LIMITED DURATION INVESTMENT GRADE PREFERRED SECURITIES FUND ANNUAL INFORMATION FORM For the year ended December 31, 2014 MARCH 31, 2015
TABLE OF CONTENTS FORWARD-LOOKING STATEMENTS... 1 NAME, FORMATION AND HISTORY OF THE FUND... 2 Formation of the Fund... 2 The Status of the Fund... 3 INVESTMENT OBJECTIVES... 3 INVESTMENT STRATEGIES... 3 The Forward Agreement... 4 Use of Derivatives... 4 Currency Hedging... 4 Leverage... 4 Securities Lending, Repurchase and Reverse Repurchase Transactions... 5 INVESTMENT RESTRICTIONS... 5 Investment Restrictions of the Fund... 5 DESCRIPTION OF THE SECURITIES OFFERED BY THE FUND... 6 Distributions... 7 Matters Requiring Unitholder Approval... 8 Amendments to the Declaration of Trust... 10 Termination of the Fund... 10 Conversion of Units... 11 Non-Resident Unitholders... 11 CALCULATION OF NET ASSET VALUE... 11 Calculation of Net Asset Value... 11 Reporting of Net Asset Value... 12 Valuation Agent... 12 VALUATION OF PORTFOLIO SECURITIES... 12 PURCHASES OF FUND UNITS... 13 Purchase for Cancellation... 13 REDEMPTION OF SECURITIES... 14 Annual Redemptions... 14 Monthly Redemptions... 14 Exercise of Redemption Privileges... 15 Limitations and Suspensions of Redemptions... 15 RESPONSIBILITY OF FUND OPERATIONS... 16 The Manager of the Fund... 16 Duties and Services to be provided by the Manager... 17 Details of the Management Agreement... 17 The Portfolio Advisor... 18 Portfolio Advisor Investment Team... 18 Details of the Portfolio Advisory Agreement... 19 The Trustee... 20 The Custodian... 20 Auditor... 21 Transfer Agent and Registrar... 21 Valuation Agent... 21 Promoter... 21 Brokerage Arrangements... 21 CONFLICTS OF INTEREST... 22 Principal Holders of Securities... 22 Principal Securityholders of the Manager... 22 Securities Held by Members of the Investment Review Committee... 22 Conflict of Interest... 22 FUND GOVERNANCE... 23 Independent Review Committee... 23 General Fund Governance... 24 Derivatives and Securities Lending, Repurchase and Reverse Repurchase Transactions... 24 Policies and Procedures... 24 Proxy Voting Policies and Procedures... 24 FEES AND EXPENSES... 25 Management Fee... 25 Service Fee... 25 Operating Expenses... 25 Additional Services... 25 INCOME TAX CONSIDERATIONS... 26 Status of the Fund... 26 Taxation of the Fund... 26 Taxation of Unitholders... 28 Taxation of Registered Plans... 29 Tax Implications of the Fund s Distribution Policy... 29 International Information Reporting... 29 REMUNERATION OF DIRECTORS, OFFICERS, TRUSTEES AND IRC... 30 Remuneration of the IRC... 30 Remuneration of the Trustee... 30 MATERIAL CONTRACTS... 30 LEGAL AND ADMINISTRATIVE PROCEEDINGS... 30 RISK FACTORS... 31 i
FORWARD-LOOKING STATEMENTS This annual information form (the Annual Information Form ) contains forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as plans, proposes, expects, estimates, intends, anticipates or believes, or variations (including negative and grammatical variations) of such words and phrases, or statements that certain actions, events or results may, could, would, might or will be taken, occur or be achieved. In addition, any statement that may be made concerning future performance, strategies or prospects and possible future action by the Fund (as hereinafter defined) is also a forward-looking statement. Forward-looking statements are based on current expectations and projections about future general economic, political and relevant market factors, such as interest rates, foreign exchange rates, equity and capital markets, and the general business environment, in each case assuming no changes to applicable tax or other laws or government regulation. Expectations and projections about future events are inherently subject to, among other things, risks and uncertainties, some of which may be unforeseeable. Accordingly, current assumptions concerning future economic and other factors may prove to be incorrect at a future date. Forward-looking statements are not guarantees of future performance and actual results or events could differ materially from those expressed or implied in any forward-looking statements made by the Fund. Any number of important factors could contribute to these digressions, including, but not limited to, general economic, political and market factors in North America and internationally, such as interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government relations, unexpected judicial or regulatory proceedings and catastrophic events. We stress that the above mentioned list of important factors is not exhaustive. Some of these risks, uncertainties and the other factors are described in this Annual Information Form under the heading Risk Factors. We encourage you to consider these and other factors carefully before making any investment decisions. Forwardlooking statements should not be unduly relied upon. While the Fund anticipates that subsequent events and developments may cause its views to change, the Fund specifically disclaims any obligation to update these forwardlooking statements, except as required by applicable law. These forward-looking statements should not be relied upon as representing the Fund s views as of any date subsequent to the date of this Annual Information Form. 1
