Relief granted from the mutual fund conflict of interest investment restrictions under securities legislation in connection with proposed investments by pooled funds in underlying pooled funds under common management -- Investments by pooled funds in underlying funds may cause pooled funds to become "substantial security holder" in underlying funds -- Pooled funds may invest in an underlying fund in which a substantial security holder of the pooled fund or its management company has a significant interest -- Relief granted subject to certain conditions.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(2)(c), 111(3), 113.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
MORGAN MEIGHEN & ASSOCIATES LIMITED ("MMA"),
MORGAN MEIGHEN INCOME POOLED FUND AND
MORGAN MEIGHEN GROWTH POOLED FUND
(Section 113 of the OSA)
The Ontario Securities Commission (the "Commission") has received an application from Morgan Meighen Income Pooled Fund, Morgan Meighen Growth Pooled Fund (collectively, the "Current Funds"), and MMA on behalf of any other pooled fund established after the date hereof that is managed by MMA (the "Future Funds", together with the Current Funds, the "MMA Funds") for an order under section 113 of the OSA exempting the MMA Funds from the restrictions contained in paragraphs 111(2)(b) and (c), and subsection 111(3) of the OSA prohibiting a mutual fund from knowingly making or holding an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder, or in an issuer in which any officer or director of the mutual fund, its management company or distribution company or an associate of any of them, or any person or company who is a substantial security holder of the mutual fund, its management company or its distribution company, has a significant interest (the "Requested Relief").
Defined terms contained in National Instrument 14-101 -- Definitions have the same meaning in this decision unless they are defined in this decision.
Each MMA Fund that invests in units of another current or future MMA Fund is referred to as a "Top Fund" and an MMA Fund that a Top Fund invests in is referred to as an "Underlying Fund".
1. MMA is a corporation incorporated under the laws of Ontario.
2. MMA is the manager, investment manager and trustee of the Current Funds and is registered as an adviser under the categories of investment counsel and portfolio manager with the Commission. MMA is not a reporting issuer.
3. MMA will be the manager, investment manager and trustee of the Future Funds.
4. Each of the MMA Funds are or will be mutual funds in Ontario, as defined under the OSA, but are not or will not be reporting issuers. Units of the MMA Funds are or will be offered for sale only on a private placement basis pursuant to available prospectus exemptions in Ontario.
5. One or more of the Top Funds may invest a certain portion of its assets in units of one or more Underlying Funds. MMA will actively manage each Top Fund's investments in an Underlying Fund, with discretion to buy and sell units of the Underlying Fund. The investment by a Top Fund in an Underlying Fund is or will be compatible with the fundamental investment objectives of the Top Fund.
6. The amounts invested from time to time in an Underlying Fund by one or more Top Funds may exceed 20% of the outstanding voting securities of the Underlying Fund. A Top Fund would be a "substantial security holder" in an Underlying Fund pursuant to paragraph 110(2)(b) of the OSA if at any time, a Top Fund, alone or together with one or more related Top Funds, holds more than 20% of the voting securities of an Underlying Fund.
7. From time to time, a Top Fund may invest in an Underlying Fund in which a substantial security holder of the Top Fund or a substantial security holder of the Top Fund's management company has a significant interest .
8. Unitholders of Top Funds will benefit from investments by a Top Fund in Underlying Funds because Top Funds will achieve greater portfolio diversification at lower cost than investing directly in the securities held by the Underlying Funds.
9. Investment by Top Funds in Underlying Funds will create larger pools of assets for the Underlying Funds, which should also provide additional benefits to unitholders of the Underlying Funds, including more favorable pricing and transaction costs on portfolio trades, increased access to investments where there is a minimum subscription or purchase amount and better economies of scale through lower custodian fees and greater administrative efficiency.
10. Where a Top Fund commences investments in one or more Underlying Funds, existing investors of the Top Fund will receive written notice prior to the Top Fund first undertaking such investment under this Order, which discloses: (i) the intent of the Top Fund to purchase securities of Underlying Funds; (ii) the fact that both the Top Fund and the Underlying Funds are managed by MMA; and (iii) the approximate or maximum percentage of the net assets of the Top Fund that is dedicated to investment in units of Underlying Funds.
11. New investors in the Top Funds will receive an offering memorandum, term sheet or similar disclosure document that contains the disclosure outlined in items (i) -- (iii) in paragraph 10 above.
12. The annual financial statements of the Top Funds will be provided to unitholders of the Top Funds in accordance with securities legislation, together with an auditor's report. In addition, either (a) summary disclosure of the securities held by the applicable Underlying Funds will be included in the annual financial statements of the Top Funds; or (b) the audited annual financial statements of any applicable Underlying Funds will be sent to unitholders of the Top Funds.
13. MMA will ensure that there is no duplication of management fees as between the Top Funds or the Underlying Funds.
14. There will be no charges levied on the purchase or redemption of securities of the Underlying Funds by the Top Funds.
15. Where a matter relating to an Underlying Fund requires a vote of unitholders of the Underlying Fund, MMA will not cause the units of the Underlying Fund held by a Top Fund to be voted at such meeting.
16. In the absence of the Requested Relief, each Top Fund would be precluded from investing in an Underlying Fund due to the investment restrictions contained in paragraphs 111(2)(b) and (c) and subsection 111(3) of the OSA.
17. Any investment by the Top Funds in units of an Underlying Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Funds.
The Commission is satisfied that the test contained in section 113 of the OSA has been met.
The Commission orders that the Requested Relief is granted to the Top Funds, provided that:
1. units of the Top Funds are distributed only on a private placement basis pursuant to available prospectus exemptions in accordance with National Instrument 45-106 -- Prospectus and Registration Exemptions;
2. MMA does not vote the units of the Underlying Funds that are held by a Top Fund;
3. no management or incentive fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service;
4. no sales or redemption charges will be payable by a Top Fund in relation to its purchases or redemptions of units of an Underlying Fund; and
5. investors in a Top Fund receive prior written disclosure which discloses:
(i) that the Top Fund may purchase securities of the Underlying Funds;
(ii) the fact that both the Top Fund and the Underlying Funds are managed by MMA; and
(iii) the approximate or maximum percentage of the net assets of the Top Fund that is dedicated to investment in units of the Underlying Funds.
DATED December 11, 2007.