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BMO Investments Inc. et al.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – approval of investment fund mergers – approval required because mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 – Investment Funds – terminating funds and continuing funds do not have substantially similar fundamental investment objectives – certain mergers are between funds that do not have the same fee structure – one merger will not be a “qualifying exchange” or a tax-deferred transaction under the Income Tax Act – mergers to otherwise comply with pre-approval criteria, including securityholder vote, IRC approval – securityholders provided with timely and adequate disclosure regarding the mergers
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.7(1)(b), 19.1(2).
September 8, 2016
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
BMO INVESTMENTS INC.
(the Manager)
and
BMO CANADIAN LOW VOLATILITY ETF CLASS,
BMO HIGH YIELD BOND FUND,
BMO ENHANCED EQUITY INCOME FUND,
BMO CANADIAN DIVERSIFIED
MONTHLY INCOME FUND,
BMO GLOBAL MONTHLY INCOME FUND,
(each, a Terminating Fund and collectively, the Terminating Funds, and with the Manager, the Filers)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) approving the mergers (the Mergers) of the Terminating Funds into the Continuing Funds (defined below) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (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 Manager 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 each of the provinces and territories of Canada, other than the province of Ontario (Other 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 Fund means each of BMO Global Low Volatility ETF Class, BMO U.S. High Yield Bond Fund, BMO Dividend Fund, BMO Diversified Income Portfolio and BMO Global Diversified Fund;
Corporation means BMO Global Tax Advantage Funds Inc.;
Continuing Corporate Class Fund means BMO Global Low Volatility ETF Class;
Corporate Class Fund means each of BMO Canadian Low Volatility ETF Class and BMO Global Low Volatility ETF Class, each a separate class of securities of the Corporation;
Fee Structure Mergers means each Merger, other than the Merger of BMO Canadian Low Volatility ETF Class into BMO Global Low Volatility ETF Class;
Fund or Funds means, individually or collectively, the Terminating Funds and the Continuing Funds;
Investment Objective Mergers means each Merger;
IRC means the independent review committee for the Funds;
NI 81-107 means National Instrument 81-107 – Independent Review Committee for Investment Funds;
Tax Act means the Income Tax Act (Canada);
Taxable Merger means the Merger of BMO High Yield Bond Fund into BMO U.S. High Yield Bond Fund;
Terminating Corporate Class Fund means BMO Canadian Low Volatility ETF Class,
Terminating Trust Fund means each of BMO High Yield Bond Fund, BMO Enhanced Equity Income Fund, BMO Canadian Diversified Monthly Income Fund and BMO Global Monthly Income Fund; and
Trust Fund means each of BMO High Yield Bond Fund, BMO Enhanced Equity Income Fund, BMO Canadian Diversified Monthly Income Fund, BMO Global Monthly Income Fund, BMO U.S. High Yield Bond Fund, BMO Dividend Fund, BMO Diversified Income Portfolio and BMO Global Diversified Fund.
Representations
This decision is based on the following facts represented by the Filers:
The Manager
1. The Manager is a corporation governed by the laws of Canada with its head office in Toronto, Ontario.
2. The Manager is the investment fund manager of the Funds and is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, and as a mutual fund dealer in Ontario and the Other Jurisdictions.
The Funds
3. The Funds are either open-ended mutual fund trusts established under the laws of Ontario or separate classes of securities of the Corporation, a mutual fund corporation governed under the laws of Ontario.
4. Securities of the Funds are currently qualified for sale under the simplified prospectus, annual information form and fund facts each dated April 19, 2016, as amended on July 8, 2016 (collec-tively, the Offering Documents).
5. Each of the Funds is a reporting issuer under the applicable securities legislation of Ontario and the Other Jurisdictions.
6. Neither the Manager nor the Funds is in default under the applicable securities legislation of Ontario or the Other Jurisdictions.
7. Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under NI 81-102.
8. The net asset value for each series of the Funds is calculated on a daily basis in accordance with the Funds’ valuation policy and as described in the Offering Documents.
