National Policy 11-203 -- Process for Exemptive Relief in Multiple Jurisdictions -- One time transfer of assets of a non-redeemable investment fund to a mutual fund subject to NI 81-102, 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 prohibition 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.
June 5, 2013
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
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 subsection 13.5(2)(b) of National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations ("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 Dynamic Power Emerging Markets Fund (the "Terminating Fund") into Dynamic Power Hedge Fund (the "Continuing Fund" and, 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 ("OSC") 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 each of the other provinces and territories of Canada (together with Ontario, the "Jurisdictions").
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 The Filer is a corporation existing under the laws of the Province of Ontario, is registered in Ontario as a portfolio manager in the category of adviser, is further registered in that category in each of British Columbia, Alberta, Manitoba, Saskatchewan, Quebec, New Brunswick, Prince Edward Island, Nova Scotia and the Northwest Territories, is registered as a commodity trading manager in Ontario and is registered as an investment fund manager in Ontario, Quebec and Newfoundland.
2 The Filer is the manager, trustee, principal distributor, registrar, and portfolio adviser of each Fund.
3 Each of the Funds is an open-end mutual fund trust. The Funds are not reporting issuers in any of the Jurisdictions.
4 Neither the Filer nor the Funds are in default of securities legislation in any of the Jurisdictions.
5 The Filer proposes to merge the Terminating Fund into the Continuing Fund, which will involve the transfer of assets of the Terminating Fund in exchange for units of the Continuing Fund. Each unitholder of the Terminating Fund will receive units of the Continuing Fund, the value of which are equal to the net asset value ("NAV") of the units held by such unitholder in the Terminating Fund.
6 The board of directors of the Filer approved the Merger on April 23, 2013 and the independent review committee ("IRC") that has been appointed for the Funds has considered the Merger and provided a positive recommendation to the Filer on the basis that the Merger would achieve a fair and reasonable result for each Fund.
7 Unitholders of the Terminating Fund will be asked to approve the Merger at a special meeting of unitholders to be held on June 3, 2013 (the "Meeting").
8 In connection with the Meeting, the Filer, as manager of the Terminating Fund, sent unitholders of the Terminating Fund a notice of special meeting, a management information circular and a related form of proxy (collectively, the "Meeting Materials") .
9 It is proposed that the Merger will occur on or about June 14, 2013 (the "Merger Date"), subject to unitholder approval.
10 Following the Merger, the Continuing Fund will continue as a privately offered open-end mutual fund and the Terminating Fund will be wound-up and terminated.
11 The Merger will take place on a taxable basis. Unitholders of the Terminating Fund will be provided with tax disclosure about the ramifications of the Merger in the Meeting Materials.
12 The following steps will be carried out to effect the Merger:
(a) On the Merger Date, the Terminating Fund will transfer all of its assets (other than such assets as are sufficient to satisfy its liabilities) to the Continuing Fund in exchange for units of the Continuing Fund. The Terminating Fund will receive units of the Continuing Fund, the value of which is equal to the NAV of the Terminating Fund transferred to the Continuing Fund, calculated as of the close of business on the Merger Date.
(b) Immediately thereafter, the units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund and the unitholders' units of the Terminating Fund will be redeemed and cancelled. Each unitholder of the Terminating Fund will receive units of the Continuing Fund, the value of which are equal to the NAV of the units of the Terminating Fund previously held by the unitholder as of the close of business on the Merger Date.
13 The Terminating Fund and the Continuing Fund have substantially similar investment objectives, valuation procedures and fee structures.
14. The information circular sent to unitholders of the Terminating Fund in connection with the Merger provides sufficient information about the Merger to permit unitholders to make an informed decision about the Merger.
15. Unitholders of the Terminating Fund will continue to have the right to redeem their units of the Terminating Fund until the Merger Date on the terms provided for in the Terminating Fund's offering memorandum.
16. No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of the Terminating Fund.
17. The investment portfolio of the Terminating Fund to be acquired by the Continuing Fund as a result of the Merger is acceptable to the portfolio manager of the Continuing Fund and is consistent with the investment objectives of the Continuing Fund.
18. Each Fund is a mutual fund trust under the Tax Act and, accordingly, units of the Funds are "qualified investments" under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans and tax-free savings accounts.
19. The transfer of the investment portfolio of the Terminating Fund to the Continuing Fund (and the corresponding purchase of such investment portfolio by the Continuing Fund) as a step in the Merger may be considered a purchase or sale of securities, knowingly caused by a registered adviser that manages the investment portfolio of the Funds, from the Terminating Fund to, or by the Continuing Fund from, an associate of a "responsible person" or from or to an investment fund for which a "responsible person" acts as an adviser, contrary to NI 31-103.
20. In the absence of this order, the Filer would be prohibited from purchasing and selling the securities of the Terminating Fund (and thereby transferring its investment portfolio to the Continuing Fund) in connection with the Merger.
21. The Funds will bear none of the costs and expenses associated with the Merger, and no sales charges, redemption fees or other fees or commissions will be payable by unitholders of the Terminating Fund in connection with the Merger.
22. The transfer of assets from the Terminating Fund to the Continuing Fund will take place at a value determined by common valuation procedures and unitholders of the Terminating Fund will receive units of the Continuing Fund, the value of which are equal to the NAV of the units held by such unitholder in the Terminating Fund.
23. In the opinion of the Filer, the Merger will not adversely affect unitholders of the Terminating Fund or the Continuing Fund and will in fact be in the best interests of unitholders of the Terminating Fund. The Filer believes that the Merger will be beneficial to unitholders of the Terminating Fund for the following reasons:
(a) the Continuing Fund has a larger portfolio and broader investment mandate than the Terminating Fund, and so should offer improved portfolio diversification and liquidity to unitholders of the Terminating Fund; and
(b) unitholders of the Terminating Fund should benefit from increased economies of scale and lower proportionate fund operating expenses as unitholders of the Continuing Fund, as the Merger is expected to eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate investment fund which costs are borne by the Terminating Fund and, therefore, indirectly by the unitholders.
24. The desired end result of the Merger could be achieved by each unitholder of the Terminating Fund redeeming its 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.
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 provided that:
a. upon a request by a unitholder of the Terminating Fund for financial statements, the Filer will make best efforts to provide the unitholder with financial statements of the Continuing Fund; and
b. if the audit report accompanying the Continuing Fund's audited financial statements for its first completed financial year after this Merger contains a reservation in respect of the value of the portfolio assets acquired by the Continuing Fund as a result of this Merger, then each securityholder of the Continuing Fund and of the Terminating Fund at the time of the merger shall be sent a copy of those financial statements.