Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund mergers -- approval required because merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- the merger will not be a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act (Canada) -- unitholders of terminating fund provided with timely and adequate disclosure regarding the merger.

Applicable Legislative Provisions

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

October 28, 2010

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

THE PROVINCE OF ONTARIO

(the "Jurisdiction")

AND

IN THE MATTER OF THE

PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

FRANKLIN TEMPLETON INVESTMENTS CORP.

(the "Manager")

AND

FRANKLIN TEMPLETON CANADIAN

SMALL CAP FUND (the "Terminating Fund")

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the "Application") from the Manager and the Terminating Fund (together, the "Filers") for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for approval of the merger (the "Merger") of the Terminating Fund into the Continuing Fund (as defined below) under section 5.5(1)(b) of National Instrument 81-102 ("NI 81-102") (the "Exemption Sought").

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

(a) the Ontario Securities Commission is the principal regulator for this Application, and

(b) the Filers have 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, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (the "Non-Principal Jurisdictions").

Interpretation

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:

"Continuing Fund" means Bissett Small Cap Fund;

"Effective Date" means the close of business on November 26, 2010 or as soon as practicable thereafter;

"Fund" or "Funds" means, individually or collectively, the Terminating Fund and the Continuing Fund; and

"Tax Act" means the Income Tax Act (Canada).

Representations

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

1. The Manager is a corporation existing under the laws of Ontario. The Manager is the manager of each of the Funds. The registered head office of the Manager is located in Toronto, Ontario.

2. Each of the Funds is an open-ended mutual fund trust established under the laws of Ontario by declarations of trust.

3. Units of the Funds are currently qualified for sale by a simplified prospectus and annual information form dated June 14, 2010, as amended September 13, 2010, which has been filed and receipted in the Jurisdiction and each of the Non-Principal Jurisdictions.

4. Each of the Funds is a reporting issuer in the Jurisdiction and each of the Non-Principal Jurisdictions. Neither the Filers nor the Continuing Fund is in default of the securities legislation in the Jurisdiction or in any of the Non-Principal Jurisdictions.

5. Other than circumstances in which the principal regulator or the securities regulatory authority of a Non-Principal Jurisdiction has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices set out in NI 81-102.

6. 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.

7. The Manager intends to merge the Terminating Fund into the Continuing Fund.

8. Pursuant to the Merger, unitholders of the Terminating Fund will receive units with the same value and in the same series of the Continuing Fund as they currently own in the Terminating Fund.

9. Unitholders of the Terminating Fund will be asked to approve the Merger at a meeting to be held on November 19, 2010.

10. The Funds' independent review committee ("IRC") has reviewed and made a positive recommendation with respect to the Merger, having determined that the Merger, if implemented, achieves a fair and reasonable result for the Terminating Fund. The decision of the IRC has been included in the notice of meeting as required by section 5.1(2) of National Instrument 81-107.

11. If the approval of the unitholders of the Terminating Fund is not received at the special meeting in respect of a Merger, the Merger will not proceed. However, in the view of the Manager, because continued operation of the Terminating Fund is no longer viable, if the Merger is not approved by the unitholders, the Terminating Fund will be wound up and terminated on or about December 29, 2010.

12. All costs attributable to the Merger (consisting primarily of legal, proxy solicitation, printing and mailing costs) will be borne by the Manager and will not be borne by the Terminating Fund or the Continuing Fund.

13. Unitholders of the 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 before the Effective Date. The management information circular mailed to unitholders of the Terminating Fund discloses that a unitholder's deferred sales charge schedule is not changed or eliminated as a result of the Merger, and that investors who redeem their units of the Terminating Fund may be subject to redemption charges as outlined in the simplified prospectus.

14. Effective as of the close of business on November 19, 2010, the Terminating Fund will cease distribution of units (except purchases under existing pre-authorized chequing plans). Following the Merger, all systematic investment programs and systematic withdrawal programs, like pre-authorized chequing plans and systematic withdrawal programs that had been established with respect to the Terminating Fund, will be re-established on a series-for-series basis in the Continuing Fund unless a unitholder advises the Manager otherwise. Unitholders may change or cancel any systematic program at any time and unitholders of the Terminating Fund who wish to establish one or more systematic programs in respect of their holdings in the Continuing Fund may do so following the Merger.

15. A material change report, press release and amendments to the simplified prospectus and annual information form, which gave notice of the proposed Merger, were filed via SEDAR on September 13, 2010.

