Highstreet Asset Management Inc., YEARS Trust and YEARS U.S. Trust - MRRS Decision

MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Application - Relief granted under section 5.5(1)(b) of National Instrument 81-102 -- Mutual Funds ("NI 81-102") to merge two exchange-traded funds captured by NI 81-102 because of their monthly redemption feature. Continuing fund to be renamed and reflective of changes to investment objectives, investment strategy, etc.. Costs of the merger and of unwinding the forwards of the two merging funds, to be paid for by the manager. Approval of change of manager also granted under section 5.5(1)(a) of NI 81-102.

Rules Cited

National Instrument 81-102 Mutual Funds, subsections 5.5(1)(a) and 5.5(1)(b).

December 15, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO, BRITISH COLUMBIA, ALBERTA,

SASKATCHEWAN, MANITOBA, QUEBEC, NEW BRUNSWICK,

NOVA SCOTIA, NEWFOUNDLAND AND LABRADOR

AND PRINCE EDWARD ISLAND (the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

HIGHSTREET ASSET MANAGEMENT INC. (the "Filer")

AND

YEARS TRUST AND YEARS U.S. TRUST

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from Highstreet Asset Management Inc. (the "Filer") for a decision under the securities legislation of the Jurisdictions (the "Legislation") for approval of the proposed reorganization of YEARS Trust ("YEARS") and YEARS U.S. Trust ("YEARS US") and approval of the change of manager of the continuing fund, as required by sections 5.5(1)(b) and 5.5(1)(a) of National Instrument 81-102 -- Mutual Funds (the "Requested Approvals").

Under the Mutual Reliance Review System for Exemptive Relief Applications

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

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

1. YEARS and YEARS US are each investment trusts governed by the laws of Ontario. The units of both funds are listed for trading on the Toronto Stock Exchange ("TSX") under the symbols "YTU.UN" and "YUS.UN", respectively.

2. Highstreet is a corporation established under the laws of Ontario. Highstreet's duties as the current manager of both YEARS and YEARS US include the investment management of each fund.

3. YEARS and YEARS US are not conventional mutual funds. Their current investment objectives are to, among other things, return at least the original issue price of $25.00 per unit to unitholders on termination of the funds and to provide unitholders with a stable stream of monthly distributions.

4. Unitholders of YEARS and YEARS US are being asked to vote on a proposal to merge YEARS and YEARS US and make changes to the continuing fund, including changes to its investment objectives, in order to provide unitholders of both funds with the opportunity to continue their investment in a single fund that should be better positioned to provide a higher level of distributions and the opportunity for growth in net asset value ("NAV") per unit. If the proposal is implemented, YEARS will be the continuing fund and will be renamed "YEARS Financial Trust" ("YEARS Financial").

5. The proposed merger does not satisfy all of the pre-approval criteria of Section 5.6 of NI 81-102, largely because YEARS and YEARS US are not conventional mutual funds, the proposal involves significant changes to the funds and many of the criteria of Section 5.6 are not applicable to the funds.

6. Ontario was selected as the principal jurisdiction for this application because the principal offices of each of the Filer, YEARS and YEARS US are in Ontario.

7. In addition to the merger of YEARS and YEARS US, the proposal contemplates significant changes to the continuing fund, including changes to its fundamental investment objectives and investment strategy and restrictions. It is not intended that the continuing fund have similar investment objectives, strategies or restrictions as either YEARS or YEARS US. Rather, it is intended that unitholders of YEARS and YEARS US, whose monthly distributions have been either reduced or suspended, have the opportunity to vote on a proposal that will provide them with an alternative to maintaining their investment in its current form.

8. The proposal contains the following elements:

(a) Merger of YEARS and YEARS US. Pursuant to the proposed merger, YEARS will acquire substantially all of the net assets of YEARS US, and YEARS will issue to YEARS US additional units of YEARS in consideration for those assets. YEARS US will then automatically redeem all of its outstanding units, other than one unit held by the Filer, and will transfer units of YEARS to unitholders of YEARS US in payment of the redemption price. Upon implementation of the merger, YEARS will be renamed "YEARS Financial Trust" and unitholders of YEARS and YEARS US will become unitholders of YEARS Financial.

(b) Settlement of forward agreements and other capital repayment arrangements. In connection with the merger, the arrangements entered into by YEARS and YEARS US relating to their capital repayment objectives (such as forward agreements with a Canadian chartered bank), will be settled.

(c) Change in the investment objectives of YEARS Financial. The investment objectives of YEARS Financial will be changed such that the new investment objectives will be to provide unitholders (i) with a stable stream of monthly cash distributions initially targeted to be $1.60 per unit per annum, which would represent a yield of approximately 7.5% per annum on the NAV of YEARS Financial; and (ii) the opportunity for growth in NAV per unit.

