IA Clarington Investments Inc. et al.

December 18, 2014

Decision

Headnote

Policy Statement 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption from paragraph 5.1(1)(c) of Regulation 81-102 respecting Investments Fund to obtain the approval of securityholders before changing the fundamental investment objectives of the funds – relief required as a result of changes to federal budget eliminating certain tax benefits associated with character conversion transaction.

Applicable Legislative Provisions

Regulation 81-102 respecting Investment Funds, s. 5.1(1)(c).

December 18, 2014

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
IA CLARINGTON INVESTMENTS INC.
(THE FILER)

AND

IA CLARINGTON CANADIAN BALANCED CLASS, IA CLARINGTON DIVIDEND GROWTH CLASS, IA CLARINGTON FOCUSED BALANCED CLASS, IA CLARINGTON GLOBAL TACTICAL INCOME CLASS, IA CLARINGTON STRATEGIC CORPORATE BOND CLASS, IA CLARINGTON STRATEGIC INCOME CLASS, IA CLARINGTON TACTICAL BOND CLASS AND IA CLARINGTON TACTICAL INCOME CLASS (each, a Fund or collectively, the Funds)

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 Funds for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption under section 19.1 of Regulation 81-102 respecting Investment Funds (c.V-1.1, r.39) (Regulation 81-102), exempting the Funds from the requirement in paragraph 5.1(1)(c) of Regulation 81-102 to obtain the approval of securityholders before changing the fundamental investment objectives of the Funds (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, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (the Other Jurisdictions), 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), Regulation 11-102 and Regulation 81-102 have the same meaning if used in this decision, unless otherwise defined. Capitalized terms used in this decision have the following meanings:

“Reference Funds or individually, a Reference Fund” means the mutual funds set out beside each of the Funds in the following table:

Funds

Reference Funds

IA Clarington Canadian Balanced Class

IA Clarington Canadian Balanced Fund

IA Clarington Dividend Growth Class

IA Clarington Canadian Dividend Fund

IA Clarington Focused Balanced Class

IA Clarington Strategic Corporate Bond Fund in respect of
the fixed income portion of the portfolio of the Fund

IA Clarington Global Tactical Income Class

IA Clarington Global Tactical Income Fund

IA Clarington Strategic Corporate Bond Class

IA Clarington Strategic Corporate Bond Fund

IA Clarington Strategic Income Class

IA Clarington Strategic Income Fund

IA Clarington Tactical Bond Class

IA Clarington Tactical Bond Fund

IA Clarington Tactical Income Class

IA Clarington Tactical Income Fund

Representations

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

The Filer

1.             The Filer is a corporation established under the Canada Business Corporations Act, R.S.C. 1985, c. C-44.

2.             The Filer’s head office is located at 1080 Grande Allée West, Québec City, Québec, G1K 7M3.

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

4.             The Filer is duly registered as an investment fund manager in Québec, Ontario and Newfoundland and Labrador and as a portfolio manager in the Jurisdictions and the Other Jurisdictions.

5.             The Filer is not in default of its obligations under the securities legislation of the Jurisdictions and of the Other Jurisdictions.

The Funds and the Reference Funds

6.             Each of the Funds is a separate class of shares of Clarington Sector Fund Inc. (CSFI), a mutual fund corporation incorporated under the laws of the Province of Ontario.

7.             Each of the Reference Funds is an open-ended investment trust established under the laws of the Province of Ontario.

8.             Each of the Funds and the Reference Funds are subject to the provisions of Regulation 81-102.

9.             The securities of each of the Funds and the Reference Funds are currently qualified for distribution pursuant to a simplified prospectus dated June 17, 2014 (the Current Simplified Prospectus) that has been prepared and filed in accordance with Regulation 81-101 respecting Mutual Funds (c.V-1.1, r.38). Accordingly, the Funds and the Reference Funds are each reporting issuers or the equivalent in the Jurisdictions and the Other Jurisdictions.

10.          Each of the Funds and the Reference Funds are not in default of its obligations under the securities legislation of the Jurisdictions and of the Other Jurisdictions.

11.          Under its fundamental investment objectives and strategies, as stated in the Current Simplified Prospectus, each of the Funds, for all or for a part of its portfolio, does, or has the ability to, obtain a return similar to its corresponding Reference Fund by purchasing equity securities and entering into a forward contract or other permitted derivatives with a counterparty, under which it forward sells the equity securities, and in return receives the total return of an investment in units of its corresponding Reference Fund (a Character Conversion Transaction).

