Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdiction -- approval of investment fund merger -- approval required because the merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 Investment Funds -- the terminating fund and continuing fund do not have substantially similar fundamental investment objectives and fee structures -- the merger will not be a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act (Canada) -- the merger otherwise complies with pre-approval criteria, including securityholder vote, IRC approval and will provide benefits to securityholders -- securityholders provided with timely and adequate disclosure regarding the merger.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.7(1)(b), 19.1(2).

July 14, 2020

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 NINEPOINT PARTNERS LP (the Filer) AND NINEPOINT ENHANCED BALANCED FUND (the Terminating Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction (the Legislation) for approval of the proposed merger (the Merger) of the Terminating Fund into Ninepoint Enhanced Equity Class (the Continuing Fund, and together with the Terminating Fund, the Funds) under paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (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 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 the other provinces and territories of Canada (together with Ontario, the Canadian 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

This decision is based on the following facts represented by the Filer:

The Filer

1. The Filer is a limited partnership under the laws of the Province of Ontario with its head office located in Toronto, Ontario.

2. The Filer is registered under the securities legislation: (i) in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador as an adviser in the category of portfolio manager; (ii) in Ontario, Newfoundland and Labrador and Quebec as an investment fund manager; and (iii) in British Columbia, Alberta, Quebec, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador as a dealer in the category of exempt market dealer.

3. The Filer is the investment fund manager of the Funds.

4. The Filer is not in default of any requirement of securities legislation in any of the Canadian Jurisdictions.

The Funds

5. The Terminating Fund is an open-ended mutual fund trust established under the laws of Ontario.

6. The Continuing Fund is a separate class of shares of the Ninepoint Corporate Class Inc. (the Corporation), a mutual fund corporation governed under the laws of Ontario.

7. Securities of the Terminating Fund and the Continuing Fund are currently qualified for sale under a simplified prospectus, annual information form and fund facts dated April 21, 2020 (collectively, the Offering Documents), as amended on May 27, 2020 to reflect the Merger and the proposed investment objective change.

8. Each of the Funds is a reporting issuer under the applicable securities legislation of the Canadian Jurisdictions.

9. The Funds are not in default of any requirement of securities legislation in any of the Canadian Jurisdictions.

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 NI 81-102.

11. The net asset value for each series of the Funds is calculated on a daily basis in accordance with the Funds' valuation policy and as described in the Offering Documents.

12. Subject to obtaining approval of the securityholders of the Continuing Fund in respect of a proposed change to the investment objective, the investment objective and name of the Continuing Fund will be changed on or about the effective date of the Merger. The new fund name is expected to be Ninepoint Risk Advantaged U.S. Equity Index Class.

Reason for Approval Sought

13. The Approval Sought 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. The pre-approval criteria are not satisfied in the following ways:

(a) the current and proposed fundamental objectives of the Continuing Fund are, or may not be considered to be "substantially similar" to the investment objectives of the Terminating Fund;

(b) the fee structure of the Continuing Fund may not be considered to be "substantially similar" to the fee structure of the Terminating Fund; and

(c) the Merger will not be completed as a "qualifying exchange" under the Income Tax Act (Canada) (the Tax Act).

14. The investment objectives of the Terminating Fund and the Continuing Fund, and the proposed investment objectives of the Continuing Fund are as follows:

Terminating Fund

Continuing Fund

Investment Objective

Current Investment Objective

Proposed Investment Objective

The investment objective of Ninepoint Enhanced Balanced Fund is to achieve long-term capital growth and current income. The Fund invests primarily in Canadian equities, fixed-income securities of Canadian issuers, and foreign equities and foreign fixed-income securities.

The investment objective of Ninepoint Enhanced Equity Class is to achieve long-term capital growth by investing primarily in Canadian and U.S. equity securities.

The Fund's investment objective is to obtain exposure to the performance of the S&P 500 Index, or a successor or replacement index (the "Index") and through the use of option strategies seek to moderate the volatility of that performance.

15. As a result of the Merger, securityholders of the Terminating Fund will receive securities of the Continuing Fund that have a management fee that is 0.05% higher than the management fee charged in respect of their securities of the Terminating Fund.

16. The Merger will be effected on a taxable basis because the Manager determined that less than 25% of securityholders of the Terminating Fund are expected to be in an unrealized gain position at the time of the Merger. In addition, for most of these securityholders, the Manager has determined that the resultant tax payable as a result of the Merger will be minimal. The Manager further determined that the cost to proceed with a s.85 rollover transaction in effecting the Merger would be unwarranted given the minimal impact on securityholders to complete the Merger on a tax deferred basis.

17. Except as described in this decision, the proposed Merger complies with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

The Proposed Merger

18. The Filer intends to reorganize by merging the Terminating Fund into the Continuing Fund such that securityholders of the Terminating Fund will be become securityholders of the Continuing Fund.

19. 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.

20. No sales charges will be payable by securityholders of the Terminating Fund in connection with the Merger.

21. Securities of the Terminating Fund and the Continuing Fund are, and are expected to continue to be at all material times, "qualified investments" under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans and tax free savings accounts.

22. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, an Independent Review Committee (the IRC) has been appointed for the Funds. The Filer presented the potential conflict of interest matters related to the Merger to the IRC for its recommendation. The IRC reviewed the potential conflict of interest matters related to the Merger and on May 20, 2020, provided its positive decision after determining that the Merger, if implemented, would achieve a fair and reasonable result for each Fund.

23. In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure, a press release announcing the proposed Merger was issued and filed by the Terminating Fund via SEDAR on May 25, 2020. A material change report with respect to the proposed Merger was filed via SEDAR on May 25, 2020.

24. The Filer has concluded that the Merger will not be a "material change" for the Continuing Fund.

25. A notice of meeting, a management information circular, a proxy and fund facts documents for the Continuing Fund in connection with special meetings of securityholders were mailed to securityholders of the Terminating Fund on June 26, 2020 and concurrently filed via SEDAR. The fund facts document mailed to securityholders of the Terminating Fund included a description of the proposed investment objective change of the Continuing Fund.

26. Securityholders of the Terminating Fund will be asked to approve the Merger at a special meeting to be held on or about July 20, 2020. Securityholders of the Terminating Fund holding Series T and Series FT units will be asked to approve the Merger separately as a class at the special meeting because following the Merger such holders will receive shares of the Continuing Fund that do not have a fixed monthly distribution, unlike their units of the Terminating Fund.

27. The Filer 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, printing, mailing and regulatory fees.

28. On or about the effective date of the Merger, the Continuing Fund proposes to redesignate certain series of its shares whereby Series A1 and Series T shares will be redesignated as Series A shares and Series F1 and Series FT shares will be redesignated as Series F shares. Securityholders of the Terminating Fund will receive securities of the equivalent series of the applicable Continuing Fund as they currently own in the Terminating Fund, with the exception of Series A1 and Series T securityholders, who will receive Series A shares and Series F1 and Series FT securityholders who will receive Series F shares of the Continuing Fund, on the effective date of the Merger. Securityholders that purchased securities of the Terminating Fund under the initial sales charge option or that were not subject to a sales charge will receive securities of the Continuing Fund that are not subject to a deferred sales charge. Securityholders that purchased securities of the Terminating Fund under the low load purchase option will receive securities of the Continuing Fund that are not subject to any deferred sales charges because the Continuing Fund will no longer offer a low load deferred sales charge option on the effective date of the Merger. No deferred sales charge will be applied to redemptions of securities of the Continuing Fund occurring after the Merger.

29. The Merger has been approved by the board of directors of each of the Filer and the Corporation.

30. If all required approvals for the Merger are obtained, it is intended that the Merger will occur on or about the close of business on July 29, 2020 (the Effective Date). The Filer therefore anticipates that each securityholder of the Terminating Fund will become a securityholder of the Continuing Fund after the close of business on the Effective Date.

31. The tax implications of the Merger, differences between being a securityholder of mutual fund corporation and a securityholder of a mutual fund trust, differences between the investment objectives as well as the differences between the fee structures of the Terminating Fund and the Continuing Fund and the IRC's recommendation of the Merger are described in the management information circular so that the securityholders of the Terminating Fund can consider this information before voting on the Merger. The meeting materials will also describe the various ways in which investors can obtain a copy of the simplified prospectus, annual information form and fund facts document(s) for the Continuing Fund and its most recent interim and annual financial statements and management reports of fund performance.

32. In light of the disclosure in the management information circular, securityholders of the Terminating Fund have all the information necessary to determine whether the proposed Merger is appropriate for them.

Merger Steps

33. The proposed merger of the Terminating Fund into the Continuing Fund will be structured as follows:

(a) Prior to effecting the Merger, the Terminating Fund will liquidate a portion of the securities in its portfolio. As a result, the Terminating Fund will temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger being effected.

(b) The value of the Terminating Fund's investment portfolio and other assets will be determined at the close of business on the business day prior to the effective date of the Merger in accordance with the constating documents of the Terminating Fund.

(c) The Corporation will acquire the investment portfolio and other assets of the Terminating Fund in consideration for securities of the Continuing Fund in such series as is required to effect the series exchange as set forth in the table below.

(d) The Corporation will not assume any 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 of the Merger.

(e) The Terminating Fund will distribute a sufficient amount of its net income and net realized capital gains, if any, to securityholders to ensure that the Terminating Fund will not be subject to tax for its current tax year.

(f) Immediately thereafter, securities of the Continuing Fund received by the Terminating Fund will be distributed to securityholders of the Terminating Fund in exchange for their securities in the Terminating Fund on a dollar-for-dollar basis, as applicable and in accordance with the following series exchange chart:

Terminating Fund

Continuing Fund

Series A, Series A1, Series T

Series A

Series F, Series F1, Series FT

Series F

Series D

Series D

(g) The securities 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 securities of the Continuing Fund will be issued at the applicable series net asset value per security as of the close of business on the business day prior to the effective date of the Merger.

(h) As soon as reasonably possible following the Merger, and in any case within 60 days following the effective date of the Merger, the Terminating Fund will be wound up.

Benefits of the Merger

34. The Filer believes that the Merger is beneficial to securityholders of each Fund for the following reasons:

(a) the Merger will result in a more streamlined and simplified product line-up that is easier for investors to understand;

(b) there is overlap between the portfolio holdings of the Terminating Fund and the portfolio holdings of the Continuing Fund, and thus the Merger will contribute towards reducing duplication and redundancy across the fund line-up;

(c) the Merger provides securityholders of the Terminating Fund with options to (a) switch to another investment, (b) redeem their investment, and (c) maintain an investment with the Filer in the Continuing Fund without having to initiate a switch with the advisor, which provides the securityholders of the Terminating Fund with flexibility, convenience and potential cost savings;

(d) the Merger will eliminate the administrative and regulatory costs of operating each of the Terminating Fund and Continuing Fund as separate funds;

(e) following the Merger, the Continuing Fund will have a portfolio of greater value, which may allow for increased portfolio diversification opportunities if desired;

(f) the Continuing Fund, as a result of its greater size, may benefit from its larger profile in the marketplace;

(g) in completing the Merger on a taxable basis, less than 25% of securityholders of the Terminating Fund will be in an unrealized gain position which will require the payment of tax on disposition of their securities of the Terminating Fund in exchange for securities of the Continuing Fund;

(h) the Continuing Fund, as a result of its greater size, may benefit from a lower MER compared to the MER of the Terminating Fund, despite the Terminating Fund having a 0.05% higher management for the equivalent series as compared to the Terminating Fund.

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 with respect to the Merger, provided that the Filer obtains the prior approval of the securityholders of the Terminating Fund for the Merger at a special meeting held for that purpose.

"Darren McKall"
Manager
Investment Funds and Structured Products Branch
ONTARIO SECURITIES COMMISSION