Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval granted under NI 81-102 for reorganization of a non-redeemable investment fund that will result in securityholders becoming securityholders of a mutual fund -- approval needed because pre-approval conditions for mergers won't be met because investment objectives and fee structure not substantially similar -- merger will result in lower management and counterparty fees for terminating fund securityholders -- merger to otherwise comply with pre-approval criteria, including securityholder, IRC approval.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.7(1)(b).

December 18, 2015

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 FRONT STREET U.S. MLP INCOME FUND LTD. (the Terminating Fund) AND FRONT STREET MLP AND INFRASTRUCTURE INCOME CLASS (Continuing Fund, and together with the Terminating Fund, the Funds or individually a Fund) AND FRONT STREET CAPITAL 2004 (the Filer)

DECISION

Background

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 approval (the Approval Sought) under subsection 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) of the proposed merger of the Terminating Fund into the Continuing Fund (the Merger).

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

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

(ii) the Filer has provided notice that subsection 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 the Jurisdiction, 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.

Representations

This decision is based on the following facts represented by the Filer.

The Filer

1. The head office of each of the Filer and the Funds is located in Toronto, Ontario. The Filer is the manager of both Funds, and is also the portfolio manager of the Terminating Fund and the investment advisor of the Continuing Fund, providing investment advisory services to both Funds in such capacity.

2. Both of the Funds are reporting issuers in each of the Jurisdictions. Neither the Filer nor the Funds is in default of securities legislation in any of the Jurisdictions.

The Terminating Fund

3. The Terminating Fund is a closed-end investment fund operating under the laws of Canada.

4. The Terminating Fund is authorized to issue 200 class A shares and an unlimited number of equity shares issuable in series, of which two series of equity shares (the series C shares and the series U shares) have been created. A trust (FSUSMLP Trust) established for the benefit of the shareholders of the Terminating Fund owns all of the issued and outstanding class A shares (voting, non-participating) of the Terminating Fund.

5. The Terminating Fund's investment objectives are:

(i) to provide shareholders of the Terminating Fund with quarterly tax-advantaged cash distributions and long-term capital appreciation, through its economic exposure to the performance of an actively managed, diversified notional portfolio (the FSUSMLP MLP Portfolio) of energy infrastructure master limited partnerships (MLPs) that are U.S. limited partnerships or limited liability companies that are (a) publicly traded on U.S. securities exchanges and (b) primarily engaged in the transportation, storage, processing, refining, marketing, exploration and production and mining of minerals or natural resources; and

(ii) seek to provide Canadian investors with the benefits of exposure to the MLP asset class, including (a) high levels of cash distributions, (b) the opportunity for capital appreciation, and (c) protection against inflation, as the revenues of many MLPs are linked to the U.S. Producer Price Index or other inflation indices pursuant to U.S. federal regulation.

6. In order to obtain such economic exposure and to create certain tax advantages, the Terminating Fund is party to two forward purchase and sale agreements (together, the Forward Agreements) entered into with a Canadian chartered bank (the Counterparty).

7. Pursuant to the Forward Agreements, the Counterparty has agreed to pay to the Terminating Fund, as the purchase price for the applicable portfolio of common shares of Canadian public companies, an amount based on the value of the FSUSMLP MLP Portfolio on the applicable settlement date, subject to any applicable costs in the event of early termination of the applicable Forward Agreement and net of leverage.

8. On March 21, 2013, the Canadian government announced, through its federal budget, that, following a transitional period ending on December 31, 2014, it would eliminate certain tax benefits in investment funds, such as the Terminating Fund, that use forward agreements to convert income to capital gains for tax purposes. Accordingly the Terminating Fund will not be able to enter into a new forward agreement to create the same tax advantages that were available under the Forward Agreements.

9. On December 9, 2015, the Filer will settle the Forward Agreement scheduled to be settled on such date and, if the Merger is approved, will also terminate the Forward Agreement scheduled to be settled on May 20, 2016. Accordingly, at the time of the Merger, the Terminating Fund will be invested entirely in cash.

