Brandes Investment Partners & Co. (Re), 2019 CanLII 42436

April 29, 2019

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 Brandes Investment Partners & Co. (the Filer)

and

BRANDES GLOBAL BALANCED FUND,

SIONNA MONTHLY INCOME FUND,

SIONNA DIVERSIFIED INCOME FUND,

BRANDES U.S. SMALL CAP EQUITY FUND AND

SIONNA CANADIAN SMALL CAP EQUITY FUND

(each, a Terminating Fund, and collectively, 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 (the Legislation) approving the proposed mergers (each, a Merger and collectively, the Mergers) of each of the Terminating Funds into applicable Continuing Funds (as defined below) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (the Approval Sought).

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 each of the provinces and territories of Canada, other than Ontario (together with Ontario, the Canadian Jurisdictions).

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. The following additional terms shall have the following meanings:

Continuing Fund means each of Sionna Canadian Balanced Fund, Brandes Global Small Cap Equity Fund and Sionna Opportunities Fund;

Fund or Funds means, individually or collectively, the Terminating Funds and the Continuing Funds;

IRC means the independent review committee for the Funds;

NI 54-101 means National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer;

NI 81-106 means National Instrument 81-106 Investment Fund Continuous Disclosure;

NI 81-107 means National Instrument 81-107 Independent Review Committee for Investment Funds; and

Tax Act means the Income Tax Act (Canada).

Representations

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

The Filer and the Funds

1. The Filer is a corporation existing under the laws of Nova Scotia having its registered head office in Toronto, Ontario. The Filer operates under the retail trade name, Bridgehouse Asset Managers.

2. The Filer is registered as an investment fund manager in each of Ontario, Quebec, and Newfoundland and Labrador, as a portfolio manager and exempt market dealer in the Canadian Jurisdictions.

3. The Filer is the investment fund manager of each of the Funds.

4. The Funds are open-end mutual funds established as trusts under the laws of the province of Ontario.

5. Units of each of the Funds are currently qualified for sale by a simplified prospectus, annual information form and fund facts documents dated May 10, 2018, as amended (collectively, the Offering Documents).

6. Each of the Funds is a reporting issuer under the securities legislation of the Canadian Jurisdictions.

7. Neither the Filer nor any of the Funds are in default of any requirement of securities legislation in any of the Canadian Jurisdictions.

8. Other than circumstances in which the securities regulatory authority of a Canadian Jurisdiction has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under NI 81-102.

9. 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, and as described in the Offering Documents. Both the Terminating Funds and the Continuing Funds have substantially similar valuation procedures.

Reason for Approval Sought

10. Regulatory approval of the Mergers is required because each Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. The pre-approval criteria are not satisfied in the following ways:

(a) the fundamental investment objectives of each Terminating Fund is not, or may not be considered to be, “substantially similar” to the investment objective of its corresponding Continuing Fund; and

(b) the Merger of Brandes U.S. Small Cap Equity Fund into Brandes Global Small Cap Equity Fund (the Taxable Merger) will not be completed as a “qualifying exchange” or as a tax-deferred transaction under the Tax Act.

11. Except as described in this decision, the proposed Mergers comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

The Proposed Mergers

12. The Filer intends to reorganize the Funds as follows:

(a) Brandes Global Balanced Fund will merge into Sionna Canadian Balanced Fund;

(b) Sionna Monthly Income Fund will merge into Sionna Canadian Balanced Fund;

(c) Sionna Diversified Income Fund will merge into Sionna Canadian Balanced Fund;

(d) Brandes U.S. Small Cap Equity Fund will merge into Brandes Global Small Cap Equity Fund; and

(e) Sionna Canadian Small Cap Equity Fund will merge into Sionna Opportunities Fund.

13. The Taxable Merger will be effected on a taxable basis, while the other Mergers will be effected on a tax-deferred basis.

14. The Filer has determined that it would not be appropriate to effect the Taxable Merger as a “qualifying exchange” within the meaning of section 132.2 of the Tax Act or as a tax-deferred transaction for the following reasons:

(a) the majority of unitholders in the Terminating Fund are tax-exempt;

(b) effecting the Taxable Merger on a taxable basis would preserve the loss carry-forwards in the Continuing Fund; and

(c) effecting the Taxable Merger on a taxable basis is not expected to have a tax impact on the Continuing Fund.

15. In accordance with NI 81-106, a press release announcing the proposed Mergers and a material change report were issued and filed via SEDAR on February 5, 2019.

16. The Filer has determined that the applicable Mergers will be a material change for Sionna Canadian Balanced Fund, as the Mergers will entail a change in the business, operations or affairs of Sionna Canadian Balanced Fund that would be considered important by a reasonable investor in determining whether to purchase or continue to hold securities of Sionna Canadian Balanced Fund. The Filer has determined that the other Mergers do not constitute material changes for the other Continuing Funds.

17. As required by NI 81-107, the Filer presented the terms of the Mergers to the IRC for its review. The IRC determined that the Mergers, if implemented, will achieve a fair and reasonable result for each of the Funds.

18. The Filer will pay for the costs of the Mergers. These costs consist mainly of brokerage charges associated with the merger related trades that occur both before and after the Effective Date (as defined below) and legal, proxy solicitation, printing, mailing and regulatory fees.

19. Unitholders of each of the Terminating Funds will continue to have the right to redeem units of their Terminating Funds or switch into units of another mutual fund trust managed by the Filer at any time up to the close of business on the applicable Effective Date. Brandes Global Balanced Fund, Sionna Monthly Income Fund, Sionna Diversified and Sionna Canadian Small Cap Equity Fund are expected to be merged on or about May 3, 2019 and Brandes U.S. Small Cap Equity Fund is expected to be merged on or about August 23, 2019 (each, an Effective Date and collectively, the Effective Dates).

20. Effective as of the close of business on January 29, 2019, the Terminating Funds were closed to new purchases of units. The Terminating Funds will remain closed to purchase-type transactions, except existing systematic investment programs (such as pre-authorized chequing plans), until they are merged with the Continuing Funds on the applicable Effective Date. All systematic programs shall remain unaffected.

21. When considering a merger of two or more funds, the Filer undertakes a process to ensure its fund line up meets the changing needs of investors. Once the Filer determines it is appropriate to no longer continue offering a particular mandate, the Filer selects the appropriate continuing fund to receive the assets of the merging fund by considering both qualitative and quantitative factors. The qualitative factors considered include the comparability of investment objectives, investment strategies, risk rating, investment philosophy and portfolio construction. When considering quantitative factors, the Filer reviews fund performance, the investment performance correlation between the potential merging funds and continuing funds, any overlap in investment holdings, the asset allocation/sector allocation/geographic allocation of each fund, fees for each series, the difference in assets under management between the funds, a taxation analysis at both the fund and unitholder level and any unique factors that would be applicable for the given merger. Once each of these items has been reviewed, the Filer formalizes the analysis and recommends a continuing fund with which to proceed forward.

22. Following the Mergers, all systematic programs that had been established with respect to the Terminating Funds will be re-established on a series-for-series basis in the applicable Continuing Funds, except for Series AN and Series FN of the Sionna Monthly Income Fund which will be re-established as Series A and Series F, in the corresponding Continuing Fund, unless unitholders advise the Filer otherwise.

23. Unitholders may change or cancel any systematic program at any time and unitholders of the Terminating Funds who wish to establish one or more systematic programs in respect of their holdings in the Continuing Funds may do so following the Mergers.

24. No sales charges will be payable by unitholders of the Funds in connection with the Merger.

25. A notice of meeting, management information circular, proxy and fund facts document(s) of the applicable series of the Continuing Funds (the Meeting Materials) were made available to unitholders of each Terminating Fund commencing on or about March 8, 2019 and were filed via SEDAR. The Filer is relying on exemptive relief granted by the securities regulatory authorities of the Canadian Jurisdictions exempting the Terminating Fund and Sionna Canadian Balanced Fund from the requirement in paragraph 12.2(2)(a) of NI 81-106, to send an information circular and proxy-related materials to the unitholders of the Terminating Funds and Sionna Canadian Balanced Fund and instead allow such Funds to make use of the notice-and-access process in section 2.7.1 of NI 54-101. The notice prescribed by section 2.7.1 of NI 54-101 (the Notice-and-Access Document), the form of proxy and the fund facts relating to the relevant series of the Continuing Fund were sent to unitholders of the Terminating Fund and Sionna Canadian Balanced Fund commencing on or about March 8, 2019. Additionally, the Notice-and-Access Document and information circular were concurrently filed via SEDAR and posted on the Filer’s website.

26. The Meeting Materials describe all relevant facts concerning the Mergers, including the investment objectives and strategies of the Funds, the tax implications and other consequences of the Mergers, as well as the IRC’s recommendation of the Mergers, so that unitholders of the Terminating Funds may make an informed decision before voting on whether to approve the Mergers. The Meeting Materials also describe the various ways in which unitholders can obtain a copy of the simplified prospectus, annual information form and fund facts document(s) dated May 10, 2018, as amended, of the Continuing Funds and the most recent interim and annual financial statements and management reports of fund performance of the Continuing Funds.

27. The Terminating Funds and the Continuing Funds are, and are expected to continue to be at all material times, mutual fund trusts under the Tax Act and, accordingly, units of the Funds are "qualified investments" under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans and tax free savings accounts.

