NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund reorganization -- Approval required because mergers do not meet the criteria for pre-approval -- Funds have differing investment objectives and fees, and mergers conducted on a taxable basis -- Securityholders provided with timely and adequate disclosure regarding the mergers.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6(1)(a), 5.6(1)(b).
July 25, 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 MARQUEST ASSET MANAGEMENT INC. (Marquest) AND IN THE MATTER OF THE MERGING FUNDS (as hereinafter defined) AND IN THE MATTER OF THE CONTINUING FUNDS (as defined below)
The principal regulator in the Jurisdiction has received an application (the Application) from Marquest, the manager of the funds discussed below (Marquest together with the funds discussed below are hereinafter referred to as the Filers) for a decision under the securities legislation of the Jurisdiction (the Legislation) for approval of the mergers (Merger Approval) pursuant to subsection 5.5(1)(b) of National Instrument 81-102 -- Mutual Funds (NI 81-102).
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 (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, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut.
Terms defined in National Instrument 14-101 -- Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
The following terms shall have the following meanings:
refers to the notice of meeting, management information circular and form of proxy of the Funds dated June 9, 2014 and mailed to securityholders of the Merging Funds on or about June 16, 2014 and which was filed on SEDAR
Continuing Trust Fund
refers to Marquest Tax Deferred Income Fund (proposed to be renamed Marquest Global Balanced Fund)
Continuing Corporate Fund
refers to Marquest Monthly Pay Fund (Corporate Class)
refers to Marquest Canadian Balanced Fund (Corporate Class), Marquest Dow Jones Canada High Dividend 50 Fund (Corporate Class), Marquest S&P/TSX Canadian Dividend Aristocrats Fund (Corporate Class) and Marquest Monthly Pay Fund (Corporate Class)
refers to Marquest Corporate Class Funds Ltd.
collectively refers to the Trust Funds and the Corporate Funds
refers to the independent review committee of a Fund or Funds
refers to the Funds' annual information dated July 9, 2013, as amended by amendment no. 1 dated November 11, 2013 and amendment no. 2 dated April 16, 2014
refers to the Funds' simplified prospectus dated July 9, 2013, as amended by amendment no. 1 dated November 11, 2013 and amendment no. 2 dated April 16, 2014
Merger Effective Date
refers to July 9, 2014 or such later date as may be determined by Marquest
Merging Corporate Funds
refers to Marquest Canadian Balanced Fund (Corporate Class), Marquest Dow Jones Canada High Dividend 50 Fund (Corporate Class), Marquest S&P/TSX Canadian Dividend Aristocrats Fund (Corporate Class)
refers to, collectively, the Merging Corporate Funds and the Merging Trust Funds
Merging Trust Funds
refers to Marquest International Income Balanced Fund and Marquest International Balanced Fund
refers to the Business Corporations Act (Ontario)
refers collectively to the mergers of the Funds
refers the initiative by Marquest to make its product offerings smaller and simpler and involves proposed changes to the investment objectives of funds, fund mergers and redemption of fund series
refers to the Income Tax Act (Canada)
srefers to Marquest International Income Balanced Fund, Marquest International Balanced Fund, and Marquest Tax Deferred Income Fund (proposed to be renamed Marquest Global Balanced Fund)
refers to Marquest Tax Deferred Income Trust Pool
This decision is based on the following facts represented by the Filers:
1. The head office of each of the Filers is located in Toronto, Ontario. The Filers are not in default of securities legislation in any jurisdiction of Canada.
2. The Fund Corporation is a multi-class mutual fund corporation incorporated under the laws of the Province of Ontario. The Fund Corporation offers the Corporate Funds.
3. Each of the Trust Funds is an open-ended mutual fund trust established under the laws of the Province of Ontario by declaration of trust pursuant to which Marquest is the trustee.
4. Marquest is the manager and trustee of each of the Trust Funds and the manager of each of the Corporate Funds.
5. Each of the Trust Funds and Corporate Funds is a reporting issuer under the applicable securities legislation in each jurisdiction in Canada.
<<Proposed Corporate Fund Mergers>>
Marquest Canadian Balanced Fund (Corporate Class)
Marquest Monthly Pay Fund (Corporate Class)
Marquest Dow Jones Canada High Dividend 50 Fund (Corporate Class)
Marquest Monthly Pay Fund (Corporate Class)
Marquest S&P/TSX Canadian Dividend Aristocrats Fund (Corporate Class)
Marquest Monthly Pay Fund (Corporate Class)
<<Proposed Trust Fund Mergers>>
Marquest International Income Balanced Fund
Marquest Tax Deferred Income Fund
Marquest International Balanced Fund
Marquest Tax Deferred Income Fund
6. Marquest will be responsible for the costs associated with the Mergers and any other costs associated with the special meeting matters.
7. There will be no sales charges payable in connection with the acquisition by a Continuing Fund of the investment portfolio of the corresponding Merging Fund.
8. As required by National Instrument 81-107 -- Independent Review Committee for Investment Funds, Marquest has referred the proposed Mergers to the IRC of the Funds as a conflict of interest matter. The IRC has reviewed the proposed Mergers and the process to be followed in connection with the proposed Mergers and, after due consideration and reasonable inquiry, concluded that the proposed Mergers achieve a fair and reasonable result for each of the securityholders of the Merging Funds.
9. The relevant notices of the meetings and Circular have been mailed to securityholders of the Merging Funds and filed on SEDAR in accordance with applicable securities legislation.
