National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Application for exemptive relief to permit a change of control of the manager of certain mutual funds; and, for an abridgement of the 60 day notice period prescribed by section 5.8(1)(a) of National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(a), 5.8(1)(a.1).
Citation: Re Hesperian Capital Management Ltd., 2014 ABASC 424
October 28, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF ALBERTA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF HESPERIAN CAPITAL MANAGEMENT LTD. (the Filer), NORREP GROUP OF FUNDS
The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for approval pursuant to subsection 5.5(1)(a.1) of National Instrument 81-102Investment Funds (NI 81-102) of a change of control of the manager of the Norrep Group of Funds (defined below) and for an abridgment of the 60-day notice period prescribed by Section 5.8(1)(a) of NI 81-102 (the Approval Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Alberta Securities Commission is the principal regulator for this application;
(b) the Filer has 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, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador and Saskatchewan;
(c) the Filer has provided notice that section 4.7(1) of MI 11-102 is intended to be relied upon in Québec with respect to Norrep II Class and Norrep Energy Class; and
(d) this decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in National Instrument 14-101 Definitions or MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.
This decision is based on the following facts represented by the Filer:
The Filer and the Norrep Group of Funds:
1. The Filer is a corporation incorporated under the laws of Alberta and has its head office in Calgary, Alberta. It also has an office in Toronto, Ontario.
2. The Filer is registered as a portfolio manager, investment fund manager and exempt market dealer in Alberta and Ontario, as a portfolio manager and exempt market dealer in British Columbia and as an investment fund manager in Newfoundland and Labrador.
3. The Filer acts as the investment fund manager and portfolio manager of a group of funds (the Norrep Group of Funds), each of which is a public mutual fund subject to NI 81-102, offering securities pursuant to prospectus documents filed under National Instrument 81-101 Mutual Fund Prospectus Disclosure. The Norrep Group of Funds are distributed to the public in all provinces of Canada, other than Québec, pursuant to simplified prospectuses, annual information forms and Fund Facts documents dated:
(a) in respect of the mutual funds that are classes of Norrep Opportunities Corp., Norrep Fund and Norrep Short Term Income Fund, June 24, 2014; and
(b) in respect of the mutual funds that are classes of Norrep Premium Portfolios Ltd., January 17, 2014.
4. The Filer is also the manager of other investment funds that are not subject to NI 81-102 and that are either flow-through limited partnerships or investment funds that are distributed pursuant to prospectus exemptions in Canada or elsewhere.
5. Each of the funds in the Norrep Group of Funds is a reporting issuer in all of the provinces of Canada, other than Québec.
6. Two of the funds in the Norrep Group of Funds, Norrep II Class and Norrep Energy Class, are reporting issuers also in Québec, given the fact that shareholders of these funds previously held units in limited partnerships that were reporting issuers in Québec. The assets of these limited partnerships were transferred to Norrep II Class and Norrep Energy Class as part of a roll-over transaction and therefore by operation of securities laws in Québec, these funds are reporting issuers in Québec.
7. None of the Norrep Group of Funds or the Filer is in default of securities regulations.
8. The issued and outstanding common shares of the Filer are today owned by employees of the Filer (the Hesperian Shareholders).
Norrep as Promoter and Sponsor of the Norrep Group of Funds
9. Norrep Inc. (Norrep) is an Alberta corporation which acts as sponsor and promoter of the Norrep Group of Funds. Mr. Gary Perron currently owns 100 percent of the issued share capital of Norrep. Mr. Perron serves as its President and Chief Executive Officer and as a director. Lois Perron, Mr. Perron's spouse, is the only other director. Norrep has no employees and carries on no active business activities except as described herein. The principal asset of Norrep is ownership of 100 percent of the common shares in the capital of Norrep Opportunities Corp., a public mutual fund corporation (of which ten classes exist as separate mutual funds).
10. Mr. Perron is a registered dealing representative, majority owner, President, Chief Executive Officer, Chief Financial Officer, Ultimate Designated Person and a director of Perron & Partners Wealth Management Corp. (PPWM), which is a registered investment dealer and member of the Investment Industry Regulatory Organization of Canada (IIROC). Prior to establishing PPWM in November 2013, Mr. Perron was a registered dealing representative and branch manager with BMO Nesbitt Burns in Calgary and held such position when the first mutual fund within the Norrep Group of Funds was created as described in the following paragraph. Mr. Perron has been in the financial services industry for over 30 years.
