Sun Life Global Investments (Canada) Inc. and Excel Funds Management Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund merger and change of custodian -- merger 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 and fee structures of the terminating funds and the continuing funds are not substantially similar for certain mergers -- unitholders of the terminating funds are provided with timely and adequate disclosure regarding the mergers -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b) and 5.5(1)(c), 19.1.
April 30, 2018
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 SUN LIFE GLOBAL INVESTMENTS (CANADA) INC. (Sun Life) AND EXCEL FUNDS MANAGEMENT INC. (Excel, and together with Sun Life, the Filers) AND THE TERMINATING FUNDS (as defined below) AND THE EXCEL MUTUAL FUNDS (as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of:
(a) the proposed mergers (the Mergers) of the Terminating Funds into the applicable Continuing Funds (as defined below) as set out in paragraph 14 below pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102); and
(b) the proposed change of custodian (the Change of Custodian) for the Excel Mutual Funds (as defined below) from State Street Trust Company Canada to RBC Investor Services Trust (RBC IS) pursuant to paragraph 5.5(1)(c) of NI 81-102
(collectively, 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 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 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 Funds means Sun Life MFS Canadian Equity Growth Fund, Sun Life Schroder Emerging Markets Fund and Sun Life Money Market Fund;
Excel Mutual Funds means Excel Emerging Markets Balanced Fund, Excel India Balanced Fund, Excel High Income Fund, Excel Money Market Fund, Excel India Fund, Excel New India Leaders Fund, Excel China Fund, Excel Chindia Fund and Excel Emerging Markets Fund;
Excel Terminating Funds means Excel Chindia Fund, Excel Emerging Markets Fund and Excel Money Market Fund;
Fund or Funds means, individually or collectively, the Excel Mutual Funds and the Sun Life Funds;
IRC means, in respect of each Fund, the independent review committee for the Fund;
NI 81-101 means National Instrument 81-101 Mutual Fund Prospectus Disclosure;
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;
Sun Life Funds means the Sun Life Terminating Funds and the Continuing Funds;
Sun Life Terminating Funds means Sun Life MFS Canadian Equity Fund and Sun Life MFS Canadian Equity Value Fund;
Terminating Funds means the Excel Terminating Funds and the Sun Life Terminating Funds; and
Tax Act means the Income Tax Act (Canada).
Representations
This decision is based on the following facts represented by the Filers:
The Filers
1. Sun Life is a corporation incorporated under the laws of Canada with its head office in Toronto, Ontario. Sun Life is an indirect wholly-owned subsidiary of Sun Life Financial Inc., a public company incorporated under the Insurance Companies Act (Canada) and listed on the Toronto Stock Exchange, the New York Stock Exchange and the Philippines Stock Exchange.
2. Sun Life is the manager, trustee and portfolio manager of the Sun Life Funds.
3. Sun Life is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, as a mutual fund dealer in each of the Canadian Jurisdictions, and as a commodity trading manager and portfolio manager in Ontario.
4. Excel is a corporation incorporated under the laws of Ontario with its head office in Mississauga, Ontario. Excel is a wholly owned subsidiary of Sun Life, which in turn is an indirect wholly-owned subsidiary of Sun Life Financial Inc.
5. As Excel is a wholly-owned subsidiary of Sun Life, Excel and Sun Life are affiliates.
6. Excel is the manager and trustee of the Excel Terminating Funds.
7. Excel is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador.
The Funds
8. The Funds are open-ended mutual funds established as trusts under the laws of Ontario.
9. Units of the Excel Mutual Funds are currently qualified for sale in each of the Canadian Jurisdictions under a simplified prospectus, annual information form and fund facts dated September 18, 2017, as amended by Amendment No. 1 dated February 16, 2018, Amendment No. 2 dated March 9, 2018 and Amendment No. 3 dated March 28, 2018.
10. Units of the Sun Life Terminating Funds and of Sun Life MFS Canadian Equity Growth Fund are currently qualified for sale in each of the Canadian Jurisdictions under a simplified prospectus, annual information form and fund facts dated February 16, 2018, as amended by Amendment No. 1 dated March 9, 2018. Units of Sun Life Schroder Emerging Markets Fund and Sun Life Money Market Fund are currently qualified for sale in each of the Canadian Jurisdictions under an amended and restated simplified prospectus, amended and restated annual information form and fund facts dated December 15, 2017, as amended by Amendment No. 1 dated March 9, 2018.
