CQI Capital Management L.P. et al.
Headnote
National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from the mutual fund conflict of interest restrictions in the Securities Act (Ontario) and the self-dealing prohibition in National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations to allow pooled funds to invest in securities of underlying funds under common management -- relief subject to certain conditions.
Applicable Legislative Provisions
Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(3), 113.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a), 15.1.
February 4, 2014
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
CQI CAPITAL MANAGEMENT L.P.
(the Filer)
AND
IN THE MATTER OF
CQI EQUITY OPPORTUNITIES FUND I AND
CQI EQUITY OPPORTUNITIES FUND II
(together, the Initial Top Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of each of the Filer, the Initial Top Funds, and any other mutual fund which is not a reporting issuer under the Securities Act (Ontario) (the Act), that is established, advised or managed by the Filer, or its affiliate, after the date hereof (the Future Top Funds and, together with the Initial Top Funds, the Top Funds), and EOF Limited Partnership (the Initial Underlying Fund), and any other mutual fund which is not a reporting issuer under the Act that is established, advised or managed by the Filer, or its affiliate, after the date hereof (the Future Underlying Funds and, together with the Initial Underlying Fund, the Underlying Funds) for a decision under the securities legislation of Ontario (the Legislation), exempting:
(a) the Top Funds, in respect of the Top Funds investment in any of the Underlying Funds, from the restrictions in paragraphs 111(2)(b) and 111(3) of the Act that prohibit a mutual fund from knowingly making or holding an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder (the Related Issuer Relief); and
(b) the Filer, or its affiliate, with respect to each of the Top Funds that invests its assets in an Underlying Fund from the restriction in sub-clause 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) from the restriction prohibiting 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 the 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 Requirement Relief).
together, theExemption 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 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 (i) in respect of the Related Issuer Relief, in Alberta and (ii) in respect of the Consent Requirement Relief, in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick and Newfoundland and Labrador.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision, unless otherwise defined.
Representations
The decision is based on the following facts represented by the Filer:
Filer
1. The Filer is a limited partnership formed under the laws of the Province of Manitoba with its head office in Toronto, Ontario.
2. The Filer is registered as a commodity trading manager in Ontario.
3. The Filer is registered as a dealer in the category of exempt market dealer under the applicable securities legislation in the provinces of Ontario, British Columbia, Alberta, Manitoba, Saskatchewan, Québec, Nova Scotia, New Brunswick and Prince Edward Island, and Newfoundland and Labrador.
4. The Filer is registered as an investment fund manager and an adviser in the category of portfolio manager in Ontario, Newfoundland and Labrador and Québec.
5. 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.
6. The Filer is the investment fund manager and portfolio adviser of the Initial Top Funds and the Initial Underlying Fund. The Filer, or an affiliate of the Filer, will be the investment fund manager and portfolio adviser of the Future Top Funds and the Future Underlying Funds. The Filer, or an affiliate of the Filer, will also act as trustee of any Future Underlying Fund structured as a trust.
Top Funds
7. Each of the Top Funds is, or will be, a mutual fund for the purposes of the Act.
8. Each Initial Top Fund is an open-end trust established under the laws of the Province of Ontario and governed by a master declaration of trust (the "Declaration of Trust").
9. The Future Top Funds will be structured as limited partnerships, trusts or corporations under the laws of Ontario or another jurisdiction of Canada.
10. Securities of each of the Top Funds, are, or will be, sold pursuant to available prospectus exemptions in accordance with National Instrument 45-106 -- Prospectus and Registration Exemptions (NI 45-106).
11. The investment objective of the Initial Top Funds is to generate superior risk-adjusted investment returns over the long term by investing in or obtaining exposure to equity-focused investment strategies. These strategies focus on investing in equity securities, as well as index futures, convertible bonds, trust units, preferred shares, warrants, options, futures, swaps and other derivatives instruments, any of which may be listed on recognized stock exchanges or unlisted.
12. The Top Funds' investments may include, but may not be limited to, the Underlying Funds. The Filer, or its affiliate, where applicable, however, may determine to invest 100% of the assets of a Top Fund in any combination of Underlying Funds as appropriate.