16. A notice of meeting, management information circular and a proxy in connection with the meeting of unitholders were mailed to unitholders of the Terminating Fund and filed via SEDAR on October 25, 2010.

17. On October 7, 2005, in connection with a prior fund merger, the Manager received an exemption from the requirement to deliver:

(a) the Franklin Templeton Investment Funds simplified prospectus to securityholders of terminating funds in connection with all future mergers of mutual funds managed by the Manager (the "Future Mergers") pursuant to paragraph 5.6(1)(f)(ii) of NI 81-102; and

(b) the most recent annual and interim financial statements of the continuing fund to securityholders of the terminating funds in connection with all Future Mergers pursuant to paragraph 5.6(1)(f)(ii) of NI 81-102;

(the relief outlined in (a) and (b) is referred to as the "Prospectus and Financial Statement Delivery Relief").

18. In accordance with the conditions of the Prospectus and Financial Statement Delivery Relief, the material sent to unitholders of the Terminating Fund included a tailored simplified prospectus consisting of:

(a) the current Part A of the simplified prospectus of the Continuing Fund, and

(b) the current Part B of the simplified prospectus of the Continuing Fund.

19. In accordance with the conditions of the Prospectus and Financial Statement Delivery Relief,

(a) the information circular sent to unitholders in connection with the Merger provided sufficient information about the Merger to permit unitholders to make an informed decision about the Merger;

(b) each of the Terminating Fund and the Continuing Fund has an unqualified audit report in respect of its last completed financial period;

(c) the information circular sent to unitholders in connection with the Merger prominently discloses that unitholders can obtain the most recent interim and annual financial statements of the Continuing Fund by accessing the SEDAR website at www.sedar.com, by accessing the Manager's website at www.franklintempleton.ca, by calling a toll-free number or by contacting the Manager at service@franklintempleton.ca; and

(d) upon request by a unitholder for financial statements, the Manager will make best efforts to provide the unitholder with financial statements of the Continuing Fund in a timely manner so that the unitholder can make an informed decision regarding the Merger.

20. Provided the necessary unitholder and regulatory approvals are obtained, the Terminating Fund will merge into the Continuing Fund on the close of business on the Effective Date.

21. Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund governed by the laws of Ontario.

22. No sales charges will be payable in connection with the exchange of units of the Terminating Fund into units of the Continuing Fund.

23. The proposed Merger will be implemented pursuant to the following steps:

(a) Unitholders of the Terminating Fund are being asked to approve the merger of the Terminating Fund into the Continuing Fund. The Merger is conditional on the majority of the unitholders of the Terminating Fund that cast their votes voting for the approval of the Merger and on regulatory approval. If the necessary approvals are obtained, the Manager will carry out the following steps to complete the Merger.

(b) Because the investment objective and strategy of the Terminating and Continuing Fund are the same, it is expected that the Terminating Fund will transfer all of its assets which will consist of cash and portfolio securities, less an amount required to satisfy the liabilities of the Terminating Fund to the Continuing Fund in exchange for units of the Continuing Fund.

(c) The Terminating Fund will distribute to its unitholders sufficient net income and net realized capital gains so that it will not be subject to tax under the Tax Act for its taxation year ending on the Merger.

(d) Immediately following the above-noted transfer, each outstanding unit of the Terminating Fund will be exchanged on a dollar-for-dollar basis into an equivalent series of the Continuing Fund, so that the unitholders of the Terminating Fund shall become direct unitholders of the Continuing Fund holding the identical series of units.

(e) As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.

24. 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 NI 81-102, as the Merger will not be a "qualifying exchange" or a tax-deferred transaction under the Tax Act.

25. The Merger cannot be carried out as 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 because the Terminating Fund does not currently qualify as a "mutual fund trust" under the Tax Act.

26. Except as noted herein, the Merger will otherwise comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

27. The Filers submit that the Merger will result in the following benefits:

(a) The Continuing Fund qualifies as a "mutual fund trust" for tax purposes while the Terminating Fund does not so qualify;

(b) There will be a savings in brokerage charges over a straight liquidation of the portfolio of units of the Terminating Fund if it was terminated;

(c) The Merger will eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate mutual fund; and

(d) The Continuing Fund will have a portfolio of greater value, allowing for increased portfolio diversification opportunities.

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 Exemption Sought is granted.

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