Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- investment fund manager obtaining relief from the requirement to obtain the approval of securityholders before changing the fundamental investment objective of certain funds -- relief required as a result of changes to federal budget eliminating certain tax benefits associated with character conversion transactions -- Filer required to send written notice at least 60 days before the effective date of the change to the investment objective of the Fund setting out the change, the reasons for such change and a statement that the Fund will no longer distribute gains under forward contracts that are treated as capital gains for tax purposes -- National Instrument 81-102.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 5.1(c), 19.1.

June 5, 2013


IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ALBERTA AND ONTARIO
(the Jurisdictions)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
CANOE FINANCIAL LP
(the Filer)

DECISION



Background

The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer for a decision on behalf of each of Canoe Strategic High Yield Class (Strategic High Yield), Canoe 'GO CANADA!' North American Monthly Income Class (NAMI), Canoe 'GO CANADA!' Bond Advantage Class (Bond Advantage) and Canoe 'GO CANADA!' Enhanced Income Class (Enhanced Income) (each, a Fund and, collectively, the Funds) under the securities legislation of the Jurisdictions (the Legislation) for a decision exempting each Fund from the requirement in National Instrument 81-102 Mutual Funds (NI 81-102) to obtain the approval of securityholders before changing the fundamental investment objective of the Fund (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a) the Alberta Securities Commission is the principal regulator for this application;

(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 by the Filer in each of the provinces and territories of Canada other than Ontario; and

(c) this decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in the Province of Ontario.

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined herein.

Representations

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

1. The Filer is the investment fund manager of each Fund. The Filer is registered in the Province of Alberta as an investment fund manager, portfolio manager and exempt market dealer. The head office of the Filer is in Calgary, Alberta.

2. The Filer is the portfolio manager of each of Bond Advantage and Enhanced Income and AEGON Capital Management Inc. (AEGON Capital) is the sub-advisor of these Funds. AEGON Capital is the portfolio manager of each of Strategic High Yield and NAMI and has appointed AEGON USA Investment Management, LLC as sub-advisor of these Funds.

3. Each Fund is a class of shares of Canoe 'GO CANADA!' Fund Corp., a mutual fund corporation incorporated under the laws of the Province of Alberta. Each Fund is subject to the provisions of NI 81-102.

4. Neither the Filer nor the Funds are in default of securities legislation in any Jurisdiction.

5. The shares of each Fund are qualified for distribution pursuant to a prospectus dated December 11, 2012, as amended, that was prepared and filed in accordance with the securities legislation of the Jurisdictions. Accordingly, each Fund is a reporting issuer or the equivalent in each Jurisdiction.

6. Under its current investment objective and strategies, each Fund may enter into transactions (Character Conversion Transactions) in which it uses derivatives to sell Canadian equity securities for prices determined with reference to its applicable reference fund(s). The current investment objective of each Fund is set out in the table below:

Fund

Investment Objective

 

Strategic High Yield

The Fund aims to provide a return that is similar to the return of a high yield fixed income mutual fund (the "Reference Fund") managed by the Filer, or by an affiliate or associate of the Filer, less transaction and hedging costs.

 

 

The Fund invests primarily in equity securities issued by Canadian corporations and enters into forward contracts or other similar derivative arrangements in order to hedge its exposure to the equities and provide the Fund with a return based on the performance of the Reference Fund. The Fund may also invest some or all of its assets directly in securities similar to those held by the Reference Fund.

 

NAMI

The Fund aims to generate income and long-term capital growth by investing primarily, directly or indirectly, in high-yielding equity securities and corporate bonds of North American issuers.

 

 

If the Fund seeks to achieve its objective indirectly, it may invest primarily in securities of mutual funds and/or equity securities issued by Canadian corporations and enter into forward contracts or other similar derivative arrangements in order to hedge its exposure to the equities and provide the Fund with a return based on the performance of a portfolio of high-yielding equity securities and corporate bonds of North American issuers.

 

Bond Advantage

The Fund aims to provide a return that is similar to the return of a Canadian bond mutual fund (the "Reference Fund") managed by the Filer, or by an affiliate or associate of the Filer, less transaction and hedging costs.

 

 

The Fund invests primarily in equity securities issued by Canadian corporations and enters into forward contracts or other similar derivative arrangements in order to hedge its exposure to the equities and provide the Fund with a return based on the performance of the Reference Fund. The Fund may also invest some or all of its assets directly in securities similar to those held by the Reference Fund.

 

Enhanced Income

The Fund aims to provide a return that is similar to the return of a fixed income balanced mutual fund (the "Reference Fund") managed by the Filer, or by an affiliate or associate of the Filer, less transaction and hedging costs.

 

 

The Fund invests primarily in equity securities issued by Canadian corporations and enters into forward contracts or other similar derivative arrangements in order to hedge its exposure to the equities and provide the Fund with a return based on the performance of the Reference Fund. The Fund may also invest some or all of its assets directly in securities similar to those held by the Reference Fund.

7. On March 21, 2013, the Federal Minister of Finance presented the majority government's budget (the Budget Proposal). The Budget Proposal will eliminate the tax benefits associated with Character Conversion Transactions. The changes apply to Character Conversion Transactions entered into or amended after March 20, 2013.

8. The Filer has reviewed the impact that the Budget Proposal regarding Character Conversion Transactions will have on each Fund. In the case of each of Strategic High Yield and NAMI, neither of these Funds had used a Character Conversion Transaction prior to the Budget Proposal and, accordingly, these Funds will never enter into Character Conversion Transactions. Bond Advantage entered into its first Character Conversion Transactions on March 21, 2013, which transaction settled on April 18, 2013. Enhanced Income has entered into Character Conversion Transactions since September 2012 and its last transaction settled on April 30, 2013. In respect of both of these Funds, the Filer has determined that, in the current low interest rate environment, the cost of the Character Conversion Transactions outweigh the tax advantage to investors. Accordingly, the Filer has determined that neither Bond Advantage nor Enhanced Income will enter into any further Character Conversion Transactions.

9. On April 26, 2013, the Filer issued a press release stating that, in the case of each of Strategic High Yield and NAMI, Character Conversion Transactions will not be entered into and, in the case of each of Bond Advantage and Enhanced Income, Character Conversion Transactions have ceased to be used. The simplified prospectus of the Funds has been amended to provide notice that each Fund will no longer use Character Conversion Transactions and will, instead, invest directly in securities of its applicable reference fund or funds.

10. The Filer wishes to amend the investment objectives of each Fund to remove all references to the use of Character Conversion Transactions to gain exposure to the applicable reference fund(s) and to clarify that each Fund may invest directly in securities

11. Similar to those held by the applicable reference fund(s) or directly in securities of the applicable reference fund. Following such amendment, the revised investment objectives of each Fund will be as set out in the table below:

Fund

Investment Objective

 

Strategic High Yield

The Fund aims to provide a return that is similar to the return of a high yield fixed income mutual fund (the "Reference Fund") managed by the Filer, or by an affiliate or associate of the Filer.

 

 

The Fund invests primarily in the securities of the Reference Fund and/or it may invest some or all of its assets directly in securities similar to those held by the Reference Fund.

 

NAMI

The Fund aims to generate income and long-term capital growth by investing primarily, directly or indirectly, in high-yielding equity securities and corporate bonds of North American issuers.

 

 

If the Fund seeks to achieve some or all of its objective indirectly, it will invest primarily in securities of mutual funds.

 

Bond Advantage

The Fund aims to provide a return that is similar to the return of a Canadian bond mutual fund (the "Reference Fund") managed by the Filer, or by an affiliate or associate of the Filer.

 

 

The Fund invests primarily in the securities of the Reference Fund and/or it may invest some or all of its assets directly in securities similar to those held by the Reference Fund.

 

Enhanced Income

The Fund aims to provide a return that is similar to the return of a fixed income balanced mutual fund (the "Reference Fund") managed by the Filer, or by an affiliate or associate of the Filer.

 

 

The Fund invests primarily in the securities of the Reference Fund and/or it may invest some or all of its assets directly in securities similar to those held by the Reference Fund.

Decision

Each of the Decision Makers 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 Makers under the Legislation is that the Exemption Sought is granted, provided that, in respect of each Fund, securityholders of the Fund will be sent a written notice at least 60 days before the effective date of the change to the investment objective of the Fund that sets out the change to the investment objective, the reasons for such change and a statement that the Fund will no longer distribute gains under forward contracts that are treated as capital gains for tax purposes.

"Tom Graham"
Director, Corporate Finance