Counsel Portfolio Services Inc. et al.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund mergers -- approval required because certain mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- the fundamental investment objectives of the terminating funds and the continuing funds are not substantially similar -- securityholders of 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.
February 28, 2018
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 COUNSEL PORTFOLIO SERVICES INC. (the Manager) AND IN THE MATTER OF COUNSEL INCOME MANAGED PORTFOLIO AND COUNSEL WORLD MANAGED PORTFOLIO (each, a Terminating Fund, and collectively the Terminating Funds)
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 proposed mergers (each a Merger, and collectively the Mergers) of each of the Terminating Funds into the applicable Continuing Funds (each as defined below) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (the Merger Approval).
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 all of the provinces and territories of Canada, other than Quebec (together 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 shall have the following meanings:
Continuing Fund or Continuing Funds means, individually or collectively, Counsel Monthly Income Portfolio (prior to January 17, 2018, "Counsel Regular Pay Portfolio") and Counsel Balanced Portfolio;
Fund or Funds means, individually or collectively, the Terminating Funds and the Continuing Funds;
Income Tax Act means the Income Tax Act (Canada);
IRC means the independent review committee for the Funds;
This decision is based on the following facts represented by the Manager:
The Manager and the Funds
1. The Manager is governed by the laws of the Province of Ontario with its head office in Toronto, Ontario.
2. The Manager is registered as follows:
a) under the securities legislation of Ontario as a portfolio manager;
b) under the securities legislation of Ontario, Quebec and Newfoundland and Labrador as an investment fund manager; and
c) under the Commodity Futures Act (Ontario) as a commodity trading manager.
3. The Manager is the manager of each Fund.
4. Each Fund is an open-end mutual fund trust governed by a declaration of trust and qualifies as a mutual fund trust under the Income Tax Act.
5. Neither the Manager nor the Funds are in default of securities legislation.
6. Each Fund is a reporting issuer under the securities legislation of each jurisdiction and is subject to the requirements of NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure.
7. Each Fund follows the standard investment restrictions and practices established under the securities legislation of the Jurisdictions except to the extent that the Funds have received an exemption from the securities regulatory authority of a jurisdiction to deviate therefrom.
8. Each Fund currently distributes its securities in all the Jurisdictions pursuant to a simplified prospectus and annual information form dated October 27, 2017, as amended.
Reason for Merger Approval
9. Regulatory approval of the Mergers is required because none of the Mergers satisfies all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. In particular, in respect of each Merger, a reasonable person may not consider each Terminating Fund to have a substantially similar fundamental investment objective as its corresponding Continuing Fund.
10. Other than the criteria described in paragraph 9, each Merger complies with all the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
The Proposed Mergers
11. The Manager intends to merge each Terminating Fund into the Continuing Fund shown opposite its name in the table below:
Counsel Income Managed Portfolio
Counsel Monthly Income Portfolio (prior to January 17, 2018, "Counsel Regular Pay Portfolio")
Counsel World Managed Portfolio
Counsel Balanced Portfolio
12. The proposed Mergers were announced in:
a) a press release dated November 17, 2017;
b) a material change report dated November 24, 2017; and
c) an amendment dated November 24, 2017 to the prospectuses of each of the Terminating Funds,
each of which has been filed on SEDAR.
13. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Manager presented the potential conflict of interest matters related to the Mergers to the IRC for a recommendation. On November 16, 2017, the IRC reviewed the potential conflict of interest matters related to the Mergers and provided its positive recommendation for the Mergers, after determining that the Mergers, if implemented, would achieve a fair and reasonable result for the Terminating Funds.
14. The Manager is convening a special meeting of the securityholders of each Terminating Fund in order to seek the approval of the securityholders of each Terminating Fund to complete its Merger, as required by paragraph 5.1(1)(f) of NI 81-102. The Meetings will be held on or about March 12, 2018.
15. The Manager has concluded that the Mergers are not material changes to the Continuing Funds, and accordingly, there is no intention to convene a meeting of securityholders of the Continuing Funds to approve the Mergers pursuant to paragraph 5.1(g) of NI 81-102.
16. By way of order dated December 14, 2017, the Manager was granted relief (the Notice-and-Access Relief) from the requirement set out in paragraph 12.2(2)(a) of National Instrument 81-106 Investment Fund Continuous Disclosure 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. In accordance with the Manager's standard of care owed to the Funds pursuant to securities legislation, the Manager will only use the notice-and-access procedure for a particular meeting where it has concluded that it is appropriate and consistent with the purposes of notice-and-access (as described in the Companion Policy to NI 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer) to do so, also taking into account the purpose of the meeting and whether the Funds would obtain a better participation rate by sending the management information circular with the other proxy-related materials.
17. Pursuant to the requirements of the Notice-and-Access Relief, a notice-and-access document and applicable form of proxies in connection with the Meetings, along with the most recent fund facts of the Continuing Fund, as applicable, were mailed to securityholders commencing on January 29, 2018 and were concurrently filed via SEDAR. The management information circular (Circular), which the notice-and-access document provides a link to, was also filed via SEDAR at the same time.
18. If all required approvals for a Merger are obtained, it is intended that the Merger will occur after the close of business on or about March 23, 2018 (the Effective Date). The Manager therefore anticipates that each securityholder of a Terminating Fund will become a securityholder of its Continuing Fund after the close of business on the Effective Date. Each Terminating Fund will be wound-up as soon as reasonably possible following its Merger.
19. The Circular describes all relevant facts concerning the Mergers, including the investment objectives, strategies and fee structure of the Terminating Funds and the Continuing Funds, the tax implications and other consequences of each Merger, as well as the IRC's recommendation of each Merger, so that securityholders of the Terminating Funds may make an informed decision before voting on whether to approve the Mergers. The Circular will also describe the various ways in which securityholders can obtain a copy of the simplified prospectus, annual information form and fund facts for the applicable Continuing Fund, and the most recent interim and annual financial statements and management reports of fund performance.
20. Securityholders of each 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 preceding the Effective Date. Following each Merger, all optional plans which were established with respect to the Terminating Funds will be re-established in comparable plans with respect to the Continuing Funds unless securityholders advise otherwise.
21. 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.
22. There are no charges payable by securityholders in the Funds in connection with the Mergers.
23. 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, to the portfolio manager(s) of the applicable Continuing Fund and are, or will be, consistent with the investment objective of the applicable Continuing Fund.
24. The Continuing Funds have the same valuation procedures as the Terminating Funds.
25. Prior to the Merger, if required, each Terminating Fund will sell any securities in its portfolio that do not meet the investment objective and strategies of the applicable Continuing Fund. This may result in the Terminating Funds realizing incremental capital gains or losses.
26. Each Terminating Fund will distribute to securityholders its net income and net realized capital gains to the extent required to ensure that each Terminating Fund is not itself subject to tax. Each distribution will be automatically reinvested in additional units of the applicable Terminating Fund.
27. Immediately after the close of business on the Effective Date, each Terminating Fund will transfer all of its net assets to its Continuing Fund in exchange for the applicable Continuing Fund units of the applicable series. The value of each Continuing Fund units received by the applicable Terminating Fund will equal the value of the net assets of the applicable series that were transferred to the applicable Continuing Fund.
28. The units of the series securityholders held in the applicable Terminating Fund will then be redeemed, and securityholders will receive their pro rata share of the applicable series of the Continuing Fund units. The value of the units securityholders receive of the Continuing Fund will be equal to the value of the units that they previously held in the applicable Terminating Fund.
29. Each Terminating Fund will thereafter be terminated.
30. The result of each Merger will be that securityholders in each Terminating Fund will cease to be securityholders of the Terminating Fund, will become securityholders of its Continuing Fund and will realize capital gains or capital losses. The Continuing Funds will continue as publicly-offered open-end mutual funds.
Benefits of the Merger
31. The Merger will benefit securityholders of the Terminating Funds for the following reasons:
a. Strategic Mandate: The Terminating Funds currently employ a dedicated tactical asset allocation approach, overseen by a tactical allocation manager. The Manager believes that this strategy has not materially contributed to performance.
In contrast, each of the Continuing Funds make use of a dedicated allocation to an underlying fund (Counsel Balanced Portfolio invests in Counsel Global Trend Strategy and Counsel Monthly Income Portfolio invests in Counsel Retirement Income Portfolio) that employs trend-following strategies. (For clarity, note that the Continuing Funds invest in other underlying funds as well.) These strategies enable the Continuing Funds to be responsive to changing market conditions. Allocation changes in the underlying funds can result in tactical changes in the overall weightings of the Continuing Fund. The Manager believes that this strategy, together with the Continuing Funds' dynamic hedging strategy are a more effective approach to achieving the Funds' objectives versus the tactical asset allocation strategy currently employed by the Terminating Funds.
The Continuing Funds also provide exposure to a wider range of fixed income securities than the Terminating Funds. This includes securities in Canada, as well as exposure to global fixed income and high yield securities, utilizing dedicated sub-advisors in each particular asset class. The Manager believes that this approach to fixed income investing will improve the underlying income generated by the Funds' holdings, and that the Continuing Funds will provide better return potential over the long term.
b. Performance of the Continuing Funds: The Continuing Funds have generally demonstrated better performance than the Terminating Funds with similar levels of risk.
c. Lower fees: Investors of the Terminating Funds will benefit from lower management fees and/or administration fees.
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 Merger Approval is granted.