Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval granted for change of manager of mutual funds for the purpose of 5.5(1)(a) – change of manager is not detrimental to investors or the public.
Applicable Legislative Provisions National Instrument 81-102 Mutual Funds, sections 5.5(1)(a), 5.3, 5.7 and 19.1.
November 28, 2013
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO AND
IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF ARROW CAPITAL MANAGEMENT INC. (Arrow Capital)
AND
IN THE MATTER OF BLUMONT CAPITAL CORPORATION (the Manager, together with Arrow Capital, the Filers)
AND
IN THE MATTER OF the Conventional Mutual Funds and Commodity Pools managed by the Manager listed at Exhibit “A” (collectively, the Funds)
DECISION
Background
The Principal Regulator has received an application from the Filers for a decision under the securities legislation of Ontario (the Legislation) approving the change of manager of the Funds from the Manager to the Amalgamated Company as further described below in accordance with section 5.5(1)(a) of National Instrument 81-102 - Mutual Funds (NI 81-102) (the Approval 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 (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, and Yukon (together with Ontario, the Jurisdictions).
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. The Manager is a privately-owned corporation existing under the Business Corporations Act (Ontario) (the OBCA). The sole shareholder of the Manager is BluMont Capital Inc. (the Seller), a wholly-owned subsidiary of Integrated Asset Management Corp. (the Parent), a public company based in Toronto and listed on the Toronto Stock Exchange.
2. The Manager is registered in the following categories in certain of the Jurisdictions, as indicated below:
(a) Ontario: Investment Fund Manager (sometimes referred to as IFM), Portfolio Manager, Mutual Fund Dealer and Exempt Market Dealer;
(b) Alberta: Exempt Market Dealer;
(c) British Columbia: Exempt Market Dealer;
(d) Quebec: Investment Fund Manager; and
(e) Newfoundland and Labrador: Investment Fund Manager.
3. The Manager’s head office is located at 70 University Avenue – Suite 1200, Toronto, Ontario M5J 2M4.
4. The Manager is not in default of securities legislation in any Jurisdiction.
5. The Manager is the IFM of the Funds.
The Funds
6. Securities of the Conventional Mutual Funds are distributed in each of the Jurisdictions under a simplified prospectus and annual information form prepared in accordance with the requirements of National Instrument 81-101- Mutual Fund Prospectus Disclosure.
7. Securities of the Commodity Pools are distributed in each of the Jurisdictions under a long form prospectus prepared in accordance with the requirements of National Instrument 41-101 - General Prospectus Requirements.
8. The Funds are reporting issuers under the applicable securities legislation of the Jurisdictions and governed by NI 81-102, or in the case of the Commodity Pools, NI 81-102 and National Instrument 81-104 - Commodity Pools.
9. The Funds are not in default of applicable securities legislation in any Jurisdiction.
Arrow Capital
10. Arrow Capital was founded in 1999 and is a corporation existing under the OBCA.
11. Arrow Capital is registered in certain of the Jurisdictions, as indicated below:
(a) Ontario: Investment Fund Manager, Portfolio Manager, Exempt Market Dealer and Commodity Trading Manager;
(b) Alberta: Exempt Market Dealer;
(c) British Columbia: Exempt Market Dealer;
(d) Quebec: Investment Fund Manager and Exempt Market Dealer; and
(e) Newfoundland and Labrador: Investment Fund Manager.
12. Arrow Capital’s head office is located at 36 Toronto Street – Suite 750, Toronto, Ontario M5C 2C5.
13. Arrow Capital is a privately-owned corporation existing under the OBCA. At the time of completion of the Proposed Acquisition (as described below), the principals of Arrow Capital and other employees of Arrow Capital will collectively own, directly or indirectly, together with their spouses, approximately 97.6% of all the issued and outstanding shares of Arrow Capital. The remaining 2.4% of the issued and outstanding shares of Arrow Capital are held indirectly by a passive investor that is not involved in the management or operations of Arrow Capital.
14. Arrow Capital was founded in 1999 by James McGovern. Arrow Capital believes its expertise in active portfolio management and portfolio manager selection is evident in its strong, diverse platform, which provides its clients with access to a global selection of investment funds, which currently includes alternative investment products and public closed-end investment funds. Together with its foreign affiliates and with its extensive network of global resources, Arrow Capital manages over $1 billion of assets. Prior to founding Arrow Capital, Mr. McGovern was the Chief Executive Officer of BPI Capital Management Corporation (BPI), a company that managed public mutual funds for many years before being purchased by CI Financial in 1999. At the time of the acquisition, BPI had assets under management of approximately $6 billion. Many of the directors and officers of Arrow Capital, along with other employees at Arrow Capital, were also with BPI for many years.