10. The Filer intends to hold a special meeting of the shareholders of the Terminating Fund to consider and, if thought fit, to approve, among other things, the Merger, by way of an amalgamation under the Canada Business Corporations Act (the CBCA), on or about January 29, 2016.

The Continuing Fund

11. Front Street Mutual Funds Limited (FSMFL) is a multi-class mutual fund corporation operating under the laws of Canada. FSMFL offers the Continuing Fund.

12. The Continuing Fund offers series A, B, F, I, X, UB, UF and UI shares. The Continuing Fund is authorized to issue an unlimited number of shares of each such series.

13. The Continuing Fund's investment objective is to provide stable and long-term capital appreciation and income by investing primarily in, or providing economic exposure to, the securities of North American issuers that collect revenue based on the transportation of commodities between producers and consumers in sectors such as pipelines, terminals, marine transportation and midstream services energy infrastructure sector, including energy infrastructure MLPs that are U.S. limited partnerships or limited liability companies that are (a) publicly traded on U.S. securities exchanges and (b) primarily engaged in the transportation, storage, processing, refining, marketing, exploration and production and mining of minerals or natural resources.

14. In order to obtain such economic exposure, the Continuing Fund will enter into one or more equity swaps with a U.S. financial institution as counterparty.

15. The Filer intends to hold a special meeting of the shareholders of the Continuing Fund to consider and, if thought fit, to approve, among other things, the amalgamation of the Continuing Fund and the Terminating Fund on or about January 29, 2016.

The Merger

16. A press release and a material change report in respect of the proposed Merger were filed on SEDAR under the Terminating Fund's profile on October 29, 2015 and November 6, 2015, respectively.

17. As required under National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), on October 8, 2015 the Funds' Independent Review Committee (IRC) reviewed the potential conflict of interest matters related to the proposed Merger and evaluated whether the proposed Merger, if implemented, would achieve a fair and reasonable result for each of the Funds and the IRC approved the Merger as to such matters.

18. Approval of the Mergers is required because the Mergers do not satisfy all of the criteria for preapproved reorganizations and transfers as set out in section 5.6 of NI 81-102, namely because: (i) a reasonable person may not consider the fundamental investment objectives of the Funds to be "substantially similar"; and (ii) a reasonable person may not consider the fee structure of the Funds to be "substantially similar".

19. Shareholders of the Terminating Fund and the Continuing Fund will be asked to approve the Merger at the special meetings scheduled to be held on or about December 21, 2015.

20. Notices of the meetings, management information circulars and proxies in connection with the special meetings were mailed to shareholders of the Funds on November 18, 2015 and filed via SEDAR.

21. The management information circular of the Terminating Fund includes information about tax implications of the Merger, as well as the differences between the Terminating Fund and the Continuing Fund. It also includes the fund facts document for the applicable series of shares of the Continuing Fund. Accordingly, shareholders of the Terminating Fund will have an opportunity to consider this information prior to voting on the Merger.

22. The Filer currently expects to implement the Merger on or about January 29, 2016. If approval of the shareholders of either Fund is not obtained, the Filer will consider whether the Terminating Fund should be terminated on the expiry of the Forward Agreement on May 20, 2016.

23. The Filer will pay for the costs of the Merger. These costs consist mainly of legal, proxy solicitation, printing, mailing and regulatory fees, as well as the costs of implementing the Merger.

24. Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund.

25. Pursuant to the Merger:

a. holders of series C shares of the Terminating Fund will receive series MC shares of the Continuing Fund, the terms and conditions attaching to such series MC shares being substantially the same as those attaching to the series F shares of the Continuing Fund;

b. holders of series U shares of the Terminating Fund will receive series MU shares of the Continuing Fund, the terms and conditions attaching to such series MU shares being substantially the same as those attaching to the series UF shares of the Continuing Fund; and

c. holders of class A shares of the Terminating Fund will receive class A shares of FSMFL and it is intended that the FSUSMLP Trust will redeem such class A shares following completion of the Merger and the FSUSMLP Trust will be wound up.

