Connor, Clark & Lunn Capital Class Inc., Natural Resources Class Shares et al.

Headnote

NP 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund merger -- approval required because merger does not meet the criteria for pre-approved re-organizations and transfers in National Instrument 81-102 -- terminating fund and continuing fund have different investment objectives -- merger not a "qualifying transaction" or a tax-deferred transaction under the Income Tax Act -- securityholders of terminating funds provided with timely and adequate disclosure regarding the merger.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6(1), 5.7(1)(b), 19.1.

December 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

CONNOR, CLARK & LUNN CAPITAL CLASS INC.,

NATURAL RESOURCES CLASS SHARES

AND

CONNOR, CLARK & LUNN CAPITAL CLASS INC.,

BALANCED PORTFOLIO CLASS SHARES, SERIES 1

AND

IN THE MATTER OF

CONNOR, CLARK & LUNN CAPITAL MARKETS INC.

(the "Filer")

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of Connor, Clark & Lunn Capital Class Inc., Natural Resources Class Shares ("NR") and Connor, Clark & Lunn Capital Class Inc., Balanced Portfolio Class Shares, Series 1 ("BR", and together with NR, the "Merging Funds") for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for approval pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") in connection with the proposed merger of the Merging Funds into Connor, Clark & Lunn Core Income and Growth Fund ("CIGF" or the "Continuing Fund", and together with NR and BP, the "CC&L Funds") (the "Requested Approval").

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 subsection 4.7(1) of Multinational Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in the jurisdictions of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.

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.

Representations

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

1. CC&L Capital Markets is the manager of the CC&L Funds, and is a registered portfolio manager, exempt market dealer and investment fund manager in the Province of Ontario and is a leading provider of investment products.

2. The principal offices of the Filer and the CC&L Funds are located at 181 University Avenue, Suite 300, Toronto, Ontario, M5H 3M7.

3. None of CC&L Capital Markets nor the CC&L Funds is in default of the securities legislation of any province or territory of Canada.

4. Connor, Clark & Lunn Capital Class Inc. (the "Company") is a corporation incorporated under the laws of Ontario. NR and BP are each a separate class of shares of the Company and are separate funds for the purposes of NI 81-102. The Company is a corporation governed by the Business Corporations Act (Ontario).

5. NR and BP were originally created to provide a liquidity mechanism for the Filer's flow-through limited partnerships, which the Filer is no longer launching.

6. Each of NR, BP, and CIGF is an open-ended mutual fund subject to NI 81-102, subject to any exemptions therefrom that have been or may be granted by securities regulatory authorities.

7. The CC&L Funds are subject to the investment restrictions and practices contained in Canadian securities law, including NI 81-102, and are managed in accordance with these restrictions and practices.

8. Shares and Units of each of the CC&L Funds are qualified investments under the Tax Act for registered retirement savings plans, registered retirement income funds, tax-free savings accounts, registered education savings plans, deferred profit sharing plans and registered disability savings plans.

9. NR currently seeks to generate long term growth by providing investors with exposure to Canadian natural resource companies. The principal business of the companies that NR can invest in include: (i) oil and gas exploration, development and productions; (ii) mineral exploration, development and production; (iii) forestry-related investments; (iv) alternative energy development and production; and (v) resource related services such as service and infrastructure providers for natural resource companies. NR may invest up to 20% of its net assets in non-Canadian issuers.

10. CIGF currently invests in a diversified portfolio of high income investments across a broad range of income-oriented securities. These may include equities, income trusts, limited partnerships, real estate investment trusts (REITs), corporate bonds, convertible bonds, preferred shares, other income funds, and other investments in accordance with the investment objectives and investment strategy of CIGF.

11. CIGF's diversification guidelines are to invest a minimum of 10% and a maximum of 80% of net assets in equities and income trusts, a minimum of 10% and a maximum of 50% of net assets in REITs and real estate, and a minimum of 10% and a maximum of 60% of net assets in bonds, preferred shares and cash.

12. CC&L Capital Markets is of the view that the fundamental investment objective and strategy of CIGF are not, or may be considered not to be, "substantially similar" to the fundamental investment objective and strategy of NR because NR's exposure is currently limited to commodities (energy & materials).

13. BP currently seeks to achieve modest capital growth by investing all or substantially all of its assets in securities of Connor, Clark & Lunn Balanced Growth Portfolio, which is diversified across different types of equity and fixed income returns to generate modest growth of capital while stabilizing returns. Foreign investments will not generally exceed approximately 30% of assets.

14. CC&L Capital Markets is of the view that the fundamental investment objective and strategy of CIGF is "substantially similar" to that of BP.

15. The management fee payable to CC&L Capital Markets for acting as the manager of NR and BP is 2.0% per annum of net asset value plus an amount equal to the service fee of 0.5% of net asset value per annum. The management fee payable to CC&L Capital Markets for acting as the manager of CIGF is 1.9% per annum of net asset value of the Series A Units (which includes the amount of the 1.0% service fee).

