Caldwell Investment Management Ltd. et al.

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund mergers -- approval required because mergers do not meet the criteria for pre-approval -- mergers have differences in investment objectives -- mergers not a "qualifying exchange" or a tax-deferred transaction under Income Tax Act -- discontinuing funds not winding up as soon as reasonably practical after the mergers -- securityholders of discontinuing funds provided with timely and adequate disclosure regarding the mergers.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.5(3), 5.6.

June 15, 2012

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

CALDWELL INVESTMENT MANAGEMENT LTD.

(the "FILER")

AND

IN THE MATTER OF

CALDWELL GLOBAL FINANCIAL SERVICES FUND

CALDWELL MEISELS CANADA FUND

(collectively, the "DISCONTINUING FUNDS")

AND

IN THE MATTER OF

CALDWELL BALANCED FUND

CALDWELL HIGH INCOME EQUITY FUND

(collectively, the "CONTINUING FUNDS")

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Discontinuing Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for approval of the proposed mergers of the Discontinuing Funds into the respective Continuing Funds (the "Mergers") pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") (the "Exemption Sought").

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, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon (together with Ontario, the "Jurisdictions").

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Filer:

1. Caldwell Investment Management Ltd. ("Caldwell"), the Filer, is the manager and trustee of each of the Discontinuing Funds and Continuing Funds (collectively, the "Funds", individually, a "Fund"). Caldwell is not in default of securities legislation of the Jurisdictions.

2. Each Fund is a mutual fund trust established under the laws of Ontario by a declaration of trust pursuant to which the Filer is the manager and trustee of each Fund.

3. The units of the Funds are qualified for distribution pursuant to a simplified prospectus and an annual information form each dated June 21, 2011 as amended by Amendment No. 1 dated May 9, 2012.

4. Each of the Funds is a reporting issuer under the securities legislation of each Jurisdiction and is not in default of the applicable securities legislation.

5. The Mergers involve the mergers of (i) Caldwell Global Financial Services Fund into Caldwell Balanced Fund and (ii) Caldwell Meisels Canada Fund into Caldwell High Income Equity Fund.

6. Amendments to the simplified prospectus and annual information form of each of the Funds were filed to describe the Mergers on May 9, 2012.

7. A press release was issued and filed on SEDAR on behalf of the Discontinuing Funds with the securities commissions of all the Jurisdictions with respect to the Mergers on May 9, 2012.

8. Investors in the Discontinuing Funds were asked to approve the Mergers at special meetings of unitholders which were held on June 12, 2012 (the "Meetings").

9. The relevant notices of the Meetings, proxy forms and management information circulars were mailed to unitholders of the relevant Funds and filed on SEDAR in accordance with applicable securities legislation on May 11, 2012.

10. The materials sent to unitholders of the Discontinuing Funds in connection with the Meetings included a statement that unitholders may obtain a copy of the most recently filed prospectus, the most recently filed fund facts document, the most recent annual and interim financial statements, and the most recent management report of fund performance that have been made public for their Continuing Fund by contacting Caldwell at a specified address or telephone number.

11. Pursuant to NI 81-107 -- Independent Review Committee for Investment Funds, the Independent Review Committee ("IRC") reviewed and made positive recommendations with respect to the Mergers and the process to be followed in connection with the Mergers, and advised Caldwell that in the IRC's opinion, having reviewed the Mergers as a potential conflict of interest matter, following the process proposed, each of the Mergers achieves a fair and reasonable result for each of the Discontinuing Funds.

12. In the management information circular dated May 11, 2012 (the "Information Circular"), the statement was made that the investment objective of the Caldwell Meisels Canada Fund is "substantially similar" to that of the Caldwell High Income Equity Fund and that the investment objective of the Caldwell Global Financial Services Fund is "substantially similar" to that of the Caldwell Balanced Fund.

13. Caldwell issued a press release on June 11, 2012 (the "June Press Release") which clarified that while there are similarities between the fundamental investment objectives of each of the respective pairs of mutual funds, there are also differences which make the fundamental investment objectives not substantially similar of which investors should be aware.

14. On June 11, 2012, Caldwell also

(a) filed the June Press Release on SEDAR;

(b) transmitted the June Press Release to any dealer shown on the records of the Discontinuing Funds as having clients invested in such Funds (the "Dealer Communication"); and

(c) transmitted the June Press Release as well as a blank Form of Proxy to all unitholders of the Discontinuing Funds that had previously delivered a proxy and advised them that they may send in a new proxy should they wish to change their vote on the Merger (the "June Unitholder Communication").

15. The Meetings were held on June 12, 2012 and 100% of the unitholders who cast votes at the Meetings in person or by proxy voted to approve the Mergers.

16. The Filer was responsible for the costs associated with the Meetings.

17. It is proposed that each Merger will occur after the close of business on June 15, 2012 (the "Effective Date"), subject to regulatory approvals, where necessary. Caldwell may, in its discretion, postpone implementing any Merger until a later date (which shall be not later than June 29, 2012) and may elect to not proceed with any Merger.

