May 28, 2021
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 BMO INVESTMENTS INC. (the Filer)
and
BMO Floating Rate Income Fund
BMO Monthly Dividend Fund Ltd.
(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 merger of each Terminating Fund into the Continuing Fund opposite its name in the table below (each, a Merger and collectively, the Mergers) pursuant to paragraph 5.5(1)(b) of NI 81-102 (the Approval Sought):
| Terminating Fund | Continuing Fund |
|---|---|
| BMO Floating Rate Income Fund | BMO U.S. High Yield Bond Fund |
| BMO Monthly Dividend Fund Ltd. | BMO Dividend Fund |
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(2) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (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 BMO U.S. High Yield Bond Fund and BMO Dividend 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 81-102 means National Instrument 81-102 Investment Funds;
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
The Filer is a corporation amalgamated under the laws of Canada with its head office in Toronto, Ontario.
The Filer is the manager of the Funds and is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, and as a mutual fund dealer in each of the Canadian Jurisdictions.
Each Fund, other than BMO Monthly Dividend Fund Ltd., is an open-ended mutual fund trust established under the laws of Ontario. BMO Monthly Dividend Fund Ltd. is a mutual fund corporation established under the laws of Ontario.
Each of the Funds is a reporting issuer under the applicable securities legislation of the Canadian Jurisdictions. Securities of the Funds are currently qualified for sale under a simplified prospectus, annual information form and fund facts each dated May 22, 2020, as amended (collectively, the Offering Documents).
Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under NI 81-102.
All of the Continuing Funds have substantially similar valuation procedures to those of their corresponding Terminating Funds. The net asset value (NAV) for each series of a Fund is calculated on a daily basis in accordance with the Fund’s valuation policy and as described in the Offering Documents.
Securities of the Continuing 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 (collectively, the Registered Plans).
Neither the Filer nor the Funds is in default under the applicable securities legislation of the Canadian Jurisdictions.
Reason for Approval Sought
- 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). The Pre-Approval Criteria are not satisfied in the following ways:
(a) the fundamental investment objectives of each Continuing Fund is not, or may be considered not to be, “substantially similar” to the investment objectives of its corresponding Terminating Fund;
(b) the fee structure of each Continuing Fund is not, or may be considered not to be, “substantially similar” to the fee structure of its corresponding Terminating Fund; and
(c) the Merger of BMO Floating Rate Income Fund into BMO U.S. High Yield Bond Fund will not be completed as a “qualifying exchange” or other tax deferred transaction under the Tax Act.
- Except as described in this decision, the proposed Mergers comply with all of the other Pre-Approval Criteria.
The Proposed Mergers and Securityholder Disclosure
Effective on or about June 25, 2021, if all required approvals for the Mergers are obtained, it is proposed that each Terminating Fund will merge into the Continuing Fund opposite its name in the table above, with each series of the Terminating Fund merging into an equivalent series of its corresponding Continuing Fund. Each Continuing Fund will continue as a publicly offered open‑end mutual fund.
As BMO Monthly Dividend Fund Ltd. has a Classic Series but BMO Dividend Fund did not, a Classic Series of BMO Dividend Fund was qualified for distribution in order to facilitate the Merger of these Funds. The Classic Series created for BMO Dividend Fund will not be available for purchase by new investors and will only be available to investors purchasing through pre-existing continuous savings plans for Classic Series securities of BMO Monthly Dividend Fund Ltd. set up prior to June 25, 2021 (which continuous savings plans will be continued for BMO Dividend Fund after the effective date of the Merger).
In accordance with NI 81-106, a press release announcing the proposed Mergers was issued on March 25, 2021 and the press release, a material change report and amendments to the Offering Documents with respect to the proposed Mergers were filed via SEDAR also on March 25, 2021.
As required by NI 81-107, an IRC has been appointed for the Funds. The Filer presented the potential conflict of interest matters related to the proposed Mergers to the IRC for a recommendation. On April 8, 2020 and March 22, 2021, the IRC reviewed the potential conflict of interest matters related to the proposed Merger of BMO Floating Rate Income Fund into BMO U.S. High Yield Bond Fund and provided its positive recommendation for the Merger, after determining that the proposed Merger, if implemented, would achieve a fair and reasonable result for each Fund. On December 2, 2020 and March 22, 2021, the IRC reviewed the potential conflict of interest matters related to the proposed Merger of BMO Monthly Dividend Fund Ltd. into BMO Dividend Fund and provided its positive recommendation for the Merger, after determining that the proposed Merger, if implemented, would achieve a fair and reasonable result for each Fund.
Securityholders of the Terminating Funds will be asked to approve the Mergers at special meetings to be held on June 18, 2021. As disclosed in the Circular (defined below), in light of the dangers associated with the coronavirus pandemic, the Filer is holding the meetings solely as a virtual (online) meeting which will be conducted by way of live video webcast and teleconference. Securityholders will not be able to attend the meeting in person, but all securityholders of the Terminating Funds and duly appointed proxyholders, regardless of geographic location, will have an equal opportunity to participate, engage with the Filer as well as other investors in real time, and to vote at the meeting.
The Filer, as manager of the Continuing Funds, is of the view that the Mergers will not be a “material change” for any of the Continuing Funds.
By way of order dated December 8, 2016, the Filer was granted relief (the Notice-and-Access Relief) from the requirement set out in paragraph 12.2(2)(a) of NI 81-106 to send a printed management information circular to securityholders while proxies are being solicited, and, subject to certain conditions, instead allows a notice-and-access document (as described in the Notice-and-Access Relief) to be sent to such securityholders.
Pursuant to the requirements of the Notice-and-Access Relief, a notice-and-access document and applicable proxies in connection with the special meetings, along with the fund facts of the relevant series of the Continuing Funds, as applicable, was mailed to securityholders of the corresponding Terminating Funds commencing on May 19, 2021 and concurrently filed via SEDAR. The management information circular, to which the notice-and-access document provides a link, was also filed via SEDAR at the same time (the Circular).
The Circular contains information about the Mergers for securityholders to consider before voting on the Mergers, including:
(a) The tax implications of the Mergers;
(b) The differences between the investment objectives and fee structures of the Terminating Funds and the Continuing Funds, as applicable;
(c) That, as a result of the Merger of BMO Monthly Dividend Fund Ltd. into BMO Dividend Fund, the nature of a securityholder’s investment will change from holding shares of a fund that is structured as a corporation, being BMO Monthly Dividend Fund Ltd., to holding units of a fund that is structured as a trust, being BMO Dividend Fund and key differences between mutual funds structured as trusts and as corporations;
(d) The IRC’s recommendation in respect of the Mergers;
(e) The various ways in which investors may obtain a copy of the simplified prospectus, annual information form and fund facts for each Continuing Fund and its most recent interim and annual financial statements and management reports of fund performance;
(f) The steps for implementing the Mergers and the benefits of the Mergers as summarized below;
(g) That securityholders of each Terminating Fund will continue to have the right to redeem securities of the Terminating Fund at any time up to the close of business on the business day immediately before the effective date of the Mergers, subject to applicable redemption charges;
(h) That after the effective date of each Merger, securityholders of each Terminating Fund will be able to redeem or switch out of the securities of the Continuing Fund that they acquire upon the Merger;
(i) That the existing standard deferred charge or low load deferred charge schedule applicable to securities of a Terminating Fund will be carried over to the securities of the corresponding Continuing Fund;
(j) That following the Mergers, all optional plans, including continuous savings plans and systematic withdrawal plans, that have been established for a Terminating Fund will be re-established for the applicable Continuing Fund, unless securityholders of the Terminating Funds advise otherwise;
(k) That no sales charges, redemption fees or other fees or commissions will be payable by securityholders of the Terminating Funds in connection with the Mergers and all costs and expenses associated with the Mergers will be borne by the Filer;
(l) The Filer’s proposal (with securityholder approval sought) for terminating BMO Floating Rate Income Fund effective on or about June 25, 2021 if the proposed Merger of BMO Floating Rate Income Fund into BMO U.S. High Yield Bond Fund is not approved; and
(m) That the Filer does not currently intend to terminate BMO Monthly Dividend Fund Ltd. if the required securityholder approval is not obtained, but may decide to do so in the future.
