Securities Law & Instruments

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund reorganization -- Approval required because mergers do not meet the criteria for pre-approval -- Funds have differing investment objectives and fees, and mergers conducted on a taxable basis -- Securityholders 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)(a), 5.6(1)(b).

May 16, 2013


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
NORTHWEST & ETHICAL INVESTMENTS L.P.
(THE MANAGER)

AND

NEI ETHICAL GROWTH FUND
NEI ETHICAL SELECT GLOBAL BALANCED PORTFOLIO
NEI ETHICAL SELECT GLOBAL GROWTH PORTFOLIO
NEI SELECT GLOBAL BALANCED CORPORATE CLASS PORTFOLIO
NEI SELECT CANADIAN GROWTH CORPORATE CLASS PORTFOLIO
NEI NORTHWEST SPECIALTY GROWTH FUND INC.
(each, a Terminating Fund(s) and
together with the Manager, the Filers)

DECISION



Background

The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Funds for a decision under the securities legislation of the Jurisdiction approving the proposed mergers described below (the Mergers) of the Terminating Funds into the Continuing Funds (defined in the table below and together with the Terminating Funds, the Funds) pursuant to paragraph 5.5(1)(b) of National Instrument 81 -- 102 Mutual Funds (NI 81-102) (the Approval 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 Manager 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 (Other Jurisdictions).

Interpretation

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

Representations

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

The Manager

1. The Manager is a corporation governed by the laws of the province of Ontario with its head office in Toronto, Ontario.

2. The Manager is the investment fund manager of the Funds. The Manager is registered as an investment fund manager in Ontario, British Columbia, Newfoundland and Labrador and Quebec, and as a portfolio manager in Ontario and British Columbia.

The Funds

3. The Funds, other than NEI Northwest Specialty Growth Fund Inc. (the SGFI Terminating Fund), are either open-ended mutual fund trusts established under the laws of the province of Ontario, or are (or will be, in the case of NEI Northwest Enhanced Yield Equity Corporate Class{1} (the New Corporate Class Continuing Fund)), separate classes of securities of Northwest Corporate Class Inc. (the Corporation), a mutual fund corporation governed under the laws of the province of Ontario. The SGFI Terminating Fund is a company incorporated under the laws of the province of Québec, which was converted from a closed-end mutual fund to an open-ended mutual fund.

4. Securities of each of NEI Ethical Growth Fund, NEI Ethical Canadian Dividend Fund, NEI Ethical Select Global Balanced Portfolio, NEI Ethical Select Canadian Balanced Portfolio, NEI Ethical Select Global Growth Portfolio and NEI Ethical Select Canadian Growth Portfolio (each, a Trust Fund and collectively, the Trust Funds) and the SGFI Terminating Fund are currently qualified for sale under the simplified prospectus, annual information form and fund facts each dated July 3, 2012, as amended (collectively, the July 3 Offering Documents). Securities of each of NEI Select Global Balanced Corporate Class Portfolio, NEI Select Canadian Growth Corporate Class Portfolio, NEI Select Canadian Balanced Corporate Class Portfolio, NEI Select Global Growth Corporate Class Portfolio and NEI Northwest Enhanced Yield Equity Corporate Class (together with the New Corporate Class Continuing Fund each, a Corporate Class Fund and collectively, the Corporate Class Funds) are currently qualified for sale under the simplified prospectus, annual information form and fund facts each dated October 31, 2012, as amended (the October 31 Offering Documents) or, in the case of the New Corporate Class Continuing Fund, will be qualified for sale under a simplified prospectus, annual information form and fund facts each dated on or about May 24, 2013 (the New Corporate Class Offering Documents and together with the July 3 Offering Documents and the October 31 Offering Documents, the Offering Documents).

5. Each of the Funds is, or will be, a reporting issuer under the applicable securities legislation of the province of Ontario and the Other Jurisdictions (the Legislation).

6. Neither the Manager nor the Funds is in default under the Legislation.

7. Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under NI 81-102.

8. The net asset value for each series of the Funds, as applicable, is calculated on a daily basis in accordance with the Funds' valuation policy and as described in the applicable Offering Documents.

The Proposed Mergers

9. The Manager intends to reorganize the Funds by merging each Terminating Fund set out in the table below into its respective Continuing Fund set out in the table below:

<<Merger #>>

<<Terminating Fund:>>

<<Continuing Fund:>>

<<This Merger is also referred to as:>>

 

 

 

 

Trust Fund Merger

 

 

 

 

Taxable Merger

 

1.

NEI Ethical Growth Fund

NEI Ethical Canadian Dividend Fund

 

 

 

 

Fee Structure Merger

 

 

 

 

Trust Fund Merger

 

 

NEI Ethical Select Global Balanced Portfolio

 

 

 

 

Taxable Merger

 

 

 

NEI Ethical Select Canadian Balanced Portfolio

 

2.

NEI Ethical Select Canadian Balanced Portfolio

(an Investment Objective Change Continuing Fund)

Investment Objective Merger

 

 

 

 

Investment Objective Change Merger

 

 

 

 

Trust Fund Merger

 

 

NEI Ethical Select Canadian Growth Portfolio

 

 

 

 

Taxable Merger

 

3.

NEI Ethical Select Global Growth Portfolio

(an Investment Objective Change Continuing Fund)

Investment Objective Merger

 

 

 

 

Investment Objective Change Merger

 

 

 

NEI Select Canadian Balanced Corporate Class Portfolio

 

 

 

 

Corporate Class Fund Merger

 

4.

NEI Select Global Balanced Corporate Class Portfolio

(a Continuing Corporate Class Fund, and

Investment Objective Merger

 

 

 

an Investment Objective Change Continuing Fund)

Investment Objective Change Merger

 

 

 

NEI Select Global Growth Corporate Class Portfolio

 

 

 

 

Corporate Class Fund Merger

 

5.

NEI Select Growth Corporate Class Portfolio

(a Continuing Corporate Class Fund)

Investment Objective Merger

 

 

 

 

SGIF Merger

 

 

 

 

Taxable Merger

 

6.

SGFI Terminating Fund

New Corporate Class Continuing Fund

Investment Objective Merger

 

 

 

 

Fee Structure Merger

10. Regulatory approval of the Mergers is required because each 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) In the case of the Investment Objective Mergers (i.e., Mergers #2, 3, 4, 5 and 6 in the table above), the fundamental investment objectives of the Continuing Funds are not, or may be considered not to be, "substantially similar" to the investment objectives of their corresponding Terminating Funds;

(b) In the case of the Fee Structure Mergers (i.e., Mergers #1 and 6 in the table above), the fee structure of the Continuing Funds is not, or may be considered not to be, "substantially similar" to the fee structure of their corresponding Terminating Funds; and

(c) In the case of the Taxable Mergers (i.e., Mergers #1, 2, 3 and 6 in the table above), these Mergers will not be completed as "qualifying exchanges" or tax-deferred transactions under the Income Tax Act (Canada).

11. Except as described in this decision, the proposed Mergers comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

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

13. The investment portfolio and other assets of each Terminating Fund to be acquired by or included in the portfolio of the applicable Continuing Fund in order to effect the Mergers are currently, or will be, acceptable, on or prior to the effective date of the Mergers, to the portfolio manager(s) of the applicable Continuing Fund and are, or will be, consistent with the investment objectives of the applicable Continuing Fund at the time of the Merger.

14. In accordance with National Instrument 81-106 -- Investment Fund Continuous Disclosure, a press release announcing the proposed Mergers and Investment Objective Change (as defined in paragraph 19) was issued on February 20, 2013 and subsequently filed on SEDAR. A material change report with respect to the Terminating Funds for the proposed Mergers and the Investment Objective Change Continuing Funds (defined in the table above) for the proposed Investment Objective Change was filed via SEDAR on Feburary 26, 2013 and amendments to the applicable Offering Documents with respect to the proposed Mergers and Investment Objective Change were filed via SEDAR on March 1, 2013.

15. A notice of meeting, a management information circular and a proxy in connection with special meetings of securityholders were mailed to securityholders of the Terminating Funds, the Investment Objective Change Continuing Funds and the Continuing Corporate Class Funds (defined in the table above) on April 5, 2013 and were subsequently filed via SEDAR.

16. Fund facts, and in the case of the New Corporate Class Continuing Fund, preliminary fund facts, relating to the relevant series of the Continuing Funds were mailed to securityholders of the corresponding Terminating Funds.