26. The fees of the applicable series of the Continuing Fund which shareholders of the Terminating Fund will receive are lower than the fees of the applicable series of the Terminating Fund.

27. No sales charges will be payable by shareholders of the Terminating Fund in connection with the Merger.

Procedure for the Merger

28. The proposed Merger will be structured according to the steps set out below:

a. the shareholders of each of the Funds will be asked to consider and, if thought fit, to approve the Merger of the Funds by way of a statutory amalgamation under the CBCA;

b. upon the Merger, the portfolio assets of the Terminating Fund, which will be entirely cash, will be transferred to the Continuing Fund in return for the issuance to the Terminating Fund of such number of shares of the Continuing Fund as is equal to the value of the cash transferred divided by the Continuing Fund's then applicable net asset value per share;

c. pursuant to the amalgamation agreement to be entered into between the Terminating Fund and the Continuing Fund as contemplated by section 182 of the CBCA, shareholders of the Terminating Fund will receive the number of shares of the corresponding series of the Continuing Fund pro rata to their shareholdings in the Terminating Fund immediately prior to the Merger;

d. the Terminating Fund will cease to exist following the amalgamation and a notice pursuant to section 2.10 of NI 81-102 will be filed on the Terminating Fund's SEDAR profile.

Benefits of the Merger

29. The Filer believes that the Merger will be beneficial to shareholders of the Funds for the following reasons:

a. although the Merger may result in the expiry of capital losses carried forward of the Terminating Fund, the amalgamation of the Funds will be a tax-deferred transaction and will not give rise to tax in either of the Funds. In addition, shareholders of the Terminating Fund who hold shares of the Terminating Fund as capital property will not realize a capital gain or capital loss as a result of the exchange of shares of the Terminating Fund for shares of the Continuing Fund on the amalgamation;

b. given the elimination of the tax benefits for which the Terminating Fund was structured, it no longer makes sense to continue to operate both the Terminating Fund and the Continuing Fund as the Terminating Fund will no longer provide an additional tax benefit to investors; once the transitional grandfathering for derivative forward agreements entered into prior to March 21, 2013 ceases to apply, there is no reasonably foreseeable reason why a shareholder would be better off in the Terminating Fund relative to Continuing Fund, as shareholders will participate in a fund with similar investment objectives. The Manager believes that the Continuing Fund will facilitate an improved after-tax outcome for shareholders of the Terminating Fund, especially after consideration of the other options of: (i) leaving shareholders in the soon to be tax-ineffective Terminating Fund; or (ii) simply winding down the Terminating Fund;

c. the Manager also believes that shareholders of a larger combined Continuing Fund will enjoy increased economies of scale and corresponding lower operating expenses (which are borne directly by shareholders);

d. the Continuing Fund will charge a management fee for each series of shares that is lower than the fees charged by the corresponding series of shares of the Terminating Fund;

e. shares of the Terminating Fund can only be redeemed on an applicable monthly or annual redemption date. Shares of the Continuing Fund are redeemable daily;

f. the valuation procedures for both Funds are substantially similar as for each Fund the net asset value of the Fund on a particular date will be equal to (i) the Fund's total assets, less (ii) the aggregate value of the liabilities of the Fund. The net asset value for a particular series of a Fund will be calculated by dividing (x) the net asset value of the Fund attributable to the applicable series by (y) the total number of shares of that series issued and outstanding, such valuation is made daily for both Funds; and

g. shares of the Terminating Fund are, and it is expected that shares of the Continuing Fund will be after the Merger, qualified investments under the Income Tax Act (Canada) for trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans, deferred profit sharing plans, registered disability plans and tax-free savings accounts.

Redemption Right

30. Shareholders of the Terminating Fund were provided with a right to redeem their shares at a price equal to their net asset value per security prior to the effective date of the Merger, on the Terminating Fund's annual redemption date, in November.

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.

"Stephen Paglia"
Acting Manager, Investment and Structured Products Branch
Ontario Securities Commission