Mutual Reliance Review System for Exemptive Relief Applications -- Approval of mutual fund mergers -- Current simplified prospectus of continuing funds not required to be sent to securityholders of terminating funds provided that a tailored simplified prospectus sent -- Financial statements of continuing funds not required to be sent to securityholders of terminating funds -- Approval also granted to permit manager to not send current simplified prospectus or financial statements for future mergers.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6.
March 1, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUÉBEC,NEW BRUNSWICK,
NOVA SCOTIA, PRINCE EDWARD ISLAND,
NEWFOUNDLAND AND LABRADOR, YUKON
TERRITORY, NORTHWEST TERRITORIES AND
IN THE MATTER OF
NATIONAL INSTRUMENT 81-102 MUTUAL FUNDS
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
SCOTIA SECURITIES INC. (SSI) AND
SCOTIA YOUNG INVESTORS FUND AND
CAPITAL U.S. SMALL COMPANIES FUND
(collectively, the Terminating Funds)
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from SSI and the Terminating Funds (the Filers) for a decision under the securities legislation of the Jurisdictions (the Legislation) for:
• approval under paragraph 5.5(1)(b) of NI 81-102 of the mergers (the Current Mergers) of the Terminating Funds into the applicable Continuing Funds (as defined below) as set out in paragraph 4 below;
• approval under paragraph 5.5(1)(b) of NI 81-102 of any merger, after the date of this decision, of mutual funds managed by SSI or an affiliate that meet all of the criteria for pre-approval of mergers under section 5.6 of NI 81-102 except for the financial statement delivery requirement and the simplified prospectus delivery requirement of sub-paragraph 5.6(1)(f)(ii) of NI 81-102 (the Future Mergers).
Under the Mutual Reliance Review System for Exemptive Relief Applications:
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Defined terms contained in National Instrument 14-101 - Definitions have the same meaning in this decision unless they are defined in this decision. The following additional terms shall have the following meanings:
Continuing Funds means Scotia Global Growth Fund and Capital Global Small Companies Fund;
Current Simplified Prospectus means the simplified prospectus dated October 31, 2006, as amended, that qualifies the Funds for sale;
Fund or Funds means, individually or collectively, the Terminating Funds and the Continuing Funds;
Tax Act means the Income Tax Act (Canada).
This decision is based on the following facts represented by the Filers:
1. SSI is a corporation established under the laws of Ontario. SSI is a wholly-owned subsidiary of The Bank of Nova Scotia, a public company listed on the Toronto Stock Exchange.
2. SSI is the manager and trustee of each of the Funds. The head office of SSI is located in Ontario.
3. Each of the Funds is an open-end mutual fund trust established under the laws of Ontario by a master declaration of trust.
4. SSI intends to reorganize the Funds as follows:
(a) Scotia Young Investors Fund will merge into Scotia Global Growth Fund (sometimes referred to as the Global Merger); and
(b) Capital U.S. Small Companies Fund will merge into Capital Global Small Companies Fund (sometimes referred to as the Small Companies Merger).
5. In the Global Merger and the Small Companies Merger, unitholders will receive units in the same series of the applicable Continuing Fund as they currently own in the Terminating Fund.
6. Securities of the Funds (consisting of Class A Units of Scotia Young Investors Fund and Class A and Class F Units of Capital U.S. Small Companies Fund) are qualified for sale by the Current Simplified Prospectus and an annual information form dated October 31, 2006, as amended, which have been filed and accepted in all of the provinces and territories of Canada.
7. Each of the Funds is a reporting issuer under the Legislation of each Jurisdiction and is not on the list of defaulting reporting issuers maintained under the Legislation 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 the Legislation of the Jurisdictions.
9. The net asset value for each series of the Funds is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.
10. No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of an applicable Terminating Fund.
11. The portfolios and other assets of each Terminating Fund to be acquired by the applicable Continuing Fund arising from the Current Mergers are currently, or will be, acceptable, on or prior to the effective date of the Current Mergers, to the portfolio advisers of the applicable Continuing Fund and are or will be consistent with the investment objectives of the applicable Continuing Fund.
12. Unitholders of a Terminating Fund will continue to have the right to redeem units of the Terminating Fund for cash at any time up to the close of business on the business day immediately prior to the effective date of the Current Mergers.
13. Amendments to the simplified prospectuses and annual information forms of the Terminating Funds and a material change report were filed via SEDAR on December 14, 2006 with respect to the Current Mergers.
