December 5, 2014
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
MACKENZIE FINANCIAL CORPORATION
(the Filer)
AND
IN THE MATTER OF
MACKENZIE NORTH AMERICAN CORPORATE BOND CLASS,
SYMMETRY FIXED INCOME PORTFOLIO CLASS, AND
FIXED INCOME CLASS
(the Terminating Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval (the Approval Sought) of the mergers (the Reorganization Transactions) of the Terminating Funds into the Continuing Funds (as defined below) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102).
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 intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (together with Ontario, the Jurisdictions).
Interpretation
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.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer is a corporation governed by the laws of Ontario with its head office located in Toronto, Ontario.
The Filer is registered as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager in the Province of Ontario. The Filer is also registered as a portfolio manager and exempt market dealer in all other Canadian provinces and territories and as an investment fund manager in the Provinces of Newfoundland and Labrador and Québec.
The Filer is the investment fund manager and portfolio manager of the Funds (as defined below).
The Funds
- The Filer is proposing the Reorganization Transactions of Terminating Funds into the corresponding Continuing Funds (the Continuing Funds, together with the Terminating Funds, the Funds) as set out below:
TERMINATING FUND
CONTINUING FUND
Mackenzie North American Corporate Bond Class
Mackenzie North American Corporate Bond Fund
Symmetry Fixed Income Portfolio Class
Symmetry Fixed Income Portfolio
Fixed Income Class
Fixed Income Fund (Portico)
Each of Mackenzie North American Corporate Bond Class and Symmetry Fixed Income Portfolio Class is a separate class of shares of Mackenzie Financial Capital Corporation (Capitalcorp), a mutual fund corporation incorporated under the laws of the Province of Ontario.
Fixed Income Class is a separate class of shares of Multi-Class Investment Corporation (Quadruscorp), a mutual fund corporation incorporated under the laws of the Province of Ontario.
Each Continuing Fund is an open-end mutual fund trust established under the laws of Ontario. The Filer is the trustee of each Continuing Fund.
Quadrus Investment Services Ltd. is the principal distributor of Fixed Income Class and Fixed Income Fund (Portico) and is an affiliate of the Filer.
Securities of the Continuing Funds are currently qualified for sale by a simplified prospectus, annual information form and fund facts document in all the Jurisdictions. The most recently filed simplified prospectus, annual information form and fund facts document for Mackenzie North American Corporate Bond Fund and Symmetry Fixed Income Portfolio are dated September 29, 2014. The most recently filed simplified prospectus, annual information form and fund facts document for Fixed Income Fund (Portico) are dated June 27, 2014.
The Terminating Funds have been closed to new purchases of their securities since April 15, 2013.
Each Fund is a reporting issuer under the securities legislation of each Jurisdiction.
Each Fund is subject to the requirements of NI 81-102, National Instrument 81-106 – Investment Fund Continuous Disclosure (NI 81-106) and National Instrument 81-107 – Independent Review Committee for Investment Funds (NI 81-107), subject to any exemptions therefrom that may be available under applicable securities legislation or granted by the securities regulatory authorities.
None of the Filer or the Funds is in default of securities legislation in any Jurisdiction.
The Reorganization Transactions
Each Terminating Fund was launched as a class of shares of a mutual fund corporation in order to provide a more tax-efficient form of fixed income exposure than that provided by the corresponding Continuing Fund. Each Terminating Fund relies, directly or indirectly, on forward contracts to provide investment returns similar to those generated by certain reference funds in order to provide this tax-efficient exposure (Character Conversion Transactions).
The favourable tax treatment of those Character Conversion Transactions was eliminated by new rules in the Income Tax Act (Canada) (the Tax Act), enacted on December 12, 2013, that affect the tax treatment of returns earned under “derivative forward agreements.”
As a result of this change, Mackenzie North American Corporate Bond Class will be unable to provide tax-efficient fixed income exposure after June 2015, Symmetry Fixed Income Portfolio Class will be unable to do so after October 2015 and Fixed Income Class will be unable to do so after December 2014. In response to the change in tax treatment, the Filer proposes to effect the Reorganization Transactions.
A press release and material change report regarding the Reorganization Transactions were filed on SEDAR on October 3, 2014. The material change report was filed in respect of the material change to the Terminating Funds.
The Reorganization Transactions will not constitute a material change for the Continuing Funds.
As required by National Instrument 81-107 – Independent Review Committee, the terms of the Reorganization Transactions were presented to the independent review committee (the IRC) of the Terminating Funds for its review and recommendation. The IRC reviewed the potential conflict of interest matter related to the Reorganization Transactions and has determined that the Reorganization Transactions, if implemented, would achieve a fair and reasonable result for each of the Funds.
Subject to necessary regulatory approval and approval of securityholders of the Terminating Funds, the Reorganization Transaction of Fixed Income Class is expected to occur on or about January 9, 2015, the Reorganization Transaction of Mackenzie North American Corporate Bond Class is expected to occur on or about July 3, 2015, and the Reorganization Transaction of Symmetry Fixed Income Portfolio Class is expected to occur on or about October 15, 2015.
If all necessary approvals required for the Reorganization Transaction in respect of a Fund are not obtained, it is the intention of the Filer to terminate such Terminating Fund, in accordance with the articles of incorporation governing the Terminating Fund and applicable securities laws.
It is proposed that the following steps be carried out to effect the Reorganization Transactions:
(a) In respect of the proposed Reorganization Transaction for Mackenzie North American Corporate Bond Class, the forward contracts held by the Terminating Fund will be settled and the securities owned by the Terminating Fund will be sold to the applicable counterparty in exchange for cash. The Terminating Fund will then concurrently subscribe for securities of the Continuing Fund. The Terminating Fund will thereafter hold only securities of the Continuing Fund and some cash reserves for liquidity purposes until the Reorganization Transaction occurs.
(b) In respect of the proposed Reorganization Transaction for Symmetry Fixed Income Portfolio Class, as the Terminating Fund invests in underlying funds, most of which use forward contracts, the Terminating Fund will redeem its investments in these underlying funds once their forward contracts are settled. The Terminating Fund will then concurrently subscribe for securities of the Continuing Fund. The Terminating Fund will thereafter hold only securities of the Continuing Fund and some cash reserves for liquidity purposes until the Reorganization Transaction occurs.
(c) In respect of the proposed Reorganization Transaction for Fixed Income Class, the Character Conversion Transaction entered into by the Terminating Fund provides returns that are determined with reference to the returns generated by Quadrus Fixed Income Fund, a fund that is currently closed to new purchases. However, the investment objectives of the Continuing Fund are similar to the investment objectives of Quadrus Fixed Income Fund. The Terminating Fund currently invests a portion of its assets directly in fixed income securities and may exchange such fixed income securities in kind for securities of the Continuing Fund. The forward contracts held by the Terminating Fund will be settled and the securities owned by the Terminating Fund will be sold to the applicable counterparty in exchange for cash. The cash will be used to subscribe for securities of the Continuing Fund. The Terminating Fund will thereafter hold only securities of the Continuing Fund, fixed income securities to be transferred in kind and some cash reserves for liquidity purposes until the Reorganization Transaction occurs.
After the close of business on the date of each Reorganization Transaction, either Capitalcorp or Quadruscorp, as the case may be, will cause all of the securities of that particular Terminating Fund to be redeemed. As proceeds of redemption, each securityholder of Terminating Fund securities will receive their pro rate share of the Continuing Fund securities held by the Terminating Fund. The value of those Continuing Fund securities will be equal to the value of the Terminating Fund securities held by a securityholder as at the close of business on the effective date of its respective Reorganization Transaction.
Following the Reorganization Transactions, the Continuing Funds will continue as publicly offered open-end mutual funds and the Terminating Funds will be wound up as soon as reasonably practicable.
Securityholders of the Terminating Funds will be asked to approve the Reorganization Transactions at special meetings of securityholders to be held on December 8, 2014, as required pursuant to section 5.1(f) of NI 81-102. If the meeting is adjourned, the adjourned meeting will be held on December 9, 2014.