13. The Initial Top Funds are identical in all respects except for the management fee charged by the Filer. CQI Equity Opportunities Fund I (formerly called GMPIM Equity Opportunities Fund) offers a Series A version of the investment strategy and its units are offered to prospectus exempt investors. CQI Equity Opportunities Fund II (formerly called GMPIM Equity Opportunities Class F Fund) offers a lower fee, Series F version of the investment strategy and its units are offered to prospectus exempt investors who are enrolled in dealer-sponsored wrap programs or flat fee accounts that are subject to an annual asset based fee and to other qualified investors for whom the Filer does not incur substantial distribution costs.
14. Neither of the Initial Top Funds is a reporting issuer under the Act nor are they in default of securities legislation of any jurisdiction of Canada. None of the Future Top Funds will be a reporting issuer under the Act.
Underlying Funds
15. Each of the Underlying Funds is, or will be, a mutual fund for purposes of the Act.
16. The Initial Underlying Fund is a limited partnership formed and organized under the laws of Ontario.
17. The Future Underlying Funds will be structured as limited partnerships, trusts or corporations under the laws of Ontario, another jurisdiction of Canada or a foreign jurisdiction.
18. The general partner of the Initial Underlying Fund is Genesis Partners GP Inc. (the General Partner), an affiliate of the Filer. The general partner of each Future Underlying Fund that is structured as a limited partnership will be an affiliate of the Filer.
19. The Initial Top Funds are the sole owners of units of the Initial Underlying Fund and the Filer does not expect to distribute units of the Initial Underlying Fund to the public. The Filer, or its affiliate, also does not expect to distribute units of the Future Underlying Funds to the public.
20. The Initial Underlying Fund will not be a reporting issuer under the Act. None of the Future Underlying Funds will be a reporting issuer under the Act.
21. The Initial Underlying Fund is not in default of securities legislation of any jurisdiction of Canada.
22. Each Initial Top Fund employs a forward agreement structure. Each Initial Top Fund obtains exposure to an actively managed diversified portfolio of investments held by GMPIM Equity Opportunities Master Fund LP (the Master Fund) through a forward agreement (the Forward Agreements). The Forward Agreements will mature in January 2016.
23. On March 21, 2013, the federal Minister of Finance proposed measures (the Character Conversion Budget Measures) that would affect certain tax benefits gained by taxable unitholders of investment funds, like the Initial Top Funds. In particular, the Character Conversion Budget Measures would limit the ability of funds, like the Initial Top Funds, to accept any new money through the forward structure, effectively capping the Initial Top Funds and closing them to new investors (due to a moratorium on increasing exposure under forward agreements such as the Forward Agreements).
24. Accordingly, the Filer amended certain of the investment strategies and restrictions of the Initial Top Funds, to permit each Initial Top Fund to own a direct, actively managed investment portfolio with investment restrictions and strategies that are substantially similar to those of the Master Fund. The Filer has determined that rather than having to establish two separate but identical investment portfolios, it is more efficient and in the best interests of the Initial Top Funds to obtain exposure to single portfolio by investing in separate classes of the Initial Underlying Fund.
25. Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.
26. Each of the Underlying Funds and their investments are considered to be liquid. While the Underlying Funds are not restricted from purchasing and holding illiquid investments, the Filer, or its affiliate, manages or will manage, the portfolios of each Underlying Fund to ensure there is sufficient liquidity to provide for redemptions of units by unitholders of the Top Funds.
Fund-on-Fund Structure
27. The custodian of the assets of each Top Fund and each Underlying Fund is, or will be, one or more financial institutions and/or their affiliates, or such third party or parties as may be appointed by the Filer or its affiliate. The custodian of each Top Fund and each Underlying Fund meets, or will meet, the qualifications set out in subsection 6.2 of National Instrument 81-102 Mutual Funds (NI 81-102).
28. The Top Funds allow investors to obtain exposure to the investment portfolios of the Underlying Funds and their respective investment strategies through direct investments by the Top Funds in securities of the Underlying Funds (the Fund-on-Fund Structure).
29. Investing in the Underlying Funds will allow the Top Funds to achieve their investment objectives in a cost efficient manner and will not be detrimental to the interests of other securityholders of the Underlying Funds.
30. An investment by a Top Fund in an Underlying Fund can provide greater diversification for a Top Fund in particular asset classes on a basis which is not materially more expensive than investing directly in the securities held by the applicable Underlying Fund.
31. 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.