Formation of the Fund NAME, FORMATION AND HISTORY OF THE FUND Limited Duration Investment Grade Preferred Securities Fund (the Fund ) is an investment fund established as a trust under the laws of the Province of Ontario pursuant to a declaration of trust (the Declaration of Trust ) dated May 27, 2013, as amended and restated on July 23, 2014 in order to create the class U units ( Class U Units ) and class V units ( Class V Units, together with the Class U Units, the USD Units ) of the Fund. Purpose Investments Inc. ( Purpose or the Manager ) is the trustee, manager and promoter of the Fund. The principal office of the Fund and the Manager is located at 77 King Street West, 21 st Floor, TD North Tower, Toronto, Ontario M5K 1G8. The fiscal year-end of the Fund is December 31. The Portfolio (as defined herein) is actively managed by Nuveen Asset Management, LLC ( Nuveen or the Portfolio Advisor ). On June 20, 2013, the Fund completed an initial public offering of 3,339,832 class A units ( Class A Units ) and 260,168 class F units ( Class F Units, and together with the Class A Units, the CAD Units ) at a price of $25.00 per CAD Unit pursuant to a prospectus dated May 28, 2013. The total gross proceeds raised by the Fund in connection with its initial public offering were approximately $90 million. On August 9, 2013, the Fund completed a treasury offering of 333,368 Class U Units and 26,900 Class V Units at US$25.00 per USD Unit pursuant to a prospectus dated July 23, 2013. On August 28, 2013, an additional 10,768 Class U Units were issued pursuant to the exercise of the agents over-allotment option in connection with the treasury offering. The total gross proceeds raised by the Fund in connection with the offering were approximately US$9 million. On December 24, 2013, Purpose entered into an asset purchase agreement with Meadowbank Capital Inc. ( Meadowbank ) and Meadowbank Asset Management Inc. ( MAMI ) whereby Meadowbank and MAMI agreed to sell to Purpose all of their rights in and to the management and investment management contracts between each of the Legg Mason Investment Grade Focus Fund (subsequently renamed the Purpose Investment Grade Focus Fund) (the LM Fund ) and the LMIG Trust (subsequently renamed the Purpose Investment Grade Focus Trust) (the Portfolio Trust ). The Portfolio Trust holds a portfolio comprised primarily of global investment grade debt securities to which the LM Fund obtains exposure to through a forward purchase and sale agreement ( Forward Agreement ) between the LM Fund and The Bank of Nova Scotia (the Counterparty ). See Investment Strategies - The Forward Agreement. In connection with the acquisition, the Fund completed a merger with the LM Fund, effective March 14, 2014 (the Merger ). The Merger was approved by unitholders of the LM Fund at a special meeting of unitholders held on February 3, 2014. Pursuant to the Merger, unitholders of the LM Fund received Class A Units of the Fund based on an exchange ratio calculated as the relative net asset values between the units of the LM Fund and the Class A Units at the close of trading on the Toronto Stock Exchange ( TSX ) on March 13, 2014. Pursuant to the terms of the Merger: (i) the Fund acquired the Forward Agreement in exchange for the issuance of Class A Units of the Fund to the LM Fund; (ii) Nuveen was appointed as the sub-advisor to the Portfolio Trust; and (iii) the declaration of trust of the Portfolio Trust was amended and restated to conform with the investment objectives, investment strategies and investment restrictions of the Fund. As a result of the Merger, the notional amount represented by the Forward Agreement applies equally to all classes of Units of the Fund on a pro-rata basis such that Unitholders benefit from the tax-advantaged character of that portion of the Fund s distributions across all classes of Units of the Fund that are funded through the partial settlement of the Forward Agreement until it is terminated in accordance with its terms. See Income Tax Considerations Taxation of the Fund and Risk Factors - Character Conversion Rules. Effective September 22, 2014, the Fund shall comply with the requirements of National Instrument 81-102 Investment Funds ( NI 81-102 ) that are applicable to it as a non-redeemable investment fund, subject to any exemptions therefrom applicable to the Fund, if any. Accordingly, the terms of the Declaration of Trust and other agreements entered into prior to September 2014, should be considered in conjunction with NI 81-102. 2
The Status of the Fund The Fund is a non-redeemable investment fund under applicable Canadian securities legislation but is not a mutual fund under applicable Canadian securities legislation. Consequently, effective September 22, 2014, the Fund is subject to certain provisions that apply to non-redeemable investment fund under NI 81-102, but not the provisions of NI 81-102 that apply only to mutual funds or other policies and regulations that apply to publicly offered mutual funds, notably National Instrument 81-101 Mutual Fund Prospectus Disclosure ( NI 81-101 ) and NI 81-102. The Fund is also subject to certain other requirements and restrictions contained in applicable securities laws, including National Instrument 81-106 - Investment Fund Continuous Disclosure ( NI 81-106 ), which governs the continuous disclosure obligations of investment funds, such as the Fund. INVESTMENT OBJECTIVES The investment objectives (the Investment Objectives ) of the Fund are to: (i) (ii) (iii) provide holders of Units ( Unitholders ) with a stable stream of monthly distributions; preserve the net asset value ( NAV ) per Unit; and reduce the risk of rising interest rates by managing portfolio duration. The Fund invests in a portfolio of U.S. dollar denominated securities comprised primarily of Investment Grade (as defined herein) preferred securities (the Portfolio ). INVESTMENT STRATEGIES The Portfolio is actively managed by the Portfolio Advisor, seeking to capitalize on historically wide credit spreads (the difference between yields to worst on preferred securities and similar duration U.S. dollar denominated Investment Grade corporate bonds) currently available in the market. The Fund seeks to reduce the risk of rising interest rates by maintaining, under normal market conditions, a weighted average Portfolio duration (as described below) of four years for at least 18 months following the closing of the offering of CAD Units