Merger Implementation
- The proposed Mergers will be structured as follows:
(a) Prior to effecting the Merger, BMO Monthly Dividend Fund Ltd. will file articles of amendment to provide it with the ability to (i) redeem shares at its option in order to effect the merger, liquidation, winding up and dissolution of BMO Monthly Dividend Fund Ltd.; and (ii) pay the proceeds of such redemption in kind, to allow the Merger of BMO Monthly Dividend Fund Ltd. into BMO Dividend Fund to qualify as a “qualifying exchange” under the Tax Act.
(b) BMO Monthly Dividend Fund Ltd. will jointly elect with BMO Dividend Fund that the Merger be treated as a “qualifying exchange”, as defined in subsection 132.2(1) of the Tax Act.
(c) Prior to effecting the Mergers, if required, each Terminating Fund will sell any securities in its portfolio that do not meet the investment objectives and investment strategies of its corresponding Continuing Fund. As a result, each Terminating Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger being effected.
(d) Prior to effecting the Mergers:
(i) BMO Floating Rate Income Fund will distribute a sufficient amount of its net income and net realized capital gains, if any, to unitholders to ensure that it will not be subject to tax for its current tax year. Any such distribution will be automatically reinvested in additional units of BMO Floating Rate Income Fund; and
(ii) BMO Monthly Dividend Fund Ltd. may pay ordinary dividends or capital gains dividends to its securityholders. Any such dividends will be automatically reinvested in additional securities of BMO Monthly Dividend Fund Ltd.
(e) The value of each Terminating Fund’s portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with its constating documents.
(f) Each Terminating Fund will sell its investment portfolio and other assets to its corresponding Continuing Fund in exchange for securities of the Continuing Fund.
(g) Each Continuing Fund will not assume liabilities of is corresponding Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the effective date of the Merger.
(h) The securities of the Continuing Fund received by its corresponding Terminating Fund will have an aggregate NAV equal to the value of the portfolio assets and other assets that the Continuing Fund is acquiring from the Terminating Fund, and the securities of the Continuing Fund will be issued at the applicable series NAV per unit as of the close of business on the effective date of the Merger.
(i) Immediately thereafter, the securities of the Continuing Fund received by its corresponding Terminating Fund will be distributed to securityholders of the Terminating Fund in exchange for their securities in the Terminating Fund on a dollar-for-dollar and series-by-series basis, as applicable.
(j) As soon as reasonably possible following the Merger, the Terminating Fund will be wound up and dissolved.
Securityholders of each Terminating Fund will receive securities of the corresponding Continuing Fund with a value equal to the value of their securities of the Terminating Fund.
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 of the Mergers and legal, proxy solicitation, printing, mailing and regulatory fees.
Tax Consequences of Mergers
The Merger of BMO Floating Rate Income Fund into BMO U.S. High Yield Bond Fund will be effected on a taxable basis and the Merger of BMO Monthly Dividend Fund Ltd. into BMO Dividend Fund will be effected on a tax-deferred basis.
