December 8, 2017
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
AND IN THE MATTER OF
MACKENZIE FINANCIAL CORPORATION
(the Manager)
AND
IN THE MATTER OF
QUADRUS TRIMARK BALANCED FUND
(the Terminating Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Fund for approval pursuant to subsection 5.5(1)(b) of National Instrument 81-102 – Investment Funds (NI 81-102) in connection with the proposed merger (the Merger) of the Terminating Fund into Mackenzie Strategic Income Fund (the “Continuing Fund”) (the “Requested Relief”).
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 Manager 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 Manager is a corporation amalgamated under the laws of Ontario with its head office in Toronto, Ontario.
The Manager is registered as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager in the Province of Ontario. The Manager 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 Manager is the manager and portfolio manager of the Terminating Fund and the Continuing Fund.
The Terminating Fund was established as a unit trust and currently qualifies as a mutual fund trust under the Income Tax Act (Canada) (the “Tax Act”) but may no longer qualify as a mutual fund trust on the date of the Merger, as it may have fewer than 150 investors by that time.
The Continuing Fund was established as a unit trust and qualifies as a mutual fund trust under the Tax Act.
Quadrus Investment Services Ltd. is the principal distributor of the Terminating Fund and of the Quadrus series securities of the Continuing Fund.
Securities of the Continuing Fund are currently qualified for sale in each of the Jurisdictions under the simplified prospectus, annual information form and fund facts each dated June 28, 2017, as amended.
Securities of the Terminating Fund ceased to be offered for sale in 2007. As a result, it does not file a renewal simplified prospectus each year. Instead it files an annual information form pursuant to Part 9 of National Instrument 81-106 – Investment Fund Continuous Disclosure(NI 81-106). The Terminating Fund filed an annual information form on June 29, 2017.
The only issued and outstanding series of the Terminating Fund is Quadrus series securities.
Neither the Manager nor the Funds are in default of securities legislation in any Jurisdiction.
Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Fund therefrom, the Funds follow the standard investment restrictions and practices established under NI 81-102.
The Manager has concluded that pre‑approval for the Merger under section 5.6 of NI 81-102 is not available because the investment objectives of the Terminating Fund may not be considered by a reasonable person to be “substantially similar” to the investment objectives of the Continuing Fund. In addition, there is a possibility that the Merger may not be completed 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 because the Terminating Fund may no longer qualify as a mutual fund trust on the date of the Merger, as it may have fewer than 150 investors by that time.
The Manager is therefore asking for the Requested Relief pursuant to subsection 5.5(1)(b) of NI 81-102. Except as noted herein, the Merger will comply with all of the other criteria for pre-approved reorganizations and transfers set out in subsection 5.6(1) of NI 81-102.
Securityholders of the Terminating Fund will be asked to approve the Merger at a special meeting of securityholders to be held on January 4, 2018.
Subject to Terminating Fund securityholder approval and regulatory approval, the Manager intends to effect the Merger on January 19, 2018. If effected, the Merger will result in securityholders of the Terminating Fund becoming securityholders of the same series of the Continuing Fund.
The Merger does not require approval of investors of the Continuing Fund as the Manager has determined that the Merger does not constitute a material change to the Continuing Fund.
The Continuing Fund has the same valuation procedures as the Terminating Fund.
No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.
Securityholders of the Terminating Fund will continue to have the right to redeem securities of the Terminating Fund or exchange such securities for securities of any other mutual fund offered under the Quadrus Group of Funds simplified prospectus at any time up to the close of business on the effective date of the Merger.
In accordance with NI 81-106, a press release announcing the proposed Merger was issued and filed via SEDAR on September 20, 2017. A material change report with respect to the proposed Merger was filed on September 22, 2017, in accordance with NI 81-106.
Pursuant to exemptive relief obtained by the Manager, dated October 21, 2016, the Manager will be following the Notice-and-Access procedure. A Notice-and-Access letter, a form of proxy in connection with the special meeting of securityholders as well as the most recent fund facts for the Quadrus series of the Continuing Fund were mailed to securityholders of the Terminating Funds on November 30, 2017 and were filed on SEDAR. The Notice-and-Access letter, management information circular and form of proxy (the “Meeting Materials”) will be posted on the website of the Quadrus Group of Funds at www.quadrusgroupoffunds.com as well as on SEDAR.
The Meeting Materials describe all relevant facts concerning the Merger, including the investment objectives, strategies and fee structure of the Terminating Fund and the Continuing Fund, the tax implications and other consequences of the Merger, as well as the IRC’s recommendation of the Merger, so that securityholders of the Terminating Fund may consider this information before voting on the Merger. The Meeting Materials will also describe the various ways in which securityholders can obtain a copy of the simplified prospectus, annual information form and fund facts for the Continuing Fund, and the most recent interim and annual financial statements and management reports of fund performance.
Following the Merger, all optional plans which were established with respect to the Terminating Fund will be re-established in comparable plans with respect to the Continuing Fund unless securityholders advise otherwise.
The Manager will pay for the costs of the proposed Merger. These costs consist mainly of brokerage charges associated with the trades that occur both before and after the date of the proposed Merger and legal, proxy solicitation, printing, mailing and regulatory fees. There are no charges payable by investors in the Terminating Fund who acquire securities of the Continuing Fund as a result of the Merger.
The Terminating Fund will be wound up as soon as reasonably possible following the Merger.
As required by National Instrument 81-107 Independent Review Committee for Investment Funds, an Independent Review Committee (the “IRC”) was appointed for the Funds. The Manager presented the potential conflict of interest matters related to the proposed Merger to the IRC for a recommendation. On September 21, 2017, the IRC reviewed the potential conflict of interest matters related to the proposed Merger and provided its positive recommendation for the Merger, after determining that the proposed Merger, if implemented, would achieve a fair and reasonable result for the Terminating Fund.
The Merger will benefit securityholders of the Terminating Fund in the following ways:
The Terminating Fund has been closed to new investment since 2007. It currently has approximately $1.7 million in assets, which is not an optimal amount to allow the portfolio managers to effectively and efficiently invest the Terminating Fund’s assets to achieve its investment objectives.
Like the Terminating Fund, the Continuing Fund is a balanced fund and it has a similar investment mandate to the Terminating Fund. However, the Continuing Fund currently has approximately $1.8 billion in assets, which allows the Continuing Fund’s portfolio managers to achieve considerable efficiencies and flexibility.
The Continuing Fund has generally demonstrated better performance than the Terminating Fund with a similar level of risk.
The Continuing Fund is available for purchase, whereas the Terminating Fund is not.
As a result of the Merger, holders of the corresponding series of the Continuing Fund will benefit from lower management fees, while the administration fees will remain the same.
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 Relief is granted.
“Vera Nunes”
Vera Nunes
Manager, Investment Funds Branch Ontario Securities Commission