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O’Leary Funds Management L.P. and O’Leary Global Bond Yield Advantaged Fund
Headnote
Policy Statement 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- investment fund manager obtaining relief from the requirement in subection 5.1(c) of Regulation 81-102 to obtain the approval of securityholders before changing the fundamental investment objectives of the Fund -- 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 objectives of the Fund setting out the change and the reasons for such change (including the fact that the Fund will no longer be able to provide tax-advantaged returns).
Applicable Legislative Provisions
Regulation 81-102 respecting Mutual Funds, ss. 5.1(c), 19.1.
September 30, 2013
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
(the Jurisdictions)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
O'LEARY FUNDS MANAGEMENT L.P.
(the Filer)
AND
IN THE MATTER OF
O'LEARY GLOBAL BOND YIELD ADVANTAGED FUND
(the Fund)
DECISION
QUÉBEC AND ONTARIO
(the Jurisdictions)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
O'LEARY FUNDS MANAGEMENT L.P.
(the Filer)
AND
IN THE MATTER OF
O'LEARY GLOBAL BOND YIELD ADVANTAGED FUND
(the Fund)
DECISION
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
O'LEARY FUNDS MANAGEMENT L.P.
(the Filer)
AND
IN THE MATTER OF
O'LEARY GLOBAL BOND YIELD ADVANTAGED FUND
(the Fund)
DECISION
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
O'LEARY FUNDS MANAGEMENT L.P.
(the Filer)
AND
IN THE MATTER OF
O'LEARY GLOBAL BOND YIELD ADVANTAGED FUND
(the Fund)
DECISION
AND
IN THE MATTER OF
O'LEARY FUNDS MANAGEMENT L.P.
(the Filer)
AND
IN THE MATTER OF
O'LEARY GLOBAL BOND YIELD ADVANTAGED FUND
(the Fund)
DECISION
O'LEARY FUNDS MANAGEMENT L.P.
(the Filer)
AND
IN THE MATTER OF
O'LEARY GLOBAL BOND YIELD ADVANTAGED FUND
(the Fund)
DECISION
AND
IN THE MATTER OF
O'LEARY GLOBAL BOND YIELD ADVANTAGED FUND
(the Fund)
DECISION
O'LEARY GLOBAL BOND YIELD ADVANTAGED FUND
(the Fund)
DECISION
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption under section 19.1 of Regulation 81-102 respecting Mutual Funds (c. V-1.1, r.39) (Regulation 81-102) from the requirements of subsection 5.1(c) of Regulation 81-102 in order to permit the Fund to change its fundamental investment objectives (the Change of Investment Objectives) without obtaining the prior approval of the unitholders of the Fund (the Exemption 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.
Interpretation
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.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a limited partnership formed under the laws of Ontario.
2. The Filer's head office is located in 1010, Sherbrooke Street West, suite 1700, Montréal, Québec.
3. The Filer is the investment fund manager and the trustee of the Fund.
4. The Filer is duly registered as an investment fund manager under the securities legislation of Quebec.
5. The Filer is not in default of securities legislation in any province of Canada.
The Fund
6. The Fund (formerly known as O'Leary Advantaged Tactical Global Corporate Bond Fund) is an open-ended investment trust established under the laws of Ontario pursuant to a declaration of trust dated May 28, 2010, which was amended and restated as of August 15, 2011 and further amended and restated as of June 18, 2012 (the Master Declaration of Trust).
7. The Fund is a reporting issuer under the securities legislation of each province of Canada.
8. The Fund is a "mutual fund" as defined in the Legislation and is governed by Regulation 81-102. The Fund was originally a non-redeemable investment fund offered under a long form prospectus dated May 28, 2010, and subsequently qualified for distribution as a mutual fund. The Fund is currently qualified for distribution by a simplified prospectus dated June 25, 2013, prepared in accordance with Regulation 81-101 respecting Mutual Fund Prospectus Disclosure (c. V-1.1, r.38) (Regulation 81-101) (theCurrent Simplified Prospectus).
9. The investment objectives of the Fund, as currently stated in the Current Simplified Prospectus, are as follows: "The Fund's objectives are to preserve capital and to provide tax efficient exposure to a portfolio comprised primarily of publicly traded debt securities of global issuers with market capitalizations of at least $1 billion. To achieve its investment objectives, the Fund invests primarily in equity securities and enters into forward contracts in order to provide the Fund with a return determined with reference to the performance of a high yield fixed income fund managed by the Manager. The Fund will seek to provide unitholders with periodic distributions in accordance with the distribution policy established for each series."
10. Since the creation of the Fund, the "high yield fixed income fund" referred to in the investment objectives of the Fund has always been the O'Leary Bond Portfolio Trust (the Reference Fund), as stated in the investment strategies of the Fund in the Current Simplified Prospectus.
11. Before March 21, 2013, the Fund invested its assets in a portfolio of equity securities (the Equity Portfolio) and entered into a forward contract with a counterparty (the Forward Agreement) whereby the Fund agreed to deliver the Equity Portfolio to the counterparty, a Canadian financial institution, at maturity of the Forward Agreement in return for a cash payment determined by reference to the net asset value of the Reference Fund. In this way, unitholders in the Fund receive a return on their investment based on the performance of the Reference Fund, with tax benefits that can be achieved through the Forward Agreement. This type of transaction is commonly referred to as a "character conversion transaction".
12. The Fund is not in default of securities legislation in any province of Canada.
The Reference Fund
13. The Reference Fund is an open-ended investment trust established under the laws of Ontario pursuant to a declaration of trust dated May 28, 2010, which was amended and restated as of August 15, 2011.
14. The Reference Fund is a "mutual fund" as defined in the Legislation and is governed by Regulation 81-102. The Reference Fund is qualified for distribution under a simplified prospectus. The Reference Fund only offers series I units, which are held by the counterparty referred to above.
15. The investment objectives of the Reference Fund are: "to preserve capital and to provide unitholders with capital appreciation by investing in a portfolio comprised primarily of publicly traded debt securities of global issuers with market capitalization of at least $1 billion."
16. The Filer is the investment fund manager and the trustee of the Reference Fund.
17. The Reference Fund is not in default of securities legislation in any province of Canada.
The Change of Investment Objectives
18. On March 21, 2013, the federal Minister of Finance presented the government's 2013 budget. The budget contains proposed amendments to the ITA (the Budget Amendments). The Budget Amendments are expected to eliminate the tax advantages of character conversion transactions like those employed by the Fund. The changes apply to character conversion transactions entered into or amended after March 20, 2013.
19. The federal Minister of Finance has given some guidance with respect to the interpretation of the Budget Amendments, and it is the Filer's current understanding that the Fund may continue to use the Forward Agreement until the expiration of its term (June 23, 2015), but that Fund may only use available subscription moneys to extend the size of the Forward Agreement under limited circumstances.
20. As new subscriptions into the Fund are limited as to the amount and way in which such moneys may be invested in the Forward Agreement, the Fund must use an alternate investment strategy. In order to most closely follow the original investment decision of investors, the Fund will invest directly in publicly traded debt securities of global issuers with market capitalization of at least $1 billion (the Direct Investment Strategy) as currently set out in the investment strategies of the Fund and in the investment objectives of the Reference Fund.
21. In order to reflect the change to the ITA, the Filer must amend the Master Declaration of Trust to change the fundamental investment objectives of the Fund.
22. The fundamental investment objectives of the Fund would be amended to remove the reference to the Forward Agreement. The amended investment objectives of the Fund will be the same as the investment objectives of the Reference Fund and would be stated as follows: "The Fund's objectives are to preserve capital and to provide unitholders with potential for capital appreciation by investing, primarily, directly or indirectly in publicly traded debt securities of global issuers with market capitalizations of at least $1 billion. The Fund will seek to provide unitholders with periodic distributions in accordance with the distribution policy established for each series."
23. The proposed changes to the investment objectives of the Fund will permit the Fund to maintain the tax benefits of the Forward Agreement as long as possible since utilization of the Forward Agreement will continue to be part of the Fund's investment strategies until the termination of that agreement, thus allowing all unitholders of the Fund to benefit from both the Forward Agreement and the Direct Investment Strategy. The changes to the investment objectives will remove the reference to the Forward Agreement, which then will be disclosed in the investment strategies, and will focus the investment objectives on the Direct Investment Strategy investments.
24. The board of directors of O'Leary Funds Management Inc., the general partner of the Filer, has approved the Change of Investment Objectives, subject to receipt of the Exemption Sought.
25. The Filer has referred the Change of Investment Objectives to the independent review committee of the Fund (the IRC) and the IRC has made a positive determination with respect to the Change of Investment Objectives.
26. If the Exemption Sought is granted, the Change of Investment Objectives will be implemented promptly thereafter through an amendment to the Master Declaration of Trust and this will be announced by press release, material change report and an amendment to the simplified prospectus of the Fund.
27. Upon the expiration of the Forward Agreement or in the event of a decision by the Filer to pre-settle the entire Forward Agreement at an earlier date due to factors which make it more advantageous to the Fund and its unitholders to do so, the Filer will amend the investment strategies of the Fund to remove the references to the Forward Agreement.
28. Most of unitholders invest in the Fund through non-registered or taxable vehicles. In order to continue to provide tax efficient distributions, the Filer will use income from the Direct Investment Strategy to offset expenses so that the overall tax treatment of the Fund's investments will be similar to that currently experienced by the Fund until the termination of the Forward Agreement. The Filer will monitor the new subscriptions of the Fund to ensure that the new investments in the Fund will not have a significant negative impact on the Fund.
29. The proposed Change of the Investment Objectives was announced in the Amendment no 6 to the simplified prospectus of the Fund filed on May 17, 2013.
The Reasons for the Exemption Sought
30. The Filer is of the view that continuing to operate the Fund by using the Forward Agreement to the end of its term is of significant value to the unitholders.
31. In the absence of the Exemption Sought, the Change of Investment Objectives would require approval of unitholders of the Fund pursuant to Section 5.1(c) of Regulation 81-102.
32. The Change of Investment Objectives is a change made in response to the Budget Amendments. The Fund wishes to use the Direct Investment Strategy instead of getting exposed to the Reference Fund by using the Forward Agreement after the expiration of the Forward Agreement.
33. In the opinion of the Filer, the Change of Investment Objectives will not adversely affect unitholders in the Fund. Both current unitholders and new unitholders in the Fund will be treated in the same way and will not be prejudiced by the Change of Investment Objectives.
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, at least 60 days before the effective date of the Change of Investment Objectives, the Filer send to each unitholder of the Fund a written notice that sets out the change of investment objectives, the reasons for such change and a statement that the Fund will no longer be able to provide tax-advantaged returns after the expiration of the Forward Agreement.
"Josée Deslauriers"
Senior Director,
Investment Funds and Continuous Disclosure
Autorité des marchés financiers