AGF Investments Inc. and The Top Funds
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from conflict of interest provisions in 111 of the Securities Act, and section 13.5 of NI 31-103 to permit investments by public and private investment funds into related underlying investments that are not reporting issuers -- relief also granted from related party transaction reporting requirements in section 117 of the Securities Act -- relief subject to certain conditions.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 111(2)(b) and (c), 111(4), 113, and 117.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a) and 15.1.
March 11, 2022
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 AGF INVESTMENTS INC. (AGFI) 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 AGFI and its affiliates (collectively, the Filer) on behalf of investment funds managed by the Filer that are 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 Existing Public Top Funds) and investment funds managed by the Filer that are not reporting issuers subject to NI 81-102 and NI 81-107 (the Existing Private Top Funds, together with the Existing Public Top Funds, the Existing Top Funds) and any future investment fund managed by the Filer that is, or will be, a reporting issuer and that is subject to NI 81-102 and NI 81-107 (the Future Public Top Funds, and together with the Existing Public Top Funds, the Public Top Funds) or is not, or will not be, a reporting issuer subject to NI 81-102 and NI 81-107 (the Future Private Top Funds, together with the Existing Private Top Funds, the Private Top Funds, and the Private Top Funds together with the Public 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 Funds and in accordance with its investment objectives and strategies, a portion of its assets in AGF SAF Private Credit Trust (the Trust) and AGF SAF Private Credit Limited Partnership (the Partnership, and together with the Trust, the Initial Underlying Investments) and/or in any other future collective investment scheme that is, or will be, managed by the Filer that will have similar non-traditional investment strategies (the Future Underlying Investments and, together with the Initial Underlying Investments, the Underlying Investments) and therefore has applied for a decision under the securities legislation of the Jurisdiction (the Legislation):
1. Exempting the Top Funds from the restriction in the Legislation which prohibits:
(a) 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;
(b) an investment fund from knowingly making an investment in an issuer in which any of the following has a significant interest:
(i) any officer or director of the investment fund, its management company or distribution company or an associate of any of them; or
(ii) any person or company who is a substantial security holder of the investment fund, its management company or its distribution company; and
(c) an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) or (b) above (collectively, the Related Issuer Relief);
2. Exempting the Filer, which wishes to cause a Top Fund to invest in an Underlying Investment, from the restriction in paragraph 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as adviser, to invest in securities of any issuer in which a responsible person or an associate of a responsible person is a partner, officer or director, unless the fact is disclosed to the client and the written consent of the client to the investment is obtained before the purchase (the Consent Relief); and
3. Exempting the Filer, with respect to the Top Funds, from the requirement to prepare a report in accordance with the requirements of the Legislation of every transaction of purchase of securities from or sale of securities to any related person or company (the Reporting Relief).
The Related Issuer Relief, the Consent Relief and the Reporting Relief are collectively referred to as the Exemption Sought.
4. 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 Ontario, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions (NI 14-101), MI 11-102, NI 81-102 and NI 81-107 have the same meaning if used in this decision, unless otherwise defined.
Representations
The Filer
1. The Filer is a corporation amalgamated under the laws of the Province of Ontario, with its head office located in Toronto, Ontario.
2. The Filer is registered in the categories of (a) exempt market dealer in the Provinces of Alberta, British Columbia, Manitoba, Ontario, Quebec and Saskatchewan, (b) portfolio manager in each of the provinces and territories of Canada, (c) investment fund manager in the Provinces of Alberta, British Columbia, Newfoundland and Labrador, Ontario and Quebec, (d) a mutual fund dealer in the Provinces of British Columbia, Ontario and Quebec and (e) a commodity trading manager in the Province of Ontario.
3. The Filer is the manager of the Existing Top Funds \ and the Filer will be the manager of any Future Public Top Funds and Future Private Top Funds (together, the "Future Top Funds"). To the extent that the Filer 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.
4. The Filer is the manager of the Trust and will be the manager of any Future Underlying Investments. To the extent that the Filer is the manager of any Future Underlying Investments, the representations set out in this decision will apply to the same extent to such Future Underlying Investments. The Filer has also been retained by the Partnership to help effect sales of the Partnership in the exempt market.