11. Each of the Funds is a reporting issuer under the applicable securities legislation of the Canadian Jurisdictions and is subject to the requirements of NI 81-102 and NI 81-101.
12. Neither the Filers nor the Funds are in default under the securities legislation of any of the Canadian Jurisdictions.
13. 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.
The Mergers
14. Each of the Terminating Funds will merge into the corresponding Continuing Fund as follows, effective on or about June 15, 2018 (the Merger Date):
(a) Sun Life MFS Canadian Equity Fund into Sun Life MFS Canadian Equity Growth Fund;
(b) Sun Life MFS Canadian Equity Value Fund into Sun Life MFS Canadian Equity Growth Fund;
(c) Excel Chindia Fund into Sun Life Schroder Emerging Markets Fund;
(d) Excel Emerging Markets Fund into Sun Life Schroder Emerging Markets Fund; and
(e) Excel Money Market Fund into Sun Life Money Market Fund.
15. Each Filer, in respect of the Terminating Funds it manages, concluded that approval for the Mergers is required because:
(a) for each Merger other than the Merger of Excel Money Market Fund into Sun Life Money Market Fund, the fundamental investment objective of each Continuing Fund is not, or may be considered not to be, "substantially similar" to the investment objective of the corresponding Terminating Fund; and
(b) for the Mergers involving the Excel Terminating Funds, the fee structure of each Continuing Fund is not, or may be considered not to be, "substantially similar" to the fee structure of the corresponding Excel Terminating Fund
and therefore each Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in subsection 5.6(1) of NI 81-102.
16. Each of the other conditions for pre-approval under subsection 5.6(1) of NI 81-102 is or will be met in respect of each Merger.
17. Each Merger will take place on a tax-deferred basis.
18. The assets of each Terminating Fund to be acquired by the applicable Continuing Fund to effect each Merger are currently or will, on the Merger Date, be acceptable to the portfolio manager of the applicable Continuing Fund and are, or will be, consistent with the investment objectives of the applicable Continuing Fund.
19. Unitholders of each Terminating Fund will be asked to approve the relevant Merger at a special meeting to be held on or about May 25, 2018.
20. Sun Life, 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 and accordingly, there is no intention to convene a meeting of securityholders of the Continuing Funds to approve the Mergers pursuant to paragraph 5.1(g) of NI 81-102.
21. The Filers 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 Merger Date and legal, proxy solicitation, printing, mailing and regulatory fees.
22. No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of the corresponding Terminating Fund.
23. No sales charges, redemption fees or other fees or commissions will be payable by securityholders of the Terminating Funds in connection with the Mergers.
24. Unitholders of each Terminating Fund will continue to have the right to redeem units of the Terminating Fund at any time up to the close of business on the business day immediately before the Merger Date. Following each Merger, all optional plans which were established with respect to the Terminating Funds will be re-established in comparable plans with respect to the Continuing Funds unless securityholders advise otherwise.
25. The Continuing Funds have the same valuation procedures as the Terminating Funds.
Unitholder Disclosure
26. In accordance with NI 81-106, a press release announcing the proposed Mergers was issued and filed via SEDAR on February 28, 2018. An amendment to the relevant simplified prospectus and annual information form of the Terminating Funds, along with amended Fund Facts and a material change report with respect to the proposed Mergers were filed via SEDAR on March 9, 2018.
27. As required by NI 81-107, an IRC has been appointed for each of the Excel Terminating Funds and the Sun Life Terminating Funds. The Filers presented the potential conflict of interest matters related to the proposed Mergers to the IRC of each Terminating Fund. Each IRC reviewed the potential conflict of interest matters related to the proposed Mergers and, on February 23, 2018, provided its positive recommendation for the Mergers, after determining that the proposed Mergers, if implemented, would achieve a fair and reasonable result for each Terminating Fund.
28. Pursuant to a decision dated December 5, 2016 (the Notice-and-Access Decision), Sun Life has obtained an exemption from the requirement in paragraph 12.2(2)(a) of NI 81-106 to send a printed management information circular while proxies are being solicited, and, subject to certain conditions, instead allows a notice-and-access document (as described in the Notice-and-Access Decision) to be sent to such securityholders. In accordance with Sun Life's standard of care owed to the Sun Life Funds pursuant to securities legislation, Sun Life will only use the notice-and-access procedure for a particular meeting where it has concluded that it is appropriate and consistent with the purpose of notice-and-access (as described in the Companion Policy to National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer) to do so, also taking into account the purpose of the meeting and whether the Sun Life Funds would obtain a better participation rate by sending the management information circular with the other proxy-related materials. As an affiliate of Sun Life, Excel is entitled to use the same exemption for the Excel Mutual Funds.
29. Pursuant to the requirements of the Notice-and-Access Decision, the notice prescribed by the Notice-and-Access Decision (the Notice-and-Access Document), the applicable form of proxy in connection with the meetings, and the most recent fund facts of the relevant series of the applicable Continuing Fund were sent to unitholders of each Terminating Fund on April 24, 2018. Additionally, the Notice-and-Access Document, form of proxy and information circular (the Circular) were filed via SEDAR on April 20, 2018 and posted on each Filer's website on April 23, 2018.
30. The Circular describes all relevant facts concerning the Mergers, including the investment objectives, strategies and fee structure of the Terminating Funds and the Continuing Funds, the tax implications and other consequences of each Merger, as well as the IRC's recommendation of each Merger, so that securityholders of the Terminating Funds may make an informed decision before voting on whether to approve the Mergers. The Circular also describes the various ways in which securityholders can obtain a copy of the simplified prospectus, annual information form and fund facts for the applicable Continuing Fund, and the most recent interim and annual financial statements and management reports of fund performance.
Procedure for the Mergers
31. Each proposed Merger will be structured as follows:
(a) prior to the Merger Date, the Terminating Fund will sell securities in its portfolio that do not meet the investment objectives and investment strategies of the applicable 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 Merger 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 Merger 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 Merger Date;
(f) 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 Merger Date;
(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 (other than holders of Institutional Series units of Excel Emerging Markets Fund, who will receive Series IS units of Sun Life Schroder Emerging Markets Fund); and
(h) as soon as reasonably possible following the Mergers, the Terminating Fund will be wound up and the Continuing Fund will continue as a publicly offered open end mutual fund.
32. The result of each Merger will be that securityholders of each Terminating Fund will cease to be securityholders of the Terminating Fund, become securityholders of the applicable Continuing Fund, and realize capital gains or capital losses.
Benefits of the Mergers
33. When undertaking a merger of two or more funds, the Filers consider both qualitative and quantitative factors when choosing the continuing fund. The qualitative factors considered include the comparability of investment objectives, investment strategies, risk rating, investment philosophy and portfolio construction. When considering quantitative factors, the Filers review fund performance (using both calendar year and to date metrics), the investment performance correlation between the potential terminating and continuing funds, any overlap in investment holdings, the asset allocation/sector allocation/geographic allocation of each fund, fees for each series, the AUM difference 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 Filers formalize the analysis and recommend a continuing fund with which to proceed forward.
34. With respect to the mergers of the Sun Life Terminating Funds into Sun Life MFS Canadian Equity Growth Fund, Sun Life determined that it was no longer viable to maintain these three funds as separate mandates. After considering the factors set out in paragraph 33, Sun Life MFS Canadian Equity Growth Fund was selected as the continuing fund primarily due to its larger size.
35. With respect to the mergers of Excel Chindia Fund and Excel Emerging Markets Fund into Sun Life Schroder Emerging Markets Fund, Excel believes that these Terminating Funds are no longer viable on their own, and must be either merged or terminated. After considering the factors set out in paragraph 33, Sun Life Schroder Emerging Markets Fund was chosen as the continuing fund for these mergers as it offers exposure to the same geographic regions as Excel Chindia Fund and Excel Emerging Markets Fund, while, in the case of Excel Chindia Fund, also possessing a broader investment mandate, which may lead to less volatile investment returns.
