National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund merger – approval required because merger does not meet the criteria for pre-approval reorganizations and transfers under National Instrument 81-102 Investment Funds – a reasonable person may not consider the merger to have substantially similar investment objectives – merger to otherwise comply with pre-approval criteria, including securityholder approval – investors of terminating fund provided with timely disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 19.1.
August 15, 2016
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
NORTHWEST & ETHICAL INVESTMENTS L.P.
NEI NORTHWEST ENHANCED YIELD EQUITY CORPORATE CLASS
(the Terminating Fund and together with the Manager, the Filers)
The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction for approval pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) of the proposed merger (the Merger) of the Terminating Fund into the Continuing Fund (defined below) (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 (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 (the Other Jurisdictions).
Terms defined in National Instrument 14-101 Definitions, and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Continuing Fund means NEI Northwest Canadian Dividend Corporate Class;
Funds means the Terminating Fund and the Continuing Fund, collectively;
Underlying Fund means NEI Northwest Canadian Dividend Fund.
This decision is based on the following facts represented by the Filers:
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 and is registered as an investment fund manager in Ontario, British Columbia, Newfoundland and Labrador and Québec, as a portfolio manager in Ontario and an exempt market dealer in Ontario, British Columbia, Québec and Saskatchewan.
3. The Funds are separate classes of securities of Northwest Corporate Class Inc. (the Corporation), a mutual fund corporation governed under the laws of the province of Ontario.
4. Securities of the Funds are currently qualified for sale under a simplified prospectus, annual information form and fund facts each dated June 10, 2016 (collectively, the Offering Documents).
5. Each of the Funds is 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 Offering Documents.
9. NEI Northwest Canadian Dividend Corporate Class (the Continuing Fund) employs a fund-of-fund structure and invests substantially all of its assets in NEI Northwest Canadian Dividend Fund (the Underlying Fund).
The Merger Application
10. The Manager intends to reorganize the Funds by merging the Terminating Fund into the Continuing Fund.
11. Regulatory 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 because the fundamental investment objectives of the Continuing Fund are not, or may be considered not to be, “substantially similar” to the investment objectives of the Terminating Fund.
12. Except for the reason noted in paragraph 11 above, the Merger otherwise complies with all the criteria for pre-approved reorganizations and transfers as set forth in section 5.6 of NI 81-102.
13. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.
14. Securityholders of the Terminating Fund will continue to have the right to redeem securities of the Terminating Fund at any time up to the close of business on the business day immediately before the effective date of the Merger.
15. In accordance with National Instrument 81-106 – Investment Fund Continuous Disclosure, a press release announcing the proposed Merger was issued on June 9, 2016 and subsequently filed on SEDAR. A material change report with respect to the Terminating Fund relating the proposed Merger was filed via SEDAR on June 9, 2016, and the related prospectus disclosure in respect of the Terminating Fund that remained open for sale to the public was included in the Offering Documents.
16. A notice of meeting, a management information circular (the Circular) and a proxy in connection with special meetings of securityholders have been mailed to securityholders of the Funds commencing on August 2, 2016 and have been filed via SEDAR. The Circular provides securityholders of the Terminating Fund and the Continuing Fund with information about the differences between the Terminating Fund and the Continuing Fund, the management fee of the Continuing Fund and the tax consequences of the Merger.
17. Fund facts relating to the relevant series of the Continuing Fund will be mailed to securityholders of the Terminating Fund on or about August 19, 2016.
18. Securityholders of the Terminating Fund will be asked to approve the Merger at a special meeting to be held on or about August 30, 2016.
19. The Manager is of the view that the Merger will not be a “material change” for the Continuing Fund as the investment returns of the Continuing Fund are derived from the investment returns of its Underlying Fund, which is significantly larger in size than the Terminating Fund.
20. In accordance with corporate law requirements, securityholders of the Continuing Fund will be asked to approve an amendment to the articles of the Corporation in connection with the exchange of securities relating to the Merger at a special meeting to be held on or about August 30, 2016.
