Next Edge Capital Corp. (Re), 2019 CanLII 49737

May 29, 2019

(the Jurisdiction)

AND

(the Filer)

AND

NEXT EDGE AHL Fund

(the Top Fund)

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Top Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):

(i) to revoke and replace the Previous Decision (as defined below); and

(ii) to grant exemptive relief pursuant to Part 19 of National Instrument 81-102 Investment Funds (NI 81-102), from subsection 2.1(1.1), 2.2(1) and 2.5(2)(a.1) of NI 81-102 to permit the Top Fund to purchase and hold securities of Man AHL DP Limited (the Bottom Fund), which has adopted the investment restrictions contained in NI 81-102 and is managed in accordance with these restrictions, except as was otherwise permitted by National Instrument 81-104 Commodity Pools (Former NI 81-104) prior to the implementation of the Alternative Mutual Fund Amendments (as defined below), and in accordance with any exemptions therefrom obtained by the Top Fund,

(collectively, the Requested Relief)

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(i) the Ontario Securities Commission is the principal regulator for this application; and

(ii) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (the Other Jurisdictions).

Interpretation

Terms defined in NI 81-102, National Instrument 41-101 General Prospectus Requirements (NI 41-101), National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), 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 incorporated under the Canada Business Corporations Act and is the trustee and investment fund manager of the Top Fund.
The Filer is registered as an Investment Fund Manager in Ontario, Québec and Newfoundland and Labrador, as an adviser in the category of Portfolio Manager in Ontario and Alberta and as a dealer in the category of Exempt Market Dealer in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia.
The Filer’s head office is located in Toronto, Ontario.
None of the Filer, the Top Fund or the Bottom Fund is in default of any securities legislation in any of the Jurisdictions.

The Top Fund and the Previous Decision

The Top Fund is a mutual fund to which NI 81-102 applies. Prior to the implementation of the Alternative Mutual Fund Amendments, the Top Fund was a commodity pool as such term is defined in Former NI 81-104, in that the Top Fund adopted fundamental investment objectives that permit the Top Fund to gain exposure to or use or invest in specified derivatives in a manner that is not permitted under NI 81-102.
Following the implementation of the Alternative Mutual Fund Amendments, the Top Fund is an alternative mutual fund as such term is defined in NI 81-102, in that the Top Fund adopted fundamental investment objectives that permit it to invest in specified derivatives in a manner not permitted for other mutual funds under NI 81-102.
The Top Fund is a reporting issuer in each of the Jurisdictions and units of the Top Fund (the Units) are currently qualified for distribution in each of the Jurisdictions under the current prospectus of the Top Fund dated November 2, 2018 (the Current Prospectus).
The Top Fund’s investment objective is to provide holders of Units (the Unitholders) with the opportunity to realize capital appreciation through investment returns that have a low correlation to traditional forms of stock and bond securities. The Top Fund is intended to provide added diversification and enhance the risk/reward profile of conventional investment portfolios.
The Top Fund obtains exposure to the returns of a diversified portfolio of financial instruments across a range of global markets including, without limitation, stocks, bonds, currencies, short-term interest rates, energy, metals and agricultural commodities (the Underlying Assets) managed by AHL Partners LLP (the Investment Manager) using a predominantly trend-following trading program (the AHL Diversified Programme). The AHL Diversified Programme is implemented and managed by AHL, a division of the Investment Manager.
The Bottom Fund will acquire and maintain the Underlying Assets. The return to the Top Fund will be based on the performance of the Bottom Fund, which, in turn, will be based on the performance of the Underlying Assets.
The Top Fund does not intend to list the Units on any stock exchange.
The Filer obtained a previous decision dated November 22, 2013 (the Previous Decision) exempting the Top Fund from subsections 2.1(1), 2.2(1) and 2.5(2)(a) and (c) of NI 81-102 to permit the Top Fund to purchase and hold securities of Man AHL DP Limited (the Bottom Fund), an exempted company with limited liability incorporated in the Cayman Islands, acquires and maintains the Underlying Assets.
The Top Fund obtains exposure to the Underlying Assets by purchasing and holding securities of Bottom Fund, which has adopted the investment restrictions contained in NI 81-102 and is managed in accordance with these restrictions, except as otherwise permitted by Former NI 81-104. The return to the Top Fund is based on the performance of the Bottom Fund, which, in turn, is based on the performance of the Underlying Assets.
Prior to the alternative mutual fund amendments (the “Alternative Mutual Fund Amendments”) published with the CSA Notice of Amendments – Modernization of Investment Fund Product Regulation – Alternative Mutual Funds (2018), 41 OSCB #40 (Supp-2) dated October 4, 2018, Former NI 81-104 did not contain an aggregate exposure limit on leverage obtained through specified derivatives transactions for commodity pools. The Alternative Mutual Fund Amendments moved most of the regulatory framework currently applicable to commodity pools under Former NI 81-104 into NI 81-102 and rename these funds as “alternative mutual funds”.
The aggregate exposure limits announced in the Alternative Mutual Fund Amendments prevents alternative mutual funds and non-redeemable investment funds under NI 81-102, including the Top Fund, from obtaining aggregate exposure to cash borrowing, short selling and specified derivatives transactions in excess of 300% of the fund’s net asset value after the Alternative Mutual Fund Amendments are proclaimed in force.
The new restrictions on aggregate exposure have a significant impact on the Top Fund that has operated in accordance with applicable regulatory requirements without limitations on the Bottom Fund’s aggregate exposure through specified derivatives in their investment strategies prior to the implementation of the Alternative Mutual Fund Amendments.
For non-redeemable investment funds, the transition provisions under NI 81-102 allow for grandfathering of existing funds that may be unduly impacted by the changes, provided the non-redeemable investment fund was established before October 4, 2018, unless the fund has filed a prospectus for which a receipt was issued after that date.
Unlike for non-redeemable investment funds, NI 81-102 does not contain transition provisions that would allow for grandfathering of former commodity pools under the Alternative Mutual Fund Amendments.
The Requested Relief is required to permit the Top Fund to continue to purchase and hold securities of the Bottom Fund in order to obtain exposure to the Underlying Assets managed in accordance with the AHL Diversified Programme. The Top Fund will obtain exposure to the Underlying Assets managed in accordance with the AHL Diversified Programme in substantially the same manner as it did prior to the implementation of the Alternative Mutual Fund Amendments.

