OceanRock Investments Inc.
Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions.
National Instrument 81-102 Investment Funds -- Change of Manager Approval -- the Filer is a mutual fund manager and seeks approval of the change in the manager under the approval requirements in section 5.5(1)(a) NI 81-102 -- the Filer established the experience and integrity of the new manager; there are no expected material changes to the management, business, operations or affairs of the fund; the independent review committee reviewed the change of manager; securityholders will vote on the change of manager.
National Instrument 81-102 Investment Funds -- Fund Mergers Approval -- a mutual fund manager seeks approval of proposed fund mergers under the approval requirements in section 5.5(1)(b) of NI 81-102 -- each continuing fund has investment objectives and strategies that are similar to the applicable terminating fund; the fund's independent review committee reviewed the merger; securityholders will vote on the proposed mergers; securityholders can redeem the investment after the merger and decide whether to remain in the continuing fund.
National Instrument 81-102 Investment Funds -- Change of Custodian Approval -- a mutual fund manager seeks approval of a change of custodian under the approval requirements in section 5.5(1)(c) of NI 81-102 -- the change of custodian is in connection with a change of the mutual fund manager, and results in the same custodian for all mutual funds for which the manager acts as investment fund manager; the change of custodian will be beneficial to unitholders and the fund.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(a); 5.5(1)(b), 5.5(1)(c).
September 10, 2018
IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF OCEANROCK INVESTMENTS INC. (the Filer or the Manager) AND IN THE MATTER OF THE MANAGER FUNDS (AS DEFINED BELOW)
1 The securities regulatory authority or regulator in each of the Jurisdictions (Decision Makers) have received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) approving (the Approval Sought):
(a) the proposed change of manager of the Applicable Funds (as defined below) (the Change of Manager);
(b) the proposed change of custodian of the Applicable Funds, in connection with the Change of Manager; and
(c) the proposed mergers of the Terminating Funds (as defined below) with the Continuing Funds (as defined below) (the Proposed Mergers);
pursuant to sections 5.5(1)(a), 5.5(1)(c) and 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102), respectively.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the British Columbia Securities Commission is the principal regulator for this application;
(b) the Filer 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 Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Prince Edward Island, Newfoundland and Labrador, Nova Scotia, Northwest Territories, Nunavut and Yukon; and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
2 Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless they are otherwise defined in this decision. In addition, the following terms have the following meanings:
Applicable Funds means Meritas Jantzi Social Index Fund, Meritas International Equity Fund, OceanRock Growth & Income Portfolio, OceanRock US Equity Fund, Meritas Growth & Income Portfolio, Meritas Maximum Growth Portfolio and OceanRock Income Portfolio.
Circular means the joint management information circular of the Manager Funds.
Continuing Fund means each of NEI Canadian Equity Fund, NEI Select Growth Portfolio, NEI Select Income & Growth Portfolio, Meritas International Equity Fund, NEI Select Maximum Growth Portfolio, NEI Canadian Bond Fund, NEI Select Growth RS Portfolio, NEI Select Income RS Portfolio, NEI Select Income & Growth RS Portfolio, NEI Conservative Yield Portfolio, NEI U.S. Equity RS Fund, NEI Select Balanced Portfolio, NEI Select Balanced RS Portfolio and NEI Canadian Equity RS Fund.
Funds means the Manager Funds and the Continuing Funds.
IRC means the Independent Review Committee of the Manager Funds.
Manager Funds means the Terminating Funds and the Applicable Funds.
NEI means Northwest & Ethical Investments L.P.
Tax Act means the Income Tax Act (Canada).
Terminating Fund means each of the OceanRock Canadian Equity Fund, OceanRock Growth Portfolio, OceanRock Income & Growth Portfolio, OceanRock International Equity Fund, OceanRock Maximum Growth Portfolio, Meritas Canadian Bond Fund, Meritas Growth Portfolio, Meritas Income Portfolio, Meritas Income & Growth Portfolio, Meritas Strategic Income Fund, Meritas U.S. Equity Fund, OceanRock Balanced Portfolio, Meritas Balanced Portfolio and Meritas Monthly Dividend and Income Fund.
3 This decision is based on the following facts represented by the Filer:
1. the Manager is a corporation formed under the laws of Canada with its head office in Vancouver, British Columbia;
2. the Manager is the investment fund manager of the Manager Funds and is registered as (i) a portfolio manager in Alberta, British Columbia, Ontario and Saskatchewan and (ii) as an investment fund manager in Alberta, British Columbia, Newfoundland and Labrador, Ontario and Québec;
3. NEI is an Ontario limited partnership; the general partner of NEI (the General Partner) is Northwest & Ethical Investments Inc., a corporation formed under the laws of Canada with its head office in Toronto, Ontario;
4. NEI is the investment fund manager of the Continuing Funds other than Meritas International Equity Fund and is registered as (i) a portfolio manager and commodity trading manager in Ontario, (ii) an exempt market dealer in British Columbia, Ontario, Québec and Saskatchewan and (iii) an investment fund manager in British Columbia, Newfoundland and Labrador, Ontario and Quebec; if unitholder and regulatory approval is obtained, the Change of Manager will result in NEI becoming the investment fund manager of Meritas International Equity Fund on the Effective Date (as defined below);
5. on December 11, 2017, Desjardins Financial Holding Inc. (Desjardins), the indirect controlling shareholder of the Manager, entered into an agreement with Canada's five provincial credit union centrals (the Centrals) and The CUMIS Group (CUMIS), pursuant to which the business of Qtrade Canada Inc., the parent company of the Manager, would be combined with the businesses of Credential Financial Inc. and NEI to create one of Canada's largest independent wealth management firms (the Transaction); the Transaction closed on March 31, 2018 and resulted in an indirect change of control of the Manager, which was approved by all of the Canadian securities regulators; the new entity, Aviso Wealth Inc., is indirectly jointly owned by Desjardins and a limited partnership comprised of the Centrals and CUMIS, with each holding a 50% stake;
6. as a result of the Transaction, the Manager and NEI became affiliates;
7. each of the Funds is a mutual fund trust established under the laws of British Columbia or Ontario and is a reporting issuer under the applicable securities legislation of each Jurisdiction;
8. t he securities of each Fund are qualified for distribution in the Jurisdictions pursuant to simplified prospectuses and annual information forms prepared and filed in accordance with the securities legislation of the Jurisdictions;
9. each Fund is subject to the requirements of NI 81-102; the securities of each Fund are issuable and redeemable on any business day;
10. none of the Manager, NEI or any Fund is in default of securities legislation in any Jurisdiction;
11. in accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106), a press release announcing the Proposed Mergers and the Change of Manager was issued on July 6, 2018; a material change report with respect to the Proposed Mergers and the Change of Manager was filed on SEDAR on July 9, 2018; amendments to the Manager Funds' simplified prospectus, annual information form and Fund Facts were filed on July 9, 2018;
12. the Manager has received approval from its Board of Directors to proceed with the Proposed Mergers and the Change of Manager; the General Partner has received approval from its Board of Directors to proceed with the Proposed Mergers and the Change of Manager;
13. meetings of the unitholders of the Manager Funds were held on August 31, 2018 (the Meetings), the Proposed Mergers and the Change of Manager were approved and will be completed on or about October 29, 2018, or such later date as may be determined by the Manager (the Effective Date);
14. the notices of meetings, form of proxy and Circular (collectively, the Meeting Materials), as well as the relevant Fund Facts documents of the Continuing Funds were mailed to unitholders of record of the Terminating Funds as at July 13, 2018 in accordance with Section 12.2 of NI 81-106; the Meeting Materials were mailed to unitholders of record of the Applicable Funds as at July 13, 2018 in accordance with Section 12.2 of NI 81-106;
15. the Meeting Materials contain a detailed description of the proposed Change of Manager and Proposed Mergers, information about the Terminating Funds and the Continuing Funds and income tax considerations for unitholders of the Terminating Funds; the Meeting Materials also describe the various ways in which investors can obtain a copy of the simplified prospectus, annual information form and the most recent annual and interim financial statements and management report of fund performance of the Continuing Funds;
16. the Meeting Materials contain all information necessary to allow unitholders to make an informed decision about the proposed Change of Manager and the Proposed Mergers; all other required information and documents necessary to comply with applicable proxy solicitation requirements of securities legislation, including, where applicable, the Fund Facts for the Continuing Funds, for the Meetings have also been mailed to applicable unitholders of the Manager Funds:
17. unitholders of the Manager Funds will continue to have the right to redeem units of the Manager Funds up to the close of business on the business day immediately prior to the Effective Date;
18. the application was made in connection with the following Proposed Mergers:
OceanRock Canadian Equity Fund
NEI Canadian Equity Fund
OceanRock Growth Portfolio
NEI Select Growth Portfolio
OceanRock Income & Growth Portfolio
NEI Select Income & Growth Portfolio
OceanRock International Equity Fund
Meritas International Equity Fund
OceanRock Maximum Growth Portfolio
NEI Select Maximum Growth Portfolio
Meritas Canadian Bond Fund
NEI Canadian Bond Fund
Meritas Growth Portfolio
NEI Select Growth RS Portfolio
Meritas Income Portfolio
NEI Select Income RS Portfolio
Meritas Income & Growth Portfolio
NEI Select Income & Growth RS Portfolio
Meritas Strategic Income Fund
NEI Conservative Yield Portfolio
Meritas U.S. Equity Fund
NEI U.S. Equity RS Fund
OceanRock Balanced Portfolio
NEI Select Balanced Portfolio
Meritas Balanced Portfolio
NEI Select Balanced RS Portfolio
Meritas Monthly Dividend and Income Fund
NEI Canadian Equity RS Fund
19. regulatory approval of the Proposed Mergers is required because they do not satisfy all the criteria for pre-approval set out in section 5.6 of NI 81-102, namely:
(a) they will not be effected as "qualifying exchanges" within the meaning of the Tax Act or as tax-deferred transactions under the Tax Act;
(b) the fee structures of the Terminating Funds and Continuing Funds are not substantially similar as each Terminating Fund pays all of its operating expenses while each Continuing Fund pays (or in the case of Meritas International Equity Fund, it is proposed that it pay) NEI a fixed administration fee in exchange for NEI agreeing to pay for certain of the Continuing Fund's operating expenses; and
(c) each Continuing Fund has investment objectives and strategies that are similar to, but not necessarily substantially the same in all respects, as the applicable Terminating Fund;
20. the Proposed Mergers are proposed to proceed as taxable mergers as:
(a) affecting the Proposed Mergers on a taxable basis will preserve, where applicable, any unused tax losses of a Continuing Fund, which would otherwise expire upon implementation of the Proposed 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;
(b) the administrative costs of a taxable merger are less than the administrative costs of a tax-deferred merger because neither the Terminating Funds nor the Continuing Funds experience a deemed taxation year end on the effective date of the taxable merger. Although the Terminating Funds are still required to file a tax return, they are not required to prepare the detailed tax election that is required as part of a tax-deferred merger. The Continuing Funds are not required to file a tax return for the short taxation year; and
(c) the Manager has determined that a substantial majority of the units of each Terminating Fund are held in tax-deferred registered plans, which are not generally affected by the tax consequences of transactions such as the Proposed Mergers;
21. unitholders of the Terminating Funds will be provided with information about the tax consequences of the Proposed Mergers in the Circular and will have the opportunity to consider such information prior to voting on the Proposed Mergers;
22. except as noted in paragraph 19, the Proposed Mergers will otherwise comply with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102;
23. the Manager has determined that the Proposed Mergers do not result in a material change for the Continuing Funds;
24. it is proposed that the following steps will be carried out to effect each Proposed Merger:
(a) Step 1: Before the effective date of the Proposed Merger, certain of the securities in the portfolios of the Terminating Fund will be liquidated;
(b) Step 2: The Terminating Fund will distribute to its unitholders sufficient amounts of its net income and net realized capital gains so that they will not be subject to tax under Part I of the Tax Act for its current taxation year;
(c) Step 3: The Terminating Fund will transfer all of its assets, which will consist of cash and/or portfolio securities less an amount required to satisfy the liabilities of the Terminating Fund, to the applicable Continuing Fund, in exchange for units of the applicable Continuing Fund;
(d) Step 4: Immediately following the above-noted transfer, the Terminating Fund will distribute to its unitholders the units of the applicable Continuing Fund so that following the distribution, the unitholders of the Terminating Fund will become direct holders of the applicable series of units of the applicable Continuing Fund;
(e) Step 5: As soon as reasonably possible following the Merger, the Terminating Fund will be wound up;
25. the Manager believes the Proposed Mergers to be in the best interests of unitholders of the Terminating Funds for the following reasons:
(a) each Continuing Fund will have a larger net asset value following the Proposed Merger, allowing for greater portfolio diversification opportunities than the Terminating Funds and Continuing Funds would enjoy separately;
(b) the Proposed Mergers will result in a more streamlined and simplified product line-up that is easier for investors to understand; and
(c) each Continuing Fund, as a result of its increased size, will benefit from a more significant profile in the marketplace;
26. no sales charges, redemption fees or other fees or commissions will be payable by unitholders in connection with the Proposed Mergers or with respect to any portfolio rebalancing in the Terminating Funds arising in connection with the Proposed Mergers; the costs and expenses specifically associated with the Proposed Mergers will be borne by the Manager;
27. in the case of each Proposed Merger, unitholders of a Terminating Fund will receive the same series of securities of the Continuing Fund as such unitholders hold in the Terminating Fund upon closing of the Proposed Merger, except that unitholders holding series T units of a Terminating Fund will receive series A units of the applicable Continuing Fund upon closing of the Proposed Merger;
28. the management fees for the relevant series of the applicable Continuing Fund are, in each case, the same as those of each Terminating Fund;
29. the valuation procedures for the applicable Continuing Fund are the same as those of each Terminating Fund;
30. investors in the Terminating Funds will have the right to vote on the Proposed Mergers pursuant to section 5.1(1)(f) of NI 81-102; due to the redemption rights of unitholders, each unitholder ultimately can make the unitholder's own choice as to whether to remain in the Continuing Fund or not;
31. the Manager has referred the Proposed Mergers to the IRC for review pursuant to section 5.1(1)(b) of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), and after reasonable inquiry, the IRC has determined that the Proposed Mergers achieve a fair and reasonable result for the Terminating Funds and their unitholders; the results of the IRC's review of the Proposed Mergers will be referred to in the Circular;
32. the Manager was appointed manager of the Applicable Funds pursuant to an Amended and Restated Master Management Agreement between OceanRock Investments Inc. as trustee and OceanRock Investments Inc. as manager dated March 1, 2011, as amended (the Management Agreement); as a result of the Transaction, the Manager and NEI are now affiliates and it has been determined that it would be inefficient for Aviso Wealth Inc. to operate two investment fund managers; as such, it is proposed that the Manager assign the Management Agreement, as it relates to the Applicable Funds, to NEI, which would result in NEI becoming the manager of the Applicable Funds; following the change of manager, the Manager will be wound-up;
33. should unitholder and regulatory approval be obtained with respect to the Change of Manager for an Applicable Fund then Desjardins Trust Inc. (DTI) will become the custodian of the Applicable Fund; DTI is currently the custodian of all the mutual funds for which NEI acts as investment fund manager;
34. after the completion of the Change of Manager, the advising representatives of the Manager with responsibility for the Applicable Funds will become advising representatives of NEI and will continue to have responsibility for the Applicable Funds; additionally, the current portfolio sub-advisors of the Applicable Funds will remain sub-advisors following the Change of Manager; this will provide continuity with respect to the management of the Applicable Funds after the Change of Manager occurs;
35. upon completion of the Change of Manager the individuals who comprise the independent review committee of the Applicable Funds will resign and the Manager has confirmed that the new members of the independent review committee for the Applicable funds will be the same individuals who currently comprise the independent review committee for NEI's current mutual funds, namely Marie Rounding, Lawrence Ward and William Woods;
36. NEI possesses all registrations under the securities legislation of the Jurisdictions and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to allow it to manage the Applicable Funds after completion of the Change of Manager;
37. NEI will have the appropriate personnel, policies and procedures and systems in place to assume the management of the Applicable Funds after completion of the Change of Manager;
38. after completion of the Change of Manager NEI will become the trustee and registrar of the Applicable Funds and DTI will become the custodian of the Applicable Funds; those changes will align the trustee, registrar and custodian of the Applicable Funds with those of NEI's current mutual funds;
39. there is no intention to change the officers or directors of NEI as a result of the Change of Manager;
40. at the Meetings, unitholders of each Applicable Fund were also asked to approve changes to the fundamental investment objective of the Applicable Fund as well as the implementation of a fixed administration fee for the Applicable Fund;
41. neither the Manager nor NEI expects the Change of Manager to adversely affect the operation or administration of the Applicable Funds; the Applicable Funds will not bear any of the costs and expenses associated with the Change of Manager; and
42. the Manager has referred the Change of Manager to the IRC for review pursuant to section 5.1(1)(b) of NI 81-107, and after reasonable inquiry, the IRC has determined that the Change of Manager achieves a fair and reasonable result for the Applicable Funds and their unitholders; the results of the IRC's review of the Change of Manager will be referred to in the Circular.
4 Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Approval Sought is granted.