Securities Law & Instruments

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund mergers -- approval required because mergers do not meet the criteria for pre-approval -- mergers have differences in investment objectives -- certain mergers not a "qualifying exchange" or a tax-deferred transaction under Income Tax Act -- securityholders of terminating funds provided with timely and adequate disclosure regarding the mergers.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6.

June 3, 2010

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

SENTRY SELECT CAPITAL INC.

(the Filer)

AND

SENTRY SELECT BALANCED CLASS, SENTRY

SELECT CANADIAN ENERGY GROWTH CLASS,

SENTRY SELECT BALANCED FUND, SENTRY

SELECT DIVIDEND GROWERS FUND, AND

SENTRY SELECT CANADIAN ENERGY GROWTH

FUND (collectively, the Terminating Funds)

AND

SENTRY CANADIAN INCOME CLASS

SENTRY CANADIAN INCOME FUND AND

SENTRY ENERGY GROWTH AND INCOME

FUND (collectively, the Continuing Funds and

together with the Terminating Funds, the Funds)

DECISION

Background

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 of the mergers (each a Merger and collectively, the Mergers) of the Terminating Funds into the applicable Continuing Funds under paragraph 5.5(1)(b) of National Instrument 81-102 -- Mutual Funds (NI 81-102) (the NI 81-102 Merger Approval).

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

(a) the Ontario Securities Commission is the principal regulator (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 each of the provinces and territories of Canada, other than the Province of Ontario (the Non-Principal Jurisdictions).

Interpretation

Terms defined in MI 11-102 and National Instrument 14-101 -- Definitions have the same meaning if used in this decision, unless otherwise defined.

Representations

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

1. The Filer is proposing to merge the Terminating Funds into the Continuing Funds, as follows:

(a) the Merger of Sentry Select Balanced Class (Balanced Class) into Sentry Canadian Income Class (Canadian Income Class);

(b) the Merger of Sentry Select Canadian Energy Growth Class (Energy Growth Class) into Canadian Income Class;

(c) the Merger of Sentry Select Balanced Fund (Balanced Fund) into Sentry Canadian Income Fund (Canadian Income Fund);

(d) the Merger of Sentry Select Dividend Growers Fund (Dividend Growers Fund) into Canadian Income Fund; and

(e) the Merger of Sentry Select Canadian Energy Growth Fund (Energy Growth Fund) into Sentry Energy Growth and Income Fund (Energy Growth and Income Fund).

(Balanced Fund, Dividend Growers Fund and Energy Growth Fund are individually a Terminating Trust Fund and collectively, the Terminating Trust Funds, Balanced Class and Energy Growth Class are individually a Terminating Class and collectively, the Terminating Classes and Canadian Income Fund and Energy Growth and Income Fund are individually a Continuing Trust Fund and collectively, the Continuing Trust Funds).

2. Under the Mergers, the securityholders of each of the Terminating Funds will receive securities of the applicable Continuing Fund into which the Terminating Fund is merged.

3. The Filer is a corporation incorporated under the laws of the Province of Ontario with its head office in Toronto, Ontario.

4. The Filer is the manager of each of the Funds and is not in default of securities legislation in the Jurisdiction or in any of the Non-Principal Jurisdictions.

5. The Filer is registered as a dealer in the category of mutual fund dealer and as an adviser in the category of portfolio manager under the Securities Act (Ontario) and as an adviser in the category of commodity trading manager under the Commodity Futures Act (Ontario). The Filer is also registered as an adviser in the category of portfolio manager under the Securities Act (Alberta).

6. At the time that the steps for the Mergers are completed, the Filer will manage the investment portfolios of each of the Funds.

7. Each of the Terminating Trust Funds is an open-end mutual fund trust established under the laws of the Province of Ontario.

8. Sentry Select Corporate Class Ltd. (Sentry Select Corp.) is a mutual fund corporation incorporated under the laws of the Province of Ontario. Balanced Class, Energy Growth Class and Canadian Income Class are each a class of shares of Sentry Select Corp.

9. The board of directors of the Filer and of Sentry Select Corp. approved the proposed Mergers on January 18, 2010 and a press release and material change report in connection with the Mergers were issued and filed on SEDAR on January 21, 2010. In anticipation of implementation of the Mergers, sales of securities of the Terminating Funds were suspended effective January 29, 2010 other than with respect to existing pre-authorized chequing plans.

10. Securities of the Terminating Funds were offered for continuous sale under a simplified prospectus and annual information form dated June 15, 2009, as amended, in each of the provinces and territories of Canada. Securities of the Continuing Funds and all the other mutual funds that form part of the Sentry Group of Funds are offered for continuous sale under a simplified prospectus and annual information form dated May 28, 2010, in each of the provinces and territories of Canada.

11. 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.

12. Unless an exemption has been obtained, each of the Funds follows the standard investment restrictions and practices established under NI 81-102.

13. The net asset value per security (NAV per Security) of each of the Funds is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading and securities of the Funds are generally redeemable on a daily basis.

14. As required by National Instrument 81-107 -- Independent Review Committee for Investment Funds, an Independent Review Committee (IRC) has been appointed for the Funds and the Filer presented the terms of each Merger to the IRC of the Funds for its recommendation. The IRC considered the proposed Mergers and provided a positive recommendation to the Filer on the basis that the Mergers would achieve a fair and reasonable result for each of the Funds.

15. Securityholders of the Terminating Funds and of Canadian Income Class approved the Mergers at special meetings (the Meetings) of securityholders held on May 25, 2010.

16. In connection with the Meetings, the Filer, as manager of the Terminating Funds and of Canadian Income Class, sent to securityholders of the Terminating Funds and of Canadian Income Class a Notice of the Meetings of Securityholders and a Management Information Circular (the Information Circular) dated April 23, 2010 and a related form of proxy. The Information Circular was filed on SEDAR on May 3, 2010. The Information Circular provided sufficient information to securityholders to permit them to make an informed decision about the Mergers.

17. The Filer intends to rely on the exemption from the delivery requirements to send annual and interim financial statements and the simplified prospectus to securityholders of the Terminating Funds set out in s. 5.6(1)(f)(ii) of NI 81-102 that was granted by the Principal Regulator to mergers of mutual funds managed by the Filer. The Filer has complied with the conditions of the exemption in respect of the mergers, including that securityholders of the Terminating Funds were sent Part A of the simplified prospectus of the Continuing Funds dated June 15, 2009 as well as Part B of such simplified prospectus as it relates to the Continuing Funds. The Information Circular prominently disclosed where securityholders of the Terminating Funds could obtain the most recent interim and annual financial statements of the Continuing Funds.

18. It is proposed that the Mergers take place on or about June 4, 2010 (the Merger Date).

19. The Filer will pay all costs and expenses associated with the Mergers. These costs consist mainly of brokerage charges associated with the trades that occur both before and after the date of the proposed mergers and legal, proxy solicitation, printing, mailing and regulatory fees.

20. Following the Mergers, the Continuing Funds will continue as publicly offered open-end mutual funds and the Terminating Funds will be wound up as soon as reasonably possible.

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

22. Prior to the date of the Mergers, the portfolio assets of each Terminating Fund to be acquired by the applicable Continuing Fund will be acceptable to the portfolio adviser of the Continuing Fund and will be consistent with the investment objectives of the applicable Continuing Fund.

23. Securityholders in the Terminating Funds were provided with income tax disclosure as it relates to the impact of the implementation of the Mergers as well as the differences between the Terminating Funds and the Continuing Funds in the Information Circular. The Mergers of the Terminating Classes into Canadian Income Class will take place as a tax-deferred transaction under the Income Tax Act (Canada) (the Tax Act) while the Mergers of the Terminating Trust Funds into the Continuing Trust Funds will take place on a taxable basis.

24. Securityholders of a Terminating Fund will continue to have the right to redeem or switch securities of the Terminating Fund at any time up to the close of business on the business day immediately prior to the Merger Date. The Information Circular discloses that securities of a Continuing Fund acquired by securityholders upon the proposed Mergers are subject to the same redemption charges to which their securities of the Terminating Fund were subject to prior to the Merger.

25. The Mergers of Balanced Class and Energy Growth Class into Canadian Income Class will be structured as follows:

(a) prior to the Merger Date, Balanced Class and Energy Growth Class will redeem their respective investments in Balanced Fund and Energy Growth Fund. As a result, the underlying portfolios attributable to Balanced Class and Energy Growth Class will temporarily hold a large portion of their respective portfolios in cash or money market instruments and will not be fully invested in accordance with their investment objectives for a brief period of time prior to the Mergers;

(b) Sentry Select Corp. will satisfy or otherwise make provision for any liabilities attributable to each of Balanced Class and Energy Growth Class existing as of the Merger Date out of the assets attributable to each Fund;

(c) the value of the underlying portfolios and other assets attributable to each of Balanced Class and Energy Growth Class will be determined at the close of business on the Merger Date;

