Sentry Select Capital Corp. and Sentry Select Focused 50 Income Fund
Headnote
NP 11-203 Process for Exemptive Relief Applications in Mutliple Jurisdictions -- Approval of mutual fund merger -- approval required because merger does not meet the criteria for pre-approval -- differences in investment objectives and fee structure -- due to inadvertence, Filer omitted to sent the current simplified prospectus and most recent annual and interim financial statements to unitholders.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, s. 5.5(1)(b).
August 15, 2008
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
SENTRY SELECT CAPITAL CORP.
(the Filer)
AND
SENTRY SELECT FOCUSED 50 INCOME FUND
(the Terminating Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of the merger (the Merger) of the Terminating Fund into Sentry Select Canadian Income Fund (the Continuing Fund) under subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) (the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator (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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.
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.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation governed by the laws of Canada and is the manager of each of the Terminating Fund and the Continuing Fund (each a Fund and collectively, the Funds). The Filer is registered as a dealer in the category of Mutual Fund Dealer and as an adviser in the category of Investment Counsel and Portfolio Manager under the Securities Act (Ontario), and as an adviser in the category of Commodity Trading Manager under the Commodities Futures Act, R.S.O. 1990. The Filer is also registered as an advisor in the category of Portfolio Manager and Investment Counsel under the Securities Act (Alberta).
2. The head office of the Filer is located in Ontario.
The Funds
3. Each of the Funds is an open-end mutual fund trust governed by an Amended and Restated Master Declaration of Trust dated May 1, 2007.
4. Units of the Funds are currently offered for sale under a simplified prospectus and annual information form dated August 10, 2007 in all provinces and territories of Canada. A simplified prospectus and annual information form will be filed in August 2008 to provide for the continued distribution of units of the Continuing Fund.
5. In the event that the Merger is not approved and implemented, the Filer proposes to terminate the Terminating Fund. Sales of units of the Terminating Fund were suspended on June 23, 2008 and units of the Terminating Fund will not be renewed for distribution following expiry of the lapse date on August 10, 2008.
6. The Funds are reporting issuers under the applicable securities legislation of each province and territory of Canada and are not on the list of defaulting reporting issuers maintained under such securities legislation.
7. Unless an exemption has been obtained, each of the Funds follows the standard investment restrictions and practices established by the securities regulatory authorities in each province and territory of Canada.
8. The net asset value (NAV) for units of each Fund is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.
Merger
9. The Filer proposes to merge the Terminating Fund into the Continuing Fund. Press releases, material change reports and an amendment to the simplified prospectus and annual information form of the Terminating Fund were filed on SEDAR in June 2008 in connection with the Merger.
10. A management information circular in connection with the Merger was filed on SEDAR and mailed to unitholders of the Terminating Fund on July 11, 2008 (the Circular).
11. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, an independent review committee (the IRC) has been appointed for the Funds. The Filer presented the terms of the Merger to the IRC for a recommendation. The IRC reviewed the proposed Merger and recommended that it be put to unitholders of the Funds for their consideration on the basis that the Merger would achieve a fair and reasonable result for the Funds.
12. Unitholders of the Terminating Fund were asked to approve the Merger at a special meeting of unitholders held on August 11, 2008. The unitholders voted unanimously to approve the Merger.
13. The proposed Merger will be structured substantially as follows:
(a) The Terminating Fund will transfer all of its assets to the Continuing Fund in exchange for units of the Continuing Fund. The units of the Continuing Fund received by the Terminating Fund will have an aggregate NAV equal to the NAV of the assets of the Terminating Fund and will be issued at the NAV per unit of each series of the Continuing Fund, in each case as of the close of business on the business day prior to the date of the Merger.
(b) Immediately thereafter, the units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund. Each unitholder will receive units of the Continuing Fund of the same series and having the same aggregate NAV as the units they previously held in the Terminating Fund as of the close of business on the business day prior to the Merger Date.
14. Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund and the Terminating Fund will be wound up as soon as reasonably practicable.
