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-approved reorganizations and transfers in National Instrument 81-102 -- a reasonable person may not consider certain of the merging funds to have substantially similar investment objectives and fee structures -- investors of terminating funds provided with timely disclosure regarding the mergers.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.5(3), 5.6, 5.7.

April 1, 2016

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 TD ASSET MANAGEMENT INC. (TDAM or the Filer) AND THE PROPOSED MERGERS (defined below)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Merging Funds (as defined below) for a decision under the securities legislation of the Jurisdiction (the Legislation) approving the proposed merger of each Merging Fund into the Continuing Fund (as defined below) opposite its name in the table below (the Proposed Mergers) pursuant to clause 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (the Merger Approval):

MERGING FUND

CONTINUING FUND

 

<<Proposed Corporate Fund Merger>>

 

TD Canadian Blue Chip Equity Class

TD Canadian Equity Class

 

<<Proposed Trust Fund Mergers>>

 

TD Mortgage Fund

TD Short Term Bond Fund

 

TD Canadian Blue Chip Equity Fund

TD Canadian Equity Fund

 

TD Latin American Growth Fund

TD Emerging Markets Fund

 

TD Energy Fund

TD Resource Fund

 

TD Precious Metals Fund

 

 

TD FundSmart Managed Income Portfolio

TD Managed Income Portfolio

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 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, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Yukon and Nunavut (collectively, the Passport 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.

The following terms shall have the following meanings:

Continuing Funds

refers to the Continuing Funds listed in the table above

 

Continuing Trust Funds

refers to the Continuing Funds listed under "Proposed Trust Fund Mergers" in the table above

 

Corporate Funds

refers to the Funds listed under "Proposed Corporate Fund Mergers" in the table above

 

Funds

refers, collectively, to the Merging Funds and the Continuing Funds

 

Merging Funds

refers to the Merging Funds listed in the table above

 

Merging Trust Funds

refers to the Merging Funds listed under "Proposed Trust Fund Mergers" in the table above

 

Trust Funds

refers to the Funds listed under "Proposed Trust Fund Mergers" in the table above

Representations

This decision is based on the following facts represented by the Filer in respect of the Filer and the Funds:

The Filer and the Funds

1. The head office of the Filer and the Funds is located in Toronto, Ontario.

2. The Filer and the Funds are not in default of securities legislation in any jurisdiction of Canada.

3. Each of the Corporate Funds is an open-end mutual fund corporate class of TD Mutual Funds Corporate Class Ltd. (TDMF Corp.), a multi-class mutual fund corporation incorporated under the laws of Canada that also offers other open-end mutual fund corporate classes.

4. Each of the Trust Funds is an open-end mutual fund trust established under the laws of Ontario by a declaration of trust.

5. Each Fund is a reporting issuer under the applicable securities legislation of each jurisdiction in Canada and is subject to NI 81-102.

6. The various series of the Funds, with the exception of TD FundSmart Managed Income Portfolio and TD Managed Income Portfolio, are qualified for distribution in the Jurisdiction and the Passport Jurisdictions pursuant to a simplified prospectus and annual information form dated July 23, 2015, as amended. The various series of TD FundSmart Managed Income Portfolio and TD Managed Income Portfolio are qualified for distribution in the Jurisdiction and the Passport Jurisdictions pursuant to a simplified prospectus and annual information form dated October 27, 2015, as amended.

7. TDAM is the manager and trustee of each of the Trust Funds and the manager of each of the Corporate Funds.

8. TDAM is registered (i) as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador; (ii) as a portfolio manager in each of the Jurisdiction and the Passport Jurisdictions; (iii) as an exempt market dealer in each of the Jurisdiction and the Passport Jurisdictions; and (iv) as a commodity trading manager in the Jurisdiction.

The Meetings and Proposed Mergers

9. In its capacity as manager of the Funds, TDAM is proposing to merge each Merging Fund into the Continuing Fund opposite its name in the table above.

10. TDAM has determined that the Proposed Mergers will not be a material change for any of the Continuing Funds other than TD Resource Fund. TDAM has determined that the Proposed Mergers relating to TD Resource Fund would constitute a material change for TD Resource Fund because each of TD Energy Fund and TD Precious Metals Fund is larger than TD Resource Fund.

