BMO Nesbitt Burns Inc. et al.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund merger – approval required because mergers do not meet the criteria for pre-approved reorganizations and transfers under National Instrument 81-102 Investment Funds – a reasonable person may not consider the merging funds and merging classes to have substantially similar investment objectives – condition of the approval requires an additional notice delivered to securityholders that describes certain attributes pertaining to the class of securities that will be received as a result of the merger relating to the automatic conversion of the units received, mergers to otherwise comply with pre-approval criteria, including securityholder approval.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(f), 5.5(1)(b), 5.6, 5.7.
December 6, 2018
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
BMO NESBITT BURNS INC.
DOUBLELINE INCOME SOLUTIONS TRUST
PINEBRIDGE INVESTMENT GRADE PREFERRED SECURITIES FUND
(the Terminating Fund and, together with DoubleLine, the Funds)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting approval under paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) to merge (the Merger) the Terminating Fund into the BMO PineBridge Preferred Securities TACTICTM Fund (the Continuing Fund) (the Approval Sought).
Under National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions (NP 11-203) for a passport application:
(a) the Ontario Securities Commission is the principal regulator (Principal Regulator) for this application, and
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon (together with Ontario, the Jurisdictions).
Defined terms contained in NI 81-102, National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless they are defined in this decision.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of the Province of Ontario.
2. The Filer’s head office is located at 1 First Canadian Place, 100 King Street West, 3rd Floor Podium, Toronto, Ontario, M5X 1H3.
3. The Filer is registered under NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations as a portfolio manager and an investment dealer in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan and Yukon; and as an investment fund manager in Newfoundland and Labrador, Ontario and Quebec; and as a futures commission merchant in Manitoba and Ontario; and as a derivatives dealer in Quebec.
4. The Filer is the manager of the Funds.
5. The Filer is not in default of any requirement of securities legislation in any of the Jurisdictions.
PineBridge Investment Grade Preferred Securities Fund
6. The Terminating Fund is a non-redeemable investment fund established under the laws of the Province of Ontario and is governed by a declaration of trust dated May 28, 2014, as amended by Amendment No. 1 dated May 3, 2016 (the PineBridge Declaration of Trust) with CIBC Mellon Trust Company as trustee (the Trustee).
7. The Terminating Fund’s current investment objectives are to: (i) provide unitholders of the Terminating Fund with monthly cash distributions; (ii) preserve the net asset value per unit; and (iii) reduce the risk of rising interest rates by managing portfolio duration.
8. The units of the Terminating Fund are listed for trading on the Toronto Stock Exchange (TSX). Units of the Terminating Fund were qualified by a long form prospectus dated May 28, 2014.
9. The Terminating Fund is a reporting issuer under applicable securities legislation in the Jurisdictions.
10. The Terminating Fund is not in default of securities legislation in the Jurisdictions.
DoubleLine Income Solutions Trust
11. DoubleLine is a closed-end (non-redeemable) investment fund established under the laws of the Province of Ontario and is governed by a declaration of trust dated October 24, 2013 (the DoubleLine Declaration of Trust) with the Trustee as trustee.
12. DoubleLine’s current primary investment objective is to seek current income; its secondary objective is to seek capital appreciation in each case by investing primarily in a diversified portfolio (the DoubleLine Portfolio) of investments selected for their potential to provide current income, growth of capital, or both. DoubleLine may invest in debt securities and other income-producing investments, including in emerging markets, based on the assessment of the portfolio manager of DoubleLine of the potential returns and risks of different sectors of the debt security markets and of particular securities.
13. The beneficial interest in the net assets and net income of DoubleLine are currently divided into class A units and class U units. The class A units of DoubleLine are currently listed for trading on the TSX. Class A and class U units of DoubleLine were qualified by a long form prospectus dated October 24, 2013.
