Heathbridge Capital Management Inc. and Heathbridge U.S. Pooled Fund - MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications - relief from self-dealing prohibition of the Act to allow in specie transfers between pooled funds and managed accounts -- there are adequate protections regarding the price at which the in specie transfers take place to mitigate the conflict of interest -- ss. 118(2)(b) and 121(2)(a)(ii) of Securities Act, R.S.O. 1990, c. S.5, as am.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 118(2)(b), 121(2)(a)(ii).

May 25, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA, SASKATCHEWAN, ONTARIO,

QUEBEC, NEW BRUNSWICK AND NOVA SCOTIA

(the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS ("MRRS")

AND

IN THE MATTER OF

HEATHBRIDGE CAPITAL MANAGEMENT INC.

("Heathbridge")

AND HEATHBRIDGE U.S. POOLED FUND

(the "Existing Fund")

MRRS DECISION DOCUMENT

BACKGROUND

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from Heathbridge for a decision under the securities legislation of the Jurisdictions (the "Legislation") that the prohibition in the Legislation that prevents a portfolio manager or a mutual fund from knowingly causing any investment portfolio managed by it to purchase or sell the securities of any issuer from or to the account of a responsible person, any associate of a responsible person or the portfolio manager (the "Self-Dealing Prohibition") shall not apply to Heathbridge in connection with In Specie Transfers, as defined below (the "Requested Relief").

Under the MRRS:

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

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

INTERPRETATION

Defined terms contained in National Instrument 14-101 -- Definitions 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 Heathbridge to the Decision Makers:

1. Heathbridge was incorporated under the laws of Ontario and its head office is in Ontario. Heathbridge has no other office in Canada.

2. Heathbridge is registered or is in the process of registering under the Legislation as an adviser, in the category of investment counsel and portfolio manager or in a similar category in the Jurisdictions.

3. Heathbridge is the trustee, manager, primary portfolio advisor and principal distributor of the Existing Fund and will act in a similar capacity for pooled funds that may be established and managed by Heathbridge after the date hereof (a "Future Fund" and, together with the Existing Fund, the "Funds"). Heathbridge has not currently retained, but may retain, a sub-advisor in respect of a Fund.

4. The Existing Fund is, and each Future Fund will be, an open-end mutual fund.

5. Heathbridge provides discretionary investment management services to individuals (including tax deferred plans for which such individuals or their spouses or children are the beneficiaries), corporations, charitable foundations and other entities (each, a "Client") seeking such services ("Managed Services") through a managed account (a "Managed Account").

6. The Managed Services are provided pursuant to an investment management agreement (the "IMA") between Heathbridge and the Client which provides full discretionary authority for Heathbridge to trade in securities for the Managed Account without obtaining the consent of the Client to any specific trade. A Client for whom Heathbridge makes, or may make, investments in the Existing Fund or a Future Fund specifically authorizes Heathbridge to make such investments in the IMA.

7. Investments in individual securities may not be appropriate for Clients in certain circumstances.

8. Heathbridge has created the Existing Fund to provide Clients with access to U.S. investments through a pooled investment vehicle.

9. The Existing Fund is currently sold by Heathbridge only to Managed Accounts of Clients who are "accredited investors" within the meaning of National Instrument 45-106 ("NI 45-106"), although it could also be sold to Managed Accounts of Clients who are not accredited investors (in Ontario this would require a specific exemption) or to other investors if they invest at least $150,000.

10. Heathbridge may, but does not currently intend to, distribute units of the Funds to investors who do not have a Managed Account with Heathbridge pursuant to available exemptions from the Dealer Registration and Prospectus Requirements in NI 45-106 or in other provisions of applicable securities laws.

11. Under the IMA Heathbridge acquires full discretionary authority to manage the assets in a Client's Managed Account in accordance with the investment guidelines established for the account. The IMA provides that, if authorized under the IMA, Heathbridge may invest the assets in a Client's Managed Account in one or more of the Funds.

12. The IMA provides that the Client will pay to Heathbridge a base management fee and a performance incentive bonus (the "Compensation") and the Client acknowledges that there may be a management fee payable by a Fund and that such fee will be in addition to the Compensation. Further, the Client acknowledges that the assets invested in a Fund will be included in calculating the Compensation.

13. While the Compensation is in addition to the management fee payable by a Fund, Heathbridge negotiates the Compensation and acquires units of a Fund on a basis such that there is no duplication of fees paid.

14. There will be no commission paid by a Client in respect of the purchase of units of a Fund.

15. Heathbridge wishes to permit payment for units of a Fund purchased by a Managed Account to be made by making good delivery of securities held by such Managed Account to the Fund, provided such securities meet the investment criteria of the Fund. Further, Heathbridge wishes to make payment of redemption proceeds in respect of the redemption of units of a Fund by making good delivery of securities held by the Fund to the Managed Account, provided the securities meet the investment criteria of the Managed Account (the foregoing deliveries are referred to as "In Specie Transfers").

16. Heathbridge would initiate an In Specie Transfer to avoid market impact and to reduce transaction costs when securities are transferred but Heathbridge retains effective control of the securities.

17. All Clients that authorize investment of their assets in Funds receive an offering memorandum in respect of the Funds. The offering memorandum discloses the relationship between Heathbridge and the Funds.

18. As Heathbridge is the portfolio manager of the Managed Accounts, it would be considered a "responsible person" under the Legislation with respect to the Managed Accounts. Furthermore, each of the Funds is an "associate" of Heathbridge under the Legislation because Heathbridge serves as trustee of the Funds.

19. Unless the requested relief is granted, the Self-Dealing Prohibition will prohibit Heathbridge from causing a Managed Account to make an In Specie Transfer of securities of any issuer to or from any of the Funds of which Heathbridge is the trustee.

DECISION

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 is that the Requested Relief is granted, provided that:

(a) in connection with the purchase of units of a Fund by a Managed Account:

(i) Heathbridge obtains the prior written consent of the relevant Managed Account Client before it engages in any In Specie Transfers in connection with the purchase of units;

(ii) the Fund would at the time of payment be permitted to purchase those securities;

(iii) the securities are acceptable to the portfolio advisor of the Fund and consistent with the Fund's investment objective;

(iv) the value of the securities is at least equal to the issue price of the securities of the Fund for which they are payment, valued as if the securities were portfolio assets of the Fund; and

(v) the quarterly statement next prepared by Heathbridge for the Managed Account shall include a note describing the securities delivered to the Fund and the value assigned to such securities;

(b) in connection with the redemption of units of a Fund by a Managed Account:

(i) Heathbridge obtains the prior written consent of the relevant Managed Account Client to the payment of redemption proceeds in the form of an In Specie Transfer

(ii) the securities are acceptable to the portfolio advisor of the Managed Account and consistent with the Managed Account's investment objective;

(iii) the value of the securities is equal to the amount at which those securities were valued in calculating the net asset value per security used to establish the redemption price;

(iv) the holder of the Managed Account has not provided notice to terminate its IMA with Heathbridge; and

(v) the quarterly statement next prepared by Heathbridge for the Managed Account shall include a note describing the securities delivered to the Managed Account and the value assigned to such securities; and

(c) Heathbridge does not receive any compensation in respect of any sale or redemption of units of a Fund (other than redemption fees, if any, disclosed in the offering documents of the Funds) and, in respect of any delivery of securities further to an In Specie Transfer, the only charge paid by the Managed Account is the commission charged by the dealer executing the trade.