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 objectives of a non-redeemable investment fund – exemptive relief required as a result of changes to tax law eliminating certain tax benefits associated with character conversion transactions – manager required to send written notice at least 30 days before the effective date of the change to the investment objectives 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.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.1(1)(c), 19.1.
September 12, 2016
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
BROMPTON FUNDS LIMITED
IN THE MATTER OF
SYMPHONY FLOATING RATE SENIOR LOAN FUND
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Fund, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) for exemptive relief from the requirement to obtain prior securityholder approval before changing the fundamental investment objectives of the Fund under subsection 5.1(1)(c) of National Instrument 81-102 – Investment Funds (“NI 81-102”) (the “Requested Relief”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission is 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 81-102 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 manager of the Fund and also the manager and trustee of SSF Trust. The Filer is registered with the Ontario Securities Commission as a portfolio manager, investment fund manager, exempt market dealer and commodity trading manager and is also registered as an investment fund manager in Quebec and Newfoundland and Labrador. The head office of the Filer is located in Toronto, Ontario.
2. The Filer is the portfolio manager of each of the Fund and SSF Trust.
3. The Fund is an investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust.
4. None of the Filer, the Fund or SSF Trust is in default of securities legislation in any Jurisdiction.
5. The Fund is a non-redeemable investment fund. Its units were qualified for distribution pursuant to a prospectus dated October 19, 2011, that was prepared and filed in accordance with the securities legislation of all the provinces and territories of Canada. Accordingly, the Fund is a reporting issuer or the equivalent in each province and territory of Canada.
6. Under its current investment objectives and strategies, the Fund may enter into character conversion transactions. The Fund is a party to a forward purchase and sale agreement dated November 1, 2011 (the “Forward Agreement”). The Forward Agreement provides the Fund with exposure to the returns of the securities of another investment fund, SSF Trust (the “Reference Fund”). The current investment objectives of the Fund are as follows:
“The Fund’s investment objectives are to: (i) provide monthly tax-advantaged distributions consisting primarily of returns of capital; and (ii) preserve capital, in each case, through exposure, pursuant to the Forward Agreement, to an actively managed, diversified portfolio consisting primarily of short-duration floating rate senior corporate debt instruments, including senior secured loans and other senior debt obligations of North American non-investment grade corporate borrowers.”
7. Through the use of the Forward Agreement, the Fund provides tax-advantaged distributions to its securityholders because the Fund will realize capital gains (or capital losses) on the disposition of securities acquired under the Forward Agreement, rather than ordinary income. Ordinary income is subject to tax at a higher rate in Canada than capital gains.
8. The Forward Agreement is expected to terminate on or about October 27, 2016, in accordance with its terms (the “Termination Date”).
9. The Income Tax Act (Canada) was amended in December 2013 to implement proposals that were first announced in the March 21, 2013 federal budget regarding the income tax treatment of character conversion transactions (the “Tax Changes”). Under the Tax Changes, the favourable tax treatment of character conversion transactions will be eliminated after a prescribed date (the “Effective Date”). The Effective Date for the Fund will be the Termination Date.
10. As a result of the Tax Changes, the Forward Agreement will no longer be able, following the Termination Date, to provide the same material tax efficiency to securityholders of the Fund. As a result, the Filer has determined that, upon the termination of the Forward Agreement, the Fund should own its portfolio of investments directly rather than through the Reference Fund, and the Reference Fund will be wound up. Following the Termination Date, the Fund will invest directly in the securities currently held in the underlying portfolio held by SSF Trust and the Filer intends to continue to pursue the Fund’s investment strategy directly without the Forward Agreement or the Reference Fund.
11. The Filer has determined that, as a result of the Tax Changes, it would be more efficient and less costly for the Fund to seek to achieve its fundamental investment objectives after the Effective Date by investing its assets using the same, or substantially the same, investment strategies as those of the Reference Fund. The Filer will also continue to manage the portfolio of the Fund in as tax-efficient a manner as possible.
12. The Filer wishes to amend the investment objectives of the Fund to remove all references to the use of the Forward Agreement to gain exposure to the Reference Fund and to delete references to “tax-advantaged” distributions. Other than for the loss of tax efficiency resulting from the Tax Changes, the Fund will have the same investment attributes under its amended investment objectives as exist under its current investment objectives.
13. Following such amendment, the revised investment objectives of the Fund will be as follows:
“The Fund’s investment objectives are to: (i) provide monthly distributions; and (ii) preserve capital through investment in an actively managed, diversified portfolio consisting primarily of short-duration floating rate senior corporate debt instruments, including senior secured loans and other senior debt obligations of North American non-investment grade corporate borrowers.”
14. The Filer has complied with the material change report requirements set out in Part 11 of National Instrument 81-106 - Investment Fund Continuous Disclosure in connection with the Filer’s decision to make the changes to the investment objectives of the Fund set out above.
15. The Filer expects the proposed changes to the fundamental investment objectives of the Fund to take effect on or about the Termination Date.
16. The Filer has determined that it would be in the best interests of the Fund and not prejudicial to the public interest to receive the Requested Relief.
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, provided that, at least 30 days before the effective date of the change in the investment objectives of the Fund, the Filer will send to each securityholder of the Fund a written notice that sets out the change to the investment objectives, 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.
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission