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 mergers conducted on a taxable basis -- Securityholders provided with timely and adequate disclosure regarding the mergers.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 19.1.
June 2, 2015
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 1832 ASSET MANAGEMENT L.P. (the "Manager") AND IN THE MATTER OF DYNAMIC REAL RETURN BOND FUND, DYNAMIC AURION CANADIAN EQUITY CLASS, DMP CANADIAN DIVIDEND CLASS, DMP CANADIAN VALUE CLASS, DMP POWER CANADIAN GROWTH CLASS, DMP GLOBAL VALUE CLASS, DYNAMICEDGE 2020 CLASS PORTFOLIO, DYNAMICEDGE 2020 PORTFOLIO, DYNAMICEDGE 2025 CLASS PORTFOLIO, DYNAMICEDGE 2025 PORTFOLIO, DYNAMICEDGE 2030 CLASS PORTFOLIO, DYNAMICEDGE 2030 PORTFOLIO (collectively, the "Terminating Funds", and together with the Manager on behalf of the Terminating Funds, the "Filers")
The principal regulator in the Jurisdiction has received an application (the "Application") from the Filers for a decision (the "Requested Approval") under the securities legislation of the Jurisdiction (the "Legislation") approving the proposed mergers of the Terminating Funds with the Continuing Funds (as defined below) (the "Proposed Mergers") pursuant to clause 5.5(1)(b) of National Instrument 81-102 -- Investment Funds ("NI 81-102").
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 the Application, and
(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System is intended to be relied upon in each of the other provinces and territories of Canada (together with Ontario, the "Jurisdictions").
Unless otherwise defined herein, terms defined in National Instrument 14-101 -- Definitions and National Instrument 81-107 -- Independent Review Committee for Investment Funds ("NI 81-107") have the same meaning in this decision. In addition, the following terms have the following meanings:
means The Bank of Nova Scotia
means each of Dynamic Advantage Bond Fund, Dynamic Aurion Tactical Balanced Class, DMP Value Balanced Class, DMP Power Global Growth Class, DynamicEdge Conservative Class Portfolio, DynamicEdge Balanced Class Portfolio, DynamicEdge Balanced Portfolio, DynamicEdge Balanced Growth Class Portfolio and DynamicEdge Balanced Growth Portfolio
means the Continuing Funds and the Terminating Funds
means the Independent Review Committee of the Funds
Target Date Funds
means each of DynamicEdge 2020 Class Portfolio, DynamicEdge 2020 Portfolio, DynamicEdge 2025 Class Portfolio, DynamicEdge 2025 Portfolio, DynamicEdge 2030 Class Portfolio and DynamicEdge 2030 Portfolio
means the Income Tax Act (Canada)
1. The Manager is an Ontario limited partnership, which is wholly-owned indirectly by BNS. The general partner of the Manager is 1832 Asset Management G.P. Inc., an Ontario corporation wholly-owned directly by BNS with its head office in Ontario.
2. The Manager is registered as: (i) a portfolio manager in all of the provinces of Canada and in Northwest Territories and Yukon; (ii) an exempt market dealer in all of the provinces of Canada (except Prince Edward Island and Saskatchewan); (iii) an investment fund manager in Ontario, Quebec, Newfoundland and Labrador and Northwest Territories; and (iv) a commodity trading manager in Ontario.
3. Each of the Funds is either a mutual fund trust or a class of a mutual fund corporation established or incorporated under the laws of Ontario or the laws of Canada and is a reporting issuer under the applicable securities legislation of each Jurisdiction.
4. The securities of each Fund are qualified for distribution in the Jurisdictions pursuant to a simplified prospectus and annual information form prepared and filed in accordance with the securities legislation of the Jurisdictions.
5. Each Fund is subject to the requirements of NI 81-102. The securities of each Fund are issuable and redeemable each business day.
6. Neither the Manager nor any Fund is in default of securities legislation in any Jurisdiction.
7. This Application is being made in connection with the following Proposed Mergers:
Dynamic Real Return Bond Fund
Dynamic Advantage Bond Fund
Dynamic Aurion Canadian Equity Class
Dynamic Aurion Tactical Balanced Class
DMP Canadian Dividend Class
DMP Canadian Value Class
DMP Value Balanced Class
DMP Power Canadian Growth Class
DMP Global Value Class
DMP Power Global Growth Class
DynamicEdge 2020 Class Portfolio
DynamicEdge Conservative Class Portfolio
DynamicEdge 2020 Portfolio
DynamicEdge 2025 Class Portfolio
DynamicEdge Balanced Class Portfolio
DynamicEdge 2025 Portfolio
DynamicEdge Balanced Portfolio
DynamicEdge 2030 Class Portfolio
DynamicEdge Balanced Growth Class Portfolio
DynamicEdge 2030 Portfolio
DynamicEdge Balanced Growth Portfolio
8. In accordance with National Instrument 81-106 -- Investment Fund Continuous Disclosure, a press release announcing the Proposed Mergers and a related material change report were filed on SEDAR on March 13, 2015. Amendments to the Funds' simplified prospectus and annual information form and to the Terminating Funds' Fund Facts were filed on SEDAR on March 23, 2015.