5. The Filer is or will be considered a "responsible person" (as such term is defined in NI 31-103) of a Top Fund and the Trust. Since the Filer is or will be the manager of a Top Fund and the Filer is the manager of the Trust, the Filer acts in a capacity in relation to the Trust similar to a "partner, officer or director" of the Trust, as contemplated by paragraph 13.5(2)(a) of NI 31-103.
6. The chief financial officer of the Filer is or will be a "responsible person" (as such term is defined in NI 31-103) of the Filer and the Partnership, since the chief financial officer of the Filer is also the Chairman of the Board of Directors of AGF SAF Private Credit Management Inc., the general partner of the manager of the Partnership.
7. The Filer is not in default of securities legislation in any Jurisdiction.
The Top Funds
8. The securities of each of the Public 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, an annual information form (as applicable) and Fund Facts, prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure. Each Public Top Fund is, or will be, a reporting issuer under the securities legislation of one or more Jurisdictions.
9. The securities of each Private Top Fund are, or will be, distributed solely to investors pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 Prospectus Exemptions (NI 45-106) and the securities legislation of one or more Jurisdictions. Each Private Top Fund has, or will have, an offering memorandum or statement of investment policies and guidelines, which is provided to investors. None of the Private Top Funds are, or will be, reporting issuers under the securities legislation of any Jurisdiction.
10. Each Top Fund may wish to invest in securities of the Underlying Investments and, as a result, the Filer is seeking the Requested Relief in order to permit the Top Fund to make such investments. A Top Fund may wish to so invest in one or more of the Underlying Investments, provided the investment is consistent with the Top Fund's investment objectives and strategies. Each Top Fund, including each Private Top Fund, will comply with the investment restrictions and practices provided for in Part 2 of NI 81-102 in making such investments, in particular, the concentration restriction provided for in section 2.1, the control restriction provided for in section 2.2 and the illiquid assets restriction provided for in section 2.4. Each Top Fund will treat securities of the Underlying Investments as illiquid assets for these purposes.
11. The Existing Top Funds are not in default of the securities legislation of any Jurisdiction.
12. Each Public Top Fund is subject to NI 81-107 and the Filer has established an independent review committee (IRC) in order to review conflict of interest matters pertaining to its management of the Public Top Funds are required by NI 81-107.
The Underlying Investments
13. The Partnership is a limited partnership governed by the terms of a limited partnership agreement.
14. AGF SAF Private Credit GP Inc. (AGF SAF GP),a corporation established under the laws of the Province of Ontario, is the general partner of the Partnership and is an affiliate of the Filer.
15. Future Underlying Investments may be structured as limited partnerships, trusts or corporations governed by the laws of a jurisdiction of Canada.
16. AGF SAF Private Credit Management LP (AGF SAF LP) is the manager of the Partnership and is an affiliate of the Filer. AGF SAF LP is a limited partnership formed under the Limited Partnerships Act (Ontario). The general partner of AGF SAF LP is AGF SAF GP.
17. The Trust is an open-ended investment trust governed by the terms and conditions of a declaration of trust dated April 30, 2021.
18. The Trust's investment objective is to provide liquidity, timing flexibility and enhanced returns for investors, primarily by making investments in the Partnership. Approximately 85% of the Trust's capital is expected to be invested in limited partnership units of the Partnership.
19. The Partnership, and the Trust through its investment in the Partnership, provides investors with exposure to a portfolio of income-generating credit securities. In particular, the Partnership's investment objective is to achieve attractive risk-adjusted returns with low correlation to traditional asset classes by constructing and maintaining a portfolio of private and public income-generating credit securities. To achieve its investment objective, the Partnership will allocate capital through various credit strategies to a diverse set of middle and lower-middle market companies, primarily within Canada and the United States, to construct a portfolio of private and public income-generating private debt instruments. The Partnership's portfolio investments will generally be structured as one or a combination of the following: (i) first and second lien senior loans, (ii) unitranche loans, (iii) mezzanine loans, (iv) bridge loans, (v) joint ventures, or (vi) sale-leasebacks.
