.
The Filer is or will be the investment fund manager and portfolio manager for the Top Funds. The Filer assists or will assist in the marketing of the Top Funds and acts or will act as a distributor of the securities of the Top Funds. Any future Top Funds will be structured as trusts under the laws of Ontario and governed by the same trust agreement and declaration of trust, as may be amended from time to time and the Filer will act as the investment fund manager of any such funds.
The Filer is not a reporting issuer in any jurisdiction.
The Filer is not in default of securities legislation of any jurisdiction of Canada.
Top Funds
The First Top Fund is an open-ended unit trust established under the laws of the Province of Ontario by a trust agreement between the Filer and The Royal Trust Company. Any future Top Funds will be structured as trusts under the laws of Ontario and governed by the same trust agreement and declaration of trust, as may be amended from time to time.
Securities of each Top Fund are, or will be, sold solely to investors pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106").
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.
The First Top Fund is aimed at achieving a balance of current income, stability and long term capital appreciation by investing primarily in a diversified portfolio of dividend paying preferred and common shares, income trusts, royalty trusts, real estate investment trusts, convertible debentures and fixed income securities.
None of the Top Funds is, or will become, a reporting issuer in any jurisdiction of Canada.
The First Top Fund is not in default of securities legislation in any jurisdiction of Canada.
Underlying Funds
The First Underlying Funds are open-ended unit trusts established under the laws of the Province of Ontario by a trust agreement between the Filer and The Royal Trust Company. Any future Underlying Funds will be structured as trusts under the laws of Ontario and governed by the same trust agreement and declaration of trust, as may be amended from time to time.
The First Underlying Funds have engaged the Filer to manage the ongoing business and administrative affairs of the First Underlying Funds and to provide investment advisory services to the First Underlying Funds. Each future Underlying Fund will engage the Filer to provide investment advisory services to such future Underlying Fund.
Each of the Underlying Funds, is, or will be, a "mutual fund" as defined securities legislation of the jurisdictions of Canada.
Each of the Underlying Funds has, or will have, separate investment objectives and investment strategies.
The Kingwest U.S. Equity Portfolio is aimed at providing capital appreciation through investments in equity securities of companies listed on recognized U.S. stock exchanges, including NASDAQ. The Kingwest Canadian Equity Portfolio is aimed at providing capital appreciation through investments in equity securities of listed Canadian companies. The First Underlying Funds do not invest in other investment entities managed by the Filer or its affiliates.
In Canada, securities of each Underlying Fund are or will be sold solely to investors pursuant to exemptions from the prospectus requirements in accordance with NI 45-106.
None of the Underlying Funds, is or will become, a reporting issuer in any jurisdiction of Canada.
The First Underlying Funds are not in default of securities legislation of any jurisdiction of Canada.
Fund-on-Fund Structure
The Filer believes that the First Top Fund will be better and more efficiently able to achieve its objectives through indirect exposure to the investment portfolios of the Underlying Funds and their investment strategies than through direct investments by the Top Funds in securities of the Underlying Funds (the Fund-on-Fund Structure).
The First Underlying Funds will invest primarily in equity securities of listed companies.
The Top Funds and the Underlying Funds have, or will have, matching redemption dates. The First Top Fund and the First Underlying Funds are redeemable twice a month.
Securityholders of a Top Fund will receive, on request, a copy of the Top Fund's audited annual and interim financial statements. The financial statements of each Top Fund will disclose its holdings of securities of Underlying Funds.
Securityholders of a Top Fund will receive, on request, a copy of the offering document, if available, and the annual and interim statements of any Underlying Fund in which the Top Fund invests.
Generally
The amounts invested from time to time in an Underlying Fund by a Top Fund, either alone or together with the other Top Funds, may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, each Top Fund could, either alone or together with the other Top Funds, become a substantial securityholder of an Underlying Fund. The Top Funds are, or will be, related mutual funds by virtue of common management by the Filer.
Since the Top Funds and the Underlying Funds do not offer their securities under a simplified prospectus, they are not subject to NI 81-102 and therefore the Top Funds and the Underlying Funds are unable to rely upon the exemption codified under subsection 2.5(7) of NI 81-102.
In the absence of the Requested Relief, each Top Fund would be precluded from purchasing and holding securities of an Underlying Fund due to the investment restrictions contained in the Legislation.
Each investment by a Top Fund in an Underlying Fund 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 Requested Relief is granted provided that:
(a) securities of the Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106;
(b) the investment by a Top Fund in an Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;
(c) no Top Fund will invest in an Underlying Fund unless the Underlying Fund invests less than 10% of its net asset value in other mutual funds other than mutual funds that are "money market funds" (as defined by NI 81-102) or that issue "index participation units" (as defined by NI 81-102);
(d) 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;
(e) 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;
(f) the Filer will not vote the securities of an Underlying Fund held by a Top Fund at any meeting of the securityholders of the Underlying Fund; and
(g) Prior to the purchase of securities of a Top Fund, an investor will be provided with the offering memorandum, where available, or other disclosure document of a Top Fund that will disclose:
a. that the Top Fund may purchase securities of the Underlying Funds;
b. the fact that the Filer is the investment fund manager of both the Top Funds and the Underlying Funds;
c. the approximate or maximum percentage of net assets of the Top Fund that it is intended be invested in securities of the Underlying Funds; and
d. the process or criteria used to select the Underlying Funds.
“Edward P. Kerwin” “Sarah B. Kavanagh”
Edward P. Kerwin Sarah P. Kavanagh
Commissioner Commissioner
Ontario Securities Commission Ontario Securities Commission