(d) Change in the investment strategy and investment restrictions of YEARS Financial. The investment strategy and restrictions will be changed such that, among other things, the investment portfolio of YEARS Financial will consist of TSX-listed issuers in the financials sector (the "Financials Sector"), within the meaning of the Global Industry Classification Standard or "GICS" maintained by Standard & Poor's and Morgan Stanley Capital International. These include shares of issuers such as Canadian chartered banks and life insurance companies, which have a history of strong earnings growth.

(e) Change in the manager of YEARS Financial. The manager of YEARS Financial will be changed to Brompton YTU Management Limited, and YEARS Financial will be part of the Brompton family of investment funds. The Filer will continue to be the investment manager of YEARS Financial.

(f) Change in the termination date of YEARS Financial. Changes will be made to the provisions relating to the manner in which YEARS Financial may be terminated, including the addition of the ability of the manager to terminate the fund without approval of the unitholders if it would be in their best interests. Unlike YEARS and YEARS US, YEARS Financial will not have a fixed termination date.

(g) Other amendments to the trust agreement of YEARS. Amendments will be made to the trust agreement of YEARS Financial in order to make certain provisions of the agreement consistent with the terms of the agreements relating to other funds managed by the Brompton Group of Companies.

(h) Amendments relating to rights or warrants. Amendments will be made to the trust agreement of YEARS Financial in order to permit the one-time issuance of rights or warrants to unitholders of YEARS Financial as of a record date to be determined in January 2006, where the exercise price of the rights or warrants may be less than the most recently calculated NAV per unit.

9. Unlike YEARS and YEARS US, YEARS Financial will not have a specified capital repayment objective. As well, the target distributions for YEARS Financial will be determined on an annual basis by the manager of the fund.

10. Unitholders of YEARS Financial will not have the capital repayment protection previously provided by the forward agreements and, in the case of YEARS, zero coupon bonds.

11. In order to make the valuation procedures for YEARS Financial the same as the procedures used by the Brompton Group of Companies, minor changes to the valuation procedures of YEARS Financial are being proposed. Effective from and after January 1, 2006, for redemption purposes only, (i) the valuation date for determining NAV will be the second last business day of the month instead of the last business day, (ii) for the purpose of calculating the redemption price of units, the value of any securities traded on a stock exchange will be equal to the weighted average trading price over the last three business days of the month in which the redemption date occurs, and (iii) in determining the redemption price, the costs associated with the redemption, including brokerage costs, will be deducted. In addition, for all valuation purposes, whether or not related to redemptions, bonds, debentures, notes and other debt securities will be valued by taking the average of the bid and ask as the price for those securities, rather than the bid price.

12. It is proposed that YEARS Financial pay a management fee to Brompton at an annual rate of 0.85% of the NAV of YEARS Financial, and that Brompton will be responsible for paying the investment management fees of the Filer out of the management fee. The trust agreement of each of YEARS and YEARS US provides that the Filer is entitled to receive management fees at an annual rate of 1.10% of the NAV of each fund, although in the case of YEARS US, such fee is automatically reduced in the event of reductions in distributions to unitholders of YEARS US. The Filer has voluntarily reduced its fees in respect of YEARS, and currently collects an annual fee of 0.30% of the NAV of YEARS. The Filer currently collects an annual fee of 0.52% of the NAV of YEARS US, since distributions by YEARS US have been reduced.

13. Service fees of 0.40% per annum on the NAV of YEARS Financial will continue to apply.

14. Forward fees payable pursuant to the forward agreements of YEARS and YEARS US will be eliminated if the proposal is approved and implemented.

15. YEARS and YEARS US are not conventional funds, and the ability of unitholders to redeem their units is characteristic of many structured products rather than conventional mutual funds. Units of both funds are redeemable on a monthly basis at a discount to NAV, and unitholders may redeem units once annually (in December) without being subject to the discount to NAV. Since the units of both funds are listed on the TSX, unitholders have an additional source of liquidity for their investment and are not dependent on redemptions alone.

16. Unitholders of both YEARS and YEARS US who do not wish to participate in YEARS Financial going forward may choose to redeem their units at 100% of NAV on the annual redemption date of December 30, 2005. If the merger and other changes are approved and implemented prior to December 30, 2005, unitholders of YEARS US will become unitholders of YEARS Financial as a result of the merger. Accordingly, former unitholders of YEARS and YEARS US who do not wish to participate in YEARS Financial would be entitled to, in that case, redeem their units of YEARS Financial at 100% of the NAV of YEARS Financial. For the purposes of redemptions of units on December 30, 2005, the NAV will be calculated in accordance with the current trust agreement of YEARS on December 30, 2005, being the last business day of December.

17. Amendments to the trust agreement of YEARS include changes to the record and payment dates for distributions, changes to the provisions relating to the conduct of unitholder meetings, changes to the manner in which the trust agreement may be amended, the addition of non-resident ownership provisions and changes to the description of the rights and duties of the manager of YEARS Financial.