20. The Underlying Investments are not reporting issuers in any of the Jurisdictions. Securities of the Initial Underlying Investments are, and any Future Underlying Investment 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. Each Initial Underlying Investment has an offering memorandum which is provided to investors.
21. The Underlying Investments are not investment funds as such term is defined under Canadian securities legislation. Nevertheless, the Underlying Investments are operated in a manner similar to how the Filer operates its investment funds. The Filer, as manager of the Trust, and AGF SAP LP, as manager of the Partnership, each calculate a net asset value (NAV) that is used for the purposes of determining the purchase and redemption price of the securities of the Trust and the Partnership, as applicable.
22. The value of the underlying portfolio of each Underlying Investment will be subject, directly or indirectly, to the independent review of an arm's length valuation agent or fund administrator. In respect of the Initial Underlying Investments, the valuation of the Partnership's underlying investments is subject to the review of Grant Thornton, an independent valuation agent, and the approval of a valuation committee that is independent of AGF SAF LP. The valuation of the Trust's holdings in AGF SAF LP, representing approximately 85% of the Trust's portfolio, is based on this independent valuation.
23. Each Underlying Investment produces audited financial statements that will be made available to the Top Funds on an annual basis, in accordance with International Financial Reporting Standards and/or generally accepted accounting principles with a qualified auditing firm as the auditor of those financial statements.
24. No Underlying Investment is in default of the securities legislation of any Jurisdiction.
25. No Top Fund will actively participate in the business or operations of an Underlying Investment.
Investments by Top Funds in the Underlying Investments
26. An investment by a Top Fund in an Underlying Investment 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.
27. The Filer believes that the investment by a Top Fund in an Underlying Investment will provide the Top Fund with an efficient and cost-effective manner of pursuing portfolio diversification and asset diversification instead of purchasing securities directly. The Top Fund will gain access to the investment strategies and asset classes of the Underlying Investments.
28. Investments by a Top Fund in an Underlying Investment 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 class or series of the Underlying Investment.
29. A Top Fund will not invest in an Underlying Investment unless the portfolio manager of the Top Fund believes that the liquidity of the Top Fund's portfolio is adequately managed through other strategies. As part of such strategies, a Top Fund will not invest more than 10% of its NAV, at the time of purchase, in securities of an Underlying Investment and it will not invest in securities of an Underlying Investment that represent, at the time of purchase, more than 10% of the securities of the Underlying Investment. The Top Fund will also comply with section 2.4 of NI 81-102 with respect to illiquid investments and the Filer will include an investment by a Top Fund in an Underlying Investment in its basket of illiquid securities for the purposes of compliance with this section.
30. Each Top Fund is, or will be, valued and redeemable daily. Each Underlying Investment may be potentially subject to lock-up periods, early redemption penalties, and limitations on redemptions.
Generally
31. Subject to compliance with section 2.2 of NI 81-102, the amount invested from time to time in an Underlying Investment by a Top Fund, together with one or more other Top Funds, may exceed 20% of the outstanding voting securities of the Underlying Investment. This may result by reason of a group of Top Funds providing initial investments into the Underlying Investment on the start-up of the Underlying Investment. As a result, each Top Fund could, together with one or more other Top Funds, become a "substantial security holder" of an Underlying Investment within the meaning of section 110 of the OSA and contrary to section 111(2)(b). The Top Funds are, or will be, "related investment funds", as such term is defined in section 106(1) of the Legislation by virtue of common management by the Filer.
32. In addition, the Filer or an affiliate of the Filer, may have a "significant interest" in an Underlying Investment and/or a person or company who is a substantial security holder of the Top Fund, the Filer or an affiliate of the Filer may have a "significant interest" in the Underlying Investment within the meaning of section 110 of the Legislation, which, under section 111(2)(c) would prohibit the Top Funds from investing in a Underlying Investment.
33. The Filer does not anticipate that any fees or sales charges would be incurred, directly or indirectly, by a Top Fund with respect to an investment in an Underlying Investment that, to a reasonable person, would duplicate a fee payable by the Top Fund to the Filer or its investors for the same service.
34. Since the Underlying Investments are not reporting issuers and are not "investment funds" pursuant to Canadian securities legislation, they are not subject to NI 81-102 and therefore the Public 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. Since the Private Top Funds are not reporting issuers subject to NI 81-102, they are also unable to rely on the exemption codified under subsection 2.5(7) of NI 81-102.
