Lissom Investment Management Inc. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from the investment fund self-dealing restrictions in the Securities Act (Ontario) 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(2)(c), 111(3), 111(4), 113.
November 18, 2015
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 LISSOM INVESTMENT MANAGEMENT INC. (the Filer) AND OWNERS FUND, OWNERS RRSP FUND (the Initial Top Funds) AND OWNERS OPPORTUNITIES FUND (the Initial Underlying Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Filer, its affiliates, the Initial Top Funds and any other investment fund that is not a reporting issuer in any jurisdiction of Canada that may be advised or managed by the Filer or its affiliate in the future (the "Future Top Funds" and, together with the Initial Top Fund, the "Top Funds") for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") exempting the Filer, its affiliates and the Top Funds, as applicable, in respect of the Top Funds' investment in the Initial Underlying Fund or any other investment fund that is not a reporting issuer in any jurisdiction of Canada that may be advised or managed by the Filer or its affiliate in the future (the "Future Underlying Funds" and, together with the Initial Underlying Fund, the "Underlying Funds") from:
(a) the restriction in securities legislation that prohibits 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;
(b) the restriction in securities legislation that prohibits an investment fund from knowingly making an investment in an issuer in which:
(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 securityholder of the investment fund, its management company or its distribution company,
has a significant interest; and
(c) the restriction in securities legislation that prohibits an investment fund, its management company or its distribution company, from knowingly holding an investment described in paragraph (a) or (b) above (the "Exemption Sought").
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 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 respect of the Exemption Sought in Alberta.
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under the Business Corporations Act (Ontario) on August 25, 2004 and has its head office in Toronto, Ontario.
2. The Filer is registered as an adviser in the category of portfolio manager and as an investment fund manager in Ontario.
3. The Filer is also registered as a dealer in the category of exempt market dealer under the applicable securities legislation in the provinces of British Columbia and Ontario.
4. The Filer is not a reporting issuer in any jurisdiction of Canada.
5. The Filer has acted, and may in the future act, as distributor of securities of the Top Funds and Underlying Funds (each, a "Fund" and collectively, the "Funds") not otherwise sold through another registered dealer.
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, acts or will act as trustee of any Top Fund and/or Underlying Fund, provided however that any Fund may appoint a third party trustee that is registered under applicable laws to carry on the business of a trust company or be permitted by law to act as a trustee of such Fund.
7. Mr. Irwin Rotenberg, an officer and director of the Filer, is a substantial securityholder of the Filer and previously held a significant interest in the Initial Underlying Fund.
8. In the future, Mr. Rotenberg and other officers and/or directors of the Filer may also be substantial securityholders of the Filer and have a significant interest in a Fund. In addition, officers and/or directors of the Filer may, in the future, be substantial securityholders of a Fund.
Top Funds
9. Each of the Top Funds is or will be an "investment fund" fund for the purposes of the Legislation.
10. Each Initial Top Fund is an investment trust established under the laws of Ontario on February 16, 2005 and is governed by a master declaration of trust dated February 16, 2005, as amended (the "Declaration of Trust").
11. Any Future Top Funds will be structured as trusts under the laws of Ontario.
12. In Canada, securities of the Initial Top Funds are, and securities of the Future Top Funds will be, sold to investors solely on a private placement basis pursuant to available prospectus exemptions in accordance with the Legislation.
13. The investment objective of each Initial Top Fund is to maximize the long term growth of capital.
14. Pursuant to the Declaration of Trust, the Filer is the trustee, manager and investment adviser of each Initial Top Fund. The Filer, or an affiliate of the Filer, will be the manager and investment adviser of the Future Top Funds and is, or will be, responsible for managing the assets of the Top Funds and has, or will have, complete discretion to invest and reinvest the Top Funds' assets, and is, or will be, responsible for overseeing all portfolio transactions in respect of the Top Funds.
15. None of the Top Funds are or will be reporting issuers in any jurisdiction in Canada.
Underlying Funds
16. The Initial Underlying Fund is, and each of the Future Underlying Funds will be, an investment fund for the purposes of the Legislation.
17. The Initial Underlying Fund is an investment trust established under the laws of Ontario on January 3, 2012 and is governed by the Declaration of Trust.
18. Any Future Underlying Funds will be structured as trusts under the laws of Ontario.
19. The Initial Underlying Fund is not, and Future Underlying Funds will not be reporting issuers in any jurisdiction in Canada.
20. In Canada, securities of the Initial Underlying Fund are, and securities of the Future Underlying Funds will be, sold to investors solely on a private placement basis pursuant to available prospectus exemptions in accordance with the Legislation.
21. The Initial Underlying Fund has, and the Future Underlying Funds will have, separate investment objectives, strategies and/or restrictions.
