Securities Law & Instruments

Headnote

National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption from the conflict of interest restriction in s. 13.5(2)(b) of NI 31-103 Registration Requirements and Exemptions -- An investment fund manager wants relief from the self-dealing restrictions in section 13.5(2)(b) of NI 31-103 for trades in portfolio securities between investment funds managed by the manager in order to execute a mutual fund reorganization -- A mutual fund will spin out underlying securities of the current investment fund to a new investment fund; the value of assets being transferred is equal to the value being returned from the new fund; the outcome of the spin out transaction is or will be consistent with the investment objectives of the current and new funds; the spun out fund has similar rules, rights, fees and procedures as the existing fund; the manager covers all costs and expenses of the transaction; security holders will have at least 30 days' notice of the spin out and may redeem in this period; clients that are not in managed accounts will sign a consent; there will be no material adverse tax consequences; the fund manager will determine that the spin out is in the best interests of the fund and approves the spin out.

Applicable Legislative Provisions

National Instrument 31-103 -- Registration Requirements and Exemptions, ss. 13.5(2)(b), 15.1.

July 28, 2014

IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA AND ONTARIO AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF NICOLA WEALTH MANAGEMENT LTD.; NWM STRATEGIC INCOME FUND; AND NWM U.S. EQUITY INCOME FUND (the Filers)

DECISION

Background

The securities regulatory authority or regulator in British Columbia and the securities regulatory authority or regulator in Ontario (Dual Exemption Decision Makers) have received an application from the Filers for a decision under the securities legislation of those jurisdictions (the Legislation) for an exemption from the Legislation that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of an investment fund for which a responsible person acts as an adviser, in order to permit the one-time exchange of securities (the One-Time Exchange) between the NWM U.S. Equity Income Fund (the U.S. Income Fund) and the NWM Strategic Income Fund (the Current Income Fund and, together with the U.S. Income Fund, the Transacting Funds) in respect of the Securities Exchange and Spinout Transaction (as defined below) (the NI 31-103 Relief).

The securities regulatory authority in British Columbia (the Local Decision Maker) has received an application from the Filers for a decision under the securities legislation of British Columbia (the Local Legislation) for an order exempting the Filers from:

(a) the self dealing provisions of the Local Legislation prohibiting a mutual fund from making or holding an investment in a person in which the mutual fund is a substantial security holder, in order to permit the momentary holding by the Current Income Fund of substantially all of the issued units of the U.S. Income Fund in respect of the Securities Exchange and Spinout Transaction (the Self Dealing Relief); and

(b) the prospectus requirement in the Local Legislation for a proposed distribution of securities of the U.S. Income Fund to non-accredited investor unit holders of the Current Income Fund as part of the Spinout (as defined below) of units of the U.S. Income Fund held by the Current Income Fund (the Prospectus Relief)

(together, the Local Exemptive Relief).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:

(a) the British Columbia Securities Commission is the principal regulator for this application;

(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 the provinces of Alberta, Ontario and Newfoundland and Labrador;

(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario; and

(d) the decision evidences the decision of the Local Decision Maker.

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 Filers:

The Manager

1. Nicola Wealth Management Ltd. (the Manager) is a company established under the laws of British Columbia with its head office located in Vancouver, British Columbia;

2. the Manager is registered in accordance with National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103) and applicable securities legislation in (i) British Columbia as a Portfolio Manager, Investment Fund Manager and Exempt Market Dealer; (ii) Alberta as a Portfolio Manager and Exempt Market Dealer; (iii) Ontario as a Portfolio Manager, Investment Fund Manager and Exempt Market Dealer; and (iv) Newfoundland and Labrador as a Portfolio Manager, Investment Fund Manager and Exempt Market Dealer;

3. the Manager is an accredited investor (Accredited Investor) within the meaning of National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106);

4. the Manager is the portfolio adviser and the investment fund manager for the U.S. Income Fund and the Current Income Fund and, as such, is, or will be, responsible for making investment decisions on behalf of the U.S. Income Fund and the Current Income Fund;

5. the Manager is not a reporting issuer in any jurisdiction of Canada and is not in default of securities legislation in any jurisdiction in Canada;

The Transacting Funds

6. the Current Income Fund is an open-ended mutual fund trust established under the laws of British Columbia; the trustee and custodian of the Current Income Fund is CIBC Mellon Trust Company, a trust company existing under the laws of Canada;

7. any securities issued by the Current Income Fund have been and will be sold solely to investors under exemptions from the prospectus requirements in accordance with NI 45-106;