35. In the absence of the Related Issuer Relief, each Top Fund would be limited by the investment restrictions in the Legislation in terms of the extent to which they could invest in the Underlying Investments. Specifically, a Top Fund would be prohibited from (i) becoming a substantial security holder of an Underlying Investment, together with other Top Funds and (ii) investing in an Underlying Investment in which an officer or director of the Filer has a significant interest or in which a person or company who is a substantial security holder of the Top Fund or the Filer, has a significant interest.
36. The action of the Filer in causing a Top Fund to invest in an Underlying Investment would require disclosure to the "client" and the prior written consent of the "client" to the investment. In the case of a public investment fund, like the Public Top Funds, it is unclear whether prospectus disclosure to investors in the public investment fund is sufficient for these purposes, particularly without obtaining consent from each investor in the public investment fund. Paragraph 13.5(2)(a) of NI 31-103 prohibits these investments in these circumstances given that (i) the Filer or an affiliate of the Filer manages each Underlying Investment, and hence acts in a capacity similar to a "partner, director or officer" and the Filer is a responsible person of the Trust, and (ii) the chief financial officer of the Filer is also the Chairman of the Board of Directors of AGF SAF Private Credit Management Inc., the general partner of the manager of the Partnership.
37. According to the Legislation, every management company shall, in respect of each investment fund to which it provides services or advice, file a report of every transaction of purchase or sale of securities between the investment fund and any related person or company within 30 days after the end of the month in which it occurs.
38. In the absence of the Reporting Relief, the Filer, acting as the management company (as defined in the applicable securities laws) of the Top Investments would be required to file a report of every purchase and sale of securities of the Underlying Funds by the Top Funds or every purchase or sale effected by the Top Funds through any related person or company with respect to which the related person or company received a fee either from the Top Funds or from the other party to the transaction or from both within 30 days after the end of the month in which such purchase or sale occurs (the Reporting Requirement).
39. It would be costly and time-consuming for the Top Funds to comply with the Reporting Requirement.
40. National Instrument 81-106 Investment Fund Continuous Disclosure requires the Public Top Funds to prepare and file annual and interim management reports of fund performance that include a discussion of transactions involving related parties to the Public Top Funds. Such disclosure is similar to that required under the Reporting Requirement and fulfills the objective to inform the general public about transactions involving related parties to the Public Top Funds.
41. Subsection 6.2(2) of NI 81-107 provides an exemption for investment funds from the "investment fund conflict of interest investment restrictions" (as defined in NI 81-102) for purchases of related issuer securities if the purchase is made on an exchange. However, NI 81-107 does not apply to the Private Top Funds and the exemption in subsection 6.2(2) of NI 81-107 does not apply to purchases of non-exchange-traded securities and therefore does not apply to purchases of an Underlying Investment by a Public Top Fund.