9. Pursuant to NI 81-107, the IRC has reviewed the Proposed Mergers on behalf of the Funds and has advised the Manager that in the IRC's opinion, having reviewed each of the Proposed Mergers as a potential conflict of interest, each of the Proposed Mergers achieves a fair and reasonable result for each of the Funds.
10. Regulatory approval of the Proposed Mergers is required because the Proposed Mergers do 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) The Proposed Mergers between:
(i) Dynamic Aurion Canadian Equity Class and Dynamic Aurion Tactical Balanced Class;
(ii) DMP Canadian Dividend Class and DMP Value Balanced Class;
(iii) DMP Canadian Value Class and DMP Value Balanced Class;
(iv) DMP Power Canadian Growth Class and DMP Value Balanced Class;
(v) DynamicEdge 2020 Class Portfolio and DynamicEdge Conservative Class Portfolio;
(vi) DynamicEdge 2025 Class Portfolio and DynamicEdge Balanced Class Portfolio;
(vii) DynamicEdge 2030 Class Portfolio and DynamicEdge Balanced Growth Class Portfolio;
(viii) DynamicEdge 2020 Portfolio and DynamicEdge Conservative Class Portfolio;
(ix) DynamicEdge 2025 Portfolio and DynamicEdge Balanced Portfolio;
(x) DynamicEdge 2030 Portfolio and DynamicEdge Balanced Growth Portfolio; and
(xi) Dynamic Real Return Bond Fund and Dynamic Advantage Bond Fund
do not meet the requirements of clause 5.6(1)(a)(ii) of NI 81-102, as the investment objectives of each Terminating Fund may not be considered by a reasonable person to be substantially similar to the investment objectives of the Continuing Fund into which it will be merged.
(b) Contrary to clause 5.6(1)(b) of NI 81-102, the Proposed Mergers between:
(i) Dynamic Real Return Bond Fund and Dynamic Advantage Bond Fund;
(ii) DynamicEdge 2020 Portfolio and DynamicEdge Conservative Class Portfolio;
(iii) DynamicEdge 2025 Portfolio and DynamicEdge Balanced Portfolio; and
(iv) DynamicEdge 2030 Portfolio and DynamicEdge Balanced Growth Portfolio
will not be effected in reliance on the "qualifying exchange" or tax-deferred transaction provisions of the Income Tax Act. The Proposed Mergers referred to in items (b)(i), (iii) and (iv) are proposed to proceed as taxable mergers as there would be a deemed tax year-end for the Continuing Funds if such Proposed Mergers were undertaken on a tax-deferred basis pursuant to the "qualifying exchange" or tax-deferred transaction provisions of the Income Tax Act. Where a deemed tax year-end is triggered, such Continuing Funds would be required to make a distribution and any unused tax losses would expire. As a result, the Manager believes that it is in the best interests of such Terminating Funds and such Continuing Funds for such Proposed Mergers to be carried out on a taxable basis in order to avoid any adverse tax consequences to such Continuing Funds and their securityholders. With respect to the Proposed Merger referred to in item (b)(ii), there are currently no provisions under the Tax Act to allow for a tax-deferred merger between a mutual fund trust (DynamicEdge 2020 Portfolio) and a class of a mutual fund corporation (DynamicEdge Conservative Class Portfolio).
11. The Proposed Merger between DMP Global Value Class and DMP Power Global Growth Class does not meet the requirements of section 5.6(1) of NI 81-102 as the investment strategies of these Funds may not be considered by a reasonable person to be substantially similar.
12. Except as noted above, the Proposed Mergers will otherwise comply with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
13. The Manager has determined that the Proposed Mergers do not result in a material change for any of the Continuing Funds.
14. The investment portfolio and other assets of each Terminating Fund that will become assets of the corresponding Continuing Fund are acceptable to the portfolio advisor of the applicable Continuing Fund and are consistent with the investment objectives of the Continuing Fund. To the extent that a particular security may be unsuitable or undesirable for the Continuing Fund, that security will be sold prior to the Proposed Merger.
15. A Continuing Fund will be able to promptly invest any significant amounts of cash that the Continuing Fund receives from the Terminating Fund.
16. Investors of the Terminating Funds will be asked to approve the Proposed Mergers at special meetings of investors scheduled to be held on or about June 2, 2015. If approved by investors of the Terminating Funds, the Proposed Mergers are expected to become effective on or about June 19, 2015 (the "Merger Date").
