September 22, 2015
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
LDIC Inc.
(the Filer)
AND
In the Matter of
LDIC north american growth & income fund
(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 investment fund which is not a reporting issuer under the securities legislation of the principal regulator (the Legislation) that is 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 LDIC North American Infrastructure Fund or LDIC North American Small Business Fund (the Initial Underlying Mutual Funds), any other mutual fund which is a reporting issuer under the Legislation and subject to National Instrument 81-102 – Investment Funds (NI 81-102) and that is advised or managed by the Filer, or its affiliate, in the future (the Future Underlying Mutual Funds) or any other investment fund which is not a reporting issuer under the Legislation that is advised or managed by the Filer, or its affiliate, after the date hereof (Future Underlying Pooled Funds and together with the Initial Underlying Mutual Funds and the Future Underlying Mutual Funds, the Underlying Funds), for a decision under the Legislation exempting the Filer and the Top Funds from:
(a) the restriction in the Legislation that prohibits an investment fund from knowingly making an investment in a person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder; and
(b) the restriction in the Legislation that prohibits an investment 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:
(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 the provinces of British Columbia, Alberta, Saskatchewan, Nova Scotia, New Brunswick and Newfoundland and Labrador (together with Ontario, the Jurisdictions).
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 head office of the Filer is located in Toronto, Ontario.
The Filer is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador and is registered as a portfolio manager in Ontario, Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Québec and Saskatchewan.
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, or will be, the portfolio manager for the Top Funds and the Underlying Funds.
The Filer or an affiliate is, or will be, the investment fund manager of the Top Funds and the Underlying Funds.
Top Funds
Each of the Top Funds is, or will be, a mutual fund established as a trust under the laws of Ontario.
The Initial Top Fund is not a reporting issuer under the Legislation 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 Legislation.
Securities of a Top Fund will be sold in Canada pursuant to available prospectus exemptions in accordance with National Instrument 45-106 – Prospectus Exemptions (NI 45-106).
The Filer expects that the assets of the Top Funds and Underlying Funds will be held in the custody of a trust company incorporated and licensed or registered under the laws of Canada or a jurisdiction, or a bank listed in Schedule I, II or III of the Bank Act (Canada), or an affiliate of such bank or trust company.
Underlying Funds
Each of the Initial Underlying Mutual Funds and each of the Future Underlying Mutual Funds is, or will be, established under the laws of Ontario or of Canada as an investment fund that is an open-ended mutual fund organized as a trust or an open-ended mutual fund organized as a corporation and is, or will be, a reporting issuer in each of the Jurisdictions.
The securities of the Initial Underlying Mutual Funds and each of the Future Underlying Mutual Funds are, or will be, qualified for distribution pursuant to simplified prospectuses, annual information forms and fund facts that have been prepared, or will be prepared, and filed in accordance with NI 81-101 – Mutual Fund Prospectus Disclosure. Each of the Underlying Funds is or will be subject to the provisions of NI 81-102.
The Initial Underlying Mutual Funds are not in default of securities legislation of any of the Jurisdictions.
Each Future Underlying Pooled Fund will be an open-ended mutual fund established under the laws of Ontario and will not be a reporting issuer in any of the Jurisdictions.
The securities of the Future Underlying Pooled Funds will be distributed pursuant to prospectus exemptions in accordance with NI 45-106. The Future Underlying Pooled Funds will not be subject to NI 81-102.
No Future Underlying Pooled Fund will hold more than 10% of its net asset value in “illiquid assets” (as defined in NI 81-102).
Fund-on-Fund Structure
The purpose of an investment by a Top Fund in an Underlying Fund is to provide the Top Fund with greater asset diversification and economies of scale regarding commission charges on portfolio trades versus investing directly in the securities held by the applicable Underlying Fund. The Initial Top Fund intends to invest a portion of its assets in one or more Underlying Funds in order to achieve diversification of exposures. The investment by a Top Fund in an Underlying Fund will allow the Top Funds to achieve their investment objectives in a cost effective manner and will not be detrimental to other securityholders of the Underlying Funds.
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 securityholder of an Underlying Fund. The Tops Funds are, or will be, related mutual funds by virtue of the common management by the Filer.
An investment by a Top Fund in an Underlying Fund will be effected in accordance with and subject to the investment objectives, investment strategies and investment restrictions of the Top Fund.
A Top Fund will only invest in an Underlying Fund that has been established and the management fees, expenses and any special incentive distributions payable by the Underlying Fund have been determined.
When a Top Fund invests in an Underlying Fund: (i) if the Underlying Fund has a class of securities with no management fee or incentive fee, the Top Fund will invest in such class of securities; and (ii) if the Underlying Fund does not have a class of securities with no management fee or incentive fee, the Filer will effect a rebate in respect of any management or incentive fees charged on securities held by the Top Fund or will, together with the valuation agent and record-keeper of the Top Fund and the Underlying Fund, ensure that no management or incentive fees are charged in respect of such securities.
Each of the Top Funds and the Underlying Funds that are subject to National Instrument 81-106 – Investment Fund Continuous Disclosure (NI 81-106) will prepare annual audited financial statements and interim unaudited financial statements in accordance with NI 81-106 and will otherwise comply with the requirements of NI 81-106 applicable to them. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements.
The portfolio of each Underlying Fund will consist primarily of publicly traded securities. An investment by a Top Fund in an Underlying Fund will be effected based on an objective NAV of the Underlying Fund.
No Underlying Fund will be a Top Fund.
A Top Fund will have the same or less frequent valuation and redemption dates as the Underlying Funds it invests in.
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 is granted provided that:
(a) securities of each 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 investment objectives of the Top Fund;
(a) at the time of the purchase of securities of an Underlying Fund, the Underlying Fund holds no more than 10% of its net asset value in securities of other investment funds, unless the Underlying Fund:
(i) is a “clone fund” (as defined by NI 81-102),
(ii) purchases or holds securities of a “money market fund” (as defined by NI 81-102), or
(iii) purchases or holds securities that are “index participation units” (as defined by NI 81-102) issued by an investment 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 an Underlying Fund for the same service;
(d) 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;
(e) the Filer, or its affiliate, does not cause the securities of an 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;
(f) the offering memorandum, where available, or other disclosure document of a Top Fund, will be provided to investors in a Top Fund prior to the time of investment and will disclose:
(i) that the Top Fund may purchase securities of Underlying Funds;
(ii) that the Filer, or its affiliate, is the investment fund manager and/or portfolio manager of both the Top Funds and the Underlying Funds;
(iii) the approximate or maximum percentage of the net asset value of the Top Fund that is intended to be invested in securities of Underlying Funds;
(iv) that investors are entitled to receive from the Filer, or its affiliate, on request and free of charge, a copy of the simplified prospectus, annual information form, fund facts, offering memorandum or other similar disclosure document of the Underlying Funds (if available);
(v) the fees, expenses and any special incentive distributions payable by the Underlying Funds that the Top Fund invests in; and
(vi) that investors are entitled to receive from the Filer, or its affiliate, on request and free of charge, the annual and semi-annual financial statements relating to the Underlying Funds in which the Top Fund invests its assets, if available.
“Judith N. Robertson”_______ “Ann Marie Ryan”
Commissioner Commissioner
Ontario Securities Commission Ontario Securities Commission