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MD Financial Management Inc
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – approval for change of control of manager under s. 5.5(1)(a.1) of National Instrument 81-102 Investment Funds – acquirer has requisite experience and integrity to participate in Canadian capital markets – transaction will not result in any material changes to operations and management of the manager or the funds it manages.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(a.1), 19.1.
September 18, 2018
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
MD FINANCIAL MANAGEMENT INC.
(the Manager)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Manager and 10803553 Canada Limited (the Purchaser and together with the Manager, the Filers) under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval pursuant to subsection 5.5(1)(a.1) of National Instrument 81-102 Investment Funds (NI 81-102) of a change of control of the Manager (the Approval Sought).
Under National Policy 11-203 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 each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (together with Ontario, the 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
The decision is based on the following facts represented by the Filers:
The Manager and the Canadian Medical Association
1. The Manager is a corporation incorporated under the laws of Canada with its head office located in Ottawa, Ontario. The Manager is registered as a portfolio manager in each of the provinces and territories of Canada and additionally is registered in Ontario in the category of commodity trading manager and investment fund manager. The Manager is also registered as an investment fund manager in the provinces of Québec and Newfoundland and Labrador. The Manager surrendered its registration as an exempt market dealer, which surrender was accepted by the Director as of August 23, 2018.
2. The Manager is the manager for the purposes of NI 81-102 and, other than in respect of MD Growth Investments Limited, trustee of all of the mutual funds identified in Schedule “A” hereto (each a Fund and collectively, the Funds).
3. The Manager is indirectly wholly-owned by CMA Holdings (2014) Inc. (CMA Holdings), which is a wholly-owned subsidiary of the Canadian Medical Association (CMA).
4. The CMA is an association incorporated and existing pursuant to An Act to Incorporate the Canadian Medical Association and is a national, voluntary association of physicians that advocates on behalf of its members and the public for access to high quality health care, and provides leadership and guidance to physicians.
5. The Manager is not in default of applicable securities legislation in any Jurisdiction.
The Funds
6. Each Fund is an open-end mutual fund trust or, in the case of MD Growth Investments Limited, a mutual fund corporation.
7. Each Fund is a reporting issuer in all of the Jurisdictions and subject to NI 81-102. The securities of each Fund are qualified for distribution pursuant to a simplified prospectus, fund facts and annual information form that have been prepared and filed in accordance with National Instrument 81-101 Mutual Funds Prospectus Disclosure.
8. Prior to June 1, 2018, the Funds were only available to “eligible” investors, as such term is defined in applicable account opening documentation, being members (and their families) and employees of the CMA. On or after June 1, 2018, investors in the Funds do not need to be members of the CMA, although investors must still be physicians (or members of a physician’s family or staff). The Funds known as the MD Funds are distributed exclusively through MD Management Limited (MDM), a wholly owned subsidiary of the Manager and a registered investment dealer and dealer member of the Investment Industry Regulatory Organization of Canada. The Funds known as the MDPIM Pools are generally distributed only to clients of the Manager who have established a discretionary managed account with the Manager, through its division known as MD Private Investment Counsel. Certain series of certain of the MDPIM Pools are also available to clients of MDM. These series are noted in Schedule “A”.
9. None of the Funds is in default of applicable securities legislation in any Jurisdiction.
The Purchaser and The Bank of Nova Scotia
10. The Purchaser is a private corporation that was incorporated to purchase 100% of the issued and outstanding shares of CMA Holdings, which indirectly owns all of the shares of the Manager (as further discussed below).
11. The Purchaser is a wholly-owned subsidiary of The Bank of Nova Scotia (Scotiabank) with its head office located in Toronto, Ontario. Scotiabank is a Schedule I bank formed and existing under the Bank Act (Canada). Common shares of Scotiabank are listed and posted for trading on the Toronto Stock Exchange and New York Stock Exchange.
12. Neither the Purchaser nor Scotiabank is in default of applicable securities legislation in any Jurisdiction.
The Proposed Transaction and the Amalgamation
13. In a press release issued on May 31, 2018, the CMA and Scotiabank announced that they entered into a share purchase agreement (the SPA) pursuant to which Scotiabank will indirectly acquire 100% of the issued and outstanding shares of CMA Holdings for consideration consisting of $2.585 billion (the Proposed Transaction) payable in cash at the Closing (as defined below). CMA Holdings owns, directly, 100% of the issued and outstanding shares of MD Financial Holdings Inc. (MDFHI), which owns, directly, 100% of the issued and outstanding shares of the Manager.
14. Completion of the Proposed Transaction is subject to customary closing conditions, including regulatory non-objections/approvals under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and the Approval Sought. Assuming timely receipt of all necessary regulatory non-objections/approvals and the satisfaction of all other conditions, the closing of the Proposed Transaction is expected to occur on or about September 28, 2018 or on such other later date when all of the conditions precedent have been satisfied or waived, and all non-objections/approvals have been obtained, subject to extension by the parties (the Closing). If completed as contemplated, following the date of Closing, Scotiabank will indirectly own 100% of the outstanding shares of the Manager.
15. On or following the date of Closing, Scotiabank may, for tax reasons, undergo a reorganization so that the Purchaser, CMA Holdings, MDFHI, and the Manager will continue as one corporation (Amalgamated Manager) (the Amalgamation) and the subsidiaries currently owned by the Manager will be owned by the Amalgamated Manager. Each of CMA Holdings, MDFHI, and the Purchaser is a private holding company, and none are registered or required to be registered under securities, commodity futures, or derivatives legislation in any Jurisdiction.
16. A material change report dated June 4, 2018 and amendments dated June 8, 2018 to the Funds’ current simplified prospectus, annual information form and related fund facts documents announcing the Proposed Transaction were filed on SEDAR.
17. Notice of the Proposed Transaction has been considered by the Compliance and Registrant Regulation branch of the principal regulator pursuant to section 11.9 of NI 31-103.
Change of Control of Manager
18. As the share ownership of the Manager will change such that after the date of Closing, Scotiabank will indirectly own 100% of the outstanding shares of the Manager, the Proposed Transaction will result in a change of control of the Manager and accordingly regulatory approval is required pursuant to section 5.5(1)(a.1) of NI 81-102.
Impact of the Proposed Transaction and the Amalgamation
19. Upon Closing, Scotiabank will become the ultimate parent of the Amalgamated Manager.
20. Neither the Proposed Transaction nor the Amalgamation is expected to result in any material changes to, or impact on, the business, operations and affairs of the Funds, the securityholders of the Funds, or the Manager. In particular, and notwithstanding the Amalgamation:
(a) There are no plans to change the role of the Amalgamated Manager as manager of the Funds or the structure of the Funds.
(b) There is no current intention to change the name or branding of the Funds as a result of the Proposed Transaction. “MD Financial Management”, the present phrase used to describe the business of the Manager, will operate as a distinct, stand-alone brand within Scotia Wealth Management following Closing.
(c) Following Closing and the Amalgamation, the Amalgamated Manager will continue to act as the investment fund manager of the Funds in materially the same manner as the Manager did immediately prior to the Closing.
(d) There is no current intention:
i. to make any substantive changes as to how the Manager operates or manages the Funds;
ii. to amalgamate or merge the Manager with any other investment fund manager; or
iii. to, immediately following the Proposed Transaction and the Amalgamation, or within a foreseeable period of time, change the Amalgamated Manager, as manager of the Funds, to another investment fund manager.
(e) There is no current intention to change the directors, officers, or senior management of the Manager, other than the addition of certain individuals associated with entities related to Scotiabank as new directors to the Board of the Amalgamated Manager, and the transfer to the CMA of two senior officers of the Manager, one of whom is presently a director of the Manager.
(f) Pursuant to the SPA, there will be no changes to the personnel employed by the Manager for one year. Specifically, following Closing, the Amalgamated Manager will retain the compliance supervisory personnel that were in place immediately prior to the Closing, including its chief compliance officer.
(g) It is not expected that there will be any immediate change to the fundamental investment objectives and strategies or the valuation procedures of the Funds as a result of the Proposed Transaction. It is not expected that there will be any immediate changes to fund accounting and other administrative functions undertaken by the current providers, both internal and external, to the Manager or the Funds as a result of the Proposed Transaction. The Amalgamated Manager may decide to change certain of the portfolio advisers for the Funds following the Closing, which is consistent with the Manager’s right to change the portfolio advisers for the Funds today. The Manager or Amalgamated Manager may decide to merge certain of the Funds and make other fundamental changes to the Funds (pursuant to NI 81-102) prior to or following the Closing.
(h) It is not expected that there will be any changes to the fees or expenses charged to the Funds as a result of the Proposed Transaction.
(i) It is not expected that the trustee of the Funds that are trusts will change. It is expected that the custodian of the Funds will be changed from State Street Trust Company to Scotiabank, as custodian. This will occur in due course following the completion of the Proposed Transaction and will be carried out in accordance with applicable laws.
(j) The members of the Independent Review Committee (IRC) of the Funds will cease to be IRC members by operation of section 3.10(1)(c) of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107). Immediately following the completion of the Proposed Transaction, the IRC will be reconstituted and the members of the IRC of the funds managed by 1832 Asset Management L.P. will be appointed as the IRC of the Funds. Each of these individuals is independent of the Manager.
21. No final decisions have been made as to any duplication of systems and some streamlining of such can be expected in due course.
22. To the extent that any related party issues arise following the Proposed Transaction, in particular if, in the future, the Amalgamated Manager wishes to appoint a service provider to a Fund that is an affiliate, including changing the custodian of the Funds, the Amalgamated Manager will establish written policies and procedures to address the conflict of interest matter and will refer such policies and procedures to the IRC for its review and input, in accordance with its obligations under NI 81-107.
23. The Proposed Transaction and the Amalgamation are not expected to adversely impact the financial stability of the Amalgamated Manager or its ability to fulfill its regulatory obligations. At this time, the Manager does not anticipate that the Proposed Transaction will give rise to any conflicts of interest in addition to those that are currently managed in the ordinary course of each Fund’s business.
Notice Requirement
24. The Manager provided written notice (the Notice) regarding the Proposed Transaction to each securityholder of the Funds as required by section 5.8(1) of NI 81-102. Delivery of the Notice was completed on July 19, 2018.
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.
“Stephen Paglia”
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission
SCHEDULE “A”
FUNDS
MD Precision Canadian Balanced Growth Fund (formerly MD Balanced Fund)
MD Bond Fund
MD Short-Term Bond Fund
MD Precision Canadian Moderate Growth Fund (formerly MD Dividend Income Fund)
MD Equity Fund
MD Growth Investments Limited
MD Dividend Growth Fund
MD International Growth Fund
MD International Value Fund
MD Money Fund
MD Select Fund
MD American Growth Fund
MD American Value Fund
MD Strategic Yield Fund
MD Strategic Opportunities Fund
MD Fossil Fuel Free Bond Fund
MD Fossil Fuel Free Equity Fund
MD Precision Conservative Portfolio
MD Precision Balanced Income Portfolio
MD Precision Moderate Balanced Portfolio
MD Precision Moderate Growth Portfolio
MD Precision Balanced Growth Portfolio
MD Precision Maximum Growth Portfolio
MDPIM Canadian Bond Pool
MDPIM Canadian Long Term Bond Pool
MDPIM Dividend Pool
MDPIM Strategic Yield
MDPIM Canadian Equity Pool +
MDPIM US Equity Pool +
MDPIM International Equity Pool
MDPIM Strategic Opportunities Pool
MDPIM Emerging Markets Equity Pool +
MDPIM S&P/TSX Capped Composite Index Pool +
MDPIM S&P 500 Index Pool +
MDPIM International Equity Index Pool+
Each of the Funds indicated with an + have a series that is available for acquisition through MD Management Limited.