28. In light of the disclosure in the Meeting Materials, unitholders of the Terminating Funds and Sionna Canadian Balanced Fund have sufficient information necessary to determine whether the proposed Mergers are appropriate for them.

29. Unitholders of the Terminating Funds and Sionna Canadian Balanced Fund approved the relevant Mergers at special meetings held on April 12, 2019.

30. Subject to receipt of the Approval Sought, the Terminating Funds will merge into the Continuing Funds on the applicable Effective Date and the Continuing Funds will continue as publicly offered open-end mutual funds.

31. The investment portfolio and other assets of each Terminating Fund to be acquired by the applicable Continuing Fund in order to effect the Mergers are currently, or will be, acceptable, on or prior to the effective date of the Mergers, to the portfolio manager(s) of the applicable Continuing Fund and are, or will be, consistent with the investment objectives of the applicable Continuing Fund.

32. The Terminating Funds will be terminated as soon as reasonably possible following the Mergers.

Merger Steps

33. The proposed Mergers will be structured as follows:

(a) Prior to the applicable Effective Date, the Terminating Fund will sell securities in its portfolio that do not meet the investment objectives and investment strategies of the Continuing Fund. As a result, the Terminating Fund may temporarily hold cash or cash equivalents and may not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger.

(b) The value of the Terminating Fund’s portfolio and other assets will be determined at the close of business on the applicable Effective Date in accordance with its declaration of trust.

(c) The Continuing Fund will acquire the assets of the Terminating Fund in exchange for units of the Continuing Fund.

(d) The Continuing Fund will not assume any liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the applicable Effective Date.

(e) The units of the Continuing Fund received by the Terminating Fund will have a total net asset value equal to the value of the assets acquired by the Continuing Fund from the Terminating Fund, and the units of the Continuing Fund will be issued at the applicable series net asset value per unit as of the close of business on the applicable Effective Date.

(f) For the Taxable Merger, the Terminating Fund will distribute to its unitholders a sufficient amount of its net income and net realized capital gains, if any, to ensure that the Terminating Fund will not be subject to tax for its taxation year that includes the applicable Effective Date. For the Tax Deferred Mergers, the Terminating Funds and the Continuing Funds will declare, pay and automatically invest a distribution to its unitholders of net realized capital gains and net income, if any, to ensure that it will not be subject to tax for its current tax year.

(g) Immediately thereafter, the units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund on a dollar for dollar basis in exchange for their units in the Terminating Fund, with unitholders of each series of the Terminating Fund receiving the corresponding series of units of the Continuing Fund, except for Series AN and Series FN unitholders of Sionna Monthly Income Fund who will receive units of Series A and Series F, respectively, of the corresponding Continuing Fund.

(h) The management fees of each applicable series of the Continuing Fund will be the same or lower than the management fees of the applicable series of the Terminating Fund at the time of the Mergers. Further, the Filer will ensure that current unitholders of the Terminating Funds will have a total cost equal to or less than the cost of the applicable series of the Terminating Fund that the unitholder currently owns. This will be accomplished, where needed, by the provision of management fee rebates to current unitholders of the Terminating Funds who become unitholders of a Continuing Fund upon implementation of the Mergers.

(i) As soon as reasonably possible following the Merger, the Terminating Fund will be wound up and the Continuing Fund will continue as a publicly offered open-end mutual fund.

Benefits of the Mergers

34. The Filer believes that the Mergers are beneficial to unitholders of each Terminating Fund and Continuing Fund for the following reasons:

(a) the Mergers will result in a more streamlined and simplified product line-up that is easier for investors to understand;

(b) the Mergers will eliminate similar fund offerings, thereby reducing the administrative and regulatory costs of operating each Terminating Fund and the applicable Continuing Fund as separate funds;

(c) each Continuing Fund has a portfolio of greater value than each Terminating Fund, allowing for increased portfolio diversification opportunities compared to the corresponding Terminating Fund;

(d) the Continuing Funds, as a result of greater size, will benefit from a larger profile in the marketplace by potentially attracting more unitholders and enabling it to maintain a “critical mass”;

(e) the Continuing Funds, as a result of greater size, will allow the operating expenses to be spread over a larger asset base, which may positively impact the management expense ratio of each Continuing Fund; and

(f) unitholders of each Terminating Fund will receive units of the applicable Continuing Fund that have a management fee that is the same or lower than that charged in respect of the series of units of the Terminating Fund that they currently hold.

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.

“Darren McKall”

Darren McKall

Investment Funds and Structured Products

Ontario Securities Commission

SEDAR Project #2882558

App. No.#2019/0127