National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – One-time transfer of portfolio securities between two pooled funds, both advised by the same portfolio adviser, to implement a merger between the funds – Funds have substantially similar investment objectives and strategies, fees and valuation policies – Costs of the merger borne by manager – Sale of securities exempt from the self-dealing prohibition in s. 13.5(2)(b)(iii), National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss.13.5(2)(b)(iii), 15.1.
November 25, 2016
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
MARRET ASSET MANAGEMENT INC.
MARRET HIGH GRADE HEDGE FUND
(the Terminating Fund)
MARRET INVESTMENT GRADE HEDGED STRATEGIES FUND
(the Continuing Fund)
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from subparagraph 13.5(2)(b)(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 a security from or to the investment portfolio of an investment fund for which a responsible person acts as an adviser, in order to effect the proposed merger (the Merger) of the Terminating Fund into the Continuing Fund (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filer has provided notice that section 4.7 of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of Ontario with its head office located in Toronto, Ontario.
2. The Filer acts as manager and portfolio manager of the Terminating Fund and the Continuing Fund (collectively, the Funds).
3. The Filer is registered as an investment fund manager, portfolio manager and exempt market in each province of Canada, and as a commodity trading manager in Ontario.
4. The Filer is not in default of securities legislation in any jurisdiction.
5. Each of the Terminating Fund and Continuing Fund is an open-end mutual fund trust established under the laws of Ontario. The Funds are not reporting issuers in any jurisdiction and are not subject to National Instrument 81-102 Investment Funds.
6. Each Fund offers its units in all provinces and territories of Canada pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions.
7. The Funds are not in default of securities legislation in any jurisdiction.
8. Currently, neither Fund qualifies as a “mutual fund trust” under the Income Tax Act (Canada) (the Tax Act) as neither Fund has at least 150 unitholders.
9. The Filer wishes to merge the Terminating Fund into the Continuing Fund on or about November 30, 2016 (the Effective Date), subject to receipt of all regulatory, and other, approvals. The Filer has decided to effect the Merger because of the similarities in the Funds’ investment portfolios and the desire to focus on one investment objective and strategy. Further, after the Merger, the Continuing Fund will have more than 150 unitholders and will therefore qualify as a “mutual fund trust” under the Tax Act.
10. Pursuant to the declaration of trust of the Terminating Fund, unitholders were provided at least 60 days’ written notice of the Merger after which the Filer, in its capacity as trustee of the Terminating Fund, may effect the Merger and other related amendments.
11. There will be no change in management fees or performance fees paid by unitholders of the Terminating Fund as a result of the Merger.
12. No redemption fees, other fees or commissions will be payable by the Funds’ unitholders in connection with the Merger. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the Terminating Fund’s investment portfolio.
13. The costs associated with the Merger will be paid by the Filer.
14. As the Funds do not qualify as “mutual fund trusts”, the Merger is not eligible to be completed on a tax deferred basis and, accordingly, will be completed on a taxable basis. Unitholders of the Terminating Fund will trigger a disposition for tax purposes on the effective date of the Merger, which will trigger a taxable gain or loss depending on the adjusted cost base of each unitholder’s units, but will not give rise to material adverse tax consequences for the Terminating Fund and the vast majority of its unitholders.
15. Unitholders of the Terminating Fund will be able to redeem their units at net asset value (NAV) at all redemption dates up to the Effective Date.
16. The investment objectives and portfolios of the Continuing Fund and the Terminating Fund are similar and both Funds primarily invest in corporate debt securities. The portfolio of assets of the Terminating Fund to be acquired by the Continuing Fund arising from the Merger will be consistent with the investment objectives of the Continuing Fund.
17. The NAV of each of the Funds is determined using substantially similar valuation principles and the Funds have similar redemption policies.
