National Policy 11-203 -- relief granted from requirement to obtain securityholder approval of mergers under National Instrument 81-102 Mutual Funds and approval granted for two mutual fund mergers -- securities of the mutual funds only available for purchase by unitholders who have entered into discretionary investment management agreements giving full discretionary authority to manager -- convening unitholder meetings would represent an unnecessary expense -- regulatory approval of mergers required because mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- one continuing fund has different investment objectives than terminating fund -- both mergers not "qualifying exchanges" or tax-deferred transactions under Income Tax Act -- both mergers will not be approved by securityholders of terminating funds at unitholder meetings and meeting materials will not be delivered.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.1(f), 5.5(1)(b), 5.6, 19.1.
July 29, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
BMO HARRIS INVESTMENT MANAGEMENT INC.
(the Filer or BMO Harris)
BMO HARRIS OPPORTUNITY BOND PORTFOLIO
BMO HARRIS INCOME OPPORTUNITY
BOND PORTFOLIO (each, a Terminating Fund
and collectively, the Terminating Funds)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):
(a) exempting the Terminating Funds from subsection 5.1(f) of NI 81-102, which requires a mutual fund to obtain the prior approval of its unitholders before the mutual fund undertakes a reorganization with, or transfers its assets to, another mutual fund (the Unitholder Meeting Relief); and
(b) approving the mergers of the Terminating Funds into the applicable Continuing Funds as set out in paragraph 9 below pursuant to subsection 5.5(1)(b) of NI 81-102 (the Merger Approval)
(collectively, the Unitholder Meeting Relief and the Merger Approval are referred to as the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the 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.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meanings in this decision unless they are defined in this decision. The following additional terms shall have the following meanings:
BMO Harris Funds means collectively the Funds and other funds managed by the Filer;
Continuing Funds means BMO Harris Canadian Total Return Bond Portfolio and BMO Harris Canadian Bond Income Portfolio;
Current Simplified Prospectus means the simplified prospectus and annual information form dated November 4, 2008 that qualifies the BMO Harris Funds for sale;
Fund or Funds means, individually or collectively, the Terminating Funds and the Continuing Funds;
IRC means the independent review committee for the Funds;
NI 81-102 means National Instrument 81-102 Mutual Funds;
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; and
Tax Act means the Income Tax Act (Canada).
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation established under the laws of Ontario. The head office of the Filer is located in Toronto, Ontario.
2. The Filer is the manager and investment manager of the Funds. An affiliate of the Filer, BMO Trust Company, is the trustee of the Funds.
3. The Filer, an indirect, wholly-owned subsidiary of Bank of Montreal, is registered in the categories of investment counsel and portfolio manager or the equivalent in all of the provinces and territories of Canada.
4. Each of the Funds is an open-ended mutual fund trust established under the laws of the Province of Ontario by declaration of trust.
5. Units of the Funds are qualified for sale in each jurisdiction in Canada by the Current Simplified Prospectus and each of the Funds is subject to NI 81-102.
6. The Funds are reporting issuers under the applicable securities legislation of each jurisdiction in 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 jurisdiction in Canada.
8. The net asset value for securities of each of the Funds is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.
9. BMO Harris intends to merge the Terminating Funds into the corresponding Continuing Fund as set out below:
(a) BMO Harris Opportunity Bond Portfolio into BMO Harris Canadian Total Return Bond Portfolio (Merger 2); and
(b) BMO Harris Income Opportunity Bond Portfolio into BMO Harris Canadian Bond Income Portfolio (Merger 3)
(Merger 2 and Merger 3 are collectively referred to as the "Mergers").
Unitholder Meeting Relief
10. The Filer offers fully discretionary investment management services to clients in each jurisdiction in Canada, including all of the investors in the Funds.
11. The BMO Harris Funds were established as an efficient and cost effective means of providing discretionary investment management services to many of the Filer's clients, including all of the investors in the Funds, as an alternative to segregated account management.
12. The Filer believes that the Mergers are in the best interests of each Fund's unitholders, as the Mergers would result in unitholders being invested in larger Continuing Funds that have increased economies of scale and increased portfolio diversification opportunities, and in the case of each Terminating Fund, there will be a savings in brokerage charges over a straight liquidation of its portfolio on a wind-up of the Fund.
13. The proposed Mergers are neutral to the unitholders of each of the Funds from a fee and expense perspective.
14. Clause 5.1(f) of NI 81-102 requires that the approval of the unitholders of a mutual fund be obtained before the mutual fund undertakes a reorganization with, or transfers its assets to, another mutual fund.
15. Units of the Terminating Funds are only available for purchase by investors who have entered into a discretionary investment management agreement with the Filer.