18. The cost of effecting the Mergers will be borne by Caldwell.

19. The securities of each Continuing Fund received by a unitholder of the corresponding Discontinuing Fund will have the same fee structure as the securities of the Discontinuing Fund held by that unitholder.

20. The shares of the Continuing Funds acquired by the unitholders of the Discontinuing Funds upon the Mergers are subject to the same redemption charges and redemption charge schedule to which their shares of the Discontinuing Funds were subject to prior to the Mergers.

21. No sales charges will be payable in connection with the acquisition by the Continuing Funds of the investment portfolios of the Discontinuing Funds.

22. Unitholders of each Discontinuing Fund will continue to have the right to redeem securities of the Discontinuing Fund at any time up to the close of business immediately before the Effective Date of the Mergers.

23. Except as noted below, each of the Mergers would otherwise comply with all of the other conditions of section 5.6 of NI 81-102.

24. In the absence of approval or relief, the Mergers would be prohibited for the following reasons:

(a) a reasonable person would consider the fundamental investment objectives of each Discontinuing Fund and its Continuing Fund to not be substantially similar;

(b) the Discontinuing Funds will not merge into the Continuing Funds on a tax deferred basis; and

(c) the Mergers do not contemplate the wind-up of the Discontinuing Funds as soon as reasonably possible following the Mergers.

25. The Filer submits that the Mergers are being proposed in order to rationalize the line-up of Caldwell mutual funds for the benefit of unitholders of the Funds. The anticipated benefits of the Mergers are as follows:

(a) each Discontinuing Fund and its Continuing Fund are largely duplicative of one another and the Mergers will eliminate the duplicative costs of operating each Discontinuing Fund and its Continuing Fund as separate mutual funds;

(b) unitholders of both the Discontinuing Funds and the Continuing Funds will enjoy increased economies of scale and potentially lower management expenses borne indirectly by unitholders as part of larger post-merger Continuing Funds;

(c) unitholders of both the Discontinuing Funds and Continuing Funds will benefit from becoming investors in larger mutual funds which will be better able to maintain diversified, well-managed portfolios with a smaller proportion of assets set aside to fund redemptions; and

(d) each Continuing Fund will benefit from its larger profile in the marketplace.

26. Neither Merger will be a "qualifying exchange" within the meaning of section 132.2 of the Income Tax Act (Canada) (the "Tax Act"). If a Discontinuing Fund and the relevant Continuing Fund were to elect to have a Merger treated as a "qualifying exchange", the tax losses of the Discontinuing Fund and of the Continuing Fund (the "Tax Losses") would be lost as a result of the Merger.

27. Given the accrued gains and losses on property held by each Discontinuing Fund, the transfer of property by a Discontinuing Fund to its Continuing Fund as part of its Merger will not give rise to any net income or net realized capital gains that would have to be included in computing the income of its unitholders. Substantially all of the unitholders of each Discontinuing Fund have an accrued capital loss on their units and effecting the Mergers on a taxable basis will allow them to realize that loss and use it against current capital gains or carry it back as permitted by the Tax Act.

28. Following the Effective Date of the Mergers:

(a) the Discontinuing Funds will apply to cease to be reporting issuers;

(b) Caldwell will not use the tax losses of the Discontinuing Funds for its proprietary benefit;

(c) Caldwell may, at its discretion, take the necessary steps, in accordance with applicable securities legislation, for one or both Discontinuing Funds to be investment funds that are offered under a prospectus or pursuant to a prospectus exemption (the "Future Funds"); and

(d) Caldwell will use the tax losses of the Discontinuing Funds for the benefit of the securityholders of the Future Funds when and if the Discontinuing Funds were offered as described in paragraph (c) immediately above.

29. The Filer submits that investors will not be prejudiced in connection with the Mergers as:

(a) 100% of unitholders who cast votes at the June 12, 2012 Meetings in person or by proxy voted to approve the Mergers;

(b) the Information Circular

(i) together with the June Press Release, the Dealer Communication and the June Unitholder Communication provided sufficient information about the Mergers to permit unitholders to make an informed decision about the Mergers;

(ii) prominently disclosed that unitholders may obtain a copy of the most recently filed prospectus, the most recently filed fund facts document, the most recent annual and interim financial statements, and the most recent management report of fund performance that have been made public for their Continuing Fund by contacting Caldwell at a specified address or telephone number;

(iii) provided disclosure regarding the income tax considerations surrounding the Mergers; and

(iv) described the differences between the Discontinuing Funds and their Continuing Funds;

(c) an unqualified auditors' report was filed in respect of each Fund for the most recently completed financial year; and

(d) the cost of effecting the Mergers will be borne by Caldwell.

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 Exemption Sought is granted, provided that Caldwell will notify the principal regulator, in writing, in advance of any public or private offering, or any future use being made of the tax losses, of the Discontinuing Funds.