(d) all of the issued and outstanding securities of each of Balanced Class and Energy Growth Class will be changed into securities of Canadian Income Class on a dollar-for-dollar and series-by-series basis and distributed to securityholders of each of Balanced Class and Energy Growth Class;

(e) the assets in the underlying portfolios and other net assets attributable to each of Balanced Class and Energy Growth Class, as applicable, will be included in the underlying portfolio of assets attributable to Canadian Income Class;

(f) the securities of Canadian Income Class received by securityholders in each of Balanced Class and Energy Growth Class will have an aggregate net asset value (NAV) equal to the value of the underlying portfolio and other assets attributable to Balanced Class and Energy Growth Class, respectively, and will be issued at the NAV per Security of the applicable series of Canadian Income Class as of the close of business on the Merger Date;

(g) immediately thereafter, the securities of Canadian Income Class received by each of Balanced Class and Energy Growth Class will be distributed to securityholders in each of Balanced Class and Energy Growth Class on a dollar-for-dollar and series-by-series basis in exchange for their securities in of Balanced Class and Energy Growth Class, as the case may be; and

(h) as soon as reasonably possible following the Mergers, each of Balanced Class and Energy Growth Class will be cancelled.

26. The Mergers of each Terminating Trust Fund into the applicable Continuing Trust Fund will be structured as follows:

(a) if necessary, prior to the Merger Date, each Terminating Trust Fund will sell any securities in its underlying portfolios that do not meet the investment objective and investment strategies of the applicable Continuing Trust Fund into which it is to be merged;

(b) each Terminating Trust Fund will satisfy or otherwise make provision for all its liabilities, if any, existing as of the Merger Date;

(c) the value of the portfolios and other assets of each Terminating Trust Fund will be determined at the close of business on the Merger Date;

(d) each Continuing Trust Fund will acquire the investment portfolio and other net assets of each applicable Terminating Trust Fund in exchange for securities of the Continuing Trust Fund;

(e) the securities of the Terminating Trust Funds received by the applicable Continuing Trust Fund will have an aggregate NAV equal to the respective values of the portfolios and other assets of each Terminating Trust Fund and will be issued at the NAV per Security of the respective series of the applicable Continuing Trust Fund as of the close of business on the Merger Date;

(f) immediately thereafter, the securities of the Continuing Trust Fund received by each Terminating Trust Fund will be distributed to securityholders in each Terminating Trust Fund on a dollar-for-dollar and series-by-series basis in exchange for their securities in the Terminating Trust Fund, as the case may be; and

(g) as soon as reasonably possible following the Mergers, the Terminating Trust Funds will be wound up.

27. Approval of the Mergers is required because the 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:

(a) the fundamental investment objective of each Terminating Fund is not, or may be considered not to be, "substantially similar" to the fundamental investment objectives of the applicable Continuing Fund; and

(b) the Mergers of the Terminating Trust Funds will not be completed as a "qualifying exchange" or a tax-deferred transaction under the Tax Act.

28. Except as described above, the proposed Mergers meet all of the other criteria for pre-approved reorganizations and transfers under s. 5.6 of NI 81-102.

29. In the opinion of the Filer, the Mergers will be beneficial to securityholders in the Terminating Funds for the following reasons:

(a) securityholders in each Terminating Fund and Continuing Fund are expected to enjoy improved economies of scale and potentially lower proportionate fund operating expenses (which are borne indirectly by securityholders) as part of a larger combined Continuing Fund;

(b) due to the smaller size and historic growth profile of the Terminating Funds, the administrative and regulatory costs of operating the Terminating Funds as stand-alone mutual funds would be higher per securityholder and could potentially increase if the Terminating Funds decrease further in asset size;

(c) the comparatively larger portfolios of the Continuing Funds are expected to offer improved portfolio diversification to securityholders in each Terminating Fund;

(d) due to their smaller size, the Terminating Funds may be impacted more significantly than the much larger Continuing Funds by having to sell securities at inopportune times to fund redemptions. The larger Continuing Funds typically have larger cash balances as a result of their comparatively larger size;

(e) the Mergers transition securityholders in each Terminating Fund to a growing and more viable Continuing Fund;

(f) generally, the historical rates of return for each Continuing Fund have been higher than the historical rates of return for the Terminating Fund(s) with which it is proposed to be merged; and

(g) for each Terminating Trust Fund there will be a savings in brokerage charges, and, in the case of each Terminating Class, possibly taxes payable by securityholders, relative to the straight liquidation of assets if it were to be terminated.

Decision

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 NI 81-102 Merger Approval is granted.

"Darren McKall"
Assistant Manager, Investment Funds
Ontario Securities Commission