National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from the requirement to obtain the approval of securityholders before changing the fundamental investment objectives of a mutual fund -- Relief required as a result of changes to federal budget eliminating certain tax benefits associated with character conversion transactions -- 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, 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(c), 19.1.
October 29, 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 CIBC ASSET MANAGEMENT INC. (the Filer) AND IN THE MATTER OF RENAISSANCE CORPORATE BOND CAPITAL YIELD FUND (the 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 (the Legislation) for exemptive relief from the requirement to obtain prior securityholder approval before changing the fundamental investment objective of the Fund under paragraph 5.1(1)(c) of National Instrument 81-102Investment Funds (NI 81-102) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this 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 (together with Ontario, the Jurisdictions).
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation organized under the laws of Canada and is registered as a portfolio manager in all provinces and territories of Canada, an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, a commodity trading manager in Ontario and a derivatives portfolio manager in Quebec. The Filer's head office is located in Toronto, Ontario.
2. The Filer is the investment fund manager, portfolio manager and trustee of the Fund and of the Reference Fund (defined below).
3. The Filer is a wholly-owned subsidiary of CIBC. CIBC is a Schedule I bank under the Bank Act (Canada).
4. The Filer and the Fund are not in default of securities legislation in any of the Jurisdictions.
5. The Fund is an open-ended mutual fund trust established under the laws of the Province of Ontario on October 7, 2009 and is subject to NI 81-102. The shares of the Fund are qualified for distribution pursuant to a simplified prospectus, annual information form and Fund Facts dated August 28, 2014 (SEDAR project number 2235520), that was prepared and filed in accordance with the securities legislation of the Jurisdictions. Accordingly, the Fund is a reporting issuer or the equivalent in each Jurisdiction.
6. Under its current investment objective and strategies, the Fund may enter into transactions (Character Conversion Transactions) in which it uses derivatives to sell Canadian equity securities for prices determined with reference to its Reference Fund. The current investment objective of the Fund is set out below:
seeks to generate tax-efficient returns, primarily through exposure to a corporate bond fund that will invest primarily in bonds, debentures, notes, and other debt instruments of Canadian issuers (the Reference Securities). The Fund may, however, also invest directly in the Reference Securities where the Fund considers it would be beneficial to unitholders to do so.
7. On March 21, 2013, the Federal Minister of Finance presented the majority government's budget (the Budget Proposal). The Budget Proposal eliminates the tax benefits associated with Character Conversion Transactions. The Income Tax Act (Canada) was amended in December 2013 to implement the Budget Proposal. The changes apply to Character Conversion Transactions entered into or amended after March 20, 2013.
8. On August 16, 2013, the Filer issued a press release announcing the temporary closing of the Fund effective August 23, 2013. The Fund continues to remain closed to new investors.
9. The Filer has determined that it is in the best interests of unitholders that the Fund be merged with the Renaissance Corporate Bond Fund, the reference fund of the Fund (the Reference Fund, and the Merger). The Merger meets the criteria in section 5.3(2) of NI 81-102, so that unitholder approval of the Merger is not required, and the criteria in section 5.6 of NI 81-102, so that regulatory approval of the Merger is not required. The Merger has been approved by the board of directors of the Filer and by the Independent Review Committee (the IRC) of the Fund and the Reference Fund.
10. While the Reference Fund currently has a larger net asset value than the Fund, the Merger will not be a material change to the Fund because the net asset value of the Fund is expected to be considerably larger than that of the Reference Fund at the time of the Merger. This is because, prior to the Merger, the forward contracts to which the Fund is a party will be terminated. A considerable proportion of the units of the Reference Fund are held as hedging positions by the counterparties to those forward contracts. The Filer expects that the counterparties to the forward contracts will exit their hedged positions in connection with the termination of the forward contracts, which will reduce the net asset value of the Reference Fund to a level below the net asset value of the Fund.
11. In connection with the Merger, the Filer wishes to amend the investment objective of the Fund to remove the reference to the generation of tax-efficient returns through the use of Character Conversion Transactions and the reference to exposure to the "Reference Securities". Following such amendment, the revised investment objective of the Fund will be as set out below:
to obtain a high level of current income by investing primarily in bonds, debentures, notes, and other debt instruments of Canadian issuers.
12. On behalf of the Fund and Reference Fund, the Filer has issued a press release and filed a material change report regarding the Merger and the intention to change the investment objective of the Fund. The Fund and the Reference Fund have filed amendments to their Simplified Prospectus, Annual Information Form and Fund Facts documents to reflect the intention to proceed with the Merger and, subject to the receipt of the Exemption Sought, the change to the investment objective of the Fund. The Filer will send to unitholders of the Fund and the Reference Fund a written notice at least 60 days before the effective date of the Merger and the change to the investment objective of the Fund that will include notice of 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.
13. The board of directors of the Filer has approved the change of investment objective, subject to receipt of the Exemption Sought.
14. The Filer has referred the change of investment objective to the IRC and the IRC has made a positive determination with respect to the change of investment objective.
The Reasons for the Exemption Sought
15. Notwithstanding the requirement for securityholder approval set out above, it is submitted that the Fund should be exempt from the requirement to obtain securityholder approval in connection with the change of its fundamental investment objective as described above for the following reasons:
(a) The fundamental investment objective of the Fund describes the tax-efficient returns generated by the use of Character Conversion Transactions. As a result of the Budget Proposal, this strategy can no longer be used as a long-term strategy for the Fund.
(b) The current fundamental investment objective of the Fund contemplates that the Fund may invest directly in securities similar to those held by the Reference Fund.
(c) Leaving the references to "Reference Securities" in the investment objective of the Fund may be misleading to investors, as the Fund will no longer invest with reference to the Renaissance Corporate Bond Fund.
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 Exemption Sought.
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 Exemption Sought is granted, provided that, in respect of the Fund, securityholders of the Fund will be sent a written notice at least 60 days before the effective date of the change to the investment objective of the Fund 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.