36. The Filers believe that the Mergers will be beneficial to unitholders of the Terminating Funds and the Continuing Funds for the following reasons:
(a) a line-up consisting of fewer mutual funds that target similar types of investors will allow Sun Life to concentrate its marketing efforts to attract additional assets in the Continuing Funds. Ultimately this benefits unitholders because it ensures that each Continuing Fund remains a viable, long-term investment vehicle for existing and potential investors;
(b) each Continuing Fund has a portfolio of greater value, allowing for increased portfolio diversification opportunities compared to the corresponding Terminating Fund;
(c) each Continuing Fund, as a result of greater size, benefits from a larger profile in the marketplace by potentially attracting more investors and enabling it to maintain a "critical mass"; and
(d) unitholders of each Terminating Fund, except for the Excel Money Market Fund, will receive units of the applicable Continuing Fund that have a management fee that is the same as, or lower than, that charged in respect of the series of units of the Terminating Fund that they currently hold.
37. In addition to the benefits stated above, Sun Life is of the belief that the merger of Sun Life MFS Canadian Equity Fund into Sun Life MFS Canadian Equity Growth Fund will be beneficial to the unitholders of the Terminating Fund by:
(a) providing unitholders with exposure to similar investment holdings; and
(b) providing unitholders with the added diversification of global equities.
38. In addition to the benefits stated above, Sun Life is of the belief that the merger of Sun Life MFS Canadian Equity Value Fund into Sun Life MFS Canadian Equity Growth Fund will be beneficial to the unitholders of the Terminating Fund by providing unitholders with exposure to similar investment holdings.
39. In addition to the benefits stated above, Excel is of the belief that the mergers of Excel Emerging Markets Fund and Excel Chindia Fund into Sun Life Schroder Emerging Markets Fund will be beneficial to the unitholders of the Terminating Funds by:
(a) providing unitholders with potential for enhanced risk adjusted returns; and
(b) providing unitholders with a higher level of emerging markets diversification, which may reduce the overall volatility at the strategy level.
40. In addition to the benefits stated above, Excel is of the belief that the merger of Excel Money Market Fund into Sun Life Money Market Fund will be beneficial to the unitholders of the Terminating Fund by providing unitholders with units of a Continuing Fund with highly similar investment objectives.
The Change of Custodian
41. Excel intends to implement the Change of Custodian for the Excel Mutual Funds effective on or about June 1, 2018. The Change of Custodian may be considered to be implemented in connection with the change of manager of the Excel Mutual Funds from Excel to Sun Life (the Change of Manager), which was previously approved by the principal regulator in a decision dated December 4, 2017. Sun Life acquired ownership of Excel effective January 2, 2018, and it is anticipated that Excel and Sun Life will be amalgamated effective on or about June 30, 2018, at which time the Change of Manager will be effected. As the Change of Custodian will be implemented in connection with the Change of Manager, approval of the principal regulator under subsection 5.5(1)(c) of NI 81-102 is required for the Change of Custodian.
42. Excel believes that the Change of Custodian will be beneficial to the Excel Mutual Funds as it will create administrative efficiencies by having custody of all the mutual funds managed by Sun Life with the same custodian once the merger is effected.
43. The current custodian of the Excel Mutual Funds is State Street Trust Company Canada.
44. State Street Trust Company Canada's most recent custodian report for the Excel Mutual Funds was filed on January 19, 2018.
45. The custodian of each Excel Mutual Fund will be changed to RBC IS. RBC IS may engage sub-custodians in connection with the assets of the Excel Mutual Funds.
46. Neither of the Filers is an affiliate of RBC IS.
47. RBC IS is the custodian of the mutual funds managed by Sun Life and meets the requirements of Part 6 of NI 81-102.
48. RBC IS's most recent custodian report for the mutual funds managed by Sun Life was filed on April 4, 2018. This report was provided to Sun Life.
49. The Change of Custodian and the custodial agreements and arrangements between the Excel Mutual Funds and RBC IS will be implemented in compliance with Part 6 of NI 81-102.
50. Excel believes that the Change of Custodian and the addition of the Excel Mutual Funds to the existing custodial arrangements between the mutual funds managed by Sun Life and RBC IS will have no adverse impact on continued compliance with Part 6 of NI 81-102.
51. Excel does not regard the Change of Custodian as either a "material change" as defined in section 1.1 of NI 81-106, or as a "conflict of interest matter" as defined in section 1.2 of NI 81-107.
52. Details of the Change of Custodian will be set out in the final renewal simplified prospectus and annual information form of the Excel Mutual Funds, which is expected to be rolled into the final renewal simplified prospectus and annual information form of the mutual funds managed by Sun Life on or about July 6, 2018.
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.