8. the Current Income Fund currently offers Class "O" units under an offering memorandum for funds managed by the Manager (the NWM Funds) dated March 31, 2014 and other private placement exemptions under applicable securities legislation; the Current Income Fund also issues Class "N" units from time to time to other NWM Funds under private placement exemptions; the Class "N" units are not offered to other investors and are identical to Class "O" units except that the Class "N" units do not have a management fee associated with them -- they are issued to avoid duplication of management fees when other NWM Funds invest in the Current Income Fund; the declaration of trust governing the NWM Funds also allows for Class "A" and Class "F" units to be issued; however, the NWM Funds (including the Current Income Fund) have not issued Class "A" or Class "F" units and do not anticipate doing so in the near future;

9. the units issued by the Current Income Fund are widely held by clients of the Manager, with over 3,000 holders of Class "O" units (the Class O Unit Holders); all but 33 Class O Unit Holders have invested through client accounts (the Managed Accounts) under which full discretionary investment authority has been granted to the Manager; the remaining 33 Class O Unit Holders (the Advisory Clients) are all residents of British Columbia and have invested through client accounts under which the Manager provides advisory services only and the client makes the final investment decision; all but two of the Advisory Clients are Accredited Investors; the non-Accredited Investor Advisory Clients subscribed for units of the Current Income Fund under the offering memorandum exemption under NI 45-106; no other units have been issued by the Current Income Fund, other than Class "N" units issued to other NWM Funds (the Class N Unit Holders, and together with the Class O Unit Holders, the Unit Holders);

10. the Manager established the U.S. Income Fund as an open-ended mutual fund trust under the laws of British Columbia; the trustee and custodian of the U.S. Income Fund is CIBC Mellon Trust Company; the U.S. Income Fund has the same distribution policies and redemption rights as the Current Income Fund;

11. any securities issued by the U.S. Income Fund will be sold solely to investors under exemptions from the prospectus requirements in accordance with NI 45-106;

12. the U.S. Income Fund will distribute Class "O" -- CAD and Class "O" -- USD units (collectively, Class "O" units) under the NWM Funds' offering memorandum dated March 31, 2014 and other private placement exemptions under applicable securities legislation; the Class "O" -- CAD units are identical to the Class "O" -- USD units other than being denominated in Canadian dollars and United States dollars, respectively; the Class "O" units of the U.S. Income Fund have the same attributes regarding valuations, redemptions, distributions, management fees and unit holder rights as the Class "O" units of the Current Income Fund;

13. the U.S. Income Fund will distribute Class "N" -- CAD and Class "N" -- USD units (collectively, Class "N" units) from time to time exclusively to other NWM Funds; the Class "N" -- CAD units are identical to the Class "N" -- USD units other than being denominated in Canadian dollars and United States dollars, respectively; the Class "N" units are identical to Class "O" units except that the Class "N" units do not have a management fee associated with them -- they are issued to avoid duplication of management fees when other NWM Funds invest in the U.S. Income Fund; the Class "N" units of the U.S. Income Fund have the same attributes regarding valuations, redemptions, distributions, management fees and unit holder rights as the Class "N" units of the Current Income Fund;

14. the sole unit issued by the U.S. Income Fund is one Class "O" unit, which has been issued to the Manager; the Manager will remain as the sole unit holder of the U.S. Income Fund until the completion of the Securities Exchange and Spinout Transaction (defined below);

15. neither of the Transacting Funds are, or will become, a reporting issuer in Canada; neither of the Transacting Funds is in default of securities legislation in any province or territory of Canada; and

16. the Transacting Funds are Accredited Investors;

Securities Exchange and Spinout Transaction

17. in connection with the growth of the Current Income Fund and the Manager's desire to provide a broader range of investment alternatives to its clients at economies of scale, the Applicant intends to spin out the U.S. investments and USD cash from the Current Income Fund such that the Current Income Fund will be focused on Canadian income-oriented investments and the U.S. Income Fund will be focused on U.S. income-oriented investments; in connection with the foregoing, the Filers wish to engage in the following transaction (the Securities Exchange and Spinout Transaction) under which:

(a) the Current Income Fund will transfer the securities of U.S. publicly traded issuers held by the Current Income Fund (the U.S. Securities) and USD cash held by the Current Income Fund (the USD Cash) to the U.S. Income Fund in exchange for Class "O" -- CAD units of the U.S. Income Fund (the Class "O" Exchanged Units) and Class "N" -- CAD units of the U.S. Income Fund (the Class "N" Exchanged Units and, together with the Class "O" Exchanged Units, the Exchanged Units);

