National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from self-dealing prohibitions in s. 13.5(2)(b)(iii) of NI 31-103 to permit a trade of portfolio securities between pooled funds, both adviser by the same portfolio adviser, in furtherance of a merger between the funds -- funds cannot rely exemptions from self-dealing prohibitions in securities legislation because they are not reporting issuers -- merging funds have substantially similar investment objectives and strategies, fees and valuation policies -- manager to bear costs of merger -- relief subject to manager determining that merger is in best interests of the funds.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(b)(iii), 15.1.
October 22, 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 JURISDICTION AND IN THE MATTER OF MARRET ASSET MANAGEMENT INC. (the Filer) AND MARRET HIGH YIELD HEDGED STRATEGIES FUND (the Terminating Fund) AND MARRET HIGH YIELD FUND (the Continuing Fund, and together with the Terminating Fund, the Funds)
The principal regulator in the Jurisdiction 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 Jurisdiction of the principal regulator (the Legislation) for an exemption from the provisions of subclause 13.5(2)(b)(iii) of National Instrument 31-103 Registration Requirements Exemptions and Ongoing Registrant Obligations (NI 31-103), which 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 effect the proposed merger (the Merger) of the Terminating Fund into the Continuing Fund (the Exemption 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 section 4.7 of Multilateral Instrument 11-102Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless they are defined in this decision.
This decision is based on the following facts represented by the Filer:
1. The Filer acts as manager and portfolio manager of the Terminating Fund and the Continuing Fund.
2. The Filer is registered as investment fund manager, portfolio manager, commodity trading manager and exempt market dealer in the Province of Ontario; an exempt market dealer, investment fund manager and portfolio manager in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Quebec and Saskatchewan.
3. The Filer is not in default of securities legislation in any jurisdiction.
4. The Terminating Fund is an open-ended mutual fund established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of July 27, 2010, as amended on December 31, 2011, April 11, 2013, and June 13, 2014. The Terminating Fund is not a reporting issuer in any jurisdiction and is not subject to National Instrument 81-102 Investment Funds.
5. The Continuing Fund is an open-ended mutual fund established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of April 5, 2012, as amended on August 1, 2013, and August 26, 2013. The Continuing Fund is not a reporting issuer in any jurisdiction and is not subject to National Instrument 81-102 Investment Funds.
6. Each Fund offers its units in all provinces and territories of Canada pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions.
7. The Funds are not in default of securities legislation in any jurisdiction.
8. The Filer has decided to effect the Merger because of the similarities in the Funds' investment objectives and portfolios, the size of the Terminating Fund, and to take advantage of certain efficiencies and economies of scale to be achieved by combining the Funds' assets.
9. Pursuant to the declaration of trust of the Terminating Fund, Unitholders were provided at least 45 days' written notice of the proposed Merger after which the Filer, in its capacity as trustee of the Terminating Fund, may effect the Merger and other related amendments. It is proposed that the Merger will occur on or about October 31, 2014 (the Effective Date), subject to regulatory approvals.
10. There will be no change in management fees or performance fees paid by unitholders of the Terminating Fund as a result of the Merger.
11. No redemption fees, other fees or commissions will be payable by the Funds' unitholders in connection with the Merger. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the Terminating Fund's investment portfolio.
12. The costs associated with the Merger will be paid by the Filer.
13. Unitholders of the Terminating Fund will be able to redeem their units at net asset value at all redemption dates up to the Effective Date.
14. The investment objectives and portfolios of the Continuing Fund and the Terminating Fund are substantially similar and both Funds primarily invest in high yielding fixed income securities. The portfolio of assets of the Terminating Fund to be acquired by the Continuing Fund arising from the Merger will be consistent with the investment objectives of the Continuing Fund.
15. The net asset value of each of the Funds is determined using substantially similar valuation principles and the Funds have similar redemption policies.