42. A Top Fund's investment in an Underlying Investment will represent the business judgment of a responsible person 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 Exemption Sought is granted provided that:
(a) Securities of the Private Top Funds are distributed in Canada solely to investors pursuant to exemptions from the prospectus requirements in NI 45-106 or the Legislation;
(b) a direct or indirect investment by a Top Fund in an Underlying Investment will be compatible with the investment objective and strategy of such Top Fund and, among other things, included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102;
(c) each Private Top Fund will comply with the investment restrictions and practices provided for in Part 2 of NI 81-102 in making such investments, in particular, the concentration restriction provided for in section 2.1, the control restriction provided for in section 2.2 and the illiquid assets restriction in section 2.4 and will treat investments in Underlying Investments as illiquid assets for this purpose;
(d) at the time of the purchase by a Top Fund of securities of an Underlying Investment, either the Underlying Investment holds no more than 15% of its NAV in securities of other investment funds or the Underlying Investment:
(i) has adopted a fundamental investment objective to track the performance of another investment fund or similar investment product;
(ii) purchases or holds securities of investment funds that are "money market funds" (as such term is defined in NI 81-102); or
(iii) purchases or holds securities that are "index participation units" (as such term is defined in NI 81-102) issued by an investment fund;
(e) in respect of an investment by a Top Fund in an Underlying Investment, no sales or redemption fees will be paid as part of the investment in the Underlying Investment, unless the Top Fund redeems its securities of an Underlying Investment during a lock-up period, in which case an early redemption fee may be payable by the Top Fund;
(f) in respect of an investment by a Top Fund in an Underlying Investment, no management fees or incentive fees will be payable by the Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Investment for the same service;
(g) the securities of an Underlying Investment held by a Top Fund will not be voted at any meeting of the security holders of the Underlying Investment, except that the Top Fund may arrange for the securities of the Underlying Investment it holds to be voted by the beneficial holders of securities of the Top Fund;
(h) where applicable, a Public Top Fund's investment in an Underlying Investment, whether direct or indirect, will be disclosed to investors in such Public Top Fund's quarterly portfolio holding reports, financial statements and/or fund facts/ETF facts documents;
(i) the prospectus of the Public 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 Public Top Fund may invest, directly or indirectly, in an Underlying Investment, which is an investment vehicle managed by the Filer;
(j) the offering memorandum or statement of investment policies and guidelines, where available, or other disclosure document of a Private Top Fund, will be provided to each new investor in a Private Top Fund prior to their purchase of securities of the Private Top Fund, and will disclose the following information at the next update of such document:
(i) that the Private Top Fund may purchase securities of one or more Underlying Investments;
(ii) the fact that the Filer is the IFM of the Private Top Fund and the Underlying Investments;
(iii) that the Filer does not anticipate that any fees or sales charges would be incurred, directly or indirectly, by the Private Top Fund with respect to an investment in an Underlying Investment that, to a reasonable person, would duplicate a fee payable by the Private Top Fund to the Filer or its investors; and
(iv) that the Private Top Fund will comply with the investment restrictions and practices provided for in Part 2 of NI 81-102 in making such investments, in particular, the concentration restriction provided for in section 2.1, the control restriction provided for in section 2.2 and the illiquid assets restriction in section 2.4;
(k) the IRC of the Public Top Fund will review and provide its approval, including by way of standing instructions, prior to the purchase of an Underlying Investment, directly or indirectly, by the Public Top Fund, in accordance with section 5.2(2) of NI 81-107;
(l) the Filer complies with section 5.1 of NI 81-107 and the Filer and the IRC of the Public Top Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions;
(m) If the IRC becomes aware of an instance where a Filer, in its capacity as manager of a Public Top Fund, did not comply with the terms of this decision, or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Public Top Fund will, as soon as practicable, notify in writing the securities regulatory authority or regulator in the jurisdiction under which the Public Top Fund is organized.
(n) where an investment is made by a Public Top Fund in an Underlying Investment, the annual and interim management reports of fund performance for the Public Top Fund disclose the name of the related person in which an investment is made, being an Underlying Investment;
(o) where an investment is made by a Top Fund in an Underlying Investment, the records of portfolio transactions maintained by the Top Fund include, separately for every portfolio transaction effected by a Top Fund by the Filer, the name of the related person in which an investment is made, being an Underlying Investment;
(p) a Top Fund will invest in, and redeem, each Underlying Investment at the NAV of the applicable securities of the Underlying Investment. For greater certainty, the NAV of the Partnership (which includes the Partnership to which the Trust invests) and each Underlying Investment is based on the valuation of the applicable portfolio assets to which the Partnership or Underlying Investment, as applicable, has exposure, independently determined by an arm's length third party; and
(q) a Top Fund will invest in a Future Underlying Investment only where it is structured in similar ways to the Initial Underlying Investments, including investing in other collective investment schemes that may be managed by entities that are arm's length third parties to the Filer, the NAV of the Future Underlying Investment is based on the valuation of those other collective investment schemes that are independently determined by an arm's length third party, and provide the Top Funds with audited annual financial statements.
The Consent Requirement Relief
"Darren McKall"
Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission
The Related Issuer Relief and the Reporting Relief
"Frances Kordyback"
Commissioner
Ontario Securities Commission
"Cecilia Williams"
Commissioner
Ontario Securities Commission
Application File #: 2021/0746