Securities Law & Instruments

Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 81-102 Mutual Funds -- A mutual fund manager seeks approval of proposed fund mergers under the approval requirements in NI 81-102 -- The continuing fund's investment objectives will either be substantially similar to those of the terminating fund, or include a component of the fundamental investment objective of the terminating fund in the continuing funds' objectives; although the fund manager will be different, the same individual portfolio managers will be responsible for most of the continuing funds; the funds' independent review committee approved the merger; unitholders will vote on the proposed mergers; terminating fund unitholders will receive alternate prospectus level disclosure; the tax consequences of the merger are as beneficial to unitholders as if the merger was on a tax-deferred basis; unitholders can redeem their investment after the merger without paying redemption fees; the new fund manager wishes to merge the terminating funds into newly-established continuing funds for reasons of administrative efficiency.

Applicable Ontario Provisions

National Instrument 81-102 Mutual Funds, s. 5.5(1)(b).

December 2, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA AND ONTARIO

(the Jurisdictions)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

INHANCE INVESTMENT MANAGEMENT INC.

(Inhance)

AND

INHANCE BALANCED FUND

INHANCE GLOBAL LEADERS FUND

INHANCE CANADIAN EQUITY FUND

INHANCE MONTHLY INCOME FUND

INHANCE BOND FUND

INHANCE MONEY MARKET FUND

(the Inhance Funds)

DECISION

Background

1 The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from Inhance for a decision under the securities legislation of the Jurisdictions (the Legislation) for approval under Section 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) of the proposed mergers of each of the Inhance Funds with certain Continuing Funds (as defined below) as set forth below (the Approval Sought):

   Terminating Fund

   Continuing Fund

 

Inhance Bond Fund

IA Clarington Bond Fund

 

Inhance Money Market Fund

IA Clarington Money Market Fund

 

Inhance Monthly Income Fund

IA Clarington Inhance Monthly Income SRI Fund

 

Inhance Canadian Equity Fund

IA Clarington Inhance Canadian Equity SRI Class

 

Inhance Global Leaders Fund

IA Clarington Inhance Global Equity SRI Class

 

Inhance Balanced Fund

IA Clarington Inhance Growth SRI Portfolio

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a) the British Columbia Securities Commission is the principal regulator for this application;

(b) Inhance 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 Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador and the Northwest Territories; and

(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

2 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

3 This decision is based on the following facts represented by Inhance:

1. Inhance is a subsidiary of Vancouver Savings Credit Union (Vancity) and the trustee and manager of the following groups of mutual funds:

(a) the Inhance Funds;

(b) the Vancity Circadian Mutual Funds (the Circadian Funds); and

(c) the Vancity Perspectives Portfolio Solutions (the Perspectives Funds).

2. on October 1, 2009, Inhance, Vancity and IA Clarington Investments Inc. (IA Clarington) entered into an agreement (the Purchase Agreement) whereby IA Clarington will acquire the mutual fund management business of Inhance by purchasing certain related assets of the business (the Transaction), subject to, among other things, receipt of applicable unitholder and regulatory approvals and a positive recommendation of the Independent Review Committee (the IRC) of the Terminating Funds (as defined below);

3. the proposed mergers involving the Inhance Funds are part of a series of merger transactions also involving the Circadian Funds and the Perspectives Funds; under the terms of the Purchase Agreement, it is proposed that each of the Inhance Funds, the Circadian Funds and the Perspectives Funds (collectively, the Terminating Funds) be merged with certain mutual funds (collectively, the Continuing Funds) managed by IA Clarington, including six newly formed mutual funds (the IAC Inhance SRI Funds) which will follow the Inhance environmental, social and governance investment strategies (the Mergers), with the unitholders of each Terminating Fund becoming securityholders of the corresponding Continuing Fund as set forth below:

Terminating Fund

Continuing Fund

 

Vancity Circadian Short-Term Investment Fund

IA Clarington Money Market Fund

 

Vancity Circadian Monthly Income Fund

IA Clarington Inhance Monthly Income SRI Fund

 

Vancity Circadian Canadian Equity Fund

IA Clarington Inhance Canadian Equity SRI Class

 

Vancity Circadian Global Leaders Fund

IA Clarington Inhance Global Equity SRI Class

 

Vancity Circadian Balanced Fund

IA Clarington Inhance Growth SRI Portfolio

 

Vancity Perspectives Income Portfolio

IA Clarington Inhance Conservative SRI Portfolio

 

Vancity Perspectives Conservative Portfolio

IA Clarington Inhance Conservative SRI Portfolio

 

Vancity Perspectives Balanced Portfolio

IA Clarington Inhance Balanced SRI Portfolio

 

Vancity Perspectives High Growth Portfolio

IA Clarington Inhance Growth SRI Portfolio

 

Vancity Perspectives Growth Portfolio

IA Clarington Inhance Growth SRI Portfolio

 

Inhance Bond Fund

IA Clarington Bond Fund

 

Inhance Money Market Fund

IA Clarington Money Market Fund

 

Inhance Monthly Income Fund

IA Clarington Inhance Monthly Income SRI Fund

 

Inhance Canadian Equity Fund

IA Clarington Inhance Canadian Equity SRI Class

 

Inhance Global Leaders Fund

IA Clarington Inhance Global Equity SRI Class

 

Inhance Balanced Fund

IA Clarington Inhance Growth SRI Portfolio

4. section 5.6 of NI 81-102, which provides that the approval of securities regulatory authorities is not required in connection with a reorganization or transfer of assets by a mutual fund where certain criteria are met, does not apply in the case of the Mergers because:

(a) the Continuing Funds are not managed by the same manager as the Terminating Funds or by an affiliate of the manager of the Terminating Funds as required by Section 5.6(1)(a)(i) of NI 81-102;

(b) the Mergers will not be "qualifying exchanges" as required by Section 5.6(1)(b) of NI 81-102 as the Mergers will be implemented on a taxable basis and the elective tax-deferred merger rules for mutual funds contained in Section 132.2 of the Income Tax Act (the ITA) will not be implemented for any of the Mergers;

(c) the investment objectives are not substantially similar in respect of the mergers of the Inhance Bond Fund into the IA Clarington Bond Fund and the Inhance Money Market Fund and the Vancity Circadian Short-Term Investment Fund into the IA Clarington Money Market Fund as required by Section 5.6(1)(a)(ii) of NI 81-102 as those Continuing Funds will not follow the environmental, social and governance investment strategies employed by the corresponding Terminating Funds; and

(d) the materials sent to unitholders of the Terminating Funds in connection with the special meetings of unitholders (the Meetings) to be held for the purpose of considering and approving the Mergers included a notice of meetings and an information circular (together, the Information Circular) in the prescribed form, which included prospectus-level disclosure regarding the Continuing Funds and the securities to be issued to unitholders of the Terminating Funds upon completion of the Mergers and referenced the availability of the current simplified prospectus and the most recent annual and interim financial statements for the IA Clarington Bond Fund and the IA Clarington Money Market Fund, and the availability, when receipted by the Canadian securities regulators, of the current simplified prospectus for the IAC Inhance SRI Funds, from IA Clarington, at no cost to unitholders of the Terminating Funds, and at www.sedar.com, but copies of these documents were not sent along with the Information Circular as contemplated in Section 5.6(1)(f)(ii) of NI 81-102;

5. IA Clarington is a wholly-owned subsidiary of Industrial Alliance Insurance and Financial Services Inc. (Industrial Alliance); Industrial Alliance is the fourth largest life and health insurance company in Canada that offers a wide range of health insurance products, savings and retirement plans, mutual and segregated funds, auto and home insurance, mortgage loans and other financial products and services;

6. IA Clarington is registered as a Portfolio Manager in each of the provinces of Canada, and its head office is located at 1080 Grande Allée Ouest, Québec City, Québec G1K 7M3;

7. IA Clarington acts as an investment fund manager in Canada and has approximately $7 billion in assets under management in 44 public mutual funds;

8. with the exception of the IA Clarington Inhance Canadian Equity SRI Class and the IA Clarington Inhance Global Equity SRI Class (the Corporate Class Funds), all of the Continuing Funds (the Trust Funds) are open-ended mutual fund trusts established under the laws of the Province of Ontario by a declaration of trust dated as of August 28, 2000, as amended and restated. IA Clarington is the trustee and manager of the Trust Funds;

9. the Corporate Class Funds are separate classes of shares of Clarington Sector Fund Inc., which is a mutual fund corporation that was incorporated on July 17, 2000, by articles of incorporation under the laws of Ontario; IA Clarington is the manager of the Corporate Class Funds;

10. each of the IA Clarington Bond Fund and the IA Clarington Money Market Fund (together, the Existing IAC Funds) is a reporting issuer in each of the provinces and territories of Canada; units of the IA Clarington Bond Fund (Series A, F, I and X) and the IA Clarington Money Market Fund (Series A, B, I and X) are offered under a simplified prospectus and an annual information form, both dated July 6, 2009, in each of the provinces and territories of Canada;

