National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund transfer of assets -- Approval Required because transfer of assets do not meet the criteria for pre-approved reorganizations and transfers in NI 81-102 -- Continuing Fund have different investment objectives than Terminating Fund provided with timely and adequate disclosure regarding the Proposed Transfer.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6.
July 19, 2013
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
O’LEARY FUNDS MANAGEMENT L.P.
IN THE MATTER OF
O’LEARY STRATEGIC YIELD ADVANTAGED CLASS
(the Terminating Fund)
IN THE MATTER OF
O’LEARY STRATEGIC YIELD PLUS FUND
(the Continuing Fund)
The securities regulatory authority or regulators in each of the Jurisdictions (Decision Maker) has received an application from the Filer, on behalf of the Terminating Fund, for a decision under the securities legislation of the Jurisdictions (the Legislation) approving the transfer of assets of the Terminating Fund into the Continuing Fund (the Proposed Transfer) pursuant to paragraph 5.5(1)(b) of Regulation 81-102 respecting Mutual Funds (c. V-1.1, r. 39) (Regulation 81-102) (the Approval Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) The Autorité des marchés financiers is the principal regulator for this application;
(b) the Filer has provided notice that section 4.7(1) of Regulation 11-102 respecting Passport System (c. V-1.1, r. 1) (Regulation 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador, and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in Regulation 14-101 respecting Definitions (c. V-1.1, r. 3) and Regulation 11-102 have the same meaning if used in this decision, unless otherwise defined.
"IRC" means O'Leary Funds' independent review committee within the meaning of Regulation 81-107;
"O'Leary Funds" means the Terminating Fund, the Continuing Fund and other mutual funds managed by the Filer;
"Circular" means a proxies and information circular within the meaning of Regulation 81-106 respecting Investment Fund Continuous Disclosure (c. V-1.1, r. 42);
"Reference Fund" means the O'Leary Strategic Yield Fund; and
"Regulation 81-107" means Regulation 81-107 respecting Independent Review Committee for Investment Funds (c. V-1.1, r. 43).
This decision is based on the following facts represented by the Filer:
1. The Filer is a limited partnership formed under the laws of Ontario.
2. The Filer's head office is located at, 1010 Sherbrooke Street West, suite 1700, Montreal, Quebec, H3A 2R7.
3. The Filer is duly registered as an investment fund manager under the securities legislation of Québec and acts as manager and trustee of the O'Leary Funds.
4. The Filer in not in default of securities legislation in any province of Canada.
5. The Terminating Fund and Continuing Fund are reporting issuers under the securities legislation of each province of Canada.
6. The Terminating Fund and the Continuing Fund are mutual funds governed by Regulation 81-102. The Continuing Fund is qualified for distribution by simplified prospectus governed by Regulation 81-101 respecting Mutual Fund Prospectus Disclosure (c. V-1.1, r.38).
7. The Terminating Fund and the Continuing Fund are not in default of securities legislation in any province of Canada.
8. The Terminating Fund (formerly known as O'Leary Strategic Yield Class) is the sole issued and outstanding class of special shares of O'Leary Funds Inc., a corporation formed under the Canada Business Corporations Act by articles of incorporation dated November 18, 2009, as amended on November 20, on December 15, 2009, on October 29, 2010, on January 25, 2011 and on February 15 and April 19, 2013.
9. The investment objectives of the Terminating Fund are "to provide tax-efficient returns similar to those of a diversified income fund managed by the Filer. To achieve its investment objectives, the Fund invests primarily in equity securities and by entering into forward contracts in order to provide the Fund with a return determined with reference to the performance of a diversified income fund managed by the Filer. Alternatively, the Fund may invest directly in fixed income and/or dividend paying equity securities where the Fund considers it would be beneficial to the shareholders to do so."
10. The "diversified income fund" referred to in the investment objectives of the Terminating Fund has at all times been the Reference Fund. The investment objectives of the Reference Fund are "to invest in an actively managed portfolio primarily comprised of publicly-traded corporate bonds, preferred securities, convertible debt securities and dividend-paying common equity securities of mid and large-cap Canadian and global issuers, providing investors with both income and potential for capital appreciation."
