Exemption Orders (Discretionary)
GDF GLOBAL DIVERSIFIED FUND INC.
2001 BCSECCOM 747
Headnote
Mutual Reliance Review System for Exemptive Relief Applications - Relief granted from certain of the self dealing requirements of the Act to permit a mutual fund structure where investors may purchase mutual fund shares by tendering securities of selected blue chip Canadian and US issuers including securities issued by the Canadian chartered banks which are substantial securityholders of the distributors of the mutual fund shares.
Applicable British Columbia Provisions
Securities Act, R.S.B.C. 1996, c. 418, ss. 121(2)(a), 126(a), 126(c) and 130
IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, ONTARIO, NOVA SCOTIA AND NEWFOUNDLAND
AND
IN THE MATTER OF THE MUTUAL RELIANCE REVIEW SYSTEM FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF GDF GLOBAL DIVERSIFIED FUND INC. AND GDF FUND MANAGEMENT INC.
MRRS DECISION DOCUMENT
[para 1]
WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of the provinces of British Columbia, Alberta, Saskatchewan, Ontario, Nova Scotia and Newfoundland (the “Jurisdictions”) has received an application from GDF Global Diversified Fund Inc. (“GDF Company”) and GDF Fund Management Inc. (“GDF Management” and together with GDF Company, the “Applicants”) for a decision under the securities legislation of the Jurisdictions (the “Legislation”) that:
(1) the prohibition (the “Mutual Fund Investment Prohibition”) contained in the Legislation against a mutual fund knowingly making or holding an investment to or in any person or company who is a “substantial security holder” of the mutual fund, its mutual fund manager or its mutual fund distributor; and
(2) the requirement (the “Related Person Reporting Requirement”) contained in the Legislation for a mutual fund manager to file a report in the required form upon a purchase or sale of a security (a) between the mutual fund and any “related person” or (b) effected by the mutual fund through any “related person" where such person receives a fee from the mutual fund or the other person to the transaction or from both,
shall not apply to certain acquisitions by GDF Company of securities of the Bank of Montreal and other Canadian chartered banks (together with Bank of Montreal, the “Chartered Banks”) or sale of such securities by GDF Company effected through the mutual fund distributors that are subsidiaries of the Chartered Banks;
[para 2]
AND WHEREAS under the Mutual Reliance Review System for Exemptive Relief Applications (the "System"), the British Columbia Securities Commission is the principal regulator for this application;
[para 3]
AND WHEREAS the Applicants have represented to the Decision Makers that:
1. GDF Company is a mutual fund corporation incorporated under the laws of British Columbia with its head office in Vancouver, British Columbia;
2. the capital structure of GDF Company consists of common shares (“Common Shares”), preferred shares (“Preferred Shares”) issuable in series and mutual find shares (“Mutual Fund Shares”);
3. GDF Fund Holdings Inc. (“GDF Holdings") is the sole holder of the Common Shares; each Common Share entitles the holder to one vote;
4. BMO Nesbitt Burns Inc. ("BMO Nesbitt Burns") owns 50% of the outstanding shares of GDF Holdings, is a promoter of GDF Company, is an authorized distributor of the Mutual Fund Shares and provides certain administrative services to GDF Company;
5. the Mutual Fund Shares are referable to a specific portfolio of assets to be held by GDF Company on behalf of the holders of Mutual Fund Shares; the Mutual Fund Shares and the portfolio of assets to which the Mutual Fund Shares are referable are described herein as the “Fund”; the Fund is a “mutual fund” within the meaning under the Legislation and National Instrument 81-102 (“81-102");
6. each Mutual Fund Share will represent the holder's proportionate interest in a diversified portfolio of Canadian, U.S. and international equity securities to be held by GDF Company on behalf of the holders of Mutual Fund Shares and will entitle the holder to receive on demand an amount equal to the holder's proportionate interest in the net assets held by GDF Company on behalf of the holders of Mutual Fund Shares;
7. the Mutual Fund Shares will be offered to the public on a continuous basis under a simplified prospectus and annual information form to be filed in each of the Jurisdictions and the other provinces and territories of Canada; upon obtaining a receipt for the simplified prospectus and annual information form, GDF Company will become a reporting issuer or the equivalent in each Jurisdiction and the other provinces and territories of Canada;
8. the fundamental investment objective of the Fund is to maximize return in a manner consistent with the preservation of capital through prudent diversification by investing primarily in Canadian, U.S. and international equity and equity-related securities over a broad range of industry sectors; certain aspects of the structure of GDF Company and the Fund have been designed specifically to facilitate the purchase of Mutual Fund Shares through an exchange of Subscription Shares (defined below) on a tax-deferred basis;
9. the authorized distributors of the Mutual Fund Shares will include BMO Nesbitt Burns and other registered dealers that are subsidiaries of the Chartered Banks (the "Bank-Owned Distributors");
