BMO Investments Inc. et al.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund mergers -- approval required because the mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- terminating funds and continuing funds do not have substantially similar fundamental investment objectives -- the fee structure of a certain terminating fund and continuing fund are not substantially similar -- securityholders of the terminating funds are provided with timely and adequate disclosure regarding the mergers.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 19.1.
March 6, 2019
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 BMO INVESTMENTS INC. (the Manager) AND BMO LADDERED CORPORATE BOND FUND, BMO FIXED INCOME YIELD PLUS ETF PORTFOLIO and BMO BALANCED YIELD PLUS ETF PORTFOLIO (each, a Terminating Fund and collectively, the Terminating Funds, and with the Manager, the Filers)
The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction (the "Legislation") approving the mergers (the "Mergers") of each Terminating Fund into its applicable Continuing Fund (defined below) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (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 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 ("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. The following additional terms shall have the following meanings:
Continuing Fund means each of BMO Core Bond Fund, BMO Fixed Income ETF Portfolio, and BMO Balanced ETF Portfolio;
Fund or Funds means, individually or collectively, the Terminating Funds and the Continuing Funds;
IRC means the independent review committee for the Funds;
NI 81-102 means National Instrument 81-102 Investment Funds;
NI 81-106 means National Instrument 81-106 Investment Fund Continuous Disclosure;
NI 81-107 means National Instrument 81-107 Independent Review Committee for Investment Funds; and
Tax Act means the Income Tax Act (Canada).
This decision is based on the following facts represented by the Filers:
1. The Manager is a corporation governed by the laws of Canada with its head office in Toronto, Ontario.
2. The Manager is the trustee and manager of the Funds.
3. The Manager is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, and as a mutual fund dealer in Ontario and the Other Jurisdictions.
4. The Funds are open-ended mutual fund trusts established under the laws of Ontario.
5. Securities of the Funds are currently qualified for sale under the simplified prospectus, annual information form and fund facts each dated May 4, 2018, as amended (collectively, the "Offering Documents").
6. Each of the Funds is a reporting issuer under the applicable Legislation of Ontario and the Other Jurisdictions.
7. Neither the Manager nor the Funds is in default under the applicable Legislation of Ontario and the Other Jurisdictions.
8. 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.
9. 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.
10. All of the Continuing Funds have substantially similar valuation procedures to those of their applicable Terminating Funds.
11. Securities of the Funds are qualified investments under the Tax Act for RRSPs, RRIFs, DPSPs, RESPs, RDSPs and TFSAs.
Reason for Approval Sought
12. 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. The pre-approval criteria are not satisfied in the following ways:
(a) The fundamental investment objectives of each Continuing Fund are not, or may be considered not to be, "substantially similar" to the investment objectives of its corresponding Terminating Fund; and
(b) The fee structure of Series F of BMO Laddered Corporate Bond Fund is not, or may be considered not to be, "substantially similar" to the fee structure of Series F of BMO Core Bond Fund, its corresponding Continuing Fund.
13. Except as described in this decision, the proposed Mergers comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
The Proposed Mergers
14. The Manager intends to reorganize the Funds as follows:
(a) BMO Laddered Corporate Bond Fund will merge into BMO Core Bond Fund;
(b) BMO Fixed Income Yield Plus ETF Portfolio will merge into BMO Fixed Income ETF Portfolio; and
(c) BMO Balanced Yield Plus ETF Portfolio will merge into BMO Balanced ETF Portfolio.
15. In accordance with NI 81-106, a press release announcing the proposed Mergers was issued and filed on SEDAR on January 25, 2019. A material change report was filed via SEDAR on January 25, 2019 and amendments to the Offering Documents were filed via SEDAR on January 29, 2019 with respect to the proposed Mergers.
16. As required by NI 81-107, an IRC has been appointed for the Funds. The Manager presented potential conflict of interest matters related to the proposed Mergers to the IRC for a recommendation. On December 5, 2018, the IRC reviewed the potential conflict of interest matters and provided its positive recommendation for each of the Mergers after determining that each proposed Merger, if implemented, would achieve a fair and reasonable result for each applicable Fund.
17. Securityholders of the Terminating Funds will be asked to approve the Mergers at special meetings to be held on or about April 4, 2019.
18. By way of order dated December 8, 2016, the Manager was granted relief (the "Notice-and-Access Relief") from the requirement set out in paragraph 12.2(2)(a) of NI 81-106 to send a printed management information circular to securityholders while proxies are being solicited, and, subject to certain conditions, instead allows a notice-and-access document (as described in the Notice-and-Access Relief) to be sent to such securityholders.
19. In accordance with the Manager's standard of care owed to the relevant Funds pursuant to applicable legislation, the Manager will only use the notice-and-access procedure for a particular meeting where it has concluded it is appropriate and consistent to do so, also taking into account the purpose of the meeting and whether the Funds would obtain better participation rates by sending the management information circular with the other proxy-related materials.
