Edgehill Partners & EHP Funds Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Investment funds that are not reporting issuers proposing to invest their assets in investment funds under common management that are reporting issuers -- Fund-on-fund structure may cause a top fund to (i) become a substantial security holder of an underlying fund, and (ii) invest in an underlying fund in which an officer or director of the top fund's manager has a significant interest, or invest in an underlying fund in which a person who is a substantial securityholder of the top fund or its manager has a significant interest -- Top funds and their investment fund manager request relief from the investment fund conflict of interest investment restrictions in paragraphs 111(2)(b) and (c) and subsection 111(4) of the Securities Act and the self-dealing prohibition in paragraph 13.5(2)(a) of NI 31-103 -- Investment fund manager of the underlying funds that are reporting issuers requests relief from the investment fund conflict of interest reporting requirement in paragraph 117(1)1 of the Securities Act in respect of the underlying funds' sale of securities to the top funds -- Relief granted subject to conditions.
Applicable Legislative Provisions
Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(2)(c), 111(4), 113, 117(1)1 and 117(2).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a) and 15.1.
April 16, 2021
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 EDGEHILL PARTNERS AND EHP FUNDS INC. (the Filers) AND THE TOP FUNDS (as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers, on behalf of Edgehill Partners (Edgehill), EHP Funds Inc. (EHP), EHP Global Multi-Strategy Fund (the Initial Top Fund) or any other investment fund that is not a reporting issuer under the securities legislation of the Jurisdiction (the Legislation) and that is established, advised or managed by Edgehill or EHP after the date hereof (the Future Top Funds and, together with the Initial Top Fund, the Top Funds), which invests its assets in any of EHP Advantage Alternative Fund, EHP Advantage International Alternative Fund, EHP Foundation Alternative Fund, EHP Foundation International Alternative Fund, EHP Select Alternative Fund and EHP Global Arbitrage Alternative Fund (collectively, the Initial Underlying Funds) or any other investment fund that is, or will be, a reporting issuer under the securities legislation in any of the provinces or territories of Canada, established, advised or managed by Edgehill or EHP, or an affiliate thereof, after the date hereof (the Future Underlying Funds and, together with the Initial Underlying Funds, the Underlying Funds), for a decision under the Legislation exempting the Filers and the Top Funds from:
(a) the restriction in the Legislation which prohibits:
(i) 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 securityholder;
(ii) an investment fund from knowingly making an investment in an issuer in which:
(A) any officer or director of the investment fund, its management company or distribution company or an associate of any of them, or
(B) any person or company who is a substantial securityholder of the investment fund, its management company or its distribution company,
has a significant interest; and
(iii) an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraphs (i) and (ii) above
(the Related Issuer Relief);
(b) the requirement in the Legislation that requires each Filer, for each investment fund in respect of which it is a management company, to file a report relating to a purchase or sale of securities between an investment fund and any related person or company within 30 days after the end of a month in which it occurs (the Reporting Relief); and
(c) the restriction in paragraph 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) prohibiting a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as adviser, to purchase 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 purchase is obtained before the purchase (the "Consent Relief" and collectively with the Related Issuer Relief and the Reporting Relief, the "Requested Relief").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission is the principal regulator for this application; and
2. the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the provinces and territories of Canada.
Interpretation
Unless expressly defined herein, terms in this decision have the respective meanings given to them in National Instrument 14-101 Definitions and MI 11-102.
Representations
This decision is based on the following facts represented by the Filers:
Filers
1. Edgehill is a general partnership formed under the laws of the Province of Ontario. EHP is a corporation incorporated under the laws of the Province of Ontario. Each of the Filers has its head office in Toronto, Ontario. EHP is an affiliate of Edgehill.
2. Edgehill is registered as an investment fund manager in the Provinces of Ontario, Québec and Newfoundland and Labrador. Edgehill is also registered as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer in the Provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Ontario, Québec and Saskatchewan.
3. EHP is registered as an investment fund manager in the Provinces of Ontario, Québec and Newfoundland and Labrador. EHP is also registered as an adviser in the category of portfolio manager in the Province of Ontario.
4. Edgehill or EHP is, or will be, the manager of the Top Funds. Edgehill or EHP, or an affiliate thereof, is or will be the manager of the Underlying Funds.
5. Edgehill or EHP is, or will be, responsible for managing the assets of the Top Funds, has, or will have, complete discretion to invest and reinvest the Top Funds' assets, and is, or will be, responsible for executing all portfolio transactions. As such, Edgehill and EHP may be considered a "management company" in respect of the Top Funds as defined in the Legislation. Furthermore, Edgehill or EHP assists, or will assist, in the marketing of the Top Funds and, subject to compliance with applicable securities laws may act as a distributor of securities of the Top Funds not otherwise sold through another registered dealer.
