Northwest & Ethical Investments L.P., Nei Northwest Macro Canadian Asset Allocation Fund and Nei Northwest Macro Canadian Asset Allocation Corporate Class

Headnote

National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund mergers – approval required because the mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 – the fundamental investment objectives are not substantially similar – the merger will not be effected as a “qualifying transaction” or as a tax-deferred transactions – unitholders of the terminating funds are provided with timely and adequate disclosure regarding the merger.

Applicable Legislative Provisions

Paragraph 5.5(1)(b) of NI 81-102 Investment Funds.

April 13, 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

IN THE MATTER OF
NORTHWEST & ETHICAL INVESTMENTS L.P.
(the Manager)

AND

IN THE MATTER OF
NEI NORTHWEST MACRO CANADIAN ASSET ALLOCATION FUND
NEI NORTHWEST MACRO CANADIAN ASSET ALLOCATION CORPORATE CLASS
(collectively, the Terminating Funds, and together with the
Manager on behalf of the Terminating Funds, the Filers)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filers for a decision (the Requested Approval) under the securities legislation of the Jurisdiction (the Legislation) approving the proposed mergers of the Terminating Funds with the Continuing Fund (as defined below) (the Proposed Mergers) pursuant to clause 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 (Principal Regulator) for the Application, and

(b)           the Filers have 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 other provinces and territories of Canada (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 — Definitions and MI 11-102 have the same meaning in this Application unless they are otherwise defined in this Application. In addition, the following terms have the following meanings:

Representations

1.             The Manager is an Ontario limited partnership. The general partner of the Manager (the General Partner) is Northwest & Ethical Investments Inc., a corporation formed under the laws of Canada with its head office in Ontario.

2.             The Manager is the investment fund manager of the Funds and is registered as (i) an exempt market dealer in British Columbia, Ontario, Quebec and Saskatchewan, (ii) an investment fund manager in British Columbia, Newfoundland and Labrador, Ontario and Quebec, and (iii) a portfolio manager in Ontario.

3.             Each of the Funds is either a mutual fund trust or a class of a mutual fund corporation established or incorporated under the laws of Ontario and is a reporting issuer under the applicable securities legislation of each Jurisdiction.

4.             The securities of each Fund are qualified for distribution in the Jurisdictions pursuant to a simplified prospectus and annual information form prepared and filed in accordance with the securities legislation of the Jurisdictions.

5.             Each Fund is subject to the requirements of NI 81-102. The securities of each Fund are issuable and redeemable on any business day.

6.             Neither the Manager nor any Fund is in default of securities legislation in any Jurisdiction.

7.             This Application is being made in connection with the following Proposed Mergers:

8.             In accordance with National Instrument 81-106 – Investment Fund Continuous Disclosure, a press release announcing the Proposed Mergers was issued on March 2, 2017. A material change report with respect to the Proposed Mergers was filed on SEDAR on March 2, 2017. Amendments to the Funds’ simplified prospectus and annual information form and to the Terminating Funds’ Fund Facts were filed on March 2, 2017.

9.             The General Partner has received approval from its Board of Directors to proceed with the Proposed Mergers. In addition, pursuant to NI 81-107, the IRC concluded after considering the Proposed Mergers that the Proposed Mergers, if implemented, would achieve a fair and reasonable result for the Terminating Funds.

10           Regulatory approval of the Proposed Mergers is required as not all of the conditions of section 5.6 of NI 81-102 will be met. More particularly, each of the Proposed Mergers would not comply with the following conditions of section 5.6 of NI 81-102:

(a)           The Proposed Mergers between:

(i)            Terminating Trust Fund and Continuing Fund; and

(ii)           Terminating Corporate Fund and Continuing Fund

will not be effected as a “qualifying transaction” within the meaning of the Tax Act or as tax-deferred transactions under the Tax Act and, as such, do not meet the requirements in section 5.6(1)(b) of NI 81-102.

The Proposed Merger referred to in item (i) in the previous paragraph is proposed to proceed as a taxable merger as there would be a deemed tax year-end for the Continuing Fund if such Proposed Merger were undertaken on a tax-deferred basis pursuant to the “qualifying exchange” provision of the Tax Act. Where a deemed tax year-end is triggered, the Continuing Fund would be required to make a distribution and any unused tax losses would expire. As a result, the Manager believes that it is in the best interests of the Terminating Trust Fund and the Continuing Fund for such Proposed Merger to be carried out on a taxable basis in order to avoid any adverse tax consequences to the Continuing Fund and its existing securityholders.

With respect to the Proposed Merger referred to in item (ii) in the previous paragraph, there are currently no provisions under the Tax Act to allow for a tax-deferred merger between the Terminating Corporate Fund and the Continuing Fund.

(b)           The Proposed Mergers do not meet the requirements of clause 5.6(1)(a)(ii) of NI 81-102 as the investment objectives of each Terminating Fund may not be considered by a reasonable person to be substantially similar to the investment objectives of the Continuing Fund. Among the differences are (i) the investment objectives of the Continuing Fund contemplate a broader geographical scope for the portfolio, and (ii) the Terminating Funds have a preservation of capital mandate as a part of their investment objectives whereas the Continuing Fund does not.

11.          Except as noted above, the Proposed Mergers will otherwise comply with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

12.          The Manager has determined that the Proposed Mergers do not result in a material change for the Continuing Fund.

13.          The investment portfolio and other assets of each Terminating Fund that will become assets of the Continuing Fund are acceptable to the advisor of the Continuing Fund and are consistent with the investment objectives of the Continuing Fund. To the extent that a particular security may be unsuitable or undesirable for the Continuing Fund, that security will be sold prior to the Proposed Mergers.

