Securities Law & Instruments

Headnote

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 objective of certain funds -- 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 objective of the funds setting out the change, the reasons for such change and a statement that the funds 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 26, 2014

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 FIDELITY INVESTMENTS CANADA ULC (the Filer) AND IN THE MATTER OF FIDELITY CORPORATE BOND CAPITAL YIELD CLASS, FIDELITY PREMIUM FIXED INCOME CAPITAL YIELD PRIVATE POOL AND FIDELITY PREMIUM TACTICAL FIXED INCOME CAPITAL YIELD PRIVATE POOL (collectively, the Funds)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer 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 of the Objectives Changes (defined below) under paragraph 5.1(1)(c) of National Instrument 81-102 Investment Funds (NI 81-102) (the Application).

Under the Process for Exemptive Relief applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for the Application; and

(b) 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, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional term shall have the following meaning:

"Reference Fund" means the mutual fund set out beside each Fund in the following table:

Fund

Reference Fund

 

Fidelity Corporate Bond Capital Yield Class

Fidelity Corporate Bond Fund [ ]

 

Fidelity Premium Fixed Income Capital Yield Private Pool

Fidelity Canadian Bond Fund

 

Fidelity Premium Tactical Fixed Income Capital Yield Private Pool

Fidelity Tactical Fixed Income Fund

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is a corporation duly amalgamated and validly existing under the laws of the Province of Alberta and its head office is located in Toronto, Ontario.

2. The Filer is registered in Ontario, Québec and Newfoundland and Labrador in the category of investment fund manager. The Filer is also registered as a portfolio manager and mutual fund dealer in each of the Jurisdictions.

3. The Filer is the investment fund manager of the Funds and the Reference Funds.

4. The Filer is the trustee of Fidelity Premium Tactical Fixed Income Capital Yield Private Pool, a trust established under the laws of Ontario.

5. Fidelity Corporate Bond Capital Yield Class and Fidelity Premium Fixed Income Capital Yield Private Pool are established as classes of shares of Fidelity Capital Structure Corp. which is a mutual fund corporation validly existing under the laws of Alberta.

6. None of the Filer, the Funds or the Reference Funds is in default of its obligations under the securities legislation of the Jurisdictions.

7. Each Fund and Reference Fund is subject to the requirements of NI 81-102 and National Instrument 81-107 Independent Review Committee for Investment Funds, subject to any exemptions therefrom that may be available under applicable securities legislation or granted by the securities regulatory authorities.

8. Each Fund and Reference Fund has a current prospectus in the Jurisdictions.

9. The Funds were launched to provide tax-efficient fixed income offerings by investing in different types of securities and entering into forward contracts (the Forwards) to provide investment returns similar to those generated by their Reference Funds.

10. The favorable tax treatment of these arrangements will be eliminated by new rules in the Income Tax Act (Canada), enacted on December 12, 2013, that affect the tax treatment of returns earned under "derivative forward agreements" (the Tax Changes). Under the transitional provisions of the Tax Changes, the favourable tax treatment for forward contracts similar to those used by the Funds will expire on December 31, 2014.

11. The Funds were closed to new purchases of securities by investors in April 2013.

12. In response to the Tax Changes the Filer wishes to change the fundamental investment objectives of the Funds (collectively, the Objectives Changes). In conjunction with the Objectives Changes, the Filer also wishes to change the names of the Funds and amend the investment strategies of the Funds in order to remove references to the capital yield investment approach and to make them consistent with the revised fundamental investment objectives.

13. The existing name and fundamental investment objectives, and proposed new name and fundamental investment objectives, of each Fund are set out in the following table:

Existing name and fundamental investment objectives

Proposed new name and fundamental investment objectives

 

Fidelity Corporate Bond Capital Yield Class

Fidelity Corporate Bond Class

The Fund aims to provide a return similar to that of a Canadian fixed income fund managed by Fidelity, less transaction and hedging costs.

The Fund aims to provide a steady flow of income.

It invests primarily in equity securities issued by Canadian companies and enters into forward contracts in order to hedge its exposure to the equities and provide the Fund with a return based on the performance of a Canadian fixed income mutual fund managed by Fidelity. It may also invest directly in fixed income securities issued by Canadian and foreign governments or companies.

It seeks a similar return to its underlying fund, which is also managed by Fidelity, by investing substantially all of its assets in units of that fund. The underlying fund aims to provide a steady flow of income by investing primarily in fixed income securities issued by Canadian and foreign companies.

We can't change the Fund's investment objectives unless we get approval from a majority of shareholders who vote at a special meeting we call.

We can't change the Fund's investment objectives unless we get approval from a majority of shareholders who vote at a special meeting we call.

 

Fidelity Premium Fixed Income Capital Yield Private Pool

Fidelity Premium Tactical Fixed Income Capital Yield Private Pool

The Pool aims to provide a return similar to that of a Canadian fixed income fund managed by Fidelity, less transaction and hedging costs.

The Pool's objective is to provide a steady flow of income.

It invests primarily in equity securities issued by Canadian companies and enters into forward contracts in order to hedge its exposure to these equity securities and to provide the Pool with a return based on the performance of a Canadian fixed income mutual fund managed by Fidelity. It may also invest directly in fixed income securities issued by Canadian and foreign governments or companies.

It seeks a similar return to its underlying Fund, which is also managed by Fidelity, by investing substantially all of its assets in units of that Fund. The underlying Fund aims to provide a steady flow of income by investing primarily in Canadian fixed income securities.

We can't change the Pool's investment objectives unless we get approval from a majority of securityholders who vote at a special meeting we call.

We can't change the Pool's investment objectives unless we get approval from a majority of securityholders who vote at a special meeting we call.

 

Fidelity Premium Fixed Income Private Pool Class

Fidelity Premium Tactical Fixed Income Private Pool

The Pool aims to provide a return similar to that of a Canadian fixed income fund managed by Fidelity, less transaction and hedging costs.

The Pool's objective is to provide a steady flow of income.

It invests primarily in equity securities issued by Canadian companies and enters into forward contracts or other similar derivative arrangements in order to hedge its exposure to these equity securities and to provide the Pool with a return based on the performance of a Canadian fixed income mutual fund managed by Fidelity (the "Reference Fund"). In addition or alternatively, it may use other derivative arrangements to provide the Pool with a similar return. It may also invest directly in fixed income securities issued by Canadian and foreign governments or companies. The Reference Fund is currently Fidelity Tactical Fixed Income Fund, which, in turn, may invest in other underlying funds managed by Fidelity.

It seeks a similar return to its underlying Fund, which is also managed by Fidelity, by investing substantially all of its assets in units of that Fund. The underlying Fund aims to provide a steady flow of income by investing primarily in Canadian fixed income securities. The underlying fund can invest in these securities either directly or indirectly through investments in other underlying funds. Currently, the underlying fund is Fidelity Tactical Fixed Income Fund.

We can't change the Pool's investment objectives unless we get approval from a majority of securityholders who vote at a special meeting we call.

We can't change the Pool's investment objectives unless we get approval from a majority of unitholders who vote at a special meeting we call.

14. The primary purposes of the Objectives Changes are to:

(a) remove references to the capital yield investment approach and the associated use of the Forwards; and

(b) reflect the proposed new investment approach of the Funds to invest substantially all of their assets in units of their corresponding Reference Fund.

15. The existing fundamental investment objectives of the Funds will continue in effect until December 22, 2014. The Objectives Changes will take effect on the next business day, December 23, 2014 as each Fund's direct exposure to its Reference Fund will commence on that date.

16. With respect to the Funds, the Filer will comply 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 Objectives Changes.

17. Securityholders may redeem their securities in advance of the Objectives Changes should they wish to do so.

18. The Filer submits that it is not prejudicial, nor contrary to the public interest to grant the Requested Relief in the circumstances as represented above.

Decision

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 is that the relief sought under the Application is granted provided that, at least 60 days before the effective date of the Objectives Changes, the Filer sends to each securityholder a written notice that sets out the change of fundamental investment objectives, the reasons for such change and a statement that the applicable Fund will no longer be able to provide tax-advantaged returns after the final Forwards have matured.

"Vera Nunes"
Manager, Investment Funds and Structured Products
Ontario Securities Commission