12.          The current fundamental investment objectives, as stated in the Current Simplified Prospectus of each of the Funds are set out in the table below:

Funds

Investment Objectives

IA Clarington Canadian Balanced Class

The Fund’s objective is to achieve capital appreciation and income with a focus on preserving the value of the original capital by investing primarily in a portfolio of Canadian equity and fixed income investments suitable for a Canadian balanced mutual fund, or it may invest all or a portion of its portfolio in Canadian equity securities and hedge its exposure to those securities by entering into forward contracts or other permitted derivatives in order to obtain a return determined by reference to the performance of a Canadian balanced fund managed by IA Clarington, or an affiliate or associate of IA Clarington (less transaction and hedging costs).

IA Clarington Dividend Growth Class

The Fund’s objective is to provide a return that is similar to the return of a Canadian dividend mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a Canadian dividend mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Canadian equity securities and hedge its equity risks by entering into forward contracts or other permitted derivatives in order to provide the Fund with a return determined by reference to the performance of the Reference Fund (less transaction and hedging costs).

IA Clarington Focused Balanced Class

The Fund achieves capital appreciation and moderate income by investing primarily, directly or indirectly, in a portfolio of Canadian equity and fixed income investments. With respect to the portion of the portfolio allocated to fixed income investments, the Fund may seek to obtain a return determined by reference to the performance of a Canadian bond fund that invests primarily in fixed income securities and is managed by IA Clarington or an affiliate or associate of IA Clarington (less transaction and hedging costs). The Fund will seek to achieve its objective by (i) investing in Securities of the Reference Fund, (ii) investing in Canadian equity and fixed income securities similar to those held by the Reference Fund, and/or (iii) obtaining exposure to the Reference Fund through the use of derivatives.

IA Clarington Global Tactical Income Class

The Fund’s objective is to provide a return that is similar to the return of a global neutral balanced mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a global neutral balanced mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Canadian equity securities and hedge its equity risks by entering into forward contracts or other permitted derivatives in order to provide the Fund with a return determined by reference to the performance of the Reference Fund (less transaction and hedging costs).

IA Clarington Strategic Corporate Bond Class

The Fund’s objective is to provide a return that is similar to the return of a high yield fixed income mutual fund that invests primarily in corporate and other high yielding fixed income securities and is managed by IA Clarington, or an affiliate or associate of IA Clarington. The Fund will seek to achieve its objective by investing primarily, directly or indirectly, including through the use of derivatives, in securities held by the Reference Fund.

IA Clarington Strategic Income Class

The Fund’s objective is to provide a return that is similar to the return of a diversified income mutual fund that invests primarily in Canadian equity and fixed income securities and is managed by IA Clarington, or an affiliate or associate of IA Clarington. The Fund will seek to achieve its objective by (i) investing in Securities of the Reference Fund, (ii) investing in Canadian equity and fixed income securities similar to those held by the Reference Fund, and/or (iii) obtaining exposure to the Reference Fund through the use of derivatives.

IA Clarington Tactical Bond Class

The Fund’s objective is to provide a return that is similar to the return of a Canadian tactical fixed income mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a Canadian tactical fixed income mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Canadian equity securities and hedge its equity risks by entering into forward contracts or other permitted derivatives in order to provide the Fund with a return determined by reference to the performance of the Reference Fund (less transaction and hedging costs).

IA Clarington Tactical Income Class

The Fund’s objective is to provide a return that is similar to the return of a Canadian tactical balanced mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a Canadian tactical balanced mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Canadian equity securities and hedge its equity risks by entering into forward contracts or other permitted derivatives in order to provide the Fund with a return determined by reference to the performance of the Reference Fund (less transaction and hedging costs).

Investment Objectives Changes

13.          The ITA has been amended following the Federal Minister of Finance’s budget proposal first introduced on March 21, 2013. The amendments to the ITA have eliminated the tax benefits associated with a Character Conversion Transaction. The changes apply to any Character Conversion Transaction entered into or amended after March 20, 2013 (the Tax Changes).

14.          On March 28, 2013, the Filer issued a press release announcing the temporary closing of the following Funds: IA Clarington Focused Balanced Class, IA Clarington Global Tactical Income Class, IA Clarington Strategic Corporate Bond Class, IA Clarington Strategic Income Class, IA Clarington Tactical Bond Class and IA Clarington Tactical Income Class, to new investments, effective as of the close of business on April 4, 2013.

15.          In response to the Tax Changes, the Filer wishes to amend the fundamental investment objectives of the Funds (collectively, the Objectives Changes) to:

(i)            remove all references to the use of a Character Conversion Transaction; and

(ii)           reflect the proposed new investment approach of the Funds pursuant to which:

a.             each Fund will be permitted to invest substantially all of its net assets in securities of its corresponding Reference Fund, except for the IA Clarington Focused Balanced Class for which such investment is limited to the fixed income portion of the portfolio of the Fund; and

b.             each Fund will retain its ability to invest in securities similar to those held by its Reference Fund, except for the IA Clarington Focused Balanced Class for which such investment is limited to the fixed income portion of the portfolio of the Fund.