16. The Filer is authorized under its discretionary investment management agreement with each client who is an investor in a Fund to make any investment on behalf of the client (provided such investment is consistent with the mandate established by that client). This includes buying and selling any securities (including securities of a Fund) without obtaining the client's approval.
17. Under its discretionary investment management agreement with each client, the Filer is authorized to receive all securityholder materials relating to the securities held in the client's account, and to vote on behalf of the client on any matters relating to the securities held in the client's account (provided that such vote is in the best interests of the client).
18. The unitholders of each Fund are relying entirely on the Filer to make investment decisions for them and, in these circumstances, the Mergers are analogous to the Filer changing a client's investment from one BMO Harris Fund to another. As such investment changes do not require client approval, the Filer has determined that it is appropriate to effect the Mergers without obtaining unitholder approval.
19. As every investor in the Terminating Funds has entered into a discretionary investment management agreement with the Filer, the Filer believes that sending meeting materials and convening unitholder meetings for the purpose of obtaining unitholder approval to effect the Mergers is not desirable and represents an unnecessary cost and inconvenience to the Filer and the unitholders of the Terminating Funds.
20. Prior to, or shortly following, the implementation of the Mergers, the Filer will communicate with each client that holds units of the Terminating Funds to explain the changes to their account that will occur as a result of the Mergers.
21. BMO Harris has presented the terms of the Mergers to the IRC for its approval. The IRC reviewed the proposed Mergers, determined that the Mergers would achieve a fair and reasonable result for each of the Funds and has provided its approval in respect of the Mergers.
22. Upon the approval of the Mergers by the board of directors of BMO Harris, a press release was issued and a material change report and amendment to the Current Simplified Prospectus in respect of the Mergers was filed on SEDAR under SEDAR Project Numbers 1327804, 1440175 and 1440176 in connection with each of the Mergers in accordance with the Funds' continuous disclosure obligations set forth in Part 11 of NI 81-106.
23. Units of each of the Terminating Funds will continue to be available for sale until the close of business on September 23, 2009, following which time the distribution of new units will cease, except under a continuous savings plan or similar systematic plan established prior to September 23, 2009.
24. No sales charges will be payable in connection with the issuance of units of a Continuing Fund in exchange for the investment portfolio of an applicable Terminating Fund.
25. The portfolio assets of each Terminating Fund to be acquired by the applicable Continuing Fund arising from the Mergers are currently, or will be, acceptable, on or prior to the effective date of the Mergers, to the portfolio advisors of the applicable Continuing Fund and are or will be consistent with the investment objectives of the applicable Continuing Fund.
26. Unitholders of a 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 preceding the effective date of the Mergers.
27. BMO Harris will bear the costs and expenses associated with the Mergers, including all brokerage expenses incurred in respect of any required sale of portfolio assets of the Terminating Funds.
28. Each of the Terminating Funds will merge into the applicable Continuing Funds on or about September 25, 2009.
29. Pursuant to the Mergers, holders of units of BMO Harris Opportunity Bond Portfolio will receive units of BMO Harris Canadian Total Return Bond Portfolio and holders of units of BMO Harris Income Opportunity Bond Portfolio will receive units of BMO Harris Canadian Bond Income Portfolio.
30. Following each of the Mergers, the Continuing Funds will continue as publicly offered open-ended mutual funds and the Terminating Funds will be wound up as soon as reasonably practicable.
31. Regulatory approval of the Mergers is required because neither of the Mergers satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102 because:
(a) neither Merger will be structured as a "qualifying exchange" or a tax-deferred transaction in accordance with the Tax Act as contemplated in subsection 5.6(1)(b) of NI 81-102;
(b) in the case of Merger 3, the fundamental investment objectives of the Continuing Fund is not, or may be considered not to be, "substantially similar" to the investment objectives of the corresponding Terminating Fund as contemplated in subsection 5.6(1)(a)(ii) of NI 81-102;
(c) the Mergers will not be approved by the unitholders of the Terminating Funds as contemplated in subsection 5.6(1)(e)(i) of NI 81-102; and
(d) meeting materials will not be delivered to unitholders of the Terminating Funds in connection with such unitholder meetings as contemplated in subsection 5.6(1)(f) of NI 81-102 since no unitholder meetings will be held in connection with the Mergers.
32. The Filer has determined that implementing the Mergers on a taxable basis will enable each Continuing Fund to retain its tax losses. As investors in the Terminating Funds will become investors in the Continuing Funds, this preserves a tax benefit for all investors by reducing the tax liability of any gains from an investment in the Continuing Funds.
33. BMO Harris will, except as noted above, comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
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.