Waratah Capital Advisors Ltd. et al.
Headnote
Exemptions granted from the mutual fund conflict of interest investment restrictions of the Securities Act (Ontario) to permit pooled funds to invest with fund-on-fund structure in other pooled funds, including limited partnerships.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(2) (c) (i) and (ii) , 111(3), 113.
February 8, 2011
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
(the Act)
AND
IN THE MATTER OF
WARATAH CAPITAL ADVISORS LTD.
(the Filer)
AND
IN THE MATTER OF
WARATAH ONE TRUST,
WARATAH INCOME FUND TRUST AND
WARATAH PERFORMANCE TRUST
(the Initial Top Funds)
ORDER
Background
The Ontario Securities Commission (the Commission) has received an application from the Filer on behalf of the Initial Top Funds and any other mutual fund established by the Filer after the date hereof (the Future Top Funds and, together with the Initial Top Funds, the Top Funds) for an order under section 113 of the Act exempting the Top Funds and the Filer from the restriction that prohibits a mutual fund from knowingly making and holding an investment,
(a) 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; or
(b) an issuer in which,
(i) an officer or director of the mutual 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 mutual fund, its management company or its distribution company,
has a significant interest (the Related Issuer Relief).
Each of the Top Funds and the Underlying Funds is not, nor will be, reporting issuers in any jurisdiction of Canada.
Interpretation
Terms defined in National Instrument 14-101 Definitions have the same meaning if used in this Order, unless otherwise defined.
Representations
This Order is based on the following facts represented by the Filer:
Manager
1. The Filer is a corporation incorporated under the laws of the Business Corporations Act (Ontario) with its head office located in Toronto, Ontario.
2. The Filer is registered with the Commission as an adviser in the category of portfolio manager, as a dealer in the category of exempt market dealer and as an investment fund manager. The Filer is also registered as a dealer in the category of exempt market dealer with the securities regulatory authority of each of British Columbia, Alberta, Québec, New Brunswick and Nova Scotia.
3. The Filer is, or will be, responsible for managing the assets of the Top Funds and the Underlying Funds (collectively, the Funds), has complete discretion to invest and reinvest the Funds' assets, and is responsible for executing all portfolio transactions. Furthermore, the Filer assists, or will assist, in the marketing of the Funds and acts, or will act, as a distributor of securities of the Funds not otherwise sold through another registered dealer.
4. The Filer is, or will be, the investment fund manager of each Top Fund and of each Underlying Fund.
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.
Underlying Funds
6. Each Underlying Fund is a limited partnership established under the laws of the Province of Ontario by a limited partnership agreement and is not or will not be in default of securities legislation of any jurisdiction of Canada.
7. Pursuant to separate management and advisory agreements the Filer is responsible for managing the day-to-day undertaking and business of each of the Initial Underlying Funds as well as the investment and trading activities of each of the Initial Underlying Funds.
8. Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.
9. Securities of the Underlying Funds are, or will be, issued pursuant to prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).
10. The Underlying Funds are not, nor will be, reporting issuers in any jurisdiction of Canada.
Top Funds
11. The Top Funds will be sold pursuant to prospectus exemptions in accordance with NI 45-106.
12. Each Initial Top Fund will be an open-ended trust established under the laws of the Province of Ontario by a declaration of trust (a Declaration of Trust) and is not or will not be in default of securities legislation of any jurisdiction of Canada.
13. Each Top Fund is, or will be, a "mutual fund" as defined in the securities legislation of the jurisdictions in which the Top Fund is distributed.
14. Pursuant to each Declaration of Trust, the Filer will also act as the trustee of each of the Initial Top Funds, will have authority to manage the business and affairs of each of the Initial Top Funds and will have the authority to bind each Initial Top Fund.
15. The Declaration of Trust of each Top Fund will describe the investment objectives and investment restrictions applicable to the Top Fund and will also describe the fees, compensation and expenses payable by a Top Fund, the calculation of net asset value, distributions, the powers and duties of the investment fund manager and all other matters material to each Top Fund, including the fact that in pursuing its investment objectives, the Top Fund may invest in one or more Underlying Funds as an investment strategy.
Fund-on-Fund Structure
16. The Top Funds allow investors in the Top Funds to obtain exposure to the investment portfolios of the Underlying Funds and their investment strategies through, primarily, direct investments by the Top Funds in securities of the Underlying Funds (the Fund-on-Fund Structure). The Filer believes that the Fund-on-Fund Structure provides an efficient and cost-effective manner of pursuing portfolio diversification on behalf of the Top Funds rather than through the direct purchase of securities.
