Northwest & Ethical Investments L.P. (Re), 2009 CanLII 64186

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund mergers – approval required because mergers do not meet the criteria for pre-approval – certain continuing funds have different investment objectives and fee structures than terminating funds, certain mergers are not “qualifying exchanges” or tax-deferred transactions under the Income Tax Act (Canada) – prospectus and annual and interim financial statements not required to be sent in connection with investor approval of mergers provided the information circular clearly discloses the various ways investors can access the financial statements – tailored prospectus of continuing funds sent to investors of terminating funds instead of a simplified prospectus.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds sections 5.5(1)(b), 5.6, 5.7 and 5.5(3).

October 22, 2009

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the “Jurisdiction”)

AND

IN THE MATTER OF NORTHWEST & ETHICAL INVESTMENTS L.P., ACTING THROUGH ITS GENERAL PARTNER, NORTHWEST & ETHICAL INVESTMENTS INC. (the Filer)

AND

IN THE MATTER OF THE TERMINATING FUNDS AND THE CONTINUING FUNDS LISTED IN SCHEDULE “A” (collectively, the Funds)

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) granting:

(a) Approval under section 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) to merge each Terminating Fund into the Continuing Fund opposite its name in the chart attached as Schedule A (the Proposed Mergers) (the Merger Approvals); and

(b) Relief from the prospectus and financial statements delivery requirement contained in section 5.6(1)(f)(ii) of NI 81-102 for the Proposed Mergers and all future mergers of mutual funds managed by the Filer or an affiliate of the Filer (collectively, Northwest) (together with the Proposed Mergers, the Mergers) (the Exemptive Relief)

(collectively, the Requested 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 Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.

Interpretation

Defined terms contained in National Instrument 14-101 – Definitions and in MI 11-102 have the same meaning if used in this decision unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1The Filer is a limited partnership existing under the laws of Ontario with its head office located in Toronto, Ontario and the manager of the Funds.

The Funds

2Each of the Funds listed in Schedule A with a name ending in the word “Fund” or “Portfolio,” but not “Corporate Class Portfolio,” is an open-end mutual fund trust established under the laws of Ontario or British Columbia under declarations of trust (the Trust Funds). Each of the Funds listed in Schedule A with a name ending in the words “Corporate Class Portfolio” is an open-end mutual fund class of shares of Northwest Corporate Class Inc., a corporation incorporated under the laws of Ontario (the Corporate Funds).

3Securities of the Funds are qualified for sale in all provinces and territories of Canada by simplified prospectus, in the case of the Corporate Funds, dated November 3, 2008, as amended, and in the case of the Trust Funds, dated June 30, 2009, as amended, except that units of the Trust Funds sold under the Credential brand are qualified for sale in Quebec by simplified prospectus dated October 9, 2009.

4The Funds are reporting issuers under applicable Canadian securities legislation and subject to the requirements of NI 81-102. The Funds are not on the list of defaulting reporting issuers maintained under applicable Canadian securities legislation or in default of applicable Canadian securities legislation in any jurisdiction.

5Each Fund follows the standard investment restrictions and practices established under applicable Canadian securities legislation except to the extent that it has received permission from the Canadian Securities Administrators to deviate therefrom.

6The net asset value (NAV) for each of the Funds is calculated on a daily basis on each day the Toronto Stock Exchange is open for business. As at August 31, 2009, the NAV of the Funds was as set out in Schedule A.

The Proposed Mergers

7The Proposed Mergers were described in a press release dated September 4, 2009 and a material change report and amendments to the simplified prospectuses and annual information forms for the Funds filed on SEDAR on or about September 11, 2009.

8The Filer proposes to effect the Proposed Mergers, subject to and after obtaining all necessary approvals, on or about October 23, 2009 (the Effective Date) after which the Continuing Funds will continue as publicly offered open-end mutual funds.

9The Filer believes the Proposed Mergers will be beneficial to securityholders of each Fund for the following reasons:

(a) Securityholders of the applicable Terminating Fund and Continuing Fund may enjoy increased economies of scale and lower operating expenses as part of a larger combined Continuing Fund;

(b) Each Continuing Fund will have a portfolio of greater value allowing for increased portfolio diversification opportunities than within the applicable Terminating Fund; and

(c) Each Continuing Fund, as a result of its increased size, will benefit from a more significant profile in the marketplace.

10The Independent Review Committee for the Funds (the IRC) has advised the Filer that, after reasonable inquiry, it has concluded that the Proposed Mergers do not create any conflict issues that have not been adequately addressed and, on that basis, achieve a fair and reasonable result for the Funds (the IRC’s Conclusion).