14. A notice of meeting, a management information circular and a proxy in connection with meetings of unitholders (collectively, the Meeting Materials) as well as a tailored document consisting of the Part A and the Part B for the relevant Continuing Fund as set out in the Current Simplified Prospectus of the Funds will be mailed to unitholders of the Terminating Funds, commencing on or about March 14, 2007, and will be filed via SEDAR.
15. Unitholders of the Terminating Funds will be asked to approve the Current Mergers at meetings to be held on April 5, 2007.
16. Each Terminating Fund will merge into the applicable Continuing Fund on or about the close of business on April 20, 2007 and the Continuing Funds will continue as publicly offered open-end mutual funds governed by the laws of Ontario.
17. Each Terminating Fund will be wound up as soon as reasonably possible following the relevant Current Merger.
18. SSI will pay for the costs of the Current Mergers. These costs consist mainly of brokerage charges associated with the merger-related trades that occur both before and after the date of the Current Mergers and legal, proxy solicitation, printing, mailing and regulatory fees.
19. Approval of the Current Mergers is required because each Current Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 in the following ways:
(a) contrary to section 5.6(1)(a)(ii) of NI 81-102, a reasonable person may not consider the fundamental investment objectives of the Continuing Funds to be substantially similar to the fundamental investment objectives of the relevant Terminating Fund, and in the case of the Small Companies Merger, a reasonable person may not consider the fee structure of the Continuing Fund to be substantially similar to the fee structure of the Terminating Fund;
(b) contrary to section 5.6(1)(b) of NI 81-102, the Global Merger will not be a "qualifying exchange" within the meaning of section 132.2 of the Tax Act or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act; and
(c) contrary to section 5.6(1)(f)(ii) of NI 81-102, the Current Simplified Prospectus and most recent annual and interim financial statements for the Continuing Funds will not be sent to the unitholders of the Terminating Funds but, instead, SSI will send to each unitholder of a Terminating Fund the following: (i) a management information circular fully describing the relevant merger, which circular will include a statement describing how unitholders can obtain the financial statements, management report of fund performance and annual information form for the relevant Continuing Fund; and (ii) a tailored document, consisting of the Part A and the Part B for the relevant Continuing Fund, as set out in the Current Simplified Prospectus of the Funds filed on SEDAR.
20. The tax implications of the Current Mergers as well as the differences between the Terminating Funds and the Continuing Funds are described in the Meeting Materials so that the unitholders of the Terminating Funds may consider this information before voting on the Current Mergers.
21. SSI believes that the Mergers will benefit unitholders of each Terminating Fund and Continuing Fund for the following reasons:
(a) unitholders of the applicable Terminating Fund and the Continuing Fund may enjoy increased economies of scale and may experience lower fund operating expenses (which are borne indirectly by unitholders) as part of a larger combined Continuing Fund;
(b) in the case of Scotia Young Investors Fund, to the extent that securities in the portfolios are transferred to the Continuing Fund, there will be a savings in brokerage charges over a straight liquidation of the portfolio securities if Scotia Young Investors Fund was terminated;
(c) the Mergers will eliminate the administrative and regulatory costs of operating each Terminating Fund as a separate mutual fund;
(d) each Continuing Fund will have a portfolio of greater value, allowing for increased portfolio diversification opportunities and, in the case of Scotia Global Growth Fund, offers the potential for better risk-adjusted performance than the Terminating Fund; and
(e) each Continuing Fund, as a result of its greater size, will benefit from its larger profile in the marketplace.
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Current Mergers and the Future Mergers (collectively, the Mergers) are approved, provided that:
(a) the information circular sent to securityholders in connection with a Merger provides sufficient information about the Merger to permit securityholders to make an informed decision about the Merger;
(b) the information circular sent to securityholders in connection with a Merger prominently discloses that securityholders can obtain the most recent interim and annual financial statements of the applicable continuing fund by accessing the SEDAR website at www.sedar.com, by accessing the SSI website, by calling SSI's toll-free telephone number or by faxing a request to SSI;
(c) upon request by a securityholder for financial statements, SSI will make best efforts to provide the securityholder with financial statements of the applicable continuing fund in a timely manner so that the securityholder can make an informed decision regarding a Merger;
(d) each applicable terminating fund and the applicable continuing fund with respect to a Merger have an unqualified audit report in respect of their last completed financial period; and
(e) the material sent to securityholders in respect of a Merger includes a tailored simplified prospectus consisting of:
(i) the current Part A of the simplified prospectus of the applicable continuing fund, and
(ii) the current Part B of the simplified prospectus of the applicable continuing fund.
This Decision, as it relates to the jurisdiction of a Decision Maker, will terminate one year after the publication in final form of any legislation or rule of that Decision Maker dealing with matters in paragraph 5.5(1)(b) of NI 81-102.