First Asset Investment Management Inc. (Re), 2016 CanLII 54479

August 22, 2016

SCHEDULE “B”

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

First Asset Investment Management Inc. (the Filer)

and

Preferred Share Investment Trust (the Terminating Fund) and

First Asset Preferred Share ETF (the Continuing Fund, and together with the Terminating Fund, the Funds)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator:

exempting the Terminating Fund from subsection 5.1(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 asset to, another mutual fund (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 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. The following additional terms shall have the following meanings:

IRC means the Independent Review Committee for the Terminating Fund and the Continuing Fund;

NI 81-102 means National Instrument 81-102 Investment 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).

Representations

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

The Filer

1. The Filer is a corporation incorporated under the laws of Ontario. The Filer's head office is located in Toronto, Ontario.
2. The Filer is registered as a portfolio manager in Ontario and as an investment fund manager under the securities legislation of each of Ontario, Quebec and Newfoundland and Labrador (the “Legislation”).
3. The Filer is not in default of securities legislation in any of the Jurisdictions.
4. The Filer is the manager and trustee of the Funds.

The Funds

5. Each Fund was established pursuant to a declaration of trust under the laws of the Province of Ontario.
6. Each Fund is governed by NI 81-102, subject to any relief thereof granted by the securities regulatory authorities.
7. The Funds are reporting issuers under the applicable securities legislation of each of the Jurisdictions and are not on the list of defaulting reporting issuers maintained under such legislation.
8. Unless an exemption has been obtained, each of the Funds follow the standard investment restrictions and practices established by the securities regulatory authorities in each of the Jurisdictions .
9. The net asset value for units of the Funds is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.
10. The Terminating Fund is a "non-redeemable investment fund" as defined in the Legislation and units of the Terminating Fund are listed on the Toronto Stock Exchange (the “TSX”).
11. The Terminating Fund was established under the laws of the Province of Ontario pursuant to a declaration of trust dated March 11, 2009 (the “Terminating Fund Declaration”) and completed its initial public offering on April 3, 2009 (the Terminating Fund Prospectus).
12. The Continuing Fund is an exchange traded "mutual fund" as defined in the Legislation and currently offers common units pursuant to a prospectus dated May 4, 2016. The investment objectives of the Terminating Fund are to provide unitholders with (i) quarterly distributions, and (ii) the opportunity for capital appreciation from the performance of the portfolio.

The portfolio is comprised primarily of investment grade preferred shares and to a lesser extent investment grade corporate debt and convertible bonds in order to provide holders with the opportunity for growth of their investment value through any capital appreciation of the portfolio and distributions.

13. The investment objectives of the Continuing Fund are to provide unitholders with (i) regular distributions, and (ii) the opportunity for capital appreciation from the performance of a portfolio comprised primarily of preferred shares of North American issuers.

The portfolio is comprised primarily of investment grade preferred shares and to a lesser extent investment grade corporate debt and convertible bonds in order to provide unitholders with the opportunity for growth of their investment value through any capital appreciation of the portfolio and distributions.

14. The Filer proposes to effect the merger of the Terminating Fund into the Continuing Fund (the Merger) on or after the 60th day following the sending of written notice thereof to unitholders of the Terminating Fund ( the Effective Date).

Unitholder Meeting Relief

15. The Filer has determined that it is appropriate to effect the Merger without obtaining unitholder approval.
16. The Filer believes that the Merger is in the best interest of unitholders of the Terminating

Fund for the following reasons:

a. the Merger will eliminate the operating and regulatory costs of the Terminating Fund operating as a separate investment fund. In addition, unitholders of the Terminating Fund will benefit from the lower management fee charged by the Continuing Fund (0.65% vs 2.10%);

b. after the Merger, the Continuing Fund will have a portfolio of considerable size and, unlike the Terminating Fund, will have the potential to have an even larger portfolio as the Continuing Fund is in continuous distribution; and

c. as a result of its greater size, the Continuing Fund may over time benefit from a reduction of its management expense ratio as the non-trading related portion of its operating costs and its regulatory costs will be paid by a larger number of unitholders.

17. Paragraph 5.1(1)(f) of NI 81-102 requires that the approval of the securityholders of an investment fund be obtained before the investment fund undertakes a reorganization with, or transfers its assets to, another issuer.
18. With the exception of Subsection 5.3(2)(a)(iv), the proposed Merger satisfies the pre-approved merger criteria set out in Section 5.3(2) of NI 81-102.
19. The Terminating Fund Prospectus states that if a decision is made to implement a permitted Merger, the manager of the Terminating Fund is required to issue a press release at least 20 business days prior to the proposed effective date of the permitted Merger thereof disclosing details of the proposed permitted Merger.

The Merger

20. The Merger will be effected in accordance with the “permitted merger” provision set out in the Terminating Fund Declaration. In particular:

i. the Continuing Fund is managed by the Manager or an affiliate of the Manager;

ii. unitholders of the Terminating Fund are permitted to redeem their units at a redemption price equal to 100% of the net asset value (“NAV”) per unit, less any costs of funding the redemption, including commissions, prior to the effective date of the Merger;

iii. the Continuing Fund has similar investment objectives as set forth in its declaration of trust;

iv. the manager of the Terminating Fund has determined in good faith that there will be no increase in the management expense ratio borne by the unitholders of the Terminating Fund as a result of the Merger;

v. the Merger will be completed on the basis of an exchange ratio determined with reference to the NAV per unit of the Terminating Fund and of the NAV per unit of the Continuing Fund; and

vi. the Merger will be accomplished on a tax-deferred rollover basis for unitholders of each of the Funds.

22. The Merger is being effected as a pre-approved reorganization and transfer in accordance with section 5.6 of NI 81-102.

23. As required by NI 81-107, the IRC approved, or will approve, 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.

24. The Terminating Fund and the Continuing Fund have substantially similar fundamental investment objectives, valuation procedures and fee structure.

25. The Merger will be accomplished on a tax-deferred rollover basis for unitholders of each of the Funds.

26. Following the Merger, the Continuing Fund will continue and the Terminating Fund will be wound up as soon as reasonably practicable.

27. The portfolio of assets of the Terminating Fund to be acquired by the Continuing Fund (i) may be acquired by the Continuing Fund in compliance with NI 81-102, and (ii) are acceptable to the portfolio adviser of the Continuing Fund and is consistent with the Continuing Fund’s investment objectives.

28. The Terminating Fund will comply with Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure upon making a decision to proceed with the Merger into the Continuing Fund.

29. Neither the Terminating Fund nor the Continuing Fund will bear the costs and expenses associated with the Merger.

30. The Terminating Fund will issue and file a news release disclosing the Merger, and send a written notice to unitholders of the Terminating Fund prior to the annual redemption date for the Terminating Fund and at least 60 days prior to the effective date of the Merger.

31. As the Merger will occur after the annual redemption date of the Terminating Fund, unitholders of the Terminating Fund will be provided with an opportunity to redeem their units at a date after the news release announcing the Merger is issued and before the effective date of the Merger.

32. Any unit of the Terminating Fund surrendered for redemption will be redeemed at a price equal to its NAV per unit on the annual redemption date.

33. The consideration offered to unitholders of the Terminating Fund for the Merger will have a value that is equal to the NAV of the Terminating Fund calculated on the date of the Merger.

34. The Terminating Fund will need to comply with the requirements of the TSX to delist.

35. The Merger is expected to take place using the following steps:

i. Prior to the Effective Date, each of the Terminating Fund and the Continuing Fund will distribute any net income and net realized capital gains for its current taxation year to the extent necessary to eliminate its liability for non-refundable income tax.

ii. The exchange ratio (the “Exchange Ratio”) will be calculated based on the relative NAV of the Terminating Fund and the Continuing Fund as at the close of business on the Effective Date.

iii. Prior to midnight on the Effective Date, the Terminating Fund will transfer all of its assets to the Continuing Fund in consideration for an amount (the “Purchase Price”) equal to the fair market value of the assets transferred to the Continuing Fund on the Effective Date.

iv. The Continuing Fund will satisfy the Purchase Price by assuming the Terminating Fund’s liabilities and by issuing to the Terminating Fund that whole number of units of the Continuing Fund equal to the number of units of the Terminating Fund then outstanding multiplied by the Exchange Ratio, plus, if applicable, cash equivalent to the NAV of any fractional unit of the Continuing Fund otherwise issuable.

v. Immediately thereafter, all of the units of the Terminating Fund will be redeemed and the redemption price therefor will be paid by delivering the applicable number of units of the Continuing Fund to unitholders of the Terminating Fund based on the number of units of the Terminating Fund then held.

vi. The Terminating Fund and the Continuing Fund will file a joint tax election in respect of the transfer to the Continuing Fund of all of the assets of the Terminating Fund; and

vii. In connection with the Merger, the units of the Terminating Fund will be de-listed from the TSX and the Terminating Fund will cease to be a reporting issuer in each of the Provinces of Canada and will cease to exist, and the units of the Continuing Fund will trade on the TSX.

36. 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.

37. In the opinion of the Filer, the Merger will not adversely affect unitholders of the Funds and will in fact be in the best interests of unitholders of the Funds.

38. In the absence of this order, the Filer would be prohibited from relying on the exception in Section 5.3(2) and would otherwise be required to obtain the approval of the unitholders of the Terminating Fund prior to effecting the Merger, notwithstanding the satisfaction of the permitted merger conditions that are contained in the declaration of trust and prospectus of the Terminating Fund.

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 Requested Relief is granted.

“Raymond Chan”

Raymond Chan, Manager

Investment Funds and Structured Products Branch

Ontario Securities Commission