Securities Law & Instruments


Headnote

National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions – Approval of investment fund mergers – approval required because the mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 – the fundamental investment objectives and fee structures of certain terminating funds and continuing funds are not substantially similar – certain mergers will not be “qualifying exchanges” or tax-deferred transactions under the Income Tax Act (Canada) – securityholders of certain terminating funds not permitted to redeem their securities prior to the date of the mergers – unitholders of the terminating funds are provided with timely and adequate disclosure regarding the mergers.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, paragraph 5.5(1)(b) and subsection 19.1.

August 10, 2018

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
PURPOSE INVESTMENTS INC.
(“Purpose”)

AND

REDWOOD UNCONSTRAINED BOND FUND,
REDWOOD UNCONSTRAINED BOND CLASS,
REDWOOD GLOBAL INFRASTRUCTURE INCOME FUND
(FORMERLY MACQUARIE GLOBAL INFRASTRUCTURE INCOME FUND),

AND

LIMITED DURATION INVESTMENT GRADE PREFERRED SECURITIES FUND
(each a “Terminating Fund” and, collectively, the “Terminating Funds”)

AND

PURPOSE FLOATING RATE INCOME FUND
(FORMERLY REDWOOD FLOATING RATE INCOME FUND AND
FORMERLY VOYA FLOATING RATE SENIOR LOAN FUND),
PURPOSE DIVERSIFIED REAL ASSET FUND, AND
PURPOSE US PREFERRED SHARE FUND
(FORMERLY REDWOOD U.S. PREFERRED SHARE FUND)

(each a “Continuing Fund” and, collectively, the “Continuing Funds”)

DECISION

Background

The Ontario Securities Commission (the “Decision Maker”) has received an application from Purpose on behalf of the Terminating Funds and the Continuing Funds (each a “Fund” and, collectively, the “Funds”) for a decision of the Decision Maker granting approval, pursuant to section 5.5(1)(b) of National Instrument 81-102 - Investment Funds (“NI 81-102”), of the proposed mergers as outlined in Appendix A (each a “Merger” and, collectively, the “Mergers”) of the Terminating Funds into the corresponding Continuing Funds (the “Approval Sought”).

Under National Policy 11-203 - Process for Exemptive Relief Applications in Multiple Jurisdictions (“NP 11-203”):

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

(b)           Purpose 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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Northwest Territories, Nunavut and Yukon (together with Ontario, the “Jurisdictions”).

Interpretation

Terms defined in National Instrument 14-101 - Definitions or in MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.

Representations

The decision is based on the following facts represented by Redwood:

Redwood and Fund Information

1.             Purpose is a corporation amalgamated under the Business Corporations Act (Ontario) with its head office located in Toronto, Ontario.

2.             Purpose is registered as an investment fund manager, portfolio manager and exempt market dealer in Ontario, as an investment fund manager and exempt market dealer in Québec, as an investment fund manager in Newfoundland and Labrador, as an exempt market dealer in Alberta and as an exempt market dealer in British Columbia.

3.             Purpose is the manager of each of the Funds and is also the trustee of each of the Trust Funds (as hereinafter defined), other than Redwood Global Infrastructure Income Fund. CIBC Mellon Trust Company is the trustee of Redwood Global Infrastructure Income Fund.

4.             Purpose is not in default of any of the requirements of the securities legislation of any of the provinces and territories of Canada.

Fund Formation

5.             Redwood Unconstrained Bond Fund (the “Terminating Trust Fund”) as well as Purpose US Preferred Share Fund (the “Continuing Trust Fund”, and together with the Terminating Trust Fund, the “Trust Funds”) are open-ended mutual fund trusts established under the laws of Ontario by declarations of trust (the “Mutual Fund Declarations of Trust”) and are governed by the provisions of NI 81-102.

6.             Each of Redwood Global Infrastructure Income Fund and Limited Duration Investment Grade Preferred Securities Fund (each a “Terminating Closed End Fund”, and together, the “Terminating Closed End Funds”) as well as Purpose Floating Rate Income Fund (the “Continuing Closed End Fund”, and together with the Terminating Closed End Funds, the “Closed End Funds”) are non-redeemable investment funds established under the laws of Ontario by declarations of trust or trust agreement (the “Closed End Trust Documents”, and together with the Mutual Fund Declarations of Trust, the “Trust Documents”) and are governed by the provisions of National Instrument 81-102.

7.             Each of Redwood Unconstrained Bond Class (the “Terminating Corporate Class”) as well as Purpose Diversified Real Asset Fund (the “Continuing Corporate Class” and together with the Terminating Corporate Class, the “Corporate Classes”) are classes of mutual fund shares of a mutual fund corporation (each a “Mutual Fund Corporation”, and together, the “Mutual Fund Corporations”). Each Corporate Class is an open-ended mutual fund governed by the provisions of NI 81-102.