14. DoubleLine is a reporting issuer under applicable securities legislation in the Jurisdictions.
15. DoubleLine is not in default of securities legislation in the Jurisdictions.
The Proposed Conversion
16. On September 4, 2018, the board of directors of the Filer approved the resolutions set out in a management information circular (the Circular) which set out the proposed operational changes to DoubleLine that include delisting DoubleLine from the TSX on or about November 26, 2018 and converting DoubleLine to an open-end (daily redeemable) mutual fund (the Conversion) which, upon completion of the Conversion, will adopt the investment objectives, strategies and valuation procedures that are the same as the Terminating Fund (with certain changes in the investment objectives as described below) and will be renamed “BMO PineBridge Preferred Securities TACTICTM Fund” (as so renamed, the Continuing Fund). At a special meeting of unitholders held on November 12, 2018, class A and class U unitholders of DoubleLine voted separately and approved the change in investment objectives of DoubleLine, the Conversion and the Merger.
17. A press release and material change report in respect of the proposed Conversion were filed on SEDAR on September 4, 2018 and September 7, 2018, respectively. Units of DoubleLine continue to be available for sale.
18. The Continuing Fund is a reporting issuer under the applicable securities legislation of each province and territory of Canada. The Continuing Fund is not in default of securities legislation in any province or territory of Canada.
19. Each of the Funds follows the standard investment restrictions and practices established under the legislation.
The Proposed Merger
20. The Filer intends to merge the Terminating Fund into the Continuing Fund.
21. In the opinion of the Filer, the Merger satisfies all of the criteria for pre-approved reorganizations and transfers set forth in s.5.6(1) of NI 81-102 except that
(a) the transaction is not a “qualifying exchange” within the meaning of section 132.2 of the Income Tax Act (Canada) (the Tax Act) or is not a tax-deferred transaction under the Tax Act; and
(b) the Terminating Fund and the Continuing Fund may be considered to not have substantially similar fundamental investment objectives as a result of the changes in the investment objectives of the Continuing Fund described below.
22. On September 4, 2018, the board of directors of the Filer approved the Merger, as described in the Circular.
23. A press release and material change report in respect of the proposed Merger were filed on SEDAR on September 4, 2018 and September 7, 2018, respectively. Units of the Terminating Fund continue to be available for sale.
24. As required by National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), the Filer presented the terms of the Merger to the Funds' Independent Review Committee (IRC) for its review and recommendation. The IRC reviewed the potential conflict of interest matters related to the proposed Conversion and the proposed Merger and has determined that the proposed Conversion and the proposed Merger, if implemented, would achieve a fair and reasonable result for each of the Funds and their respective unitholders (as applicable).
25. The Circular provided unitholders of the Terminating Fund with information about the differences between the Terminating Fund and the Continuing Fund including that (a) the structure of the Continuing Fund as an open-end mutual fund governed by NI 81-102 that will constitute a commodity pool for the purposes of National Instrument 81-104 Commodity Pools (NI 81-104) is different from the structure of the Terminating Fund, (b) the Continuing Fund will adopt the investment objective of the Terminating Fund with changes to provide that the Continuing Fund will not pay regular distributions, and (c) the management fees of the Continuing Fund and the tax consequences of the Merger. Accordingly, unitholders of the Terminating Fund had an opportunity to consider this information prior to voting on the Merger.
26. In connection with the special meetings of the unitholders held on November 12, 2018, a notice of meeting, the Circular and related form of proxy (the Meeting Materials) in connection with the Merger were delivered to unitholders of the Terminating Fund on October 12, 2018 using notice-and-access procedure pursuant to exemptive relief and were subsequently filed on SEDAR.
27. A summary of the IRC’s recommendation was included in the Meeting Materials sent to unitholders of the Terminating Fund as required by section 5.1(2) of NI 81-107.
28. Unitholders of the Terminating Fund approved the Merger at the special meeting of the unitholders of the Terminating Fund held on November 12, 2018.
29. The Merger is conditional on the approval and implementation of the Conversion by the unitholders of DoubleLine pursuant to which DoubleLine will (i) convert into a mutual fund governed by NI 81-102 that will constitute a commodity pool for the purposes of NI 81-104; and (ii) adopt investment objectives, strategies and valuation procedures that are the same as the Terminating Fund with certain changes to (A) enable the Continuing Fund to use specified derivatives, (B) provide that it is not intended that regular distributions will be paid but that returns generated will be reinvested to grow the NAV of the Continuing Fund, (C) account for changes in taxation laws, and (D) mirror the requirements prescribed by NI 81-102, as modified by NI 81-104 for commodity pools.
30. Subject to receipt of the Approval Sought pursuant to this Application, it is anticipated that the Merger will be implemented on or about December 7, 2018.
31. If the Approval Sought is obtained, the following steps will be carried out to effect the Merger:
(a) The Merger will take place sequentially after the Conversion pursuant to which DoubleLine will, among other things, change its name to “BMO PineBridge Preferred Securities TACTICTM Fund” (being the Continuing Fund).
(b) The Terminating Fund will transfer all or substantially all of its net assets to the Continuing Fund in consideration for class P units of the Continuing Fund. The Continuing Fund will issue one class P unit for each unit of the Terminating Fund outstanding on the effective date of the Merger, such that each unit of the Terminating Fund will effectively be exchanged for one class P unit of the Continuing Fund.
(c) Immediately following the transfer of the assets of the Terminating Fund to the Continuing Fund and the issuance of the class P units of the Continuing Fund to the Terminating Fund, all units of the Terminating Fund will be automatically redeemed and each unitholder of the Terminating Fund participating in the Merger will receive such number of the class P units of the Continuing Fund as is equal to the number of units of the Terminating Fund held.
(d) If necessary, the Terminating Fund may make a distribution of net income and/or net realized capital gains in order that it is not liable to tax in the taxation year that includes the Merger (any such distribution, an Additional Distribution). Any such Additional Distribution will be payable in cash. The Manager does not currently anticipate that the Terminating Fund will pay an Additional Distribution; however, circumstances may change before the effective date of the Merger.
(e) Following the Merger, the Continuing Fund will continue as an open-end mutual fund and the Terminating Fund will be wound up as soon as reasonably practicable.
32. Following the Merger, class P units of the Continuing Fund received by unitholders in the Terminating Fund as a result of the Merger will have lower annual management fees than those of the Terminating Fund.
33. The Filer will pay all costs and reasonable expenses relating to the solicitation of proxies and holding the unitholder meeting in connection with the Merger as well as the costs of implementing the Merger, including any brokerage fees.
34. The Merger is not a material change for the Continuing Fund as it is the larger fund compared to the Terminating Fund.
35. The PineBridge Declaration of Trust and the DoubleLine Declaration of Trust will be amended, as necessary, to provide unitholders of the Terminating Fund and unitholders of DoubleLine who wish to redeem their units with a special redemption right (the Special Redemption Right), allowing unitholders of the Terminating Fund and unitholders of DoubleLine to redeem their units prior to the Merger on the same terms that are applicable to the annual redemptions as contemplated by the PineBridge Declaration of Trust and the DoubleLine Declaration of Trust, as applicable.
36. For each unit of the Terminating Fund and DoubleLine submitted for redemption pursuant to the Special Redemption Right, unitholders of the Terminating Fund and DoubleLine, as applicable, will receive a redemption price per unit equal to the applicable NAV per unit on November 29, 2018 together with any unpaid distributions (including any special distribution) in respect of such unit, less any costs and expenses incurred by the applicable Fund in order to fund such redemption, including brokerage costs, and less any net realized capital gains or income of the applicable Fund that are distributed to redeeming unitholders of the Terminating Fund and unitholders of DoubleLine concurrently with the proceeds of disposition on redemption (the Redemption Amount), to be paid to such unitholders of the Terminating Fund and unitholders of DoubleLine on or before the 15th day of December 2018.
37. The Redemption Amount will be paid to redeeming unitholders on or before the effective date of the Merger.
38. There will be no fees associated with the units of the Terminating Fund to be redeemed under the Special Redemption Right.
39. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.
40. The Filer will not receive any compensation in respect of the acquisition, sale or redemptions of the units of the Fund delivered upon terminations.
41. The Continuing Fund will adopt the investment objectives, strategies and valuation procedures that are the same as the Terminating Fund with certain changes as described in the Circular.
42. The portfolios and other assets of the Terminating Fund to be acquired by the Continuing Fund as a result of the Merger are currently, or will be, acceptable to the portfolio advisors of the Continuing Fund prior to the effective date of the Merger, and are or will also be consistent with the investment objectives of the Continuing Fund.
