Ewing Morris & Co. Investment Partners Ltd. (Re), 2013 CanLII 83088

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) 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) and 113.

December 18, 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 EWING MORRIS & CO. INVESTMENT PARTNERS LTD.

(the Filer)

AND

EWING MORRIS OPPORTUNITIES TRUST FUND

(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 other 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 Ewing Morris Opportunities Fund LP (the First Underlying Fund) or any other investment fund which is not a reporting issuer and may be established, advised or managed by the Filer in the future (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 in Ontario 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 in Ontario from knowingly making an investment in an issuer in which:

(i) any officer or director of the mutual fund, its management company or distribution company or an associate of any of them, or

(ii) any person or company who is a substantial securityholder of the mutual fund, its management company or its distribution company,

has a significant interest; and

(c) the restriction in the Legislation which prohibits a mutual fund in Ontario, its management company or its distribution company from knowingly holding an investment described in paragraph (a) or (b) 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:

The Filer

1. The Filer is a corporation established under the laws of Ontario with its head office located in Toronto, Ontario.

2. The Filer is registered as an investment fund manager, portfolio manager and exempt market dealer in Ontario, as a portfolio manager and exempt market dealer in Alberta and as an exempt market dealer in British Columbia.

3. The Filer is or will be the investment fund manager of the Top Funds and the Underlying Funds.

4. The Filer is or will be the portfolio manager for the Top Funds and the Underlying Funds. The Filer may also act as a distributor of the securities of the Top Funds and Underlying Funds not otherwise sold through another registered dealer.

5. The Filer is not a reporting issuer in any jurisdiction and is not in default of securities legislation in any jurisdiction.

6. An officer and director of the Filer, who is also a substantial security holder of the Filer, currently has a significant interest in the First Underlying Fund. In the future, other officers and/or directors of the Filer may also be substantial security holders of the Filer and have a significant interest in an Underlying Fund. In addition, in the future, officers and/or directors of the Filer may be substantial security holders of a Top Fund and have a significant interest in an Underlying Fund.

Top Funds

7. The First Top Fund will be an investment trust established under the laws of Ontario in or around January 2014. The future Top Funds will be structured as limited partnerships, trusts or corporations under the laws of Ontario or another jurisdiction of Canada.

8. The 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).

9. Each of the Top Funds will be a “mutual fund” as defined in securities legislation of the jurisdictions in which the Top Funds are distributed.

10. The First Top Fund’s investment objectives will be to achieve preservation and growth of capital through superior securities selection, which will be achieved primarily by investing in securities of the First Underlying Fund.

11. None of the Top Funds will be a reporting issuer in any jurisdiction of Canada.

12. The First Top Fund is not in default of securities legislation of any jurisdiction of Canada.

Underlying Funds

13. The First Underlying Fund is a limited partnership established under the laws of Ontario by declaration dated August 24, 2011. The future Underlying Funds will be structured as limited partnerships, trusts or corporations under the laws of Ontario or another jurisdiction of Canada or foreign jurisdiction.

14. The general partner of the First Underlying Fund is Ewing Morris Opportunities GenPar Ltd., an affiliate of the Filer. The general partner of each future Underlying Fund that is structured as a limited partnership will be an affiliate of the Filer.

15. Each of the Underlying Funds has, or will have, separate investment objectives and investment strategies.

16. The First Underlying Fund was formed for the purpose of providing consistent positive absolute returns. The First Underlying Fund does not invest in other investment entities managed by the Filer or its affiliates.

17. 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.

18. Each of the Underlying Funds is, or will be, an “investment fund” as defined in securities legislation of the jurisdictions in which the Top Funds are distributed.

19. None of the Underlying Funds is, or will be, a reporting issuer in any jurisdiction of Canada.

20. The First Underlying Fund is not in default of securities legislation of any jurisdiction of Canada.

Fund-on-Fund Structure

21. The First Top Fund is being, and other Top Funds may be, created by the Filer to allow investors in the Top Funds to obtain indirect exposure to the investment portfolio 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). Rather than running the First Top Fund’s and the First Underlying Fund’s investment portfolios as separate pools, the Filer wishes to make use of economies of scale by managing an investment pool in the Underlying Fund. Unlike the First Underlying Fund, which is a limited partnership, the First Top Fund is being formed as a trust for the purpose of accessing a broader base of investors, including registered retirement savings plans and other investors that may not or wish not to invest directly in a limited partnership. Rather than running the First Top Fund’s and each Underlying Fund’s investment portfolios as separate pools, the Filer wishes to make use of economies of scale by managing only one investment pool, in the Underlying Funds.

22. An investment by a Top Fund in an Underlying Fund is, or will be, compatible with the investment objectives of the Top Fund.

23. The investments held by the First Underlying Fund are considered to be liquid. To the extent illiquid securities are held by a Top Fund or an Underlying Fund, such illiquid securities will only comprise an immaterial portion of the portfolio of the applicable Top Fund or Underlying Fund. Where a Top Fund or Underlying Fund holds illiquid securities, the remainder of such Top Fund’s or Underlying Fund’s portfolio will be managed to provide sufficient liquidity to fund redemptions in the ordinary course.

24. The Top Funds and the Underlying Funds have, or will have, matching valuation dates. The First Top Fund and the First Underlying Fund are valued monthly.

25. Securities of the Top Funds and the Underlying Funds have, or will have, matching redemption dates. The First Top Fund and the First Underlying Fund are redeemable monthly.

26. A Top Fund will not purchase or hold securities of an Underlying Fund unless:

(a) the Underlying Fund invests less than 10% of its net assets in other mutual funds other than mutual funds that are “money market funds” (as defined by National Instrument 81-102 Mutual Funds (NI 81-102)) or that issue “index participation units” (as defined by NI 81-102);

(b) no management fees or incentive fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service;

(c) no sales fees or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund;

(d) the Filer does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of the Underlying Fund except that the Top Fund may arrange for the securities it holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund; and

(e) the offering memorandum, where available, or other disclosure document of a Top Fund will be provided to all investors of the Top Fund and will disclose:

(i) that the Top Fund may purchase securities of the Underlying Funds;

(ii) that the Filer is the investment fund manager of both the Top Funds and the Underlying Funds, if applicable;

(iii) 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

(iv) the process or criteria used to select the Underlying Funds, if applicable.

27. Prior to the time of purchase of securities of a Top Fund, an investor 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.

28. 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.

29. Securityholders of a Top Fund will receive, on request, a copy of the offering document, if available, and the annual and interim financial statements, of any Underlying Fund in which the Top Fund invests.

Generally

30. 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 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.

31. In addition, the Fund-on-Fund Structure may result in a Top Fund investing in an Underlying Fund in which an officer or director of the Filer has a significant interest and/or a Top Fund investing in an Underlying Fund in which a person or company who is a substantial securityholder of the Top Fund or the Filer has a significant interest.

32. 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.

33. 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.

34. 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 Funds 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 assets 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 a 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 a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund;

(f) the Filer does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of the Underlying Fund except that the Top Fund may arrange for the securities it holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;

(g) the offering memorandum, where available, or other disclosure document of a Top Fund 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, if applicable;

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, if applicable; and

(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 Funds through investments made in securities of such Underlying Funds. 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.

“AnneMarie Ryan” “James E. A. Turner”

Commissioner Vice-Chair

Ontario Securities Commission Ontario Securities Commission

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) 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) and 113.