A notice of meeting, a management information circular dated November 7, 2014 (the Circular), a proxy in connection with the Reorganization Transactions and a copy of the most recently filed fund facts document for the applicable Continuing Funds were mailed to the securityholders of the Terminating Funds on November 14, 2014 in accordance with applicable securities laws. The Circular will contain a description of the proposed Reorganization Transactions, the investment objectives and fee structures of the Terminating Funds and the Continuing Funds and income tax considerations for securityholders of the Terminating Funds. The Circular will disclose that securityholders of the Terminating Funds may obtain in respect of the Continuing Funds, at no cost, the most recent annual and interim financial statements, the current simplified prospectus, annual information form and the most recent management report on fund performance that have been made public by contacting the Filer or by accessing the website of the Terminating Funds or the System for Electronic Document Analysis and Retrieval (SEDAR), which are also incorporated by reference in the Circular. A simplified prospectus and fund facts document are not available for Series I securities of Mackenzie North American Corporate Bond Fund, which will be a newly created series of securities. Thus, securityholders of Series I securities of Mackenzie North American Corporate Bond Class will be sent the fund facts document relating to series A securities of the Continuing Fund.
The Filer will pay for the costs and expenses associated with the Reorganization Transactions, including the cost of holding the meetings in connection with the Reorganization Transactions and of soliciting proxies, including costs of mailing the Circular and accompanying materials. The Funds will bear none of the costs and expenses associated with the Reorganization Transactions.
Securityholders of the Terminating Funds continue to have the right to redeem securities of the Terminating Funds up to the close of business on the business day immediately before the effective date of the Reorganization Transactions.
Securityholders of the Terminating Funds are receiving advance notice of the Reorganization Transactions and may switch their Terminating Fund securities for securities of other Capitalcorp funds, if they hold securities of Mackenzie North American Corporate Bond Class or Symmetry Fixed Income Portfolio Class, or for securities of other Quadruscorp funds, if they hold securities of Fixed Income Class, up to the close of business on the business day immediately before the effective date of the Reorganization Transactions, and all such switches will be tax-deferred.
No sales charges will be payable by securityholders of the Funds in connection with the Reorganization Transactions.
Following the Reorganization Transactions of the Terminating Funds, all optional services will continue to be available to securityholders, who will be automatically enrolled in comparable plans with respect to securities of the applicable Continuing Fund unless they advise otherwise.
The Reorganization Transactions of the Terminating Funds will benefit securityholders of the Terminating Funds in the following ways:
a) Securityholders will receive a more tax-efficient version of a fund with similar investment objectives because interest income may be taxed when earned by each Terminating Fund since it is a corporate class fund;
b) Management fees and administration fees will remain substantially the same or, in some cases, be lower, as the Filer reduced the management fee rates and administration fee rates of certain series of the Terminating Funds and Continuing Funds as of September 29, 2014;
c) The risk profile of each Continuing Fund is the same as that of its corresponding Terminating Fund, except that the Continuing Funds do not bear the additional risks and costs associated with Character Conversion Transactions; and
d) The Continuing Funds are available for purchase, whereas the Terminating Funds are not.
The Approval Sought is required because the Reorganization Transactions do not satisfy one of the criteria for pre-approved reorganizations and transfers under section 5.6 of NI 81-102; namely, each Reorganization Transaction will not be implemented 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), 86(1) or 87(1) of the Tax Act.
The Reorganization Transactions:
a) will not be “qualifying exchanges” within the meaning of section 132.2 of the Tax Act, because paragraph (a) of this definition requires that “all or substantially all” of the issued and outstanding shares of the mutual fund corporation be acquired by the Continuing Funds, which will not be the case;
b) will not be tax-deferred transactions under subsection 85(1), 85.1(1) or 86(1) of the Tax Act, because these subsections are only applicable where, inter alia, the securities of the Terminating Fund are acquired by a corporation, whereas the Continuing Funds are mutual fund trusts; and
c) will not be tax-deferred transactions under subsection 87(1) of the Tax Act, because this subsection is only applicable to where two corporations amalgamate, whereas the Continuing Funds are mutual fund trusts.
- Except as noted above, the Reorganization Transactions otherwise comply with all 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 Approval Sought is granted, provided that the Filer obtains the prior approval of the securityholders of the Terminating Funds for the Reorganization Transactions at the special meeting held for that purpose, or any adjournments thereof.
“Vera Nunes”
Vera Nunes Manager, Investment Funds and Structured Products Branch Ontario Securities Commission