Multilateral Instrument 11-102 Passport System -- National Instrument 81-102 Mutual Funds -- A mutual fund manager seeks approval of proposed current fund mergers and future fund mergers under the approval requirements in NI 81-102 -- The continuing fund will include a component of the fundamental investment objective of the terminating fund in the continuing funds' objectives; the funds' independent review committee approved the merger; unitholders will vote on the proposed merger; terminating fund unitholders will receive alternate prospectus level disclosure; the tax consequences of the merger are as beneficial to unitholders as if the merger was on a tax-deferred basis; unitholders can redeem their units of the terminating fund before the merger. -- Future fund mergers comply with the pre-approved merger requirements in NI 81-102 except that the Manager will provide alternate prospectus level disclosure instead of the prospectus and financial statements for the terminating funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, s. 5.5.
November 16, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
DIMENSIONAL FUND ADVISORS CANADA ULC
(the Filer or Dimensional)
IN THE MATTER OF
DFA U.S. SMALL CAP FUND
DFA INTERNATIONAL SMALL CAP FUND
(together, the Terminating Funds)
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer and the Terminating Funds for a decision under the securities legislation of the Jurisdictions (the Legislation) for:
(a) approval of the merger of the DFA U.S. Small Cap Fund into the DFA U.S. Value Fund, and the merger of the DFA International Small Cap Fund into the DFA International Value Fund (the Current Mergers) under subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102); and
(b) 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 the Filer 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 Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the British Columbia Securities Commission is the principal regulator (Principal Regulator) for this application,
(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 Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon, and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario pursuant to Section 104(2)(c) of the Securities Act (Ontario).
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 on the following facts represented by the Filer:
1. the Filer is a corporation continued under the Nova Scotia Companies Act; the head office of the Filer is located in British Columbia;
2. the Filer is the manager, trustee, principal portfolio advisor and promoter of the DFA U.S. Value Fund, the DFA International Value Fund (together, the Continuing Funds) and the Terminating Funds; the head office of the Funds is located in British Columbia;
3. each of the Terminating Funds and the Continuing Funds (collectively, the Funds) is a separate open-end mutual fund organized as a trust under the laws of British Columbia pursuant to a master declaration of trust;
4. units of the Funds are currently offered for sale in all of the provinces and territories of Canada under a simplified prospectus and annual information form, as amended;
5. the Funds are reporting issuers under the applicable securities legislation of each province and territory of Canada and are not on the list of defaulting reporting issuers maintained under such securities legislation;
6. each of the Funds follows the standard investment restrictions and practices established under the Legislation;
7. the net asset value per unit for each class of units of each of the Funds is calculated at the close of trading on each valuation day (normally 4:00 p.m. Toronto time); for each of the Funds, a valuation day is any day that the Toronto Stock Exchange is open for business, unless the fund is not accepting orders to purchase, switch or redeem units on that day;
8. the board of directors of the Filer approved the Current Mergers on September 17, 2009; a press release and material change report in respect of the Current Mergers was subsequently filed on SEDAR;
9. as required by National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), the Filer has presented the terms of the Merger to the independent review committee of each of the Funds for review; the independent review committee has provided its positive recommendation that the Current Mergers will achieve a fair and reasonable result for the Funds;
10. unitholders of the Terminating Funds will continue to have the right to redeem or transfer their units of the Terminating Funds at any time up to the close of business on the business day prior to the effective date of the Current Mergers;
11. a notice of meeting, management information circular and a proxy (collectively, the Meeting Materials) in connection with the Current Mergers were mailed to unitholders of the Terminating Funds on or about October 7, 2009 and will subsequently be filed on SEDAR;
12. unitholders of the Terminating Funds approved the Current Mergers at special meetings held on November 5, 2009; implicit in the approval by unitholders of the Current Mergers is the adoption by the Terminating Funds of the investment objectives of the Continuing Funds;
13. the Filer anticipates that the Current Mergers will be implemented on or about November 17, 2009;
14. following the Current Mergers, the Continuing Funds will continue as a publicly offered open-end mutual funds and the Terminating Funds will be wound up as soon as reasonably practicable;
15. the following steps will be carried out to effect the Current Mergers, which are proposed to occur on or about November 17, 2009 (the Merger Date):
(a) prior to the Current Mergers, the investment portfolios of each of the Terminating Funds will be modified in certain ways to facilitate the Current Mergers; these changes may include the sale of securities in a Terminating Fund's portfolio that do not meet the investment objectives and investment strategies of the applicable Continuing Fund and holding a higher than normal level of cash, money market instruments and other short term investments; the Terminating Funds will seek to invest cash in exchange traded funds or derivatives (such as futures) for the purpose of gaining exposure to equity markets while maintaining liquidity; the equity markets and securities underlying the exchange traded funds and derivatives purchased during this period may provide the funds with exposure to certain equity markets and issuers that the funds would typically not invest in; as a result, for a brief period of time prior to the Current Mergers each of the Terminating Funds may not be fully invested in accordance with its investment objectives;
(b) the value of the Terminating Funds' portfolio and other assets will be determined at the close of business on the effective date of the Current Mergers, in accordance with the declaration of trust of each of the Terminating Funds;
(c) the Continuing Funds will acquire the investment portfolio and other assets of the Terminating Funds in exchange for units of the Continuing Funds;
(d) the Continuing Funds will not assume liabilities of the Terminating Funds and the Terminating Funds will retain sufficient assets to satisfy their estimated liabilities, if any, as of the date of the Current Mergers;
(e) each of the Terminating Funds will distribute a sufficient amount of its net income and net realized capital gains to unitholders to ensure that it will not be subject to tax for its current tax year ending on the date of the Current Mergers;
(f) the units of the Continuing Funds received by the Terminating Funds will have an aggregate net asset value equal to the respective value of the portfolio assets and other assets that the Continuing Funds acquire from the Terminating Funds, and the units of the Continuing Funds will be issued at the applicable series net asset value per unit as of the close of business on the effective date of the Current Mergers;
(g) immediately thereafter, the units of the Continuing Funds received by the Terminating Funds will be distributed to unitholders of the Terminating Funds in exchange for their units in the Terminating Funds on a dollar-for-dollar and class-by-class basis;
(h) as soon as reasonably possible following the Current Mergers, the Terminating Funds will be wound up;
16. the Terminating Funds and the Continuing Funds are, and are expected to continue to be at all material times, mutual fund trusts under the Income Tax Act (Canada) (the Tax Act) and, accordingly, units of each of the Funds are "qualified investments" under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans and tax-free savings accounts;
17. the Filer will pay all costs and reasonable expenses relating to the solicitation of proxies and holding the unitholder meetings in connection with the Current Mergers, as well as the costs of implementing the Current Mergers;
18. approval of the Principal Regulator for the Current Mergers is required because the Current Mergers do not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102 because the fundamental investment objectives of the Terminating Funds are not substantially similar to the fundamental investment objectives of the Continuing Funds and because the Current Mergers are not tax deferred transactions as described in section 5.6(1)(b) of NI 81-102;
19. 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 delivered to unitholders of the Terminating Funds prior to the unitholder meetings;
20. the Filer believes that the Current Mergers will be beneficial to unitholders of the Terminating Funds for the following reasons:
(a) unitholders of the Terminating Funds may have the potential to enjoy increased economies of scale with respect to operating costs and administrative expenses as part of a larger continuing fund;
(b) by merging the Terminating Funds instead of terminating them (which is one option that would be considered by the Filer if the Current Mergers were not approved) there will be a savings for the Terminating Funds in brokerage charges associated with the liquidation of the Terminating Funds' portfolio on a wind-up; the unitholders of the Terminating Funds will not be responsible for the costs associated with the Current Mergers;
(c) the Current Mergers will eliminate the administrative and regulatory costs of operating the Terminating Funds as separate mutual funds;
(d) each of the Continuing Funds will have a portfolio of greater value, allowing for increased portfolio diversification opportunities;
(e) for both the Class A and Class F units of the Terminating Funds a lower management fee is charged to unitholders of the corresponding classes of the Continuing Funds after the Current Mergers (the Funds do not pay a management fee in respect of Class I and Class I (H) units as each investor and those units pay the negotiated management fee directly to the Filer).
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 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 management information circular sent to unitholders in connection with a Merger prominently discloses that unitholders can obtain the most recent interim and annual financial statements of the applicable Continuing Fund by contacting their dealer, by calling Dimensional collect, by emailing Dimensional, or by accessing the SEDAR website at www. sedar. com ;
(c) upon request by a unitholder for financial statements, Dimensional makes best efforts to provide the unitholder with financial statements of the applicable continuing fund in a timely manner so that the unitholder can make an informed decision regarding a Merger;
(d) each applicable terminating fund and the applicable continuing fund with respect to a Merger has an unqualified audit report in respect of its 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.