Headnote National Policy 11-203 – Process for Exemptive Relief in Multiple Jurisdictions – One time transfer of assets of a non-redeemable investment fund to a mutual fund subject to NI 81-102, both advised by the same portfolio manager, to implement a merger – Costs of the merger borne by the manager – Sale of securities exempt from the self–dealing prohibition in paragraph s.13.5(2)(b)(iii), National Instrument 31–103 – Registration Requirements and Exemptions
Applicable Legislative Provisions
National Instrument 31–103 – Registration Requirements and Exemptions, s.13.5(2)(b)(iii) and s.15.1.
March 16, 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
Aston Hill Asset Management Inc.
(the Filer)
and
IA Clarington Aston Hill Tactical Yield Fund (the Terminating Fund)
and IA Clarington Tactical Income Fund
(the Continuing Fund, and together with the Terminating Fund, the Funds)
DECISION
Background
The securities regulatory authority or regulator in the Jurisdiction (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdiction for exemptive relief from Section 13.5(2)(b)(iii) of National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103) in connection with the transfer of the investment portfolio of the Terminating Fund to the Continuing Fund in order to implement the merger (the Merger) of the Terminating Fund into the Continuing Fund (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Ontario Securities Commission is the principal regulator (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 each of the provinces and territories of Canada (collectively with Ontario, the Jurisdictions).
Interpretation
Terms defined in MI 11-102 and National Instrument 14-101 - Definitions have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer is a corporation amalgamated under the laws of Ontario. The Filer’s head office is located in Toronto, Ontario.
The Filer is registered as an investment fund manager in Ontario and as a portfolio manager under the securities legislation of each of Ontario, Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia and Quebec (the Legislation).
The Filer is not in default of securities legislation in any Canadian jurisdiction.
IA Clarington Investments Inc. (the Manager) is the manager and trustee of the Funds and the Filer is the portfolio advisor of the Funds.
The Manager proposes to effect the Merger of the Terminating Fund into the Continuing Fund, subject to obtaining this approval, on or about April 30, 2012 (the Merger Date).
Each Fund was established pursuant to a declaration of trust under the laws of the Province of Ontario.
The Funds are reporting issuers under the securities legislation of each province and territory of Canada and are not on the list of defaulting reporting issuers maintained under such legislation.
Unless an exemption has been obtained, each of the Funds follows the standard investment restrictions and practices established under the applicable securities legislation of each province and territory of Canada.
The Terminating Fund is a “non-redeemable investment fund” as defined in the Legislation and units of the Terminating Fund (the Units) are listed on the Toronto Stock Exchange (TSX).
The Terminating Fund was established under the laws of the Province of Ontario pursuant to a declaration of trust dated March 29, 2010 (the Terminating Fund Declaration) and completed its initial public offering on April 19, 2010.
The Continuing Fund is a “mutual fund” as defined in the Legislation and currently offers series A, E, E6, F, F6, F8, I, L, L6, L8, O, T6 and T8 units pursuant to a simplified prospectus dated July 12, 2011, as amended on July 29, 2011, September 19, 2011 and on November 28, 2011 (collectively, the Prospectus).
The Continuing Fund has filed amendments dated February 15, 2012, to its simplified prospectus and annual information form to qualify the Series X Units to be used in the Merger. These amendments were receipted on February 27, 2012.
Series X Units of the Continuing Fund have a distribution policy which seeks to provide unitholders with monthly distributions.
The investment objectives of the Terminating Fund are “(i) to provide unitholders with monthly cash distributions, initially targeted to be 6.0% per trust unit per annum on the original offering price of $10.00 per unit ($0.05 per trust unit per month or $0.60 per trust unit per annum); and (ii) to maximize total returns for unitholders, consisting of both cash distributions and capital appreciation, while reducing risk and preserving capital”. As of March 15, 2012, the Terminating Fund’s holdings of illiquid securities meet the requirements of s. 2.4 of NI 81-102.
The investment objective of the Continuing Fund is “to seek to achieve a steady flow of monthly income by investing primarily in trust units, equity securities and fixed income securities of Canadian issuers”.
The Merger will not be a material change for the Continuing Fund, as the net asset value (NAV) of the Continuing Fund is larger than the NAV of the Terminating Fund. The NAV for units of each Fund is calculated on a daily basis on each day that the TSX is open for trading.
The Merger will be effected in accordance with the “conversion” provision set out in the Terminating Fund Declaration. This provision provides that the Manager may merge the Terminating Fund with an open‑ended mutual fund managed by the Manager or an affiliate thereof, provided that:
(a) the open‑ended mutual fund must have similar investment objectives as set forth in its governing instrument, as determined by the Manager in its sole discretion;
(b) the Manager must have determined that there likely will be a percentage reduction in the general, administrative and operating expenses attributed to the combined fund as a result of the merger as compared to those of the Terminating Fund prior to the merger;
(c) the merger is completed on a relative net asset value per security basis; and
(d) the merger is accomplished on a tax‑deferred rollover basis under the Income Tax Act (Canada) (the Tax Act) for unitholders of the Terminating Fund pursuant to section 132.2 of the Tax Act (as may be amended).
Although the Terminating Fund is a non-redeemable investment fund and not a mutual fund, the Terminating Fund Declaration also provides that the approval of unitholders of the Terminating Fund is not required if the merger is approved by the independent review committee (IRC) of the Terminating Fund under s. 5.2(2) of NI 81-107 and if the Terminating Fund is being reorganized with, or its assets are being transferred to, a mutual fund to which National Instrument 81-102 – Mutual Funds and National Instrument 81-107 – Independent Review Committee for Investment Funds (NI 81-107) apply and that is managed by the Manager, or an affiliate of the Manager.
