Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval granted for change of manager of mutual funds under section 5.5(1)(a) of NI 81-102 on specified conditions – change of manager is not detrimental to investors.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 5.5(1)(a), 5.5(3), 5.7, 19.1.

December 8, 2014

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
(the Jurisdiction)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
PRO-FINANCIAL ASSET MANAGEMENT INC.
(PFAM)

AND

PRO FTSE RAFI CANADIAN INDEX FUND, PRO FTSE RAFI US INDEX FUND,
PRO FTSE RAFI GLOBAL INDEX FUND, PRO FTSE RAFI HONG KONG CHINA INDEX FUND,
PRO MONEY MARKET FUND, PRO FTSE RAFI EMERGING MARKETS INDEX FUND,
PRO FTSE NA DIVIDEND INDEX FUND, PRO FUNDAMENTAL BALANCED INDEX FUND
AND PRO FUNDAMENTAL BOND INDEX FUND
(collectively, the Funds)

AND

IN THE MATTER OF
KINGSHIP CAPITAL CORPORATION
(KCC, and together with PFAM, the Filers)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of a change of manager of the Funds from PFAM to KCC pursuant to section 5.5(1)(a) of National Instrument 81-102 Investment Funds (NI 81-102) (the Approval Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a)           the Ontario Securities Commission (the OSC) is the principal regulator for this application (the Principal Regulator); and

(b)           the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador (the Non-Principal Jurisdictions, and together with Ontario, the Jurisdictions).


Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. Except as otherwise stated, all dollar amounts herein are expressed in Canadian dollars.

Representations

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

PFAM and the Funds

1.             PFAM is:

(a)           an Ontario corporation with its head office located at 5090 Orbitor Dr., Unit 3, Mississauga, Ontario L4B 5W5;

(b)           registered with the OSC as a portfolio manager and has been operating as an investment fund manager under section 16.4(1) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103);

(c)           an investment management firm that has assets under management of approximately $37.06 million (as of October 23, 2014).

(d)           the manager of the Funds.

2.             The Funds are mutual funds which PFAM and KCC seek to requalify for distribution in Ontario, British Columbia and Alberta pursuant to a simplified prospectus and annual information form that have been prepared and filed in accordance with applicable Canadian securities regulatory requirements. The Funds are currently not in continuous distribution. The Funds were formerly distributed by PFAM pursuant to a simplified prospectus and annual information form which lapsed on or about April 21, 2014.

3.             The Funds account for approximately $31.03 million (as of October 23, 2014) of the assets under management by PFAM. The remaining assets under management, approximately $6.03 million, are attributable to discretionary managed accounts managed by PFAM.

4.             Neither PFAM nor any of the Funds are in default of the securities legislation in any jurisdiction of Canada, except that PFAM has insufficient regulatory capital as further described in an OSC order dated October 17, 2013 (In the Matter of Pro-Financial Asset Management Inc.), and that PFAM, on behalf of the Funds, failed to file the Funds’ interim financial statements and Management Reports of Fund Performance by August 29, 2014. The Funds have been noted in default on the OSC Reporting Issuers List.

5.             KCC:

(a)           is an Ontario business corporation registered with the OSC as a portfolio manager, investment fund manager and exempt market dealer with its head office located at 3215 Settlement Court, Burlington Ontario, L7M 0A9;

(b)           was established on or about March 26, 2012;

(c)           is not in default of the securities legislation in any jurisdiction of Canada.

The Change of Manager

6.             Pursuant to an agreement dated September 30, 2013 (the Agreement), PFAM has agreed to sell all the investment management agreements (the Fund Contracts) in respect of the Funds to KCC (the PFAM Transaction), which will result in a change of investment fund manager for the Funds (the Change of Manager Transaction). At closing, (i) KCC will be wholly-owned by 2389401 Ontario Inc. (the KCC Transaction), an Ontario corporation whose sole shareholder, David Hopps, will be a passive investor in KCC and will not be an officer of KCC or play a day-to-day role in the management of KCC; and (ii) KCC will agree to be bound by and provide all services under the Fund Contracts. PFAM, 2389401 Ontario Inc. and KCC are not related parties and the Agreement was negotiated at arm’s length.