11. Securityholder approval of the Proposed Mergers will be sought at special meetings of the securityholders of all of the Merging Funds and of the Continuing Funds, TD Resource Fund and TD Canadian Equity Class, to be held on or about April 6, 2016. Approval of the securityholders of TD Canadian Equity Class is required under applicable corporate law.

12. TDAM will be responsible for the costs associated with the special meetings of securityholders.

13. Subject to receipt of the requisite securityholder approvals and the Merger Approval, the Filer currently proposes to effect the Proposed Mergers on or about April 15, 2016 (the Merger Effective Date).

14. If the requisite securityholder approval is not received for a Proposed Merger, that Proposed Merger will not proceed.

15. The investment portfolio and other assets of each Merging Fund that will become assets of the corresponding Continuing Fund are acceptable to the portfolio manager of that Continuing Fund and are consistent with the investment objectives of the Continuing Fund. To the extent that the portfolio manager of the Continuing Fund does not wish to hold a particular security in the investment portfolio of the Merging Fund, the security will be sold prior to the Merger Effective Date.

16. TD Precious Metals Fund has obtained exemptive relief to invest in certain commodities (the Commodities Relief) that its corresponding Continuing Fund has not obtained. TD Precious Metals Fund does not currently hold, and will not hold at the time of its Proposed Merger into TD Resource Fund, any investments that were made in reliance on the Commodities Relief.

17. The value of any portfolio securities sold prior to the Proposed Mergers will depend generally on prevailing market conditions. TDAM will pay for any transaction costs associated with such portfolio holdings re-alignments undertaken in connection with the Proposed Mergers.

18. It is not expected that any of the securityholders of the Merging Funds will experience any adverse tax consequences as a result of the pre-merger liquidations. Prior to the Merger Effective Date:

(a) TD Canadian Blue Chip Equity Class, TD Mortgage Fund, TD Energy Fund, TD Precious Metals Fund and TD Latin American Growth Fund will liquidate a significant percentage of the securities in their portfolios. In the case of TD Canadian Blue Chip Equity Class, TD Energy Fund and TD Precious Metals Fund, TDAM anticipates that capital losses may be realized by the Funds as a result of the liquidations. In the case of TD Mortgage Fund and TD Latin American Growth Fund, TDAM anticipates that a small capital gain may be realized as a result of the liquidation which will be offset by the carry-forward of net capital losses from prior years; and

(b) TD Canadian Blue Chip Equity Fund and TD FundSmart Managed Income Portfolio will also liquidate a portion of the securities in their portfolios. However, in each case, the capital gain on the dispositions is not expected to be significant.

19. The Proposed Merger of each Merging Fund into its corresponding Continuing Fund involves the exchange of all of the securityholders' securities of each series of each Merging Fund for securities of the same series of the corresponding Continuing Fund and such exchange will be completed as a "qualifying exchange" or otherwise implemented as a tax-deferred transaction under the Income Tax Act (Canada) (the Tax Act).

20. The Proposed Corporate Fund Merger will be implemented as follows:

(a) Prior to the Proposed Corporate Fund Merger, TD Canadian Blue Chip Equity Class will liquidate the securities in its portfolio, which are mainly comprised of units of TD Canadian Blue Chip Equity Fund. As a result, TD Canadian Blue Chip Equity Class and TD Canadian Equity Class will each temporarily hold cash or money market instruments and will not be fully invested in accordance with their respective investment objectives for a brief period of time prior to, and following the Proposed Corporate Fund Merger.

(b) The articles of incorporation of TDMF Corp. (the TDMF Corp. Articles) will be amended to authorize the exchange of all the issued and outstanding shares of TD Canadian Blue Chip Equity Class for shares of TD Canadian Equity Class on a series-by-series and dollar-for-dollar basis.

(c) Each securityholder of TD Canadian Blue Chip Equity Class will receive shares of the same series of TD Canadian Equity Class with a value equal to the value of their shares of TD Canadian Blue Chip Equity Class as determined at the close of business on the Merger Effective Date in accordance with the TDMF Corp. Articles.

(d) On the Merger Effective Date, the net assets attributable to TD Canadian Blue Chip Equity Class (which will largely consist of cash and liabilities) will be included in the portfolio of assets and liabilities attributable to TD Canadian Equity Class.

