BMO Private Investment Counsel Inc. and BMO Private Canadian Short-Term Bond Portfolio
National Policy 11-203 -- merger approval granted and relief granted from requirement to obtain approval for merger under National Instrument 81-102 Investment Funds of investors in terminating fund held in discretionary investment management arrangement with manager.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.1(1)(f), 5.5(1)(b), 5.5(3), 5.6 and 19.1.
June 29, 2021
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 PRIVATE INVESTMENT COUNSEL INC. (the Filer) AND BMO PRIVATE CANADIAN SHORT-TERM BOND PORTFOLIO (the Terminating Fund)
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 of the principal regulator (the Legislation):
(a) exempting the Terminating Fund from the requirement in subsection 5.1(1)(f) of NI 81-102 to obtain the prior approval of its unitholders for the Merger (defined below) (theUnitholder Approval Relief); and
(b) approving of the merger of the Terminating Fund into BMO Private Canadian Mid-Term Bond Portfolio (the Continuing Fund, together with the Terminating Fund, the Funds) (the Merger) pursuant to subsection 5.5(1)(b) of NI 81-102 (the Merger Approval, together with the Unitholder Approval Relief, the Requested Relief)
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 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, Québec, New Brunswick, Nova Scotia, Newfoundland and Labrador and Prince Edward Island.
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:
IRC means the Independent Review Committee for the Terminating Fund and the Continuing Fund;
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 Filer:
The Filer and the Funds
1. The Filer is a corporation established under the laws of Ontario. The head office of the Filer is located in Toronto, Ontario.
2. The Filer, an indirect, wholly-owned subsidiary of Bank of Montreal, is registered as a portfolio manager and exempt market dealer in each of the provinces and territories of Canada, as an investment fund manager in Ontario, Newfoundland and Labrador and Quebec, as a commodity trading counsel and commodity trading manager in Ontario and as a derivatives portfolio manager in Quebec.
3. The Filer is the manager and portfolio manager of the Terminating Fund and the Continuing Fund. An affiliate of the Filer, BMO Trust Company, is the trustee of the Funds.
4. Each of the Funds is an open-ended mutual fund established as a trust under the laws of the Province of Ontario by declaration of trust.
5. The Funds are reporting issuers under the applicable securities legislation of each jurisdiction of Canada. Units of the Terminating Fund, the Continuing Fund and other mutual funds managed by the Filer are qualified for sale in each jurisdiction in Canada by a simplified prospectus dated May 7, 2021 (the BMO Private Portfolios).
6. Each Fund is governed by NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities. Unless an exemption has been obtained, each of the Funds follows the standard investment restrictions and practices established by the securities regulatory authorities in each jurisdiction in Canada.
7. The net asset value for units of the Funds is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.
8. Each Fund pays all expenses relating to its operation and the carrying on of its business. Although any sub-advisory fees (including taxes) are an expense of each Fund, under the management agreement, the Filer has agreed to absorb a portion of the sub-advisory fees, such that the Filer is reimbursed for sub-advisory fees incurred in excess of 0.15% of each Fund's net asset value (plus applicable tax).
9. Neither the Filer nor the Funds are in default of securities legislation in any jurisdiction of Canada.
10. The Filer offers fully discretionary investment management services to clients in each jurisdiction in Canada, including to all of the investors in the BMO Private Portfolios.
11. The BMO Private Portfolios were established as an efficient and cost effective means of providing discretionary investment management services to many of the Filer's clients, including all of the investors in the Terminating Fund and the Continuing Fund, as an alternative to segregated account management.
12. The Filer proposes to merge the Terminating Fund into the Continuing Fund on or about July 9, 2021.
13. Prior to or concurrently with the implementation of the Merger, the Filer anticipates changing the name of the Continuing Fund to BMO Private Canadian Short-Mid Bond Portfolio.
Unitholder Approval Relief
14. Paragraph 5.1(1)(f) of NI 81-102 requires that the approval of the securityholders of an investment fund be obtained before the investment fund undertakes a reorganization with, or transfers its assets to, another issuer.
15. The Filer has determined that it is appropriate to effect the Merger without obtaining unitholder approval.
16. Units of the Terminating Fund are only available for purchase by investors who have entered into a discretionary investment management agreement with the Filer.
17. The Filer is authorized under its discretionary investment management agreement with each client who is an investor in a BMO Private Portfolio to make any investment on behalf of the client (provided such investment is consistent with the mandate established by that client). Unitholders of a BMO Private Portfolio do not participate in the investment decision of purchasing, holding, or selling units of a BMO Private Portfolio. Instead, unitholders of any BMO Private Portfolio rely entirely on the Filer to make investment decisions for them, a service which these clients have sought.
18. Under its discretionary investment management agreement with each client, the Filer is authorized to receive all unitholder materials relating to the securities held in the client's account, and to vote on behalf of the client on any matters relating to the securities held in the client's account (provided that such vote is in the best interests of the client).
19. The unitholders of the Terminating Fund rely entirely on the Filer to make investment decisions for them and, in these circumstances, the Merger is analogous to the Filer changing a client's investment from one BMO Private Portfolio to another. As such investment changes do not require client approval, the Filer has determined that it is appropriate to effect the Merger without obtaining unitholder approval.
20. As every investor in the Terminating Fund has entered into a discretionary investment management agreement with the Filer, the Filer believes that sending meeting materials and convening unitholder meetings for the purpose of obtaining unitholder approval to effect the Merger is not desirable and represents an unnecessary cost and inconvenience to the Filer and the unitholders of the Terminating Fund.
21. Prior to, or no later than the next account statement mailing following the implementation of the Merger, the Filer will communicate with each client that holds units of the Terminating Fund to explain the changes to their account occurring as a result of the Merger.