7.             For the purposes of section 5.5(1)(a) of NI 81-102, the Change of Manager Transaction will result in a change in the manager of the Funds.

8.             PFAM referred the Change of Manager Transaction to the Independent Review Committee (IRC) of the Funds for its review, and the IRC provided its positive recommendation, after reasonable inquiry, that if approved by unitholders, the Change of Manager Transaction would achieve a fair and reasonable result for the Funds.

9.             In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure, PFAM issued a press release announcing the Change of Manager Transaction on October 25, 2013. PFAM also filed a material change report in respect of the Change of Manager Transaction on November 1, 2013. PFAM intends to file a further press release upon completion of the Change of Manager Transaction.

10.          After the completion of the Change of Manager Transaction, the portfolio manager of the Funds will change from PFAM to KCC. In addition, several PFAM personnel are expected to join KCC following completion of the Change of Manager Transaction, thereby providing continuity and experience to the management of the Funds. These personnel are expected to include Samantha Pinto as a Vice President, Director and Chief Financial Officer; Paul Azzopardi as a Portfolio Manager, David Vasoff as a Trader, and Stuart McKinnon as a Business Development Manager. Other PFAM employees are also expected to assume other roles at KCC, including Jacinta Fernandes as a Corporate Accountant, Simon Kantor as a Senior Fund Accountant, and Patrick Ruiz as a Senior Fund Accountant.

11.          KCC will have the appropriate personnel, policies and procedures and systems in place to assume the management of the Funds on closing of the Change of Manager Transaction.

12.          In accordance with section 3.10(1)(b) of National Instrument 81-107 Independent Review Committee for Investment Funds, the members of the Funds’ current IRC will cease to be IRC members on the completion of the Change of Manager Transaction. KCC intends to appoint the members of a new IRC for the Funds upon completion of the Change of Manager Transaction. Members of the Funds’ new IRC are expected to be (i) David Knopf, a previous member of PFAM’s IRC, (ii) Fred McCutcheon, also a previous member of PFAM’s IRC, and (iii) Stephen Tapp.

13.          KCC possesses all registrations under the Securities Act (Ontario) and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) to allow it to manage the Funds after closing of the Change of Manager Transaction.

14.          KCC does not propose to change any of the Funds’ current service providers following the closing of the Change of Manager Transaction except for the Funds’ registrar, transfer agent and fund accountant which recently changed from the Investment Administration Solutions (IAS). Effective August 8, 2014, Prometa Fund Services Inc. has been acting as the new transfer agent and registrar for the Funds and is expected to continue in this role following the closing of the Change of Manager Transaction. KCC will perform fund accounting for the Funds in-house.

15.          In addition to continued experienced investment fund management and portfolio management, other benefits of the Change of Manager Transaction to unitholders of the Funds are expected to include the following:

(a)           the Funds would come under the management of a solvent investment fund manager, but with the benefit of the experience of the current PFAM management team;

(b)           KCC will have the appropriate personnel, policies and procedures, and systems in place to assume the management of the Funds on the closing of the Change of Manager Transaction; and

(c)           KCC will benefit from ongoing regulatory compliance assistance from North Star Regulatory Compliance Solutions Inc., or comparable services provided by another consultant acceptable to OSC staff, which is expected to utlimately benefit unitholders of the Funds.

16.          KCC does not expect its acquisition of the Fund Contracts pursuant to the Change of Manager Transaction to adversely affect the operation and administration of the Funds.

17.          KCC has no current intention to change the fundamental investment objectives of the Funds following closing of the Change of Manager Transaction. Notwithstanding the foregoing, KCC may implement changes to certain of the Funds following the completion of the Change of Manager Transaction. KCC will continue to use a fundamental indexation investment strategy for the funds, however, KCC may consider alternative index providers that offer similar fundamental based indexes which do not constitute a fundamental change to the investment objectives. KCC also intends to rename the Funds, to reduce the number of funds being offered for distribution from nine funds currently offered to six funds and to reduce the number of provinces in which the funds are currently distributed to three provinces only (British Columbia, Alberta and Ontario). Any such changes will be reflected in the prospectus disclosure of the Funds and in accordance with applicable securities laws.