Reason for Approval Sought
9. Regulatory approval of the Mergers is required because each Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. The pre-approval criteria are not satisfied in the following ways:
(a) The fundamental investment objectives of the Continuing Funds in the Invest-ment Objective Mergers are not, or may be considered not to be, “substantially similar” to the investment objectives of their corresponding Terminating Funds;
(b) The fee structure of the Continuing Funds in the Fee Structure Mergers are not, or may be considered not to be, “substantially similar” to the fee structure of their corresponding Terminating Funds;
(c) The Taxable Merger will not be completed as a “qualifying exchange” under the Tax Act.
10. Except as described in this decision, the proposed Mergers comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
The Proposed Mergers
11. The Manager intends to reorganize the Funds as follows:
(a) BMO Canadian Low Volatility ETF Class will merge into BMO Global Low Volatility ETF Class;
(b) BMO High Yield Bond Fund will merge into BMO U.S. High Yield Bond Fund;
(c) BMO Enhanced Equity Income Fund will merge into BMO Dividend Fund;
(d) BMO Canadian Diversified Monthly Income Fund will merge into BMO Diversified Income Portfolio; and
(e) BMO Global Monthly Income Fund will merge into BMO Global Diversified Fund.
12. In accordance with National Instrument 81-106 – Investment Fund Continuous Disclosure, a press release announcing the proposed Mergers was issued and filed on SEDAR on July 8, 2016. A material change report and amendments to the Offering Documents with respect to the proposed Mergers were filed via SEDAR on July 8, 2016.
13. As required by NI 81-107, an IRC has been appointed for the Funds. The Manager presented the potential conflict of interest matters related to the proposed Mergers to the IRC for a recommendation. On June 6, 2016, the IRC reviewed the potential conflict of interest matters related to the proposed Mergers and provided its positive recommendation for each of the Mergers, after determining that each proposed Merger, if implemented, would achieve a fair and reasonable result for each applicable Fund.
14. Securityholders of the Terminating Funds will be asked to approve the Mergers at special meetings to be held on or about September 16, 2016.
15. In accordance with corporate law requirements, securityholders of the Continuing Corporate Class Fund will be asked to approve an amendment to the articles of the Corporation in connection with the exchange of securities relating to the applicable Merger for the Continuing Corporate Class Fund at special meetings to be held on or about September 16, 2016.
16. The Mergers involving an exchange of securities of the Corporation have also been approved by the Manager as the sole common voting shareholder of the Corporation, as required under applicable corporate law.
17. A notice of meeting, a management information circular and a proxy in connection with special meetings of securityholders (collectively, the Meeting Materials) were mailed to security-holders of the Terminating Funds and the Continuing Corporate Class Fund commencing on August 23, 2016 and were concurrently filed via SEDAR.
18. The tax implications of the Mergers as well as the differences between the investment objectives and fee structures of the Terminating Funds and the Continuing Funds and the IRC’s recommen-dation of the Mergers are described in the Meeting Materials so that the securityholders of the Terminating Funds may consider this information before voting on the Mergers. The Meeting Materials also describe the various ways in which investors can obtain a copy of the simplified prospectus, annual information form and fund facts for the Continuing Fund and its most recent interim and annual financial statements and management reports of fund performance.
19. Fund facts relating to the relevant series of the Continuing Funds were mailed to securityholders of the corresponding Terminating Funds.
20. Securityholders of each Terminating Fund will continue to have the right to redeem securities of the Terminating Fund at any time up to the close of business on the business day immediately before the effective date of the Mergers.
Merger Steps
21. The proposed Mergers of the Trust Funds will be structured as follows:
(a) Prior to the Merger, if required, each Terminating Trust Fund will sell any securities in its portfolio that do not meet the investment objectives and investment strategies of the applicable Continuing Fund. As a result, some of the Termin-ating Trust Funds may temporarily hold cash or money market instruments and may not be fully invested in accordance with their investment objectives for a brief period of time prior to the Merger being effected.
(b) The value of each Terminating Trust Fund’s portfolio and other assets will be determined at the close of business on the effective date of each applicable Merger in accordance with the constating documents of the applicable Terminating Trust Fund.
(c) Each Continuing Fund and Terminating Trust Fund will distribute a sufficient amount of its net income and net realized capital gains, if any, to securityholders to ensure that it will not be subject to tax for its current tax year.
