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 Claret Asset Management Corporation (the "Filer")
DECISION
Background
The Ontario Securities Commission has received an application from the Filer for a decision under applicable securities legislation (the "Legislation") for exemptive relief from subsections 111(2)(b) and 111(4) of the Securities Act (Ontario), which prohibits (i) 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 securityholder; and (ii) an investment fund, its management company or its distribution company from knowingly holding an investment described in (i) (the "Requested Relief").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) The Ontario Securities Commission is the principal regulator (the "Principal Regulator") for the purposes of 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
Unless expressly defined herein, terms in this decision 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
1The Filer is a corporation established under the laws of Canada with its head office in Montréal, Québec.
2The Filer currently is registered as a portfolio manager in Alberta, British Columbia, Ontario, Prince Edward Island and Québec, an investment fund manager in Ontario and Québec, a commodity trading manager in Ontario and a derivatives portfolio manager in Québec.
3The Filer currently is registered as an investment adviser with the United States Securities and Exchange Commission (SEC).
4The Filer is not a reporting issuer in any jurisdiction and is not in default of securities legislation of any jurisdiction of Canada.
5The Filer is, or will be, the portfolio manager and investment fund manager of each of the Claret "Outside the box" Fund (the "Initial Top Fund"), the Global Multi-Asset, the Canadian Feeder Fund (as defined below) and the Cayman Master Fund (together, the "Funds"). Certain directors and officers of the Filer will act as directors or officers of the general partner of the Canadian Feeder Fund and / or the Cayman Master Fund which will be set up as entities created under the laws of the Cayman Islands or the laws of other foreign jurisdictions as determined by the Filer from time to time.
6None of the Funds currently prepares and provides an offering memorandum or other similar disclosure document to its potential investors.
7Each of the Initial Top Fund and the Global Multi-Asset is an investment fund that is established under the laws of Ontario.
8Each of the Canadian Feeder Fund and the Cayman Master Fund will be established under the laws of the Cayman Islands.
9The Filer has complete discretion to invest the assets of each Fund and is responsible for executing all portfolio transactions. The Filer enters into discretionary management agreement with each of its clients ("managed account client"). The Filer, subject to compliance with applicable securities laws and pursuant to Section 8.6 of National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103"), may act as a distributor of securities of the Funds not otherwise sold through another registered dealer.
10The securities of each Fund are, or will be, distributed pursuant to one or more available exemptions from the prospectus requirement of applicable securities legislation. None of the Funds is, or is expected to be, a reporting issuer in any province or territory of Canada or other jurisdiction and none are, or are expected to be, subject to National Instrument 81-102 – Investment Funds ("NI 81-102").
11Except for the shares or classes of shares sold by the Cayman Master Fund to the Canadian Feeder Fund, which can only be purchased by the Canadian Feeder Fund, all of the other classes of shares of the Cayman Master Fund will be sold outside of Canada pursuant to available prospectus exemptions and applicable laws.
12Subject to the terms of this Decision, the Filer, or an affiliate of the Filer, may be entitled to receive management fees and incentive allocations with respect to one or more classes of securities of the Funds.
13On November 28, 2018, the Filer obtained a decision from the Autorité des marchés financiers, and other provincial securities regulators having jurisdictions acting as principal regulator for this purpose, permitting inter-fund trades and in-specie transactions.
14Pursuant to subparagraph 13.5(2)(a)(ii) of NI 31-103, the written consent of each managed account client is obtained before the purchase by a Fund of a security of an issuer in which a responsible person or an associate of a responsible person is a partner, officer or director (as defined for the purpose of subparagraph 13.5(2)(a)(ii) of NI 31-103); and such fact is duly disclosed to the client.
Claret "Outside the box" Fund
15The Claret "Outside the box" Fund was formed on August 1, 2014 and is governed by an amended and restated master trust agreement dated January 1, 2019, governed by the laws of the province of Ontario, made between the Filer, as trustee, and the Filer, as manager (the "Master Trust Agreement").
16The investment objective of the Initial Top Fund is to provide long-term capital growth by using diverse investment strategies separately or concurrently arising from the Filer's ongoing research to invest in a portfolio of securities of issuers traded on global markets. The investment strategies may include, but are not limited to, traditional long/short, market-neutral, global macro or any strategy deemed appropriate by the Filer. The Initial Top Fund may invest in listed equity securities, debt securities, exchange-traded futures contracts, over the counter ("OTC") futures contracts and other OTC derivatives cleared through a recognized clearing house and, from time to time, OTC derivatives which are not cleared through a recognized clearing house. The Initial Top Fund may also invest in restricted securities of public issuers which are distributed in private transactions pursuant to prospectus exemptions and, from time to time, in securities of private issuers. The Initial Top Fund may achieve leverage through a number of ways, including cash borrowing, short selling and derivatives transactions. The aggregate gross exposure resulting from the use of leverage may vary depending on the investment strategy and type of borrowing. The Initial Top Fund may invest cash temporarily uninvested in money market instruments. The Initial Top Fund may make short sales of securities or maintain a short position in any security to attain its investment objectives.