(b) the U.S. Securities will be transferred at fair market value, as determined by the Manager using its standard valuation procedures as applicable to public issuers (the Fair Market Value) as all of the U.S. Securities are listed on recognized exchanges in the United States and bid / ask prices are readily available; the U.S. Securities will be valued on the date of the Securities Exchange and Spinout Transaction;

(c) the Exchanged Units will be issued (the Issue Price) at the Canadian dollar equivalent (based on the Bank of Canada noon rate on the date of the Securities Exchange and Spinout Transaction) of USD$10.00 per unit and the aggregate number of Exchanged Units issued in exchange for the U.S. Securities will be the aggregate Fair Market Value of the U.S. Securities plus the amount of the USD Cash divided by USD$10.00;

(d) immediately upon receipt of the Exchanged Units, the Current Income Fund will distribute the Exchanged Units to the Unit Holders, pro rata in accordance with each Unit Holder's holdings in the Current Income Fund (the Spinout), with Unit Holders that are not NWM Funds receiving Class "O" Exchanged Units and Unit Holders that are NMW Funds receiving Class "N" Exchanged Units; if necessary, fractional Exchanged Units will be issued to Unit Holders under the Securities Exchange and Spinout Transaction to the fourth decimal;

(e) to the extent of gains inherent in the U.S. Securities at the time of transfer, the Spinout will trigger gains allocable to Unit Holders in the normal course (and effectively a bump in the cost base of their economic interest then represented by the Exchanged Units received by the Unit Holders), and the Spinout will otherwise be treated as a return of capital to the Unit Holders for accounting and income tax purposes and not give rise to an adverse tax consequence to Unit Holders or the Transacting Funds; the Manager does not believe that any taxes arising from the Securities Exchange and Spinout Transaction would have consequences for Unit Holders that are inconsistent with purchases and sales of securities already conducted by the Current Income Fund in the ordinary course;

(f) each Unit Holder will receive at least 30 days prior notice of the Securities Exchange and Spinout Transaction and each Advisory Client will receive an offering memorandum in Form 45-106F2 for the NWM Funds (including the Current Income Fund and the U.S. Income Fund); each Advisory Client will be asked to sign a consent to receive the Exchanged Units under the Securities Exchange and Spinout Transaction; Advisory Clients that are not Accredited Investors will also be asked to sign a "Risk Acknowledgement Form" in the form of Form 45-106F4;

(g) each Unit Holder, including the Advisory Clients, will have an opportunity to redeem its units in the Current Income Fund prior to the Securities Exchange and Spinout Transaction; the units of the Current Income Fund can be redeemed and are valued on any business day;

(h) any Unit Holder not wishing to hold Exchanged Units will have the ability to redeem the Exchanged Units for cash; the units of the U.S. Income Fund will be redeemable and are valued on any business day;

(i) neither the Manager nor the Transacting Funds will charge any fees in connection with the Securities Exchange and Spinout Transaction and no sales charges, redemption fees or other fees or commissions will be payable by the Unit Holders of the Transacting Funds in connection with the Securities Exchange and Spinout Transaction; all costs and expenses associated with the Securities Exchange and Spinout Transaction will be borne by the Manager;

(j) upon completion of the Securities Exchange and Spinout Transaction, Unit Holders will hold units in the Current Income Fund and U.S. Income Fund having an aggregate fair market value equal to the aggregate fair market value of the units of the Current Income Fund immediately prior to the Securities Exchange and Spinout Transaction; Unit Holders will be in substantially the same position after the Securities Exchange and Spinout Transaction except that Unit Holders will hold units of two fund as opposed to one; there will not be any adverse consequences to the Unit Holders or the Transacting Funds as a result of the Securities Exchange and Spinout Transaction, although there will be ordinary course capital gains attributable to the disposition of the U.S. Securities; and

(k) the Securities Exchange and Spinout Transaction will take place on the date set forth in the notice to Unit Holders; the Filers expect it to take place at least 35 days after the date of this order;

18. the Filers do not believe that any taxes arising from the Securities Exchange and Spinout Transaction will have material adverse consequences for Unit Holders;

19. the U.S. Securities meet the anticipated investment criteria and are consistent with the fundamental investment objectives of the U.S. Income Fund and are acceptable to the Manager as the portfolio adviser of the U.S. Income Fund;

20. the U.S. Income Fund has valuation rules and procedures, fee structures, redemption rights and distribution rights that are substantially similar to those of the Current Income Fund;

