February 17, 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 PICTON MAHONEY ASSET MANAGEMENT (the Filer)
AND
IN THE MATTER OF THE TOP FUNDS (as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Filer, each of the funds listed in Schedule “A” and any other investment fund that will not be a reporting issuer in any jurisdiction of Canada that may be established, advised or managed by the Filer in the future (collectively, the Top Funds) which invests its assets in any other investment fund that is not or will not be a reporting issuer in any jurisdiction of Canada and that has been or may be in the future established, advised or managed by the Filer (the Underlying Funds):
(a) for a decision to revoke and replace the Prior Relief (as defined below);
(b) for an order pursuant to the securities legislation (the Legislation) of Ontario and Alberta, exempting the Filer and the Top Funds from the restriction which prohibits
(i) an investment fund in Ontario, or a mutual fund in Alberta, from knowingly making an investment in any person or company in which the investment fund or mutual fund, as applicable, alone or together with one or more related mutual funds, is a substantial security holder;
(ii) an investment fund in Ontario, or a mutual fund in Alberta from knowingly making an investment in an issuer in which:
(A) any officer or director of the investment fund or mutual fund, as applicable, its management company or distribution company or an associate of any of them, or
(B) any person or company who is a substantial security holder of the investment fund or mutual fund, as applicable, its management company or its distribution company,
has a significant interest, and
(iii) a mutual fund, its management company or its distribution company from knowingly holding an investment described in paragraphs (A) and (B) above
(the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
the Ontario Securities Commission is the principal regulator for this application; and
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 respect of the Requested Relief, in Ontario and Alberta.
Interpretation
Unless expressly defined herein, terms in this application have the respective meanings given to them in National Instrument 14-101 – Definitions and MI 11-102.
Representations
This decision is based on the following facts represented by the Filer:
Filer
The Filer is a general partnership formed under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
The Filer is registered as (i) an investment fund manager in Ontario, Québec and Newfoundland and Labrador; (ii) an adviser in the category of portfolio manager in Ontario, British Columbia, Saskatchewan, Manitoba, Québec and Prince Edward Island; and (iii) a dealer in the category of exempt market dealer in Ontario, British Columbia, Alberta and Québec.
The Filer is, or will be, the investment fund manager and portfolio manager for the Top Funds and the Underlying Funds (collectively, the Funds). As such, the Filer is responsible for managing the assets of the Funds, has complete discretion to invest and reinvest the Funds’ assets, and is responsible for executing all portfolio transactions.
The Filer is not a reporting issuer in any jurisdiction of Canada and is not in default of securities legislation of any jurisdiction of Canada.
Top Funds
Each Top Fund is or will be an open-ended trust established under the laws of the Province of Ontario by declaration of trust, as amended and restated (the Master Trust Declaration).
Pursuant to the Master Trust Declaration, the Filer acts or will act as the trustee of the Top Funds and has or will have authority to manage the business and affairs of the Top Funds and to bind the Top Funds.
Each of the Top Funds is or will be sold pursuant to prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions (NI 45‑106).
Each of the Top Funds is or will be an investment fund for the purposes of the Securities Act (Ontario) (the Act) or a mutual fund for the purposes of the Securities Act of Alberta, but no Top Fund is or will be a reporting issuer in any jurisdiction of Canada.
The existing Top Funds are not in default of securities legislation of any jurisdiction of Canada.
The Master Trust Declaration of each of the Top Funds describes or will describe the separate investment objectives, strategies and/or restrictions applicable to the Top Funds, the fees, compensation and expenses payable by the Top Funds, the calculation of net asset value, distributions, the powers and duties of the investment fund manager and all other matters material to each of the Top Funds, including the fact that in pursuing its investment objectives, each Top Fund may invest all, or less than all, its assets in one or more Underlying Funds as an investment strategy.
Underlying Funds
Each Underlying Fund is or will be an open-ended trust established under the laws of the Province of Ontario by the Master Trust Declaration.