Claret Global Multi-Asset Fund
17The Claret Global Multi-Asset Fund ("Global Multi-Asset Fund") was formed on May 9, 2016 and is governed by the Master Trust Agreement.
18The investment objective of the Global Multi-Asset Fund is to provide positive absolute returns by investing in a variety of mostly systematic investment strategies arising from the Filer's ongoing research. The investment strategies may include, but shall not be limited to, different time frames (Short, Medium or Long Term), styles (Trend-Following, Mean Reversion, Relative Value, Momentum, Spread Trading, etc…) and asset classes (Currencies, Fixed Income, Equities and Commodities). The Global Multi-Asset Fund may invest globally in listed equity securities, debt securities, exchange-traded products, exchange-traded futures contracts, OTC forward contracts and other OTC derivatives cleared through a recognized clearing house and, from time to time, OTC derivatives which are not cleared through a recognized clearing house. The Global Multi-Asset Fund may also invest in restricted securities of public issuers which are distributed in private transactions pursuant to prospectus exemptions and, from time to time, in securities of private issuers. Leverage is an integral part of the Global Multi-Asset Fund's investment strategy. The Global Multi-Asset Fund may achieve leverage through a number of ways, including cash borrowing, short selling and derivatives transactions. The aggregate gross exposure resulting from the use of leverage may vary depending on the investment strategy and type of borrowing and may be multiples of the Global Multi-Asset Fund's net asset value ("NAV"). The Global Multi-Asset Fund may invest cash temporarily uninvested in money market instruments. The Global Multi-Asset Fund may make short sales of securities or maintain a short position in any security to attain its investment objectives.
19The Global Multi-Asset Fund will not, directly or indirectly, hold more than 10% of its NAV in "illiquid" assets (as defined in NI 81-102).
Cayman Master Fund and Canadian Feeder Fund
20As part of its international expansion, the Filer intends to establish another investment fund created under the laws of the Cayman Islands as an exempted company (the "Cayman Master Fund"), with the same investment objective as the Global Multi-Asset Fund.
21The Cayman Master Fund will not, directly or indirectly, hold more than 10% of its NAV in "illiquid" assets (as defined in NI 81-102).
22The Filer intends to establish a limited partnership or an exempt company in the Cayman Islands that will be interposed between the Global Multi-Asset Fund and the Cayman Master Fund for tax reasons (the "Canadian Feeder Fund").
Multi-Fund Structure
23The Filer has determined it is in the best interests of the Initial Top Fund to invest more than 20% of its NAV in units of the Global Multi-Asset Fund to achieve economies of scale by consolidating the pool of assets held by the Global Multi-Asset Fund with the similar pool of assets held by the Initial Top Fund, while maintaining the Global Multi-Asset Fund and the Initial Top Fund as separate trusts. Implementing diversification in the Initial Top Fund by investing in the Global Multi-Asset Fund will provide economies of scale, allow the Initial Top Fund to achieve its investment objective in a cost-efficient manner, and will not be detrimental to the interests of other securityholders of the Global Multi-Asset Fund.
24In addition, the Filer believes that, in the future, there may be circumstances where the Filer determines it would be in the best interests of the Global Multi-Asset Fund to invest more than 20% of its NAV in securities of one or more of the Canadian Feeder Fund and the Cayman Master Fund for diversification and tax optimization purposes.
25To achieve the above, the Filer proposes to cause the Initial Top Fund to adopt a multi-fund structure with two tiers at the onset, and four tiers upon the creation of the Cayman Master Fund under which the Initial Top Fund will be a substantial security holder of the Global Multi-Asset Fund, which will in turn be a substantial security holder of the Canadian Feeder Fund, which will in turn invest all or substantially all of its assets in the Cayman Master Fund.
26The Canadian Feeder Fund will be a limited partnership flow-through vehicle or exempt company established in the Cayman Islands that will be interposed between the Global Multi-Asset Fund and the Cayman Master Fund for tax reasons. The only investor in the Canadian Feeder Fund will be the Global Multi-Asset Fund. The Canadian Feeder Fund will not be sold to other investors. The purpose of the Canadian Feeder Fund will be to preserve certain aspects of the tax treatment to Canadian investors and therefore ensure that the Canadian investors will not experience any negative impact from a Canadian tax perspective due to the proposed multi-fund structure in place.