21. the Manager will keep a written record of the Securities Exchange and Spinout Transaction, including date, parties, a list of the U.S. Securities transferred and pricing thereof and other relevant terms for a period of five years, with the records being in a reasonably accessible place for the first two years;

22. the Securities Exchange and Spinout Transaction will be completed in accordance with the declaration of trust governing the Current Income Fund and the U.S. Income Fund;

23. the Current Income Fund is a mutual fund trust under the Income Tax Act (Canada) (Tax Act) and accordingly, units of the Current Income Fund are "qualified investments" under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered disability savings plans, registered education savings plans and tax-free savings accounts (Registered Plans); upon the effective date of the Securities Exchange and Spinout Transaction, the U.S. Income Fund is expected to meet the dispersal requirements in a single coincident closing, and at that time is also expected to meet all other requirements to be a "mutual fund trust" for purposes of the Tax Act; accordingly, after the Securities Exchange and Spinout Transaction, units of the U.S. Income Fund will be "qualified investments" under the Tax Act for Registered Plans;

24. as the Manager is, or will be at the time of the Securities Exchange and Spinout Transaction, the portfolio adviser for each of the U.S. Income Fund and Current Income Fund, the Manager would be considered to be a "responsible person" within the meaning of section 13.5 of NI 31-103; without the NI 31-103 Relief, the Manager would be prohibited from engaging in the One-Time Exchange of U.S. Securities because of the prohibition in the Legislation against a purchase or sale of securities, knowingly caused by a registered adviser that manages the investment portfolio of an investment fund, from or to the investment portfolio of an investment fund for which a "responsible person" acts as an advisor;

25. since the Current Income Fund would momentarily hold virtually all of the Class "O" units of the U.S. Income Fund after the One-Time Exchange and prior to the Spinout, without the Self Dealing Relief, the Current Income Fund would be prohibited from engaging in the One-Time Exchange under the Legislation by virtue of holding greater than 20% of the U.S. Income Fund;

26. since two of the Advisory Clients are not Accredited Investors and the offering memorandum exemption under NI 45-106 does not apply for a distribution of a security of another issuer, without the Prospectus Relief, the Current Income Fund would be unable to complete the Spinout for two clients without a prospectus under the Legislation; and

27. the Securities Exchange and Spinout Transaction represents the business judgment of the Manager uninfluenced by considerations other than the best interests of the Transacting Funds; the Manager believes the Securities Exchange and Spinout Transaction will be beneficial to Unit Holders for the following reasons:

(a) Unit Holders will have more choice in varying their investment exposure weighting between Canadian and U.S. investments;

(b) Unit Holders will have the option of receiving distributions from the U.S. Income Fund in Canadian or U.S. dollars, an option which is not available for the Current Income Fund;

(c) the Securities Exchange and Spinout Transaction will be a cost effective and efficient way to split the Current Income Fund into two separate funds without un-necessary brokerage and other costs; the alternative method of splitting the Current Income Fund into two separate funds would be for the Current Income Fund to dispose of all of the U.S. Securities in the market for cash, distribute the cash to Unit Holders, cause the Managed Accounts to purchase Class "O" units of the U.S. Income Fund and advise the Advisory Clients to do the same under the applicable Accredited Investor or "offering memorandum" prospectus exemption under sections 2.3 and 2.9 of NI 45-106, and cause the U.S. Income Fund to purchase the same U.S. Securities in the market (the Higher Cost Transaction); and

(d) the Higher Cost Transaction would not require either the NI 31-103 Relief or the Local Exemptive Relief but would:

(i) significantly add transaction cost; and

(ii) expose investors to the risk of market movement of the U.S. Securities during the time in which the U.S. Securities are disposed of for cash.

Decision

Each of the principal regulator and the securities regulatory authority or regulator in Ontario is satisfied that the decision meets the test set out in the Legislation for the relevant regulator or securities regulatory authority to make the decision.

The decision of the Dual Exemption Decision Makers under the Legislation is that the NI 31-103 Relief is granted provided that, prior to the completion of the Securities Exchange and Spinout Transaction, the board of directors of the Manager determines that the Securities Exchange and Spinout Transaction is in the best interests of the Current Income Fund and approves the Securities Exchange and Spinout Transaction.

The decision of the Local Decision Maker under the Local Legislation is that the Local Exemptive Relief is granted provided that the first trade in the U.S. Income Fund units acquired under the Spinout will be deemed to be a distribution unless the conditions in section 2.6 or section 2.14(1) of National Instrument 45-102 Resale of Securities are satisfied.

"Brenda M. Leong"
Chair
British Columbia Securities Commission