November 17, 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 INVESCO CANADA LTD. (the "Filer")
AND
IN THE MATTER OF INVESCO INTACTIVE STRATEGIC CAPITAL YIELD PORTFOLIO CLASS (“Capital Yield Class”) and INVESCO INTACTIVE STRATEGIC YIELD PORTFOLIO (“Strategic Yield Portfolio”, and collectively, the “Funds”)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for:
(i) exemptive relief from the requirement under section 5.1(1)(f) of National Instrument 81-102 - Investment Funds ("NI 81-102") to obtain prior securityholder approval of a proposed reorganization (the “Proposed Transaction”) whereby securities of Series A, Series F, Series F4, Series F6, Series P, Series PF, Series PT4, Series PT6, Series T4 and Series T6 of Capital Yield Class will be exchanged for the applicable corresponding securities of Strategic Yield Portfolio as described below (the “Securityholder Relief”); and
(ii) approval pursuant to paragraph 5.5(1)(b) and section 5.7 of NI 81-102 in connection with the Proposed Transaction (the “Approval Application”).
Paragraphs (i) and (ii) are collectively referred to as the Relief Sought.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator for this application; and
(ii) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.
Interpretation
Defined terms contained in NI 81-102, 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 on behalf of the Funds:
1. The Filer:
(a) is a corporation amalgamated under the laws of Ontario;
(b) is an indirect wholly-owned subsidiary of Invesco Ltd., a global investment manager;
(c) has its head office in Toronto, Ontario;
(d) is registered as an investment fund manager in Ontario; and
(e) is not in default of applicable securities legislation in any jurisdiction.
2. Strategic Yield Portfolio:
(a) is an open-end mutual fund trust established under the laws of Ontario;
(b) complies with NI 81-102, subject to any exemptions therefrom that may be available under applicable securities legislation or granted by securities regulatory authorities;
(c) has filed a simplified prospectus and annual information form prepared in accordance with NI 81-102 and National Instrument 81-101 – Mutual Fund Prospectus Disclosure (“NI 81-101”);
(d) is a reporting issuer under the securities laws of each of the provinces and territories of Canada;
(e) is qualified for distribution in all provinces and territories of Canada; and
(f) is not in default of securities legislation in any province or territory of Canada.
3. Capital Yield Class:
(a) is an open-end mutual fund established as a class of a mutual fund corporation under the laws of Ontario;
(b) complies with NI 81-102, subject to any exemptions therefrom that may be available under applicable securities legislation or granted by securities regulatory authorities;
(c) is a reporting issuer under the securities laws of each of the provinces and territories of Canada;
(d) is no longer qualified for distribution in all provinces and territories of Canada, but has filed an annual information form in accordance with National Instrument 81-106 – Investment Fund Continuous Disclosure (“NI 81-106”); and
(e) is not in default of securities legislation in any province or territory of Canada.
The Proposed Transaction
4. Capital Yield Class was launched to provide tax-efficient exposure to the return profile of Strategic Yield Portfolio by investing in different types of securities and entering into forward contracts (“Forwards”) with a counterparty. New rules in the Income Tax Act (Canada) (the “Tax Act”) that affect the tax treatment of returns earned under “derivative forward agreements” have been enacted which will eliminate any favourable tax treatment enjoyed by Capital Yield Class.
5. Due to the changes in the Tax Act, the favourable tax treatment for forward contracts with respect to Capital Yield Class will expire in May 2017. Following that date, it will no longer be possible to provide the shareholders of Capital Yield Class with the exposure to the return profile of Strategic Yield Portfolio on a tax-advantaged basis. Given this change, and after considering the alternatives, the Filer has determined that the Proposed Transaction is in the best interests of investors.
6. The Proposed Transaction will be structured so that immediately after the close of business on the date of the Proposed Transaction (the “Transaction Date”), shareholders of the applicable series of Capital Yield Class will have their shares redeemed at the applicable net asset value per share in exchange for the same series of units of Strategic Yield Portfolio on a dollar-for-dollar basis. The value of the units of Strategic Yield Portfolio that are issued pursuant to the Proposed Transaction will be equal to the value of the shares of Capital Yield Class held by the securityholders at the close of business on the Transaction Date. Series T8, Series F8 and Series PT8 of Capital Yield Class will not be subject to the Proposed Transaction and will be terminated on the Transaction Date.
7. During the 30 days before the Transaction Date, the Forwards will be closed out and securities owned by Capital Yield Class will be sold to the counterparty for cash. Capital Yield Class will then concurrently subscribe for units of Strategic Yield Portfolio. By the Transaction Date, it is expected that Capital Yield Fund will only hold units of Strategic Yield Portfolio (as well as cash to manage redemption requests made prior to the Transaction Date).
8. The strategies of Capital Yield Class allow for the direct purchase of units of Strategic Yield Portfolio under certain circumstances (including a merger transaction), and therefore there is no need to amend the objectives or strategies of Capital Yield Class to account for this interim period.
9. Capital Yield Class will be using only cash to invest in Strategic Yield Portfolio as part of the Proposed Transaction. As such, there are no concerns about whether Strategic Yield Portfolio will receive assets that (a) may be acquired in compliance with NI 81-102, (b) are acceptable to the Filer (as manager) or sub-advisor of Strategic Yield Portfolio, and (c) are consistent with the fundamental investment objectives of Capital Yield Class.
10. The Filer will wind up Capital Yield Class as soon as reasonably possible following the Proposed Transaction.
11. The Filer has complied with the requirements to file a material change report in respect of the Proposed Transaction as required by Part 11 of NI 81-106. The Proposed Transaction does not constitute a material change for Strategic Yield Portfolio.
12. The Filer will pay for the costs and expenses associated with the Proposed Transaction and the Funds will not bear any of such costs and expenses. The Proposed Transaction will not impact the redemption fee schedules of any investors who receive units of Strategic Yield Portfolio following the Transaction Date.
13. Capital Yield Class has been closed to additional investments since June 2013. Following this closure, the Filer has determined that the costs associated with qualifying shares of Capital Yield Class under a prospectus were not justifiable, and instead the Filer filed an annual information form in accordance with NI 81-106.
14. The prospectus of Capital Yield Class provided for at least 60 days’ notice to be given to shareholders for transactions such as the Proposed Transaction for each period in which Capital Yield Class was available for purchase. Shareholders of Capital Yield Class will be given at least 60 days’ notice of the Proposed Transaction.
15. The Proposed Transaction has been approved by the independent review committee of the Funds (the “IRC”).
16. Securityholders may redeem their securities of Capital Yield Class in advance of the Proposed Transaction should they wish to do so.
17. The Filer believes that a reasonable person would consider the fundamental investment objectives of the Capital Yield Class to be substantially similar to those of Strategic Yield Portfolio.
18. The management and advisory fees and trailing commissions of the applicable series of the Funds are identical, and no sales charges or redemption charges are applicable for investors following the Proposed Transaction. Accordingly, the Proposed Transaction will not impact the fees of Capital Yield Class investors. It is expected that following the Proposed Transaction, the cost of Strategic Yield Portfolio will be decreased due to the elimination of costs associated with the Forwards.
19. The valuation procedures of the Funds are substantially similar to each other as well. Each Fund is valued daily using the same methodology.
Under the Proposed Transaction, all optional services (pre-authorized chequing plans, systematic exchange plans and systematic withdrawal plans) other than the ability to purchase Series PT6 and Series T6 in U.S. dollars will continue to be available to securityholders, who will be automatically enrolled in such plans with respect to units of Strategic Yield Portfolio, unless they advise otherwise.
Due to the fact that:
a. Capital Yield Class is a class of Invesco Corporate Class Inc. (“ICCI”), a mutual fund corporation for purposes of the Tax Act;
b. Capital Yield Class distributes net realized capital gains to investors, if necessary, within 60 days of the year end of ICCI; and
c. ICCI has sufficient capital loss carryforwards in respect of any net realized and unrealized capital gains of Capital Yield Class,
the level of unrealized capital gains and the impact of the Proposed Transaction on securityholders from a capital gains tax perspective are collectively not expected to be significant and would be identical if the Filer had decided to terminate each series of Capital Yield Class rather than carry out the Proposed Transaction.
Securityholder approval of the Proposed Transaction is required under section 5.1(1)(f) of NI 81-102 because the Proposed Transaction does not satisfy all of the conditions referenced in section 5.3(2) of NI 81-102; namely, the requirement that the Proposed Transaction be a “qualified exchange” within the meaning of section 132.2 of the Tax Act or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act, as required under section 5.6(1)(b) of NI 81-102.
Similarly, approval of the principal regulator of the Proposed Transaction is required under section 5.5(1)(b) and section 5.7 of NI 81-102 because the Proposed Transaction does not meet the pre-approval requirement under section 5.6 of NI 81-102 noted above.
Decision
The principal regulator is satisfied that the test contained in the Legislation that provides the principal regulator with the jurisdiction to make the decision has been met.
The decision of the principal regulator under the Legislation is that the Relief Sought is granted, provided that:
(a) The Proposed Transaction is approved by the IRC of the Funds;
(b) The Filer sends the following to each securityholder of Capital Yield Class at least 60 days prior to the Transaction Date:
a. A detailed notice that sets out the information necessary for the securityholder to understand the Proposed Transaction, including:
i. A brief description of the Proposed Transaction and the Transaction Date;
ii. A description of Strategic Yield Portfolio and any differences investors are expected to experience in holding securities of Strategic Yield Portfolio versus holding securities of Capital Yield Class;
iii. The IRC’s determination regarding the Proposed Transaction;
iv. The tax consequences of the Proposed Transaction, the ability to switch to another corporate class fund managed by the Filer on a tax-deferred basis and the timelines under which this switch must be completed; and
v. A statement that securityholders may obtain, free of charge, the most recent annual and interim financial statements, the current simplified prospectus, annual information form and fund facts documents, and the most recent management report on fund performance of Strategic Yield Portfolio that have been made public by contacting the Applicant or through SEDAR; and
b. The fund facts document of the series of Strategic Yield Portfolio that the securityholder will hold after the completion of the Proposed Transaction.
signed <Vera Nunes>
Vera Nunes
Manager, Investment Funds & Structured Products Branch
Ontario Securities Commission