32. The Filer, or its affiliate, will ensure that the arrangements between or in respect of a Top Fund and an Underlying Fund in respect of an investment pursuant to the Fund-on-Fund Structure avoid the duplication of management fees and incentive fees. The Filer currently does not charge any management fee or incentive fee to the Initial Top Funds.
33. There will be no sales fees or redemption fees payable by a Top Fund in respect of an acquisition, disposition or redemption of securities of an Underlying Fund by the Top Fund.
34. Prior to the time of purchase of securities of a Top Fund, an investor will be provided with an offering memorandum of the Top Fund that contains disclosure about the relationships and potential conflicts of interest between the Top Fund and the Underlying Funds.
35. The offering memorandum of each Top Fund will describe the Top Funds' intent, or ability, to invest in securities of the Underlying Funds and that the Underlying Funds are also managed and advised by the Filer or its affiliate.
36. Each of the Top Funds and the Underlying Funds will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 -- Investment Funds Continuous Disclosure (NI 81-106) and will otherwise comply with the requirements of NI 81-106, as applicable.
37. Securityholders of a Top Fund will receive, on request, a copy of such Top Fund's audited annual financial statements and interim unaudited financial statements. The financial statements of each Top Fund will disclose its holdings of securities of the applicable Underlying Funds.
38. Securityholders of a Top Fund will receive, on request, a copy of the offering memorandum of an Underlying Fund, or other similar document, if available, and the annual and interim financial statements of any Underlying Fund in which the Top Fund invests.
39. The Filer, or its affiliate, will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of any Underlying Fund, except that the Filer, or its affiliate, may arrange for the securities of the Underlying Fund held by a Top Fund to be voted by the beneficial holders of securities of the Top Fund.
40. Each Initial Top Fund and each Initial Underlying Fund have matching valuation dates and are valued on a weekly basis. The valuation date for each Initial Top Fund and each Initial Underlying Fund is the last business day of each week.
41. Securities of each Initial Top Fund and each Initial Underlying Fund have matching redemption dates. Each Initial Top Fund and each Initial Underlying Fund is redeemable on any valuation date.
42. An Underlying Fund will be valued no less frequently than a Top Fund.
43. An Underlying Fund will be redeemable no less frequently than a Top Fund.
44. No Underlying Fund will be a Top Fund.
45. 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 mutual funds by virtue of the common management by the Filer or its affiliate.
Generally
46. Since the Top Funds do not offer their securities under a simplified prospectus, they are not subject to NI 81-102 and therefore the Top Funds are unable to rely upon the exemption codified under sub-section 2.5(7) of NI 81-102.
47. In the absence of the Related Issuer Relief, the Top Funds would be precluded from implementing the Fund-on-Fund Structure due to certain investment restrictions in the Legislation.
48. In the absence of the Consent Requirement Relief, the Filer, or its affiliate, would be precluded from causing any Top Fund to invest in an Underlying Fund, unless the consent of each investor in the Top Fund is obtained, since an officer, partner, and/or director of the Filer, or its affiliate (considered a responsible person within the meaning of the applicable provisions of NI 31-103), may also be an officer, partner, and/or director of, or may perform a similar function for or occupy a similar position with, the Underlying Fund.
49. A Top Fund's investments in the Underlying Funds represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the applicable 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 a Top Fund 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 fundamental 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 its net assets in securities of other mutual funds, unless the Underlying Fund:
(i) links its performance to the performance of another mutual fund;
(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 a mutual 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 fee or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund;
(f) the Filer, or its affiliate, does not cause the securities of the Underlying Fund held by a Top Fund to be voted at any meeting of holders of such securities, except that the Filer, or its affiliate, may arrange for the securities the Top Fund holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund; and
(g) the offering memorandum, where available, or similar document of a Top Fund, will be provided to investors in a Top Fund and will disclose:
(i) that a Top Fund may purchase securities of the Underlying Funds;
(ii) that the Filer, or an affiliate of the Filer, is the investment fund manager and portfolio adviser of both the Top Fund and the Underlying Funds;
(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
(h) investors in each Top Fund are entitled to receive from the Filer or its affiliates, on request and free of charge, a copy of the offering memorandum, or other disclosure documents, if available, or the annual or semi-annual financial statements relating to all Underlying Funds in which the Top Fund may invest its assets.
The Consent Requirement Relief
The Related Issuer Relief