11. on October 5, 2009, IA Clarington filed a preliminary simplified prospectus and a preliminary annual information form under National Instrument 81-101 Mutual Fund Prospectus Disclosure for each of the IAC Inhance SRI Funds with L'Autorité des marchés financiers in Québec (the AMF) and each of the securities regulatory authorities in each of the other provinces and territories of Canada; on November 26, 2009, IA Clarington obtained a receipt from the AMF for the final simplified prospectus and the final annual information form for each of the IAC Inhance SRI Funds listed below to offer the following securities in each of the provinces and territories of Canada:

IAC Inhance SRI Fund
Securities
 
IA Clarington Inhance Monthly Income SRI Fund
Series A, F, I and V
 
IA Clarington Inhance Canadian Equity SRI Class
Series A, F, I and V{•}
 
IA Clarington Inhance Global Equity SRI Class
Series A, F, I and V{•}
 
IA Clarington Inhance Growth SRI Portfolio
Series A, F and V
 
IA Clarington Inhance Conservative SRI Portfolio
Series A
 
IA Clarington Inhance Balanced SRI Portfolio
Series A, T6 and V

{•} each a class of shares of Clarington Sector Fund Inc.

12. at the time of the Meetings, the Continuing Funds will, with the exception of the Existing IAC Funds, be newly formed funds without any prior history and each will have at least $150,000 in assets; following the completion of the Mergers, the IAC Inhance SRI Funds are intended to essentially succeed the relevant Terminating Funds and be managed following substantially the same investment objectives and environmental, social and governance investment strategies as the relevant Terminating Funds;

13. Inhance is a corporation existing under the Canada Business Corporations Act; Inhance was formerly known as Real Assets Investment Management Inc., which changed its name to Inhance Investment Management Inc. effective February 13, 2006;

14. Inhance is registered as a Portfolio Manager in British Columbia, Manitoba, Quebec and Ontario; Inhance's head office is located at 1200 -- 900 West Hastings Street, Vancouver, British Columbia V6C 1E5;

15. Inhance presently has approximately $75.3 million under management;

16. the Inhance Funds are open-ended unit trusts established under the laws of the Province of British Columbia pursuant to a declaration of trust dated as of September 12, 2003, as amended December 6, 2005, February 13, 2006, and November 19, 2007 (the Inhance Declaration of Trust); Inhance is the trustee and manager of each of the Inhance Funds under the Inhance Declaration of Trust; each of the Inhance Funds is a reporting issuer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador and the Northwest Territories; the units of the Inhance Funds (Classes A, F and O) are offered under a simplified prospectus and an annual information form, dated May 21, 2009, in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and the Northwest Territories; none of the Inhance Funds are in default of the securities legislation in any jurisdiction in which any of the Inhance Funds is a reporting issuer;

17. the Circadian Funds and the Perspectives Funds are open-ended unit trusts established under the laws of the Province of British Columbia pursuant to a declaration of trust dated as of January 10, 2007, as amended December 7, 2007 (the Circadian/Perspectives Declaration of Trust); Inhance is the trustee and manager of each of the Circadian Funds and the Perspectives Funds under the Circadian/Perspectives Declaration of Trust; each of the Circadian Funds and each of the Vancity Perspectives Funds is a reporting issuer in the Province of British Columbia only; the units of the Circadian Funds (Classes A, F and O) and the Perspectives Funds (Class A) are offered under a simplified prospectus and an annual information form, dated May 11, 2009 and December 16, 2008, respectively, in British Columbia; none of the Circadian Funds and none of the Perspectives Funds are in default of the securities legislation in British Columbia;

18. Inhance anticipates that each of the Mergers will be structured as follows:

(a) unless IA Clarington determines to accept the portfolio securities of a Terminating Fund into the portfolio of the corresponding Continuing Fund, each Terminating Fund will liquidate its investment portfolio prior to the date of the Merger such that each Terminating Fund will be holding cash at the time of the Merger;

(b) each Continuing Fund will acquire the securities or the cash holdings of the corresponding Terminating Fund in exchange for units (or shares in the case of the Corporate Class Funds) of the Continuing Funds (the Exchanged IAC Securities) with an aggregate fair market value equal to the net asset value of the assets being transferred by the Terminating Fund;

(c) the Continuing Funds will not be assuming the liabilities of the Terminating Funds; the Terminating Funds may retain sufficient assets to satisfy their estimated liabilities, if any, as of the effective date of the Mergers; to the extent that the expenses of the Terminating Funds exceed the management expense ratio prescribed for each Terminating Fund under its respective simplified prospectus, Inhance will absorb the Terminating Funds' remaining liabilities;

(d) all of the Exchanged IAC Securities received by the corresponding Terminating Fund will be distributed to the unitholders of the Terminating Funds in exchange for their units of the Terminating Funds on a class by class pro rata basis; upon such distribution, the former unitholders of each of the Terminating Funds will become direct securityholders of the applicable Continuing Fund; and

(e) as soon as reasonably possible following the Mergers, all of the Terminating Funds, having no unitholders and no material assets, will be wound up;.in the event that unitholder approval is not obtained for any Merger, it is anticipated that such Terminating Fund(s) will be wound up in accordance with the constating documents of such Terminating Fund(s);

19. the operational and administrative procedures of the Terminating Funds differ in many respects from those of the mutual funds managed by IA Clarington, including the Continuing Funds, and IA Clarington has determined that it is preferable for it to structure the transactions contemplated by the Purchase Agreement by way of a merger of the Terminating Funds into the Continuing Funds in order to eliminate the complexity of maintaining multiple administrative and operational procedures for the Terminating Funds following the acquisition;

20. unitholders of each of the Terminating Funds will have the right to redeem units of the Terminating Funds up to the close of business on the day prior to the effective date of the Mergers;

21. the Mergers will be implemented on a taxable basis and the elective tax-deferred merger rules for mutual funds contained in Section 132.2 of the ITA will not be implemented for any of the Mergers that may have otherwise qualified for such election; unitholders of the Terminating Funds will not be entitled to a roll-over with respect to the adjusted cost basis of the units they hold in any of the Terminating Funds; the reasons for completing the Mergers on a taxable basis are as follows:

(a) for a Merger to qualify for a tax-deferred election, the Terminating Fund must qualify for tax purposes, at the date of the Merger, as a "mutual fund trust" and the Continuing Fund must also qualify for tax purposes, at the date of the Merger, as a "mutual fund trust"; based on the Terminating and Continuing Funds' tax status, such election would not be available for all of the proposed Mergers; specifically, the elective tax-deferred merger rules would not be available for nine of the sixteen Terminating Funds as they are not mutual fund trusts or are being merged with a mutual fund corporation;

(b) if the Mergers are completed on a taxable basis, Inhance believes that the majority of non-registered account holders would realize a capital loss and so would not benefit from the deferral of capital gains, which is the primary reason for pursuing a tax-deferred merger;

(c) if the elective tax-deferred merger rules were available and utilized, there could be tax implications to the Continuing Funds, such as deemed year end and expiry of loss carry forwards, which may have negative consequences for certain of the Continuing Funds and their securityholders (which would include former unitholders of the Terminating Funds which are proposed to be merged with these Continuing Funds); accordingly, the tax structure of the Mergers considered the balance of the competing interests of investors in both the Terminating Funds and the Continuing Funds; and

(d) Inhance has determined that a substantial majority of the units of the Terminating Funds are held in tax deferred registered plans, which are not generally affected by the tax consequences of the Mergers;

22. under the Purchase Agreement, IA Clarington's obligation to complete the Mergers is conditional upon Mergers involving Terminating Funds that represent in the aggregate at least 75% of the total net assets of all Terminating Funds being approved by their respective unitholders;

23. Inhance will initially act as sub-advisor (the Sub-Advisor) to the IAC Inhance SRI Funds pursuant to a sub-advisory agreement (the Sub-Advisory Agreement) between IA Clarington, Industrial Alliance Investment Management Inc. and Inhance; pursuant to the terms of the Sub-Advisory Agreement, the Sub-Advisor will be responsible for managing the portfolios of the IAC Inhance SRI Funds in accordance with their investment objectives and strategies, including environmental, social and governance investing strategies; shortly following completion of the Mergers, Inhance intends to assign the Sub-Advisory Agreement to Vancity Investment Management Limited (VCIM), an affiliate of Vancity; the same individual portfolio managers previously employed by Inhance and responsible for managing the Terminating Funds will become employees of VCIM;

24. effective upon completion of the Mergers, Vancity and IA Clarington will also enter into a strategic relationship agreement (the Strategic Relationship Agreement) pursuant to which IA Clarington will agree to provide Vancity with appropriate access to mutual funds managed by IA Clarington (the IA Clarington Funds), including the IAC Inhance SRI Funds, and other services, such as assistance in connection with sales training, preparation of marketing materials, professional development and product training with respect to the IA Clarington Funds.; uder the Strategic Relationship Agreement, Vancity has agreed, among other things, to promote, support and facilitate the distribution of the IA Clarington Funds, including the IAC Inhance SRI Funds, through Vancity's distribution network;

25. Inhance will be seeking the approval of unitholders of record of the Terminating Funds at the Meetings; the Information Circular was mailed to unitholders of the Terminating Funds on November 5, 2009;