27The Filer expects that the increased economies of scale that may be achieved through the multi-fund structure may provide additional benefits to security holders of the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund, including more favourable pricing and transaction costs on portfolio trades and increased access to investments where there is a minimum subscription or purchase amount.
28The multi-fund structure will enable the Filer to maintain the Initial Top Fund, the Global Multi-Asset Fund, the Canadian Feeder Fund and the Cayman Master Fund as separate legal structures for tax and marketing reasons. The Cayman Master Fund allows the Filer to access foreign investors and offer them an investment vehicle in a form that is familiar to them.
29The multi-fund structure will allow the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund to achieve their investment objectives in a cost-efficient manner and will not be detrimental to the interests of their security holders or of those of the Cayman Master Fund.
30The Funds will have matching valuation dates and will be valued no less frequently than on a monthly basis.
31Securities of the Funds will have matching redemption dates and will be redeemable no less frequently than on a monthly basis.
32An investment by the Initial Top Fund, the Global Multi-Asset Fund or the Canadian Feeder Fund, in the Global Multi-Asset Fund, the Canadian Feeder Fund or the Cayman Master Fund, as applicable, will be effected at an objective price. An objective price for this purpose will be the NAV per security of the applicable class or series of the applicable Fund.
33All of the investments by the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund in securities of the Global Multi-Asset Fund, the Canadian Feeder Fund or the Cayman Master Fund, as applicable, described above are referred to herein as Fund-on-Fund Investments. The Filer believes that Fund-on-Fund Investments provide an efficient and cost-effective manner of pursuing portfolio diversification on behalf of the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund rather than through the direct purchase of securities.
The Requested Relief
34The Funds will be related mutual funds (under applicable securities legislation) by virtue of the common management by the Filer. The amounts invested by the Initial Top Fund in the Global Multi-Asset Fund, and, in the future, by the Global Multi-Asset Fund in the Canadian Feeder Fund, and by the Canadian Feeder Fund in the Cayman Master Fund, as applicable, may exceed 20% of the outstanding voting securities of the Global Multi-Asset Fund, the Canadian Feeder Fund or the Cayman Master Fund. As a result, each of the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund, could become a substantial security holder of the Global Multi-Asset Fund, the Canadian Feeder Fund or the Cayman Master Fund, as applicable,.
35In the absence of the Requested Relief, the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund would be precluded from purchasing and holding securities of the Global Multi-Asset Fund, the Canadian Feeder Fund and the Cayman Master Fund, due to the investment restrictions contained in the Legislation. Specifically, the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund would be prohibited from becoming substantial security holders of the Global Multi-Asset Fund, the Canadian Feeder Fund or the Cayman Master Fund.
36Since the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund do not offer their securities under a simplified prospectus and are therefore not subject to NI 81-102, they are unable to rely on the exemption codified for retail fund-on-fund investments under subsection 2.5(7) of NI 81-102 and accordingly seek the Requested Relief under this decision.
37The direct and indirect investments, as applicable, of each of the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund in one or more of the Global Multi-Asset Fund, the Canadian Feeder Fund and the Cayman Master Fund will represent the business judgment of a responsible person uninfluenced by considerations other than the best interests of the Initial Top Fund, the Global Multi-Asset Fund or the Canadian Feeder Fund, as applicable.
