Cortland Credit Group Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief from paragraph 13.5(2)(b) to permit inter-fund trades in private debt securities between related counterparties subject to conditions -- private debt securities not subject to bid and ask prices that are readily available.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(b), and 15.1.
February 10, 2025
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF CORTLAND CREDIT GROUP INC. (the Filer) AND THE FUNDS AND THE PRIVATE CREDIT FUNDS (as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) for an exemption from section 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell the securities of any issuer from or to the investment portfolio of an associate of a responsible person, or any investment fund for which a responsible person acts as an adviser; in each case in respect of trades involving Private Debt Securities (as defined below) (the Exemption Sought).
Interpretation
Defined terms contained in National Instrument 14-101 Definitions, NI 81-102 and NI 31-103 have the same meaning in this decision unless otherwise defined. The following terms have the following meanings:
Existing Pooled Fund means Cortland Credit Strategies L.P., which is not a reporting issuer;
Existing Private Credit Fund means Cortland Credit Institutional L.P., which is not a reporting issuer;
Existing Offshore Fund means Cortland Credit Offshore Master Fund, Ltd., which is not a reporting issuer;
Funds means, collectively, the Pooled Funds and the Offshore Funds;
Inter-Fund Trade means the purchase or sale of securities (i) between Funds, (ii) between a Fund and a Private Credit Fund; and (iii) between a Managed Account and a Fund or a Private Credit Fund;
Managed Account means an account managed by the Filer for a client that is not a responsible person and over which the Filer has discretionary authority;
NI 81-102 means National Instrument 81-102 Investment Funds of the Canadian Securities Administrators, as the same may be amended from time to time;
Offshore Funds means the Existing Offshore Fund and any current or future investment fund organized under the laws of a jurisdiction outside of Canada that is not a reporting issuer of which the Filer or an affiliate of the Filer acts as the portfolio manager;
Pooled Funds means the Existing Pooled Fund any current or future investment fund that is not a reporting issuer, of which the Filer or an affiliate of the Filer acts as investment fund manager and portfolio manager; and
Private Credit Funds means the Existing Private Credit Fund and any current or future non-investment fund that is not a reporting issuer, which is managed by the Filer or an affiliate of the Filer and which has as a principal component of its investment strategy, the origination and management of private credit investments.
Representations
In support of this Decision, the Filer has made the following representations:
The Filer
1. The Filer is a corporation existing under the laws of the Province of Ontario with its head office in Toronto, Ontario.
2. The Filer is registered as an investment fund manager in the provinces of Ontario and Québec, as a portfolio manager in the Province of Ontario, and as an exempt market dealer in each of the provinces of Ontario, Québec, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick and Nova Scotia.
3. The Filer is, or will be, the portfolio manager of the Private Credit Funds, and the investment fund manager and/or portfolio manager of the Pooled Funds. The Filer, or an affiliate of the Filer, will be the portfolio manager of the Offshore Funds and will provide certain investment administrative services to the Offshore Funds.
4. The Filer also provides discretionary investment management services to clients through Managed Accounts.
5. The Filer, each Private Credit Fund and each existing Fund is not in default of securities legislation in the Jurisdiction.
The Private Credit Funds
6. Each of the Private Credit Funds is, or will be, an open-ended or closed-ended issuer established as a limited partnership under the laws of a jurisdiction of Canada.
7. No Private Credit Fund will be considered to be an "investment fund" under the applicable securities laws of the Jurisdiction due to the fact that the origination and management of private credit investments will be a principal element of the investment strategies of the Private Credit Funds.
8. None of the Private Credit Funds is, or will be, a reporting issuer in any jurisdiction of Canada, nor subject to NI 81-102.
9. The securities of the Private Credit Funds are, or will be, distributed on a private placement basis pursuant to available prospectus exemptions.
The Pooled Funds
10. Each of the Pooled Funds is, or will be, an open-ended or closed-ended investment fund established as a limited partnership or a trust under the laws of a jurisdiction of Canada.