18. The following steps will be carried out to effect the Merger:
(a) the value of the Terminating Fund’s investment portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with its declaration of trust;
(b) any securities in the investment portfolio of the Terminating Fund which do not conform to the investment objective and strategies of the Continuing Fund will be sold in the market for cash;
(c) the Continuing Fund will acquire the portfolio assets and other assets of the Terminating Fund in exchange for units of the Continuing Fund;
(d) the Continuing Fund will not assume the liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the Merger;
(e) the units of the Continuing Fund received by the Terminating Fund will have an aggregate NAV equal to the value of the Terminating Fund’s portfolio assets and other assets that the Continuing Fund is acquiring, which units will be issued at the applicable NAV per security as of the close of business on the effective date of the Merger;
(f) if necessary, the Terminating Fund will distribute a sufficient amount of its income and capital gains, if any, to ensure that the Terminating Fund will not be liable for income tax under Part I of the Tax Act, other than alternative minimum tax, for its current taxation year. Currently, it is expected that there will not be any distributions from the Terminating Fund;
(g) immediately thereafter, the units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund on a dollar-for-dollar basis in exchange for their respective equivalent class of units in the Terminating Fund; and
(h) as soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
19. Although the Funds are not subject to National Instrument 81-107 Independent Review Committee for Investment Funds, the Filer presented the Merger to the independent review committee (IRC) that it has established with respect to the Funds. The IRC has approved the Merger after concluding that it would achieve a fair and reasonable result for each Fund.
20. The board of directors of the Filer has determined that the Merger is in the best interests of the Funds and has approved the Merger, subject to obtaining the Exemption Sought.
21. The assets of the Funds will be valued in accordance with the valuation policies and procedures outlined in the declaration of trust of each Fund, and, at this value, the assets of the Terminating Fund will subsequently be exchanged for units of the Continuing Fund as described above.
22. The transfer of the assets of the Terminating Fund to the Continuing Fund will not adversely impact the liquidity of the Continuing Fund.
23. The Filer believes that the Merger is in the best interests of unitholders of the Funds for the following reasons:
(a) the Merger will result in a more streamlined and simplified product line-up that is easier for investors to understand;
(b) the Merger will eliminate similar fund offerings across product line ups, reducing duplication and redundancy;
(c) the Merger will allow the Continuing Fund to qualify as a “mutual fund trust” under the Tax Act, which will benefit all its investors;
(d) following the Merger, the Continuing Fund will have more assets, thereby allowing for increased portfolio diversification opportunities and a smaller proportion of assets to be set aside for fund redemptions; and
(e) the Continuing Fund will benefit from its larger profile in the marketplace.
24. The desired end result of the Merger could be achieved by each unitholder redeeming his or her units of the Terminating Fund and using the proceeds to purchase units of the Continuing Fund. Executing the trades in this manner would result in negative consequences to the Terminating Fund and the Continuing Fund through the incurrence of unnecessary brokerage charges relating to the sale and repurchase of portfolio securities.
25. The portfolio securities and other assets of the Terminating Fund will be transferred from the Terminating Fund to the Continuing Fund in accordance with the steps described above. Because the transfer of portfolio securities and assets will take place at a value determined by common valuation procedures and the issue of units will be based upon the relative net asset value of the portfolio securities and other assets received by the Continuing Fund, and notice and redemption rights have been provided to unitholders, it is the Filer’s submission that any potential conflict of interest has been adequately addressed and as a result there is no conflict of interest for the Filer in effecting the Merger.
26. The sale of the assets of the Terminating Fund to the Continuing Fund, and the corresponding purchase of such assets by the Continuing Fund, as a step in the Merger may be considered a purchase or sale of securities, knowingly caused by a registered adviser that manages the investment portfolios of both Funds, from the Terminating Fund to, or by the Continuing Fund from, an investment fund for which a “responsible person” acts as an adviser, contrary to subparagraph 13.5(2)(b)(iii) of NI 31-103.
27. Unless the Exemption Sought is granted, the Filer would be prohibited from knowingly causing the securities of the Terminating Fund to be transferred to the Continuing Fund in connection with the Merger.
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.
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission