1832 Asset Management L.P.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to permit investment funds subject to NI 81-102 to invest in securities of related underlying investment funds that are not reporting issuers and that hold more than 10% of their net asset value in securities of other related and unrelated investment funds -- relief subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(a), 2.5(2)(b), 2.5(2)(c) and 19.1.
August 1, 2024
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 1832 ASSET MANAGEMENT L.P. (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 (the Application) from the Filer on behalf of each of the Filer, Scotia INNOVA Income Portfolio, Scotia INNOVA Balanced Income Portfolio, Scotia INNOVA Balanced Growth Portfolio, Scotia INNOVA Growth Portfolio, Scotia INNOVA Maximum Growth Portfolio, Scotia Partners Income Portfolio, Scotia Partners Balanced Income Portfolio, Scotia Partners Balanced Growth Portfolio, Scotia Partners Growth Portfolio and Scotia Partners Maximum Growth Portfolio (the Existing Top Funds) and other existing and future investment funds managed or to be managed by the Filer, or an affiliate of the Filer, that is, or will be, reporting issuers subject to National Instrument 81-102 Investment Funds (NI 81-102) and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) (the Future Top Funds, and together with the Existing Top Funds, the Top Funds).
The Filer intends for one or more Top Funds to invest, as the Filer considers in the best interest of the Top Fund and in accordance with its investment objectives and strategies, a portion of its assets in Scotia Private Real Estate Fund, an investment fund structured as a trust that is not currently subject to NI 81-102 or NI 81-107 (the Initial Underlying Fund), and/or in any other future investment fund that is, or will be, managed by the Filer or any affiliate and that is not subject to NI 81-102 or NI 81-107 (the Future Underlying Funds and, together with the Initial Underlying Fund, the Underlying Funds), each of which Underlying Fund in turn may hold more than 10% of its net asset value (NAV) in securities of one or more investment funds (the Third Tier Funds and, each, a Third Tier Fund) (each, a Three-Tier Structure). The Filer has therefore applied for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Top Funds from the following prohibitions in NI 81-102:
(a) section 2.5(2)(a) of NI 81-102, which prohibits an investment fund from purchasing or holding a security of another investment fund unless, if the investment fund is a mutual fund, other than an alternative mutual fund, either of the following applies: (i) the other investment fund is a mutual fund, other than an alternative mutual fund, that is subject to this Instrument; (ii) the other investment fund is an alternative mutual fund or a non-redeemable investment fund that is subject to this Instrument and, at the time of the purchase of that security, the investment fund holds no more than 10% of its net asset value in securities of alternative mutual funds and non-redeemable investment funds;
(b) section 2.5(2)(b) of NI 81-102, which prohibits an investment fund from purchasing or holding a security of another investment fund which in turn may hold more than 10% of its net asset value (NAV) in securities of one or more investment funds; and
(c) section 2.5(2)(c) of NI 81-102, which prohibits an investment fund from purchasing or holding a security of another investment fund unless the other investment fund is a reporting issuer in a jurisdiction
(collectively, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the 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, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Québec, Prince Edward Island, Saskatchewan and Yukon (together with the Jurisdiction, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions 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
1. The Filer is a limited partnership formed and organized under the laws of the province of Ontario. The general partner of the Filer is 1832 Asset Management G.P. Inc., an Ontario corporation wholly-owned by the Bank of Nova Scotia, with its head office located in Toronto, Ontario.
2. The Filer is registered as: (i) a portfolio manager in all of the provinces of Canada and in the Northwest Territories and the Yukon; (ii) an exempt market dealer in all of the provinces of Canada (except Prince Edward Island and Saskatchewan); (iii) an investment fund manager in Ontario, Quebec, Newfoundland and Labrador and the Northwest Territories; (iv) a commodity trading manager in Ontario; (v) an adviser in Manitoba; and (vi) a derivatives portfolio manager in Quebec.
3. The Filer is not in default of securities legislation in any Jurisdiction.
The Top Funds
4. Each Top Fund is, or will be, an investment fund to which NI 81-102 applies, and will be organized and governed by the laws of a Jurisdiction.
5. The Filer is the manager of the Existing Top Funds and the Filer, or an affiliate of the Filer, will be the manager of any Future Top Funds. To the extent that the Filer or its affiliate is the manager of any Future Top Fund, the representations set out in this decision will apply to the same extent to such Future Top Fund.
6. The securities of each of the Top Funds are, or will be, qualified for distribution in one or more of the Jurisdictions and distributed to investors pursuant to a simplified prospectus and Fund Facts, prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
7. Each Top Fund is, or will be, a reporting issuer under the securities legislation of one or more Jurisdictions.
8. The Top Funds wish to have the ability to purchase securities of the Underlying Funds, each of which will hold more than 10% of its NAV in securities of the Third Tier Funds, as described below.