The Manager has determined that the investment objectives of the Funds are similar and that there will likely be a percentage reduction in the general, administrative and operating expenses attributed to the combined fund as a result of the merger as compared to those of the Terminating Fund prior to the merger. In addition, the Merger will be completed on a relative net asset value per security basis and on a tax-deferred rollover basis under the Tax Act.
The board of directors of the Manager has approved the Merger.
The Manager has sent written notice of the Merger to the unitholders of the Terminating Fund on February 15, 2012, which is at least 75 days prior to the Merger Date.
As required by NI 81-107, an IRC has been appointed for each of the Funds. The Manager presented the terms of the Merger to the IRC and the IRC approved the Merger in accordance with the requirements of s. 5.2(2) of NI 81-107 on the basis that the Merger would achieve a fair and reasonable result for each of the Funds.
A press release and material change report announcing the conversion of the Terminating Fund by way of merger into the Continuing Fund was filed on SEDAR under the profile of the Terminating Fund on February 17, 2012. A press release and material change report in respect of the Merger will be filed on SEDAR under the profile of each of the Funds upon completion of the Merger.
At the present time, no TSX approval is required for the Merger. However, the Terminating Fund will need to comply with the requirements of the TSX to delist.
All costs and expenses associated with the Merger will be borne by the Manager. No sales charges, redemption fees or other fees or commissions will be payable by unitholders of the Funds in connection with the Merger.
Following the Merger, the Continuing Fund will continue as a publicly offered open‑end mutual fund and the Terminating Fund will be wound up and terminated.
The Filer is a “responsible person” as defined in the Legislation as a result of being the portfolio advisor of the Funds.
The transfer of the investment portfolio of the Terminating Fund to the Continuing Fund (and the corresponding purchase of such investment portfolio by the Continuing Fund) as a step in the Merger may be considered a purchase or sale of securities, knowingly caused by a registered adviser that manages the investment portfolio of the Funds, from or to the investment portfolio of an investment fund for which a “responsible person” acts as an adviser, contrary to NI 31‑103.
The Merger is expected to take place using the following steps:
(a) Prior to the Merger Date, the Terminating Fund will sell any securities in its portfolio that do not meet the investment objective and investment strategies of the Continuing Fund. As a result, the Terminating 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.
(b) Effective as of close of business on or about April 25, 2012, which is approximately three business days prior to the Merger Date, the Units of the Terminating Fund will be de‑listed from the TSX.
(c) 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 the Terminating Fund Declaration.
(d) The Continuing Fund will acquire the investment portfolio and other assets of the Terminating Fund in exchange for Series X Units of the Continuing Fund.
(e) The Continuing Fund will not assume 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.
(f) The Series X Units of the Continuing Fund received by the Terminating Fund will have an aggregate NAV equal to the value of the Terminating Fund’s portfolio assets and other assets that the Continuing Fund is acquiring, and the Series X Units will be issued at their applicable series NAV per unit as of the close of business on the Merger Date.
(g) The Terminating Fund will distribute to its unitholders a sufficient amount of its net income and net realized capital gains so that it will not be subject to tax under Part I of the Tax Act for its taxation year ending on the Merger Date.
(h) Immediately thereafter, the Terminating Fund will be terminated and the Series X 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.
(i) As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
(j) The Manager will issue a press release forthwith after the Merger is completed announcing the completion of the Merger and the ratio by which Units of the Terminating Fund were exchanged for Series X Units.
Each Fund is a mutual fund trust under the Tax Act and, accordingly, Units of the Funds are “qualified investments” under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered disability savings plans, registered education savings plans and tax‑free savings accounts.
In the absence of this order, the Filer would be prohibited from purchasing and selling the securities of the Terminating Fund (and thereby transferring the investment portfolio of the Terminating Fund to the Continuing Fund) in connection with the Merger.
The Merger would comply with the exemption from section 13.5(2)(b) of NI 31‑103 provided in subsection 6.1(4) of NI 81‑107 but for subsection 6.1(2)(f). It is not possible to effect the transfer of assets from the Terminating Fund to the Continuing Fund in accordance with the “market integrity requirements”, as such term is defined in Section 6.1(1) of NI 81‑107, because the purchase and sale of such assets will be effected directly between the Terminating Fund and the Continuing Fund and accordingly will not be printed on the TSX.
In the opinion of the Filer and the Manager, the Merger will not adversely affect unitholders of the Terminating Fund or the Continuing Fund and will in fact be in the best interests of Unitholders of the Terminating Fund. The Filer believes that the Merger will be beneficial to Unitholders for the following reasons:
(a) The Continuing Fund has a larger portfolio and better opportunity for diversification than the Terminating Fund;
(b) Series X Units of the Continuing Fund will have greater liquidity through daily purchases and redemptions than Units of the Terminating Fund and the Merger will eliminate the discount to NAV for the Terminating Fund;
(c) The Terminating Fund pays a trailer fee directly rather than embedding it in its management fee. The management fee plus trailer fee for the Terminating Fund will be the same as the management fee for the Series X Units of the Continuing Fund; and
(d) The Continuing Fund allows greater unitholder flexibility with respect to switches, reclassifications and conversions.
Decision
The Decision Maker 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 Maker is that the Exemption Sought is granted provided that:
(a) upon a request by a Unitholder for financial statements, the Filer will make best efforts to provide the unitholder with financial statements of the Continuing Fund; and
(b) the Terminating Fund and the Continuing Fund with respect to a Merger have an unqualified audit report in respect of their last completed financial period.
“Raymond Chan”
Raymond Chan
Manager, Investment Funds Branch
ONTARIO SECURITIES COMMISSION