The Bottom Fund and the Underlying Assets

The Bottom Fund is an exempted company with limited liability incorporated in the Cayman Islands on September 5, 2013 that acquires and maintains the Underlying Assets.
Man Fund Management (Guernsey) Limited (the AHL DP Manager) is the manager and services manager of the Bottom Fund. The Underlying Assets are actively managed by the Investment Manager. The Investment Manager is authorized and regulated in the United Kingdom by the Financial Conduct Authority and is a member of Man Group plc (Man Group).
In managing the Underlying Assets, the Investment Manager employs the AHL Diversified Programme. The Bottom Fund has adopted and is subject to the investment restrictions contained in NI 81-102. The Underlying Assets are managed in accordance with these restrictions, except as otherwise permitted by Former NI 81-104 and subject to receipt of any exemptions therefrom obtained by the Bottom Fund or the Top Fund.
The Bottom Fund is a reporting issuer under the Securities Act (Ontario) and the Securities Act (Québec) and subject to the continuous disclosure requirements of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106). The financial statements and other reports required to be filed by the Bottom Fund are available through SEDAR.
The Bottom Fund is a mutual fund because holders of its securities are entitled to receive, on demand, an amount computed by reference to the NAV of the Bottom Fund. However, the Bottom Fund will not distribute any securities under its non-offering prospectus. Accordingly, the Bottom Fund will be a mutual fund to which NI 81-106 applies, but will not be subject to the requirements of either NI 81-102 or Former NI 81-104.
Though not subject to NI 81-102, the Bottom Fund has adopted fundamental investment objectives that permit it to invest in physical commodities or specified derivatives in a manner permitted under NI 81-102, subject to receipt of any exemptions therefrom obtained by the Bottom Fund or the Top Fund including pursuant to the Requested Relief.
The Bottom Fund has adopted the investment restrictions contained in NI 81-102 and the Underlying Assets are managed in accordance with these restrictions, except as otherwise permitted by Former NI 81-104, and in accordance with any exemptions therefrom obtained by the Bottom Fund or the Top Fund.
The Investment Manager monitors the Bottom Fund’s compliance with its investment restrictions for the Underlying Assets.
The investment by the Top Fund in securities of the Bottom Fund will comply with the requirements of NI 81-102, except as was otherwise permitted by Former NI 81-104.
As of the date that the Requested Relief is granted, the Filer will no longer rely on the Previous Decision.

Requested Relief

The investment objectives and strategies of the Top Fund and the Bottom Fund permit each of the Top Fund and the Bottom Fund to have aggregate exposure to specified derivatives transactions subject to the investment restrictions contained in NI 81-102, except as otherwise permitted by Former NI 81-104 and subject to receipt of any exemptions therefrom obtained by the Bottom Fund or the Top Fund.
The granting of the Requested Relief will not expose the Top Fund or its Unitholders to additional risks as the Top Fund will continue to have the same investment exposure as it did prior to the implementation of the Alternative Mutual Fund Amendments and the Top Fund will not engage in any new borrowing or short selling of securities.
The investment by the Top Fund in securities of the Bottom Fund represents the business judgement of responsible persons uninfluenced by considerations other than the best interest of the Top Fund and the Unitholders, respectively.

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:

the Top Fund is an alternative mutual fund subject to NI 81-102 that filed a long form prospectus as a commodity pool under Former NI 81-104 prior to the Alternative Mutual Fund Amendments;
the Bottom Fund is an investment fund that complies with the investment restrictions contained in NI 81-102 and the Underlying Assets are managed in accordance with these restrictions, except as otherwise permitted by Former NI 81-104 and in accordance with any exemptions therefrom obtained by the Top Fund, and the Top Fund will not engage in any new borrowing or short selling of securities;
the Bottom Fund is a reporting issuer subject to National Instrument 81-106 Investment Fund Continuous Disclosure;
no securities of the Bottom Fund are distributed in Canada other than to the Top Fund;
the investment by the Top Fund in securities of the Bottom Fund is made in compliance with each provision of NI 81-102, except subsection 2.1(1.1), 2.2(1) and 2.5(2)(a.1) of NI 81-102;
the specified derivatives transactions entered into by the Top Fund and the Bottom Fund will be consistent with the fundamental investment objectives and investment strategies of the Top Fund;
the Top Fund’s simplified prospectus, annual information form and fund facts documents will contain adequate disclosure to ensure that unitholders of the Funds are fully aware of the specified derivatives transactions entered into by the Top Fund and the Bottom Fund and the risks associated therewith; and
this decision shall expire upon the change in the fundamental investment objectives and investment strategies of the Top Fund or the Bottom Fund.

“Darren McKall”

Darren McKall, Manager

Manager, Investment Funds and Structured Products Branch

Ontario Securities Commission