11. Norrep was established to act as manager, sponsor and promoter of the Norrep Fund, which was the first mutual fund in the Norrep Group of Funds and was created as a private mutual fund trust in May 1997, subsequently becoming a public mutual fund trust in April 2000. The Filer was retained in January 1999 to serve as Norrep Fund's portfolio manager. The original retail investors in the Norrep Fund were, primarily, clients of Mr. Perron, through BMO Nesbitt Burns. On December 16, 2004, Norrep launched Norrep Opportunities Corp., a corporate class mutual fund family for which the Filer was retained as portfolio manager and investment fund manager. The Norrep Fund was subsequently closed to new investors on March 1, 2005.
12. Norrep is not, and has never been required to be, registered in any capacity under applicable securities laws.
13. Norrep has delegated all operational, administrative and investment management responsibilities for the Norrep Group of Funds to the Filer pursuant to various management and portfolio management agreements (the Norrep Funds Agreements).
14. Mr. Perron is not a director or officer of the Filer. He has no involvement or authority with respect to investment decisions made by the Filer. Mr. Perron's relationship with PPWN (and prior to November 2013, with BMO Nesbitt Burns) is disclosed prominently in the simplified prospectuses and annual information forms of the Norrep Group of Funds, and his relationship with Norrep is clearly disclosed to PPWM clients (as it was to any BMO Nesbitt Burns clients investing in the Norrep Group of Funds).
15. The relevant parties have decided to restructure the Filer and Norrep into a more clearly defined structure (the Proposed Restructuring) whereby Norrep will be renamed Norrep Investment Management Group Inc. or some variation thereof (NIMGI) and Mr. Perron will hold a majority interest in NIMGI, with the Hesperian Shareholders collectively holding a minority interest. None of the Hesperian Shareholders, other than Mr. Perron, will hold more than 10 percent of the securities of any class or series of NIMGI.
16. The business of NIMGI will be to provide overall strategic direction to the entities within the structure (the Norrep Financial Group structure) and to serve as the ownership entity for any future acquisitions.
17. Following the Proposed Restructuring, NIMGI will:
(a) own 100 percent of the issued share capital of the Filer as well as certain other investment entities currently owned by the Filer;
(b) continue to own 100 percent of the issued common shares of Norrep Opportunities Corp.;
(c) own 100 percent of the common shares of Norrep Premium Portfolios Ltd.; and
(d) continue to act as sponsor and promoter of the Norrep Group of Funds.
18. It is also expected that the name of the Filer will be changed to Norrep Capital Management Ltd. (or a variation of that name) upon the restructuring to better align the branding and public recognition of the Filer with the Norrep Group of Funds.
19. The completion of the Proposed Restructuring is subject to the satisfaction of closing conditions, including regulatory approvals, and is expected to close on or about November 30, 2014 following receipt of the regulatory approvals and after the notice to security holders in the Norrep Group of Funds contemplated by this Decision has been given.
Change of Control of Manager
20. The Proposed Restructuring will result in an indirect change of control of the Filer as the indirect share ownership by Mr. Perron and by the Hesperian Shareholders will change so that Mr. Perron will hold a majority interest and the Hesperian Shareholders will hold a minority interest.
21. By operation of section 3.10(1)(c) of National Instrument 81-107Independent Review Committee for Investment Funds (NI 81-107), the current members of the independent review committee (IRC) for the Norrep Group of Funds will automatically cease to be members of the IRC. The Filer intends to reappoint the same members immediately after the closing of the Proposed Restructuring. The Filer considers that the Proposed Restructuring does not constitute a conflict of interest matter within the meaning of NI 81-107, accordingly the Filer has not formally referred the Proposed Restructuring to the IRC for their review and recommendation.
