NP 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund reorganization pursuant to section 5.5(1)(b) of NI 81-102 required because the reorganization does not meet criteria for pre-approval -- reorganization undertaken in connection with changes to the Income Tax Act (Canada) which eliminated certain tax benefits associated with character conversion transactions.
Upon reorganization, portfolio assets of converting fund to continue as portfolio assets of continuing Fund -- continuing Fund to have same investment objectives, investment strategies, management fees, portfolio investment manager, and, at effective date of conversion, same portfolio assets as the converting funds -- Financial data of converting fund is significant information that can assist investors in making decision to purchase or hold shares of continuing fund.
Exemption from sections 15.3(2.1), 15.6(a)(ii), 15.6(b), 15.6(d), 15.8(2)(a), 15.8(3)(a) and 15.9(2)(d) of NI 81-102 to permit the continuing funds to use the performance data of the converting funds in sales communications and reports to securityholders -- Exemption from section 4.4 of NI 81-106 and Items 3.1(1), 3.1(7), 3.1(8), 4.1(1), 4.1(2), 4.2(1), 4.2(2) and 4.3(1)(a) of Part B of Form 81-106F1 and Items 3(1) and 4 of Part C of Form 81-106F1 to permit the continuing fund to include in their annual and interim management reports of fund performance the financial highlights and past performance of the converting fund.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 19.1.
National Instrument 81-106 Investment Fund Continuous Disclosure, s. 17.1.
January 13, 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 BMO NESBITT BURNS INC. (the "Filer") AND IN THE MATTER OF STAR PORTFOLIO CORP. (the "Converting Fund") AND IN THE MATTER OF STAR YIELD MANAGERS TRUST (the "Continuing Fund" and collectively with the Converting Fund, the "Funds")
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Converting Fund for a decision under the securities legislation of the Jurisdiction (the "Legislation") in connection with the conversion (the "Conversion") of the Converting Fund into the Continuing Fund, which will result in the shareholders of the Star Yield Managers Class shares of the Converting Fund becoming unitholders of the Continuing Fund, for an exemption from the following provisions of the Legislation to enable the Continuing Fund to include in its annual and interim management reports of fund performance ("MRFP") the performance data and information derived from the financial statements (collectively, the "Financial Data") of the Converting Fund:
(a) Section 4.4 of National Instrument 81-106 Investment Fund Continuous Disclosure ("NI 81-106") for the relief requested from Form 81-106F1 -- Contents of Annual and Interim Management Report of Fund Performance (Form 81-106F1) for the Continuing Fund;
(b) Items 3.1(1), 3.1(7), 3.1(8), 4.1(1) in respect of the requirement to comply with subsections 15.3(2.1) and 15.9(2)(d) of NI 81-102, 4.1(2), 4.2(1), 4.2(2) and 4.3(1)(a) of Part B of Form 81-106F1; and
(c) Items 3(1) and 4 of Part C of Form 81-106F1 for the Continuing Fund.
(collectively, the "Requested Relief"),
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
1. the Ontario Securities Commission is the principal regulator (the "Principal Regulator") for this application; and
2. 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 other provinces and territories of Canada (collectively with Ontario, the "Jurisdictions").
Terms defined in National Instrument 14-101 -- Definitions, MI 11-102 and NI 81-106 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is the administrator of the Converting Fund. The Filer is incorporated under the laws of Canada and is an indirect subsidiary of the Bank of Montreal, a bank listed in Schedule 1 of the Bank Act (Canada). The Filer is a member of IIROC and is registered as an investment dealer (or equivalent) with the securities regulatory authorities in each province and territory of Canada. The Filer is registered as an "investment fund manager" in the province of Ontario, with its head office located in Toronto, Ontario.
2. The Converting Fund is a corporation incorporated under the Business Corporations Act (Ontario) (the "OBCA"), and is a non-redeemable investment fund and qualifies as a "mutual fund corporation" under the Income Tax Act (Canada) (the "Tax Act").
3. The Star Yield Managers Class shares (the "Shares") is the only class of publicly held shares of the Converting Fund and the Shares are listed on the Toronto Stock Exchange.
4. The Converting Fund has 2,039,248 Shares outstanding. The Shares of the Converting Fund were qualified for distribution pursuant to a prospectus dated September 28, 2010, that was filed in accordance with the securities legislation of all the provinces and territories of Canada. Accordingly, the Converting Fund is a reporting issuer or the equivalent in each province and territory of Canada.
5. The Converting Fund has, and the Continuing Fund will have, an independent review committee (the "IRC") as required by National Instrument 81-107 Independent Review Committee for Investment Funds ("NI 81-107").
6. The Converting Fund is, and the Continuing Fund will be following the Conversion, subject to the requirements of NI 81-102 and NI 81-107, subject to any exemptions therefrom that may be available under applicable securities legislation or granted by the securities regulatory authorities.
7. Neither the Filer nor the Converting Fund is in default of securities legislation in any jurisdiction.
8. The Continuing Fund will be established as a unit trust governed by the laws of the Province of Ontario, specifically for the purpose of effecting the Conversion and will be a non-redeemable investment fund governed by NI 81-102 following the Conversion.
9. The Filer will be the manager and administrator of the Continuing Fund.
10. The Continuing Fund will be authorized to issue an unlimited number of units of the Continuing Fund (the "Units"). The number of Units outstanding upon completion of the Conversion will be identical to the number of Shares outstanding immediately prior to the Conversion. The net asset value per Unit upon completion of the Conversion will be identical to the net asset value per Share immediately prior to the Conversion.
11. The Converting Fund and the Continuing Fund have substantially similar investment objectives, investment strategies, valuation procedures and fee structures.
12. The holders of the Shares of the Continuing Fund (the "Shareholders") having approved the Conversion, the Filer proposes to convert the Converting Fund from a "mutual fund corporation" to a "mutual fund trust" as a result of changes to the Tax Act that eliminated the tax advantages of character conversion transactions.
13. The Filer proposes to effect the Conversion by transferring, on or about the close of business on January 15, 2016 (the "Conversion Date"), all or substantially all of the assets of the Converting Fund to the Continuing Fund in exchange for Units and the assumption by the Continuing Fund of liabilities of the Converting Fund.
14. Immediately after the step above, and on the Conversion Date, the Converting Fund will redeem all the Shares (other than outstanding Shares, if any, of a Shareholder who dissents in respect of the Conversion) and will distribute the Units as payment "in kind" of the redemption price of the Shares immediately. Upon such distribution, the Shareholders whose Shares are redeemed will become direct unitholders of the Continuing Fund ("Unitholders").
15. As soon as practicable after the step above, the Units of the Continuing Fund will be listed on the Toronto Stock Exchange.
16. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Converting Fund.
17. The Converting Fund and the Continuing Fund will elect that the transaction be a "qualifying exchange" as contemplated by section 132.2 of the Tax Act.
18. As soon as possible following the steps set out above, the Converting Fund will be wound up and dissolved.
19. The Filer submits that the proposed Conversion:
(i) will result in investors participating in the income and gains (or losses) of the Continuing Fund on a more tax efficient basis than is the case with the Converting Fund;
(ii) will not result in substantial changes to the investment Shareholders made in the Converting Fund, as the investment objectives, strategies and restrictions of the Continuing Fund will be substantially the same as those of the Converting Fund; and
(iii) will not impact the net asset value, as the net asset value of the Shares will be equal to the net value of the Units immediately after the Conversion.
Reasons for the Conversion
20. Prior to October 28, 2015, the Converting Fund was structured as a tax advantaged fund that provided returns to investors partially through economic exposure to a portfolio of securities (the "Aston Hill Portfolio") by virtue of a forward agreement (the "Forward Agreement") made as of October 29, 2010 with a Canadian chartered bank. The Forward Agreement was terminated on October 28, 2015. Star Yield Trust was established for the purpose of acquiring and holding the Aston Hill Portfolio.
21. In 2013, the Tax Act was amended to eliminate the tax advantages of character conversion transactions like those achieved via the Forward Agreement, subject to limited grandfathering for pre-existing agreements (the "DFA Rules"). As a result of these tax changes, if the Forward Agreement was extended past its termination date, the tax advantages of the Forward Agreement would have been lost.
22. The Filer therefore determined that it would be more efficient and less costly for the Converting Fund to seek to achieve its investment objectives with respect to the Aston Hill Portfolio by investing that portion of its assets directly in the same, or substantially the same, assets as those held by the Star Yield Trust.
23. The Filer therefore sought and received approval from Shareholders to amend the investment objectives and investment restrictions of the Converting Fund to permit the Converting Fund to directly hold the assets held by Star Yield Trust, and accordingly, settled the entire amount of the Forward Agreement on or before October 28, 2015.
24. As a result of the DFA Rules and the resulting composition of the Converting Fund's assets after the termination of the Forward Agreement, it is expected that the Converting Fund will incur non-refundable income tax under the Tax Act that it would not otherwise incur if it was structured as a "mutual fund trust". This is because the Converting Fund is currently structured as a "mutual fund corporation" and a mutual fund corporation is subject to non-refundable income tax on ordinary income. A mutual fund trust generally is not subject to tax on such income, provided it makes such income payable to its unitholders.
25. The Filer is therefore now proposing that the Converting Fund change its structure from a "mutual fund corporation" to a "mutual fund trust" to be more tax-efficient in light of the DFA Rules and the resulting composition of the Converting Fund's assets after the termination of the Forward Agreement.
Reasons for Seeking the Requested Relief
26. The Filer is seeking to make the Conversion as seamless as possible for investors of the Converting Fund. Accordingly, the Filer submits that treating the Continuing Fund as a continuation of the Converting Fund would be beneficial to investors and that to do otherwise would cause unnecessary confusion among investors concerning the difference between the Converting Fund and the Continuing Fund.
27. The Filer submits that investors will not be misled if the Financial Data of the Continuing Fund reflect the Financial Data of the Converting Fund.
28. The Financial Data of the Converting Fund is significant information which can assist investors in determining whether to acquire units of the Continuing Fund in the market. In the absence of the relief requested herein, investors will have no financial information (such as past performance) on which to base such an investment decision.
29. The Continuing Fund will be a new fund. However, while the Continuing Fund will have the same assets and liabilities as the Converting Fund, it will not have its own Financial Data as at the Conversion Date. The Continuing Fund will have a December 31 year end for financial reporting purposes. In order for the Conversion to be as seamless as possible for shareholders of the Converting Fund, the Administrator proposes that:
(a) the Converting Fund will prepare interim financial statements for the six-month period ended November 30, 2015. The Converting Fund will file and deliver the interim financial statements and an interim management report of fund performance ("MRFP") within 60 days, as required under NI 81-106;
(b) the Continuing Fund will prepare an annual MRFP commencing with the year ended December 31, 2016 and interim MRFPs commencing with the seven-month period ended June 30, 2016 using the Converting Fund's historical financial data;
(c) the Continuing Fund will prepare comparative annual financial statements commencing with the year ended December 31, 2016 and interim financial statements commencing with the seven-month period ended June 30, 2016 under sections 2.1 and 2.3, respectively, of NI 81-106 using the Converting Fund's historical financial data;
(d) the MRFP for the Continuing Fund will include the Financial Data of the Converting Fund and disclose the Conversion; and
30. The Filer has filed a separate application for exemptive relief from certain provisions of NI 81-102 to permit (a) the Conversion, and (b) the Continuing Fund's sales communications and reports, among other things, to Unitholders (the "Fund Communications") to use performance data of the Converting Fund prepared in accordance with Part 15 of NI 81-102, including section 15(1) of NI 81-102 (the "NI 81-102 Relief").
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 under the Legislation is that the Requested Relief is granted provided that:
(a) the Converting Fund prepare interim financial statements under section 2.1 of NI 81-106 for the six-month period ended November 30, 2015;
(b) the MRFP for the Continuing Fund includes the Financial Data of the Converting Fund and discloses the Conversion; and
(c) the Continuing Fund prepares its Fund Communications in accordance with the NI 81-102 Relief.