10. payment of the purchase price for the Mutual Fund Shares may be made in cash or through a tax-deferred exchange (an “Exchange”) of shares (“Subscription Shares”) of certain selected Canadian and U.S. public companies ("Selected Companies") identified by the Board of Directors of GDF Company from time to time; the Subscription Shares and Selected Companies will be identified in the simplified prospectus of the Fund or otherwise communicated to authorized distributors of the Mutual Fund Shares; it is intended that the initial list of Subscription Shares and Selected Companies will include securities of the Chartered Banks, including the Bank of Montreal;
11. purchasers who pay the purchase price for Mutual Fund Shares through an Exchange rather than in cash will receive a number of Mutual Fund Shares determined by reference to the market price of the Subscription Shares on the date of the Exchange;
12. GDF Capital has agreed to subscribe for all of the Preferred Shares to be issued by GDF Company; the issued and outstanding securities of GDF Capital are owned indirectly by BMO Nesbitt Burns as to 47% and PSK Financial Services Inc. as to 26 2/3% as well as directly by Robert Kopstein as to 33 1/3%;
13. a separate series of Preferred Shares will be issued for each type of Subscription Share acquired by GDF Company in exchange for its Mutual Fund Shares; the Preferred Shares will be retractable at the option of the holder for consideration either in the form of the underlying Subscription Shares (or property substituted therefor) or the proceeds of disposition of the Subscription Shares; the Preferred Shares will also entitle GDF Capital to receive a dividend equal to dividends received on the Subscription Shares; the retraction feature supports the value of the Preferred Shares and will enable GDF Capital, through a financing transaction external to the Fund, to raise the necessary funds to pay for the Preferred Shares;
14. the cash purchase price for the Preferred Shares will be equivalent to the trading value of the underlying Subscription Shares at the time of issuance of the Preferred Shares; the proceeds from the cash subscriptions for Mutual Fund Shares and the sale of the Preferred Shares to GDF Capital will be used to acquire the Fund's investment portfolio;
15. the Preferred Shares will be issued over a period of approximately two weeks after the date of purchase of the Mutual Fund Shares; until the Preferred Shares have been issued and the cash invested in the diversified portfolio, the portfolio of the Fund will include Subscription Shares exchanged for Mutual Fund Shares; thereafter, the portfolio of the Fund will consist of a diversified portfolio of equity securities acquired from the proceeds of issuance of the Preferred Shares and cash subscriptions, and the Subscription Shares will be held by GDF Company separately from the Fund and for the benefit of the holders of Preferred Shares;
16. each of the Chartered Banks is a “substantial security holder”, as such term is defined in the Legislation, of each of the relevant Bank-Owned Distributors;
17. the Bank of Montreal is also a "substantial security holder", as such term is defined in the Legislation, of GDF Company because the Bank of Montreal indirectly owns 50%of the issued voting securities of GDF Company;
18. in the absence of this decision, due to the Mutual Fund Investment Prohibition, GDF Company is prohibited from investing in Subscription Shares that may include securities issued by the Bank of Montreal and other Chartered Banks which are substantial security holders of the Bank-Owned Distributors of the Mutual Fund Shares;
19. in the absence of this decision, due to the Related Person Reporting Requirement, GDF Management would be required to file a report in the required form in respect of any purchase or sale of securities of the Chartered Banks (a) between GDF Company and the Bank-Owned Distributors of the Mutual Fund Shares and (b) effected by GDF Company through the Bank-Owned Distributors of the Mutual Fund Shares;
[para 4]
AND WHEREAS under the System this MRRS Decision Document evidences the decision of each Decision Maker (collectively, the “Decision”);
[para 5]
AND WHEREAS each of the Decision-Makers is satisfied that the test contained in the Legislation that provides the Decision-Makers with the jurisdiction to make the decision has been met;
[para 6]
THE DECISION of the Decision Makers under the Legislation is that:
1. the Mutual Fund Investment Prohibition shall not apply to GDF Company in respect of the acquisition by GDF Company of securities of the Chartered Banks that are Subscription Shares as payment for the Mutual Fund Shares, provided that none of these securities are held by the Fund for more than 30 days from the date of their acquisition; and
2. the Related Person Reporting Requirement shall not apply to GDF Management in connection with (a) purchases through the Bank-Owned Distributors by GDF Company of securities of the Chartered Banks in the circumstances described in paragraph 1 above and (b) sales through the Bank-Owned Distributors of the securities of the Chartered Banks previously acquired in the circumstances described in paragraph 1 above.
[para 7]
DATED July 13, 2001.
Joyce C. Maykut, Q.C.
Vice Chair