21. The Manager will pay for the costs of the Merger. These costs consist mainly of brokerage charges associated with the merger-related trades that occur both before and after the effective date of the Merger and legal, proxy solicitation, translation, printing, mailing and regulatory fees.
22. If the required approvals are obtained, the Terminating Fund will merge into the Continuing Fund at the close of business on or about September 16, 2016 (and in any event, before October 1, 2016) and the Continuing Fund will continue as a publicly offered open-ended mutual fund.
23. The Terminating Fund will be wound up following the Merger.
24. Securities of the Continuing Fund received by securityholders in the Terminating Fund as a result of the Merger will have the same sales charge option and, for securities purchased under low load, low load 2, low load 3 or deferred sales charge options, the same remaining deferred sales charge schedule as their securities in the Terminating Fund.
25. The Merger will be structured as follows:
(a) prior to the effective date of the Merger, all securities held by the Terminating Fund will be sold and converted to cash or cash equivalents. In this limited circumstance, the Terminating Fund may hold cash or money market instruments and may not be fully invested in accordance with its investment objectives for a period of time prior to the effective date of the Merger;
(b) the Corporation may elect to declare dividends payable to the shareholders of the Terminating Fund;
(c) the articles of incorporation of the Corporation, as amended, will be further amended to provide that all of the issued and outstanding shares of the Terminating Fund will be exchanged for shares of the Continuing Fund on a dollar-for-dollar basis and distributed to shareholders of the Terminating Fund. The holders of Series A shares and Series F shares of the Terminating Fund will receive corresponding Series A shares and Series F shares of the Continuing Fund. The shares of the Terminating Fund will be cancelled; and
(d) the cash and securities in the portfolio of assets attributable to the Terminating Fund will be included in the portfolio of assets attributable to the Continuing Fund and invested in the units of the Underlying Fund.
26. As required by National Instrument 81-107 – Independent Review Committee for Investment Funds (NI 81-107), the Manager presented the potential conflict of interest matters related to the proposed Merger to the Independent Review Committee (the IRC) for a recommendation. On May 12, 2016, the IRC reviewed the potential conflict of interest matters related to the proposed Merger and provided its positive recommendation for the Merger, after determining that the proposed Merger, if implemented, would achieve a fair and reasonable result for each Fund.
27. The investment objectives of the Terminating Fund compared to the Continuing Fund for which merger approval per representation 11 is being sought are as follows:
NEI Northwest Enhanced Yield Equity Corporate Class
The investment objective of NEI Northwest Enhanced Yield Equity Corporate Class is to achieve long-term growth of capital and a sustainable level of yield through the investment of its assets primarily in the Canadian equity market and by writing covered call options. The Fund invests primarily in common shares and, to a lesser extent, in money market and fixed income securities.
NEI Northwest Canadian Dividend Corporate Class
The investment objective of NEI Northwest Canadian Dividend Corporate Class is to achieve a balance between high dividend income and capital growth by investing mainly in a diversified portfolio of blue-chip Canadian common stocks and, to a lesser extent, in high-yield preferred stocks and interest bearing securities.
28. The Manager believes that the Merger will be beneficial to the securityholders of the Terminating Fund and the Continuing Fund for the following reasons:
- shareholders of the Terminating Fund will enjoy increased economies of scale and lower operating expenses as part of a larger combined Continuing Fund as the fixed administration fee of this Fund will be reduced from 0.45% to 0.40% for Series A shares and from 0.40% to 0.30% for Series F shares;
- because of the investment strategy of the Continuing Fund to invest in the Underlying Fund, there will be increased portfolio diversification opportunities than within the Terminating Fund; and
- each of the Continuing Fund and its Underlying Fund, as a result of its increased size, will benefit from a more significant profile in the marketplace.
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.
Investment Funds and Structured Products
Ontario Securities Commission