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 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 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.1(1)(c), 19.1.
September 8, 2016
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
SCOTIA MANAGED COMPANIES ADMINISTRATION INC.
IN THE MATTER OF
MONEDA LATAM CORPORATE BOND FUND
The Ontario Securities Commission (the “Decision Maker”) has received an application from the Filer, on behalf of the Fund, for a decision under the securities legislation of the Jurisdiction (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, a corporation existing under the laws of the Province of Ontario which is a wholly-owned subsidiary of Scotia Capital Inc., is the manager of the Fund. The Filer is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador. The head office of the Filer is located in Toronto, Ontario.
2. The Fund is an investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of October 26, 2011.
3. Neither the Filer nor the Fund are in default of securities legislation in any Jurisdiction.
4. The Fund is a non-redeemable investment fund. Its units were qualified for distribution pursuant to a prospectus dated October 26, 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. The Class A Units of the Fund, which are designed for investors wishing to make their investment in Canadian dollars, are listed and posted for trading on the Toronto Stock Exchange under the symbol MLD.UN. The Class U Units are designed for investors wishing to make their investment in U.S. dollars.
5. The Fund is a party to a forward purchase and sale agreement dated November 3, 2011 (the “Forward Agreement”). The Forward Agreement provides the Fund with exposure to the total return performance of Moneda Deuda Latinoamericana Fondo de Inversion (the “Moneda Fund”), a Chilean listed investment fund established in 2000 which is actively managed by Moneda S.A. Administradora de Fondos de Inversion. The current investment objectives of the Fund are as follows:
“The Fund’s investment objectives are to: (i) preserve and enhance the net asset value of the Fund; and (ii) provide Unitholders with quarterly tax-advantaged distributions consisting primarily of returns of capital, in each case through exposure by virtue of the Forward Agreement to the total return performance of the Moneda Fund.”
6. The fundamental investment objective of the Moneda Fund is to seek capital appreciation and income from the investment in a diversified portfolio of high yield fixed income securities of companies located in, or with significant operations in, Latin America (including the Caribbean), primarily denominated in U.S. dollars.
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 November 3, 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, it is anticipated that the Forward Agreement will no longer be able, over the long term, 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 invest directly in the securities of the Moneda 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 it currently employs.
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 Moneda 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) preserve and enhance the net asset value of the Fund; and (ii) provide unitholders with quarterly distributions through direct investment in the Moneda Fund.”
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 Effective 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 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.
Investment Funds and Structured Products Branch
Ontario Securities Commission