Headnote 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 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.
June 2, 2014
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 IBV CAPITAL LTD. (the “Filer”)
AND
IN THE MATTER OF IBV CAPITAL GLOBAL VALUE CANADIAN FEEDER LP (the “Initial Top Fund”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of each of the Filer, the Initial Top Fund, and any other mutual fund which is not a reporting issuer under the Securities Act (Ontario) (the “Act”), that is established, advised or managed by the Filer, or its affiliate, after the date hereof (the “Future Top Funds” and together with the Initial Top Fund, the “Top Funds”), which invests its assets in IBV Capital Value Fund LP (the “Initial Underlying Fund”) or any other investment fund which is not a reporting issuer under the Act and may be established, advised or managed by the Filer, or its affiliate, in the future (the “Future Underlying Funds” and together with the Initial Underlying Fund, the “Underlying Funds”), for a decision under the securities legislation of the Jurisdiction (the “Legislation”) exempting the Filer and the Top Funds 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 Quebec.
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
The Filer is a corporation existing under the laws of Canada with its head office in Toronto, Ontario.
The Filer is registered in the categories of investment fund manager, portfolio manager and exempt market dealer in Ontario and Québec.
The Filer is not a reporting issuer in any jurisdiction in Canada and is not in default of securities legislation of any jurisdiction in Canada.
The Filer is the investment fund manager and portfolio adviser of the Initial Top Fund and the Initial Underlying Fund. The Filer, or an affiliate of the Filer, will be the investment fund manager and portfolio adviser of the Future Top Funds and Future Underlying Funds.
5. The officers and directors of the Filer are personally, or through their holding companies, the limited partners of a limited partnership organized under the laws of Ontario (“Incentive LP”). Incentive LP will be the initial securityholder in the Initial Underlying Fund.
6. As the limited partners of Incentive LP, directly or indirectly, the officers and directors of the Filer have a significant interest in the Initial Underlying Fund.
7. The officers and directors of the Filer are, directly or indirectly, substantial securityholders of the Filer and, as described in representation 6 above, have a significant interest in the Initial Underlying Fund.
8. In the future, officers and directors of the Filer may also be, directly or indirectly, limited partners of other limited partnerships that will be the initial securityholders in Future Underlying Funds. As limited partners of such limited partnerships, the officers and directors of the Filer will have a significant interest in Future Underlying Funds.
Top Funds
Each of the Top Funds is, or will be, a mutual fund for the purposes of the Act.
The Initial Top Fund is a limited partnership established under the laws of the Province of Ontario and governed by a limited partnership agreement.
The Future Top Funds will be structured as limited partnerships, trusts or corporations under the laws of Ontario or another jurisdiction of Canada.
The general partner of the Initial Top Fund is IBV Capital Global Value Fund GP Inc., an affiliate of the Filer. The general partner of each Future Top Fund that is structured as a limited partnership will be an affiliate of the Filer.
Securities of each of the Top Funds, are, or will be, sold pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”).
14. The investment objective of the Initial Top Fund is to invest substantially all of its assets in the Initial Underlying Fund, which will provide consistent and attractive rates of return over a long-term time horizon and throughout various market environments by investing in equity, fixed income, and related instruments. The primary geographic focus will be developed markets and, to a lesser extent, developing markets.
The investment objectives of the Future Top Funds will be to invest substantially all of their assets in one or more Future Underlying Funds.
The Initial Top Fund is not a reporting issuer under the Act nor is it in default of securities legislation of any jurisdiction of Canada. None of the Future Top Funds will be a reporting issuer under the Act.
Underlying Funds
Each of the Underlying Funds is, or will be, a mutual fund for purposes of the Act.
The Initial Underlying Fund is an exempted limited partnership formed and organized under the laws of the Cayman Islands. An exempted limited partnership is established under the Cayman Islands Exempted Limited Partnership Law (2007 Revision). This form of partnership is exempted from the restrictions, filing and gazetting requirements that are applicable to ordinary limited partnerships in the Cayman Islands. This is the form of limited partnership that is used to establish a mutual fund in the Cayman Islands.
The Future Underlying Funds will be structured as limited partnerships, trusts or corporations under the laws of Ontario, another jurisdiction of Canada or a foreign jurisdiction.
IBV Capital Global Value Fund GP Inc. is also the general partner of the Initial Underlying Fund. The general partner of each Future Underlying Fund that is structured as a limited partnership will be an affiliate of the Filer.
The Initial Underlying Fund will not be a reporting issuer under the Act. None of the Future Underlying Funds will be a reporting issuer under the Act.
The Initial Underlying Fund is not in default of securities legislation of any jurisdiction of Canada.
Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.
The Initial Underlying Fund’s investment objectives are to provide consistent and attractive rates of return over a long-term time horizon and throughout various market environments by investing in equity, fixed income, and related instruments. The primary geographic focus will be developed markets and, to a lesser extent, developing markets.
Each of the Underlying Funds and their investments are considered to be liquid. While the Underlying Funds are not restricted from purchasing and holding “illiquid assets” (as defined in National Instrument 81-102 Mutual Funds (NI 81-102)), the Filer, or its affiliate, manages or will manage the portfolios of each Underlying Fund to ensure there is sufficient liquidity to provide for redemptions of securities by securityholders of the Top Funds.
