1832 Asset Management L.P. et al.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – approval of investment fund mergers – approval required because mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 Investment Funds – terminating funds and continuing fund do not have substantially similar fundamental investment objectives – mergers will not be a “qualifying exchange” or a tax-deferred transaction under the Income Tax Act – mergers to otherwise comply with pre-approval criteria, including securityholder vote, IRC approval – securityholders provided with timely and adequate disclosure regarding the mergers.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.7(1)(b), and 19.1(2).
May 9, 2019
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
1832 ASSET MANAGEMENT L.P.
SCOTIA LATIN AMERICAN FUND,
SCOTIA PACIFIC RIM FUND
(each, a Terminating Fund, 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 under the securities legislation of the jurisdiction of the principal regulator (the Legislation) approving the mergers of each of the Terminating Funds into the Continuing Fund (as defined below) (the Mergers), pursuant to 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 Filers have 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 in Canada (the Other Jurisdictions and collectively with Ontario, the Jurisdictions).
Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms have the following meanings:
Circular means the management information circular provided by the Manager in connection with the Mergers.
Continuing Fund means Scotia International Equity Fund.
Funds mean collectively, the Terminating Funds and the Continuing Fund.
Tax Act means the Income Tax Act (Canada).
The decision is based on the following facts represented by the Filers:
1. The Manager is an Ontario limited partnership, which is wholly-owned indirectly by The Bank of Nova Scotia. The general partner of the Manager (the General Partner) is 1832 Asset Management G.P. Inc., an Ontario corporation wholly-owned directly by The Bank of Nova Scotia, with its head office in Toronto, Ontario.
2. The Manager is the manager of the Funds and is registered as: (i) a portfolio manager in all of the provinces of Canada and in the Northwest Territories and the 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, Québec, Newfoundland and Labrador and the Northwest Territories; and (iv) a commodity trading manager in Ontario.
3. Each of the Funds is an open-ended mutual fund trust established under the laws of Ontario.
4. Each of the Funds is a reporting issuer under the applicable securities legislation of each Jurisdiction.
5. Neither the Manager nor any Fund is in default of securities legislation in any Jurisdiction.
6. Other than circumstances in which the securities regulatory authority of a Jurisdiction has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions established under NI 81-102.
7. The securities of each Fund are qualified for distribution in the Jurisdictions pursuant to a simplified prospectus and annual information form dated November 9, 2018, prepared and filed in accordance with the securities legislation of the Jurisdictions.
8. The net asset value for each series of securities of the Funds is calculated on a daily basis in accordance with the Funds’ valuation policy and as described in the simplified prospectus and annual information form for the Funds.
Reasons for the Approval Sought
9. Regulatory approval of the Mergers is required because each merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. In particular:
(a) 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 Funds; and
(b) each Merger will not be completed as a “qualifying exchange” or a tax-deferred transaction under the Tax Act.
10. Except as described in this decision, the Mergers will otherwise comply with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
11. Pursuant to the Mergers, securityholders of each of the Terminating Funds would become securityholders of the Continuing Fund, as follows:
Scotia Latin American Fund
Scotia International Equity Fund
Scotia Pacific Rim Fund
12. As required by National Instrument 81-107 – Independent Review Committee for Investment Funds, the Manager presented the terms of the Mergers to the Independent Review Committee (IRC) of the Funds for a recommendation. The IRC reviewed the Mergers and provided a positive recommendation for each of the Mergers on March 6, 2019, having determined that the Mergers, if implemented, would achieve a fair and reasonable result for each of the Funds and their respective securityholders.
13. In accordance with National Instrument 81-106 – Continuous Disclosure, a press release and material change report describing the Mergers was issued and filed on SEDAR on March 7, 2019. Amendments to the simplified prospectus, annual information form and fund facts of the Funds were filed with on SEDAR on March 11, 2019.
14. The Manager has determined that the Mergers will constitute a material change for the Continuing Fund. As a result, the Manager will be seeking the prior approval of the securityholders of the Continuing Fund.
15. Securityholders of the Funds will be asked to approve the Mergers at special meetings to be held on or about June 14, 2019.
16. Pursuant to the requirements of notice-and-access exemptive relief granted to the Manager, the Manager will mail a notice-and-access document, form of proxy in connection with the special meeting, and the most recent fund facts of the relevant series of the Continuing Fund, as applicable (collectively, the Meeting Materials) to securityholders of the Funds commencing on or about May 10, 2019 and concurrently filed on SEDAR. The Circular, to which the notice-and-access document provides a link, will also be filed on SEDAR at the same time.
17. The Circular outlines the material facts concerning the Mergers relevant to each securityholder, including the differences between fundamental investment objectives and fee structures of the Terminating Funds and the Continuing Fund, the IRC's recommendation of the Mergers, and income tax considerations so that securityholders of the Funds may consider this information before voting on the Mergers. The Circular also describes the various ways in which securityholders can obtain a copy of the simplified prospectus and annual information form of the Continuing Fund, as well as the most recent interim and annual financial statements and management reports of fund performance for the Continuing Fund, at no cost.
18. Securityholders of the Terminating Funds will continue to have the right to redeem or switch their 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 Mergers.
19. The Manager will pay for the costs of the Mergers. These costs consist mainly of brokerage charges associated with the trades that occur both before and after the date of the Mergers and legal, proxy solicitation, printing, mailing and regulatory fees.
20. There are no sales charges, redemption fees or other fees or commissions that will be payable by securityholders of the Terminating Funds who acquire securities of the Continuing Fund as a result of the Mergers.
21. The Mergers will be affected on a taxable basis to the Terminating Funds, which the Manager has determined will be in the overall best interests of the investors of the Terminating Funds and the Continuing Fund. Affecting the Mergers on a taxable basis will preserve any unused tax losses of the Continuing Fund, which would otherwise expire upon implementation of the Merger on a tax deferred basis and therefore would not be available to shelter income and capital gains realized by the Continuing Fund in future years.
22. If all required approvals for the Mergers are obtained, the Mergers will be completed on or before July 12, 2019.
23. Following the Mergers, all operational services (such as systematic withdrawal plans and pre-authorized contribution plans) will be available to investors with respect to the Continuing Fund. Securityholders of the Terminating Funds who wish to establish one or more systematic plans in respect of their holdings in the Continuing Fund may do so following the implementation of the Mergers.
24. The assets of each Terminating Fund to be acquired by the Continuing Fund in order to effect the Mergers are currently, or will be, acceptable, on or prior to the effective date of the Mergers, to the portfolio manager of the Continuing Fund and are, or will be, consistent with the investment objectives of the Continuing Fund.
Procedure for the Mergers
25. If the necessary approvals are obtained, the Manager will carry out the following steps to complete the Mergers:
(a) Prior to affecting the Mergers, each Terminating Fund may sell any investment that is not consistent with the investment objective and investment strategies of the Continuing Fund or acceptable to the portfolio manager of the Continuing Fund. As a result, the Terminating Funds may temporarily hold cash or money market instruments and may not be fully invested in accordance with their investment objectives for a brief period of time prior to the Merger being effected.
(b) The value of each Terminating Fund’s portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with the constating documents of the Terminating Fund.
(c) The Continuing Fund will acquire the investment portfolio and other assets of the Terminating Funds in exchange for securities of the Continuing Fund. The securities of the Continuing Fund received by each Terminating Fund will (a) have an aggregate net asset value equal to the value of the net assets transferred by the Terminating Fund and (b) be issued at the net asset value per security of the Continuing Fund as of the close of business on the effective date of the Merger.
(d) Immediately thereafter, the securities of the Continuing Fund received by each Terminating Fund will be distributed to securityholders of each Terminating Fund in exchange for their securities in the Terminating Fund on a dollar-for-dollar and series-by-series basis.
(e) In each case, the investors in the Terminating Funds will receive the same series of securities of the Continuing Fund as such investors hold in the Terminating Funds.
(f) The Continuing Fund will not assume any liabilities of the Terminating Funds and the Terminating Funds will retain sufficient assets to satisfy their respective estimated liabilities, if any, as of the effective date of the Mergers.
(g) The Terminating Funds will distribute a sufficient amount of their net income and net realized capital gains, if any, to securityholders to ensure that they will not be subject to tax for their current tax year.
(h) Each Terminating Fund will be wound up as soon as reasonably possible following the completion of the Merger.
26. Following the implementation of the Mergers, securityholders of the Terminating Funds will cease to be securityholders of the Terminating Fund and will become securityholders of the Continuing Fund. The Continuing Fund will continue as a publicly offered open-ended mutual fund offering securities in the Jurisdictions.
27. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Funds.
28. The Manager believes that the Mergers are beneficial to securityholders of the Terminating Funds and Continuing Fund for the following reasons:
(a) Economies of scale: The Mergers will provide economies of scale by eliminating duplicative administrative and regulatory costs of operating the Terminating Funds and the Continuing Fund as separate mutual funds. The Mergers will also allow the Manager to make its international product offering simpler and therefore easier for investors to understand.
(b) Flexible mandate of the Continuing Fund: While all the Funds have international mandates, the Continuing Fund provides a similar yet broader or more flexible mandate with consistency of management that the Manager believes provides the Continuing Fund with broader investment opportunities that may lead to increased diversification and potentially less volatility.
(c) Increased diversification: Over the years, interest in narrowly focused regional equity funds such as the Terminating Funds has decreased significantly and the erosion of assets has made it increasingly inefficient to manage the Terminating Funds as standalone mutual funds and provide proper diversification. Following the Mergers, the Continuing Fund will have more assets allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions.
(d) Similar or lower fees: Securityholders of the Terminating Funds will receive units of the Continuing Fund that have lower administration fees than the units of the funds they currently hold, and securityholders of the Continuing Fund will also benefit from reduced administration fees as a result of the Mergers.
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, provided that the Filers obtain the prior approval of the securityholders of the Funds for the Mergers at a special meeting held for that purpose.
Investment Funds and Structured Products Branch