Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – approval for fund merger under 5.5 of NI 81-102 – relief needed because merger will not meet pre-approval criteria – the merger will not be tax deferred – securityholders of terminating fund provided with timely and adequate disclosure regarding the merger
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds – sections 5.5(1)(b), 5.6. 5.7(1)(b) and 19.1
June 21, 2012
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
FRANKLIN TEMPLETON INVESTMENTS CORP.
(the “Manager”) AND WELLINGTON WEST FRANKLIN Templeton BALANCED RETIREMENT INCOME FUND
(the “Terminating Fund” and 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 merger (the “Merger”) of the Terminating Fund into the Continuing Fund (as defined below) under section 5.5(1)(b) of National Instrument 81-102 Mutual Funds (“NI 81-102”) (the “Exemption Sought”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (“OSC”) 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, Alberta, Saskatchewan and Manitoba (the “Non-Principal Jurisdictions”).
Interpretation
Defined terms contained 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:
“Continuing Fund” means Quotential Balanced Growth Portfolio;
“Effective Date” means the close of business on June 22, 2012 or as soon as practicable thereafter;
“Fund” or “Funds” means, individually or collectively, the Terminating Fund and the Continuing Fund;
“Tax Act” means the Income Tax Act (Canada);
Representations
This decision is based on the following facts represented by the Filers:
The Manager is a corporation existing under the laws of Ontario having its registered head office in Toronto, Ontario.
The Manager is the manager of each of the Funds.
Each of the Funds is an open-ended mutual fund trust established under the laws of Ontario by a declaration of trust.
Units of the Terminating Fund are currently qualified for sale by a simplified prospectus, annual information form and fund facts document dated June 29, 2011, which have been filed and receipted in the Jurisdiction and each of the Non-Principal Jurisdictions.
Units of the Continuing Fund are currently qualified for sale by a simplified prospectus, annual information form and fund facts document dated June 20, 2011, as amended on December 7, 2011, which have been filed and receipted in Ontario and each of the Non-Principal Jurisdictions, as well as Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.
The Continuing Fund and Terminating Fund are reporting issuers in Ontario and each of the Non-Principal Jurisdictions and are not in default under the securities legislation in force in such Jurisdictions.
Other than circumstances in which the principal regulator or the securities regulatory authority of a Non-Principal Jurisdiction has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices set out in NI 81-102.
The net asset value for each series of the Funds is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.
Provided the necessary unitholder and regulatory approvals are obtained, the Terminating Fund will merge into the Continuing Fund at the close of business on the Effective Date.
Pursuant to the Merger, unitholders of the Terminating Fund will receive units with the same value and in the same series of the Continuing Fund as they currently own in the Terminating Fund.
No sales charges will be payable in connection with the exchange of units of the Terminating Fund into units of the Continuing Fund.
The Merger cannot be carried out as a “qualifying exchange” within the meaning of section 132.2 of the Tax Act or a tax-deferred transaction under subsection 85(1), 85.1(1) or 97(1) of the Tax Act because the Terminating Fund does not currently qualify as a “mutual fund trust” under the Tax Act.
Unitholders of the Terminating Fund approved the Merger at a meeting held on June 15, 2012.
The independent review committee (“IRC”) of the Funds has reviewed and made a positive recommendation with respect to the Merger, having determined that the Merger, if implemented, achieves a fair and reasonable result for the Funds. The recommendation of the IRC has been included in the notice of meeting as required by section 5.1(2) of National Instrument 81-107.
If the approval of the unitholders of the Terminating Fund is not received at the special meeting in respect of the Merger, the Merger will not proceed. However, in the view of the Manager, because continued operation of the Terminating Fund is no longer viable, if the Merger is not approved by the unitholders, the Terminating Fund will be wound up and terminated on or about July 27, 2012.
All costs attributable to the Merger (consisting primarily of legal, proxy solicitation, printing and mailing costs) will be borne by the Manager and will not be borne by the Terminating Fund or the Continuing Fund.
Unitholders of the Terminating Fund will continue to have the right to redeem units of the Terminating Fund for cash at any time up to the close of business on June 21, 2012. The management information circular mailed to unitholders of the Terminating Fund discloses that a unitholder’s deferred sales charge schedule is not changed or eliminated as a result of the Merger, and that investors who redeem their units of the Terminating Fund may be subject to redemption charges as outlined in the simplified prospectus.
Effective as of the close of business on April 2, 2012, the Terminating Fund ceased distribution of units. Following the Merger, all systematic withdrawal programs that were established with respect to the Terminating Fund, will be re-established in the Continuing Fund, unless a unitholder advises the Manager otherwise. Unitholders may change or cancel any systematic program at any time and unitholders of the Terminating Fund who wish to establish one or more systematic programs in respect of their holdings in the Continuing Fund may do so following the Merger.
A material change report and press release, which gave notice of the proposed Merger, were filed via SEDAR on April 3, 2012.
A notice of meeting, management information circular (the “Circular”) and a proxy in connection with meetings of unitholders were mailed to unitholders of the Terminating Fund on or about May 22, 2012 and were filed via SEDAR.
The Circular that was mailed to unitholders of the Terminating Fund sets out:
a) information about the differences between the units of the Terminating Fund and the units of the Continuing Fund including investment objectives, net asset values, management fees and management expense ratios;
b) information about the investment objectives and strategies of the Continuing Fund sufficient to consider the Merger;
c) information about the tax consequences of the Merger;
d) the various ways in which unitholders of the Terminating Fund can obtain, at no cost, the most recent simplified prospectus, the annual information form, the audited financial statements for the period ended December 31, 2011 and the unaudited semi-annual financial statements for the period ended June 30, 2011 of the Continuing Fund; and
e) the opinion of the IRC of the Funds that the Merger achieves a fair and reasonable result for the Terminating Fund and the Continuing Fund.
The current Fund Facts for Series A of the Continuing Fund were also mailed to unitholders of the Terminating Fund.
Following the Merger, the Continuing Fund will continue as a publicly offered open- end mutual fund governed by the laws of Ontario.
The proposed Merger will be implemented pursuant to the following steps:
Step 1: Prior to the Effective Date, all securities in the portfolio of the Terminating Fund will be liquidated. As a result, the Terminating Fund will temporarily hold cash or money market instruments and will not be invested in accordance with its investment objectives for a brief period of time prior to the Merger.
Step 2: One day prior to the Effective Date, the terminating Fund will distribute to its unitholders sufficient net income and net realized capital gains so that it will not be subject to tax under Part 1 of the Tax Act for its current taxation year.
Step 3: On the Effective Date, the Terminating Fund will transfer all of its assets, which will consist of cash or money market instruments (less an amount required to satisfy the liabilities of the Terminating Fund), to the Continuing Fund, in exchange for Series A units of the Continuing Fund. The Series A units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the Terminating Fund’s net assets, which units will be issued by the Continuing Fund at the Series A net asset value per unit as of the close of business on the Effective Date.
Step 4: Immediately following the above-noted transfer, the Terminating Fund will distribute Series A units of the Continuing Fund held in its portfolio to its unitholders in exchange for their Series A units of the Terminating Fund on a dollar-for-dollar basis, so that following the distribution, the unitholders of the Terminating Fund will become direct unitholders of the Continuing Fund.
Step 5: As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
Approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102, as the Merger will not be effected a “qualifying exchange” or a tax-deferred transaction under the Tax Act.
Except as noted herein, the Merger will otherwise comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
The Filers submit that the Merger will result in the following benefits to unitholders of the Funds:
a) The Continuing Fund qualifies as a “mutual fund trust” for tax purposes while the Terminating Fund does not qualify. Once a mutual fund qualifies as a mutual fund trust for tax purposes it is no longer subject to alternative minimum tax, Part X.2 tax and Part XII.2 tax. In addition, it becomes entitled to a capital gains refund, which in certain situations has the effect of mitigating double taxation on capital gains realized by the fund;
b) The Merger will eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate mutual fund; and
c) The Continuing Fund will have a portfolio of greater value, potentially allowing for increased portfolio diversification opportunities.
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 Exemption Sought is granted.
“Darren McKall”
Darren McKall
Manager, Investment Funds Branch
Ontario Securities Commission SEDAR Project # 1900876
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – approval for fund merger under 5.5 of NI 81-102 – relief needed because merger will not meet pre-approval criteria – the merger will not be tax deferred – securityholders of terminating fund provided with timely and adequate disclosure regarding the merger
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds – sections 5.5(1)(b), 5.6. 5.7(1)(b) and 19.1