22. The Proposed Restructuring is in the best interests of the Norrep Group of Funds and their respective businesses for the following reasons:
(a) The Proposed Restructuring will remove any confusion in the marketplace as to the distinction between the Filer and Norrep with respect to the Norrep Group of Funds. As the Norrep Group of Funds continues to grow, it is considered important from a marketing standpoint that advisors and their retail clients have a clear understanding of the corporate structure underlying the "Norrep" brand.
(b) The assets contained in the Norrep Group of Funds constitute the majority of assets managed by the Filer. The Proposed Restructuring will give the Hesperian Shareholders a direct ownership interest in revenues derived from the Norrep Group of Funds, as opposed to the current contractual relationships under the Norrep Funds Agreements, which can be terminated on due notice in accordance with their terms. This is considered an important change that will allow the Filer to attract and retain key employees as the firm continues to grow.
(c) Mr. Perron's focus (since leaving his role as a dealing representative and branch manager of BMO Nesbitt Burns in Calgary in November 2013 to launch PPWM) has been the building of the PPWM business. Accordingly, Mr. Perron would prefer that Norrep and the Norrep Group of Funds become a direct part of a combined organization managed by the Filer and its employees where Mr. Perron's involvement is only as a majority interest shareholder and as a director in the parent holding company, as opposed to serving as President, Chief Executive Officer and a director of Norrep, as he now does.
23. The Proposed Restructuring is not expected to affect the management of the Norrep Group of Funds or any aspect of their operations, which will continue to be managed and administered by the Filer in the ways they are so managed and administered today. Without limitation:
(a) the Filer has confirmed that there are no current plans to:
(i) make any substantive changes to how the Filer operates or manages the Norrep Group of Funds;
(ii) amalgamate or merge the Filer with another investment fund manager or sell the management rights to the Norrep Group of Funds to another investment fund manager;
(iii) immediately following the completion of the Proposed Restructuring, change the manager of the Norrep Group of Funds to NIMGI or an affiliate of NIMGI (other than the Filer); or
(iv) within a foreseeable period of time, change the manager of the Norrep Group of Funds to NIMGI or an affiliate of NIMGI (other than the Filer);
(b) the Proposed Restructuring does not involve any change to the investment objectives or strategies of any of the Norrep Group of Funds or their expense structures;
(c) it is expected that all of the current officers and directors of the Filer will continue on in their current capacities;
(d) Mr. Perron will continue to have no involvement or authority with respect to investment decisions made by the Filer. His involvement will continue to be limited to providing strategic advice as a member of the board of NIMGI;
(e) the Proposed Restructuring will not impact the financial stability of the Filer or its ability to fulfill its regulatory obligations; and
(f) the Proposed Restructuring is expected to assist the Filer in attracting and retaining top talent.
24. The Proposed Restructuring will not create any conflicts of interest that are different than the conflicts of interest that are now disclosed to PPWM clients as a result of Mr. Perron's relationship with the Norrep Group of Funds.
25. While the overall corporate structure will change, the business processes of the Norrep Group of Funds will remain effectively the same, as will Mr. Perron's potential economic interest.
26. Mr. Perron's role within the Norrep Financial Group structure will not differ materially from what it is today in the context of the Norrep Group of Funds. Mr. Perron will continue to have no involvement or authority with respect to investment decisions made by the Filer or any other registered entity within the structure. His involvement will continue to be limited to providing strategic advice as a member of the board of NIMGI. The Proposed Restructuring will not change the management or administration of the Filer or any of the Norrep Group of Funds. Mr. Perron will not be a member of the Board of the Filer; the directors of the Filer will continue to be members of the management team of the Filer.
27. Upon receipt of this Decision and the other required regulatory approvals, the Filer will issue a press release describing the Proposed Restructuring and file the press release on SEDAR against the applicable SEDAR project numbers for the applicable Norrep Group of Funds. The Filer will also notify all registered dealers that distribute the Norrep Group of Funds in advance of closing the Proposed Restructuring of the changes in the corporate structure and will mail out the notice to securityholders of the Norrep Group of Funds contemplated by this Decision.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Approval Sought is granted, provided that:
(a) the securityholders of the Norrep Group of Funds are given at least 30 days' advance written notice of the change of control of manager of the Norrep Group of Funds; and
(b) no material changes will be made to the management, operations or portfolio management of the Norrep Group of Funds for at least 60 days following the date of such notice.