Pursuant to the Master Trust Declaration, the Filer acts or will act as the trustee of the Underlying Funds and has or will have authority to manage the business and affairs of the Underlying Funds and to bind the Underlying Funds.
Each of the Underlying Funds has or will have separate investment objectives, strategies and/or restrictions, as described in the Master Trust Declaration.
Each of the Underlying Funds calculates and will calculate its net asset value and offer redemptions at least at the same frequency as the applicable Top Fund.
Securities of the Underlying Funds are and will be issued pursuant to prospectus exemptions in accordance with NI 45-106.
The Underlying Funds are, or will be, investment funds for the purposes of the Act or a mutual fund for the purposes of the Securities Act (Alberta), but no Underlying Fund is, or will be, a reporting issuer in any jurisdiction of Canada.
The existing Underlying Funds are not in default of securities legislation of 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). 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.
For the purpose of implementing the Fund-on-Fund Structure, the Filer will ensure that:
(a) 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.
(b) an investment in an Underlying Fund by a Top Fund will be effected at an objective price. The portfolio of each Underlying Fund consists and will consist primarily of publicly-traded securities and/or derivatives traded over-the-counter and on an exchange; the underlying assets of such derivatives will be primarily traded on markets or exchanges for which an observable market price is available;
(c) the respective investment portfolio of the Underlying Funds are or will be considered to be liquid. While the Underlying Funds are not prohibited from purchasing and holding “illiquid assets” (as defined in National Instrument 81-102 – Investment Funds (NI 81-102)), the Filer 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;
(d) the units of an Underlying Fund are or will be recorded in the Underlying Fund’s transfer agent’s record in the name of the Top Fund and the remaining assets of each Top Fund and each Underlying Fund are, or will be, held by one or more entities that meet, or will meet, the qualifications set out in subsection 6.2 of NI 81-102, other than that audited financial statements may not have been made public for the purpose of subsection 6.2(3)(a) of NI 81-102, or for fund assets held outside of Canada, entities that meet, or will meet, the qualifications set out in subsection 6.3 of NI 81-102, other than that audited financial statements may not have been made public for the purpose of subsection 6.3(3)(a) of NI 81-102;
(e) the assets of the existing Top Funds and the existing Underlying Funds are currently held by Scotia Capital Inc., Goldman, Sachs & Co., RBC Dominion Securities Inc., Société Générale Capital Canada Inc., and Goldman Sachs International;
(f) the arrangements between or in respect of each Top Fund and the Underlying Funds are and will be such as to avoid the duplication of management fees or incentive fees paid to the Filer or its affiliates for the same service;
(g) no sales fees or redemption fees are payable by the Top Fund in relation to its purchases or redemptions of securities of the Underlying Funds;
(h) the Filer will not vote the securities of the applicable Underlying Fund held by the Top Funds at any meeting of holders of such securities except that the Top Fund may, if the Filer so chooses, arrange for all of the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of a Top Fund to the extent the matter being voted on would have required the approval of such beneficial holders had it occurred at the Top Fund level;
(i) the offering memorandum or other disclosure document, where available, of each of the Top Funds will be provided to all investors of the applicable Top Funds and will disclose:
(i) that the Top Fund may purchase securities of an Underlying Fund;
(ii) that the Filer, or an affiliate of the Filer, is the investment fund manager and portfolio manager of both the Top Funds and the Underlying Funds and potential conflicts of interests relating to such relationship;
(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; and
(v) the fees and expenses payable by the Underlying Funds that the Top Fund may invest in, including any incentive fees;
(j) each of the Funds which is 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; and
(k) the investors in each of the Top Funds are entitled to receive, on request and free of charge, a copy of the offering documents (if available) and financial statements of all Underlying Funds in which the Top Fund may invest its assets.
No Underlying Fund will be invested in units of a Top Fund that is already invested in units of such Underlying Fund.
The Filer is entitled to receive quarterly management fees, payable in arrears with respect to the Top Funds and the Underlying Funds, but no management fees or incentive fees are or will be payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service.
A Top Fund’s investments in the Underlying Funds represent the business judgment of a responsible person uninfluenced by considerations other than the best interests of the Top Fund.
Generally
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 investment funds by virtue of the common management by the Filer.
Persons or companies who are officers or directors of the Filer or substantial security holders of the Filer or the Top Funds may acquire and hold a significant interest in one or more Underlying Funds from time to time. The significant interest in the Underlying Funds may arise as a result of the direct or indirect investment in securities of the Underlying Fund by such persons or companies.
Because the Top Funds and the Underlying Funds are not subject to NI 81-102, the Top Funds and the Underlying Funds are and will be unable to rely on the exception available 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 investment restrictions contained in securities legislation.
Prior Relief
Under a decision dated March 12, 2010 (the Prior Relief), the Filer and Picton Mahoney Diversified Strategies Fund and any other investment fund established and managed by the Filer after the date thereof (collectively, the Prior Relief Top Funds) were granted relief to permit the Prior Relief Top Funds to invest in certain underlying funds that were established, managed and advised by the Filer or may have been established, managed and advised by the Filer after the date thereof (the Prior Relief Underlying Funds).
The Filer now seeks relief for certain investment funds created prior to March 12, 2010 to engage in fund-on-fund investing. Therefore, the Filer is seeking to revoke and replace the Prior Relief with the Requested Relief, to more accurately reflect the Top Funds under the Fund-on-Fund Structure.
Decision
The decision of the principal regulator under the Legislation of the Jurisdiction is that
the Prior Relief is revoked; and
the Requested Relief is granted, provided that, in each case:
(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 investment objectives of a 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 the market value of its net assets in securities of other investment funds, unless the Underlying Fund:
(i) is a “clone fund” (as defined in 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;
(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 the Top Fund in relation to its purchases or redemptions of securities of the Underlying Funds;
(f) the Filer will not vote the securities of the Underlying Fund held by the Top Funds at any meeting of holders of such securities, except that a Top Fund may arrange for the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;
(g) no Underlying Fund will be invested in units of a Top Fund that is already invested in units of such Underlying Fund; and
(h) the offering memorandum, where available, or other disclosure document, of each of the Top Funds will be provided to all investors of the applicable Top Funds prior to the time of investment and will disclose:
(i) that the Top Fund may purchase securities of an Underlying Fund;
(ii) that the Filer is the investment fund manager and portfolio manager of both the Top Funds and the Underlying Funds and potential conflicts of interests relating to such relationship;
(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) each officer and director or substantial security holder of the Filer, if any, that has or may have a significant interest in the Underlying Fund through investments made in securities of such Underlying Fund, the approximate amount of the significant interest they hold on an aggregate basis as of the date of the applicable disclosure document, expressed as a percentage of the NAV of the Underlying Fund, and the potential conflicts of interest which may arise from such relationships;
(v) the process or criteria used to select the Underlying Funds;
(vi) the fees and expenses payable by the Underlying Fund(s) that the Top Fund may invest in, including any incentive fees; and
(vii) that the investors in each of the Top Funds are entitled to receive, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of the Underlying Funds (if available) and the annual and semi-annual financial statements of the Underlying Funds in which the Top Fund invests its assets.
“Sarah B. Kavanagh”
“Deborah Leckman”
Commissioner
Commissioner
Ontario Securities Commission
Ontario Securities Commission
Schedule “A”
List of Funds
Picton Mahoney Market Neutral Equity Fund
Picton Mahoney Global Market Neutral Equity Fund
Picton Mahoney Income Opportunities Fund
Picton Mahoney Diversified Strategies Fund
Picton Mahoney Long Short Equity Fund
Picton Mahoney Global Long Short Equity Fund
Picton Mahoney Long Short Emerging Markets Fund
Picton Mahoney Long Short Global Resource Fund
Picton Mahoney 130/30 Alpha Extension Canadian Equity Fund
Picton Mahoney Premium Fund
Picton Mahoney Long Short US SMid Cap Fund
Picton Mahoney Special Situations Fund