11. None of the Pooled Funds is, or will be, a reporting issuer in any jurisdiction of Canada, nor subject to NI 81-102.
12. The securities of the Pooled Funds are, or will be, distributed on a private placement basis pursuant to available prospectus exemptions.
The Offshore Funds
13. Each of the Offshore Funds is, or will be, an open-ended investment fund established as a corporation, limited partnership or a trust under the laws of a jurisdiction located outside of Canada.
14. None of the Offshore Funds is, or will be, a reporting issuer in any jurisdiction of Canada, nor subject to NI 81-102.
15. The securities of the Offshore Funds are, or will be, distributed on a private placement basis to investors resident in one or more jurisdictions of Canada and/or investors resident outside of Canada on a basis which is exempt from the requirement to prepare and file prospectus in such jurisdictions.
Managed Accounts
16. Each Managed Account client wishing to receive the discretionary investment management services of the Filer has entered into, or will enter into, a written agreement (an Investment Management Agreement) whereby the client appoints the Filer to act as portfolio manager in connection with an investment portfolio of the client with full discretionary authority to trade in securities for the Managed Account without obtaining the specific consent of the client to execute the trade.
17. Each Investment Management Agreement or other documentation in respect of a Managed Account contains, or will contain, the authorization of the client for the Filer to engage in Inter-Fund Trades.
Private Debt
18. To the extent consistent with the investment objective of a Private Credit Fund, a Fund or a Managed Account, the investment portfolio of the Private Credit Fund, Fund, or Managed Account may include private debt securities and loans (or a portion of a loan) in respect of which the bid and ask price is not readily available given the limited number of investors/lenders and the limited amount of trading involved (Private Debt Securities).
Inter-Fund Trades
19. The Filer wishes to be able to permit any Fund, Private Credit Fund or Managed Account to engage in Inter-Fund Trades in respect of Private Debt Securities.
20. The Filer is unable to carry out Inter-Fund Trades in Private Debt between the Funds, Private Credit Funds and Managed Accounts because Private Debt Securities are not commonly traded in secondary markets, do not have an external pricing source, and accordingly do not have readily available bid and ask quotes. As such, absent the Exemption Sought, the Filer is prohibited by subparagraphs 13.5(2)(b)(ii) and (iii) of NI 31-103 from carrying out an Inter-Fund Trade on behalf of a Fund, Private Credit Fund or Managed Account in respect of Private Debt Securities.
Controls
21. Each Fund, Private Credit Fund or Managed Account will only purchase Private Debt Securities pursuant to an Inter-Fund Trade that are consistent with, or necessary to meet the investment objectives of the Fund, the Private Credit Fund or Managed Account as applicable. Each Fund, Private Credit Fund and Managed Account will only sell Private Debt Securities pursuant to an Inter-Fund Trade if the Filer has determined that disposing of such securities is appropriate for the Fund, Private Credit Fund or Managed Account, as applicable.
22. All decisions to purchase or sell Private Debt Securities pursuant to an Inter-Fund Trade will be made based on the judgment of responsible persons uninfluenced by considerations other than the best interests of the Funds, Private Credit Funds or Managed Account, as applicable.
23. The Filer has, or will have, policies and procedures in place to address any potential conflicts of interest that may arise as a result of Inter-Fund Trades in respect of Private Debt Securities and the Filer will be able to appropriately deal with any such conflicts.
24. The Filer, on behalf of each Pooled Fund, has established or will establish an independent review committee (the IRC) consistent with section 3.7 of National Instrument 81-107 (NI 81-107). The IRC of each Pooled Fund will be expected to comply with the standard of care set out in section 3.9 of NI 81-107. As specified in its Charter, the IRC will perform tasks additional to its primary role of reviewing conflict of interest matters that are referred to it by the Filer in respect of the Pooled Funds. Such additional tasks will include, among others, reviewing conflicts of interest as they apply to the Offshore Funds, and as they also apply to the Private Credit Funds which are not investment funds under securities legislation of the Jurisdiction.
25. The Filer will refer the Inter-Fund Trades in respect of Private Debt Securities involving a Fund or a Private Credit Fund to the IRC of such Fund or Private Credit Fund.