14.          The Continuing Fund will be able to promptly invest any significant amounts of cash that the Continuing Fund receives from the Terminating Funds.

15.          Investors of the Terminating Funds approved the Proposed Mergers at special meetings of investors held on April 10, 2017. The Proposed Mergers are expected to become effective on or about on or about April 18, 2017, or such later date as may be determined by the Manager (the Merger Date). The Manager expects to wind-up the Terminating Funds within 60 days of the Merger Date.

16.          It is proposed that the following steps will be carried out to effect the Proposed Merger of the Terminating Trust Fund with the Continuing Fund:

(a)           Immediately following the close of business on the Merger Date, the Terminating Trust Fund will transfer all of its assets (less amounts necessary to satisfy its liabilities) to the Continuing Fund. The Terminating Trust Fund will receive, in exchange, units of the Continuing Fund, the aggregate net asset value (the NAV) of which is equal to the aggregate value of the assets transferred to the Continuing Fund, calculated as of the close of business on the Merger Date.

 

(b)           Immediately thereafter, the units of the Continuing Fund received by the Terminating Trust Fund will be distributed to securityholders of the Terminating Trust Fund on a dollar-for-dollar and series-by-series basis in exchange for their units of the Terminating Trust Fund. This will result in each securityholder of the Terminating Trust Fund receiving units of the applicable series of the Continuing Fund with a value equal to the NAV of the units of the relevant series of the Terminating Trust Fund that were held by such securityholder.

(c)           The above Proposed Merger will occur on a taxable basis. This means that the exchange of units of the Terminating Trust Fund for units of the Continuing Fund may result in a capital gain or loss to securityholders of the Terminating Trust Fund. In addition, any non-capital and net capital loss carryforwards of the Terminating Trust Fund will not be deductible in computing income and net realized capital gains realized on the assets formerly held by the Terminating Trust Fund for taxation years beginning after the Merger Date. However, non-capital and net capital loss carryforwards of the Continuing Fund will not be affected by the Proposed Merger.

17.          It is proposed that the following steps will be carried out to effect the Proposed Merger of the Terminating Corporate Fund with the Continuing Fund:

(a)           Immediately following the close of business on the Merger Date, the Terminating Corporate Fund will transfer all of its assets (less amounts necessary to satisfy its liabilities) to the Continuing Fund. The Terminating Corporate Fund will receive, in exchange, units of the Continuing Fund, the aggregate NAV of which is equal to the aggregate value of the assets transferred to the Continuing Fund, calculated as of the close of business on the Merger Date.

(b)           Immediately thereafter, the units of the Continuing Fund received by the Terminating Corporate Fund will be distributed to securityholders of the Terminating Corporate Fund on a dollar-for-dollar and series-by-series basis in exchange for their shares of the Terminating Corporate Fund. This will result in each securityholder of the Terminating Corporate Fund receiving units of the applicable series of the Continuing Fund with a value equal to the NAV of the shares of the relevant series of the Terminating Corporate Fund that were held by such securityholder.

(c)           Under current tax laws, the Proposed Merger described above cannot be effected on a tax-deferred basis. However, the Manager anticipates that the transfer of the net assets of the Corporate Fund to the Continuing Fund will not result in a material tax liability for the Corporation.

18.          The Circular and proxy in connection with the Proposed Mergers was filed on SEDAR and mailed to investors of record of the Terminating Funds as at March 9, 2017. Each such investor was also mailed the Fund Facts of the Continuing Fund. The Circular includes a summary of the IRC determination, a comparison of certain facts, including the management expense ratios and performance, of each Terminating Fund and the Continuing Fund, as well as disclosure as to the consequences of each Proposed Merger being effected on a taxable basis. Accordingly, investors of the Terminating Funds will have an opportunity to consider this information prior to voting on the Proposed Mergers at the special meetings.

19.          Securityholders of the Terminating Funds will continue to have the right to redeem securities of the Terminating Funds up to the close of business on the business day immediately prior to the effective date of the Proposed Mergers.

20.          The Manager believes that the Proposed Mergers will be beneficial to securityholders of the Terminating Funds for the following reasons:

(a)           the Continuing Fund has a larger portfolio and broader investment mandate than each Terminating Fund, and therefore has the potential to offer improved portfolio diversification and liquidity to securityholders of the Terminating Funds; and

(b)           the Continuing Fund, as a result of its increased size, will benefit from a more significant profile in the marketplace.

21.          No sales charges, redemption fees or other fees or commissions will be payable by securityholders in connection with the Proposed Mergers or with respect to any portfolio rebalancing in the Terminating Fund arising in connection with the Proposed Mergers. The costs and expenses specifically associated with the Proposed Mergers will be borne by the Manager.

22.          In the case of each Proposed Merger, the investors in a Terminating Fund will receive the same series of securities of the Continuing Fund as such investors hold in the Terminating Fund upon closing of the Proposed Merger.

23.          The management fees for the relevant series of the Continuing Fund are, in each case, the same as those of each Terminating Fund.

24.          The valuation procedures for the Continuing Fund are the same as those of each Terminating Fund.

25.          Investors in the Terminating Funds will have the right to vote on the Proposed Mergers. Due to the redemption rights of securityholders, each securityholder ultimately can make the securityholder’s own choice as to whether to remain in the Continuing Fund or not.

26.          Subsequent to the completion of the Mergers, the Terminating Funds will be wound up.

27.          Investors of each Terminating Fund are expected to benefit from the increased scale and operational efficiencies of the Continuing Fund, enjoying the same management fees.

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 Approval is granted.

“Vera Nunes”
Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission