NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund reorganization -- approval required because reorganization does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- reorganization not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- securityholders of the terminating funds provided with timely and adequate disclosure regarding the reorganization.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, s. 5.5(1)(b).
December 11, 2008
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO (the "Jurisdiction")
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
ING DIRECT ASSET MANAGEMENT LIMITED
IN THE MATTER OF
ING DIRECT STREETWISE BALANCED
INCOME CLASS, ING DIRECT STREETWISE
BALANCED CLASS AND ING DIRECT STREETWISE
BALANCED GROWTH CLASS
(the "Corporate Funds")
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 (the "Approval Sought") under subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") of the conversion (the "Conversion") of each of the Corporate Funds into a mutual fund trust (each a "Trust Fund" and, collectively, the "Trust Funds") that has identical investment objectives and investment strategies.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) The Ontario Securities Commission (the "OSC") 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.
Terms defined in National Instrument 14-101 -- Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based upon the following facts represented by the Filer:
1. The Filer is registered as an "investment counsel/portfolio manager" in the province of Ontario, with its head office located in Toronto, Ontario.
2. The Filer is the manager and portfolio adviser of each of the Corporate Funds and the proposed trustee, manager and portfolio adviser of each of the Trust Funds.
3. Each of the Corporate Funds is represented by a class of shares (the "Shares") of ING Direct Corporate Class Limited (the "Corporation"), a corporation formed under the Canada Business Corporations Act (the "CBCA").
4. Shares of the Corporate Funds are currently qualified for sale in each of the provinces and territories of Canada pursuant to a simplified prospectus and annual information form dated January 2, 2008, as amended by amendments to the simplified prospectus and annual information form dated May 30, 2008 and October 23, 2008 ("Corporate Funds' Prospectus").
5. The Corporation qualifies as a "mutual fund corporation" under the Income Tax Act (Canada) (the "Tax Act").
6. The Corporation, as the issuer of the Shares of the Corporate Funds, is a reporting issuer under applicable securities legislation of each province and territory of Canada and is not on the list of defaulting reporting issuers in any of such jurisdictions.
7. The Filer has filed a preliminary simplified prospectus and preliminary annual information form dated October 20, 2008 with respect to the Trust Funds and will file a simplified prospectus and annual information form in due course to qualify the units of the Trust Funds for distribution to the public.
8. Subject to obtaining the approval of the shareholders (the "Shareholders") of each of the Corporate Funds, at a meeting to be held on January 9, 2009, the Filer proposes to effect the Conversion by transferring, on or about January 9, 2009 (the "Conversion Date"), all or substantially all of the Corporation's assets to the Trust Funds in exchange for units of the Trust Funds. The assets of the Corporation attributable to ING DIRECT Streetwise Balanced Income Class will be transferred to ING DIRECT Streetwise Balanced Income Fund. The number of units issued by ING DIRECT Streetwise Balanced Income Fund will equal the number of ING DIRECT Streetwise Balanced Income Class shares of the Corporation immediately prior to the transfer. Similar transfers will take place for the other assets and the other two Converting Funds of the Corporation.
9. Also on the Conversion Date, the Corporation will redeem all the outstanding shares of each of the Corporate Funds at their net asset value and transfer the units of the corresponding Trust Fund to its Shareholders as consideration for the redemption. Each ING DIRECT Streetwise Balanced Income Class Shareholder will receive units of ING DIRECT Streetwise Balanced Income Fund corresponding to the number of Shares of the ING DIRECT Streetwise Balanced Income Class they hold in exchange for those Shares. A similar matching will occur for the Shareholders of the other two Corporate Funds.
10. An election will be filed with the T3 trust tax return for the first taxation year of each Trust Fund pursuant to subsection 132(6.1) of the Tax Act. Accordingly, each Trust Fund will be deemed to have been a mutual fund trust retroactive to the date that the trust was formed.
11. Since the Corporate Funds have been in operation less than one year and the Trust Funds have not yet been formed, no annual returns have been prepared.
12. The Filer intends to cease distribution of Shares of the Corporate Funds at the close of business on the day immediately preceding the Conversion Date and, accordingly, does not intend to renew the Corporate Funds' Prospectus under subsection 62(2) of the Act. As soon as possible following the Conversion, the Corporation will be wound-up.
13. The investment objectives and investment strategies of each of the Trust Funds are identical to the investment objectives and investment strategies of their corresponding Corporate Fund.
14. The Trust Funds will be charged management fees and administration fees in amounts that are identical to the management fee and administration fee currently charged by the Filer in respect of the Corporate Funds.
15. Each Corporate Fund currently pays certain operating expenses directly, including the costs and expenses related to the independent review committee (the "IRC") of the Corporate Funds, the cost of any government or regulatory requirements introduced after July 1, 2007, and any borrowing costs and all brokerage fees and commissions (collectively "Other Fund Costs"), and taxes. The simplified prospectus for the Corporate Funds discloses that the Filer may, in some years and in certain cases, pay a portion of a Corporate Fund's administration fee or Other Fund Costs and, in any event, will always pay a portion of the administration fee or Other Fund Costs so that the Corporate Fund's total operating expenses in any year are never greater than 0.20% of the Corporate Fund's net asset value.
16. Each Trust Fund will pay certain operating expenses directly, including the costs and expenses related to the IRC of the Trust Funds, the cost of any government or regulatory requirements introduced after July 1, 2007, borrowing costs and taxes (including, but not limited to, GST). These costs will be allocated among the Trust Funds in a fair and equitable manner in accordance with the services used. The simplified prospectus for the Trust Funds will disclose that the Filer may, in its discretion, absorb a portion of a Trust Fund's costs in any year, but will always do so to ensure that the Fund's management expense ratio in any year is never greater than 1.00% of the Fund's net asset value.
17. The changes in the manner in which the Filer may choose to pay a portion of a Trust Fund's costs (described in paragraphs 15 and 16, above) could result in the Trust Funds incurring higher costs for brokerage fees and commissions, and withholding taxes than the Corporate Funds.
18. In order to effect the Conversion without seeking the approval of the OSC, the Filer must be able to satisfy all of the provisions of section 5.6 of NI 81-102.
19. Paragraph 5.6(1)(b) of NI 81-102 requires that the Conversion be effected as a "qualifying exchange" within the meaning of section 132.2 of the Tax Act which contemplates the transfer of property by a mutual fund corporation "to a mutual fund trust".
20. The proposed Conversion raises two technical issues under section 132.2 of the Tax Act, namely:
(a) the Trust Funds that will acquire the property of the Corporation will not be "mutual fund trusts", as defined in subsection 132(6) of the Tax Act, at the time of the transfer, because they will have fewer than 150 unitholders; and
(b) the Conversion requires that the Corporation transfer its property to three mutual fund trusts rather than "a mutual fund trust".
21. The Filer applied for but was unsuccessful in obtaining a ruling from the Canada Revenue Agency that, notwithstanding the technical issue described in paragraph 20(b), above, the Conversion would be "qualifying exchange" for the purposes of section 132.2.
22. Except for subsection 5.6(1)(b) of NI 81-102, the Filer is able to satisfy all the provisions of section 5.6 of NI 81-102.
23. In order to effect the Conversion without seeking the approval of Shareholders, the Filer must be able to satisfy all of the provisions of subsection 5.3(2) of NI 81-102.
24. Since the Conversion will not comply with paragraph 5.6(1)(b) of NI 81-102 the Filer cannot rely on subsection 5.3(2) of NI 81-102. Accordingly, the Filer is proposing to hold a meeting of the Shareholders (the "Shareholders Meeting") of each of the Corporate Funds to approve the Conversion pursuant to section 5.1 of NI 81-102.
25. The Filer is proposing the Conversion because the Trust Funds are expected to be more tax efficient than the Corporate Funds. This is primarily because the Trust Funds will not be required to pay income tax as long as they have distributed sufficient net income to their unitholders, whereas the Corporate Funds are required to pay tax on their net income and net realized capital gains against which they may apply a refund only in respect of tax related to Canadian source dividends and capital gains. The composition of the Corporate Funds (principally the relative size of the fixed income portfolios) together with the relatively low fees and expenses incurred by the Corporate Funds (1% of net asset value) mean that the Corporation could incur non-refundable income tax under the Tax Act.
26. The IRC has provided a positive "recommendation" with respect to the proposed Conversion pursuant to paragraph 5.3(1)(a) of NI 81-107 and such recommendation is included in the management information circular (the "Management Information Circular") prepared in respect of the Shareholders Meeting.
27. Pursuant to paragraph 5.6(1)(h) of NI 81-102, neither the Corporate Funds nor the Trust Funds will bear any of the costs and expenses associated with the Conversion and all such costs and expenses will be borne by the Filer.
28. No sales charges, if any, will be payable in connection with the acquisition by the Trust Funds of the investment portfolio of the Corporate Funds.
29. The Management Information Circular will, among other things,:
(a) describe the difference in the way the Filer intends to absorb certain costs and expenses on behalf of the Trust Funds than it did on behalf of the Corporate Funds;
(b) describe the income tax considerations applicable to the Conversion;
(c) describe the material differences between being a shareholder of the Corporate Funds and being a unitholder of the Trust Funds; and
(d) include a copy of the final simplified prospectus and the audited opening balance sheet for the Trust Funds.
Shareholders will have the opportunity to consider this information prior to voting for the Conversion.
30. In accordance with subsections 189(3) and (7) of the CBCA and subsection 5.2(2) of NI 81-102, the Shareholders of each of the Corporate Funds will vote on the Conversion separately as classes because they will be affected differently by the proposed Conversion.
31. In accordance with subsections 189(3), (5) and (8) of the CBCA and subsection 5.2(1) of NI 81-102, the approval of the Shareholders must be given by at least two-thirds of Shareholders present at the meeting in person or by proxy.
32. The Filer submits that the proposed Conversion:
(a) will benefit investors because, as described in paragraph 25 above, the Trust Funds can be managed on a more tax efficient basis for than is the case with the Corporate Funds;
(b) will result in the Filer being able to provide its management services to the Trust Funds on a more economically rational basis;
(c) has received or will receive levels of review and approval by the IRC and the Shareholders themselves to ensure that Shareholders are being dealt with fairly; and
(d) would not be prejudicial to the public interest.
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 is that the Approval Sought is granted, provided that the approval of the Shareholders to the Conversion is obtained as described in paragraphs 24 through 30, above.