6. Edgehill or EHP, or an affiliate thereof, is or will be responsible for managing the assets of the Underlying Funds, has, or will have, complete discretion to invest and reinvest the Underlying Funds' assets, and is, or will be, responsible for executing all portfolio transactions. As such, Edgehill and EHP may be considered a "management company" in respect of the Underlying Funds as defined in the Legislation. Furthermore, Edgehill or EHP, or an affiliate thereof, assists or will assist in the marketing of the Underlying Funds and, subject to compliance with applicable securities laws may act as a distributor of securities of the Underlying Funds not otherwise sold through another registered dealer.
7. Edgehill or EHP is, or will be, the investment fund manager of each Top Fund.
8. Edgehill or EHP, or an affiliate thereof, is or will be the investment fund manager of each Underlying Fund.
9. Neither of the Filers is a reporting issuer in any jurisdiction of Canada and neither of the Filers is in default of securities legislation of any jurisdiction of Canada.
The Top Funds
10. The Top Funds are, or will be, formed as trusts or limited partnerships under the laws of Ontario by a trust agreement or limited partnership agreement, as applicable.
11. Each of the Top Funds is, or will be, sold pursuant to prospectus exemptions in accordance with the Legislation and National Instrument 45-106 -- Prospectus Exemptions (NI 45-106).
12. Pursuant to an amended and restated trust agreement dated as of December 28, 2020 (the Trust Agreement), Computershare Trust Company of Canada acts as the trustee of the Initial Top Fund. Pursuant to the Trust Agreement, Edgehill has been appointed as the investment fund manager of the Initial Top Fund and has authority to manage the business and affairs of the Initial Top Fund and to bind the Initial Top Fund.
13. The investment objective of the Initial Top Fund is to seek to generate superior risk adjusted investment returns over the long term by utilizing a multi-strategy approach consisting of diversified quantitative and systematic investment strategies, including by gaining exposure to the returns of the Initial Underlying Funds. The Initial Top Fund will also seek to preserve capital and mitigate risk through the application of portfolio and risk management tools.
14. The offering memorandum of the Initial Top Fund describes the investment objectives and investment restrictions applicable to the Initial Top Fund and also describes the fees, compensation and expenses payable by the Initial Top Fund, distributions, the powers and duties of the investment fund manager and all other matters material to the Initial Top Fund, including the fact that in pursuing its investment objectives, the Initial Top Fund may invest in one or more Underlying Funds as an investment strategy.
15. The Top Funds are, or will be, mutual funds for the purposes of the Legislation. None of the Top Funds is, or has current plans to become, a reporting issuer in any jurisdiction of Canada.
16. The Initial Top Fund is not in default of securities legislation of any jurisdiction of Canada.
The Underlying Funds
17. Each of the Initial Underlying Funds is organized as a trust and formed under the laws of the Province of Ontario.
18. The trustee of each of EHP Advantage Alternative Fund, EHP Advantage International Alternative Fund, EHP Foundation Alternative Fund, EHP Foundation International Alternative Fund, EHP Select Alternative Fund and EHP Global Arbitrage Alternative Fund is EHP.
19. EHP has entered into a master declaration of trust in respect of each of the Initial Underlying Funds, pursuant to which, EHP is responsible for directing the affairs of each Initial Underlying Fund and providing day-to-day management services to each Initial Underlying Fund, including management of each Initial Underlying Fund's investment portfolio on a discretionary basis and arranging for the distribution of the units of each Initial Underlying Fund, and such other services as may be required from time to time. EHP may delegate certain of these duties from time to time.
20. Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.
21. The Underlying Funds are, or will be, reporting issuers in the provinces and territories of Canada and the securities of the Underlying Funds are, or will be, offered and issued pursuant to a simplified prospectus, annual information form and fund facts in the provinces and territories of Canada.
22. The investment objectives of the Initial Underlying Funds are as follows:
(a) EHP Advantage Alternative Fund -- The investment objective of the EHP Advantage Alternative Fund is to generate superior risk adjusted investment returns over the long-term by utilizing a multi-strategy approach consisting of diversified quantitative and systematic investment strategies.
(b) EHP Advantage International Alternative Fund -- The investment objective of the EHP Advantage International Alternative Fund is to generate superior risk adjusted investment returns over the long-term by utilizing a multi-strategy approach consisting of diversified quantitative and systematic investment strategies.