(e) As soon as reasonably practicable following the Proposed Corporate Fund Merger, the unissued shares of TD Canadian Blue Chip Equity Class will be cancelled by TDMF Corp., and TD Canadian Blue Chip Equity Class will be terminated.

21. The Proposed Trust Fund Mergers will be implemented as follows:

(a) Prior to each Proposed Trust Fund Merger, the Merging Trust Fund will sell the securities in its portfolio that do not meet the investment objectives and investment strategies of the Continuing Trust Fund. In the case of the Proposed Trust Fund Mergers of TD Mortgage Fund into TD Short Term Bond Fund, TD Energy Fund into TD Resource Fund, TD Precious Metals Fund into TD Resource Fund and TD Latin American Growth Fund into TD Emerging Markets Fund, a significant percentage of the investment portfolio of the Merging Trust Funds will be liquidated prior to the Merger Effective Date. As a result, the Merging Trust Fund and the Continuing Trust Fund may each temporarily hold cash or money market instruments and may not be fully invested in accordance with their respective investment objectives for a brief period of time prior to, and following, the Proposed Trust Fund Merger.

(b) Prior to each Proposed Trust Fund Merger, each of the Merging Trust Fund and the Continuing Trust Fund will distribute to their respective securityholders sufficient net income (including net realized capital gains) so that neither of the funds will be subject to tax under Part I of the Tax Act for its taxation year ending on the Merger Effective Date.

(c) On the Merger Effective Date, each Merging Trust Fund will transfer all of its assets and its liabilities to the applicable Continuing Trust Fund in exchange for units of the Continuing Trust Fund. The units of the Continuing Trust Fund received by the Merging Trust Fund will have an aggregate net asset value equal to the value of the Merging Trust Fund's investment portfolio and other assets (minus the liabilities) that the Continuing Trust Fund is acquiring, which units will be issued at the applicable series net asset value per unit as of the close of business on the Merger Effective Date in accordance with its declaration of trust.

(d) Immediately thereafter, the Merging Trust Fund will redeem all of its outstanding units and will distribute to its securityholders the units of the Continuing Trust Fund received by it on a dollar-for-dollar and series-by-series basis in exchange for their units in the Merging Trust Fund.

(e) As soon as reasonably possible following the Proposed Trust Fund Mergers, each Merging Trust Fund will be wound up.

22. In each case, the securityholders in the Merging Funds will receive the same series of securities of the Continuing Fund, in the same currency, as such securityholders hold in the Merging Funds.

23. Investors in each Merging Fund will have the same purchase options and deferred sales charge schedules for the securities of the Continuing Fund that they will receive in exchange for their securities of the Merging Fund as a result of the applicable Proposed Merger.

24. Costs and expenses associated with the Proposed Mergers will be borne by the Filer and will not be charged to the Funds. The costs of the Proposed Mergers include legal, printing, mailing and regulatory fees, as well as proxy solicitation and brokerage costs.

25. No sales charges will be applied on the Proposed Mergers.

Comparison of Merging Funds and Continuing Funds

26. 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. Specifically:

(a) the investment objectives of each Merging Fund are not, in the opinion of TDAM, substantially similar to the investment objectives of its corresponding Continuing Fund;

(b) a portion of the portfolio holdings of each Merging Fund is not acceptable to the portfolio manager of its corresponding Continuing Fund; and

(c) in respect of the Proposed Merger of TD Mortgage Fund into TD Short Term Bond Fund, the Investor Series and Advisor Series of the Merging Trust Fund, TD Mortgage Fund, are subject (in addition to the management fee) to an administration fee, payable to TDAM, of 0.15%, in consideration for TDAM paying certain operating expenses of the Merging Trust Fund, which include recordkeeping and communication costs, custodial costs, certain legal fees, audit fees, regulatory filing fees and bank charges. None of the series of the Continuing Trust Fund, TD Short Term Bond Fund, is subject to an administration fee, and the Continuing Trust Fund is responsible for payment of its operating expenses.