Fund-on-Fund Structure
The custodian of the assets of each Top Fund and each Underlying Fund is, or will be, one or more financial institutions and/or their affiliates, or such third party or parties as may be appointed by the Filer or its affiliate. The custodian of each Top Fund and each Underlying Fund meets, or will meet, the qualifications set out in subsection 6.2 of NI 81-102.
The Top Funds allow investors to obtain exposure to the investment portfolios of the Underlying Funds and their respective investment strategies through direct investments by the Top Funds in securities of the Underlying Funds (the “Fund-on-Fund Structure”).
Investing in the Underlying Funds will allow the Top Funds to achieve their investment objectives in a cost efficient manner and will not be detrimental to the interests of other securityholders of the Underlying Funds.
Non-U.S. tax-exempt investors and U.S. tax-exempt investors may invest directly in the Initial Underlying Fund in the Cayman Islands and Canadian investors, who are subject to Canadian tax, can invest indirectly through the Initial Top Fund.
An investment by a Top Fund in an Underlying Fund can provide greater diversification for a Top Fund in particular asset classes on a basis that is not materially more expensive 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. 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.
The Filer, or its affiliate, will ensure that the arrangements between or in respect of a Top Fund and an Underlying Fund in respect of an investment pursuant to the Fund-on-Fund Structure avoid the duplication of management fees and incentive fees. The Filer currently does not charge any management fee or incentive fee to the Initial Top Funds.
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 the time of purchase of securities of a Top Fund, an investor will be provided with an offering memorandum of the Top Fund that contains disclosure about the relationships and potential conflicts of interest between the Top Fund and the Underlying Funds.
The offering memorandum of each Top Fund will describe the Top Funds' intent, or ability, to invest in securities of the Underlying Funds and that the Underlying Funds are also managed and advised by the Filer or its affiliate.
Each of the Top Funds and the Underlying Funds will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 –Investment Funds Continuous Disclosure (“NI 81-106”) and will otherwise comply with the requirements of NI 81-106, as applicable.
Securityholders of a Top Fund will receive, on request, a copy of such Top Fund's audited annual financial statements and interim unaudited financial statements. The financial statements of each Top Fund will disclose its holdings of securities of the applicable Underlying Funds.
Securityholders of a Top Fund will receive, on request, a copy of the offering memorandum of an Underlying Fund, or other similar document, if available, and the annual and interim financial statements of any Underlying Fund in which the Top Fund invests.
The Filer, or its affiliate, will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of any Underlying Fund, except that the Filer, or its affiliate, may arrange for the securities of the Underlying Fund held by a Top Fund to be voted by the beneficial holders of securities of the Top Fund.
The Initial Top Fund and the Initial Underlying Fund have matching valuation dates and are valued as of the last business day of each month.
The securities of Initial Top Fund may be redeemed on the last business day of each fiscal quarter, provided the Fund has received 60 days’ prior written notice of a unitholder’s redemption request. The fiscal year of the Initial Top Fund is December 31 of each calendar year.
An Underlying Fund will be valued no less frequently than a Top Fund.
An Underlying Fund will be redeemable no less frequently than a Top Fund.
No Underlying Fund will be a Top Fund.
The Filer is entitled to receive management fees with respect to certain classes of securities of the Initial Underlying Fund that have a management fee. The Incentive LP, an affiliate of the Filer, is also entitled to receive performance fees with respect to certain classes of securities of the Initial Underlying Fund. The General Partner is entitled to receive a nominal general partner allocation in respect of each of the Initial Top Fund and Initial Underlying 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 security holder of an Underlying Fund. The Top Funds are, or will be, related mutual funds by virtue of the common management by the Filer or its affiliate.
Generally
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, a 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 sought 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 purchase or hold securities of an Underlying Fund unless, at the time of the purchase of securities of the Underlying Fund, the Underlying Fund holds no more than 10% of its net assets in securities of other mutual funds unless the Underlying Fund:
(i) purchases or holds securities of a "money market fund" (as defined by NI 81-102), or
(ii) purchases or holds securities that are "index participation units" (as defined by NI 81-102) issued by a mutual fund;
(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, or its affiliate, does not cause the securities of the Underlying Fund held by a Top Fund to be voted at any meeting of holders of such securities, except that the Filer, or its affiliate, may arrange for the securities the Top Fund holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund; and
(g) the offering memorandum, where available, or other similar document of a Top Fund, will be provided to investors in a Top Fund and will disclose:
(i) that the Top Fund may purchase securities of the Underlying Funds;
(ii) the fact that the Filer is the investment fund manager and portfolio adviser of both the Top Funds and the Underlying Funds;
(iii) the approximate or maximum percentage of net assets of the Top Fund that the Top Fund intends to invest in securities of the Underlying Funds;
(iv) the process or criteria used to select the Underlying Funds;
(h) investors in each Top Fund will be informed that they are entitled to receive from the Filer, or its affiliates, on request and free of charge, a copy of the offering memorandum or other disclosure documents, if available, and the annual or semi-annual financial statements relating to all Underlying Funds in which the Top Fund may invest its assets; and
(i) prior to the time of investment, securityholders of a Top Fund will be provided with disclosure with respect to each officer and director of the Filer, if any, that has a significant interest in the Underlying Fund through investments made in securities of such Underlying Fund and that such officer and/or director of the Filer is also a substantial securityholder of the Filer. 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.
“Edward P. Kerwin”
“Deborah Leckman”
Name: Edward P. Kerwin
Name: Deborah Leckman
Title: Commissioner
Title: Commissioner
Ontario Securities Commission
Ontario Securities Commission