17. Securities of an Underlying Fund will be acquired by a Top Fund under an exemption from the prospectus requirement in accordance with NI 45-106 and the Filer will act as the dealer in respect of the trade.
18. The amounts invested from time to time in an Underlying Fund by a Top Fund may exceed 20% of the outstanding voting securities of any single Underlying Fund. Accordingly, each Top Fund could, either along or together with the 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.
19. Each of the Top Funds will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and will otherwise comply with the requirements of NI 81-106 applicable to them. Each of the Underlying Funds will prepared annual audited financial statements and interim unaudited financial statements in accordance with NI 81-106. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund.
20. For the purpose of implementing the Fund-on-Fund Structure, the Filer shall ensure that:
(a) the arrangements between or in respect of each Top Fund and an Underlying Fund are such as to avoid the duplication of management fees or incentive fees;
(b) no sales fees or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund;
(c) the offering memorandum of each Top Fund will describe the Top Fund's intent, or ability, to invest in securities of the Underlying Funds and that the Underlying Funds are also managed by the Filer and, if no offering memorandum is prepared in respect of a Top Fund, purchasers will be provided with details about the Top Fund and given disclosure respecting relationships and potential conflicts of interest, and advised that a copy of the Declaration of Trust or other constating document is available on request;
(d) the Filer will not vote the securities of an Underlying Fund held by a Top Funds at any meeting of holders of such securities, except that a Top Fund may, if the Filer so chooses, arrange for the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;
(e) security holders of a Top Fund will receive, on request, a copy of the offering memorandum of the Underlying Funds, if available, and the audited annual financial statements and interim unaudited financial statements of any Underlying Fund in which the Top Fund invests;
(f) purchasers of securities of a Top Fund will be advised that the Fund-on-Fund structure may result in a situation where one or more officers and/or directors of the Filer (considered a responsible person) is may be an officer and/or director of the Underlying Fund, including, for greater certainty, an officer and/or director of the general partner of the Underlying Fund, and written consent of the purchasers of securities of a Top Fund will be obtained consenting to the purchase by a Top Fund of a security of an Underlying Fund in which the Filer or an associate of the Filer is an officer or a director; and
(g) prior to the time of investment, unitholders of a Top Fund will be provided with disclosure regarding: (i) the relationships between the Filer, the Top Fund and the applicable Underlying Fund (including the Filer's role as Trustee/Adviser to the Top Fund and as Manager and Adviser to the Underlying Fund); (ii) the Filer and the General Partner of the Underlying Fund; and (iii) that each of the principals of the Filer have an indirect significant interest in the Underlying Fund through investments made in limited partnership units of such Underlying Fund. Investors in a Top Fund will also be advised of the potential conflicts of interest which may arise from such relationships. The foregoing disclosure will be contained in any offering memorandum prepared in connection with a distribution of units of the Top Fund or, if no offering memorandum is prepared, in the subscription agreement for units of the Top Fund.
Generally
21. In the absence of the Related Issuer Relief, the Top Fund would be precluded from implementing the Fund-on-Fund Structure due to certain investment restrictions contained in the Act.
22. The Fund-on-Fund Structure represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of each Top Fund.
Decision
The Commission is satisfied that the test contained in section 113 of the Act has been met.
The Commission orders that the Related Issuer Relief 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 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;
(d) 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;
(e) the Filer will not vote the securities of the Underlying Fund held by the Top Funds at any meeting of holders of such securities, except that a Top Fund may, if the Filer so chooses, arrange for the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;
(f) the offering memorandum, if available, or similar document of a Top Fund will disclose:
1. that a Top Fund may purchase units of the Underlying Funds;
2. the fact that the Filer is the investment adviser to both the Top Funds and the Underlying Funds; and
3. that substantially all of the net assets (or the percentage of net assets) of the Top Funds will be invested in securities of the Underlying Funds; and
(g) prior to the time of investment, unitholders of a Top Fund will be provided with disclosure that each of the principals of the Filer have an indirect significant interest in the Underlying Fund through investments made in limited partnership units of such Underlying Fund. Investors in a Top Fund will also be advised of the potential conflicts of interest which may arise from such relationships. The foregoing disclosure will be contained in any offering memorandum prepared in connection with a distribution of units of the Top Fund or, if no offering memorandum is prepared, in the subscription agreement for units of the Top Fund.