Ninepoint Partners LP and the Top Funds
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief from the conflict of interest restrictions in the Securities Act (Ontario) and the self-dealing prohibitions in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to permit fund-on-fund structures involving pooled funds under common management 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), 117(2).
February 15, 2019
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
NINEPOINT PARTNERS LP
AND
IN THE MATTER OF
THE TOP FUNDS
(as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from Ninepoint Partners LP on behalf of each of the Top Funds (as defined below) for a decision under the securities legislation of the principal regulator (the Legislation) in respect of the Fund-on-Fund Structure (as defined below) exempting:
(a) the Top Funds from the restriction in the Legislation that prohibits an investment fund from knowingly making an investment in any person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial securityholder;
(b) the Top Funds from the restriction in the Legislation that prohibits an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) (collectively, the Investment Restrictions); and
(c) the Filer (as defined below) from the reporting obligations in the Legislation in connection with the transactions referred to in (a) and (b) above;
(collectively, the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the 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 each of the provinces of Alberta, British Columbia, New Brunswick, Newfoundland, Nova Scotia and Saskatchewan.
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 or in the Act have the same meaning if used in this Decision, unless otherwise defined. The following additional terms shall have the following meanings:
Act means the Securities Act (Ontario);
Existing Funds means each pooled fund, being an investment fund that is not a reporting issuer, of which the Filer currently acts as manager and/or portfolio manager as set out in Exhibit A hereto;
Existing NI 81-102 Fund means each existing NI 81-102 Fund, being an investment fund that is a reporting issuer and subject to NI 81-102 of which the Filer currently acts as manager and/or portfolio adviser;
Filer means Ninepoint Partners LP or any affiliate of Ninepoint Partners LP;
Funds means, collectively, the NI 81-102 Funds and the Pooled Funds (individually, a Fund);
Future NI 81-102 Fund means each future NI 81-102 Fund, being an investment fund that is or will be a reporting issuer and subject to NI 81-102 of which the Filer will act as manager or portfolio adviser in the future;
Future Pooled Fund means each pooled fund, being an investment fund that is not or will not be a reporting issuer, which is established, advised or managed by the Filer in the future;
NI 81-102 means National Instrument 81-102 - Investment Funds;
NI 81-102 Funds means, collectively, the Existing NI 81-102 Funds and the Future NI 81-102 Funds (individually, each an NI 81-102 Fund);
NI 81-106 means National Instrument 81-106 - Investment Fund Continuous Disclosure;
Pooled Funds means, collectively, the Existing Funds and the Future Pooled Funds (individually, each a Pooled Fund);
Top Funds means, collectively, one or more Pooled Funds as further defined in Representation 11 (each a Top Fund).
REPRESENTATIONS
The decision is based on the following facts represented by Ninepoint Partners LP:
Ninepoint Partners LP
1. Ninepoint Partners LP is a limited partnership formed and organized under the laws of the Province of Ontario. The general partner of Ninepoint Partners LP is Ninepoint Partners GP Inc., a corporation incorporated under the laws of the Province of Ontario. The head office of Ninepoint Partners LP is located in Ontario.
2. Ninepoint Partners LP is registered as (i) an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, (ii) a portfolio manager in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Newfoundland and Labrador, and (iii) an exempt market dealer in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Newfoundland and Labrador and Quebec. Neither the Filer nor any of the Funds currently managed by the Filer is in default of securities legislation in any province or territory of Canada.
3. Ninepoint Partners LP became the manager and portfolio adviser of the Existing Funds when the management agreements relating to the Existing Funds were transferred to the Filer by Sprott Asset Management LP pursuant to an Asset Purchase Agreement among, inter alia, Sprott Asset Management LP, Sprott Private Wealth LP and Ninepoint Financial Group Inc. (formerly 2568004 Ontario Inc.) dated April 10, 2017, as filed on SEDAR under the profile of Sprott Inc., as the same may be amended, supplemented or modified from time to time in accordance with its terms.
Existing Relief
4. Each of the Existing Funds obtained the same relief as the Requested Relief evidenced by a decision dated July 27, 2010 (the Specified Prior Relief). Ninepoint Partners LP, as the current manager of the Existing Funds, is now seeking to obtain the Requested Relief in a separate, new decision, reflecting itself as the current manager of the Existing Funds, and on behalf of the Future Pooled Funds the Filer may establish in the future.
5. Should the Requested Relief be granted, neither the Filer or the Top Funds will rely on the Specified Prior Relief. The Specified Prior Relief will continue to apply to existing and future investment funds managed by Sprott Asset Management LP.
The Funds
6. Each of the NI 81-102 Funds is, or will be, an open-ended mutual fund trust or other trust established under the laws of the Province of Ontario, a mutual fund corporation or other corporation established under the laws of the Province of Ontario or of Canada or a limited partnership established under the laws of the Province of Ontario. Each of the NI 81-102 Funds is, or will be, a reporting issuer in Ontario and/or at least one of the other provinces and territories of Canada.
7. Each of the Pooled Funds is, or will be, a limited partnership, corporation or a trust and will not be a reporting issuer. Securities of each Pooled Fund, if distributed in Canada, will be distributed only to 'accredited investors' within the meaning of National Instrument 45-106 Prospectus Exemptions, or to other investors pursuant to exemptions from the prospectus requirement.
8. Each Fund is, or will be, an "investment fund" for the purposes of the Legislation.
9. The Filer is, or will be, the manager and/or portfolio adviser for the Funds.
10. Securities of each of the Pooled Funds, if distributed in Canada, are or will be offered on a private placement basis to qualified investors pursuant to available exemptions from the prospectus requirements under Canadian securities legislation.
