National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval for change of control of manager under s. 5.5(1)(a.1) of National Instrument 81-102 Investment Funds -- acquirer has requisite experience and integrity to participate in Canadian capital markets -- transaction will not result in any material changes to operations and management of the manager or the funds it manages.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(a.1), 5.7(1)(a), 19.1.
February 9, 2016
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 CAPITAL 2004 (the Filer)
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 under section 5.5(1)(a.1) of National Instrument 81-102 Investment Funds (NI 81-102) to the change of control of the Filer (the Approval Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this Application; and
(b) 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 Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Quebec, Saskatchewan and Yukon.
Terms defined in National Instrument 14-101 Definitions and in MI 11-102 have the same meaning if used in this decision unless they are otherwise defined.
This decision is based on the following facts represented by the Filer:
Front Street Capital 2004
1. the Filer is a partnership established under the laws of the province of Ontario, of which the current partners are Lamarche Partner Corporation, having a 30.25% interest, Mersch (AFAB) Partner Corporation, having a 30.25% interest, Selke Partner Corporation, having a 30.25% interest, Mistere Partner Corporation, having a 5.00% interest, and Hryma Partner Corporation, having a 4.25% interest;
2. the Filer has a management committee, to be renamed its governance committee (the Filer's Governance Committee) which has the complete and exclusive power and authority generally to administer the business of the Filer, consisting of Normand G. Lamarche (the principal of Lamarche Partner Corporation), Frank L. Mersch (the principal of Mersch (AFAB) Partner Corporation) and Gary P. Selke (the principal of Selke Partner Corporation);
3. the head office of the Filer is at 33 Yonge Street, Suite 600, Toronto, Ontario M5E 1G4;
4. the Filer is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, as an adviser in the category of portfolio manager in British Columbia and Ontario, and as a dealer in the category of exempt market dealer in Alberta and Ontario;
5. the Filer is not in default of the securities legislation of any jurisdiction in Canada;
6. the Filer is the manager and portfolio adviser (within the meaning of such terms in NI 81-102) of a group of publicly offered mutual and non-redeemable investment funds (the Front Street Funds);
7. the Front Street Funds are reporting issuers in each of the jurisdictions of Canada;
Proposed Change of Control of the Filer
8. on October 9, 2015, the Filer issued a press release announcing a proposed sale of a majority interest in the Filer, subject to receipt of all required securities regulatory approvals (the Proposed Transaction);
9. on November 16, 2015, notice was sent to each of the securityholders of the Front Street Funds informing such securityholders of the Proposed Transaction, as required by section 5.8(1)(a) of NI 81-102;
10. subject to the receipt of all required securities regulatory approvals, it is intended that the Proposed Transaction be completed on or around February 17, 2016;
11. a notice regarding the Proposed Transaction was delivered to the Compliance & Registrant Regulation branch of the OSC on November 27, 2015 pursuant to sections 11.9 and 11.10 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103);
12. under the Proposed Transaction, an investor group (the Investor Group) has established a holding company (FS Group Holdings Ltd.) which will acquire approximately 79% of the partnership interests of the Filer;
13. specifically, FS Group Holdings Ltd. would acquire 100% of the interests in the Filer held by Selke Partner Corporation and 70% of the interests in the Filer held by each of Lamarche Partner Corporation, Mersch (AFAB) Partner Corporation, Mistere Partner Corporation and Hryma Partner Corporation, such that following completion of the Proposed Transaction the partners of the Filer will be FS Group Holdings Ltd., with a 79.075% interest, Lamarche Partner Corporation and Mersch (AFAB) Partner Corporation, each with a 9.075% interest, Mistere Partner Corporation, with a 1.5% interest, and Hryma Partner Corporation, with a 1.275% interest;
14. the members of the Investor Group, who collectively are the sole shareholders of FS Group Holdings Ltd., are three individuals, two of whom are also shareholders of Marquest Asset Management Inc. (Marquest) and together hold a majority voting interest in Marquest;
15. the head office of Marquest is located at Suite 4420, 161 Bay Street, TD Canada Trust Tower, Toronto, Ontario, M5J 2S1;
16. Marquest is registered as a dealer in the category of exempt market dealer, as an adviser in the category of portfolio manager and as an investment fund manager with the securities regulatory authorities of each of Ontario, British Columbia, Alberta, Saskatchewan, Quebec, New Brunswick and Newfoundland and Labrador;
17. Marquest is not in default of the securities legislation in any of the jurisdictions of Canada;
18. Marquest is currently the manager of certain mutual funds, closed end investment funds and flow-through limited partnerships subject to NI 81-102 (the Marquest Funds);
Effect of the Proposed Transaction on the Filer and the Front Street Funds
19. completion of the Proposed Transaction is not expected to result in any material changes to, or impact on, the business, operations or affairs of the Filer, the Front Street Funds and the securityholders of the Front Street Funds;
20. other than as noted below, the Filer will continue to act as the investment fund manager of the Front Street Funds as a discrete, separate and distinct legal entity in materially the same manner as it has conducted such activities immediately prior to completion of the Proposed Transaction;
21. Mr. Selke, currently the ultimate designated person (UDP) of the Filer, intends to depart the firm after completion of the Proposed Transaction, although he will remain for a period of time post-closing in a consulting role with the Filer, and will be replaced by one of the Investors Group members on an interim basis as Chief Executive Officer and UDP of the Filer;
22. as a result of Mr. Selke's departure, the Filer's Governance Committee will be re-constituted to include current members Mr. Lamarche and Mr. Mersch and additionally include the three members of the Investor Group;
23. other than noted above, no current directors, officers or employees of Marquest or its affiliates are expected to become involved in the day-to-day management of the Front Street Funds following completion of the Proposed Transaction, nor is it expected that Marquest will have any involvement in any of the business, operations or affairs of the Filer;
24. upon completion of the Proposed Transaction, the appointments of the current members of independent review committee (the IRC) for the Front Street Funds will automatically terminate, but the Filer intends to re-appoint each such member to the IRC;
25. the portfolio managers of the Filer currently responsible for the management of the assets of the Front Street Funds will continue to manage the Front Street Funds and such persons are entirely unrelated, and will remain unrelated, to the persons responsible for managing the Marquest Funds;
26. there is no intention to seek to increase any fees associated with the Front Street Funds as a result of the Proposed Transaction;
27. is no intention to seek to change the custodian or administrator of the Front Street Funds;
28. there is no intention to seek to change the investment objectives or investment strategies of any of the Front Street Funds;
29. there is no intention to change the Front Street "brand";
30. neither the Filer nor the Investor Group expects the acquisition of control of the Filer to have any negative consequences on the ability of the Filer to satisfy its obligations to the Front Street Funds or to adversely affect the operation and administration of the Front Street Funds;
31. the Proposed Transaction does not contemplate and will not at the time of its completion result in a change of manager of either the Front Street Funds or the Marquest Funds;
32. there is no current intention to effect a change of manager either following completion of the Proposed Transaction or, within a foreseeable period of time after completion of the Proposed Transaction.
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.