11. The Continuing Fund (formerly known as O'Leary Founder's Series Income & Growth Fund) was established under the laws of Ontario pursuant to a declaration of trust dated September 28, 2009 which was amended by an amended and restated declaration of trust dated August 9, 2010, as further amended and restated on November 1, 2010, on January 25, 2011 and on January 31, 2011 and amended and restated by a Master Declaration of Trust, dated June 18, 2012 which was amended on October 19, 2012.
12. The investment objectives of the Continuing Fund are "to invest in an actively managed portfolio comprised primarily of publicly-traded corporate bonds, preferred securities, convertible debt securities and dividend-paying common equity securities of mid and large-cap Canadian and global issuers, providing investors with both income and potential for capital appreciation. The Fund will seek to provide unitholders with periodic distributions in accordance with the distribution policy established for each series."
The Proposed Transfer
13. As described in paragraph 9 hereinabove, in order to achieve its objectives, the Terminating Fund has entered into a character conversion transaction which involves the use of a forward contract (the Forward Contract) in order for securityholders to benefit from a return similar to the return of the Reference Fund optimized by an advantageous tax treatment.
14. On March 21, 2013 the federal budget of the Government of Canada proposed amendments to the ITA which are expected to eliminate the tax advantages of character conversion transactions using forward contracts at the maturity or termination of the relevant forward contract. The Terminating Fund's Forward Contract will reach its maturity on December 29, 2014.
15. The Government of Canada has given some guidance with respect to the interpretation of the budget proposals and the Filer's current understanding is that the Terminating Fund may only use available subscription moneys to extend the size of the Forward Contract under limited circumstances. Given the fact that the Terminating Fund is relatively small in size, with approximately $7.3 million of assets under management, and given that the Terminating Fund cannot grow significantly in size through the use of its alternate strategy to "invest directly in fixed income and/or dividend paying equity securities" as set out in its investment objectives, without eroding the tax benefits of the Forward Contract, the Filer has determined that it is in the best interests of the Terminating Fund to proceed with the Proposed Transfer.
16. The Proposed Transfer is expected to be completed on or about July 19, 2013.
17. The Proposed Transfer will be implemented pursuant to the following steps:
Step 1: Prior to the Proposed Transfer, the Terminating Fund will pre-settle the Forward Contract.
Step 2: On the date of the Proposed Transfer, the Terminating Fund will transfer all of its assets, less an amount required to satisfy the liabilities of the Terminating Fund, to the Continuing Fund in exchange for units of the Continuing Fund. The units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the Terminating Fund's net assets, which units will be issued by the Continuing Fund at each series net asset value per unit as of the close of business on the date of the Proposed Transfer.
Step 3: The Terminating Fund, if necessary, will pay a capital gains dividend to shareholders so that it will not be subject to Part 1 of the ITA for its current taxation year.
Step 4: Immediately following the above-noted transfer and dividend, the Terminating Fund will redeem all outstanding shares and distribute the units of the Continuing Fund held in its portfolio as a payment "in kind" of the redemption price of the shares held in the Terminating Fund, so that following the distribution, the securityholders of the Terminating Fund will become unitholders of the Continuing Fund.
Step 5: The Funds will file an election to have the Proposed Transfer including the exchange of shares for units effected as a "qualifying exchange" under the ITA.
Step 6: As soon as reasonably possible following the Proposed Transfer the Corporation will be wound up and dissolved.
18. Upon completion of the Proposed Transfer as described in paragraph 17, the holders of shares of the Terminating Fund will receive units of the same series of units of the Continuing Fund as the series of shares which they hold in the Terminating Fund, with the following exceptions: holders of series A shares will receive Founder's series units (in order to benefit from the same management fee as currently applies to the Series A Shares), holders of series F6 shares will receive series F units and holders of series T6 shares will receive Founder's series units.
19. The currently outstanding series of shares of the Terminating Fund and corresponding series of units of the Continuing Fund which these shareholders will received upon completion of the Proposed Transfer and the corresponding management fees applicable to these units and shares are as follows:
Series A and T6 1.95%
Series F and F6 0.95%
Founder's Series 1.95%
Series M No fee
Founder's Series 1.95%
Series F 0.95%
Founder's Series 1.95%
Series M No fee
20. Since the Terminating Fund will no longer have the tax advantage of the Forward Contract, the Filer has determined that, in keeping with its stated discretion in the simplified prospectus of the Continuing Fund to adjust the distribution rates from time to time, the current distribution policy of each series of the Continuing Fund will continue and the policy of the relevant series as stated in the simplified prospectus will apply for purposes of distributions to investors in the Terminating Fund after the date of the Proposed Transfer.
21. In accordance with Regulation 81-107, the Filer presented the terms of the Proposed Transfer, as described above in paragraph 17, to the members of the IRC for its recommendation. On May 7, 2013, further to reasonable inquiry, the members of the IRC recommended the Proposed Transfer, subject to the approval of the securityholders and the Decision Makers, on the basis that the transfer would achieve a fair and reasonable result for the Funds.
22. On May 8, 2013, the members of the board of directors of O'Leary Funds Management Inc., the general partner of the Filer and the members of the board of directors of O'Leary Funds Inc., have approved the Proposed Transfer as described above in paragraph 17.
23. On May 10, 2013, a press release was issued and filed on SEDAR and material change report was filed on SEDAR.
24. On May 17, 2013, the simplified prospectus was amended to provide information on the Proposed Transfer.
25. The Proposed Transfer does not require approval of unitholders of the Continuing Fund pursuant to subsection 5.1(g) of Regulation 81-102 because the Filer believes that the Proposed Transfer would not be a material change for this fund, since:
(a) As part of the Proposed Transfer, the Terminating Fund will transfer to the Continuing Fund assets composed of cash and securities which meet the investment objectives of the Continuing Fund; and
(b) the net asset value of the Continuing Fund is larger than the net asset value of the Terminating Fund.
26. The Proposed Transfer requires approval of shareholders of the Terminating Fund pursuant to subsection 5.1(f) of Regulation 81-102 since the requirements of subsection 5.3(2) of Regulation 81-102 cannot all be met.
27. On June 4, 2013, in accordance with section 5.4 of Regulation 81-102, a notice of meeting and a circular was sent to securityholders of the Terminating Fund not less than 21 days before the date of the meeting and was filed on SEDAR.
28. The Circular sent to the securityholders of the Terminating Fund:
(a) complies with paragraph 5.6(1)(f) of the Regulation 81-102;
(b) gives information on the significant differences between the Terminating Fund and the Continuing Fund;
(c) states the different measures that will be taken to process the Proposed Transfer in an orderly manner; and
(d) provides information on the Proposed Transfer to enable the securityholders of the Terminating Fund to make an informed decision regarding the Proposed Transfer (including the exchange of shares for units as described above).
29. On June 28, 2013, more than two thirds of the securityholders of the Terminating Fund have approved the Proposed Transfer during the meeting.
30. Regulatory approval of the Proposed Transfer is required because the Proposed Transfer does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of Regulation 81-102 namely because a reasonable person may not consider the fundamental investment objectives of the Terminating Fund and those of the Continuing Fund to be "substantially similar".
31. Except as described in the preceding paragraph, the Proposed Transfer meets, or will meet, all of the other criteria for pre-approved reorganizations and transfers under section 5.6 of Regulation 81-102.
32. All costs and expenses associated with the Proposed Transfer will be borne by the Filer.
33. No sales charges, redemption fees or other fees or commissions will be payable by securityholders of the Funds in connection with the Proposed Transfer.
34. Unitholders of the Terminating Fund will continue to have the right to redeem shares of the Terminating Fund at any time up to the close of business on the date of the Proposed Transfer.
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 Approval Sought is granted.