Professionals’ Financial – Mutual Funds Inc. and FDP US Dividend Equity Portfolio

Decision

Policy Statement 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – merger approval required because merger does not meet one criterion for pre-approval – continuing fund has different investment objectives than terminating fund –merger to otherwise comply with pre-approval criteria, including unitholder vote, IRC approval – unitholders provided with timely and adequate disclosure regarding the merger. 

Applicable Legislative Provisions

Regulation 81-102 respecting Investment Funds, paragraphs 5.5(1)(b), 5.6, 5.7(1)(b) and 19.1.

[Translation]

August 03, 2018

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
(the Jurisdictions)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
PROFESSIONALS’ FINANCIAL – MUTUAL FUNDS INC.
(the Filer)

AND

FDP US DIVIDEND EQUITY PORTFOLIO
(the Terminating Fund)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) approving the proposed merger (the Merger) of the Terminating Fund into FDP US Index Equity Portfolio (the Continuing Fund) pursuant to paragraph 5.5(1)(b) of Regulation 81-102 respecting Investment Funds, CQLR, c. V-1.1, r. 39 (Regulation 81-102) (the Approval Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a)           the Autorité des marchés financiers is the principal regulator for this application,

(b)           the Filer has provided notice that subsection 4.7(1) of Regulation 11-102 respecting Passport System, CQLR V-1.1, r. 1 (Regulation 11-102) is intended to be relied upon in New Brunswick (together with Québec and Ontario, the Filing Jurisdictions), and

(c)           the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in Regulation 14-101 respecting Definitions, CQLR, c. V-1.1, r. 3, Regulation 11-102, Regulation 81-106 respecting Investment Fund Continuous Disclosure, CQLR, c. V-1.1, r. 42 (Regulation 81-106), and Regulation 81-107 respecting Independent Review Committee for Investment Funds, CQLR, c. V-1.1, r. 43 (Regulation 81-107) 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.

Representations

This decision is based on the following facts represented by the Filer:

General

1.             The Filer is a corporation incorporated under the laws of Québec with its head office in Montréal, Québec.

2.             The Filer is registered as an investment fund manager in Québec and Ontario, and as a mutual fund dealer, a portfolio manager and a derivatives portfolio manager in Québec.

3.             The Filer acts as the investment fund manager of the Funds.

The Funds

4.             The Funds are open-ended mutual funds established as trusts under the laws of Québec.

5.             Series A units of each of the Funds are currently qualified for distribution in each of the Filing Jurisdictions under a simplified prospectus dated May 24, 2018, as amended by an amendment no. 1 dated June 6, 2018, an annual information form dated May 24, 2018, as amended by an amendment no. 1 dated June 6, 2018, and fund facts dated June 6, 2018 (collectively, the Offering Documents).

6.             Each of the Funds is a reporting issuer under the applicable securities legislation of the Filing Jurisdictions.

7.             Neither the Filer nor the Funds are in default under the securities legislation of any of the Filing Jurisdictions.

Reason for Approval Sought

8.             Regulatory approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of Regulation 81-102. In particular, the fundamental investment objectives of the Continuing Fund are not, or may be considered not to be, substantially similar to the investment objectives of the Terminating Fund.

9.             Except as described above, the Merger will otherwise comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of Regulation 81-102.

The Merger

10.          The Filer intends to merge the Terminating Fund into the Continuing Fund, effective on or about August 31, 2018 (the Merger Date).

11.          The Filer is of the view that the Merger will constitute a “material change” for the Continuing Fund.

12.          Unitholders of the Terminating Fund and unitholders of the Continuing Fund will be asked to approve the Merger at meetings to be held on or about August 27, 2018.

13.          The Filer will pay for the costs of the Merger. The Funds will bear none of the costs and expenses associated with the transaction.

14.          No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.

15.          Units of the Funds are offered without commission or sales or redemption charges.

16.          Unitholders of the Terminating Fund will continue to have the right to redeem units of the Terminating Fund at any time up to the close of business on the business day immediately before the Merger Date.

Unitholder Disclosure

17.          In accordance with section 11.2 of Regulation 81-106, a press release announcing the Merger was issued and filed via SEDAR on June 6, 2018. Amendments to the Offering Documents dated June 6, 2018 and a material change report also dated June 6, 2018 with respect to the Merger have been filed via SEDAR.

18.          In accordance with section 5.3 of Regulation 81-107, the Filer presented the potential conflict of interest matters relating to the Merger to the IRC. The IRC reviewed the potential conflict of interest matter related to the Merger and on June 7, 2018, provided its positive recommendation for the Merger, after determining that the Merger, if implemented, would achieve a fair and reasonable result for the Funds.

19.          As required by section 12.2 of Regulation 81-106, the Filer has sent an information circular and proxy-related materials (the Meeting Materials) to the unitholders of the Funds commencing on or about July 16, 2018. The fund facts relating to Series A of the Continuing Fund have also been sent to unitholders of the Terminating Fund commencing on or about July 16, 2018. Additionally, the Meeting Materials were concurrently filed via SEDAR and posted on the Filer’s website.

20.          The Meeting Materials provide unitholders of the Funds with sufficient information to enable them to make an informed decision as to whether or not to approve the Merger.

Merger Steps

21.          The Merger of the Terminating Fund into the Continuing Fund will be structured as follows:

(a)           The Terminating Fund will transfer all (or substantially all – 90% or more) of its property to the Continuing Fund at the Merger Date. As a result, the Terminating Fund will recognize any unrealized capital losses at the transfer time, which may be offset by electing to recognize any or all of its unrealized gains at that time. The Continuing Fund will recognize any unrealized capital losses at the transfer time, which may be offset by electing to recognize any or all of its unrealized gains at that time.

(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 units 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 units of the Continuing Fund received by the Terminating Fund will have an aggregate value equal to the aggregate value of the assets acquired by the Continuing Fund from the Terminating Fund, and the units of the Continuing Fund will be issued at the applicable series net asset value per unit as of the close of business on the Merger Date.

(f)            The Terminating Fund will distribute to its unitholders 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 during which occurs the Merger Date.

(g)           Immediately thereafter, the units of the Terminating Fund will be redeemed at their series net asset value and such amount will be paid to unitholders of the Terminating Fund on a dollar for dollar basis by way of the transfer of units of an equivalent series of the Continuing Fund to each Terminating Fund unitholder.

(h)           As soon as possible after the Merger, the Terminating Fund will be wound up.

22.          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 objective of the Continuing Fund.

23.          The result of the Merger will be that unitholders of the Terminating Fund will cease to be unitholders of the Terminating Fund and will become unitholders of the Continuing Fund. The Continuing Fund will continue as a publicly-offered open-ended mutual fund.

Benefits of Merger

24.          The Filer believes that the Merger will be beneficial to unitholders of the Terminating Fund and Continuing Fund for the following reasons:

(a)           the Merger will enable a decrease in operating costs as the assets under management of the Continuing Fund will double;

(b)           the Merger will allow the addition of a complementary strategy which could improve the diversification of the Continuing Fund and decrease the volatility of returns;

(c)           the Continuing Fund, as a result of its greater size, will benefit from a larger profile in the marketplace by potentially attracting more investors and enabling it to maintain a “critical mass”;

(d)           unitholders of the Terminating Fund will receive units 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 units of the Terminating Fund that they currently hold;

(e)           the Filer expects that the Merger will result in a more streamlined product offering that is easier for investors to understand.

25.          The Approval Sought is not detrimental to the protection of investors.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Approval Sought is granted.

“Lucie J. Roy”                                                      
Senior Director Corporate Finance
Autorité des marchés financiers