8.             Securities of the Terminating Funds, other than the Terminating Closed End Funds, are currently qualified for sale in each of the provinces and territories of Canada pursuant to simplified prospectuses, annual information forms, funds facts and/or ETF facts documents.

9.             Securities of the Closed End Terminating Funds were qualified for distribution in each of the provinces and territories of Canada pursuant to long form prospectuses, annual information forms and are currently listed and traded on the Toronto Stock Exchange (“TSX”) or the Aequitas NEO Exchange (“NEO”).

10.          Purpose Floating Rate Income Fund is currently a non-redeemable investment fund; however, it is in the process of converting into an open-ended mutual fund and will have been converted into an open-ended mutual fund which offers mutual fund securities and ETF securities as of the Effective Date (as defined below). A preliminary prospectus dated May 17, 2018 in respect of such mutual fund and ETF securities was filed with the applicable Canadian securities regulators.

11.          Securities of the Continuing Funds are qualified for sale in each of the provinces and territories of Canada pursuant to simplified prospectuses, annual information forms, funds facts and/or ETF facts, as applicable (collectively, the “Continuing Fund Offering Documents”).

12.          The Terminating Funds and the Continuing Funds are reporting issuers as defined under the applicable securities legislation of each province and territory of Canada and are not in default of any of the requirements of the securities legislation of any of the provinces and territories of Canada.

13.          Other than under circumstances in which the securities regulatory authority or securities regulator of a province or territory of Canada has expressly exempted a Fund therefrom, each of the Funds follow the standard investment restrictions and practices established by NI 81-102.

14.          The net asset value for each Fund is calculated on a daily basis at the end of each day the TSX or NEO, as applicable, is open for trading in accordance with the Fund’s valuation policy and as described in the Funds’ offering documents.

Reasons for Merger Approval

15.          Purpose has concluded that pre-approval of the Mergers pursuant to section 5.6 of NI 81-102 is not available because:

(a)           the fundamental investment objective of each of the Continuing Funds may not be considered to be “substantially similar” by a reasonable person to the investment objective of each of the corresponding Terminating Funds;

(b)           each Merger, other than the Merger of Limited Duration Investment Grade Preferred Securities into Purpose US Preferred Share Fund, is being conducted on a taxable basis contrary to subsection 5.6(1)(b) of NI 81-102; or

(c)           the securityholders of the Terminating Closed End Funds will not be provided with a right to redeem their units prior to the Effective Date (as defined below). Securityholders of the Terminating Closed End Funds will subsequently be able to trade such units on a designated stock exchange on any business day following the Effective Date.

16.          Other than the criteria described above, each Merger complies with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

The Mergers

17.          A press release was issued and filed on SEDAR on June 8, 2018, and a material change report was subsequently filed on SEDAR on June 11, 2018, with respect to the proposed Mergers. The simplified prospectus, annual information form, and fund facts for the Terminating Funds were amended to include disclosure with respect to the Mergers in accordance with applicable securities law. For Mergers that are material for a Continuing Fund, amendments to the applicable Continuing Fund Offering Documents were also completed in accordance with applicable securities laws.

18.          Except in the case of Purpose Diversified Real Asset Fund, Purpose has concluded that the Mergers are not material to the Continuing Funds, and accordingly, there is no intention to convene a meeting of securityholders of the Continuing Funds, other than as described in paragraph 19, to approve the Mergers pursuant to paragraph 5.1(1)(g) of NI 81-102.

19.          Purpose is of the view that the Merger of Redwood Global Infrastructure Income Fund into Purpose Diversified Real Asset Fund will be a material change because it is anticipated that at the time of the Merger, the net asset value of Redwood Global Infrastructure Income Fund will be greater than the net asset value of Purpose Diversified Real Asset Fund. Accordingly, as described below, Purpose intends to convene meetings of the securityholders of each of the Terminating Funds and of Purpose Diversified Real Asset Fund to approve the applicable Mergers pursuant to paragraph 5.1(1)(g) of NI 81-102 on or about August 16, 2018. Purpose also intends to convene a meeting of the securityholders of Purpose Floating Rate Income Fund (together with Purpose Diversified Real Asset Fund, the “Voting Continuing Funds”) to approve the applicable Merger pursuant to Purpose Floating Rate Income Fund’s Trust Document.

20.          A notice of meeting, a management information circular (the “Circular”), a form of proxy and a voting instruction form in connection with the special meetings of securityholders was mailed to securityholders of the Terminating Funds and the Voting Continuing Funds and filed on SEDAR on July 26, 2018 (the “Mailing Date”). The most recently filed fund facts/ETF facts, as applicable, of a Continuing Fund was included in the meeting materials sent to securityholders of the applicable Terminating Fund.

21.          The Circular prepared in connection with the special meetings to approve the Mergers provided a comparison of the fundamental investment objectives, fee structures, other material differences between the Funds, and the tax consequences of the Merger to the Terminating Fund, the Continuing Fund and their securityholders. The Circular also described the various ways in which securityholders can obtain, at no cost, a copy of the simplified prospectus, annual information forms and fund facts and/or ETF facts, as applicable, for the Continuing Funds, their most recent interim and annual financial statements and management reports of fund performance. Accordingly, securityholders of each Terminating Fund and of each Voting Continuing Fund have been provided with sufficient information to make an informed decision about the Mergers.

22.          Other than the differences described in the Circular, there are no material differences between a security of a Terminating Fund and the corresponding security of a Continuing Fund that unitholders will receive once the Merger is completed.

23.          Purpose will convene special meetings of the securityholders of each Terminating Fund and of each Voting Continuing Fund to seek the approval of securityholders to complete the Mergers (each a “Meeting”). The Meetings will take place on or about August 16, 2018.

24.          Purpose will pay for the costs of the Mergers. These costs consist mainly of legal, proxy solicitation, printing, mailing, brokerage costs and regulatory fees.

25.          Subject to receipt of necessary regulatory approval and the outcome of the vote of securityholders of each Terminating Fund and of each Voting Continuing Fund with respect to the Mergers, each Merger is anticipated to be effective on or about August 27, 2018 (each an “Effective Date”).

26.          Securities of the applicable Continuing Fund will be issued at the applicable series net asset value per security as of the close of business on the Effective Date. Securities of the applicable Continuing Fund will be distributed to securityholders of the corresponding Terminating Fund in exchange for their securities in the Terminating Fund on a dollar for dollar and series-by-series basis, as applicable.

27.          Prior to the Mergers, as required, each Terminating Fund will sell any securities in its portfolio that do not meet the investment objective and investment strategies of the applicable Continuing Fund. As a result, the Terminating Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objective for a brief period of time prior to the Merger being effected. Any accumulated loss carry-forwards of the Terminating Fund, as well as any losses arising from the disposition of the assets in its portfolio, will expire at the end of the taxation year during which the Merger occurs and will not be available to be deducted against taxable income, including taxable capital gains arising after the Merger. The Circular provides securityholders with information about such tax implications.

28.          The Mergers will be structured substantially as follows:

(a)           The board of directors of Purpose and each of the Mutual Fund Corporations, as applicable, have approved each Merger.

(b)           Pursuant to subsection 5.1(f) of NI 81-102, securityholders of each Terminating Fund approved their respective Mergers.

(c)           Pursuant to subsection 5.1(g) of NI 81-102, securityholders of each Voting Continuing Fund approved their respective Mergers as they constitute a material change for the Continuing Fund. Securityholders of Purpose US Preferred Share Fund are not required to vote on and approve their Merger as such Merger does not constitute a material change for the Continuing Fund.

(d)           The Trust Documents governing the Trust Funds and the articles of each of the Mutual Fund Corporations will be amended to permit such actions as are necessary to complete the Mergers.

(e)           Prior to the Merger, as required, each Terminating Fund will sell any securities in its portfolio that do not meet the investment objective and investment strategies of the applicable Continuing Fund. As a result, the Terminating Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objective for a brief period of time prior to the Merger being effected.

(f)            The value of the Terminating Fund’s investment portfolio and other assets will be determined at the close of business on the Effective Date in accordance with the constating documents of the Terminating Fund.

(g)           Each Terminating Fund and the Continuing Fund will declare, pay and automatically reinvest a distribution to its securityholders of net realized capital gains and net income, if any, to ensure that it will not be subject to tax for its current tax year.

(h)           A Terminating Fund’s assets and liabilities will be transferred to the respective Continuing Fund. In return, the Continuing Fund will issue to the Terminating Fund securities of the Continuing Fund having an aggregate net asset value equal to the value of the assets transferred to the Continuing Fund.

(i)            Immediately thereafter, securities of the Continuing Fund received by the Terminating Fund will be distributed to securityholders of the Terminating Fund in exchange for their securities in the Terminating Fund on a dollar-for-dollar and class-by-class basis.

(j)            The Terminating Fund will be wound-up as soon as practicable and, in any case, within 30 days following the Merger.

29.          Should a Merger receive all required approvals, the right of securityholders of the Terminating Funds, other than Terminating Closed End Funds, to purchase or switch their securities of the Terminating Fund will cease as of the close of business two days prior to the Effective Date. Securityholders will have the right to redeem the securities of a Terminating Fund up to the close of business on the Effective Date.

30.          No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of its corresponding Terminating Fund.

31.          Purpose will pay the costs associated with the sale of securities in a Terminating Fund’s portfolio that do not meet the investment objective and investment strategies of the applicable Continuing Fund, including brokerage commissions.

32.          To the extent that assets remain in a Terminating Fund following the sale of securities in its portfolio that do not meet the investment objective and investment strategies of the applicable Continuing Fund, such assets of a Terminating Fund to be acquired by the Continuing Fund as a result of a Merger will be acceptable to the portfolio advisor of the Continuing Fund prior to the Effective Date and consistent with the investment objective of the Continuing Fund.

33.          The right of securityholders of the Terminating Funds, other than Terminating Closed End Funds, to purchase or switch their securities of the Terminating Fund will cease as of the close of business two days prior to the Effective Date. Securityholders will have the right to redeem the securities of a Terminating Fund up to the close of business on the Effective Date.

34.          Each Merger, other than the Merger of Limited Duration Investment Grade Preferred Securities into Purpose US Preferred Share Fund (the “Trust to Trust Tax Deferred Merger”), will be completed on a taxable basis and will not be a “qualifying exchange” or other form of tax-deferred transaction under the Income Tax Act (Canada) (the “Tax Act”).

35.          The Trust to Trust Tax Deferred Merger will be a “qualifying exchange” under the Tax Act. Accordingly, the disposition of units of the Terminating Fund in connection with the Trust to Trust Tax Deferred Merger will be effected on a tax deferred “rollover” basis for unitholders of the Terminating Fund.

36.          Pursuant to National Instrument 81-107 - Independent Review Committee for Investment Funds, the independent committee of the Funds (the “IRC”) will review the proposed Mergers as a potential “conflict of interest” matter and the process to be followed in connection with each such Mergers and will determine if the Mergers will achieve a fair and reasonable result for each Fund. The determination of the IRC will be disclosed in the Circular.

37.          Purpose believes that the Merger will be beneficial to securityholders of each of the Funds for the following reasons:

(a)           Although the investment objectives of a Terminating Fund may not be substantially similar to its corresponding Continuing Fund, Purpose submits that each Terminating Fund has a similar investment mandate as its corresponding Continuing Fund. As a result, each Merger will contribute towards reducing duplication and redundancy across the Purpose fund line-up and may potentially reduce the administrative and regulatory operating costs and expenses associated with the Terminating Funds.

(b)           Each Merger has the potential to lower costs for securityholders as the operating costs and expenses of the Continuing Fund will be spread over a greater pool of assets when the Terminating Funds merge into the Continuing Fund, potentially resulting in a lower management expense ratio for the Continuing Fund than may occur otherwise. Management fees of each series of each Continuing Fund will be the same or lower as those of the corresponding series of a Terminating Fund. No securityholder of the Terminating Funds will be subject to an increase in management fees as a result of the Mergers.

(c)           Each Continuing Fund will have an asset base of greater size, potentially allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions. The ability to improve diversification may lead to increased returns and a reduction of risk, while at the same time creating a higher profile that may attract more investors.

(d)           Each Continuing Fund is expected to attract more assets as marketing efforts will be concentrated on a single fund, rather than multiple funds with similar investment mandates. The ability to attract assets to the Continuing Fund will benefit investors by ensuring that the Continuing Fund is a viable, long-term, attractive investment vehicle for existing and potential investors.

Decision

The Decision Maker 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 Maker under the Legislation is that the Approval Sought is granted provided securityholders of each Terminating Fund and each Voting Continuing Fund approve the applicable Mergers.

“Darren McKall”
Manager, Investment Funds & Structured Products Branch
Ontario Securities Commission

 

APPENDIX “A”

TERMINATING FUND

CONTINUING FUND

Redwood Unconstrained Bond Fund

Purpose Floating Rate Income Fund (formerly Redwood Floating Rate Income Fund and formerly Voya Floating Rate Senior Loan Fund)

Redwood Unconstrained Bond Class

Purpose Floating Rate Income Fund (formerly Redwood Floating Rate Income Fund and formerly Voya Floating Rate Senior Loan Fund)

Redwood Global Infrastructure Income Fund (formerly Macquarie Global Infrastructure Income Fund)

Purpose Diversified Real Asset Fund

Limited Duration Investment Grade Preferred Securities Fund

Purpose US Preferred Share Fund (formerly Redwood U.S. Preferred Share Fund)