43. The Terminating Fund and the Continuing Fund are, and are expected to continue to be at all material times, mutual fund trusts under the Tax Act and, accordingly, units of both Funds are "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.
44. The Filer believes that the Merger will be beneficial to unitholders of the Funds for the following reasons:
(a) The investment objectives, strategies, and valuation procedures of Continuing Fund upon completion of the Conversion will be the same as those of the Terminating Fund with certain changes as described in the Circular;
(b) Upon completion of the Merger, the Continuing Fund will have a greater level of assets than each Fund separately which may result in economies of scale for operating expenses as part of a larger combined fund;
(c) The Merger is expected to provide unitholders of the Terminating Fund with enhanced liquidity;
(d) Unitholders of the Terminating Fund will no longer be subject to market purchase fees or redemption fees on a redemption of units as there will be no redemption fees associated with the units of the Continuing Fund to be issued to unitholders of the Terminating Fund;
(e) Implementation of the Merger is not anticipated to result in significant portfolio transactions as the Continuing Fund’s current portfolio holdings are consistent with the investment objectives and strategies that will be adopted by the Continuing Fund upon completion of the Conversion;
(f) The Merger will result in Terminating Unitholders owning units of the Continuing Fund which has a substantial amount of tax loss carry-forwards available to be applied against future gains of the Continuing Fund;
(g) Unitholders of the Terminating Fund who do not wish to be part of the Merger will have the option of redeeming their investment for cash at 100% of net asset value per unit as part of the Special Redemption Right; and
(h) The costs of the Merger will be borne by the Filer.
45. The foregoing reasons for the Merger were set out in the Circular along with certain prospectus-level disclosure concerning the Continuing Funds, including information regarding fees, expenses, investment objectives, valuation procedures, the manager, the portfolio advisor (or sub-advisor, as applicable), income tax considerations and net asset value. The Circular provided sufficient information about the Merger to permit unitholders to make an informed decision about the Merger. The Circular also disclosed that unitholders can obtain the long form prospectus, the most recent financial statements, and the most recent management report of fund performance of the Continuing Fund that have been, or will be, made public, from BMONB upon request, on BMONB’s website or on SEDAR at www.sedar.com.
46. Approval of the Merger is required pursuant to subsection 5.5(1)(b) of NI 81-102 which states that “the approval of the securities regulatory authority or regulator is required before a reorganization or transfer of assets of an investment fund is implemented, if the transaction will result in the securityholders of the investment fund becoming securityholders in another issuer”.
47. Additionally, the Filer has determined that it would not be appropriate to effect the Merger as a "qualifying exchange" within the meaning of section 132.2 of the Tax Act or as a tax-deferred transaction for the following reasons: (i) the Terminating Fund will utilize its loss carry-forwards to shelter net capital gains that could arise for it on the taxable disposition of its portfolio assets on the Merger; (ii) to the extent that unitholders in the Terminating Fund have an accrued capital loss on their units, effecting the Merger on a taxable basis will afford them the opportunity to realize that loss and use it against current capital gains or even carry it forward or back as permitted under the Tax Act; (iii) effecting the Merger on a taxable basis would preserve the net losses and loss carry-forwards in the Continuing Fund; and (iv) effecting the Merger on a taxable basis will have no other tax impact on the Continuing Fund.
48. In light of the disclosure in the Circular, unitholders of the Terminating Fund should have had all the information necessary to determine whether the proposed Merger is appropriate for them and will continue to have their normal course annual redemption right under the terms of PineBridge Declaration of Trust to permit them to exit the Terminating Fund should they not wish to become unitholders of the Continuing Fund.
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:
(i) the Filer issue a press release on the effective date of the Merger announcing that the Merger has been completed and setting out the classes of units of the Continuing Fund, including a description of the management fee associated with each class and the fact that each class of units is redeemable on a daily basis at the net asset value thereof, and also setting out a unitholder’s ability to convert their class X units or class P units into another class of units;
(ii) the Filer will at least 60 days prior to February 28, 2019, send to the holders of the class X units and class P units a notice containing the information contained in the press release referred to above; and
(iii) the Filer will post on its website the press release and notice referred to in (i) and (ii) above.
Investment Funds and Structured Products
Ontario Securities Commission