(c) EHP Foundation Alternative Fund -- The investment objective of the EHP Foundation Alternative Fund is to provide a positive total return, regardless of market conditions or general market direction, with low correlation to North American equity markets.
(d) EHP Foundation International Alternative Fund -- The investment objective of the EHP Foundation International Alternative Fund, is to provide a positive total return, regardless of market conditions or general market direction, with low correlation to international developed equity markets.
(e) EHP Select Alternative Fund -- The investment objective of the EHP Select Alternative Fund is to provide a better risk-adjusted return than the S&P TSX Composite Index, regardless of market conditions or general market direction. The Fund targets a volatility that is approximately equal to the S&P TSX Composite Index, but with lower correlation to the index and with lower peak-to-trough drawdowns.
(f) EHP Global Arbitrage Alternative Fund -- The investment objective of the EHP Global Arbitrage Alternative Fund is to provide a positive total return over a market cycle, regardless of market conditions or general market direction, with low correlation to equity markets.
23. Persons or companies who are partners, officers or directors of Edgehill or EHP or substantial securityholders of the Top Funds, Edgehill or EHP may acquire or hold a significant interest in one or more Underlying Funds from time to time.
24. The Underlying Funds are, or will be, alternative mutual funds as defined under National Instrument 81-102 Investment Funds (NI 81-102).
25. None of the Initial Underlying Funds are in default of securities legislation of any jurisdiction of Canada.
Fund-on-Fund Structure
26. The Top Funds allow investors in such investment funds to obtain exposure to the investment portfolios of the Underlying Funds and their respective investment strategies primarily through direct investments by the Top Funds in securities of the Underlying Funds (the Fund-on-Fund Structure). The Filers believe 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.
27. Investing directly in separate securities instead of allowing direct exposure to the securities invested in by the Underlying Fund is a less desirable option due to the increased costs and inefficiencies that are associated with such direct investing.
28. Investments by the Top Funds in the Underlying Funds will increase the asset base of the Underlying Funds enabling the Underlying Funds to further diversify their respective portfolios to the benefit of their investors. The larger asset base will also benefit investors in the Underlying Funds through achieving favourable pricing and transaction costs on portfolio trades, increased access to investments where there is a minimum subscription or purchase amount and economies of scale through greater efficiency.
29. Purchasers of securities of a Top Fund may subscribe for securities of the Top Funds pursuant to a subscription agreement (a Subscription Agreement).
30. Prior to executing a Subscription Agreement, the purchaser will be provided with a copy of the Top Fund's offering memorandum or, if no offering memorandum is prepared in respect of the Top Fund, the purchaser will be provided with details about the Top Fund and disclosure respecting relationships and potential conflicts of interest between the Top Fund and the applicable Underlying Fund.
31. An investment in an Underlying Fund by a Top Fund is, or will be, effected at an objective price.
32. 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 related investment funds, become a substantial securityholder of an Underlying Fund. The Top Funds and the Underlying Funds are, or will be, related investment funds by virtue of being under common management by Edgehill or EHP, or affiliates thereof.
33. In the absence of the Related Issuer Relief, the Top Funds would be constrained by the investment restrictions in Canadian securities legislation in terms of the degree to which they could implement the Fund-on-Fund Structure. Specifically, the Top Funds would be prohibited from: (i) becoming substantial securityholders of the Underlying Funds, either alone or together with related investment funds; and (ii) investing in an Underlying Fund in which an officer or director of the Top Fund's manager has a significant interest and/or investing in an Underlying Fund in which a person or company who is a substantial securityholder of the Top Fund or the Top Fund's manager, has a significant interest.
34. In the absence of the Consent Relief, each Top Fund would be precluded from investing in one or more Underlying Funds unless the specific fact is disclosed to securityholders of the Top Fund and the written consent of the securityholders of the Top Fund to the investment is obtained prior to the purchase, since an officer and/or director of Edgehill or EHP, as applicable, who may be considered a responsible person (as defined in section 13.5 of NI 31-103) or an associate of a responsible person, may also be a partner, officer and/or director of the applicable Underlying Fund.
35. According to the Legislation, every management company of an investment fund that is a reporting issuer shall 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. Each of the Top Funds may be a 'related person or company' of the Underlying Funds under the Legislation.
36. In the absence of the Reporting Relief, Edgehill or EHP, as applicable, acting as the management company of the Underlying Funds, would be required to file a report of every sale of securities of the Underlying Funds to the Top Funds within 30 days after the end of the month in which such sale occurs.
