Securities Law & Instruments

Headnote

MRRS -- Exemption granted from requirements contained in section 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.

Applicable Legislative Provisions

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

March 7, 2007

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

NEXGEN FINANCIAL LIMITED PARTNERSHIP

(NexGen)

AND

IN THE MATTER OF

NEXGEN GLOBAL VALUE REGISTERED FUND

AND

NEXGEN GLOBAL VALUE TAX MANAGED FUND

(collectively the Global 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 Global Funds and all NexGen open-end mutual funds established from time to time (the Future Funds) for a decision under the securities legislation of the Jurisdictions (the Legislation) that:

(a) exempts NexGen Global Value Registered Fund and all Future Trust Funds (defined herein) from the requirements of subsections 2.4 and 2.6(h) of NI 81-102 and NexGen Global Value Tax Managed Fund and all Future Corporate Funds (defined herein) from the requirements of subsection 2.6(a) of NI 81-102 in respect of the issuance of limited recourse debt by NexGen Global Value Tax Managed Fund and any Future Corporate Fund to NexGen Global Value Registered Fund or any Future Trust Fund (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 Quebec 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 in the Province of Ontario 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 is the manager of the NexGen Funds, a group of 26 open-end mutual funds (the Existing Funds), whose securities are qualified for sale in the Jurisdictions pursuant to a simplified prospectus and annual information form dated May 5, 2006.

3. NexGen has filed a preliminary simplified prospectus and annual information form dated December 15, 2006 (the Preliminary Prospectus) in respect of the Global Funds with the securities regulatory authorities of each of the Jurisdictions for which a preliminary receipt dated December 15, 2006 was issued. The Global Funds have similar characteristics to those of the Existing Funds.

4. NexGen Global Value Registered Fund and each of the Future Funds that are organized in the form of a trust (the Future Trust Funds) will offer units of multiple series (the Series). NexGen Global Value Tax Managed Fund and each of the Future Funds that are organized in the form of a corporation (the Future Corporation Funds) will have 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 will be a separate class within NexGen Investment Corporation, an open-end mutual fund corporation established under the laws of Ontario. However, all of the tax classes and the Inter-Fund Class will share a single investment portfolio and comprise a single mutual fund.

5. NexGen Global Value Tax Managed Fund and each Future Corporate Fund offer the same series as NexGen Global Value Registered Fund and each Future Trust Fund.

6. It is intended that NexGen Global Value Registered Fund and each of the Future Trust Funds 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 NexGen Global Value Tax Managed Fund or the underlying Future Corporate Fund having a similar investment objective as NexGen Global Value Registered Fund or the Future Trust Fund (the Fund on Fund arrangements). The Fund on Fund arrangements will comply with NI 81-102 except for the applicable corporate fund's issuance of and the applicable trust fund's investment in the Debt.

7. The Debt, which would be issued by NexGen Investment Corporation to NexGen Global Value Registered Fund or the applicable Future Trust Fund, would consist of limited recourse notes redeemable on demand by NexGen Global Value Registered Fund or the applicable Future 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 and/or interest, would be limited to the assets of the applicable Inter-Fund Class of NexGen Global Value Tax Managed Fund or the applicable Future 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 NexGen Global Value Registered Fund or the applicable Future 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.

8. The Fund on Fund arrangements are intended to increase the tax efficiency of the NexGen Global Value Tax Managed Fund or the applicable underlying Future Corporate Fund, by:

a. flowing taxable income from such corporate fund to the applicable trust fund (which is restricted to non-taxable investors) through the interest payments on the Debt; and

b. utilizing the redemption activity of shares as input to the capital gains refunding mechanism through the re-balancing of the Debt to equity;

while, in each case, not adversely affecting NexGen Global Value Registered Fund or the applicable trust fund.

9. As will be disclosed in the prospectus and as described above, the Global Funds and Future Funds will be 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.

10. The capital structure of an Inter-Fund Class has been structured purely for tax purposes to increase the tax efficiency of the NexGen Global Value Tax Managed Fund or the Future Corporate Fund without adversely affecting NexGen Global Value Registered Fund or the Future Trust Fund, including the underlying investment performance or return of the NexGen Global Value Registered Fund or the Future Trust Fund investment. The capital structure shares the fundamental attributes of an income trust. Specifically, the debt/equity ratio does not affect the underlying investment return of the Inter-Fund assets and thereby NexGen Global Value Registered Fund or a trust Future Fund. That investment return is dictated solely by the performance of the investment portfolio of the underlying NexGen Global Value Tax Managed Fund or the Future Corporate Fund, the investment objective and strategies of which are substantially similar to NexGen Global Value Registered Fund or the Future Trust Fund. The debt/equity ratio simply streams that investment return into different forms of income for tax purposes, effectively transferring high rate income from NexGen Global Value Tax Managed Fund or a Future Corporate Fund to NexGen Global Value Registered Fund or a Future Trust Fund, through interest payments on the Debt. As NexGen Global Value Registered Fund or the Future Trust Fund is restricted to registered investors, the characterization of that investment return is not relevant and the receipt of high rate interest income does not adversely affect NexGen Global Value Registered Fund or the Future Trust Fund. As a result, the acquisition of the Debt by NexGen Global Value Registered Fund or a Future Trust Fund should not be viewed as inconsistent with its investment objective or adversely affecting, in any manner, the ability of NexGen Global Value Registered Fund or a Future Trust Fund to achieve its investment objective.

11. Although the Debt obligations will be issued by NexGen Investment Corporation, recourse will be limited in all circumstances to the assets of the Inter-Fund Class. Accordingly, from the viewpoint of the other NexGen corporate existing funds or classes, the Debt should be viewed simply as an additional liability of that Class of NexGen Global Value Tax Managed Fund or a Future Corporate Fund's 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.

12. From the viewpoint of NexGen Global Value Registered Fund or a Future Trust Fund, as noted above, the existence of the Debt is largely irrelevant as it has no impact on the value or performance of the underlying NexGen Global Value Tax Managed Fund's or a Future Corporate Fund's investment portfolio. Regardless of the performance of the equity markets, the value of NexGen Global Value Registered Fund's or a Future 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 NexGen Global Value Registered Fund or a Future Trust Fund or their respective unitholders in this situation.

13. The sole shareholder of the Inter-Fund Class shall be NexGen Global Value Registered Fund or a Future Trust Fund. All voting in respect of those securities shall be treated in accordance with section 2.5 (6) of National Instrument 81-102. Specifically, NexGen Global Value Registered Fund or a Future Trust Fund will not vote the shares of the Inter-Fund Class of NexGen Global Value Tax Managed Fund or a Future Corporate Fund, and NexGen may, in its discretion flow these votes through to the unitholders of NexGen Global Value Registered Fund or a Future Trust Fund.

14. The capital structure, including the issuance of the Debt has been established for tax purposes only. The acquisition of the Debt is not made for the purpose of exercising control or management over NexGen Global Value Tax Managed Fund or a Future Corporate Fund and should not raise the same policy concerns underlying sections 2.1 and 2.2 of National Instrument 81-102.

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 under the Legislation is that the Requested Relief is granted so long as:

1. 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;

2. The Debt is not used as financial leverage and used solely for the purpose described in this decision document;

3. NexGen Global Value Registered Fund and the Future Trust Funds maintain a debt to equity ratio of 1 to 1, as described in paragraph 7 above; and

4. The Fund on Fund arrangements are structured as described in paragraph 6 above.

"Leslie Byberg"
Manager, Investment Funds
Ontario Securities Commission