15. Arrow Capital and the Manager are not related parties. Except pursuant to the Purchase Agreement (defined below), there are currently no relationships between Arrow Capital and the Manager or its affiliates.
16. Arrow Capital is not in default of securities legislation in any Jurisdiction.
The Proposed Acquisition and the Proposed Amalgamation
17. On September 18, 2013, Arrow Capital, the Manager, the Seller and the Parent entered into a definitive share purchase agreement (the Purchase Agreement) pursuant to which Arrow Capital will acquire all of the issued and outstanding shares of the Manager (the Proposed Acquisition).
18. Completion of the Proposed Acquisition, which is subject to obtaining all necessary securityholder and regulatory approvals is anticipated to occur on or about December 2, 2013, will result in a change of control of the Manager (the Change of Control).
19. Following completion of the Proposed Acquisition, Arrow Capital will seek to amalgamate the Manager with Arrow Capital (the Proposed Amalgamation), with the amalgamated company continuing under the name “Arrow Capital Management Inc.” (the Amalgamated Company). It is anticipated that the Proposed Amalgamation will take place within six months following the completion of the Proposed Acquisition and it is proposed that the Amalgamated Company will become the investment fund manager of the Funds (the Proposed Acquisition together with Proposed Amalgamation, collectively the Change of Manager).
20. In respect of the impact of the Proposed Acquisition and Change of Control on the management and administration of the Funds:
(a) the Change of Control is not expected to have any material impact on the business, operations or affairs of the Funds or the securityholders of the Funds;
(b) except that most of the directors and senior officers of the Manager will be replaced by directors and senior officers of Arrow Capital, it is not otherwise expected that there will be any change in the management of the Funds, including the portfolio managers or sub-advisors, the investment objectives and strategies of the Funds, or the expenses that are charged to the Funds as a result of the Change of Control;
(c) Arrow Capital has confirmed that there is no current intention to make any substantive changes as to how the Manager operates or manages the Funds;
(d) it is not expected that there will be any change in the custodian, auditor or trustee of any of the Funds;
(e) until completion of the Proposed Amalgamation, Arrow Capital intends to maintain the Funds as a separately managed fund family with the Manager as their IFM;
(f) there is no current intention to change the names of the Funds as a result of the Change of Control;
(g) the Change of Control will not adversely affect the Manager’s financial position or its ability to fulfill its regulatory obligations; and
(h) upon the Change of Control, the current members of the Manager’s Independent Review Committee (IRC) will cease to be IRC members by operation of section 3.10(1)(c) of National Instrument 81-107 - Independent Review Committee for Investment Funds (NI 81-107). Immediately following the Change of Control, the IRC will be reconstituted such that the current members will cease to act as members and new members will be appointed effective on that date. Such new members will be the same individuals that currently comprise the IRC of East Coast Investment Grade Income Fund and Raven Rock Strategic Income Fund, Canadian public non-redeemable investment funds managed by Arrow Capital.
21. Prior to completing the Proposed Acquisition, the Manager sought securityholder approval of the Change of Manager at special meetings of securityholders of the Funds (the Special Meetings). A notice of meeting dated October 28, 2013 and an information circular (the Information Circular) were sent to securityholders of the Funds in connection with the Special Meetings containing the information, and within the timing, contemplated by section 5.4 of NI 81-102. At Special Meetings held on November 27, 2013, securityholders of the Funds approved the Change of Manager.
22. In respect of the impact of the Proposed Amalgamation on the management and administration of the Funds:
(a) the Proposed Amalgamation is not expected to have any material impact on the business, operations or affairs of the Funds or the securityholders of the Funds;
(b) it is expected that the directors and senior officers of the Amalgamated Company after the Proposed Amalgamation will be the same as the current directors and senior officers of Arrow Capital. It is not expected that there will otherwise be any change in the management of the Funds, including the portfolio managers or sub-advisors, the investment objectives and strategies of the Funds, or the expenses that are charged to the Funds as a result of the Proposed Amalgamation. Furthermore, it is expected that Veronika Hirsch, the current Chief Investment Officer of the Manager, will remain an employee, portfolio manager and registered advising and dealing representative of the Amalgamated Company;
(c) it is not expected that there will be any change in the custodian, auditor or trustee of any of the Funds as a result of the Proposed Amalgamation;
(d) Arrow Capital intends to maintain the Funds as a separately managed fund family with the Amalgamated Company as their IFM;
(e) there is no current intention to change the names of the Funds as a result of the Proposed Amalgamation;
(f) the Proposed Amalgamation will not adversely affect the Amalgamated Company’s financial position or its ability to fulfill its regulatory obligations; and
(g) upon the Proposed Amalgamation, the members of the Manager’s IRC will cease to be IRC members by operation of section 3.10(1)(b) of NI 81-107. Immediately following the Proposed Amalgamation, it is expected that the IRC will be reconstituted with the same members.