17. Securityholders of the Terminating Funds approved the Mergers at special meetings held on April 30, 2013.

18. Securityholders of the Investment Objective Change Continuing Funds approved a proposed change to the Investment Objective Change Continuing Funds' fundamental investment objectives (the Investment Objective Change) at special meetings of securityholders of the Investment Objective Change Continuing Funds held on April 30, 2013, to provide greater flexibility to invest in foreign property, as currently disclosed in the applicable Offering Documents.

19. Each Merger other than the Corporate Class Fund Mergers (i.e., Mergers #1, 2, 3 and 6 in the table above), will be effected on a taxable basis.

20. The Manager will pay for the costs of the Mergers. These costs consist mainly of brokerage charges associated with the merger-related trades that occur both before and after the effective date of the Mergers and legal, proxy solicitation, translation, printing, mailing and regulatory fees.

21. Each Terminating Fund will merge into the applicable Continuing Fund at the close of business on or about May 24, 2013 and the Continuing Funds will continue as publicly offered open-ended mutual funds.

22. Implicit in the approval by securityholders of the Investment Objective Change Mergers (i.e., Mergers #2, 3 and 4 in the table above), is the adoption by the Terminating Fund of the fundamental investment objective of the Investment Objective Change Continuing Fund. Investors in the Terminating Fund were informed about the Investment Objective Change in the management information circular when they were asked to consider the merits of the Investment Objective Change Merger of the Terminating Fund into the Investment Objective Change Continuing Fund. Implementation of the Investment Objective Change Mergers is conditional upon approval of the Investment Objective Change by securityholders of the applicable Investment Objective Change Continuing Fund.

23. All of the issued and outstanding securities of each Terminating Fund will be exchanged for securities of its applicable Continuing Fund on a dollar-for-dollar and series-by-series basis, so that securityholders of each Terminating Fund become securityholders of its applicable Continuing Fund.

24. Each Terminating Fund will be wound up following the applicable Merger.

25. As required by National Instrument 81-107 -- Independent Review Committee for Investment Funds, an independent review committee (IRC) has been appointed for the Funds. The Manager presented the potential conflict of interest matters related to the proposed Mergers to the IRC for a recommendation. On February 15, 2013, the IRC reviewed the potential conflict of interest matters related to the proposed Mergers and provided its positive recommendation for each of the Mergers, after determining that each proposed Merger, if implemented, would achieve a fair and reasonable result for each applicable Fund.

26. The Manager believes that the Mergers are beneficial to securityholders of each Terminating Fund and Continuing Fund for the following reasons:

Trust Fund Mergers (i.e., Mergers #1, 2 and 3 in the table above) and Corporate Class Fund Mergers (i.e., Mergers #4 and 5 in the table above)

(a) securityholders of certain applicable Terminating Funds and Continuing Funds will benefit from greater flexibility to invest in foreign property, which will provide a more appropriate level of diversification and exposure to a broader set of investment opportunities across global capital markets;

(b) securityholders of the applicable Terminating Fund and Continuing Fund may enjoy increased economies of scale and lower operating expenses as part of a larger combined Continuing Fund;

(c) each Continuing Fund will have a portfolio of greater value allowing for increased portfolio diversification opportunities than within the applicable Terminating Fund; and

(d) each Continuing Fund, as a result of its increased size, will benefit from a more significant profile in the marketplace,

SGFI Merger (i.e., Merger #6 in the table above)

(a) securityholders of the applicable Terminating Fund and Continuing Fund will benefit from greater flexibility to invest across the Canadian equity market, which will provide a more appropriate level of diversification and exposure to a broader set of investment opportunities; and

(b) once created, the Continuing Fund will be a class of shares of Northwest Corporate Class Inc. and so, as securityholders of the Continuing Fund, investors will be able to switch between different funds that are classes of Northwest Corporate Class Inc. without triggering a disposition of their shares for income tax purposes.

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 Approval Sought is granted.

'Darren McKall'
Investment Funds Branch

{1} A new class of shares of Northwest Corporate Class Inc. to be qualified for sale under a simplified prospectus to be dated on or before the date of the SGFI Merger (as defined herein).