(d) Each Continuing Fund will acquire the investment portfolio and other assets of the applicable Terminating Trust Fund in exchange for securities of the Continuing Fund.
(e) Each Continuing Fund will not assume liabilities of the applicable Terminating Trust Fund and the Terminating Trust Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the effective date of the applicable Merger.
(f) The securities of each Continuing Fund received by the applicable Terminating Trust Fund will have an aggregate net asset value equal to the value of the portfolio assets and other assets that the Continuing Fund is acquiring from the Terminating Trust Fund, and the securities of the Continuing Fund will be issued at the applicable series net asset value per security as of the close of business on the effective date of the Merger.
(g) Immediately thereafter, securities of each Continuing Fund received by the applicable Terminating Trust Fund will be distributed to securityholders of the Terminating Trust Fund in exchange for their securities in the Terminating Trust Fund on a dollar-for-dollar and series-by-series basis.
(h) As soon as reasonably possible following each Merger, and in any case within 60 days, the applicable Terminating Trust Fund will be wound up.
22. The proposed Merger of the Corporate Class Funds will be structured as follows:
(a) Prior to the Merger, if required, the Corporation will sell any securities in the portfolio underlying the Terminating Corporate Class Fund that do not meet the investment objectives and investment strategies of the Continuing Corporate Class Fund. As a result, the portfolio underlying the Terminating Corporate Class Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger being effected.
(b) The value of the Terminating Corporate Class Fund’s portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with the constating documents of the Terminating Corporate Class Fund.
(c) The Corporation may pay ordinary divi-dends or capital gains dividends to securityholders of the Terminating Cor-porate Class Fund and/or the Continuing Corporate Class Fund, as determined by the Manager at the time of the Merger.
(d) The portfolio of assets attributable to the Terminating Corporate Class Fund will be included in the portfolio of assets attributable to the Continuing Corporate Class Fund and the net asset value of the Continuing Corporate Class Fund will be increased by an amount equal to the value of the portfolio of assets being attributed to the Continuing Corporate Class Fund determined at the close of business on the effective date of the Merger in accordance with the constating documents of the Continuing Corporate Class Fund.
(e) The articles of incorporation, as amended, of the Corporation will be amended so that all of the issued and outstanding securities of the Terminating Corporate Class Fund will be exchanged for securities of the Continuing Corporate Class Fund on a dollar-for-dollar and series-by-series basis, so that security-holders of the Terminating Corporate Class Fund become securityholders of the Continuing Corporate Class Fund and so that the securities of the Terminating Corporate Class Fund are cancelled.
23. The Manager 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 effective date of the Mergers and legal, proxy solicitation, printing, mailing and regulatory fees.
24. No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of its applicable Terminating Fund.
25. The investment portfolio and other assets of each Terminating Fund to be acquired by the applicable Continuing Fund in order to effect the Mergers are currently, or will be, acceptable, on or prior to the effective date of the Mergers, to the portfolio manager(s) of the applicable Continuing Fund and are, or will be, consistent with the investment objectives of the applicable Continuing Fund.
26. Each Terminating Fund will merge into its applicable Continuing Fund and the Continuing Funds will continue as publicly offered open-ended mutual funds.
Benefits of Mergers
27. The Manager believes that the Mergers are beneficial to securityholders of each Terminating Fund and Continuing Fund for the following reasons:
(a) the Mergers will result in a more stream-lined and simplified product line-up that is easier for investors to under-stand;
(b) the Mergers will eliminate similar fund offerings across product line ups, thereby reducing the administrative and regula-tory costs of operating each Terminating Fund and Continuing Fund as separate funds;
(c) following the Mergers, each Continuing Fund will have a portfolio of greater value, which may allow for increased portfolio diversification opportunities if desired; and
(d) each Continuing Fund, as a result of its greater size, may benefit from its larger profile in the marketplace.
