Bullion Management Services Inc. (Re), 2014 CanLII 52237

August 28, 2014

Background

The principal regulator in the Principal Jurisdiction has received an application from BMS, the investment fund manager of each of the funds discussed below for a decision under the securities legislation of the Principal Jurisdiction (the Legislation) for approval of the merger (the Merger Approval) pursuant to clause 5.5(1)(b) of National Instrument 81-102 – Mutual Funds.

The funds proposed to be merged are set forth below:

Merging Fund

Continuing Fund

BMG Gold Advantage Return BullionFund

BMG Gold BullionFund

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for the application, 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, Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, the Northwest Territories, Yukon and Nunavut.

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.

The following terms shall have the following meanings:

“2009 Relief” refers to the exemptive relief dated September 14, 2009 obtained by the Continuing Fund to invest substantially all of its assets in gold bullion.

“BMS” refers to Bullion Management Services Inc.

“Circular” refers to the management information circular with respect to the Merger.

“Continuing Fund” refers to BMG Gold BullionFund.

“Declaration of Trust” refers, collectively, to the amended and restated master declaration of trust dated August 24, 2011, as amended, and the applicable regulations of the Funds.

“Funds” refers, collectively, to the Continuing Fund and the Merging Fund.

“IRC” means the independent review committee of the Funds.

“MER” means management expense ratio.

“Meeting” refers to the special meeting of untiholders of the Merging Fund.

“Merger” refers to the proposed merger of the Merging Fund with the Continuing Fund to be effective on the Merger Effective Date subject to the receipt of applicable unitholder and regulatory approvals.

“Merger Effective Date” refers to August 28, 2014, the expected date for effecting the Merger.

“Merging Fund” refers to BMG Gold Advantage Return BullionFund.

“SWP” means the systematic withdrawal plan.

“Tax Act” refers to the Income Tax Act (Ontario).

Representations

This decision is based on the following facts represented by the Filer:

The Filers

The head office of each of the Filers is located in Markham, Ontario.
The Filers are not in default of securities legislation in any jurisdiction in Canada subject to the comment noted in representation 6 below.
Each of the Funds is an open-end mutual fund trust established under the laws of the Province of Ontario by the Declaration of Trust.
BMS is the investment fund manager and trustee of the Funds and is registered as an investment fund manager in Ontario.
Each of the Funds is a reporting issuer under applicable securities legislation of each jurisdiction in Canada.
The Continuing Fund invests substantially all of its assets in gold bullion pursuant to the 2009 Relief. The Principal Regulator has indicated that the Merging Fund should also have obtained such relief at the time of its inception.