16.          On October 28, 2014, the Filer sent to each securityholder of the Funds a written notice that sets out the Objectives Changes, the reasons for such change and a statement that the Fund will no longer be able to provide tax-advantaged returns.

17.          The current investment objectives of the Funds will continue to be in effect until December 29, 2014.

18.          The new investment objectives of the Funds will take effect on December 30, 2014, and will be substantially as set out below:

Funds

Investment Objectives

IA Clarington Canadian Balanced Class

The Fund’s objective is to achieve capital appreciation and income with a focus on preserving the value of the original capital by investing primarily in a portfolio of Canadian equity and fixed income investments suitable for a Canadian balanced mutual fund, and it may invest all or a portion of its portfolio in Securities of a Reference Fund managed by IA Clarington, or an affiliate or associate of IA Clarington.

IA Clarington Dividend Growth Class

The Fund’s objective is to provide a return that is similar to the return of a Canadian dividend mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a Canadian dividend mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Securities of the Reference Fund.

IA Clarington Focused Balanced Class

The Fund achieves capital appreciation and moderate income by investing primarily, directly or indirectly, in a portfolio of Canadian equity and fixed income investments. With respect to the portion of the portfolio allocated to fixed income investments, the Fund may seek to obtain a return determined by reference to the performance of a Canadian bond fund that invests primarily in fixed income securities and is managed by IA Clarington or an affiliate or associate of IA Clarington. The Fund will seek to achieve its objective by (i) investing in Securities of the Reference Fund and/or (ii) investing in Canadian equity and fixed income securities similar to those held by the Reference Fund.

IA Clarington Global Tactical Income Class

The Fund’s objective is to provide a return that is similar to the return of a global neutral balanced mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a global neutral balanced mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Securities of the Reference Fund.

IA Clarington Strategic Corporate Bond Class

The Fund’s objective is to provide a return that is similar to the return of a high yield fixed income mutual fund that invests primarily in corporate and other high yielding fixed income securities and is managed by IA Clarington, or an affiliate or associate of IA Clarington. The Fund will seek to achieve its objective by investing primarily, directly or indirectly, in securities held by the Reference Fund and may invest all or a portion of its portfolio in Securities of the Reference Fund.

IA Clarington Strategic Income Class

The Fund’s objective is to provide a return that is similar to the return of a diversified income mutual fund that invests primarily in Canadian equity and fixed income securities and is managed by IA Clarington, or an affiliate or associate of IA Clarington. The Fund will seek to achieve its objective by (i) investing in Securities of the Reference Fund, and/or by (ii) investing in Canadian equity and fixed income securities similar to those held by the Reference Fund.

IA Clarington Tactical Bond Class

The Fund’s objective is to provide a return that is similar to the return of a Canadian tactical fixed income mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a Canadian tactical fixed income mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Securities of the Reference Fund.

IA Clarington Tactical Income Class

The Fund’s objective is to provide a return that is similar to the return of a Canadian tactical balanced mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a Canadian tactical balanced mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Securities of the Reference Fund.

19.          The Objectives Changes were announced in the Amendment no 3 to the Current Simplified Prospectus of the Funds filed on November 19, 2014. A press release and a material change report were filed.

20.          Securityholders of the Funds may switch or redeem their securities prior to the effective date of the Objectives Changes.

21.          The board of directors of CSFI and the board of directors of the Filer has each approved the Objectives Changes.

22.          The independent review committee of the Funds has provided a positive recommendation with respect to the Objectives Changes.

The Reasons for the Exemption Sought

23.          In the absence of the Exemption Sought, the Objectives Changes would require approval of securityholders of the Funds pursuant to paragraph 5.1(1)(c) of Regulation 81-102.

24.          The Objectives Changes are changes made in response to the Tax Changes. The forward contracts that were in place before the Tax Changes are allowed to maintain their favorable tax treatment until they expire. The forward contracts will terminate on December 29, 2014.

25.          In the opinion of the Filer, the Objectives Changes will not adversely affect securityholders of the Funds.

26.          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 under the Legislation is that the Exemption Sought is granted, provided that, in respect of each Fund, securityholders of the Fund have been sent a written notice, at least 60 days before the effective date of the change to the investment objectives of the Fund, that sets out the change to the investment objectives, the reasons for such change and a statement that the Fund will no longer be able to distribute gains under forward contracts that are treated as capital gains for tax purposes.

“Josée Deslauriers”
Senior Director, Investment Funds and Continuous Disclosure
Autorité des marchés financiers

Funds	Reference Funds
IA Clarington Canadian Balanced Class	IA Clarington Canadian Balanced Fund
IA Clarington Dividend Growth Class	IA Clarington Canadian Dividend Fund
IA Clarington Focused Balanced Class	IA Clarington Strategic Corporate Bond Fund in respect of the fixed income portion of the portfolio of the Fund
IA Clarington Global Tactical Income Class	IA Clarington Global Tactical Income Fund
IA Clarington Strategic Corporate Bond Class	IA Clarington Strategic Corporate Bond Fund
IA Clarington Strategic Income Class	IA Clarington Strategic Income Fund
IA Clarington Tactical Bond Class	IA Clarington Tactical Bond Fund
IA Clarington Tactical Income Class	IA Clarington Tactical Income Fund

Funds	Investment Objectives
IA Clarington Canadian Balanced Class	The Fund’s objective is to achieve capital appreciation and income with a focus on preserving the value of the original capital by investing primarily in a portfolio of Canadian equity and fixed income investments suitable for a Canadian balanced mutual fund, or it may invest all or a portion of its portfolio in Canadian equity securities and hedge its exposure to those securities by entering into forward contracts or other permitted derivatives in order to obtain a return determined by reference to the performance of a Canadian balanced fund managed by IA Clarington, or an affiliate or associate of IA Clarington (less transaction and hedging costs).
IA Clarington Dividend Growth Class	The Fund’s objective is to provide a return that is similar to the return of a Canadian dividend mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a Canadian dividend mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Canadian equity securities and hedge its equity risks by entering into forward contracts or other permitted derivatives in order to provide the Fund with a return determined by reference to the performance of the Reference Fund (less transaction and hedging costs).
IA Clarington Focused Balanced Class	The Fund achieves capital appreciation and moderate income by investing primarily, directly or indirectly, in a portfolio of Canadian equity and fixed income investments. With respect to the portion of the portfolio allocated to fixed income investments, the Fund may seek to obtain a return determined by reference to the performance of a Canadian bond fund that invests primarily in fixed income securities and is managed by IA Clarington or an affiliate or associate of IA Clarington (less transaction and hedging costs). The Fund will seek to achieve its objective by (i) investing in Securities of the Reference Fund, (ii) investing in Canadian equity and fixed income securities similar to those held by the Reference Fund, and/or (iii) obtaining exposure to the Reference Fund through the use of derivatives.
IA Clarington Global Tactical Income Class	The Fund’s objective is to provide a return that is similar to the return of a global neutral balanced mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a global neutral balanced mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Canadian equity securities and hedge its equity risks by entering into forward contracts or other permitted derivatives in order to provide the Fund with a return determined by reference to the performance of the Reference Fund (less transaction and hedging costs).
IA Clarington Strategic Corporate Bond Class	The Fund’s objective is to provide a return that is similar to the return of a high yield fixed income mutual fund that invests primarily in corporate and other high yielding fixed income securities and is managed by IA Clarington, or an affiliate or associate of IA Clarington. The Fund will seek to achieve its objective by investing primarily, directly or indirectly, including through the use of derivatives, in securities held by the Reference Fund.
IA Clarington Strategic Income Class	The Fund’s objective is to provide a return that is similar to the return of a diversified income mutual fund that invests primarily in Canadian equity and fixed income securities and is managed by IA Clarington, or an affiliate or associate of IA Clarington. The Fund will seek to achieve its objective by (i) investing in Securities of the Reference Fund, (ii) investing in Canadian equity and fixed income securities similar to those held by the Reference Fund, and/or (iii) obtaining exposure to the Reference Fund through the use of derivatives.
IA Clarington Tactical Bond Class	The Fund’s objective is to provide a return that is similar to the return of a Canadian tactical fixed income mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a Canadian tactical fixed income mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Canadian equity securities and hedge its equity risks by entering into forward contracts or other permitted derivatives in order to provide the Fund with a return determined by reference to the performance of the Reference Fund (less transaction and hedging costs).
IA Clarington Tactical Income Class	The Fund’s objective is to provide a return that is similar to the return of a Canadian tactical balanced mutual fund. The Fund invests primarily, directly or indirectly, in securities held by a Canadian tactical balanced mutual fund managed by IA Clarington, or an affiliate or associate of IA Clarington, and may invest all or a portion of its portfolio in Canadian equity securities and hedge its equity risks by entering into forward contracts or other permitted derivatives in order to provide the Fund with a return determined by reference to the performance of the Reference Fund (less transaction and hedging costs).