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First Asset Equal Weight Small-Cap Income Fund et al. - MRRS Decision
Headnote
One time trade of securities between mutual funds in the same family of funds that are not reporting issuers to implement fund merger is exempted from the conflict of interest restrictions in section 118(2)(b). Commission extremely reluctant to approve requested relief since costs of the merger were to be borne by the unitholders and this was not disclosed in any materials. Order was approved based on fact that in the past, there was no requirement that managers bear the cost of mergers in the context of entities not subject to NI 81-102 and no notice that staff would generally insist on this as a pre-condition to recommending in favour of discretionary relief in connection with such mergers.
Applicable Ontario Statutory Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 118(2)(b),121(2)(a)(ii).
September 27, 2006
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ALBERTA, SASKATCHEWAN, ONTARIO,
NEW BRUNSWICK, NOVA SCOTIA AND
NEWFOUNDLAND AND LABRADOR
(the "Jurisdictions")
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
FIRST ASSET EQUAL WEIGHT SMALL-CAP
INCOME FUND AND FIRST ASSET EQUAL
WEIGHT REIT INCOME FUND
(collectively, the "Funds")
AND
FIRST ASSET INVESTMENT MANAGEMENT INC.
(the "Filer")
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filer, on its own behalf and on behalf of the Funds for a decision under the securities legislation of the Jurisdictions (the "Legislation") granting relief from the restriction in the Legislation which prohibits a portfolio manager from purchasing or selling the securities of any issuer from or to the account of a responsible person or any associate of a responsible person in connection with a proposed merger (the "Proposed Merger") between First Asset Equal Weight Small-Cap Income Fund (the "Small Cap Fund") and First Asset Equal Weight REIT Income Fund (the "REIT Fund") (the "Requested Relief").
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. The Filer intends to merge the Small Cap Fund and the REIT Fund (the "Proposed Merger"), which will involve the transfer of the assets and liabilities of the Small Cap Fund in exchange for units of the REIT Fund (the "REIT Units").
2. At the time the Proposed Merger is effected, the Filer will be the "portfolio manager", or in British Columbia, a "responsible person", for both Funds for purposes of the Legislation.
3. The transfer of the investment portfolio of the Small Cap Fund to the REIT Fund by operation of the Proposed Merger may be considered a sale of securities caused by the Filer from the Small Cap Fund to the account of an the REIT Fund for which the Filer is also portfolio manager, contrary to the Legislation.
4. Each Fund was established pursuant to a Declaration of Trust under the laws of the Province of Ontario and the Filer is the trustee and manager of the Funds.
5. The Small Cap Fund offered its units in all of the Provinces of Canada pursuant to a final prospectus dated April 7, 2005 and closed its initial public offering on April 26, 2005.
6. The REIT Fund offered its units in all of the Provinces of Canada pursuant to a final prospectus dated October 28, 2004 and closed its initial public offering on November 15, 2004.
7. The Proposed Merger will be completed in accordance with the permitted merger guidelines (the "Merger Criteria") approved at a meeting of the unitholders of the Funds held on June 12, 2006 (the "Meeting"). At the Meeting, the unitholders of the Funds passed a resolution (the "Extraordinary Resolution") authorizing First Asset Funds Inc. ("FAFI"), an affiliate of the Filer to amend the Declaration of Trust of each of the Funds. The Extraordinary Resolution grants to FAFI the authority, without seeking unitholder approval, to merge the Funds in accordance with the Merger Criteria. The Proposed Merger is expected to occur on or about September 29, 2006 (the "Effective Date").
8. It is anticipated that the following events will occur in order to give effect to the Proposed Merger:
(a) The Declaration of Trusts for the Funds will be amended as required in order to implement the Proposed Merger;
(b) Prior to the Proposed Merger, the Small Cap Fund and the REIT Fund will make distributions of income and capital gains sufficient to ensure that neither will be liable for tax under Part 1 of the Income Tax Act (Canada) in the taxation year ending on the Effective Date;
(c) The Small Cap Fund exchange ratio will be based upon the relative net asset value of the Funds as at the close of trading on the TSX on the day prior to the Effective Date;
(d) On the Effective Date, the Small Cap Fund will transfer all of its property to the REIT Fund for consideration equal to the value of such assets on the day prior to the Effective Date;
(e) On the Effective Date, FAFI will deliver to The Canadian Depository for Securities Limited a certificate evidencing the aggregate number of REIT Units acquired by the former unitholders of the Small Cap Fund pursuant to the Proposed Merger;
(f) Immediately thereafter, the Small Cap Units will be redeemed and the Unitholders will receive their pro rata share of the REIT Units held by the Small Cap Fund. Unitholders of the Small Cap Fund will not be required to take any action in order to be recognized as unitholders of the REIT Fund following the Proposed Merger;
(g) All tax elections and tax returns in connection with the Proposed Merger will be prepared and filed by the Funds.
9. FAFI will file a press release and material change report to announce the merger.
10. h distributions and capital appreciation from growth in the real estate sector and from consolidation and privatization activity in the REIT market.
11. The Proposed Merger will increase the assets in the merged fund to a market capitalization larger than the existing market capitalization of the Small Cap Fund and the REIT Fund taken separately. This is expected to reduce the operating costs of the REIT Fund on a per unit basis and increase ongoing liquidity of the REIT Units on the TSX.
12. In the opinion of the Filer, the Proposed Merger is in the best interest of the Small Cap Fund, the REIT Fund and their respective unitholders.
13. In the absence of this order, the Filer would be prohibited from purchasing and selling the securities of the Small Cap Fund in connection with the Proposed Merger.
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 Relief is granted, provided that (a) the Proposed Merger is completed in accordance with the Merger Criteria, and (b) the Filer and the Funds comply with paragraphs 8 and 9 hereof.
"Paul K. Bates"
"Harold P. Hands"