The Merger

The Filers currently propose to effect the Merger on or about the Merger Effective Date.
Pursuant to National Instrument 81-107 - Independent Review Committee for Investment Funds, the IRC reviewed the Merger, and advised BMS that in the IRC’s opinion, having reviewed the Merger as a potential conflict of interest, following the process proposed, the Merger, if implemented, achieves a fair and reasonable result for each of the Funds.
BMS has determined that the Merger does not constitute a material change for the Continuing Fund due to the small size of the Merging Fund relative to the Continuing Fund.
The Merging Fund currently invests almost all of its assets in class I units of the Continuing Fund, and the Merger reflects the merger of a two-tiered fund-on-fund structure.
Approval of unitholders of the Merging Fund is required because the Merger does not satisfy all of the criteria for circumstances under which approval of unitholders is not required as set out under the Legislation and the Declaration of Trust.
BMS will be responsible for all costs associated with the Merger.
There will be no sales charges payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Merging Fund.
BMS will waive any redemption-related costs such as redemption fees and short-term trading fees for investors who redeem their units of the Merging Fund between June 24, 2014, the date that the Merger was announced, and the Merger Effective Date.
Unitholders of the Merging Fund have the right to redeem their units of the Merging Fund at any time up to the close of business on the business day prior to the Merger Effective Date.
Subsequent to the Merger, unitholders of the Merging Fund who become unitholders of the Continuing Fund will have the right to redeem their units of the Continuing Fund for 60 days after the Merger Effective Date. BMS will waive any redemption-related costs such as redemption fees and short-term trading fees for investors who previously held units of the Merging Fund who redeem their units of the Continuing Fund during this 60 day period.
Subject to paragraph 16, units of the Continuing Fund received by unitholders of the Merging Fund as a result of the Merger will have the same sales charge option and, for units purchased under the low load option, remaining deferred sales charge schedule as their units in the Merging Fund.
All unitholders of the Continuing Fund (including former unitholders of the Merging Fund) may open a SWP under which a unitholder can pre-arrange with their dealer/adviser to automatically redeem units held by the unitholder so as to receive withdrawals of $0.07 per unit per month or any other amount as the unitholder deems appropriate. Therefore, current unitholders of the Merging Fund who receive $0.07 per unit per month as a return of their capital may choose to redeem units of the Continuing Fund after the Merger representing the same dollar amount that they currently receive each month until such time as the unitholder’s original investment has been used up. If the units of the Merging Fund were held by a unitholder as capital property for income tax purposes before the Merger, a return of capital would have reduced the adjusted cost base of the unitholder’s units, but would not have resulted in an income inclusion. However, if the return of capital before the Merger had exceeded the adjusted cost base of the unitholder’s units, the excess would have been taxed as a capital gain. After the Merger, under the SWP, a unitholder redeeming a portion of their units will realize a capital gain or a capital loss depending on whether or not the amount paid to the unitholder exceeds or is less than the adjusted cost base of the units being redeemed by the unitholder. The foregoing tax consequences will be disclosed in a press release by BMS on behalf of the Funds.
Notice of the Meeting and the Circular were mailed to unitholders of the Merging Fund and filed on SEDAR in accordance with applicable securities legislation.
The Circular describes the relevant facts concerning the Merger, including a comparison of the investment objectives and strategies, distribution policy, fees and expenses and MER of the Funds, the tax consequences of the Merger and the IRC’s recommendation of the Merger. The Circular also includes disclosure where unitholders can obtain the most recent continuous disclosure documents of the Funds.
The Circular states that, if an affirmative vote of untiholders of the Merging Fund or regulatory approval is not received, the Merging Fund will be terminated. Accordingly, unitholders had an opportunity to consider this information prior to voting on the Merger.
The Meeting of unitholders of the Merging Fund was held on August 22, 2014. All necessary unitholder approvals under the Legislation and Declaration of Trust were sought and received from unitholders of the Merging Fund at the Meeting.

Reasons for Merger Approval

The Filers require Merger Approval because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in the Legislation. Specifically, the Merger will not be a qualifying exchange or a tax deferred transaction within the meaning of the Tax Act.
The Merger will be effected on a taxable basis. The Merging Fund has sufficient loss carry-forwards to shelter any net capital gains that could arise for it on the taxable disposition of its portfolio assets on the Merger. Substantially all of the unitholders of the Merging Fund have accrued capital loss on their units or hold their units in registered plans and effecting the Merger on a taxable basis will afford taxable unitholders of the Merging Fund, realization of that loss and the ability to use it against current capital gains or even carry it back as permitted under the Tax Act. For the Continuing Fund, effecting the Merger on a taxable basis would preserve the net losses and loss carry-forwards in the Continuing Fund and will have no other tax impact on the Continuing Fund or its unitholders.
BMS believes that the Merger will be beneficial to unitholders of the Funds for the following reasons:

(a) The implementation of the Merger is expected to result in a merged Continuing Fund with potentially lower MER, increased economies of scale and cost synergies for unitholders;

(b) As of August 1, 2014, the MER of the Merging Fund and the Continuing Fund was as follows:

Merging Fund (%)

Continuing Fund (%)

Class A

8.30

3.06

Class F

7.52

2.02

Class G1

7.74

3.06

The higher MER of the Merging Fund compared to the Continuing Fund is a result of significantly higher operating expenses (excluding management fee and inclusive of HST) of the Merging Fund as compared to the operating expenses (excluding management fee and inclusive of HST) of the Continuing Fund, as set out below.

Merging Fund

Management Fee plus related HST (%)

Operating Expense plus related HST (%)

Class A

2.52

5.78

Class F

1.40

6.12

Class G1

2.35

5.39

Continuing Fund

Management Fee plus related HST (%)

Operating Expense plus related HST (%)

Class A

2.41

0.65

Class F

1.38

0.64

Class G1

2.41

0.65

The merged Continuing Fund may benefit from a possible reduction of its MER as the non-trading portion of its operating costs and its regulatory costs will be paid by a larger number of unitholders; and

(c) The operating, administrative and regulatory costs of the Merging Fund operating as a separate mutual fund will be eliminated.

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 Merger Approval is granted.

Signed____________________________

Vera Nunes

Manager, Investment Funds Branch

ONTARIO SECURITIES COMMISSION