Compass Private Wealth Inc. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- One-time transfer of portfolio securities between two pooled funds, both advised by the same portfolio adviser, to implement a merger between the funds -- Funds have substantially similar investment objectives and strategies and valuation policies -- Costs of the merger borne by manager -- Sale of securities exempt from the self-dealing prohibition in paragraph s. 13.5(2)(b)(iii), National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss.13.5(2)(b)(iii) and 15.1.
March 7, 2025
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
COMPASS PRIVATE WEALTH INC.
(the "Filer")
AND
COMPASS INCOME FUND
(the "Terminating Fund")
AND
COMPASS ALTERNATIVE ASSET FUND
(the "Continuing Fund")
DECISION
Background
The principal regulator in the Jurisdiction has received a passport application from the Filer, who will be acting as portfolio manager of the Terminating Fund and the Continuing Fund (collectively, the "Funds") on the Effective Date (as defined below) for a decision under the securities legislation of the Jurisdiction (the "Legislation") for an exemption from the prohibition contained in subparagraph 13.5(2)(b)(iii) of National Instrument 31-103Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103") which prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of an investment fund for which a responsible person acts as an adviser in order to effect the proposed merger (the "Merger") of the Terminating Fund into the Continuing Fund (the "Exemption 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; 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 the province of Quebec (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101Definitions 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 Filer.
The Filer
1. The Filer is a corporation formed under the laws of the Province of Ontario having its head office in Guelph, Ontario.
2. The Filer is a registered as portfolio manager in British Columbia, Ontario and Québec.
3. The Filer is not in default of securities legislation of any jurisdiction of Canada.
The Funds
4. Majestic Asset Management LLC ("Majestic") acts as investment fund manager for the Funds. TSX Trust Company acts as trustee for the Funds.
5. Northfront Financial Inc. ("Northfront") currently acts as portfolio manager for the Funds. Effective March 31st, 2025, Northfront will cease to act as portfolio manager for the Funds and the Filer will be appointed as portfolio manager for the Funds.
6. Each Fund is an open-ended trust established under the laws of the Province of Quebec by an amended and restated trust agreement dated May 1st, 2014 (the "Trust Agreement").
7. The Funds are not reporting issuers in any jurisdiction and are not subject to National Instrument 81-102Investment Funds.
8. Each Fund offers its units in the Jurisdictions pursuant to available prospectus exemptions in accordance with National Instrument 45-106Prospectus Exemptions.
9. The Funds are not in default of securities legislation in any jurisdiction of Canada.
10. Each Fund is a "mutual fund trust" as defined in the Income Tax Act (Canada) (the "Tax Act").
11. The objective of the Terminating Fund is to provide investors with consistent income from public and private securities.
12. To achieve its objective, the Terminating Fund invests in a combination of private and public fixed income investments which includes infrastructure, real estate and private debt to give investors positive returns that are less correlated to traditional public market investments.
13. The objective of the Continuing Fund is to give investors positive returns that are less correlated to traditional public market investments.
14. To achieve its objective, the Continuing Fund allocates its capital to assets across alternative assets, predominantly alternative funds, private equity, private corporate fixed income securities and structured products.
The Merger
15. The Filer and Majestic wish to merge the Terminating Fund into the Continuing Fund on or about March 31st, 2025 (the "Effective Date"), subject to receipt of all regulatory approvals. The Filer and Majestic have decided to effect the Merger because of the similarities in the Funds' investment portfolios.
16. Pursuant to the Trust Agreement, no special meeting of unitholders is required to be called in order to approve the Merger.
17. Unitholders of the Funds were provided with a written notice of the Merger at least 60 days prior to the Effective Date. The Filer has determined that the Merger is not material to the Continuing Fund.
18. There will be no increase in management fees and advisory fees paid by unitholders of the Terminating Fund and the Continuing Fund as a result of the Merger.
19. No redemption fees, other fees or commissions will be payable by the Funds' unitholders in connection with the Merger. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the Terminating Fund's investment portfolio.
20. The costs of the Merger will be borne by Majestic.
21. The Terminating Fund and Continuing Fund will take all necessary steps, including the making of a joint election, so that the Merger will occur on a tax-deferred basis under section 132.3 of the Income Tax Act (Canada). The Merger will not give rise to material adverse tax consequences for the Terminating Fund and its unitholders.
22. Unitholders of the Terminating Fund will be able to redeem their units at the Terminating Fund's net asset value at all redemption dates up to the Effective Date, with the last redemption date before the Effective Date being February 28th, 2025.
23. The investment objectives and portfolios of the Continuing Fund and the Terminating Fund are similar and both Funds primarily invest in income-generating securities in the private and public markets and seek to generate returns that are less correlated with public markets. The portfolio of assets of the Terminating Fund to be acquired by the Continuing Fund arising from the Merger will be consistent with the investment objectives of the Continuing Fund and comply with the Continuing Fund's investment restrictions.
24. The net asset value of each of the Funds is determined using the same valuation principles.
25. The following steps will be carried out to effect the Merger:
(i) the value of the Terminating Fund's investment portfolio and other assets will be determined at the close of business on the Effective Date in accordance with the Trust Agreement;
(ii) any securities in the investment portfolio of the Terminating Fund which do not conform to the investment objective, strategies and restrictions of the Continuing Fund will be sold for cash, if needed;
(iii) the Continuing Fund will acquire the portfolio assets and other assets of the Terminating Fund in exchange for units of the Continuing Fund;
(iv) the Continuing Fund will not assume the liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the Merger;
(v) the units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the Terminating Fund's portfolio assets and other assets that the Continuing Fund is acquiring, which units will be issued at the applicable net asset value per unit as of the close of business on the Effective Date;
(vi) if necessary, the Terminating Fund will distribute a sufficient amount of its income and capital gains, if any, to ensure that the Terminating Fund will not be liable for income tax under Part I of the Tax Act, other than alternative minimum tax, for its current taxation year;
(vii) immediately thereafter, the units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund on a dollar-for-dollar basis in exchange for their respective equivalent series of units in the Terminating Fund; and
(viii) as soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
26. The assets of the Funds will be valued in accordance with the valuation policies and procedures outlined in the Trust Agreement and, at this value, the assets of the Terminating Fund will subsequently be exchanged for units of the Continuing Fund as described above.
27. The Filer and Majestic have determined it is in the best interest of the Funds to proceed with the Merger.
28. All unitholders of the Funds are clients under discretionary mandate with the Filer. The Filer has determined that it is in the best interest of, and suitable for, unitholders of the Terminating Fund to hold units of the Continuing Fund.
29. The transfer of the assets of the Terminating Fund to the Continuing Fund will not adversely impact the liquidity of the Continuing Fund.
30. The board of directors of Majestic has determined that the Merger is in the best interests of the Funds and has approved the Merger, subject to obtaining the Exemption Sought.
31. The Filer and Majestic believe that the Merger is in the best interest of unitholders of the Funds for the following reasons:
(i) the Filer believes it is suitable for unitholders of the Terminating Fund to hold units of the Continuing Fund and be exposed to the Continuing Fund's objective and strategy;
(ii) the Merger has the potential to lower costs for unitholders as the operating costs of the Continuing Fund will be spread over a greater pool of assets after the Merger;
(iii) the Merger will increase the size of the Continuing Fund, thus generating cost efficiencies for unitholders, particularly in respect of costs associated with the private equity component of the portfolio;
(iv) the combined larger portfolio will increase the potential opportunities to acquire private fixed-income investments within the alternative portion of the portfolio;
(v) the Merger will allow the Filer to streamline and simplify its strategies focused on fixed-income instruments that are less correlated to traditional public market investments; and
(vi) a greater pool of assets for the Continuing Fund will provide its unitholders with increased diversification.
32. The desired end result of the Merger could be achieved by each unitholder redeeming his or her units of the Terminating Fund and using the proceeds to purchase units of the Continuing Fund. Executing the trades in this manner would result in negative consequences to the Terminating Fund and the Continuing Fund through the incurrence of unnecessary brokerage charges relating to the sale and repurchase of portfolio securities.
33. The portfolio securities and other assets of the Terminating Fund will be transferred from the Terminating Fund to the Continuing Fund in accordance with the steps described above. Because the transfer of portfolio securities and assets will take place at a value determined by common valuation procedures and the issue of units will be based upon the relative net asset value of the portfolio securities and other assets received by the Continuing Fund and notice and redemption rights have been provided to unitholders, any potential conflict of interest has been adequately addressed and as a result, there is no conflict of interest for the Filer in effecting the Merger.
34. The sale of the assets of the Terminating Fund to the Continuing Fund, and the corresponding purchase of such assets by the Continuing Fund, as a step in the Merger may be considered a purchase or sale of securities, knowingly caused by a registered adviser that manages the investment portfolios of both Funds, from the Terminating Fund to, or by the Continuing Fund from, an investment fund for which a "responsible person" acts as an adviser, contrary to subparagraph 13.5(2)(b)(iii) of NI 31-103.
35. Unless the Exemption Sought is granted, the Filer would be prohibited from knowingly causing the units of the Terminating Fund to be issued to the Continuing Fund in connection with the Merger.
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 Exemption Sought is granted.
"Darren McKall"
Manager, Investment Management Division
Ontario Securities Commission
Application File #: 2025/0022