17. It is proposed that the following steps will be carried out to effect the Proposed Merger of each Terminating Fund that is a mutual fund trust:
(a) Immediately following the close of business on the Merger Date, the Terminating Fund will transfer all of its net assets (after providing for the payment of its liabilities) to the applicable Continuing Fund with which the Terminating Fund is merging.
(b) In exchange, the Terminating Fund will receive securities of the relevant series of the applicable Continuing Fund, the aggregate value of which is equal to the aggregate net asset value (the "NAV") of the assets of the Terminating Fund transferred to such Continuing Fund, in each case calculated as of the close of business on the Merger Date.
(c) Immediately thereafter, the Terminating Fund will cause all of its securities to be redeemed in exchange for securities of the Continuing Fund. This will result in each securityholder of the Terminating Fund receiving securities of the applicable series of the Continuing Fund with a value equal to the NAV of the securities of the relevant series of the Terminating Fund that were held by such securityholder.
18. It is proposed that the following steps will be carried out to effect the Proposed Merger of each Terminating Fund that is a class of a mutual fund corporation:
(a) Immediately following the close of business on the Merger Date, each outstanding share of the Terminating Fund will be exchanged for shares of the equivalent series of the Continuing Fund based on the relative NAVs of the shares of each series being exchanged.
(b) The assets and liabilities of the applicable mutual fund corporation attributable to the Terminating Fund will be reallocated to the Continuing Fund. The mutual fund corporation will not dispose of any of its property as a result of the Proposed Merger.
19. On May 7, 2015, a management information circular and proxy in connection with the Proposed Mergers was both filed on SEDAR and mailed to investors of record of the Terminating Funds as at April 14, 2015. Each such investor will also be mailed the Fund Facts of the applicable Continuing Funds. The circular highlights the differences in investment objectives and investment structures (i.e. trust or corporation) between each of the Terminating Funds and its applicable Continuing Fund. Other information contained in the circular includes a summary of the IRC determination, a comparison of the management expense ratios and performance, of each Terminating Fund and the applicable Continuing Fund, as well as disclosure as to whether each Proposed Merger will be effected on a taxable basis. Accordingly, investors of the Terminating Funds will have an opportunity to consider this information prior to voting on the Proposed Mergers at the special meetings.
20. The Manager believes that the Proposed Mergers will be beneficial to securityholders of the Terminating Funds for the following reasons:
(a) the Continuing Funds have larger portfolios and, with the exception of the Continuing Funds into which the Target Date Funds will be merged, have similar or broader investment objectives than the corresponding Terminating Funds, and therefore have the potential to offer improved portfolio diversification and liquidity to securityholders of the Terminating Funds;
(b) each Continuing Fund into which a Target Date Fund will be merged (i) utilizes a similar "fund of funds" structure that is utilized by the corresponding Target Date Fund and (ii) has a virtually identical equity / fixed income allocation as the current allocation of the corresponding Target Date Fund;
(c) as each Terminating Fund is smaller than each applicable Continuing Fund, securityholders of a Terminating Fund should benefit from increased economies of scale as securityholders of the applicable Continuing Fund; and
(d) in the case of the Merger involving DynamicEdge 2020 Portfolio, securityholders of that Terminating Fund will become securityholders of DynamicEdge Conservative Class Portfolio, a class of Dynamic Global Fund Corporation, which will provide such securityholders with the opportunity to change mutual fund investments within Dynamic Global Fund Corporation while deferring the realization of any capital gains on their investments.
21. No sales charges, redemption fees or other fees or commissions will be payable by securityholders in connection with the Proposed Mergers. The costs and expenses specifically associated with the Proposed Mergers will be borne by the Manager.
22. The investors in the Terminating Funds will, in each case, receive the same series of securities of the Continuing Funds as such investors hold in the Terminating Funds.
23. The management fees for the relevant series of a Continuing Fund are, in each case, the same or lower than those of the applicable Terminating Fund.
24. Investors of the Terminating Funds will continue to have the right to redeem securities of the Terminating Funds up to the close of business on the business day immediately before the effective date of the Proposed Mergers.
25. As soon as reasonably possible following the date of the Proposed Mergers, the Terminating Funds will be wound up.
26. While the investment objective of each of the Terminating Funds is not entirely the same as the corresponding Continuing Fund with which it is proposed to be merged, the investment objectives of the Terminating Funds and Continuing Funds are, in each case, nevertheless complementary.
27. Investors of each Terminating Fund are expected to benefit from the increased scale and operational efficiencies of the applicable Continuing Fund, enjoying the same or lower management fees.
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 Requested Approval is granted.