15. The Filer will pay all costs and expenses relating to the solicitation of proxies and the holding of the unitholder meeting in connection with the Merger as well as the costs of implementing the Merger. Neither the Terminating Fund nor the Continuing Fund will bear any of the costs and expenses of the Merger.
16. Subject to the required approval of the Principal Regulator, the Merger is expected to occur on or about August 20, 2008.
17. Unitholders of the Terminating Fund will continue to have the right to redeem units of the Terminating Fund for cash at any time up to the close of business on the business day immediately preceding the effective date of the Merger.
18. Approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102 because:
(a) the fundamental investment objective of the Terminating Fund is not substantially similar to the fundamental investment objective of the Continuing Fund,
(b) the Funds do not have the same fee structure, and
(c) the meeting materials sent to unitholders did not include the current simplified prospectus and the most recent annual and interim financial statements of the Continuing Fund.
19. Due to inadvertence, the Filer omitted to include the current simplified prospectus and the most recent annual and interim financial statements of the Continuing Fund with the meeting materials sent to unitholders as required under section 5.7(1)(b)(iv) of NI 81-102. The Filer did not make the Principal Regulator aware of this until after it mailed the Circular.
20. The primary differences between the fundamental investment objective of the Terminating Fund and the Continuing Fund are that while the Terminating Fund is limited to investing in income funds (which consist of trusts, limited partnerships or other similar entities), the Continuing Fund invests in equities, fixed-income instruments, real estate investment trusts and income trusts. While both the Terminating Fund and the Continuing Fund seek to provide consistent monthly distributions, the Continuing Fund also seeks to provide capital appreciation.
21. The fee structure for the Funds are different because the operating expenses of the Terminating Fund are paid for by the Filer, while the Continuing Fund is responsible for paying all of its own operating expenses. In addition, the management fee for the Series A units of the Terminating Fund is 1.75% and for the Series A units of the Continuing Fund it is 2.25%.
22. The tax implications of the Merger as well as the differences between the Terminating Fund and the Continuing Fund are described in the Circular so that unitholders of the Terminating Fund could consider this information before voting on the Merger.
23. The Filer believes that the Merger will be beneficial to unitholders of the Terminating Fund and the Continuing Fund for the following reasons:
(a) The potential for portfolio diversification will improve through the management of a larger Continuing Fund.
(b) The investment objectives of the Terminating Fund limit the Fund to investing only in income funds.
(c) The Filer proposes terminating the Terminating Fund in the event that the proposed merger is not approved and implemented. The proposed Merger will be implemented on a tax-deferred basis which will not result in the realization of a capital gain or capital loss to Unitholders of the Terminating Fund or to the Terminating Fund itself. In the event that the Merger is not approved and implemented and the Terminating Fund is otherwise terminated, such termination will result in the realization of a capital gain or capital loss to Unitholders on their Units and a net capital gain to the Terminating Fund, which would be distributed to Unitholders and be taxable in their hands.
(d) By merging the Terminating Fund, instead of terminating the Terminating Fund, there will be no costs incurred by the Terminating Fund for brokerage charges associated with the liquidation of the Terminating Fund's portfolio on a wind-up. All costs related to the implementation of the Merger will be borne by the Filer.
24. The meeting materials sent to unitholders of the Terminating Fund did not include the most recent simplified prospectus and annual and interim financial statements that have been made public for the Continuing Fund. Adequate information concerning the Continuing Fund to permit unitholders to make an informed decision about the Merger was provided to unitholders in the Circular, in earlier simplified prospectuses sent to unitholders of the Terminating Fund, and in the financial statements sent to those unitholders who requested them. The Circular further disclosed that unitholders could obtain the most recent interim and annual financial statements, simplified prospectus, annual information form, and additional information relating to the Continuing Fund by accessing the SEDAR website at www.sedar.com, by calling the Filer's toll-free telephone number, or by submitting (by fax or mail) a request to the Filer
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.