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).
November 21, 2013
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
FT PORTFOLIOS CANADA CO.
IN THE MATTER OF
FIRST TRUST CANADIAN CAPITAL STRENGTH PORTFOLIO
(the Continuing Fund)
SCOTIAMCLEODTM CANADIAN CORE PORTFOLIO
(the Terminating Fund)
The principal regulator in Ontario has received an application from the Filer on behalf of the Terminating Fund and the Continuing Fund (each individually referred to herein as a Fund and together the Funds) for a decision under the securities legislation of Ontario granting approval, pursuant to section 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) of the proposed merger (the Merger) of the Terminating Fund into the Continuing Fund (the Approval Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission (the OSC) is the principal regulator for this application; and,
2. 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon Territory and Nunavut (together, with Ontario, the Jurisdictions).
Terms defined in NI 81-102, National Instrument 14-101 -- Definitions or MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
1. The Filer is an unlimited liability corporation governed by the laws of Nova Scotia.
2. The Filer is registered under the Securities Act (Ontario) as an investment fund manager and mutual fund dealer. The Filer is the manager of the Terminating Fund and the Continuing Fund.
3. The head office of the Filer is located at 330 Bay Street, Suite 1300, Toronto, Ontario M5H 2S8.
4. The Terminating Fund was launched on September 29, 2003 and is a mutual fund trust governed by a trust agreement.
5. The Continuing Fund was launched on November 30, 2001 and is a mutual fund trust governed by a trust agreement.
6. The Terminating Fund previously distributed its securities in all the Jurisdictions pursuant to a simplified prospectus, annual information form and fund facts each dated September 28, 2012 (the Terminating Fund Documents). The Terminating Fund Documents lapsed on September 28, 2013 (the Lapse Date). The Filer has not filed a renewal prospectus on behalf of the Terminating Fund in accordance with the securities legislation of the Jurisdictions (the Legislation) and therefore, purchases of, and switches to, units of the Terminating Fund have ceased and are no longer be permitted.
7. The Continuing Fund currently distributes its securities in all of the Jurisdictions pursuant to a simplified prospectus, annual information form and fund facts each dated September 27, 2013 (the Continuing Fund Documents).
8. The Terminating Fund and the Continuing Fund are reporting issuers under the Legislation.
9. Neither the Filer nor the Funds are in default of any of the requirements of the Legislation.
10. 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 the Legislation.
11. The net asset value (NAV) for each series of units of each Fund is calculated as at 4:00 p.m. Eastern Time on each day that the Toronto Stock Exchange is open for trading.
12. The proposed Merger was announced in:
a) a press release dated September 30, 2013; and
b) a material change report relating to the Terminating Fund dated October 1, 2013, both of which have been filed on SEDAR.
13. As required by National Instrument 81-107 -- Independent Review Committee for Investment Funds, the Filer presented the terms of the Merger to the independent review committee of the Terminating Fund (the IRC). The IRC determined on September 16, 2013, after reasonable inquiry, that the proposed Merger achieves a fair and reasonable result for the Terminating Fund.
14. Unitholders of the Terminating Fund will continue to have the right to redeem, or switch their units of the Terminating Fund at any time up to the close of business on the day prior to the Effective Date (as defined below).
15. Approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102, namely because: (i) a reasonable person may not consider the fundamental investment objectives of the Terminating Fund and that of the Continuing Fund to be "substantially similar"; (ii) a reasonable person may not consider the fee structure of the Terminating Fund and that of the Continuing Fund to be "substantially similar"; and (iii) the Merger will not be a tax-deferred transaction as described in paragraph 5.6(1)(b) of NI 81-102. Except for these three reasons, 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.
16. The Filer has determined that it would not be appropriate to effect the Merger as a "qualifying exchange" within the meaning of section 132.2 of theIncome Tax Act (Canada) (the Tax Act) or as a tax-deferred transaction for the following reasons: (i) the Terminating Fund has sufficient loss carry-forwards to shelter any net capital gains that could arise for it on the taxable disposition of its portfolio assets on the Merger; (ii) substantially all the unitholders in the Terminating Fund have an accrued capital loss on their units and effecting the Merger on a taxable basis will afford them the opportunity to realize that loss and use it against current capital gains or even carry it back as permitted under the Tax Act; (iii) effecting the Merger on a taxable basis would preserve the net losses and loss carry-forwards in the Continuing Fund; and (iv) effecting the Merger on a taxable basis will have no other tax impact on the Continuing Fund.
17. Unitholders of the Terminating Fund will be asked to approve the Merger at a special meeting scheduled to be held on or about November 21, 2013 (the Meeting).
18. A notice of meeting, management information circular (the Circular) and form of proxy in connection with the Meeting were mailed to unitholders of the Terminating Fund on October 25, 2013 and were subsequently filed on SEDAR. The most recently-filed fund facts document of the Continuing Fund was also included in the meeting materials sent to unitholders of the Terminating Fund.
19. The Circular provides unitholders of the Terminating Fund with information about (i) the investment objectives of the Funds, (ii) the fee structures of the Funds, (iii) the tax consequences of the Merger, and (iv) how unitholders of the Terminating Fund may obtain, at no cost, the most recent simplified prospectus, annual information form, fund facts document, interim and annual financial statements and management reports of fund performance of the Continuing Fund. Accordingly, unitholders of the Terminating Fund will have sufficient information to make an informed decision about the Merger.
20. The cost of effecting the Merger (consisting primarily of proxy solicitation, printing mailing, legal and regulatory fees) will be borne by the Filer.
21. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.
22. If unitholders approve the Merger at the Meeting and all required approvals for a Merger are obtained, it is intended that the Merger will occur after the close of business on the Effective Date. The Filer therefore anticipates that each unitholder of the Terminating Fund will become a unitholder of the Continuing Fund after the close of business on the Effective Date. The Terminating Fund will be wound-up as soon as reasonably possible following the Merger, but in any event no later than December 31, 2013.
23. The specific steps to implement the Merger are described below. The result of the Merger will be that investors in the Terminating Fund will cease to be unitholders in the Terminating Fund and will become unitholders in the Continuing Fund.
24. The proposed Merger will be structured as follows:
(a) The value of the Terminating Fund's portfolio and other assets will be determined at the close of business on the effective date of the Merger, which, if approved, is expected to be on or about November 22, 2013 (the Effective Date). If the assets held by the Terminating Fund are not suitable for the Continuing Fund, those assets will be sold prior to the Merger. Brokerage costs associated with such sales will be paid by the Filer.
(b) The Continuing Fund will acquire the investment portfolio and other assets of the Terminating Fund in exchange for units of the Continuing Fund.
(c) The Continuing Fund will not assume liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Effective Date.
(d) The Terminating Fund will distribute a sufficient amount of its net income and net realized capital gain, if any, to unitholders to ensure that it will not be subject to tax for its current year.
(e) The units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the portfolio assets and other assets that the Continuing Fund is acquiring from the Terminating Fund, and the units of the Continuing Fund will be issued at the applicable series net asset value per unit as of the close of business on the Effective Date.
(f) Immediately thereafter, units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund in exchange for their units in the Terminating Fund on a dollar-for-dollar and series-by-series basis.
(g) Following the Merger, the Terminating Fund will be wound up no later than December 31, 2013 and the Fund's user agreement with Scotia Capital Inc. in respect of its investment strategy will be terminated
25. If the Merger is approved, unitholders of the Terminating Fund will receive units of an equivalent series of the Continuing Fund, as shown opposite in the table below:
Series A units
Series A units
Series F units
Series F units
26. In the opinion of the Filer, the Merger will be beneficial to unitholders of the Funds for the following reasons:
(a) The Merger will reduce the duplication of administrative and regulatory costs involved in operating the Terminating Fund and the Continuing Fund as separate mutual funds.
(b) There is significant overlap between portfolio holdings of the Funds and the Merger would therefore eliminate a degree of redundancy and result in a more streamlined and simplified product line-up that is easier for investors to understand.
(c) The Continuing Fund will have a greater level of assets which is expected to allow for increased portfolio diversification opportunities and greater liquidity of investments.
(d) Unitholders of the Terminating Fund and the Continuing Fund may enjoy increased economies of scale for operating expenses as part of a larger combined Continuing Fund.
(e) The Continuing Fund, as a result of its greater size, may benefit from its larger profile in the marketplace.
Accordingly, the Filer has recommended to the unitholders of the Terminating Fund that they vote for the resolution that will authorize the Merger.
The principal regulator is satisfied that the decision meets the test set out in the securities legislation of Ontario for the principal regulator to make the decision.
The decision of the principal regulator under the securities legislation of Ontario is that the Approval Sought is granted.