9. The Existing Top Funds are not in default of the securities legislation of any Jurisdiction.
10. The simplified prospectus of each Top Fund discloses, or will disclose, in its description of the Top Fund's investment strategies that the Top Fund may invest up to 10% of its assets directly or indirectly in the Underlying Funds. This limit is consistent with the classification of the Underlying Funds as illiquid assets for purposes of NI 81-102.
11. Each Top Fund is, or will be, subject to NI 81-107 and the Filer has established, or will establish, an independent review committee (IRC) in order to review conflict of interest matters pertaining to its management of the Top Funds as required by NI 81-107.
The Underlying Funds
12. The Initial Underlying Fund falls, and each Future Underlying Fund will fall, within the definition of "investment fund" under the Securities Act (Ontario).
13. The Filer is the manager of the Initial Underlying Fund and the Filer, or an affiliate of the Filer, will be the manager of any Future Underlying Funds. To the extent that the Filer or an affiliate of the Filer is the manager of any Future Underlying Funds, the representations set out in this decision will apply to the same extent to such Future Underlying Funds
14. The Initial Underlying Fund is an investment fund structured as a trust and will be organized and governed by the laws of a Jurisdiction, but will not be subject to NI 81-102 or NI 81-107. Future Underlying Funds may be structured as limited partnerships, trusts or corporations and will be organized and governed by the laws of a Jurisdiction, but will not be subject to NI 81-102 or NI 81-107.
15. No Underlying Fund will prepare a simplified prospectus in accordance with NI 81-101 or a long form prospectus in accordance with NI 41-101.
16. The Underlying Funds are not, or will not be, reporting issuers in any of the Jurisdictions or listed on any recognized stock exchange.
17. Securities of the Underlying Funds will be distributed solely to investors pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 -- Prospectus Exemptions and the Legislation.
18. The Initial Underlying Fund is not in default of the securities legislation of any Jurisdiction.
19. The investment objective of the Initial Underlying Fund is to invest primarily in North American private real estate funds and real estate-related investments that offer attractive, income-focused risk-adjusted returns. The Fund will also maintain a smaller allocation to listed North American securities.
20. As part of its investment objective and strategies, each Underlying Fund may invest in securities of Third Tier Funds.
21. No Underlying Fund will sell short securities of a Third Tier Fund, excluding index participation units.
22. The securities of each Underlying Fund are, or will be, illiquid assets for purposes of NI 81-102, including for purposes of the restriction in section 2.4 of NI 81-102 applicable to each of the Top Funds.
23. The Filer has one valuation policy for the calculation of NAV, which applies to both the Top Funds and the Underlying Funds managed by it. The Filer calculates, or will calculate, NAV for the Underlying Funds in accordance with Part 14 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106).
24. The value of the underlying portfolio assets of the Initial Underlying Fund will be determined by a third party administrator that is independent of the Filer and the Top and Underlying Funds. The value of the underlying portfolio assets of the Initial Underlying Fund will be determined on at least a quarterly basis. Similar independent valuation will be carried out in respect of the underlying portfolio assets of each Future Underlying Fund.
25. Each Underlying Fund produces, and will produce, audited financial statements on an annual basis, in accordance with generally accepted accounting principles with a qualified auditing firm as the auditor of those financial statements.
26. No Top Fund will actively participate in the business or operations of an Underlying Fund.
Investments by Top Funds in the Underlying Funds
27. An investment by a Top Fund in an Underlying Fund will only be made if the investment is, or will be, compatible with the investment objectives of the Top Fund and allows, or will allow, the Top Fund to obtain exposure to asset classes in which the Top Fund may otherwise invest directly.
28. The investments in the Underlying Funds will be included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102 for each Top Fund.
29. Each Top Fund will also comply with the other investment restrictions and practices provided for in Part 2 of NI 81-102 in making such investments except where exempted pursuant to the Exemption Sought or other exemptive relief previously obtained.
30. The Filer believes that the investment by a Top Fund in an Underlying Fund will provide the Top Fund with an efficient and cost-effective manner of pursuing portfolio diversification and asset diversification instead of purchasing securities directly.
31. Investments by a Top Fund in an Underlying Fund will be effected at an objective price. The Filer's policies and procedures provide that an objective price, for this purpose, will be the NAV per security of the applicable Underlying Fund.
32. A Top Fund will not invest in an Underlying Fund unless the portfolio manager of the Top Fund believes that the liquidity of the Top Fund's portfolio is adequately managed through other strategies.
33. Subsection 2.5(2)(b) of NI 81-102 prohibits an investment fund from investing in another investment fund if, at the time of purchase, the other investment fund has more than 10% of its net assets invested in securities of other investment funds (the Multi-Tier Prohibition).