37. 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.
38. A Top Fund's investments in the Underlying Funds represent the business judgment of a responsible person uninfluenced by considerations other than the best interests of the investment funds concerned.
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 Requested Relief is granted, provided that Edgehill or EHP, as applicable, ensures 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 investment objectives of the Top Fund;
(c) an investment in an Underlying Fund by a Top Fund will be effected at an objective price, calculated in accordance with section 14.2 of NI 81-106;
(d) a Top Fund will not invest in an Underlying Fund unless the Underlying Fund prepares annual audited financial statements for the Underlying Fund's most recently completed financial year and interim financial statements for the Underlying Fund's most recently completed interim period;
(e) no Top Fund will purchase or hold a security of an Underlying Fund unless at the time of purchasing securities of the Underlying Fund, the Underlying Fund holds no more than 10% of its net asset value (NAV) in securities of other investment funds, unless the Underlying Fund:
(i) is a "clone fund" (as defined in NI 81-102);
(ii) purchases or holds securities of a "money market fund" (as defined in NI 81-102); or
(iii) purchases or holds securities that are "index participation units" (as defined by NI 81-102) issued by an investment fund;
(f) 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;
(g) no sales fees or redemption fees are payable by the Top Fund in relation to its purchases, dispositions or redemptions of securities of an Underlying Fund that, to a reasonable person, would duplicate a fee payable by an investor in the Top Fund other than brokerage fees incurred for the purchase or sale of an index participation unit issued by an investment fund;
(h) Edgehill or EHP, as applicable, will not vote, or cause to be voted, the securities of the applicable Underlying Fund held by a Top Fund at any meeting of holders of such securities except that Edgehill or EHP, as applicable, 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 Edgehill or EHP, as applicable, or an officer, director or substantial securityholder of Edgehill or EHP, as applicable;
(i) when purchasing and/or redeeming securities of an Underlying Fund, Edgehill or EHP, as applicable, shall, as investment fund manager of the applicable Top Fund and Underlying Fund, act honestly in good faith and in the best interests of the Top Fund and the Underlying Fund, respectively, and shall exercise the care and diligence that a reasonably prudent person would exercise in comparable circumstances;
(j) the offering memorandum, where available, or other disclosure document, of each of the Top Funds will be provided to all investors of the applicable Top Fund prior to the time of investment, and will disclose:
(i) that a Top Fund may purchase securities of one or more applicable Underlying Funds;
(ii) that Edgehill or EHP, as applicable, is the investment fund manager and portfolio manager of the Top Funds and that Edgehill or EHP, as applicable, or an affiliate thereof, is the investment fund manager and portfolio manager of the Underlying Funds;
(iii) that the Top Fund may invest all, or substantially all, of its assets in securities of Underlying Funds;
(iv) the fees, expenses and any performance or special incentive distributions payable by the Underlying Funds in which a Top Fund invests;
(v) the process or criteria used to select the Underlying Funds;
(vi) for each officer, director and/or substantial securityholder of Edgehill or EHP, as applicable, an affiliate thereof or of a Top Fund, that also has a significant interest in the applicable Underlying Fund, and for the officers and directors and substantial securityholders who together in aggregate hold a significant interest in the applicable Underlying Fund, the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of the applicable Underlying Fund's NAV, and the potential conflicts of interest which may arise from such relationship;
(vii) that investors are entitled to receive from Edgehill or EHP, as applicable, or an affiliate thereof, on request and free of charge, a copy of the simplified prospectus, annual information form and fund facts of any Underlying Fund in which the Top Fund invests;
(viii) that investors are entitled to receive from Edgehill or EHP, as applicable, or an affiliate thereof, on request and free of charge, the annual audited financial statements and interim financial statements relating to any Underlying Fund in which the Top Fund invests;
(k) Edgehill or EHP, as applicable, shall annually inform investors in a Top Fund of their right to receive from Edgehill or EHP, as applicable, on request and free of charge, a copy of each Underlying Fund's simplified prospectus, annual information form and fund facts and the annual audited financial statements and interim financial reports relating to each Underlying Fund in which the Top Fund invests; and
(l) in respect of an Underlying Fund's sale of securities to a Top Fund, the annual and interim management reports of fund performance for the Underlying Fund will disclose this sale as a related party transaction in accordance with Item 2.5 of Part B of Form 81-106F1 -- Contents of Annual and Interim Management Report of Fund Performance.
The Consent Relief:
"Darren McKall"Manager, Investment Funds and Structured Products BranchOntario Securities Commission
The Related Issuer Relief and Reporting Relief: