Headnote NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund merger – approval required because merger does not meet the criteria for pre-approval – The continuing fund does not have substantially similar fundamental investment objectives and fees compared to the terminating fund – Terminating fund’s unitholders provided with timely and adequate disclosure regarding the merger and the continuing fund.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, clauses 5.5(1)(b) and 5.6(1)(a).
June 13, 2011
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
EDUCATORS FINANCIAL GROUP INC. (the Manager) and
EDUCATORS GLOBAL FUND
(Global Fund and collectively with the Manager, the Filers)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of the proposed merger (the Merger) of the Global Fund into the Educators Balanced Fund (the Balanced Fund) (together with the Global Fund, the Funds) pursuant to clause 5.5(1)(b) of National Instrument 81-102 Mutual 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 Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia.
Interpretation
Terms defined in National Instrument 14-101 Definitions and 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 Filers:
The head office of each Filer is located in Toronto. Neither the Filers nor the Balanced Fund are not in default of securities legislation in any jurisdiction.
The Manager is registered as an investment fund manager in Ontario and as a dealer in the category of mutual fund dealer in Ontario and British Columbia.
Each of the Funds is a mutual fund trust established under the laws of Ontario and is part of a family of nine mutual funds (Educators Financial Group Funds) for which the Manager acts as trustee, investment fund manager and principal distributor. Each Fund is a reporting issuer in Ontario and British Columbia.
The Global Fund was established on August 21, 1991, and is currently governed by an amended, restated and combined declaration of trust dated October 6, 2008, as amended March 14, 2011 (the Declaration of Trust). The Balanced Fund was established on June 24, 1984, and is currently also governed by the Declaration of Trust, which applies to all of the Educators Financial Group Funds.
The authorized capital of the Funds consists of an unlimited number of class A units (the Class A units) and an unlimited number of class B units (the Class B units).
Class A units of the Funds are offered for sale only in the Provinces of Ontario and British Columbia to eligible purchasers, who must be members of the education community in those provinces, meaning teachers and non-teaching administration personnel and staff employed by a Board of Education and their immediate family members in Ontario or British Columbia. Class A units of the Funds may only be purchased from the Manager or from selected dealers authorized by the Manager to sell Class A units. Class B units are offered in Ontario and British Columbia through brokers, investment dealers and mutual fund dealers unaffiliated with the Manager, to members of the education community and their immediate family members in those provinces. To date, Class B units have not been issued.
On March 28, 2011, the Manager announced the calling of a special meeting (the Meeting) of the unitholders of the Global Fund to consider the amalgamation of the Global Fund into the Balanced Fund. The Meeting, which will be held June 15, 2011 is required as a result of the provisions of section 5.1(f) of NI 81-102. as the Global Fund will cease to exist following the merger, and unitholders of the Global Fund will become unitholders of the Balanced Fund pursuant to the Merger. The Manager has established a record date of April 18, 2011 for unitholders entitled to receive notice of, and to vote at, the Meeting.
The Manager determined that it was appropriate to recommend the Merger to unitholders of the Global Fund as a result of the following factors and concerns: (i) the declining size of the Global Fund; (ii) the lack of interest in the Global Fund; (iii) the high cost of operating and managing the Global Fund; (iv) the disappointing performance of the Global Fund; and (v) the availability of other, and better, investment options from third party fund companies for investors who want specialty equity funds. The Board of Directors of the Manager has also approved the Merger, subject to regulatory approval.
A press release dated March 28, 2011, a material change report dated March 28, 2011 and an amended and restated simplified prospectus and annual information form each dated March 31, 2011 were filed on SEDAR in connection with the Meeting.
A notice of meeting and management information circular (the Circular) which includes the most recently filed Fund Facts document for the Class A units of the Balanced Fund were mailed to unitholders of the Global Fund in connection with the Meeting on or about April 19, 2011.
A meeting of the unitholders of the Balanced Fund is not required in connection with the Merger, pursuant to the provisions of section 5.1(g) of NI 81-102, as the Balanced Fund will continue in existence after the Merger, the unitholders of the Balanced Fund will continue to hold units of the Balanced Fund, and the Merger will not result in a material change to the Balanced Fund.
Unitholders of the Global Fund will continue to have the right to redeem their units at the net asset value thereof at any time up to the close of business on the day prior to the date the Merger is effected (the Effective Date).
The Merger will be a “qualifying exchange” within the meaning of section 132.2 of the Income Tax Act (Canada).
The Circular includes disclosure about the Merger. The Circular also incorporates by reference the current prospectus, the financial statements of the Balanced Fund for the year ended December 31, 2010 and the annual management report of fund performance for the Balanced Fund for the year ended December 31, 2010. The Circular also discloses that these documents are available from the Manager upon request or on SEDAR at www.sedar.com.
The Circular also describes the tax implications of the Merger, the principal differences between the Global Fund and the Balanced Fund, and the right of unitholders of the Global Fund to redeem their units up to the Effective Date if they do not wish to participate in the Merger, and it also indicates that the Global Fund’s Independent Review Committee (the IRC) concluded that submitting the proposed merger to such unitholders for their consideration and approval achieves a fair and reasonable result for unitholders.
The IRC of the Funds concluded that the Merger would achieve a fair and reasonable result for the Funds.
The costs of the Merger will be paid for by the Manager.
Section 5.5(1)(b) of NI 81-102 requires the approval of the securities regulatory authority of a mutual fund before a reorganization or transfer of assets of the mutual fund is implemented, if the transaction will result in the securityholders of the mutual fund becoming securityholders in another mutual fund.
Section 5.5(1)(b) of NI 81-102 applies to the Merger, which would result in unitholders of the Global Fund becoming unitholders of the Balanced Fund. Therefore, the Merger must be approved by the securities regulatory authority before it can be implemented, and the Filers cannot rely on section 5.6(1) of NI 81-102 because the fundamental investment objectives of the Balanced Fund, as well as its fee structure, are not substantially the same as for the Global Fund.
The Global Fund invests in a portfolio of global equities, with portfolio management being provided by HSBC Asset Management (Canada) Limited and its affiliate, Sinopia Asset Management S.A. The Balanced Fund, on the other hand, invests in a balanced portfolio of equities and fixed income investments, with no more than 25% of its net assets to be invested in foreign securities, and with AEGON Capital Management Inc. acting as portfolio manager.
Although the investment objective of the Balanced Fund is materially different from that of the Global Fund, the Manager is of the view that the Balanced Fund will be an appropriate investment vehicle for most Global Fund unitholders. If unitholders of the Global Fund wish to maintain their investment in a global equity fund, the Circular advised such unitholders that they should consider redeeming their units prior to the Merger, and then invest the net proceeds in a global equity fund managed by another fund company. Representatives of the Manager are available to speak to any such unitholder about the investment options available in this regard, and the Manager will arrange any such redemption and purchase, and the Circular so states.
Although the Balanced Fund does not have a substantially identical fee structure to the Global Fund, the differences are in the Global Fund unitholders’ favour. The Balanced Fund has a lower management fee (1.75% versus 1.95% for the Global Fund) and a lower management expense ratio (1.83% versus 2.05% for the Global Fund for the period ended December 31, 2010, calculated after all absorptions of expenses and waivers of fees by the Manager; 1.92% versus 2.14% for the same period before such absorptions and waivers). It is a much larger fund and has also had better historic performance.
The Merger is expected to provide the following benefits:
(a) Unitholders are expected to enjoy improved economies of scale and potentially lower proportionate fund operating expenses as part of the larger Balanced Fund following the Merger.
(b) The Balanced Fund offers a lower management fee as compared to the current Global Fund management fee.
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 Merger Approval is granted.
“Vera Nunes”
Vera Nunes, Manager Investment Funds
ONTARIO SECURITIES COMMISSION
SEDAR Project No. 1731055