11Due to the different structures of the Funds, the procedures for implementing the Proposed Mergers will vary. However, the result of each Proposed Merger will be that investors in each Terminating Fund will cease to be holders of securities of a class of the Terminating Fund and will become holders of securities of an equivalent class of its corresponding Continuing Fund.

12At the same time as proposing the Proposed Mergers, the Filer has proposed fixed administration fees for the Continuing Funds. Investors in the Continuing Funds approved the fixed administration fees at the same meetings held on October 14th and 15th, 2009 at which investors in the Terminating Funds and certain Continuing Funds approved the Proposed Mergers (the Securityholder Meetings). However, it is expected that the Proposed Mergers will result in substantially similar fees for investors in the Terminating Funds, except in respect of the Proposed Merger of Ethical Canadian Index Fund into Ethical Growth Fund which Proposed Merger is expected to result in increased fees for investors in the Terminating Fund, Ethical Canadian Index Fund.

13Eight of the Proposed Mergers involve a Terminating Fund or Terminating Funds with a larger NAV as at August 31, 2009 than their corresponding Continuing Fund, specifically:

Terminating Fund and NAV as at Aug 31, 2009

Continuing Fund and NAV as at Aug 31, 2009

Northwest Quadrant Conservative Portfolio –$12,218,471

Credential Select Conservative Portfolio – $17,610,674

Northwest Quadrant Income Portfolio –$19,519,529

Ethical Advantage 2015 Fund – $24,456,954

Ethical Advantage 2010 Fund – $11,463,579

Ethical Advantage 2020 Fund – $35,380,119

Ethical Advantage 2030 Fund – $24,884,621

Ethical Advantage 2040 Fund – $10,644,637

Credential Money Market Fund – $75,962,082

Northwest Money Market Fund – $41,197,629

Northwest Quadrant All Equity Corporate Class Portfolio – $3,967,106

Northwest Quadrant Global Equity Corporate Class Portfolio – $268,133

The Filer has concluded that, except for the Proposed Merger of Credential Money Market Fund into Northwest Money Market Fund, these Proposed Mergers constitute a material change for these Continuing Funds and investors in these Continuing Funds, except investors in Northwest Money Market Fund, were asked to and did approve their respective Proposed Mergers at the Securityholder Meetings pursuant to section 5.1(g) of NI 81-102.

14A notice of meeting, management information circular (the Circular) and a form of proxy were mailed to investors and filed on SEDAR on or about September 25, 2009 in connection with the Securityholder Meetings. The materials mailed to investors also included a copy of a tailored prospectus containing the current Part A and current Part B of the simplified prospectus for the relevant Continuing Fund.

15For four of the Proposed Mergers, the Terminating Fund did, but the Continuing Fund did not, at the time meeting materials were mailed to investors, have a current simplified prospectus in Quebec and for Series F units in all jurisdictions, specifically:

Terminating Fund and NAV as at Aug 31, 2009

Continuing Fund and NAV as at Aug 31, 2009

Northwest Quadrant Conservative Portfolio – $12,218,471

Credential Select Conservative Portfolio –$17,610,674

Northwest Quadrant Income Portfolio – $19,519,529

Northwest Quadrant Global Equity Portfolio – $592,043

Credential Select High Growth Portfolio –$35,163,324

Northwest Quadrant All Equity Portfolio – $20,095,210

The Filer sent investors in these Terminating Funds in Quebec, and in their Series F units in all jurisdictions, together with the Circular, the current Part A and the current Part B of the simplified prospectus of the corresponding Continuing Fund filed with the securities regulatory authorities in the provinces and territories of Canada outside Quebec.

16The Circular set out:

(a) The Proposed Mergers, including the procedures for implementing them and the consequences of the Proposed Mergers, including their fees consequences and their tax consequences for the Terminating Funds and for investors in the Terminating Funds;

(b) That the Proposed Mergers will not proceed unless investors in the Continuing Funds approve the proposed fixed administration fees;

(d) The various ways in which investors can obtain a copy of the annual information form and most recent annual and interim financial statements for the Continuing Funds; and

(e) The IRC’s Conclusion.

17The Circular provides sufficient information about the Proposed Mergers to permit investors to have made an informed decision about the Proposed Mergers.

18The Filer is conducting the Proposed Mergers of Trust Funds on a taxable basis in order to preserve loss carryforwards in the Continuing Funds, which it believes to be a better result for investors in the Trust Funds.

19The cost of effecting the Proposed Mergers (consisting primarily of legal, proxy solicitation, brokerage fees, printing, mailing and regulatory fees) will be borne by the Filer.

20Investors in the Terminating Funds will continue to have the right to redeem securities of the Terminating Funds until the close of business on the business day before the Effective Date.

21No sales charges will be payable in connection with the acquisition by the Continuing Funds of the investment portfolio of the applicable Terminating Funds.

22Following the Proposed Mergers, the Terminating Funds will be wound up as soon as reasonably practicable.

23The Merger Approvals are required because the Proposed Mergers do not satisfy all of the criteria for pre-approved mergers set out in section 5.6 of NI 81-102, specifically:

(a) For all Proposed Mergers, except the Proposed Merger of Credential Money Market Fund into Northwest Money Market Fund, a reasonable person might not consider the investment objectives of the merging Funds to be substantially similar as would be required to meet the criteria in section 5.6(1)(a)(ii) of NI 81-102;

(b) The Filer is proposing the introduction of fixed administration fees for the Continuing Funds, which is not a feature of the Terminating Funds. A reasonable person might therefore not consider the fee structures of the merging Funds to be substantially similar as would be required to meet the criteria in section 5.6(1)(a)(ii) of NI 81-102;

(c) A tailored version of the current simplified prospectus, except in Quebec for Credential Select Conservative Portfolio and Credential Select High Growth Portfolio and in all jurisdictions for their Series F units, was sent, and the most recent annual and interim financial statements that have been made public for the Continuing Funds were not sent, to investors in the Terminating Funds, contrary to the criteria in section 5.6(1)(f)(ii) of NI 81-102; and

(d) The Proposed Mergers, other than the Proposed Mergers of Corporate Funds, will be completed on a taxable basis and not as a “qualifying exchange” or as a tax deferred transaction as would be required to meet the criteria in section 5.6(1)(b) of NI 81-102.

24Except as noted above, the Proposed Mergers will comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

Decision

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 Approval is granted provided that, in respect of the Exemptive Relief:

(a) In satisfaction of the simplified prospectus delivery requirement in subsection 5.6(1)(f)(ii) of NI 81-102, Northwest sends securityholders of a terminating fund a tailored simplified prospectus consisting of:

(i) The current Part A of the simplified prospectus of the applicable continuing fund, and

(ii) The current Part B of the simplified prospectus of the applicable continuing fund;

(b) The management information circular sent to securityholders in connection with a Merger prominently discloses that securityholders can obtain the most recent interim and annual financial statements of the applicable continuing fund by accessing the SEDAR website at www.sedar.com, by accessing Northwest’s website, by calling Northwest’s toll-free telephone numbers or by submitting (by fax or mail) a request to Northwest;

(c) Upon a request by a securityholder of a terminating fund for financial statements, Northwest will make best efforts to provide the securityholder with financial statements of the applicable continuing fund in a timely manner so that the securityholder can make an informed decision regarding the Merger;

(d) Each applicable terminating fund and the applicable continuing fund with respect to a Merger have an unqualified audit report in respect of their last completed financial period; and

(e) The management information circular sent to securityholders in connection with a Merger provides sufficient information about the Merger to permit securityholders to make an informed decision about the Merger.

“Rhonda Goldberg” Rhonda Goldberg Manager, Investment Funds Branch Ontario Securities Commission

Schedule A - Terminating Funds and Continuing Funds and NAVs as at August 31, 2009

Terminating Fund

Continuing Fund

Northwest Canadian Bond Fund – $211,078,515

Ethical Income Fund – $313,817,216

Northwest Quadrant Conservative Portfolio –$12,218,471

Credential Select Conservative Portfolio –$17,610,674

Northwest Quadrant Income Portfolio – $19,519,529

Northwest Quadrant Growth Portfolio – $5,375,495

Northwest Quadrant Balanced Growth Portfolio – $79,989,502

Northwest Quadrant Global Growth Portfolio –$1,642,748

Northwest Quadrant Global Equity Portfolio – $592,043

Credential Select High Growth Portfolio –$35,163,324

Northwest Quadrant All Equity Portfolio – $20,095,210

Ethical Monthly Income Fund – $60,065,548

Ethical Balanced Fund – $312,949,225

Ethical Canadian Index Fund – $48,636,074

Ethical Growth Fund – $301,044,767

Ethical Canadian Stock Fund – $727,466