22. The investment objective of the Initial Underlying Fund is to maximize the long term growth of capital.
23. Pursuant to the Declaration of Trust, the Filer is the trustee, manager and investment adviser of the Initial Underlying Fund. The Filer, or an affiliate of the Filer, will be the manager and investment adviser of the Future Underlying Funds and is, or will be, responsible for managing the assets of the Underlying Funds and has, or will have, complete discretion to invest and reinvest the Underlying Funds' assets, and is, or will be, responsible for overseeing all portfolio transactions in respect of the Underlying Funds.
24. 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 securities by securityholders of the Top Funds.
25. The Initial Underlying Fund and its investments are considered liquid. To the extent illiquid assets (as defined in National Instrument 81-102 Investment Funds ("NI 81-102")) are held by an Underlying Fund, such illiquid assets are expected to only comprise an immaterial portion of the applicable Underlying Fund.
26. The portfolio of the Initial Underlying Fund consists, and the portfolio of each Underlying Fund will consist, primarily of publicly traded securities. An investment by a Top Fund in an Underlying Fund will be effected at an objective price. For this purpose, an objective price shall be the net asset value of the Underlying Fund, which is calculated using the fair value of an investment fund's assets and liabilities within the meaning of the term "fair value" in section 14.2(1.2) of National Instrument 81-106 -- Investment Fund Continuous Disclosure.
27. Notwithstanding that the Underlying Funds are not subject to NI 81-102, were such Funds subject to NI 81-102, investments by the Underlying Funds would have complied, and will comply, with the requirements pertaining to investments in "illiquid assets" (as defined in NI 81-102) as set out in section 2.4 of NI 81-102.
Fund-on-Fund Structure
28. Top Funds, including the Initial Top Funds, created by the Filer permit investors in the Top Funds to, among other things, obtain exposure to the investment portfolio of the Underlying Funds and their investment strategies through direct investments by the Top Funds in securities of the Underlying Funds (the "Fund-on-Fund Structure").
29. An investment by a Top Fund in an Underlying Fund is, and will, be compatible with the investment objectives of the Top Fund. Any investment made by a Top Fund in an Underlying Fund complies and aligns, and will comply and be aligned, with the investment objectives, investment strategy, risk profile and other principal terms of the Top Fund.
30. To achieve their respective investment objectives in a cost efficient manner, the investment portfolio of each of the Initial Top Funds includes securities of the Initial Underlying Fund. Rather than operating each of the Initial Top Funds' and the Initial Underlying Fund's investment portfolios as separate pools investing directly in securities of the asset class in which the Initial Underlying Fund invests, the Filer determined that it was in the best interest of securityholders of the Initial Top Funds to make use of economies of scale by managing one investment pool of that asset class in the Underlying Fund. Through investing in the Underlying Funds, the Top Funds are, and will be, able to achieve greater diversification at a lower cost than investing directly in the securities held by the applicable Underlying Fund.
31. 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.
32. The Fund-on-Fund Structure involving Future Top Funds and Future Underlying Funds will be structured similarly to that of the Initial Top Funds and the Initial Underlying Fund.
33. The Filer, or its affiliate, has ensured and will continue to ensure that 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.
34. No sales fees or redemption fees are or will be payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund.
35. The Filer, or its affiliate, have not, and 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.
36. 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 investment funds unless the Underlying Fund (a) is a "clone fund" (as defined by NI 81-102); (b) purchases or holds securities of a "money market fund" (as defined by NI 81-102) or (c) purchases or holds securities that are "index participation units" (as defined by NI 81-102) issued by an investment fund.
37. Prior to the time of their initial purchase of securities of a Top Fund, an investor will be provided with disclosure by the Top Fund about the relationships and potential conflicts of interest between the Top Fund and the Underlying Funds, and that describes:
(a) that the Top Fund may purchase securities of the Underlying Funds;
(b) the fact that the Filer, or its affiliate, is the investment fund manager and portfolio manager of both the Top Funds and the Underlying Funds;
(c) 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; and
(d) the process or criteria used to select the Underlying Funds.
38. Prior to the time of their initial purchase of securities of a Top Fund, an investor has been, and will be, provided with disclosure by the Top Fund of (i) with respect to each officer, director, and/or substantial securityholder of the Filer and/or the Top Fund that has a significant interest in an Underlying Fund and the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of net asset value (NAV) of the Underlying Fund and (ii) the potential conflicts of interest which may arise from such relationships. The foregoing disclosure has been, and will be, contained documentation provided in connection with a distribution of securities of the Top Fund.
39. Each of the Top Funds and the Underlying Funds prepares, or 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 otherwise complies, or will otherwise comply, with the requirements of NI 81-106, as applicable.
40. The securityholders of a Top Fund have received, and will continue to receive, on request and free of charge, a copy of such Top Fund's annual audited and interim unaudited financial statements. The financial statements of each Top Fund disclose, and will continue to disclose, its holdings of securities of the applicable Underlying Funds.