10. Each of the Merging Funds will be wound up as soon as possible following completion of the Proposed Mergers.
The Proposed Corporate Fund Mergers
11. The Filers propose to effect the Proposed Corporate Fund Mergers on or about the Merger Effective Date.
12. Shareholders of the Merging Corporate Funds will continue to have the right to redeem securities of the Merging Corporate Funds at any time up to the close of business immediately before the Merger Effective Date.
13. Certain shareholders of the Continuing Corporate Fund will be given dissent rights in connection with the Reorganization in accordance with the provisions of the OBCA.
Proposed Trust Fund Mergers
14. Marquest is proposing that there be mergers of the Merging Trust Funds with the Continuing Trust Fund.
15. Unitholders of each Merging Trust Fund will continue to have the right to redeem securities of the Merging Trust Funds at any time up to the close of business immediately before the Merger Effective Date.
Reasons for Merger Approval
16. The Filers require Merger Approval in connection with one or more Proposed Mergers and cannot rely on section 5.6(1) of NI 81-102 for the following reasons:
(a) the investment objectives of the Merging Funds with its corresponding Continuing Fund are not substantially similar;
(b) the Proposed Trust Fund Mergers are not tax deferred mergers;
(c) the Merging Funds do not have the same fees as the relevant Continuing Funds; and
(d) the materials sent to securityholders of the Merging Funds did not include a copy of the current simplified prospectus or the most recently filed fund facts document of the Continuing Funds. A preliminary and pro forma prospectus and annual information form with related fund facts for each of the Continuing Funds were filed on SEDAR on June 9, 2014.
(e) The Circular contains a summary of the information that the Filer has deemed to be material and which includes the proposed changes to the investment objectives and exchanges of units of shares classes of the relevant Continuing Funds so that securityholders of the Merging Funds may consider this information before voting on the proposed Mergers.
(f) The Circular also indicates that securityholders can obtain the most recently filed annual information form, fund facts documents, financial statements and management reports of fund performance of the Funds from Marquest or through SEDAR at no cost.
Trust Fund Mergers
17. Since its acquisition of the Funds in September 2013, Marquest has, subsequent to the resignation of the sub-adviser that specializes in managing funds of exchange traded funds, served as the manager of the Merging Trust Funds. Marquest has determined that its focus is primarily on funds that engage in active stock selection and does not have an alternative sub-adviser for the style of mandate employed by the Merging Trust Funds.
18. Although the method of implementation of the investment objectives of the Merging Trust Funds is not the same and the investment objective may not be substantially similar to the Continuing Trust Fund, they are nevertheless complementary.
19. The Continuing Trust Fund has material capital losses that will be preserved if the Trust Fund Mergers are completed on a taxable basis. As a result, it is in the best interest of unitholders to complete the Proposed Trust Fund Mergers on a taxable basis in order to preserve material loss carry forwards currently available to the Merging Trust Funds.
Corporate Fund Mergers
20. Since its acquisition of the Funds in September 2013, Marquest has served as the manager of the Merging Corporate Funds. Marquest does not otherwise offer passive index tracking mutual funds other than the Merging Corporate Funds and does not intend to offer passive mutual funds at this time. After due consideration of possible merger scenarios, Marquest has determined that, although there are differences between the investment objectives of the Merging Corporate Funds and the Continuing Corporate Fund, the Continuing Corporate Fund represents the most appropriate merger alternative of the mutual funds currently managed by Marquest.
21. The Merger of the Merging Corporate Funds into the Continuing Corporate Fund will be implemented on a tax-deferred rollover basis such that the Merger will not involve a disposition of assets for tax purposes.
Common Benefits of the Mergers
22. Marquest believes that the Mergers will be beneficial to securityholders of each Fund for the following reasons:
(a) it is expected that each Proposed Merger will reduce duplication and redundancy between the Funds, thereby increasing operational efficiencies;
(b) following the Proposed Mergers, each Continuing Fund will have more assets, thereby allowing for increased portfolio diversification opportunities;
(c) Since its acquisition of the Funds in September 2013, Marquest has voluntarily waived, absorbed or paid certain of the expenses of the Merging Funds. Marquest has determined that it is no longer willing to absorb these expenses for the Merging Funds. As such, the corresponding operating expenses as a percentage of the net asset values of the Merging Fund would increase commensurately to a level that would become it is becoming uneconomical to securityholders from an expense perspective to continue to operate the Merging Funds. As a result of the Mergers, investors will have the opportunity to continue their investment in a Continuing Fund in order to have the expenses spread out across a larger pool of assets; and
(d) each Continuing Fund will benefit from its larger profile in the marketplace.
23. Marquest submits that the investors will not be prejudiced in connection with the Proposed Mergers as:
(a) the Circular sent to securityholders in connection with a Proposed Merger provided sufficient information about the Proposed Merger to permit securityholders to make an informed decision about the Proposed Merger including the tax implications of the Proposed Merger, the differences between the Merging Fund and the Continuing Fund and the Funds' IRC's recommendation that the Mergers achieve a fair and reasonable result for the applicable Funds;
(b) the Circular sent to securityholders prominently disclosed the various ways in which securityholders can obtain the most recently filed annual information form, fund facts documents, financial statements and management reports of fund performance of the Funds;
(c) each applicable Continuing Fund and Merging Fund with respect to a Proposed Merger have an unqualified audit report in respect of their last completed financial period; and
(d) securityholders of the Merging Funds shall be required to approve the Proposed Mergers at duly constituted meetings of securityholders prior to the implementation thereof.
24. Except as noted above, Marquest believes that each Proposed Merger satisfies all of the criteria for pre-approved reorganizations and transfers set forth in section 5.6(1) of NI 81-102.
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 Merger Approval is granted.