National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – approval granted under NI 81-102 for reorganization of mutual fund that will result in securityholders becoming securityholders of a different fund – approval needed because pre-approval conditions for merger won’t be met because investment objectives differ and merger to be effected on a taxable basis – continuing fund larger than terminating fund – merger to otherwise comply with pre-approval criteria, including securityholder vote, IRC approval.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.7(1)(b).
August 15, 2017
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
SUN LIFE GLOBAL INVESTMENTS (CANADA) INC.
SUN LIFE SENTRY CONSERVATIVE BALANCED FUND
(the “Terminating Fund” and with the Manager, the “Filers”)
The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) approving the merger (the Merger) of the Terminating Fund into Sun Life Granite Income Portfolio (the Continuing Fund) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (the Approval 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 Manager 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 each of the provinces and territories of Canada, other than Ontario (together with Ontario, the Jurisdictions).
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 additional terms shall have the following meanings:
Fund or Funds means, individually or collectively, the Terminating Fund and the Continuing Fund;
IRC means the independent review committee for the Funds;
NI 81-107 means National Instrument 81-107 Independent Review Committee for Investment Funds;
Tax Act means the Income Tax Act (Canada); and
This decision is based on the following facts represented by the Filers:
1. The Manager is a corporation incorporated under the laws of Canada with its head office in Toronto, Ontario.
2. The Manager is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, as a mutual fund dealer in all of the provinces and territories of Canada, and as a commodity trading manager and portfolio manager in Ontario.
3. The Filer is the Manager and promoter of the Funds.
4. The Funds are open ended mutual funds established as trusts under the laws of Ontario.
5. Securities of each of the Funds are currently qualified for sale in each of the Jurisdictions under a simplified prospectus, annual information form and fund facts dated February 10, 2017, other than Series T5 of the Continuing Fund (collectively, the Offering Documents). Series T5 of the Continuing Fund is being qualified pursuant to an amendment to the Offering Documents dated July 28, 2017.
6. Each of the Funds is a reporting issuer under the applicable securities legislation of the Jurisdictions.
7. Neither the Manager nor the Funds is in default under the securities legislation of any of the Jurisdictions.
8. Other than circumstances in which the securities regulatory authority of a Jurisdiction has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under NI 81-102.
9. The net asset value for each series of the Funds is calculated on a daily basis in accordance with the Funds’ valuation policy and as described in the Offering Documents.
Reason for Approval Sought
10. Approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102, namely because: (i) a reasonable person may not consider the fundamental investment objectives of the Terminating Fund and that of the Continuing Fund to be “substantially similar”; and (ii) the Merger will not be a tax-deferred transaction as described in paragraph 5.6(1)(b) of NI 81-102. Except for these two reasons, the Merger will otherwise comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
The Proposed Merger
11. The Manager intends to merge Sun Life Sentry Conservative Balanced Fund into Sun Life Granite Income Portfolio, effective on or about October 27, 2017 (the Merger Date).
12. The Manager is of the view that the Merger will not be a “material change” for the Continuing Fund as the Continuing Fund is significantly larger in size than the Terminating Fund.
13. The investment objectives of the Terminating Fund and the Continuing Fund are as follows:
Sun Life Sentry Conservative Balanced Fund
The Fund’s investment objective is to seek to provide stable income and long-term capital appreciation, primarily by investing directly in a conservative diversified portfolio of Canadian fixed-income and income-oriented equity securities or indirectly by investing in mutual funds (including exchange-traded funds) that invest in such securities.
Sun Life Granite Income Portfolio
The Fund’s investment objective it to seek to generate a consistent level of income by investing primarily in a mix of income-focused fixed income and equity mutual funds (including exchange-traded funds).
14. The Filer has determined that it would not be appropriate to effect the Merger as a “qualifying exchange” within the meaning of section 132.2 of the Tax Act or as a tax-deferred transaction for the following reasons:
(a) The Terminating Fund must dispose of 100% of its portfolio assets before the Merger because they are not consistent with the objectives of the Continuing Fund. The Terminating Fund is expected to realize a net capital gain, which will be distributed to securityholders of the Terminating Fund whether or not the Merger is effected as a “qualifying exchange”.
(b) Approximately 60% of taxable securityholders in the Terminating Fund are in a loss position. Capital losses realized by these securityholders can be used to shelter the capital gain distribution expected to be paid to them by the Terminating Fund before the Merger.
(c) Approximately 92% of the securityholders in the Terminating Fund hold their securities in non-taxable registered plans.
(d) Approximately 97% of securityholders of the Terminating Fund either hold their securities in a non-taxable registered plan or have an accrued capital loss on their securities.
(e) Effecting the Merger on a taxable basis will preserve the net capital losses and non-capital loss carry-forwards in the Continuing Fund.
(f) Effecting the Merger on a taxable basis will have no other tax impact on the Continuing Fund.
15. Securityholders of the Terminating Fund will be asked to approve the Merger at a special meeting to be held on or about October 6, 2017.