11. The assets of each Top Fund (only if such Top Fund holds securities other than securities of an Underlying Fund) and each Underlying Fund will be held by an entity that meets the qualifications of section 6.2 of NI 81-102 (for assets held in Canada) or an entity that meets the qualifications of section 6.3 of NI 81-102 (for assets held outside Canada).
12. The Filer has developed a marketplace niche with respect to pooled funds that invest more than 10% of their assets in "illiquid assets". The Existing Funds currently have over 12,000 aggregate investors and over $1 billion in aggregate net asset values and, in reliance on the Specified Prior Relief, have been investing in "illiquid assets" for many years.
13. Given this sizable investor and asset base it not practical for the Existing Funds to alter their investment strategies in order to limit the amount of "illiquid assets" held by the Existing Funds. The Filer is of the view that any such alteration would be detrimental to existing investors in the Existing Funds.
Fund-on-Fund Structure
14. The Pooled Funds will invest directly in a portfolio of securities that is consistent with each Pooled Fund's investment strategy, however, the Filer may determine it would be in the best interest of a Pooled Fund (a Top Fund) to invest a portion of its portfolio in an underlying NI 81-102 Fund or Pooled Fund (the Underlying Funds) to achieve its investment objective on a more cost effective basis instead of directly purchasing individual securities (the Fund-on-Fund Structure). The Filer believes that the Fund-on-Fund Structure provides an efficient and cost-effective manner of achieving the investment objective and asset mix allocation on behalf of the Top Funds rather than through the direct purchase of individual securities and will not be detrimental to the interests of other securityholders of the Underlying Funds.
15. The Underlying Funds that are NI 81-102 Funds will primarily hold publicly traded securities and will not hold greater than 10% of their assets in 'illiquid assets' as defined in National Instrument 81-102 Investment Funds.
16. No Underlying Fund will be a Top Fund.
17. An investment in an Underlying Fund by a Top Fund will be effected at an objective price. According to the Filer's policies and procedures, an objective price for this purpose, will be the net asset value per security of the applicable class or series of the applicable Underlying Fund, calculated in accordance with section 14.2 of NI 81-106.
18. The amounts invested, from time to time, in an Underlying Fund by one or more of the Top Funds, may exceed 20% of the outstanding voting securities of any single Underlying Fund. Accordingly, each Top Fund could, either alone or together with other Top Funds, become a substantial securityholder of an Underlying Fund.
19. Each Underlying Fund has, or is expected to have, other investors in addition to the Top Funds.
20. With respect to a Top Fund that is a Future Pooled Fund, the corresponding Underlying Fund(s) will have matching or more frequent redemption and valuation cycles compared to the redemption and valuation cycles of such Top Fund.
21. The Top Funds and Underlying Funds will prepare annual audited financial statements and interim financial reports in accordance with NI 81-106 and will otherwise comply with the requirements of NI 81-106.
22. In the absence of the Requested Relief, the Top Funds would be precluded by the Investment Restrictions from implementing the Fund-on-Fund Structure. Specifically, a Top Fund would be prohibited from becoming a substantial security holder of an Underlying Fund, either alone or together with related investment funds.
23. The Fund-on-Fund Structure represents the business judgment of responsible persons as of the date hereof, uninfluenced by considerations other than the best interests of the Top Funds. The "responsible persons" of the Filer with respect to the Fund-on-Fund Structure are the executive committee of the Filer, which includes the lead portfolio
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.
(a) The decision of the principal regulator under the Legislation is that the Requested Relief is granted provided that: securities of a Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirement under applicable securities legislation;
(b) an investment by a Top Fund in an Underlying Fund is consistent with the fundamental investment objectives and strategy 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 complies with the provisions of NI 81-106 that apply to a "mutual fund in Ontario" as defined in the Act;
(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 in securities of other mutual 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 81102) issued by an investment fund;
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;
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 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) the Filer does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the holders of such securities, except that the Filer may arrange for the securities the Top Fund holds in the Underlying Fund to be voted by the beneficial owners of the securities of the Top Fund, who are not the Filer or an officer, director or substantial security holder of the Filer;
(i) when purchasing and/or redeeming securities of an Underlying Fund, the Filer 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) a disclosure document, including an offering memorandum where available, of a Top Fund shall be provided to each investor in a Top Fund prior to the time of the investor's investment, and shall disclose:
(i) that the Filer is the investment fund manager and/or portfolio manager of the Top Fund and the Underlying Fund;
(ii) the approximate or maximum percentage of net assets of the Top Fund that is intended be invested in securities of Underlying Funds;
(iii) the fees, expenses and any performance or special incentive distributions payable by an Underlying Fund in which the Top Fund invests;
(iv) the process or criteria used to select an Underlying Fund;
(v) that investors are entitled to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of each Underlying Fund, if available;
(vi) that investors are entitled to receive from the Filer, on request and free of charge, the annual audited financial statements and interim financial reports relating to each Underlying Fund in which the Top Fund invests; and
(k) the Filer shall annually inform investors in a Top Fund of their right to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of each Underlying Fund, if available, and the annual audited financial statements and interim financial reports relating to each Underlying Fund in which the Top Fund invests.
“Garnet Fenn” “Tim Moseley”
Commissioner Vice-Chair
Ontario Securities Commission Ontario Securities Commission
EXHIBIT A
EXISTING FUNDS
Pooled Funds
1 Ninepoint Enhanced Long Short Equity RSP Fund
2 Ninepoint Enhanced Long Short Equity Fund L.P.
3 Ninepoint Credit Income Opportunities Fund
4 Ninepoint Alternative Income Fund
5 Ninepoint - TEC Private Credit Fund
6 Ninepoint Canadian Senior Debt Fund