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 Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106;
(b) the Global Multi-Asset Fund and the Canadian Feeder Fund will invest all or substantially all of their assets in the Canadian Feeder Fund and the Cayman Master Fund, respectively;
(c) the investment by the Initial Top Fund in the Global Multi-Asset Fund, and by the Global Multi-Asset Fund in the Canadian Feeder Fund, and by the Canadian Feeder Fund in the Cayman Master Fund, respectively, is or will be, as applicable, compatible with the fundamental investment objectives of the Initial Top Fund, the Global Multi-Asset Fund, and the Canadian Feeder Fund, respectively;
(d) an investment by each of the Initial Top Fund, the Global Multi-Asset Fund or the Canadian Feeder Fund, in any of the Global Multi-Asset Fund, the Canadian Feeder Fund or the Cayman Master Fund, will be effected at an objective price, calculated in accordance with section 14.2 of National Instrument 81-106 Investment Fund Continuous Disclosure ("NI 81-106");
(e) the Initial Top Fund, the Global Multi-Asset Fund or the Canadian Feeder Fund will not purchase or hold securities of the Global Multi-Asset Fund, the Canadian Feeder Fund or the Cayman Master Fund, as applicable, unless, at the time of the purchase of securities of the applicable Fund, none of the Global Multi-Asset Fund, the Canadian Feeder Fund, or the Cayman Master Fund holds more than 10% of its net assets in securities of other investment funds, which must be managed by a party at arm's length with the Filer and any affiliate;
(f) the Initial Top Fund, the Global Multi-Asset Fund or the Canadian Feeder Fund will not invest in any of the Global Multi-Asset Fund, the Canadian Feeder Fund, or the Cayman Master Fund, unless such Fund complies with the provisions of NI 81-106 that apply to a "mutual fund in Ontario" as defined in the Act, to the extent such requirements apply to it;
(g) no management fees or incentive fees are payable by any of the Initial Top Fund, the Global Multi-Asset Fund or the Canadian Feeder Fund that, to a reasonable person, would duplicate a fee payable for the same service by any of the Global Multi-Asset Fund, the Canadian Feeder Fund or the Cayman Master Fund in which each of them directly or indirectly invests its assets;
(h) no sales fees or redemption fees are payable by any of the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund, in relation to its purchases or redemptions of securities of any of the Global Multi-Asset Fund, the Canadian Feeder Fund and the Cayman Master Fund;
(i) the Filer does not cause the securities of any of the Global Multi-Asset Fund, the Canadian Feeder Fund and the Cayman Master Fund held by the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund, as applicable, to be voted at any meeting of holders of such securities, except that the Filer may arrange for such securities to be voted by the beneficial holders of securities of the Initial Top Fund, the Global Multi-Asset Fund or the Canadian Feeder Fund, as applicable, who are not the Filer or its affiliate, or an officer, director or substantial securityholder of the Filer or its affiliate;
(j) when purchasing and/or redeeming securities of any of the Global Multi-Asset Fund, the Canadian Feeder Fund and the Cayman Master Fund, the Filer will, as portfolio adviser of the Funds, act honestly, in good faith and in the best interests of the Funds, and will exercise the care and diligence that a reasonably prudent person would exercise in comparable circumstances;
(k) the interim and annual financial statements of each of the Initial Top Fund, the Global Multi-Asset Fund and the Canadian Feeder Fund will disclose the top 25 positions of the Cayman Master Fund, each expressed as a percentage of NAV of the Cayman Master Fund as at the end of the financial reporting period;
(l) the offering memorandum, where available, or other disclosure document of the Initial Top Fund and the Global Multi-Asset Fund, respectively, will be provided to investors in the Initial Top Fund and the Global Multi-Asset Fund, as applicable, prior to the time of investment, and will disclose:
i) that the Initial Top Fund or the Global Multi-Asset Fund, as applicable, will directly or indirectly hold a substantial investment in one or more of the Global Multi-Asset Fund, the Canadian Feeder Fund and the Cayman Master Fund;
ii) that the Filer is the investment fund manager and/or portfolio adviser of each Fund in the multi-fund structure of the Initial Top Fund and the Global Multi-Asset Fund, as applicable;
iii) the investment objective and investment strategies of each Fund in which the Initial Top Fund and the Global Multi-Asset Fund, as applicable, directly or indirectly invest their assets;
iv) the fees, expenses and any performance or special incentive distributions payable by any of the Funds in which the Initial Top Fund and the Global Multi-Asset Fund, as applicable, directly or indirectly invest their assets;
v) that investors are entitled to receive from the Filer or its affiliate, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of each Fund in which the Initial Top Fund and the Global Multi-Asset Fund, as applicable, directly or indirectly invest their assets;
vi) that investors are entitled to receive from the Filer or its affiliate, on request and free of charge, the annual and interim financial statements of each Fund in which the Initial Top Fund and the Global Multi-Asset Fund, as applicable, directly or indirectly invest their assets;
(m) each existing securityholder of the Initial Top Fund and the Global Multi-Asset Fund receives, within one month from the date of this decision, the offering memorandum or disclosure document providing the disclosure contemplated in paragraph (l); and
(n) the Filer will annually inform investors in the Initial Top Fund and the Global Multi-Asset Fund, respectively, of their right to receive from the Filer, on request and free of charge, a copy of the offering memorandum, where available, or other similar disclosure document, and the annual and interim financial statements, of each Fund in which the Initial Top Fund and the Global Multi-Asset Fund directly or indirectly invest their assets.
"M. Celia Williams" "Garnet W. Fenn"
M. Cecilia Williams Garnet W. Fenn
Commissioner Commissioner
Ontario Securities Commission Ontario Securities Commission
Application #2019/0072