26. Inhance will be responsible for all costs incurred by the Terminating Funds in connection with the Mergers, including the preparation and mailing of the Information Circular and related meeting materials and the calling and holding of the Meetings;

27. each of the Inhance Funds is a separate trust and, as such, will hold a separate special meeting of unitholders; if any of the Inhance Funds does not obtain unitholder approval for the proposed merger affecting that fund, that merger will not proceed;

28. provided unitholder and regulatory approvals are obtained, it is the intention of Inhance, Vancity and IA Clarington to effect the Mergers on or about the close of business on December 4, 2009;

29. the fundamental investment objectives and strategies of each of the IAC Inhance SRI Funds are substantially similar to the fundamental investment objectives and strategies of each of their corresponding Terminating Funds; the fundamental investment objectives of each of the Existing IAC Funds are similar to those of their corresponding Terminating Fund, but not substantially similar, as the Existing IAC Funds will not adopt the environmental, social and governance investment strategies that are currently employed by the corresponding Terminating Funds which are to be merged into each applicable Existing IAC Fund;

30. the valuation procedures of each of the Terminating Funds are substantially similar to the valuation procedures of each of the corresponding Continuing Funds;

31. the fee structures of each of the Terminating Funds are substantially similar to the fee structures of each of the corresponding Continuing Funds;

32. as a result of the Mergers, unitholders' holdings in each Continuing Fund will be converted to a front end purchase option at a 0% sales charge, thereby eliminating potential redemption fees applicable to unitholders who purchased units of a Terminating Fund on a low load or deferred sales charge basis;

33. Inhance believes that approval of the Mergers involving the Inhance Funds should be granted for the following reasons:

(a) the structure, rationale, benefits and tax consequences of the Mergers has been disclosed to unitholders of each of the Terminating Funds in the Information Circular that was mailed to unitholders of each of the Terminating Funds in advance of the Meetings to be held for the purpose of considering and approving the Mergers; unitholders of each of the Terminating Funds will be given an opportunity to vote for or against the Mergers at the Meetings;

(b) the Transaction, the Mergers and the other matters contemplated in the Purchase Agreement have been reviewed by the IRC of each of the Terminating Funds and the IRC has determined that the Mergers, as part of the Transaction and the other matters contemplated in the Purchase Agreement, achieve a fair and reasonable result for each of the Terminating Funds, including each of the Inhance Funds;

(c) unitholders of the Terminating Funds will be able to redeem their units at any time prior to the close of business on the business day immediately preceding the effective date of the Mergers;

(d) t the unitholders of the Terminating Funds will be entitled, as securityholders of the Continuing Funds, to the ongoing management of their investments in a manner which is consistent with the investment objectives and strategies of each Terminating Fund; in particular, the portfolio managers currently managing the Terminating Funds will be engaged through the Sub-Advisory Agreement to manage the portfolios of the IAC Inhance SRI Funds; consequently, the investment strategy employed for the IAC Inhance SRI Funds will be essentially the same as that of the corresponding Terminating Funds;

(e) by joining the IA Clarington family of mutual funds as a result of the Mergers, the unitholders of the Terminating Funds will benefit from, among other things, IA Clarington's depth of mutual fund experience, and in particular, the range and size of its mutual fund and investment product lines and more extensive distribution channels; this result may assist the IAC Inhance SRI Funds in achieving better economies of scale and sustainability in the long run than those Terminating Funds may have achieved on their own if the distribution of those Terminating Funds continued primarily within Vancity's distribution network;

(f) the Mergers will be beneficial to the unitholders of the Terminating Funds because, as securityholders of the Continuing Funds, they will be entitled to switch to other mutual funds managed by IA Clarington, subject to the rules and criteria set out in the relevant simplified prospectus for the Continuing Funds, which selection of mutual funds is greater than the selection currently available to unitholders of the Terminating Funds;

(g) as a result of the Mergers, unitholders' holdings in each Continuing Fund will be converted to a front-end purchase option at a 0% sales charge, thereby eliminating potential redemption fees applicable to unitholders who purchased units of the Terminating Fund on a low-load or deferred sales charge basis;

(h) two of the Continuing Funds are classes of shares of a mutual fund corporation; as shareholders of a mutual fund corporation, investors will be able to switch between different funds that are classes of the mutual fund corporation without creating a disposition for tax purposes; and

(i) certain of the Terminating Funds will merge into the Existing IAC Funds which have larger portfolios than their corresponding Terminating Funds, allowing for increased portfolio diversification opportunities.

Decision

4 Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Approval Sought is granted.

"Martin Eady, CA"
Director, Corporate Finance
British Columbia Securities Commission