The Filer has determined that it would not be appropriate to effect the Merger of BMO Floating Rate Income Fund into BMO U.S. High Yield Bond Fund as a “qualifying exchange” or a tax deferred transaction under the Tax Act for the following reasons:
(a) BMO U.S. High Yield Bond Fund has significant, unutilized loss carryforwards that would be lost if the Merger were completed on a tax-deferred basis under the Tax Act;
(b) The vast majority of investors in BMO Floating Rate Income Fund hold their securities in tax-exempt Registered Plans and a taxable merger is neither beneficial nor detrimental to a tax-exempt Registered Plan;
(c) Most investors who hold their securities of BMO Floating Rate Income Fund outside a Registered Plan are also in a loss position and triggering a loss can be beneficial to such investors because they can use the losses to offset any capital gains realized in the same year or any of the previous three years, and thus immediately reduce their tax liability. Under a tax-deferred merger, the realization of an investor’s capital losses would be deferred. The Filer is of the view that this deferral is detrimental to those investors because the loss would not be immediately available to the investor to offset current or prior capital gains; and
(d) The few taxable investors in a gain position on their securities of BMO Floating Rate Income Fund who may be negatively impacted by the Merger proceeding on a taxable basis will be provided with fulsome disclosure on the tax impact of such proposed Merger and will have the opportunity to redeem their securities prior to the effective date of the Merger or to vote against the proposed Merger.
- In respect of the Merger:
(a) of BMO Monthly Dividend Fund Ltd. into BMO Dividend Fund that will be effected on a tax-deferred basis, the Circular discloses that the Filer expects that a significant portion of the portfolio will be sold and that, based on current market values, the Filer expects that any income or capital gains realized by BMO Monthly Dividend Fund Ltd. on the liquidation of securities prior to the Merger will be offset by available losses; and
(b) of BMO Floating Rate Income Fund into BMO U.S. High Yield Bond Fund that will be effected on a taxable basis, the Circular discloses that the Filer expects that all or substantially all of the securities in the portfolio will be sold and that as at the date of the Circular, the Filer expects that BMO Floating Rate Income Fund will have sufficient losses to absorb any gains generated by the sale of portfolio assets.
Benefits of Mergers
- The Filer believes that the Mergers are beneficial to securityholders of each Terminating Fund and Continuing Fund for the following reasons:
(a) the Continuing Funds have broader investment objectives than their corresponding Terminating Funds, thereby providing greater flexibility to the portfolio manager, which may benefit investors across market cycles and credit cycles;
(i) with respect to the Merger of BMO Floating Rate Income Fund into BMO U.S. High Yield Bond Fund, the Continuing Fund offers a wider approach to investing in non-investment grade fixed income than the Terminating Fund, and thus Terminating Fund investors may benefit from the synergies of the portfolio manager’s global fixed income capabilities;
(ii) with respect to the Merger of BMO Monthly Dividend Fund Ltd. into BMO Dividend Fund, the Continuing Fund offers exposure to a Canadian dividend mandate that has a wider approach to investing in dividend paying securities than the Terminating Fund, and thus Terminating Fund investors may benefit from a wider set of investment options;
(b) there is minimal demand for each Terminating Fund, as evidenced by declining assets under management (AUM) in each Terminating Fund over an extended period of time, which may lead to portfolio diversification challenges in the Terminating Funds if AUM continues to decline;
(c) each Terminating Fund has variable operating expenses, which means its expenses are spread over a smaller asset base as the AUM of each Terminating Fund continues to decline, while each Continuing Fund uses a fixed administration fee model, which means a consistent expense is charged to the fund, even if the AUM of a Continuing Fund were to decline;
(d) the Mergers will result in a more streamlined and simplified product line-up that is easier for investors to understand;
(e) each Continuing Fund has delivered stronger long-term performance than its applicable Terminating Fund;
(f) each Continuing Fund, as a result of its greater size, may benefit from its larger profile in the marketplace to attract additional investors and thus remain a viable long term investment; and
(g) management fees in the Continuing Funds are the same as, or lower than, management fees in the Terminating Funds.
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 at special meetings held for that purpose.
“Darren McKall”
Darren McKall, Manager Investment Funds & Structured Products Branch Ontario Securities Commission
Application #2021/0209
SEDAR Project #3203029