NexGen Financial Limited Partnership et al. - MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- Exemption granted from requirements contained in subsections 2(a) and 2(c) of NI 81-101 to comply with certain form requirements of Form 81-101F1 -- Exemption granted to permit two funds that are components of an integrated structure for tax purposes to combine their profiles in their simplified prospectus.

Exemption also granted from requirements contained in sections 2.4, 2.6(a), and 2.6(h) of NI 81-102 to permit the issuance of limited recourse debt by bottom corporate funds to top trust funds and facilitate integrated structure for tax purposes.

Rules Cited

National Instrument 81-101 Mutual Funds, ss. 2(a), 2(c), 6.1, Form 81-101F1.

National Instrument 81-102 - Mutual Funds, ss. 2.4, 2.6(a), 2.6(h), 19.1.

February 24, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA,

ONTARIO, AND QUEBEC,

(the Jurisdictions)

AND

IN THE MATTER OF

NATIONAL INSTRUMENT 81-102

MUTUAL FUNDS (NI 81-102)

AND

IN THE MATTER OF

NATIONAL INSTRUMENT 81-101

MUTUAL FUNDS (NI 81-101)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

NEXGEN FINANCIAL LIMITED PARTNERSHIP (NexGen)

AND

NEXGEN CANADIAN CASH TRUST

NEXGEN CANADIAN BOND TRUST

NEXGEN CANADIAN GROWTH AND INCOME TRUST

NEXGEN CANADIAN BALANCED GROWTH TRUST

NEXGEN CANADIAN LARGE CAP TRUST

NEXGEN CANADIAN GROWTH TRUST

NEXGEN CANADIAN DIVIDEND AND INCOME TRUST

NEXGEN NORTH AMERICAN DIVIDEND AND INCOME TRUST

NEXGEN AMERICAN GROWTH TRUST

NEXGEN NORTH AMERICAN VALUE TRUST

NEXGEN NORTH AMERICAN SMALL / MID CAP TRUST

NEXGEN NORTH AMERICAN GROWTH TRUST

NEXGEN NORTH AMERICAN LARGE CAP TRUST

(collectively, the Trust Funds)

NEXGEN CANADIAN CASH CORPORATE CLASS

NEXGEN CANADIAN BOND CORPORATE FUND

NEXGEN CANADIAN GROWTH AND INCOME CORPORATE FUND

NEXGEN CANADIAN BALANCED GROWTH CORPORATE FUND

NEXGEN CANADIAN GROWTH CORPORATE FUND

NEXGEN AMERICAN GROWTH CORPORATE FUND

NEXGEN CANADIAN DIVIDEND AND INCOME CORPORATE FUND

NEXGEN NORTH AMERICAN DIVIDEND AND INCOME CORPORATE FUND

NEXGEN CANADIAN LARGE CAP CORPORATE FUND

NEXGEN NORTH AMERICAN VALUE CORPORATE FUND

NEXGEN NORTH AMERICAN SMALL / MID CAP CORPORATE FUND

NEXGEN NORTH AMERICAN GROWTH CORPORATE FUND

NEXGEN NORTH AMERICAN LARGE CAP CORPORATE FUND

(collectively, the Corporate Funds, and together with the Trust Funds, the Funds)

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from NexGen in respect of the Funds for a decision under the securities legislation of the Jurisdictions (the Legislation) that:

(a) exempts the Funds from the requirements of subsection 2 (a) and 2 (c) of NI 81-101 to comply with certain of the requirements of Form 81-101F1 as it relates to the profiles of each of the Funds (other than NexGen Canadian Cash Trust, NexGen Canadian Cash Corporate Class, NexGen Canadian Bond Trust and NexGen Canadian Bond Corporate Fund); and

(b) exempts the Trust Funds (other than NexGen Canadian Cash Trust and NexGen Canadian Bond Trust) from the requirements of section 2.4 and subsection 2.6(h) of NI 81-102 and the Corporate Funds (other than NexGen Canadian Cash Corporate Class and NexGen Canadian Bond Corporate Fund) from the requirements of subsection 2.6 (a) of NI 81-102, in respect of the issuance of limited recourse debt by such Corporate Funds to such Trust Funds.

(collectively, the Requested Relief)

Under the Mutual Reliance Review System for Exemptive Relief Applications

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions or in Québec Commission Notice 14-101 have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by NexGen:

1. NexGen Financial Limited Partnership ("NexGen") is a limited partnership formed under the laws of the Province of Ontario having its head office in Toronto, Ontario. NexGen is registered as an adviser in the categories of investment counsel and portfolio manager and as a dealer in the categories of mutual fund dealer and limited market dealer.

2. NexGen intends to file a preliminary simplified prospectus and annual information form and a prospectus and annual information form for the NexGen Funds (collectively, the Prospectus), a group of 26 open end-mutual funds to be established under National Instrument 81-102, consisting of 13 mutual fund trusts and 13 investment portfolios within a mutual fund corporation. The Trust Funds will be available for investment by registered investors and the Corporate Funds will be available for investment by non-registered investors.

3. The Prospectus will comply with the form requirements of National Instrument 81-101, except that the Prospectus, in respect of each Fund (other than NexGen Canadian Cash Trust, NexGen Canadian Cash Corporate Class, NexGen Canadian Bond Trust and NexGen Canadian Bond Corporate Fund) will combine 2 mutual funds within a single fund profile in Part B of the simplified prospectus. Each profile will include a Trust Fund and the corresponding Corporate Fund with a similar investment objective and refer to these funds collectively in accordance with their investment objective.