16. The Merger is expected be beneficial to shareholders of the Merging Funds for the following reasons:

(a) the Continuing Fund will provide a broader asset base, stable investment attributes, and lower management expense ratio including lower management fees;

(b) the net assets of the Merging Funds are no longer growing such that they are not commercially viable and will be terminated if the Merger is not implemented. The Merging Funds were originally created to provide a liquidity mechanism for the Manager's flow-through limited partnerships, which the Manager is no longer launching; and

(c) the Continuing Fund will have a portfolio of greater size, allowing for more efficient implementation of its investment strategy.

17. Immediately prior to the date of the Merger, the Merging Funds will sell all of the securities and assets in their portfolios. As a result, the Merging Funds will temporarily hold all or substantially all of their assets in cash as of the effective date of the Merger.

18. The value of the Merging Funds' assets will be determined at the close of business on the business day prior to the effective date of the Merger in accordance with the articles of incorporation governing the Merging Funds.

19. The Continuing Fund will acquire the assets (i.e. cash) of the Merging Funds in exchange for units in the Continuing Fund.

20. The Continuing Fund will not assume liabilities of the Merging Funds and the Merging Funds will retain sufficient assets to pay off or satisfy its estimated liabilities, if any, as of the date of the Merger.

21. The units of the Continuing Fund received by the Merging Funds will have an aggregate net asset value equal to the value of the Merging Funds' portfolio assets and other assets that the Continuing Fund is acquiring, which units will be issued at the applicable net asset value per unit as of the effective date of the Merger.

22. Immediately thereafter, the units of the Continuing Fund received by the Merging Funds will be distributed to shareholders of the Merging Funds in exchange for their shares in the Merging Funds, with shareholders of the Merging Funds receiving Series A Units of the Continuing Fund.

23. As soon as reasonably possible following the Merger, the Merging Funds will be wound up and the Continuing Fund will continue as a publicly offered open-end mutual fund existing under the laws of Ontario.

24. The Merger will not constitute a material change for the Continuing Fund, as the net asset value of the Continuing Fund is significantly larger than the net asset value of the Merging Funds.

25. Shareholders of BP approved the Merger at a special meeting of shareholders held on December 20, 2012, and the shareholders of NR approved the Merger at an adjourned special meeting of shareholders held on December 21, 2012, as required pursuant to section 5.1(f) of NI 81-102.

26. Subject to necessary regulatory approval and approval of shareholders of NR and BP, the Merger is expected to occur on or about January 8, 2013.

27. If all necessary approvals required for the Merger in respect of a Merging Fund are not obtained, it is the intention of CC&L Capital Markets to terminate such Merging Fund, in accordance with applicable securities laws.

28. A notice of meeting, a management information circular dated November 9, 2012 (the "Circular") and a proxy in connection with the Merger has been mailed to the shareholders of NR and BP in accordance with applicable securities laws. The Circular contains a description of the proposed Merger, information about NR, BP, and CIGF, including the differences between NR and CIGF's investment objectives and the income tax considerations for shareholders of NR and BP. The Circular discloses that shareholders of BP and NR may obtain in respect of CIGF, at no cost, the most recent annual and interim financial statements, the current prospectus 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 CC&L Funds or the System for Electronic Document Analysis and Retrieval ("SEDAR").

29. The Filer will pay for the costs and expenses associated with the Merger, including the cost of holding the meetings in connection with the Merger and of soliciting proxies, including costs of mailing the Circular and accompanying materials. The CC&L Funds will bear none of the costs and expenses associated with the Merger.

30. As required by National Instrument 81-107 -- Independent Review Committee, the terms of the Merger were presented to the independent review committee (the "Independent Review Committee") of NR and BP for its review and recommendation. After considering the potential conflict of interest matter related to the Merger, the independent review committee provided its positive recommendation for the Merger.

31. Shares of the Merging Funds will continue to be redeemable by shareholders on a daily basis up to the business day immediately prior to the effective date of the Merger.

32. The cash and any other assets of the Merging Funds acquired by the Continuing Fund in connection with the Merger will be acquired and invested in accordance with the investment objectives, strategies, and restrictions of CIGF and NI 81-102.

33. The CC&L Funds have complied with Part 11 of NI 81-106 in connection with the making of the decision to proceed with the Merger.

34. Under section 5.6 of NI 81-102, approval of the Merger by the regulator is not required if all of the criteria for pre-approval listed in paragraphs 5.6(1)(a) through (i) are satisfied.

35. The foregoing representations contained in this application indicate that the merger will satisfy the requirements of paragraphs 5.6(1)(a) through (i) of NI 81-102 with the exception of paragraph 5.6(1)(a)(ii) for NR only, as a reasonable person would likely consider that NR does not have "substantially similar" fundamental investment objective as the Continuing Fund, and paragraph 5.6(1)(b) for both NR and BP, as the Merger of both NR and BP with CIGF will not be "qualifying exchange".

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 is that the Requested Approval is granted.