18. The funds are not conventional mutual funds and do not offer units for sale on a continuous basis pursuant to a simplified prospectus.

19. The merger of YEARS and YEARS US will not be a "qualifying exchange" within the meaning of section 132.2 of the Income Tax Act (Canada). If YEARS and YEARS US were to elect to have the merger treated as a "qualifying exchange", the tax losses of each of the funds would be lost as a result of the merger. YEARS has accumulated approximately $15.7 million of non-capital and capital tax losses, which will be available to YEARS Financial to offset gains in the investment portfolio of YEARS Financial. All unitholders of YEARS Financial after the merger will indirectly benefit from the use of such tax losses, and this benefit will be shared with unitholders of YEARS US who become unitholders of YEARS Financial upon the merger.

20. YEARS US will continue to exist as a trust after the merger in order to preserve its tax losses for possible future use. Following the merger, YEARS US will apply to the Authorities to cease to be a reporting issuer and to have its units delisted from the TSX.

21. The net assets of YEARS US being acquired by YEARS pursuant to the merger of the funds will eventually be sold in order for the portfolio of YEARS Financial to comply with its proposed new investment restrictions and criteria.

22. It is proposed that Brompton replace the Filer as the manager of YEARS Financial, but that the Filer continue as the investment manager of the fund.

23. Brompton was incorporated pursuant to the Business Corporations Act (Ontario) on November 1, 2005. Brompton was organized for the purpose of managing and administering closed-end investment funds including YEARS Financial. Brompton is a member of the Brompton Group of Companies.

24. The Brompton Group of Companies provides specialized financial products and services to clients. Affiliates of Brompton currently manage eleven public investment funds totalling approximately $2.8 billion in assets. Asset management services are provided by Brompton Funds LP and its affiliates. Affiliates of Brompton also offer merchant banking services to clients. Brompton and its directors and officers have extensive experience in managing financial assets and public and private entities, including the management of closed-end funds.

25. Brompton will engage the Filer to act as investment manager to YEARS Financial, pursuant to an investment management agreement. Currently, the Filer is the portfolio manager of a Brompton fund, and is the option advisor for another fund being distributed by an affiliate of Brompton.

26. If approved, the change in the manager of YEARS Financial will take effect on the effective date of the proposed merger (currently anticipated to be on December 16, 2005) or on such later date as may be determined by the Filer.

27. The Royal Trust Company acts as trustee of both YEARS and YEARS US. It acts as custodian of the assets of both funds and is responsible for certain aspects of the day-to-day administration of the funds, including executing instruments on behalf of the funds, processing redemptions, calculating NAV, net income and net realized capital gains of the funds and maintaining the books and records of the funds. The Royal Trust Company will continue to act as trustee to YEARS Financial (the continuing fund) following the implementation of the proposal, although certain provisions in the trust agreement of YEARS Financial will be amended in order to make those provisions consistent with the terms of the agreements relating to other funds managed by the Brompton Group of Companies.

28. Neither YEARS or YEARS US is on the list of defaulting reporting issuers maintained under the applicable securities legislation in the Jurisdictions.

29. A press release with respect to the proposal was issued on November 2, 2005 following the approval by the board of directors of the Filer of the submission of the proposal to unitholders. An additional press release was issued on November 11, 2005 following the mailing of the meeting materials to unitholders.

30. A material change report with respect to the proposal was filed on SEDAR on November 11, 2005.

31. A joint notice and management information circular of YEARS and YEARS US (the "Circular") was mailed to unitholders and subsequently filed on SEDAR on November 11, 2005.

32. The risks associated with the proposal and the implementation thereof are disclosed in the Circular.

33. Special meetings of the unitholders of each of YEARS and YEARS US were scheduled for December 2, 2005 for the purposes of voting on the proposed transactions, however, due to a lack of quorum, the meetings were postponed until December 12, 2005. The Filer issued a press release to this effect on December 2, 2005.

34. In order to be implemented, the proposal requires the approval of 66 2/3% of the unitholders of each of YEARS and YEARS US voting at the special meetings of unitholders. In approving the proposal, unitholders will be indicating their acceptance of the merger as well as the significant changes to the continuing fund.

35. Whether or not the proposal is approved by unitholders, the Filer will pay all out-of- pocket transaction expenses relating to the implementation of the merger. This includes all brokerage commissions relating to the sale of assets by YEARS and YEARS US and the purchase of securities in the Financials Sector by YEARS Financial. Accordingly, such expenses will not be borne by either YEARS or YEARS US. A press release to this effect was issued by the Filer on December 1, 2005. Such costs and expenses are exclusive of any costs relating to the offering and issuance of warrants to unitholders of YEARS Financial.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met.

The decision of the Decision Makers under the Legislation is that the Requested Approvals are granted.

"Leslie Byberg"
Manager, Investment Funds Branch
Ontario Securities Commission