23. Arrow Capital believes the Change of Manager will benefit the Funds and securityholders of the Funds because Arrow Capital is an investment manager with significant resources to grow the Funds, which growth may lead to economies of scale that would benefit securityholders of the Funds. It is expected that the Proposed Amalgamation will reduce the operational, regulatory and administrative costs of maintaining two separately registered companies which may also lead to economies of scale that would benefit securityholders of the Funds. The combined platforms of the Manager and Arrow Capital will provide investors with greater investment choices and an improved level of service.
The New Management Team
24. Arrow Capital has and, at the time of the Proposed Amalgamation, the Amalgamated Company will have, all the necessary registrations under applicable securities legislation in the Jurisdictions, including National Instrument 31-103 - Registration Requirements and Exemptions and Ongoing Registrant Obligations (NI 31-103), and the integrity and experience contemplated by section 5.7(1)(a)(v) of NI 81-102, to manage the Conventional Mutual Funds and Commodity Pools.
25. At the time of completion of the Proposed Acquisition, the permitted individuals (as defined in National Instrument 33-109 - Registration Information) of Arrow Capital will be James McGovern, Mark Purdy, Frederick Dalley, Robert Maxwell and Robert Parsons (the Permitted Individuals). Upon completion of the Proposed Acquisition, it is expected that James McGovern and Robert Maxwell will replace certain directors and senior officers of the Manager. Upon completion of the Proposed Amalgamation, the directors and senior officers of the Amalgamated Company will be the current directors and senior officers of Arrow Capital, including the Permitted Individuals.
26. The experience of the Permitted Individuals relevant to managing the Funds was described in the Information Circular.
27. Regarding the continuity of operations and administration personnel, it is Arrow Capital’s intention to retain all relevant operational employees of the Manager. This would include the operations and back-office personnel that not only have experience managing conventional mutual funds, but have the institutional knowledge and experience with the particular Conventional Mutual Funds and Commodity Pools managed by the Manager.
Notices and Amendments
28. Notice of the Change of Control with respect to the Proposed Acquisition was provided by mail to securityholders of the Funds on September 23, 2013, in accordance with section 5.8(1) of NI 81-102.
29. On September 26, 2013, an amendment to the simplified prospectus and annual information form of the Mutual Funds and an amendment to the prospectus of the Commodity Pools describing the Change of Control were filed with each of the Jurisdictions, and the Commission issued a receipt in respect of the same on October 9, 2013.
30. On November 22, 2013, the Registration Branch of the Ontario Securities Commission issued a letter of non-objection in respect of the notice of the Proposed Acquisition previously submitted to the Ontario Securities Commission by Arrow Capital pursuant to section 11.9 of National Instrument 31-103 - Registration Requirements and Exemptions and Ongoing Registrant Obligations.
31. Within 10 days of the completion of the Change of Control, it is the intention of the Manager and Arrow Capital to file amendments to the applicable offering documents of the Funds to disclose: (i) the closing of the Proposed Acquisition; (ii) certain operational changes in connection with the closing of the Proposed Acquisition, principally the changes to the directors and officers of the Manager and the reconstitution of the IRC; and (iii) the Proposed Amalgamation.
32. The Funds will not bear any of the costs and expenses associated with the Change of Manager. Such costs will be borne by the Manager. These costs may include legal and accounting fees, proxy solicitation, printing and mailing costs and regulatory fees.
33. The Manager has determined that the Change of Manager is not a conflict of interest matter pursuant to section 5.1 of NI 81-107 and that, as a result, the Change of Manager will not require the approval or recommendation of the Funds’ IRC. The Manager, has, however, provided information relating to the Change of Manager to the IRC.
Decision
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 Approval Sought is granted.
signed <Raymond Chan>
Raymond Chan
Manager, Investment Funds Branch
ONTARIO SECURITIES COMMISSION
Exhibit “A”
The Conventional Mutual Funds:
Exemplar Leaders Fund
Exemplar Global Infrastructure Fund
Exemplar Timber Fund
Exemplar Yield Fund
Exemplar Global Agriculture Fund (collectively, the Conventional Mutual Funds)
The Commodity Pools:
Exemplar Canadian Focus Portfolio
Exemplar Diversified Portfolio (collectively, the Commodity Pools)