28. In addition to the reasons set out in paragraph 27, the Manager believes that the Merger of the Corporate Class Funds is beneficial to security-holders of each of the Terminating Corporate Class Fund and the Continuing Corporate Class Fund for the following reasons:
(a) the Continuing Corporate Class Fund may offer a more global approach to investing, which allows the Continuing Corporate Class Fund to benefit from the synergies that the Manager and its international affiliates have recently developed;
(b) investors will receive securities of the Continuing Fund that have a manage-ment fee that is the same as the management fee charged in respect of the securities of the Terminating Fund that they currently hold; and
(c) investors will receive securities of the Continuing Fund that have a fixed administration fee that is the same as the fixed administration fee charged in respect of the securities of the Terminating Fund that they currently hold.
29. In addition to the reasons set out in paragraph 27, the Manager believes that the Merger of BMO High Yield Bond Fund into BMO U.S. High Yield Bond Fund is beneficial to securityholders of each of the Terminating Fund and the Continuing Fund for the following reasons:
(a) the Continuing Fund has delivered stronger long term performance than the Terminating Fund;
(b) there is significant overlap between port-folio holdings of the Terminating Fund and portfolio holdings of the Continuing Fund;
(c) investors will receive securities of the Continuing Fund that have a manage-ment fee that is lower than the manage-ment fee charged in respect of the securities of the Terminating Fund that they currently hold; and
(d) investors will receive securities of the Continuing Fund that are charged a fixed administration fee by the Manager and certain operating expenses that are paid directly by the Continuing Fund, rather than all of the variable operating expenses that are paid directly by the Terminating Fund, and such fixed admini-stration fee provides investors with more certainty about the ongoing costs with respect to their investment in securities of the Continuing Fund.
30. Further, the Manager believes that proceeding with the Merger of BMO High Yield Bond Fund into BMO U.S. High Yield Bond Fund on a taxable basis is beneficial to securityholders of each of the Terminating Fund and the Continuing Fund because:
(a) as at August 5, 2016, the majority of investors in the Terminating Fund were tax exempt or had an accrued loss on their securities; and
(b) effecting the Merger on a taxable basis will preserve the unused tax losses of the Continuing Fund, which would otherwise expire upon implementation of the Mer-ger on a tax-deferred basis and therefore would not be available to shelter income and capital gains realized by the Continuing Fund in future years.
31. In addition to the reasons set out in paragraph 27, the Manager believes that the Merger of BMO Enhanced Equity Income Fund into BMO Dividend Fund is beneficial to securityholders of each of the Terminating Fund and the Continuing Fund for the following reasons:
(a) the Continuing Fund has delivered stronger long term performance than the Terminating Fund;
(b) Series A investors will receive securities of the Continuing Fund that have a management fee that is lower than the management fee charged in respect of the securities of the Terminating Fund that they currently hold; and
(c) investors will receive securities of the Continuing Fund that have a fixed administration fee that is lower than the fixed administration fee charged in respect of the securities of the Terminating Fund that they currently hold.
32. In addition to the reasons set out in paragraph 27, the Manager believes that the Merger of BMO Canadian Diversified Monthly Income Fund into BMO Diversified Income Portfolio is beneficial to securityholders of each of the Terminating Fund and the Continuing Fund for the following reasons:
(a) the Continuing Fund may offer a more global approach to investing, which allows the Continuing Fund to benefit from the synergies that the Manager and its international affiliates have recently developed;
(b) the Continuing Fund has delivered stronger long term performance than the Terminating Fund;
(c) investors will receive securities of the Continuing Fund that have a management fee that is lower than the management fee charged in respect of the securities of the Terminating Fund that they currently hold; and
(d) investors will receive securities of the Continuing Fund that are charged a fixed administration fee by the Manager and certain operating expenses that are paid directly by the Continuing Fund, rather than all of the variable operating expenses that are paid directly by the Terminating Fund, and such fixed administration fee provides investors with more certainty about the ongoing costs with respect to their investment in securities of the Continuing Fund.
33. In addition to the reasons set out in paragraph 27, the Manager believes that the Merger of BMO Global Monthly Income Fund into BMO Global Diversified Fund is beneficial to securityholders of each of the Terminating Fund and the Continuing Fund because investors will receive securities of the Continuing Fund that have a management fee that is the same as the management fee charged in respect of the securities of the Terminating Fund that they currently hold.
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.
“Raymond Chan”
Manager,
Investment Funds and Structured Products Branch
Ontario Securities Commission