34. Since an Underlying Fund's investment in securities of the Third Tier Funds may, from time to time, exceed 10% of the NAV of the Underlying Fund, the Multi-Tier Prohibition will prohibit a Top Fund from investing in an Underlying Fund.
35. An investment by a Top Fund in an Underlying Fund would not qualify for the exemptions in paragraph 2.5(4) of NI 81-102 from the Multi-Tier Prohibition because the Underlying Funds do not issue index participation units and are not clone funds or money market funds.
36. An investment in the Underlying Funds by a Top Fund is an efficient and cost-effective alternative to administering one or more investment strategies directly.
37. An investment by a Top Fund in an Underlying Fund or by an Underlying Fund in a Third Tier Fund represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund or the applicable Underlying Fund, as the case may be.
38. The Third Tier Funds may be managed by the Filer or its affiliates (the 1832 Third Tier Funds).
39. There will be no duplication of management fees or incentive fees between the Top Fund and the Underlying Funds, and between the Underlying Funds and the 1832 Third Tier Funds. The prospectus of the Top Funds and the offering memorandum the Underlying Funds will disclose that such management fees and incentive fees will not be duplicated.
Generally
40. Since the Underlying Funds are not reporting issuers and are not subject to NI 81-102, the Top Funds are unable to rely upon the exemption codified under subsection 2.5(7) of NI 81-102 for investments by investment funds subject to NI 81-102 in other investment funds.
41. Absent the Exemption Sought, a Top Fund would by prohibited by sections 2.5(2)(a), 2.5(2)(b) and 2.5(2)(c) from purchasing or holding securities of an Underlying Fund because the Underlying Funds (i) are not subject to NI 81-102; (ii) may hold more than 10% of its NAV in securities of other investment funds; and (iii) are not reporting issuers in the Jurisdictions.
42. The Filer considers that investments in the Underlying Funds by the Top Funds raise "conflict of interest matters" within the meaning of NI 81-107 and therefore if the Exemption Sought is granted, the Filer will request approvals of the IRC for the proposed investments of the Top Funds in the Underlying Funds, including by way of standing instructions. No such investments will be made until the IRC provides its approvals under section 5.2 of NI 81-107.
43. The decision to permit the Top Funds to invest in the Underlying Funds represents the Filer's business judgment and is not influenced by factors other than the best interests of the Top Funds.
44. On an annual basis the financial statements of each Underlying Fund, are, or will be, audited by the Underlying Fund's external auditors, which audit includes independent confirmation of the fair value of each portfolio investment. Such appointed auditor also audits the value of the portfolio investments to ensure that they are accurately valued in accordance with the Underlying Fund's valuation policy. Such financial statements will be accessible in the ordinary course by the Filer.
45. Aside from the sections covered by the Exemption Sought, the Top Funds will comply with section 2.5 of NI 81-102 with respect to any investment in an Underlying Fund and the investments in the Underlying Funds will be included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102 applicable to each Top Fund.
46. The Filer will foster standards of fairness in the allocation of orders policy, the purpose of which is to seek the fair treatment for investors in all investment funds managed by the Filer that are involved in a fund of fund structure by assessing material costs between funds that pertain to transaction charges. This policy is designed to isolate material and/or excessive transaction costs associated with significant trades, at the Filer's discretion, and to prevent the dilution of a fund's assets when these material transactions occur by taking steps to ensure that the applicable fund or funds bear(s) the appropriate economic impact of such transaction costs.
47. The Filer has implemented a liquidity risk management policy, the purpose of which is to monitor underlying liquidity of investment funds managed by the Filer, with each such investment fund potentially considered a large unitholder investment. This policy seeks to ensure that unitholders are not adversely impacted by trading activities of large unitholders.
48. To manage liquidity risk due to cross-ownership of funds within a Three-Tier Structure, the Filer will use a combination of risk management tools to address the significant investor risk, including: (i) Independent Review Committee (or IRC) approved governance policies that have been adopted to protect all investors in the Top Funds, the Underlying Funds and the 1832 Third Tier Funds; (ii) internal portfolio manager notification requirements of significant cash flows into the Top Funds, the Underlying Funds and the 1832 Third Tier Funds; (iii) ongoing liquidity monitoring of each Fund's portfolio; and (iv) real time cash projection reporting for Top Funds, the Underlying Funds and the 1832 Third Tier Funds. Each Top Fund, Underlying Fund and the 1832 Third Tier Fund in a Three-Tier Structure will be managed as a stand-alone investment for purposes of the application of these risk management tools.
48. The prospectus of the Top Fund discloses or will disclose in the next regularly scheduled renewal, or amendment if earlier, that the Top Fund invests in securities of the Underlying Funds, and that each Underlying Fund may invest more than 10% of its NAV in securities, on an aggregate basis, of other investment funds, including 1832 Third Tier Funds.
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 Exemption Sought is granted, provided that:
(a) the Filer or an affiliate is the registered investment fund manager of each Top Fund, each Underlying Fund and each 1832 Third Tier Fund;
(b) no Top Fund will actively participate in the business or operations of any Underlying Fund;
(c) each Top Fund will be treated similar to an arm's-length investor when making investments in each Underlying Fund, with such investment being accepted by the Underlying Fund on a fair and equitable basis as compared to all other third-party investors;
(d) the investment by a Top Fund in securities of an Underlying Fund is compatible with the investment objectives and strategies of the Top Fund;
(e) the investments in the Underlying Funds are included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102 for a Top Fund;
(f) the IRC of a Top Fund will review and provide its approval, including by way of standing instructions, prior to the purchase of an Underlying Fund by the Top Fund in accordance with section 5.2(2) of NI 81-107. The Filer will comply with section 5.1 of NI 81-107, and the Filer and the IRC of the Top Fund will comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions;
(g) the Filer does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the holders of such securities, except that the Filer may arrange for the securities the Top Fund holds of an Underlying Fund to be voted by the beneficial owners of the securities of the Top Fund who are not the Filer or an officer, director or substantial securityholder of the Filer;
(h) a Top Fund will invest in, and redeem, each Underlying Fund at the NAV of the applicable securities of the Underlying Fund, which will be based on the valuation of the applicable portfolio assets, including the Third Tier Funds, to which the Underlying Fund has exposure, determined by a third party that is independent of the Filer and the Top and Underlying Funds;
(i) a Top Fund will invest in a Future Underlying Fund only where it is managed by the Filer or an affiliate, structured in similar ways to the Initial Underlying Fund and the NAV of the Future Underlying Fund is based on a valuation that is determined by a third party that is independent of the Filer and the Top and Underlying Funds;
(j) the prospectus of each Top Fund discloses, or will disclose in the next renewal or amendment thereto following the date of a decision evidencing the Exemption Sought, the fact that the Top Fund may invest in securities of the Underlying Funds, which are investment funds managed by the Filer or an affiliate, and that each Underlying Fund may invest more than 10% of its NAV in securities, on an aggregate basis, of other investment funds, including 1832 Third Tier Funds;
(k) the Top Fund's investment in securities of each Underlying Fund and each Underlying Fund's investment in each Third Tier Fund in a Three-Tier Structure is otherwise made in compliance with all other requirements of section 2.5 of NI 81-102 (except to the extent that discretionary relief has been granted from any such requirement), including, for greater certainty that:
(i) no management fees or incentive fees will be payable by a Top Fund or an Underlying Fund, respectively, that, to a reasonable person, would duplicate a fee payable by an Underlying Fund or an 1832 Third Tier Fund, respectively, for the same service,
(ii) no sales fees or redemption fees will be payable by a Top Fund or an Underlying Fund, respectively, in relation to its purchases or redemptions of the securities of an Underlying Fund or an 1832 Third Tier Fund, respectively; and
(iii) no sales fees or redemption fees will be payable by a Top Fund or an Underlying Fund, respectively, in relation to its purchases or redemptions of securities of an Underlying Fund or Third Tier Fund, respectively, that, to a reasonable person, would duplicate a fee payable by an investor in the Top Fund or Underlying Fund, respectively.
(l) the Three-Tier Structure is implemented in a manner that seeks the fair treatment for investors in all of the investment funds managed by the Filer that are involved in a Three-Tier Structure by assessing material portfolio transaction costs among all of such investment funds;
(m) the Filer maintains investor protection policies and procedures that address liquidity and redemption risk due to cross-ownership of funds within a Three-Tier Structure, and each Top Fund, Underlying Fund and 1832 Third Tier Fund in a Three-Tier Structure is managed as a stand-alone investment for purposes of these policies and procedures;
(n) each Top Fund in a Three-Tier Structure complies with the requirements under NI 81-106 relating to quarterly portfolio holdings, top 25 positions portfolio holdings disclosure in its management reports of fund performance, and statement of investment portfolio in its annual and interim financial reports, and the requirements of Form 81-101F3 relating to top 10 position portfolio holdings disclosure in its Fund Facts, in respect of its investment in an Underlying Fund and, where applicable, as if the Top Fund was investing directly in the Third Tier Funds; and
(o) none of the Top Funds, Underlying Funds and 1832 Third Tier Funds relies on any discretionary relief permitting such fund to exceed the leverage exposure otherwise permitted under NI 81-102 through the use of borrowing, short selling, and specified derivatives.
Application File #: 2024/0296
Sedar File #: 6132365