Marret Asset Management Inc. and Marret Multi-Strategy Income Fund
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval granted under paragraph 5.5(1)(d) of NI 81-102 to suspend redemptions to allow for the orderly wind-up and termination of a non-redeemable investment fund -- approval expires on December 31, 2016 -- manager to comply with notice requirements in NI 81-102 regarding fund's termination -- approval based on specific representations and subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(d), 19.1.
December 29, 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 JURISDICTIONS AND IN THE MATTER OF MARRET ASSET MANAGEMENT INC. (the Filer) AND MARRET MULTI-STRATEGY INCOME FUND (the Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval under paragraph 5.5(1)(d) of National Instrument 81-102 Investment Funds (NI 81-102) to permit the Fund to suspend the right of its unitholders to request that the Fund redeem their units (the Suspension of Redemptions) prior to the termination of the Fund (the Requested Approval).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for the application; and
(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, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, and Yukon (together with Ontario, the Applicable Jurisdictions).
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under the laws of the Province of Ontario with its head office located in Toronto, Ontario. The Filer is registered under the securities legislation of all the provinces of Canada as an investment fund manager and portfolio manager.
2. The Filer is not in default of securities legislation in any Applicable Jurisdiction.
3. The Filer is the manager of the Fund.
The Fund
4. The Fund is a trust formed under the laws of the Province of Ontario and governed by a declaration of trust dated as of February 25, 2011 (as amended from time to time, the Declaration of Trust).
5. The Fund is a "non-redeemable investment fund" (as such term is defined under the Securities Act (Ontario)). The Fund completed an initial public offering of Class A units and Class F units (collectively, units) in the Applicable Jurisdictions pursuant to a prospectus dated February 25, 2011 and therefore is a reporting issuer in each Applicable Jurisdiction and an investment fund to which NI 81-102 applies.
6. The Class A units of the Fund currently are listed for trading on the Toronto Stock Exchange (the TSX). The Class F units of the Fund are not so listed, but are convertible into Class A units at the option of the holder.
7. The Fund's investment objectives are to:
(a) generate equity-like returns with substantially less volatility than the S&P/TSX Composite Index; and
(b) provide unitholders of the Fund with attractive, risk adjusted, quarterly, tax advantaged cash distributions, initially targeted to be 5% per annum on the original issue price of $12,00 per unit,
by obtaining exposure to between four and five separate, actively managed, portfolios (collectively, the Portfolio) that invest primarily in investment and non-investment grade corporate debt and U.S. and Canadian yield producing equities.
8. To pursue its investment objectives, the Fund is a party to a forward agreement dated March 18, 2011 (the Forward Agreement) which provides the Fund with exposure to the returns of the Portfolio held by Marret MSIF Trust (the Reference Trust).
9. The Fund is not in default of securities legislation in any Applicable Jurisdiction.
10. According to the Declaration of Trust, the regularly scheduled termination date of the Fund is December 31, 2016.
Termination of the Fund
11. Pursuant to the Declaration of Trust, unitholders of the Fund are entitled to request that the Fund redeem their units at their net asset value on the last business day of each year (each an Annual Redemption Date). An Annual Redemption Date will occur on December 31, 2014.
12. The Fund has received requests to redeem approximately 44% of its outstanding units. As of December 15, 2014, the net asset value of the Fund was approximately $32,905,000. If all redemption requests are processed on December 31, 2014, the net asset value of the Fund is expect to diminish to approximately $17,938,000.
13. The Portfolio currently includes two investments (the Illiquid Positions) that constitute illiquid assets with an aggregate value of approximately $3,005,000, equivalent to approximately 9.13% of the net asset value of the Fund as at December 15, 2014. If all redemption requests are processed on December 31, 2014, it is expected that assets in the Portfolio other than the Illiquid Positions will be liquidated, with the result that the Illiquid Positions will become equivalent to approximately 16.75% of the net asset value of the Fund.
14. Pursuant to the Declaration of Trust, the Filer is of the opinion that it would be in the best interests of unitholders to terminate the Fund due to:
(a) the diminished size of the Fund and related loss of economies of scale that would result if all redemption requests are processed;
(b) the risk of reduced diversification resulting from investing a smaller amount of assets across a smaller portfolio of high yield securities;
(c) the increased proportion of the Fund's investment exposure that would be represented by the Illiquid Positions if all redemption requests are processed; and
(d) the disproportionate amount of risk that would be borne by unitholders of the Fund who did not submit requests to redeem their units due to the increased concentration of Illiquid Positions in the Portfolio.
15. Accordingly, the Filer proposes to:
(a) suspend the right of unitholders to redeem their units on December 31, 2014;
(b) settle the Forward Agreement and thereafter become a unitholder of the Reference Trust;
(c) redeem units of the Reference Trust equal to approximately the net asset value of the Trust, less the value of the Illiquid Positions, and distribute the proceeds therefrom to the unitholders of the Fund, which distribution will represent approximately 90% of the current net asset value per unit of the Fund; and
(d) in due course, redeem its remaining units of the Reference Trust once the Reference Trust has liquidated the Illiquid Positions and distribute the proceeds therefrom to the unitholders of the Fund,
(collectively, the Termination Steps).
The Filer expects to complete the steps described in paragraphs (a) through (c) above by January 31, 2015. The Filer will seek to complete the actions described in paragraph (d) above by December 31, 2016, at which time the Fund will terminate. The Filer has issued a press release and filed a material change report in accordance with subsection 75(2) of the Securities Act (Ontario) announcing the Suspension of Redemptions and subsequent wind-up and termination of the Fund.
16. The Filer will seek to maintain the listing of its Class A units on the TSX until the date the Fund terminates.
17. The Filer believes that the Termination Steps will be in the best interests of unitholders of the Fund because:
(a) the Termination Steps will enable the Fund to distribute the maximum amount of assets pro rata to all its unitholders as quickly as possible in an orderly manner; and
(b) the Termination Steps will ensure that all existing unitholders are treated in a similar manner in connection with the termination of the Fund, rather than providing unitholders who have requested a redemption of their units greater liquidity at the expense of unitholders who have not submitted such a request.
18. As a result of the amendments to NI 81-102, which came into effect on September 22, 2014, the Fund may only suspend redemptions of its securities in the limited circumstances described in section 10.6 of NI 81-102, neither of which apply in the present case.
19. As a result, pursuant to paragraph 5.5(1)(d) of NI 81-102, the Fund requires the approval of the regulator before it can implement the Suspension of Redemptions.
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 Requested Approval is granted provided that:
(a) the Suspension of Redemptions may continue until, but not beyond, December 31, 2016;
(b) the proceeds of the sale of all positions in the Portfolio, other than the Illiquid Positions, will be distributed to unitholders of the Fund by January 31, 2015;
(c) during the Suspension of Redemptions, the Fund will continue to meet its continuous disclosure obligations under National Instrument 81-106 Investment Fund Continuous Disclosure;
(d) the Manager will stop earning and collecting management fees from the Fund while the Suspension of Redemptions remains in effect;
(e) the Fund will not distribute any further securities prior to its termination; and
(f) the Filer will comply with section 5.8.1 of NI 81-102 with respect to providing notice to unitholders of the Fund regarding the termination of the Fund.