18.          The Change of Manager Transaction will not adversely affect KCC’s financial position or its ability to fulfill its regulatory obligations.

19.          The Funds will not bear any of the costs and expenses associated with the Change of Manager Transaction. Such costs will be borne by PFAM or KCC. These costs may include legal and accounting fees, proxy solicitation, printing and mailing costs and regulatory fees.

20.          PFAM and KCC have provided notice to the securities administrators pursuant to Sections 11.9 and 11.10 of NI 31-103 requesting non-objections in respect of the PFAM Transaction and the KCC Transaction. These notices were approved by decision of the Commission on July 16, 2014 (the Commission Decision) on specified terms and conditions.

21.          Among other terms and conditions, the Commission Decision specifies that:

(a)           KCC shall enter into a consulting agreement under which North Star Compliance and Regulatory Solutions Inc. will agree to provide on-going regulatory compliance assistance to KCC, including assistance with respect to compliance with NI 31-103, substantially on the terms and conditions of the draft agreement submitted to the Commission, and those services, or comparable services provided by another consultant acceptable to OSC staff, shall be provided for a period of at least two years from the date of completion of the PFAM Transaction and the KCC Transaction;

(b)           Stuart McKinnon may enter into a contractual relationship with KCC under which he will provide services to KCC that do not require registration under the Securities Act (Ontario) but, except with the prior written consent of the Commission, Stuart McKinnon will not be an officer, director or shareholder of KCC or play a similar role in KCC; and that,

(c)           KCC shall, upon completion of the PFAM Transaction and the KCC Transaction, issue a news release publicly announcing the completion of the Transaction and summarizing four specified conditions of the Commission Decision, and shall send a copy of the Commission Decision to the then current unitholders of the Funds and to the then current managed account clients of PFAM.

22.          The unitholders of each Fund considered and approved the Change of Manager Transaction at special meetings of unitholders of the Funds held on December 10, 2013. (the Unitholder Approval). The resolution passed by unitholders resolves that the ultimate form of the KCC/PFAM Transactions might differ from that approved by unitholders in December 2013 and provides specifically that any officer or director of PFAM is “authorized to take all such steps as may be necessary or desirable” to give effect to the Change of Manager Transaction”. The Management Information Circular distributed to unitholders of the Funds prior to the December 10, 2013 unitholder vote makes specific reference to this aspect of the resolution and notes that such steps may include those that are necessary to “fulfill regulatory or other requirements to give effect to the Change of Manager Transaction”.

23.          The Approval Sought will not be detrimental to the protection of investors in the Funds or prejudicial to the public interest.

Decision

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 Approval Sought is granted provided that:

(a)           as soon as reasonably practicable following completion of the Change of Manager, KCC shall enter into a consulting agreement under which North Star Compliance and Regulatory Solutions Inc. will agree to provide on-going regulatory compliance assistance to KCC, including assistance with respect to compliance with NI 31-103, substantially on the terms and conditions of the draft agreement submitted to the Commission, and those services, or comparable services provided by another consultant acceptable to OSC staff, shall be provided for a period of at least two years from the date of completion of the PFAM Transaction and the KCC Transaction;

(b)           Stuart McKinnon may enter into a contractual relationship with KCC under which he will provide services to KCC that do not require registration under the Securities Act (Ontario) but, except with the prior written consent of the Commission, Stuart McKinnon will not be an officer, director or shareholder of KCC or play a similar role in KCC; and that,

(c)           KCC shall, upon completion of the PFAM Transaction and the KCC Transaction, issue a news release publicly announcing the completion of the Transaction and summarizing four conditions of the Commission Decision, as specified in the Commission Decision, and shall send a copy of the Commission Decision to the then current unitholders of the Funds.

“Vera Nunes”
Manager,
Investment Funds & Structured Products Branch
Ontario Securities Commission