16. The Manager will pay for the costs of the Merger. These costs consist mainly of brokerage charges associated with the Merger-related trades that occur both before and after the Merger date and legal, proxy solicitation, printing, mailing and regulatory fees.
17. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.
18. Securities of the Continuing Fund received by securityholders in the Terminating Fund as a result of the Merger will have the same sales charge option and, for securities purchased under low load or deferred sales charge options, the same remaining deferred sales charge schedule as their securities in the Terminating Fund.
19. Securityholders of the Terminating Fund will continue to have the right to redeem securities of the Terminating Fund at any time up to the close of business on the business day immediately before the Merger Date.
20. In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106), a press release announcing the proposed Merger was issued and filed via SEDAR on July 24, 2017. Amendments to the Offering Documents dated July 28, 2017 and a material change report dated July 28, 2017 with respect to the proposed Merger were filed via SEDAR.
21. As required by NI 81-107, an IRC has been appointed for the Funds. The Manager presented the potential conflict of interest matters related to the proposed Merger to the IRC. The IRC reviewed the potential conflict of interest matter related to the proposed Merger and on July 12, 2017 provided its positive recommendation for the Merger, after determining that the proposed Merger, if implemented, would achieve a fair and reasonable result for the Terminating Fund.
22. Pursuant to a decision dated December 5, 2016 (the Notice-and-Access Decision), the Manager has obtained an exemption from the requirement in paragraph 12.2(2)(a) of NI 81-106 to send an information circular and proxy-related materials to the securityholders of the Terminating Fund and instead allow the Terminating Fund to make use of a notice-and-access process. The notice prescribed by the Notice-and-Access Decision (the Notice-and-Access Document), the form of proxy and the fund facts relating to the relevant series of the Continuing Fund will be sent to securityholders of the Terminating Fund commencing on or about August 31, 2017. Additionally, the Notice-and-Access Document, form of proxy and information circular (the Meeting Materials) were concurrently filed via SEDAR and posted on the Manager’s website.
23. The Meeting Materials will provide securityholders of the Terminating Fund with sufficient information to permit them to make an informed decision as to whether or not to approve the Merger, including information about the differences between the Terminating Fund and Continuing Fund, the management fees of the Continuing Fund, the administration fees of the Continuing Fund and the tax consequences of the Merger. Accordingly, securityholders of the Terminating Fund will have an opportunity to consider this information prior to voting on the Merger.
24. The proposed Merger of the Terminating Fund into the Continuing Fund will be structured as follows:
(a) The Terminating Fund will liquidate 100% of the securities in its portfolio before the Merger Date. As a result, the Terminating Fund will realize all of its accrued capital gains and capital losses, will temporarily hold cash and cash equivalents and will not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger Date.
(b) The value of the Terminating Fund’s portfolio and other assets will be determined at the close of business on the Merger Date in accordance with the declaration of trust of the Terminating Fund.
(c) The Continuing Fund will acquire the assets of the Terminating Fund in exchange for securities of the Continuing Fund.
(d) The Continuing Fund will not assume any liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Merger Date.
(e) The securities of the Continuing Fund received by the Terminating Fund will have a total net asset value equal to the value of the assets acquired by the Continuing Fund from the Terminating Fund, and the securities of the Continuing Fund will be issued at the applicable series net asset value per security as of the close of business on the Merger Date.
(f) The Terminating Fund will distribute to its securityholders a sufficient amount of its net income and net realized capital gains, if any, to ensure that the Fund will not be subject to tax for its taxation year that includes the Merger Date.
(g) Immediately thereafter, the securities of the Terminating Fund will be redeemed by the Terminating Fund in exchange for securities of the Continuing Fund held by the Terminating Fund on a dollar-for-dollar and series-by-series basis.
(h) As soon as reasonably possible following the Merger, the Terminating Fund will be wound up and the Continuing Fund will continue as a publicly offered open end mutual fund.
25. The assets of the Terminating Fund to be acquired by the Continuing Fund to effect the Merger are currently or will, on the Merger Date, be acceptable to the portfolio manager of the Continuing Fund and are, or will be, consistent with the investment objectives of the Continuing Fund.
Benefits of Merger
26. The Manager believes that the Merger will be beneficial to securityholders of the Terminating Fund and Continuing Fund for the following reasons:
(a) the Continuing Fund provides its securityholders with a higher stream of yield than the Terminating Fund, while protecting from capital erosion;
(b) the Continuing Fund has greater flexibility than the Terminating Fund to shift between fixed income and equity, which may allow the Continuing Fund to better protect securityholders in times of volatility;
(c) The Continuing Fund has a portfolio of greater value, allowing for increased portfolio diversification opportunities compared to the Terminating Fund;
(d) The Continuing Fund, as a result of its greater size, benefits from a larger profile in the marketplace by potentially attracting more investors and enabling it to maintain a “critical mass”;
(e) Securityholders of the Terminating Fund will receive securities of the Continuing Fund that have a management fee that is the same as, or lower than, that charged in respect of the series of securities of the Terminating Fund that they currently hold.
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 Approval Sought is granted.
Investment Funds and Structured Products
Ontario Securities Commission