26. Prior to any Fund or Private Credit Fund making a purchase or sale of Private Debt Securities pursuant to an Inter-Fund Trade:
(a) the IRC of the Fund or Private Credit Fund will approve the transaction in accordance with subsection 5.2(2) of NI 81-107;
(b) the Filer will comply with section 5.1 of NI 81-107;
(c) the Filer and the IRC of the Fund or Private Credit Fund will comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transaction; and
(d) the value attributed to Private Debt Securities determined from the use of the Filer's Valuation Models (as defined below) in connection with the Inter-Fund Trade will be confirmed as correct and appropriate by an independent reputable valuation firm in accordance with paragraph 28(b) below.
27. All Inter-Fund Trades will comply with paragraphs (e) and (g) of subsection 6.1(2) and with subsection 6.1(2.1) of NI 81-107.
Valuation
28. With respect to Private Debt Securities to be purchased or sold pursuant to an Inter-Fund Trade:
(a) The valuation and/or prices of the Private Debt Securities are not reported by an independent source. The Filer has developed valuation models and methodologies (the Valuation Models) specifically for Private Debt Securities to determine fair value. The Valuation Models are based on a fair value through profit and loss model with financial instruments such as Private Debt Securities valued at their fair value upon initial recognition, plus transaction costs in the case of financial instruments measured at amortized cost. The application of the Valuation Models and the inputs used in the Valuation Models are reviewed by an internal risk group of the Filer whose members do not include the portfolio management team which makes the investment decisions in respect of Private Debt Securities for a Fund, a Private Credit Fund or Managed Account, as applicable.
(b) The Valuation Models to be used by the Filer to determine the prices at which Private Debt Securities are purchased or sold by a Fund, a Private Credit Fund or Managed Account in connection with an Inter-Fund Trade will be verified on an annual basis by a reputable valuation firm that is: (i) independent of the Funds, the Private Credit Funds, the Filer and its affiliates; (ii) not the Auditor (as defined below) of a Fund, a Private Credit Fund or the Filer and its affiliates; and (iii) an accounting firm registered with the Canadian Public Accountability Board (CPAB) and the valuation services of which are provided by professionals who are active members of the Canadian Institute of Chartered Business Valuators. The independent valuation firm will review the Valuation Models developed and utilized by the Filer and confirm, prior to the Inter-Fund Trade being completed, that the value attributed to Private Debt Securities from the use of such Valuation Models at the time of, and in connection with, each Inter-Fund Trade, is correct and appropriate from the perspective of an independent third party. The Filer will not complete an Inter-Fund Trade unless and until such confirmation is received from the independent valuation firm.
(c) The Valuation Models to be used by the Filer to determine the prices at which Private Debt Securities are purchased or sold by a Fund or a Private Credit Fund in connection with an Inter-Fund Trade will also be used to calculate the net asset value for the purpose of the issue price or redemption price of units or shares of the Funds or Private Credit Funds, as applicable.
(d) A public accounting firm that is registered with the CPAB is, or will be, retained to act as auditor of each Fund and Private Credit Fund (the Auditor) and will carry out an audit, in accordance with generally accepted auditing standards, of the annual financial statements of each Fund and Private Credit Fund. The annual financial statements will be prepared in accordance with International Financial Reporting Standards. The Auditor will be independent of the Funds, the Private Credit Funds, the Filer and its affiliates, and the reputable valuation firm referenced in paragraph (b).
Compensation
29. The Filer and its affiliates will receive no remuneration with respect to any purchase or sale of Private Debt Securities in connection with an Inter-Fund Trade. In the case of syndicated Private Debt Securities, an agent bank may charge a Fund, a Private Credit Fund or Managed Account nominal fees for the transfer or assignment of such syndicated Private Debt Securities.
Record Keeping
30. For each purchase or sale of Private Debt Securities, the Filer will keep written records for the applicable financial year of each Fund, Private Credit Fund and for the year ended December 31st in respect of each Managed Account. These records will reflect details of the Private Debt Securities received or delivered by the applicable Fund, Private Credit Fund and Managed Account and the value assigned to such Private Debt Securities during the period. These records will be retained for five years after the end of the applicable financial year of each Fund, Private Credit Fund and Managed Account, the most recent two years in a reasonably accessible place.
Disclosure
31. The Filer will disclose in the next update of the offering documents of each Fund and Private Credit Fund, and the Investment Management Agreement or other documentation in respect of each Managed Account that Inter-Fund Trades of Private Debt Securities among the Funds, the Private Credit Funds and Managed Accounts may occur from time to time, and also disclose how the price of such Private Debt Securities is determined and the valuation procedure for such Private Debt Securities.
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 the following conditions are satisfied:
(a) the Inter-Fund Trade is consistent with the investment objectives of the Fund, Private Credit Fund or Managed Account, as applicable;
(b) the Filer refers an Inter-Fund Trade involving a Fund or Private Credit Fund to the IRC of that Fund or Private Credit Fund in the manner contemplated by section 5.1 of NI 81-107 and the Filer and the IRC of the Fund or Private Credit Fund (as applicable) comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Inter-Fund Trade;
(c) the next update of the offering documents of each Fund or Private Credit Fund and the Investment Management Agreement or other documentation in respect of a Managed Account, involved in an Inter-Fund Trade discloses that the Fund, Private Credit Fund or Managed Account, as applicable, may engage in Inter-Fund Trades of Private Debt Securities from time to time and also discloses how the price of such Private Debt Securities is determined and the valuation procedure for such Private Debt Securities;
(d) in the case of an Inter-Fund Trade between Funds or between a Fund and a Private Credit Fund:
(i) the IRC of each Fund and Private Credit Fund has approved the Inter-Fund Trade in respect of the Fund or Private Credit Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;
(ii) the Inter-Fund Trade complies with paragraphs (e) and (g) of subsection 6.1(2) and with subsection 6.1(2.1) of NI 81-107;
(e) in the case of an Inter-Fund Trade between a Managed Account and a Fund or a Private Credit Fund:
(i) the IRC of the Fund or Private Credit Fund has approved the Inter-Fund Trade in respect of such Fund and Private Credit Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;
(ii) the Investment Management Agreement or other documentation in respect of the Managed Account authorizes the Inter-Fund Trade; and
(iii) the Inter-Fund Trade complies with paragraphs (e) and (g) of subsection 6.1(2) and with subsection 6.1(2.1) of NI 81-107;
(f) The Filer will utilize the Valuation Models it has developed specifically for Private Debt Securities to determine fair value. The Valuation Models are based on a fair value through profit and loss model with financial instruments such as Private Debt Securities valued at their fair value upon initial recognition, plus transaction costs in the case of financial instruments measured at amortized cost. The application of the Valuation Models and the inputs used in the Valuation Models are reviewed by an internal risk group of the Filer whose members do not include the portfolio management team which makes the investment decisions in respect of Private Debt Securities for the Funds, Private Credit Funds or Managed Accounts.
(g) The Valuation Models to be used by the Filer to determine the prices at which Private Debt Securities are purchased and sold by a Fund, Private Credit Fund or Managed Account in connection with an Inter-Fund Trade will be verified on an annual basis by a reputable valuation firm that is: (i) independent of the Funds, the Private Credit Funds, the Filer and its affiliates; (ii) not the Auditor of a Fund, Private Credit Fund, the Filer and its affiliates; and (iii) an accounting firm registered with the CPAB and the valuation services of which are provided by professionals who are active members of the Canadian Institute of Chartered Business Valuators. The independent valuation firm will review the Valuation Models developed and utilized by the Filer and confirm, prior to the Inter-Fund Trade being completed, that the value attributed to Private Debt Securities from the use of such Valuation Models, at the time of, and in connection with, each Inter-Fund Trade are appropriate and correct from the perspective of an independent third party. The Filer will not complete an Inter-Fund Trade unless and until such confirmation is received from the independent valuation firm.
Application File #: 2024/0354