41. The securityholders of a Top Fund will receive, on request and free of charge, a copy of any then current disclosure document of any Underlying Fund in which the Top Fund invests, if available, and a copy of the annual audited financial statements and interim financial statements of the Underlying Fund in which the Top Fund invests.
42. The Initial Top Funds and the Initial Underlying Fund have matching valuation dates. The Initial Top Fund and the Initial Underlying Fund are valued monthly.
43. An Underlying Fund and its securities will be valued no less frequently than a Top Fund and its securities.
44. No Underlying Fund will be a Top Fund.
45. Through inadvertence, each of the Initial Top Funds currently is, alone or together with the other Initial Top Fund, a substantial securityholder of the Initial Underlying Fund contrary to the Legislation. As such, the Filer is seeking the Exemption Sought to be able to maintain the Fund-on-Fund Structure on a going forward basis, and has strengthened its internal control systems to ensure future compliance with applicable laws and regulations.
46. The amount invested in the Initial Underlying Fund by the Initial Top Funds exceeds 20% of the outstanding voting securities of the Underlying Fund. The amounts invested from time to time in a Future Underlying Fund by a Future Top Fund may exceed 20% of the outstanding voting securities of the Future Underlying Fund. As a result, each Top Fund is or could become, either alone or together with other Top Funds, a substantial securityholder 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.
47. The assets of the Funds are, or will be, held in the custody of a trust company incorporated, and licensed or registered, under the laws of Canada or a jurisdiction, or a bank listed in Schedule I, II or III of the Bank Act (Canada) or a qualified affiliated of such bank or trust company.
48. Notwithstanding that the Initial Top Funds and the Initial Underlying Fund are not subject to NI 81-102, were such Funds subject to NI 81-102, investments by an Initial Top Fund in the Initial Underlying Fund would have complied with the substantive requirements pertaining to investments in other investment funds set out in section 2.5 of NI 81-102, namely sections 2.5(2)(b), 2.5(2) (d), 2.5(2) (e), 2.5(2)(f), and 2.5(6), subject to, where applicable, the exception in section 2.5(4).
Generally
49. As noted above, each of the Initial Top Funds currently is, alone or together with the other Initial Top Fund, a substantial securityholder of the Initial Underlying Fund.
50. Persons or companies who are officers or directors of the Filer or substantial securityholders of the Filer or the Top Funds may acquire and hold a significant interest in one or more Underlying Funds from time to time. The significant interest in the Underlying Funds may arise as a result of the direct or indirect investment in securities of the Underlying Fund by such persons or companies.
51. The Fund-on-Fund Structure may result in a Top Fund investing in an Underlying Fund in which an officer, director or substantial securityholder of the Filer or the Top Fund has a significant interest.
52. Since the Top Funds and the Underlying Funds are not subject to NI 81-102, the Top Funds and the Underlying Funds are unable to rely upon the exception in subsection 2.5(7) of NI 81-102.
53. In the absence of the Exemption Sought, a Top Fund would be precluded from purchasing and holding securities of an Underlying Fund due to the investment restrictions contained in the Legislation.
54. A Top Fund's investments in the Underlying Funds has represented and in the future will represent the business judgement of responsible persons 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) to the extent sold in Canada, securities of the Top Funds and Underlying Funds are distributed solely on a private placement basis pursuant to available prospectus exemptions in accordance with the Legislation;
(b) the investment by a Top Fund in an Underlying Fund is compatible with the investment objectives of the 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 investment funds unless the Underlying Fund:
(i) is a clone fund (as defined by NI 81-102),
(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 an investment 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 fees 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 an 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;
(g) documentation provided to investors in a Top Fund in connection with a distribution of securities of the Top Fund and will disclose (the "Fund-on-Fund Disclosure"):
(i) that the Top Fund may purchase securities of the Underlying Funds;
(ii) the fact that the Filer, or its affiliate, is the investment fund manager and portfolio adviser of both the Top Funds 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) each officer, director or substantial securityholder of the Filer, or its affiliate, or of a Top Fund that also has a significant interest in the Underlying Fund, the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of the NAV of the Underlying Fund, and the potential conflicts of interest which may arise from such relationships;
(v) the fees and expenses payable by the Underlying Fund that the Top Fund invests in, including the incentive fees;
(vi) that investors are entitled to receive from the Filer, or its affiliate, on request and free of charge, a copy of any current disclosure document of any Underlying Fund in which the Top Fund invests;
(vii) that investors are entitled to receive from the Filer a copy of the annual audited financial statements and interim financial statements of the Underlying Fund in which the Top Fund invests; and
(viii) the process or criteria used to select the Underlying Funds; and
(h) each existing unitholder of the Initial Top Funds receives, on or before December 31, 2015, in writing, the current Fund-on-Fund Disclosure.