20. Pursuant to the requirements of the Notice-and-Access Relief, a notice-and-access document and applicable proxies in connection with the special meetings, along with the fund facts of the relevant series of the Continuing Funds, as applicable (collectively, the "Meeting Materials"), will be mailed to securityholders of the corresponding Terminating Funds commencing on March 4, 2019 and concurrently filed via SEDAR. The management information circular, to which the notice-and-access document provides a link, will also be filed via SEDAR at the same time.
21. The tax consequences of the Mergers, the differences between the investment objectives and fee structures of the Terminating Funds and the Continuing Funds, as applicable, and the IRC's recommendation of the Mergers will be described in the Meeting Materials so that the securityholders of the Terminating Funds can consider this information before voting on the Mergers.
22. The Meeting Materials will describe the various ways in which investors could obtain a copy of the simplified prospectus, annual information form and fund facts for each Continuing Fund and its most recent interim and annual financial statements and management reports of fund performance.
23. Securityholders of each Terminating Fund 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.
24. No sales charges, redemption fees or other fees or commissions will be payable by securityholders of the Terminating Funds in connection with the Mergers. The Manager will waive any redemption fees payable by a securityholder in connection with the redemption of securities of the Terminating Funds purchased under the standard deferred charge option or the low load deferred charge option.
25. Purchases made pursuant to pre-established systematic purchase plans will be suspended as of the close of business on the fifth business day immediately preceding the effective date of the Mergers. Following the Mergers, systematic plans that have been established for each Terminating Fund will be re-established for the applicable Continuing Fund, unless securityholders of the Terminating Funds advise otherwise. A systematic plan may be changed at any time.
26. The proposed Mergers will be structured as follows:
(a) Each Terminating Fund will jointly elect with the applicable Continuing Fund that the Merger be a "qualifying exchange" as defined in subsection 132.2(1) of the Tax Act.
(b) Prior to effecting the Mergers, if required, each Terminating Fund will sell any securities in its portfolio that do not meet the investment objectives and investment strategies of the applicable 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 Mergers being effected.
(c) Each Terminating Fund will distribute a sufficient amount of its net income and net realized capital gains, if any, to securityholders to ensure that it will not be subject to tax for its current tax year.
(d) 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 applicable Merger in accordance with the constating documents of the Terminating Fund.
(e) Each Terminating Fund will sell its investment portfolio and other assets to the applicable Continuing Fund in exchange for securities of the Continuing Fund.
(f) Each Continuing Fund will not assume liabilities of the applicable Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the effective date of the applicable Merger.
(g) The securities of each Continuing Fund received by the applicable 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 effective date of the applicable Merger.
(h) Immediately thereafter, the securities of each Continuing Fund received by the applicable 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 and series-by-series basis, as applicable.
(i) As soon as reasonably possible following each Merger, and in any case within 60 days following the effective date of the Merger, the applicable Terminating Fund will be wound up.
27. Securityholders of each series of the Terminating Fund will receive the corresponding series of securities of the Continuing Fund.
28. The existing standard deferred charge or low load deferred charge schedule applicable to securities of a Terminating Fund will be carried over to the securities of the relevant Continuing Fund.
29. The Manager will pay for the costs of the Mergers. These costs consist mainly of brokerage charges associated with the Merger-related trades that occur both before and after the effective date of the Mergers and legal, proxy solicitation, printing, mailing and regulatory fees.
30. No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of its applicable Terminating Fund.
31. The investment portfolio and other assets of each Terminating Fund to be acquired by the applicable 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(s) of the applicable Continuing Fund and are, or will be, consistent with the investment objectives of the applicable Continuing Fund.
32. Subject to receipt of all required securityholder approvals, it is intended that each Terminating Fund will merge into its applicable Continuing Fund on or about the close of business on April 5, 2019, and each Continuing Fund will continue as a publicly offered open-ended mutual fund.
33. Each Merger will be effected on a tax-deferred basis.
Benefits of Mergers
34. The Manager believes that the Mergers are beneficial to securityholders of each Terminating Fund and Continuing Fund for the following reasons:
(a) the Continuing Funds have broader investment objectives than their corresponding Terminating Funds thereby providing greater flexibility to the portfolio manager, which may benefit investors across market cycles and credit cycles;
(b) the Mergers will result in a more streamlined and simplified product line-up that is easier for investors to understand;
(c) the Continuing Funds have delivered stronger long term performance than their corresponding Terminating Funds;
(d) following the Mergers, each Continuing Fund will have a portfolio of greater value, which may allow for increased portfolio diversification opportunities if desired;
(e) each Continuing Fund, as a result of its greater size, may benefit from its larger profile in the marketplace; and
(f) in most cases, management fees and/or fixed administration fees will be lower for the Continuing Funds and, thus, the management expense ratios of the Continuing Funds are expected to be lower than for their corresponding Terminating Funds.
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.