16. The following steps will be carried out to effect the Merger:
(a) the value of the Terminating Fund's investment portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with its declaration of trust;
(b) any securities in the investment portfolio of the Terminating Fund which do not conform to the investment objective and strategies of the Continuing Fund will be sold in the market for cash;
(c) to facilitate the issuance of units of the Continuing Fund to class A and F unitholders of the Terminating Fund, the Filer, as trustee, will amend the declaration of trust of the Continuing Fund to authorize the Continuing Fund to issue class AA and FF units, which will have the same terms and fees as the existing classes of the Terminating Fund.
(d) the Continuing Fund will acquire the portfolio assets and other assets of the Terminating Fund in exchange for units of the Continuing Fund;
(e) the Continuing Fund will not assume the liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the Merger;
(f) the units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the Terminating Fund's portfolio assets and other assets that the Continuing Fund is acquiring, which units will be issued at the applicable net asset value per security as of the close of business on the effective date of the Merger;
(g) if necessary, the Terminating Fund will distribute a sufficient amount of its income and capital gains, if any, to ensure that the Terminating Fund will not be liable for income tax under Part I of the Income Tax Act (Canada), other than alternative minimum tax, for its current taxation year. Currently, it is expected that there will not be any distributions from the Terminating Fund;
(h) immediately thereafter, the units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund on a dollar-for-dollar basis in exchange for their units in the Terminating Fund, whereby class A and F units of the Terminating Fund will be exchanged for class AA and FF units of the Continuing Fund, respectively; and
(i) as soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
17. The assets of the Funds will be valued in accordance with the valuation policies and procedures outlined in the declaration of trust of each Fund, and, at this value, the assets of the Terminating Fund will subsequently be exchanged for units of the Continuing Fund as described above.
18. The transfer of the assets of the Terminating Fund to the Continuing Fund will not adversely impact the liquidity of the Continuing Fund.
19. The Filer believes that the Merger is in the best interests of unitholders of the Funds for the following reasons:
(a) the Merger will eliminate duplication because of the similarities in the investment portfolios of the Terminating Fund and the Continuing Fund;
(b) the Merger will eliminate duplicative administrative and regulatory costs of operating the Terminating Fund and the Continuing Fund as separate mutual funds;
(c) following the Merger, the Continuing Fund will have more assets allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions; and
(d) there will be a savings in brokerage charges through a merger rather than liquidating the portfolio of securities of the Terminating Fund.
20. The desired end result of the Merger could be achieved by each unitholder redeeming his/her units of the Terminating Fund and using the proceeds to purchase units of the Continuing Fund. Executing the trades in this manner could result in taxation of the redemption proceeds received by the unitholder as well as negative consequences to the Terminating Fund and the Continuing Fund through the incurrence of unnecessary brokerage charges relating to the sale and repurchase of portfolio securities.
21. The Merger will be completed on a tax-deferred basis.
22. The portfolio securities and other assets of the Terminating Fund will be transferred from the Terminating Fund to the Continuing Fund in accordance with the steps described above. Because the transfer of portfolio securities and assets will take place at a value determined by common valuation procedures and the issue of units will be based upon the relative net asset value of the portfolio securities and other assets received by the Continuing Fund, and notice and redemption rights have been provided to Unitholders, it is the Filer's submission that any potential conflict of interest has been adequately addressed and as a result there is no conflict of interest for the Filer in effecting the Merger.
23. The sale of the assets of the Terminating Fund to the Continuing Fund (and the corresponding purchase of such assets by the Continuing Fund) as a step in the Merger may be considered a purchase or sale of securities, knowingly caused by a registered adviser that manages the investment portfolios of both Funds, from the Terminating Fund to, or by the Continuing Fund from, an investment fund for which a "responsible person" acts as an adviser, contrary to sub-paragraph 13.5(2)(b)(iii) of NI 31-103.
24. Unless the Exemption Sought is granted, the Filer would be prohibited from knowingly causing the purchase and sale of securities of the Terminating Fund (and thereby transferring its assets to the Continuing Fund) in connection with the Merger.
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 Exemption Sought is granted provided that, prior to completion of the Merger, the board of directors of the Manager determines that the Merger is in the best interests of the Funds and approves the Merger.