27. The Proposed Mergers 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.

Reasons for and Benefits of Mergers

28. The Filer believes the Proposed Mergers are in the best interest of the Funds and their securityholders. In selecting a continuing fund for a Merging Fund, TDAM considered the investment mandate, portfolio holdings and fee structures of the Funds. TDAM selected the Continuing Funds from amongst the Funds it manages, and believes that the Proposed Mergers will be beneficial to the securityholders of each Fund, for the following reasons:

(a) In the cases of the Proposed Mergers of TD Canadian Blue Chip Equity Class and TD Canadian Blue Chip Equity Fund into TD Canadian Equity Class and TD Canadian Equity Fund, respectively, the investment objectives of the respective Continuing Funds are broader than those of their Merging Funds. The Continuing Funds' investments are not limited to securities of large-capitalization issuers. Accordingly, each Continuing Fund offers greater flexibility to seek growth opportunities and investments in cyclical sectors when the portfolio adviser believes investing in such sectors will be rewarded with greater return potential.

(b) In the case of the Proposed Merger of TD Mortgage Fund into TD Short Term Bond Fund, the current and expected long term low interest rate environment has resulted in lower yields in mortgage investments, reducing the desirability of investing in mortgages due to the relatively higher cost of investing, as reflected in TD Mortgage Fund's management expense ratios. In the view of TDAM, short-term bonds can potentially generate similar gross returns at lower cost and accordingly investing in a short-term bond fund presents a lower cost option for investors. TD Mortgage Fund will liquidate the mortgages in its portfolio prior to the Merger Effective Date and TDAM does not propose to transfer any mortgages to TD Short Term Bond Fund upon completion of the Proposed Merger.

(c) In the case of the Proposed Merger of TD Latin American Growth Fund into TD Emerging Markets Fund, the investment objective of the Continuing Fund is broader than that of the Merging Fund. The Continuing Fund's investments are not limited to those in Latin America. They include those in other emerging countries around the world. Accordingly, the Continuing Fund has greater flexibility to seek growth opportunities with potentially lower risks as it is not limited to investments in Latin America.

(d) In the case of the Proposed Merger of TD Energy Fund into TD Resource Fund, the investment objective of the Continuing Fund is broader than that of the Merging Fund. Unlike the Merging Fund, the Continuing Fund's investments are not limited to equity securities in the energy sector. They include those in the resource and resource-related industries (including the energy industry) anywhere in the world. Accordingly, the Continuing Fund has greater flexibility to seek growth opportunities and risk reduction as it is not limited to the energy sector. The broader investment mandate of the Continuing Fund provides it with greater ability to seek growth opportunities and reduce volatility in the following ways: the Continuing Fund has greater flexibility to invest outside Canada; the ability to invest outside of Canada gives the Continuing Fund greater opportunity to invest in a wider range of large-cap issuers; and the broader mandate of the Continuing Fund permits the portfolio adviser to invest across sectors in the resource industry in order to seek growth opportunities while reducing exposure to depressed or distressed sectors.

(e) In the case of the Proposed Merger of TD Precious Metals Fund into TD Resource Fund, the investment objective of the Continuing Fund is broader than that of the Merging Fund. Unlike the Merging Fund, the Continuing Fund's investments are not limited to equity securities in the precious metals sector. They include those in the resource and resource-related industries (including precious metals) anywhere in the world. Accordingly, the Continuing Fund has greater flexibility to seek growth opportunities and risk reduction as it is not limited to the precious metals sector.

(f) In the case of the Proposed Merger of TD FundSmart Managed Income Portfolio into TD Managed Income Portfolio, there is considerable overlap in the investment portfolios of the Merging Fund and the Continuing Fund, but the Merging Fund has an allocation to another mutual fund that the Continuing Fund does not. The Merging Fund has underperformed compared to the Continuing Fund. Accordingly, TD believes that investors in the Merging Fund would potentially be better served if they become investors in the Continuing Fund.

(g) The management fees for the relevant series of a Continuing Fund are, in each case, the same or lower than those of the applicable Merging Fund's relevant series.

29. For any Merging Fund that was identified by TDAM as a merger candidate, the other option, instead of a merger, would be to continue or terminate such Fund. Continuing a Merging Fund means the Fund may remain at a relatively small size and will further decrease in size if it continues to experience negative net sales. Issues faced by small size funds, compared to larger funds, typically include more limited portfolio diversification opportunities and, therefore, possibly less potential for investment returns and the reduction of investment risks. In addition, larger funds tend to have a greater profile in the marketplace, enabling the fund to attract more investors, which in turn enables the fund to maintain a "critical mass". As a result of the Proposed Mergers, investors in each Merging Fund will become part of a larger, combined Continuing Fund. A larger fund offers the potential for greater portfolio diversification and accordingly greater potential for investment returns and risk reduction.

Securityholder Disclosure

30. A press release announcing the Proposed Mergers was issued and filed on the System for Electronic Document Analysis and Retrieval (SEDAR) on October 23, 2015. A material change report with respect to the Proposed Mergers was filed on SEDAR on October 23, 2015. In connection with the Proposed Mergers, amendments to the TD Mutual Funds' simplified prospectus dated July 23, 2015, the TD Mutual Funds' annual information form dated July 23, 2015, and the fund facts documents pertaining to the Merging Funds (other than TD FundSmart Managed Income Portfolio) and TD Resource Fund were filed on October 29, 2015. Furthermore, the simplified prospectus and annual information form of the TD Managed Assets Program Portfolios and the fund facts document of TD FundSmart Managed Income Portfolio describing the Proposed Merger of TD FundSmart Managed Income Portfolio into TD Managed Income Portfolio were filed on October 27, 2015.

31. The relevant notices of the special meetings and management information circular (the Circular) was mailed on March 11, 2016 to securityholders of the Merging Funds, TD Resource Fund and TD Canadian Equity Class and was filed on SEDAR in accordance with applicable securities legislation.

32. The Circular includes a comparison describing the similarities and differences between each Merging Fund and its Continuing Fund, and includes information regarding fees, expenses, investment objectives, investment strategies, the manager, the portfolio manager, and net asset values and discusses the income tax considerations applicable to the Proposed Mergers. The Circular also discloses where securityholders can obtain the most recent simplified prospectus, annual information form, fund facts, interim and annual financial statements and/or reports and management report of fund performance of the Merging Funds and the Continuing Funds at no cost. In connection with the delivery of the Circular to securityholders, the fund facts document of the relevant Continuing Fund was also provided.

Securityholder Purchases and Redemptions

33. Securities of the Funds are redeemable daily at their net asset value per security calculated daily.

34. Securityholders of a Merging Fund will have the right to redeem securities of, or make switches out of, a Merging Fund, up to the close of business on the business day immediately before the Merger Effective Date.

35. TDAM will not charge investors any redemption fees, sales charges or other fees for any transactions involving securities of the Merging Funds purchased on or prior to October 23, 2015, the date that TDAM announced the Proposed Mergers. After the applicable Proposed Merger, redemptions of the securities of the Continuing Fund received in exchange for these securities of the Merging Funds will not be subject to any redemption fees. Securities of the Merging Funds purchased after October 23, 2015 will be subject to the usual redemption fees if they were purchased under the back-end load option or either of the low-load options. After the applicable Proposed Merger, redemptions of the securities of the Continuing Fund received in exchange for these securities of the Merging Funds will be subject to the usual redemption fees, based on the date on which an investor originally purchased the securities of the Merging Fund.

36. Following each Proposed Merger, systematic plans or any other optional services or programs that have been established for a Merging Fund and administered by TDAM will be re-established for the applicable Continuing Fund, unless an investor advises otherwise. However, as disclosed in the Circular, where an investor in a Merging Fund already has a pre-authorized purchase plan or a pre-authorized contribution plan set up for the Continuing Fund, after the Proposed Merger, such investor's plan in the Continuing Fund will continue and the plan in the Merging Fund will not be re-established for the Continuing Fund.

37. Each Merging Fund has the same valuation principles and distribution policy as its corresponding Continuing Fund.

38. Securityholders of the Merging Funds who have elected to receive distributions in cash from the Merging Fund before the Proposed Merger will receive distributions in cash from the Continuing Fund after the Proposed Merger.

IRC Review

39. Pursuant to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), the Independent Review Committee for the Funds (the IRC) has provided a positive recommendation for the Proposed Mergers, after determining 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.

40. A summary of the IRC's recommendation has been included in the notice of special meetings sent to securityholders as required by section 5.1(2) of NI 81-107.

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 Merger Approval is granted in respect of each Proposed Merger, provided that the Filer obtains the prior securityholder approvals for the Proposed Merger at the special meetings held for that purpose, or any adjournments thereof.

"Raymond Chan"
Manager,
Investment Funds and Structured Products Branch
Ontario Securities Commission