Dominion Equity Resource Fund Inc. - s. 5.5(1)(a) of NI 81-102 Mutual Funds
Headnote
Approval granted for change of manager. Management function to be transferred from board of directors of fund to registered portfolio manager.
Rules cited
National Instrument 81-102 Mutual Funds, s. 5.5(1)(a).
September 15, 2005
IN THE MATTER OF
THE SECURITIES LEGISLATION
OF ALBERTA, SASKATCHEWAN, MANITOBA, QUEBEC,
BRITISH COLUMBIA AND ONTARIO (THE "JURISDICTIONS")
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
DOMINION EQUITY RESOURCE FUND INC.
(THE "FILER" OR THE "FUND")
Background
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the "Legislation") for regulatory approval in connection with the normalization of certain management administration function of the Filer (the "Requested Approval"). Under the Mutual Reliance Review System for Exemptive Relief Applications
(a) the Alberta Securities Commission is the principal regulator for this application, and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a reporting issuer in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec.
2. The Filer is a public mutual fund corporation that has offered its securities to the public pursuant to National Instrument 81-101 (and its predecessor legislation) ("NI 81-101") since 1994.
3. The Filer currently offers its securities to the public by way of simplified prospectus in the provinces of Alberta, British Columbia and Ontario.
4. There are currently approximately 1,690 securityholders in the Fund with total net assets of approximately $67.4 million as at July 15, 2005.
5. Executive and portfolio management services are currently provided to the Filer by Brickburn Asset Management Inc. ("Brickburn", formerly Network Portfolio Management Inc. ("Network")), a registered portfolio manager under the Securities Act (Alberta) (the "Alberta Act"), the Securities Act (British Columbia) and the Securities Act (Ontario).
6. Prior to August 4, 2004, executive and portfolio management services were provided to the Filer by Crescent Capital Corp. ("Crescent").
7. On August 4, 2004 Network acquired all of the issued and outstanding shares of Crescent and on December 1, 2004, Crescent and Network amalgamated and continued as Network.
8. On June 23, 2005 the name of Network was changed to Brickburn Asset Management Inc.
9. Brickburn is bound by the Investment Management Agreement dated April 22, 2002 between Crescent and the Filer (the "Investment Management Agreement") which governs the engagement of Brickburn as the portfolio manager of the Filer and addresses matters such as Brickburn's responsibilities and the fees and expenses payable in connection with Brickburn's engagement.
10. The Investment Management Agreement is a material contract of the Filer and has been filed on SEDAR pursuant to the requirements of NI 81-101.
11. Pursuant to NI 81-102 the Board of Directors of the Filer is currently considered the manager of the Filer. As such the Board of Directors has appointed executive officers and supervises the management and administration of the Filer including valuation services, accounting and shareholder records which are managed on a daily basis by the executive officers.
12. In consideration for its portfolio management services, Brickburn is entitled to receive an annual fee of 1% of the Filer's total net assets, calculated and payable quarterly (the "Management Fee") and is entitled to reimbursement for all expenses reasonably incurred in the management of the Filer.
13. The Filer pays all expenses relating to its operation including, but not limited to, the Management Fee, administration and accounting costs, brokerage commissions, applicable taxes, audit and legal fees, the cost of preparing and submitting annual and semi-annual financial statements, directors' fees, custodial fees, shareholder relations and record keeping costs and the cost of preparing a qualifying prospectus and other disclosure documents and forwarding those documents to current shareholders required to comply with laws regulating the issue and sale of shares. All costs and expenses incurred by or on behalf of the Filer are included in its management expense ratio.
Proposed Transaction
14. In an effort to normalize the management functions of the Filer so that it more closely approximates the structures employed by the majority of Canadian investment funds it is proposed that management and administration functions be transferred from the Board of Directors of the Filer to Brickburn, thus expanding the role and responsibilities of Brickburn.
15. Upon completion of the proposed transaction, Brickburn will direct the business, operations and affairs of the Filer, subject to the general oversight of the Board of Directors of the Filer, as mandated by the Business Corporations Act (Alberta), and will continue to manage the portfolio assets of the Filer in the same manner as it had done prior to the transaction.
16. In this expanded role, Brickburn will become the "manager" of the Filer pursuant to NI 81-102. Disclosure relating to Brickburn and its directors and officers is contained in the Simplified Prospectus and Annual Information of the Filer. There have been no changes in the personnel of Brickburn since the date of those documents.
17. In consideration for the provision of these additional services, Brickburn will receive as compensation, a percentage of the net asset value based upon the size of the portfolio of the Filer, as described below.
18. The normalization will result in a number of changes to the Investment Management Agreement and the structure of the Filer.
19. It is proposed that the Investment Management Agreement be amended such that the provision of administrative, accounting and investor relation services to the Filer be added to the responsibilities of Brickburn.
20. Once the responsibility for such services is transferred from the Filer to Brickburn, the Filer will no longer be responsible for expenses incurred relating to these services, including expenses relating to stationery, office supplies, employee wages and remittances.
21. In connection with the expansion of Brickburn's responsibilities under the Investment Management Agreement and the assumption of certain overhead expenses such as rent and utilities, etc., it is proposed that the Management Fee of 1% of the Filer's total net asset value currently payable under the Investment Management Agreement be revised such that the management fee payable will be determined on the basis of the net asset value of the Filer's portfolio on a sliding scale subject to a maximum of 1.75% and a minimum of 1.55%.
22. By virtue of the Investment Management Agreement, Brickburn will bear the risk of fluctuations in the cost of overhead (such as rent, utilities and operating costs) and the provision of administrative and management services to the Filer.
23. The Filer will continue to be responsible for certain expenses incurred in connection with the business and affairs of the Filer including directors' remuneration, legal and audit fees, custodial fees and all costs and expenses in respect of compliance by the Filer with applicable securities laws.
24. The provisions in the Investment Management Agreement relating to the termination of the agreement will also be expanded such that the Investment Management Agreement can be terminated for the breach or failure of the investment manager to comply with any of the terms or conditions of the Investment Management Agreement or if the investment manager fails to renew or maintain its registration as a portfolio manager under the Alberta Act or such registration is adversely amended, suspended, cancelled or terminated.
25. The anticipated benefits of the proposed transaction to the shareholders of the Filer are:
(a) reduction of the Management Fee based upon an increased net asset value of the portfolio of the Filer;
(b) transference of the risk of increasing administrative costs and expenses and overhead to Brickburn;
(c) elimination of the allocation of costs between the Filer, Brickburn and other related companies sharing office space, staff and equipment; and
(d) reduced audit costs and audit risk as a result of the elimination of significant expenses requiring individual tracking and auditing.
Decision
The decision of the Decision Makers under the Legislation is that the Requested Approval is granted.