One time trade of securities between pooled funds, both advised by the same portfolio manager, to implement a merger -- costs of the merger borne by the manager -- sale of securities exempt from the self-dealing prohibitions in paragraph s.13.5(2)(b)(iii), National Instrument 31-103 -- Registration Requirements and Exemptions.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5(2)(b)(iii), 15.1.
November 30, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTION
IN THE MATTER OF
MARQUEST ASSET MANAGEMENT INC.
(Marquest or the Filer)
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 subclause 13.5(2)(b)(iii) of National Instrument 31-103 Registration Requirements and Exemptions (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 merger (the Merger) of the Marquest Bridge Fund (the Terminating Fund) into Marquest Equity Growth Fund (the Continuing Fund, together with the Terminating Fund, the Funds) (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 this 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 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 they are defined in this decision.
This decision is based on the following facts represented by the Filer:
1. Marquest is a corporation governed under the laws of Canada. Marquest is registered in the provinces of Alberta, Ontario, British Columbia, Quebec and Saskatchewan as an adviser in the category of portfolio manager and in the province of Ontario as a dealer in the category of exempt market dealer.
2. Marquest acts as manager and portfolio manager of the Terminating Fund and the Continuing Fund.
3. The Filer is not in default of securities legislation in any jurisdiction.
4. Each of the Terminating Fund and Continuing Fund is an open-end mutual fund trust established under the laws of Ontario by a trust deed dated October 1, 1997 and as amended and restated on April 3, 2000 (the Trust Deed). The Funds are not reporting issuers in any jurisdiction.
5. The Funds are not in default of securities legislation in any jurisdiction.
6. The Funds are utilized by Marquest as part of its portfolio management on behalf of pooled fund clients (the Clients). Each Client of Marquest either meets the definition of an "accredited investor" under National Instrument 45-106 Prospectus and Registration Exceptions or qualifies to purchase units of the Funds under an exemption from the prospectus and registration requirements.
7. The Filer proposes to merge the Terminating Fund into the Continuing Fund. In accordance with the Trust Deed of the Funds, 60 days' prior written notice of the Merger has been provided to the Funds' unitholders. The notice is dated September 3, 2009.
8. As at September 3, 2009, distribution of the new units of the Terminating Fund ceased and the Filer ceased accepting new purchases and redemption of units of the Terminating Fund by its unitholders.
9. Subject to the required approval of the principal regulator, the Merger is expected to occur on or about November 30, 2009 or such later date as may be determined by Marquest, but in no event later than December 31, 2009.
10. It is the opinion of the Filer that the Terminating Fund and the Continuing Fund have substantially similar investment objectives. Each of the Funds has an investment objective of providing long-term capital appreciation through the investment in small capitalization growth companies. The Continuing Fund will maintain full eligibility for registered plans.
11. As a result of the Merger, unitholders of the Terminating Fund will pay a reduced management fee of 1.75% and there will be no change in performance fees paid by unitholders of the Terminating Fund.
12. No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of the Terminating Fund.
13. Units of the Continuing Fund and Terminating Fund are sold without sales charges.
14. The costs associated with the Merger will be paid by the Filer. The Terminating Fund will realize a capital gain (or capital loss) as a result of the disposition of its assets on the Merger. The Terminating Fund is expected to have sufficient loss carryforwards to shelter any net realized capital gains resulting from the Merger. It is expected that a loss carryforward of the Terminating Fund will expire on the Merger.
15. Based on the current and anticipated size of the Continuing Fund and the Terminating Fund, at the time the Merger occurs, for the moment in time after the Terminating Fund has transferred its assets in exchange for units of the Continuing Fund and before the units of the Terminating Fund are distributed to its unitholders, the Terminating Fund may hold in excess of 20.0% of the issued and outstanding units of the Continuing Fund.
16. The portfolio of assets of the Terminating Fund to be acquired by the Continuing Fund arising from the Merger will be acceptable to the portfolio adviser of the Continuing Fund and will be consistent with the respective investment objectives of the Continuing Fund.
17. The Continuing Fund will have valuation procedures that are identical to the valuation procedures of the Terminating Fund.
18. The following steps will be carried out to effect the Merger:
(a) the value of the Terminating Fund's portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with its Trust Deed;
(b) the Continuing Fund will acquire the portfolio assets and other assets of the Terminating Fund in exchange for units of the Continuing Fund;
(c) 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;
(d) the units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value 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 series net asset value per security as of the close of business on the effective date of the Merger;
(e) 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 Income Tax Act (Canada), other than alternative minimum tax, for its current taxation year. Currently, it is expected that there will not be any distributions;
(f) 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 units in the Terminating Fund; and
(g) as soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
19. In the opinion of the Filer, the Merger will be in the best interests of its Clients as it will allow Clients greater portfolio diversification, will reduce portfolio transaction costs and tax impact associated with rebalancing each Client's portfolio.
20. The desired end result of the Merger could be achieved by each Client redeeming his/her units of the Terminating Fund and using the proceeds to purchase the units of the Continuing Fund. Executing the trades in this manner could result in negative consequences to the Funds by incurring unnecessary brokerage charges in forcing the sale and repurchase of portfolio holdings.
21. Marquest is or will be a "responsible person" as a result of being the portfolio manager for the Funds.
22. Unless the Requested Relief is granted, the Filer would be prohibited from causing the Terminating Fund to purchase units of 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 Requested Relief is granted.