22. The exception to unitholder approval for the Merger in subsection 5.3(2) of NI 81-102 would otherwise be available, except that the Merger does not meet the requirement (a) for the investment funds involved in a pre-approved reorganization or transfer to have substantially similar investment objectives pursuant to section 5.6 of NI 81-102 (as referenced below) and (b) that written notice of the Merger be sent at least 60 days before the effective date of the change, as a result of the Terminating Fund being held by its investors pursuant to a discretionary investment management arrangement with the Filer.
23. Regulatory approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102 because:
(a) a reasonable person may not consider the fundamental investment objectives of the Terminating Fund to be substantially similar to the fundamental investment objectives of the Continuing Fund, as contemplated in paragraph 5.6(1)(a)(ii) of NI 81-102;
(b) approval of the Merger will not be obtained by the unitholders of the Terminating Fund, as contemplated in paragraph 5.6(1)(e)(i) of NI 81-102; and
(c) materials will not be sent to the unitholders of the Terminating Fund in connection with the approval under paragraph 5.1(1)(f) of NI 81-102, as contemplated in paragraph 5.6(1)(f) of NI 81-102.
24. The Filer will, except as noted above, comply with all of the other criteria for pre-approved reorganizations and transfers, as set out in section 5.6 of NI 81-102.
25. A reasonable person may not consider the fundamental investment objectives of the Terminating Fund and the Continuing Fund to be substantially similar. However, both Funds have substantially similar investment strategies and mandates in that they both provide exposure to fixed income securities such as bonds and debentures issued by governments and corporations in Canada that mature in more than one year. The Terminating Fund's objectives are to produce a high level of interest income, and to preserve the capital invested, while the Continuing Fund's objective is to produce superior returns through a combination of interest income and capital growth while also pursuing capital preservation. The capital growth aspect of the investment objectives of the Continuing Fund permit it to hold a longer duration bond than the Terminating Fund. As a result, the broader investment objectives of the Continuing Fund permit it to hold both shorter-term (i.e. 1-5 years) and longer-term (i.e. 5-10 years) fixed income securities.
26. The proposed Merger is neutral to the unitholders of each of the Funds from a fee and expense perspective.
27. The Merger will be completed as a "qualifying exchange" within the meaning of section 132.2 of the Tax Act.
28. The portfolio assets of the Terminating Fund to be acquired by the Continuing Fund arising from the Merger are currently, or will be, acceptable, on or prior to the effective date of the Merger, to the portfolio advisor of the Continuing Fund and are or will be consistent with the investment objectives of the Continuing Fund. The Filer anticipates that no portfolio assets will be liquidated in anticipation of or as a result of the Merger and that there will only be portfolio turnover in the normal course of business for the Funds. The Filer views the Merger, on balance, as the best path towards combining the two Funds' mandates versus for example, implementing a redemption from the Terminating Fund and purchase of the Continuing Fund.
29. The Filer has concluded that the Merger does not represent a material change for the Continuing Fund.
30. The Merger will cause the Funds to have a deemed year end on the date of the Merger. The Filer anticipates that the Terminating Fund will not require a capital gains distribution, as it will use available capital losses to offset any capital gains. The Filer anticipates that the Continuing Fund will have capital gains for distribution to taxable investors. The Filer will include information on the tax consequences of the Merger in a communication sent to clients prior to, or no later than the next account statement mailing following the implementation of the Merger.
31. On April 7, 2021, the Filer presented the terms of the Merger to the IRC for its approval. The IRC reviewed the proposed Merger, determined that the Merger would achieve a fair and reasonable result for the Funds and has provided its approval in respect of the Merger.
32. Upon the approval of the Merger by the boards of directors of the Filer and of BMO Trust Company on April 30, 2021, a press release was issued and filed on April 30, 2021, a material change report describing the Merger and the final simplified prospectus for the Funds were also filed on SEDAR in accordance with the continuous disclosure obligations of the Terminating Fund in Part 11 of NI 81-106.
33. Units of the Terminating Fund will continue to be available for sale until the close of business on July 7, 2021, following which time the distribution of new units will cease, except under a continuous savings plan or similar systematic plan established prior to July 7, 2021.
34. Unitholders of the Terminating Fund will continue to have the right to redeem units of the Terminating Fund at any time up to the close of business on the business day immediately preceding the effective date of the Merger.
35. The Filer will bear the costs and expenses associated with the Merger, including any costs incurred in respect of any required sale of portfolio assets of the Terminating Fund.
36. Units of the Funds are not issued in separate series and do not charge sales charges or redemption charges. No sales charges or redemption charges will be payable in connection with the issuance of units of the Continuing Fund in exchange for the investment portfolio of the Terminating Fund.
37. Pursuant to the Merger, holders of units of the Terminating Fund will receive units of the Continuing Fund equivalent in value to their units of the Terminating Fund.
38. Following the Merger, the Continuing Fund will continue as a publicly offered open-ended mutual fund and the Terminating Fund will be wound up as soon as reasonably practicable.
39. The Filer believes that the Merger is in the best interests of the unitholders of the Terminating Fund and the Continuing Fund because:
(a) the Continuing Fund has delivered stronger long-term performance than the Terminating Fund;
(b) the Merger would result in unitholders being invested in a Continuing Fund with a portfolio of greater value, allowing for increased portfolio diversification opportunities;
(c) the Merger will be effected on a tax-deferred basis and thus will not trigger a capital gain or loss upon the transfer of each unitholder's investment from the Terminating Fund to the Continuing Fund; and
(d) the Merger will eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate mutual 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 Requested Relief is granted.