4. NexGen will be the manager and the principal distributor of the Funds and NexGen Limited, the general partner of the Partnership, will be the trustee of the Funds.

5. The securities of the NexGen Funds will be distributed through independent third party brokers and dealers.

6. Each of the Trust Funds offers units of multiple series (the "Series"). Each of the Corporate Funds, with the exception of NexGen Canadian Cash Corporate Class, has 4 publicly offered tax classes, being: (i) Capital Gains Class; (ii) Return of Capital Class; (iii) Dividend Tax Credit Class; and (iv) Compound Growth Class and a single non-publicly offered class, being the Inter-Fund Class. Each of these classes and NexGen Canadian Cash Corporate Class is a separate class within NexGen Investment Corporation, an open-end mutual fund corporation to be established under the laws of Ontario. However, all of the tax classes and the Inter-Fund Class share a single investment portfolio and comprise a single mutual fund.

7. Each Corporate Fund offers the same Series as the Trust Funds.

8. It is intended that each of the Trust Funds, other than NexGen Canadian Cash Trust and NexGen Canadian Bond Trust, will invest substantially all of its portfolio assets in a combination of non-publicly offered limited recourse debt (the "Debt") and securities of the Inter-Fund Class of the underlying Corporate Fund having a similar investment objective as the Trust Fund (the "Fund on Fund arrangements"). The Fund on Fund arrangements will comply with NI 81-102 except for the Corporate Funds' issuance of and the Trust Funds' investment in the Debt.

9. The Debt, which would be issued by NexGen Investment Corporation to the applicable Trust Fund, would consist of limited recourse notes redeemable on demand by the Trust Fund and would pay interest at a floating rate equal to the prime rate of interest plus 1%. The recourse in all circumstances, including default in the payment of principal or interest, would be limited to the assets of the applicable Inter-Fund Class of that Corporate Fund. The value of the aggregate Debt of each Inter-Fund Class to the value of the aggregate equity (represented by the shares of such Inter-Fund Class issued to the Trust Fund) will be maintained at a ratio of one to one within prescribed tolerance levels of plus or minus 5%. As a result, if the value of the aggregate equity of the Inter-Fund declines to 45% of the aggregate value of the combined Debt and equity of the Class or increases to 55% of such value, an equivalent portion of the existing Debt will be sold or purchased to ensure that the Debt to equity ratio of an Inter-Fund Class will always be maintained within the prescribed tolerance levels and returned to a ratio of 1 to 1.

10. The Fund on Fund arrangements are intended to increase the tax efficiency of the underlying Corporate Funds while, in each case, not adversely affecting the Trust Funds.

11. As will be disclosed in the Prospectus and as described above, the Funds are offered through an integrated investment structure. That structure involves the Fund on Fund arrangements described above. Those Fund on Fund arrangements are in respect of an individual Trust Fund and the corresponding Corporate Fund . A single profile to describe each of the Trust Fund and Corporate Fund with a similar investment objective is consistent with the investment structure.

12. The capital structure of an Inter-Fund Class has been structured purely for tax purposes to increase the tax efficiency of the Corporate Funds without adversely affecting the Trust Funds, including the underlying investment performance or return of the Trust investment. The capital structure shares the fundamental attributes of an income trust. The Debt will not be used as financial leverage. Specifically, the debt/equity ratio does not affect the underlying investment return of the Inter-Fund assets and thereby the Trust. That investment return is dictated solely by the performance of the investment portfolio of the underlying Corporate Fund, the investment objective and strategies of which are substantially similar to the Trust Fund. As a result, the acquisition of the Debt by a Trust Fund should not be viewed as inconsistent with its investment objective or adversely affecting, in any manner, the ability of the Trust Fund to achieve its investment objective.

13. Although the Debt obligations will be issued by NexGen Investment Corporation, recourse will be limited in all circumstances to the assets of the applicable Inter-Fund Class. Accordingly, from the viewpoint of the other Corporate Funds or Classes, the Debt should be viewed simply as an additional liability of that Class of a Corporate Fund sharing the same fundamental attributes of any other liability of that Class and subject to an equal risk of default as with any other liability.

14. From the viewpoint of the Trust Funds, as noted above, the existence of the Debt is largely irrelevant as it has no impact on the value or performance of the underlying Corporate Fund's investment portfolio. Regardless of the performance of the equity markets, the value of the Trust Fund's portfolio and its units will never be less than the value it would have realized absent the capital structure. Accordingly, there would be no prejudice to either the Trust Fund or its unitholders in this situation.

15. The sole shareholder of each Inter-Fund Class shall be the identified Trust Funds. All voting in respect of those securities shall be treated in accordance with section 2.5 (6) of National Instrument 81-102. Specifically, such Trust Funds will not vote the shares of the Inter-Fund Class of the Corporate Fund, and NexGen may, in its discretion, flow these votes through to the unitholders of the Trust Funds.

AND WHEREAS under the System this MRRS Decision Document evidences the decision of each Decision Maker (collectively, the "Decision");

AND WHEREAS each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met;

THE DECISION of the Decision Makers under the Legislation is that the Requested Relief is granted so long as:

(i) The Debt is limited recourse debt and the recourse is limited in all circumstances, including default in the payment of principal and/or interest, to the assets of the applicable Inter-Fund Class of that Corporate Fund.

(ii) The Debt is not used as financial leverage and used solely for the purposes described in paragraphs 10, 12, 13, and 14 above.

(iii) The Trust Funds maintain a debt to equity ratio of 1 to 1, as described in paragraph 9, above.

(iv) The Fund on Fund arrangements are structured as described in paragraphs 8 and 11 above.