on June 20, 2013 and not more than six years thereafter. The Fund invests at least 80% of the Total Assets (as defined herein) in preferred securities (including hybrid securities), at least 80% of the Total Assets in Investment Grade securities and 100% of the Total Assets in U.S. dollar denominated securities (except to the extent that investments in Cash Equivalents (as defined below) are denominated in Canadian dollars). The Fund invests primarily in preferred securities issued by companies in the financial services sector and, to a lesser degree, in securities of companies in other sectors, such as energy, industrials, utilities, pipelines, health care and telecommunications. Total Assets means the aggregate value of the assets of the Fund including the principal amount of any borrowings made on behalf of the Fund by the Portfolio Advisor. Investment Grade in respect of a security means a security, and in respect of an issuer means an issuer, which, at the time of purchase, has at least one of the following ratings: (i) at least BBB- by Standard & Poor s Rating Services; (ii) at least Baa3 by Moody s Investor Services, Inc.; (iii) at least BBB- by Fitch Ratings; or (iv) the equivalent rating by another designated rating organization as defined in NI 81-102. Up to 40% of the Total Assets may be U.S. dollar-denominated securities of issuers that are not domiciled in the United States. The Portfolio Advisor may also invest up to 20% of the Total Assets in: (i) cash on deposit with the Custodian (as defined herein) or a broker; (ii) an evidence of indebtedness that has a remaining term to maturity of 365 days or less and that is issued, or fully and unconditionally guaranteed as to principal and interest, by (A) any of the Federal or Provincial Governments of Canada, (B) U.S. federal, state or local governments, (C) U.S. government agencies or (D) a Canadian financial institution (provided that in the case of (A), (B) or (C), such evidence of indebtedness has a rating of at least R-1 (mid) by DBRS Limited or the equivalent rating from another designated rating organization); or (iii) other cash cover as defined in NI 81-102 (collectively, Cash Equivalents ). 3
The Forward Agreement Pursuant to the terms of the Forward Agreement, the Counterparty will deliver to the Fund, on or about October 18, 2017, a specified portfolio of common shares of Canadian public companies that are Canadian securities as defined in subsection 39(6) of the Income Tax Act (Canada) (the Tax Act ) (the Canadian Securities Portfolio ) with an aggregate value equal to the NAV of the Portfolio Trust net of any amount owing by the Fund to the Counterparty, on such date. Under the terms of the Forward Agreement, the Fund and the Counterparty have agreed that the Counterparty s settlement obligations under the Forward Agreement will be discharged by physical delivery of the Canadian Securities Portfolio by the Counterparty to the Fund. The Fund is fully exposed to the credit risk associated with the Counterparty. To secure the obligations of the Counterparty under the Forward Agreement, the Counterparty has pledged collateral in favour of the Fund with an aggregate value equal to 100% of the mark-tomarket value of the Fund s exposure under the Forward Agreement and the amount of the collateral is reset on a weekly basis to 100%. The obligations of the Counterparty to the Fund under the Forward Agreement are determined by reference to the performance of the Portfolio Trust which, in turn, is subject to the performance of the Portfolio. For the purposes of calculating amounts owing under the Forward Agreement, all distributions paid on units of the Portfolio Trust are assumed to be reinvested in additional units of the Portfolio Trust. Pursuant to the terms of the Forward Agreement, the Counterparty will, in connection with a requested partial settlement, deliver Canadian Securities Portfolio securities to the Fund with an aggregate value based on the partial settlement amount. The Fund will then sell such securities into the market in order to fund the monthly distribution, redemption or operating expenses and other liabilities of the Fund. Use of Derivatives The Fund may invest in or use derivative instruments for hedging purposes, including to offset or reduce risks associated with losses from interest rate fluctuations and to manage the average duration of the Portfolio, consistent with the investment objectives and subject to the Fund s investment restrictions. Specifically, the Portfolio Advisor may, by way of futures and/or options on futures, interest rate swaps and other derivative instruments maintain a short position in order to hedge against the possible adverse effects caused by an increase in interest rates and, thus, reduce the Portfolio s duration. No assurance can be given that the Portfolio will be hedged from any particular risk from time to time. All such uses of derivatives are made in accordance with the provisions of NI 81-102. See Fund Governance Derivatives and Risk Factors Use of Derivatives and Risk Factors Currency Risk. Currency Hedging The securities in the Portfolio are denominated in U.S. dollars and, therefore, the value of the Portfolio attributable to the CAD Units is exposed to the changes in the value of the U.S. dollar against the Canadian dollar. The Portfolio s exposure to the U.S. dollar in respect of the CAD Units is hedged by the Manager, on behalf of the Fund, back to the Canadian dollar. As the USD Units are denominated in U.S. dollars, the value of the Portfolio attributable to the USD Units is not hedged. See Risk Factors Currency Risk. Leverage The Fund employs various forms of leverage, including through borrowings and margin facilities. The leverage employed by the Fund is achieved primarily by way of margin facilities. See Risk Factors Leverage. The maximum aggregate amount of leverage that the Fund will employ is 25% of the Total Assets. Accordingly, at the time such leverage is incurred, the maximum amount of leverage to NAV of the Fund that may be employed is 1.33:1 (calculated as total long positions (including leveraged positions) divided by the NAV of the Fund). If at any time leverage exceeds the threshold, the Manager will cause the leverage to be reduced to below such threshold. See Investment Restrictions. 4
Securities Lending, Repurchase and Reverse Repurchase Transactions In order to generate additional returns and/or to acquire securities for the purpose of entering into short sale transactions, the Fund may enter into securities lending, repurchase and reverse repurchase transactions. Any securities lending by the Fund must be pursuant to a securities lending agreement to be entered into between the Fund and a securities borrower acceptable to the Fund pursuant to which the Fund will loan the securities comprising the Portfolio to the securities borrower on the terms therein, which terms shall include that: (i) the borrower will pay to the Fund a negotiated securities lending fee and will make compensation payments to the Fund equal to any distributions received by the borrower on the securities borrowed; (ii) the securities loans must qualify as securities lending arrangements for the purposes of the Tax Act; and (iii) the Fund must receive collateral security. In a repurchase transaction the Fund would be selling a security at one price and agreeing to buy it back from the same party at a higher price. In a reverse repurchase transaction the Fund would be buying a security at one price and agreeing to sell it back to the same party at a higher price. Any repurchase or reverse repurchase transactions entered into by the Fund will be pursuant to a master repurchase agreement to be entered into between the Fund and a counterparty pursuant to which the Fund will be buying or selling the subject securities on the terms therein, which terms shall include that the purchaser or the seller will post collateral security to one another on mark-to-market basis. The Manager and/or the Portfolio Advisor are responsible for setting and reviewing any securities lending, repurchase and reverse repurchase transactions. Investment Restrictions of the Fund INVESTMENT RESTRICTIONS In addition to the investment restrictions set out in NI 81-102 that are applicable to the Fund, which are designed, in part, to ensure that the investments of the Fund are diversified and relatively liquid and to ensure the proper administration of the Fund, the investment activities of the Fund are to be conducted in accordance with, among other things, the following investment restrictions: (a) 100% of the Total Assets shall be invested in U.S. dollar denominated securities (or Canadian Cash Equivalents subject to restriction (d) below); (b) at least 80% of the Total Assets must be invested in preferred securities, which includes hybrid securities; (c) at least 80% of the Total Assets shall be invested in securities rated Investment Grade; (d) up to 20% of the Total Assets may be invested in Cash Equivalents; (e) up to 40% of the Total Assets may be invested in securities of non-u.s. domiciled companies; (f) not more than 10% of the Total Assets may be invested in the securities of any one issuer (other than in respect of Cash Equivalents); (g) no securities will be purchased if after such purchase the Fund would hold more than 10% of the outstanding voting securities of that issuer; (h) the Fund will not borrow or enter into any leverage transaction if, immediately after such transaction, the aggregate amount of leverage employed by the Fund exceeds 25% of the Total Assets; (i) the Fund will not invest in or use derivatives, except for hedging purposes; (j) the Fund will not sell securities short, except for hedging purposes; (k) not more than 10% of the Total Assets may be invested in illiquid securities, which for these purposes means securities the resale of which is restricted by a representation, undertaking or agreement by the Fund or by law; 5
(l) the Fund will not invest in or hold (i) securities of or an interest in any non-resident entity, an interest in or a right or option to acquire such property, or an interest in a partnership which holds any such property if the Fund (or the partnership) would be required to include any significant amounts in income pursuant to section 94.1 of the Tax Act, (ii) an interest in a trust (or a partnership which holds such an interest) which would require the Fund (or the partnership) to report significant amounts of income in connection with such interest pursuant to the rules in proposed section 94.2 of the Tax Act, or (iii) any interest in a non-resident trust other than an exempt foreign trust for the purposes of proposed section 94 of the Tax Act (or a partnership which holds such an interest), each as set forth in the proposed amendments to the Tax Act dated October 24, 2012 (or amendments to such proposals, provisions as enacted into law or successor provisions thereto); (m) the Fund will manage its investments and affairs to ensure that it is a mutual fund trust for purposes of the Tax Act and will not acquire any property that would be taxable Canadian property of the Fund as such term is defined in the Tax Act (if the definition were read without reference to paragraph (b) thereof) (or any amendment to such definition); (n) the Fund will not make or hold any investments that would result in the Fund itself being subject to the tax for SIFT trusts as provided for in section 122 of the Tax Act; and (o) the Fund will not purchase or hold: (i) any securities of an entity that would be a foreign affiliate of the Fund for purposes of the Tax Act; or (ii) any security that would be a tax shelter investment within the meaning of section 143.2 of the Tax Act. If a percentage restriction on investment or use of assets or borrowing or financing arrangements set forth above as an investment restriction is adhered to at the time of the transaction (other than the restrictions in paragraphs (a) through (h), (k) through (n) and (o) above which must be complied with at all times and which may necessitate the selling of investments from time to time), later changes to the market value of the investment or NAV of the Fund will not be considered a violation of the investment restrictions. In the event that the percentage restrictions in paragraphs (a) through (h) and (k) above are exceeded, the Fund will sell Portfolio securities in an orderly manner and use the proceeds therefrom to reduce the outstanding positions. If the Fund receives from an issuer subscription rights to purchase securities of that issuer, and if the Fund exercises those subscription rights at a time when the Fund s holdings of securities of that issuer would otherwise exceed the limits set forth above, the exercise of those rights will not be considered a violation of the investment restrictions if, prior to the receipt of securities of that issuer on exercise of these rights, the Fund has sold at least as many securities of the same class and value as would result in the restriction being complied with. For purposes of investment rating limitations in this Annual Information Form, a security is considered to have the highest rating assigned to it by a designated rating organization. Investment rating limitations are considered to apply only at the time of purchase and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of an acquisition of securities. DESCRIPTION OF THE SECURITIES OFFERED BY THE FUND The beneficial interest in the net assets and net income of the Fund is divided into four classes of units, Class A Units, Class F Units, Class U Units and Class V Units (each a Unit and collectively, the Units ). The Fund is authorized to issue an unlimited number of classes of units and an unlimited number of units of each class. The Class F Units and Class V Units (the Unlisted Units ) are designed for fee-based and/or institutional accounts and differ from the Class A Units and Class U Units (the Listed Units ) in the following ways: (i) the Unlisted Units will not be listed on a stock exchange; (ii) the agents fees payable on the issuance of the Unlisted Units are lower than those payable on the issuance of the Listed Units; and (iii) the Service Fee (as defined herein) component of the management fee paid by the Fund is payable in respect of the Listed Units only. Accordingly, the NAV per Unit of each class will not be the same as a result of the different fees allocable to each class of Units. 6
Each Unit of a class entitles the holder to the same rights and obligations as a Unitholder of that class and no Unitholder of a class is entitled to any privilege, priority or preference in relation to any other Unitholder of that class. Each Unitholder is entitled to one vote at all meetings of Unitholders and at all meetings of Unitholders of that class for and is entitled to participate equally with respect to any and all distributions made by the Fund, including distributions of net realized capital gains, if any. On the redemption of the Units, however, the Fund may in its sole discretion, designate payable to redeeming Unitholders, as part of the redemption price, any capital gains realized by the Fund in the taxation year in which the redemption occurred. On termination or liquidation of the Fund, Unitholders of record are entitled to receive on a pro rata basis all of the assets of the Fund remaining after payment of all debts, liabilities and liquidation expenses of the Fund. Unitholders will have no voting rights in respect of securities held by the Fund. On December 16, 2004, the Trust Beneficiaries Liability Act, 2004 (Ontario) came into force. This statute provides that holders of units of a trust are not, as beneficiaries, liable for any act, default, obligation or liability of the trust if, when the act or default occurs or the liability arises: (i) the trust is a reporting issuer under the Securities Act (Ontario); and (ii) the trust is governed by the laws of the Province of Ontario. The Fund is a reporting issuer under the Securities Act (Ontario) and it is governed by the laws of the Province of Ontario by virtue of the provisions of the Declaration of Trust. Distributions Monthly Distributions The Fund intends to make monthly cash distributions to Unitholders of record on the last business day of each month. Distributions, if any, are paid on a business day on or before the 15 th day of the following month (each, a Distribution Payment Date ). The Fund does not have a fixed monthly distribution amount. The securities in the Portfolio are denominated in U.S. dollars and, accordingly, the monthly distribution amount may vary between the USD Units and CAD Units. The amount of cash distributions may therefore fluctuate from month to month and the Fund may be unable to make any distributions in any particular month or months. See Distribution Policy and Risk Factors. The distribution amount for 2014 was $0.125 per CAD Unit and US$0.1198 per USD Unit and the Fund has made all such monthly distributions for the year ended December 31, 2014. If the Fund s net income for tax purposes, including net realized capital gains, for any year, exceeds the aggregate amount of the regular monthly distributions made in the year to Unitholders, the Fund will also be required to pay one or more special distributions (in either cash or Units) in such year to Unitholders as is necessary to ensure that the Fund will not be liable for income tax on such amounts under the Tax Act (after taking into account all available deductions, credits and refunds). Any special distributions payable in Units will increase the aggregate adjusted cost base of a Unitholder s Units. Immediately following payment of such a special distribution in Units, the number of Units outstanding will be automatically consolidated such that the number of Units outstanding after such distribution will be equal to the number of Units outstanding immediately prior to such distribution, except in the case of a non-resident Unitholder to the extent tax was required to be withheld in respect of the distribution. See Income Tax Considerations. Distribution Reinvestment Plan Unitholders of the Fund have the opportunity to reinvest distributions from the Fund in additional Units by participating in the Fund s distribution reinvestment plan (the Reinvestment Plan ) which provides that cash distributions made by the Fund, if any, shall, at the election of a Unitholder, be automatically reinvested in additional Class A Units, Class U Units, Class F Units and/or Class V Units (as the case may be) on such Unitholder s behalf in accordance with the terms of such plan (as described below) and the reinvestment plan agreement between the Manager on behalf of the Fund, the Manager and a Canadian plan agent (the Plan Agent ) appointed to establish the Reinvestment Plan. Notwithstanding the foregoing, Unitholders who are not residents of Canada will not be able to participate in the Reinvestment Plan and Unitholders who cease to be residents of Canada are required to terminate such Unitholders participation in the Reinvestment Plan. Subject to the foregoing, cash distributions are automatically reinvested in additional Class A Units, Class U Units, Class F Units and/or Class V Units (as the case may be) on behalf of those Unitholders who are residents of Canada 7
(each such Unitholder being a Plan Participant ). Such distributions due to Plan Participants are paid to the Plan Agent and applied to the purchase of Units on behalf of Plan Participants in the following manner. If the Market Price (as defined herein) plus estimated brokerage fees and commissions is greater than or equal to the NAV per Unit (calculated as described under Calculation of Net Asset Value ) as at such distribution payment date (the Distribution Payment Date ), the Plan Agent will, after the relevant Distribution Payment Date, apply distributions to the purchase of Units from the Fund at a price equal to the NAV per Unit as at the Distribution Payment Date, provided that if the NAV per Unit as at the Distribution Payment Date is less than 95% of the Market Price per Unit as at the Distribution Payment Date, then the Units will be purchased from the Fund at a price equal to 95% of the Market Price as at the Distribution Payment Date (the Treasury Purchase Procedure ). Otherwise, if the Market Price plus estimated brokerage fees and commissions is less than the NAV per Unit as at the Distribution Payment Date, purchases of Units will be made in the market during the 10 business days following the relevant Distribution Payment Date, on any business day when the Market Price is less than the NAV per Unit as at such Distribution Payment Date, and on the 11 th business day after the Distribution Payment Date the unused part (if any) of the distributions paid to the Plan Agent for the benefit of Plan Participants will be applied to a purchase of Units from the Fund in accordance with the Treasury Purchase Procedure. Applicable brokerage fees and commissions incurred in connection with purchases of Units made in the market pursuant to the Reinvestment Plan are paid by and from the accounts of Plan Participants. The Units purchased in the market or from the Fund are allocated on a pro rata basis to the Plan Participants. The Plan Agent will credit a Plan Participant s account in respect of Units acquired on behalf of such Plan Participant under the Reinvestment Plan. While the Fund will not issue fractional Units, a cash payment for any fractional Units that would otherwise be issuable under the Reinvestment Plan relating to a distribution is paid by the Plan Agent to the relevant Plan Participants shortly after the payment date for such distribution. No certificates representing the Units issued or purchased pursuant to the Reinvestment Plan are issued. The automatic reinvestment of the distributions under the Reinvestment Plan will not relieve Plan Participants of any income tax applicable to such distributions. See Income Tax Considerations. If the Units are thinly traded, purchases in the market under the Reinvestment Plan may significantly affect the market price. Depending on market conditions, direct reinvestment of cash distributions by Unitholders in the market may be more, or less, advantageous than the reinvestment arrangements under the Reinvestment Plan. The Plan Agent s fees for administering the Reinvestment Plan are paid by the Fund. The Manager is able to terminate the Reinvestment Plan, in its sole discretion, upon not less than 30 days notice to the Plan Participants and the Plan Agent. The Manager is also able to amend, modify or suspend the Reinvestment Plan at any time in its sole discretion, provided that it gives notice of that amendment, modification or suspension to Unitholders, which notice may be given by the Fund by issuing a press release or by publishing an advertisement containing a summary description of the amendment in at least one major daily newspaper of general and regular paid circulation in Canada, or in any other manner the Manager determines to be appropriate. The Fund will not be required to issue Units into any jurisdiction where that issuance would be illegal. Matters Requiring Unitholder Approval Amendments to the terms of the Units must be approved by Unitholders of the Fund in accordance with applicable laws and the Declaration of Trust. In addition to the voting rights provided in NI 81-102 and unless otherwise required by law, the following acts require the approval of the Unitholders by resolution passed by the affirmative vote of at least 66 2 / 3 % of the votes cast, either in person or by proxy, at a meeting of Unitholders called for the purpose of considering such resolution (an Extraordinary Resolution ): (a) the removal of the trustee of the Fund; (b) a change to the investment objectives or investment restrictions of the Fund, unless such changes are necessary to ensure compliance with applicable laws, regulations or other requirements imposed by applicable regulatory authorities from time to time; 8
(c) except as described herein, a change in the Manager, other than: (i) a change resulting in an affiliate of the Manager assuming such position; or (ii) a termination of the Management Agreement (as defined herein) in accordance with its terms; (d) any increase in the basis of calculating management fees paid to the Manager; (e) any material amendments to the Declaration of Trust, other than any material amendment that requires either unanimous Unitholder approval or the consent of the Manager or does not require Unitholder approval as set forth under the heading Amendments to the Declaration of Trust below; (f) the merger (other than a Permitted Merger (as defined herein)) or the sale of all or substantially all of the assets of the Fund other than in the ordinary course of its activities and other than in connection with the termination of the Fund; (g) any amendment, modification or variation in the provisions or rights attaching to the Units; (h) any change in the frequency of calculating the NAV per Unit to less often than daily; (i) any termination of the Fund, other than disclosed under Termination of the Fund ; or (j) the issuance of additional Units, including any offering of rights, warrants or options to existing Unitholders to acquire Units, other than: (i) for net proceeds per Unit equal to or greater than 100% of the most recently calculated NAV per Unit calculated prior to the entering into of the commitment by the subscriber to purchase such Units or prior to the offering, as the case may be; or (ii) by way of Unit distribution. The Manager may, without obtaining Unitholder approval, merge the Fund (a Permitted Merger ) with another fund or funds, provided that: (a) the fund(s) with which the Fund is being merged must be managed by the Manager or an affiliate of the Manager (the Affiliated Fund(s) ); (b) Unitholders are permitted to redeem their Units at a redemption price equal to 100% of the NAV per Unit, less any costs of funding the redemption, including commissions prior to the effective date of the merger; (c) the funds being merged have similar investment objectives as set forth in their respective declarations of trust, as determined in good faith by the Manager in its sole discretion; (d) the Manager must have determined in good faith that there will be no increase in the management expense ratio borne by the Unitholders as a result of the merger; (e) the merger of the funds is completed on the basis of an exchange ratio determined with reference to the net asset value per unit of each fund; and (f) the merger of the funds must be capable of being accomplished on a tax-deferred rollover basis for Unitholders of the Fund. If the Manager determines that a merger is a Permitted Merger, the Manager may effect the merger, including any required changes to the Declaration of Trust, without seeking Unitholder approval for the merger or such amendments. If a decision is made to merge, the Manager will issue a press release at least 30 Business Days prior to the proposed effective date thereof disclosing details of the proposed merger and will comply with all applicable laws including the requirements of the TSX concerning mergers involving listed investment funds. While the funds to be merged will have similar investment objectives, the funds may have different investment strategies, guidelines and restrictions and, accordingly, the units of the merged funds will be subject to different risk factors. Each Unit will have one vote at such a meeting. Any change to any of the foregoing matters requiring Unitholder approval shall require the same approval required to approve such matter. 9
Amendments to the Declaration of Trust Unless all of the Unitholders consent thereto, no amendment can be made to the Declaration of Trust which would have the effect of reducing the interests in the Fund of the Unitholders, increasing the liability of any Unitholder, or changing the right of any Unitholder to vote at any meeting of the Fund. No amendment may be made to the Declaration of Trust which would have the effect of reducing the fees payable or expenses reimbursable to the Manager or terminating the Manager unless the Manager, in its sole discretion, consents. The trustee of the Fund at the request of the Manager may, without the approval of or notice to Unitholders, amend the Declaration of Trust for the following limited purposes: (a) to remove any conflicts or other inconsistencies which may exist between any terms of the Declaration of Trust and any provisions of any law or regulation applicable to or affecting the Fund; (b) to make any change or correction in the Declaration of Trust which is of a typographical nature or is required to cure or correct any ambiguity or defect or inconsistent provision, clerical omission, mistake or manifest error contained therein; (c) to bring the Declaration of Trust into conformity with: (i) applicable laws, rules and policies of Canadian securities regulators; or (ii) current practice within the securities or investment fund industries; provided that any amendment contemplated by (ii) does not adversely affect the pecuniary value of the interests of the Unitholders; (d) to maintain the status of the Fund as a unit trust and mutual fund trust for the purposes of the Tax Act or to respond to amendments (including proposed amendments) to such Tax Act or the interpretation thereof; (e) to terminate the Fund without Unitholder approval as set forth under the heading Termination of the Fund below; (f) to create one or more new class or classes of securities of the Fund having rights or privileges inferior to or equal to the outstanding securities of any class and make consequential amendments to the Declaration of Trust related thereto; (g) to change the name of the Fund; or (h) to provide added protection or benefit to Unitholders or to the Fund. Except for changes to the Declaration of Trust which require the approval of Unitholders by an Extraordinary Resolution or changes described above which require neither approval nor prior notice to Unitholders, the Declaration of Trust may only be amended by resolution passed by an affirmative vote of at least a majority of the votes cast, either in person or by proxy, at a meeting of Unitholders called for the purpose of considering such resolution. Termination of the Fund The Fund does not have a fixed termination date. However, the Manager may, in its sole discretion, on 60 days notice to Unitholders, terminate the Fund without the approval of Unitholders if, in the opinion of the Manager, the NAV of the Fund is reduced so that it is no longer economically feasible to continue the Fund. The Fund will also issue a press release 10 days prior to the date of such proposed termination setting forth the details of the termination. The Fund may also be terminated by Extraordinary Resolution of the Unitholders as discussed under Matters Requiring Unitholder Approval above. Upon termination, the net assets of the Fund will be distributed to Unitholders on a pro rata basis. Immediately prior to the termination of the Fund, including on the termination date, the Manager will, to the extent possible, convert the assets of the Fund to cash and after paying or making adequate provision for all of the Fund s liabilities, distribute the net assets of the Fund to the Unitholders as soon as practicable after the date of termination. Any 10
unliquidated assets may be distributed in specie rather than in cash, subject to compliance with any securities or other laws applicable to such distributions. The Declaration of Trust provides that the Manager may, in its discretion and upon not less than 30 days prior written notice to the Unitholders, postpone any termination date by a period of up to 180 days if the Manager determines that it will be unable to convert all of its assets to cash prior to any termination date and the Manager determines that it would be in the best interests of the Unitholders to do so. Conversion of Units A holder of any class of Units may convert their Units into any other class of Units in accordance with the Declaration of Trust in any week on the Thursday of such week (the Conversion Date ) by delivering written notice thereof by 5:00 pm (Toronto time) at least two business days prior to the relevant Conversion Date. For each Unit so converted, a holder will receive that number of Units of the class into which such Unit is being converted equal to the NAV per Unit of the class being converted as of the close of trading on the Conversion Date divided by the NAV per Unit of the class into which such Unit is being converted as of the close of trading on the Conversion Date. If a USD Unit is being converted into a CAD Unit or vice versa, the conversion rate is calculated with reference to the applicable rate of exchange available from the Custodian. Converted Units are delivered on the business day following the Conversion Date. No fraction of a Unit will be issued upon any conversion of any Units. If the conversion of a Unit would result in the issuance of a fractional Unit the Fund will, following the Conversion Date, forward a cash payment to CDS Clearing and Depository Services Inc. ( CDS ) equal to CAD $25.00 or U.S. $25.00, as the case may be, multiplied by such fraction of a Unit, in lieu of issuing a fractional Unit. A conversion of USD Units into CAD Units or vice versa by a Unitholder will likely be treated as a disposition of such Units for the purposes of the Tax Act. See Income Tax Considerations Taxation of Unitholders. Non-Resident Unitholders At no time may persons who are non-residents of Canada for purposes of the Tax Act and/or partnerships that are not Canadian partnerships within the meaning of the Tax Act (or any combination thereof) (collectively, nonresidents ) be the beneficial owners of a majority of the Units. The Manager may require declarations as to the jurisdictions in which a beneficial owner of Units is resident and, if a partnership, its status as a Canadian partnership. If the Manager becomes aware, as a result of requiring such declarations as to beneficial ownership or otherwise, that the beneficial owners of 40% of the Units then outstanding are, or may be, non-residents, or that such a situation is imminent, the Manager may make a public announcement thereof. If the Manager determines that more than 40% of the Units are beneficially held by non-residents, or that such a situation is imminent, the Manager may send a notice to such non-resident Unitholders, chosen in inverse order to the order of acquisition or in such manner as the Manager may consider equitable and practicable, requiring them to dispose of their Units or a portion thereof within a specified period of not less than thirty (30) days. If the Unitholders receiving such notice have not disposed of the specified number of Units or provided the Manager with satisfactory evidence that they are not non-residents within such period, the Manager may, on behalf of such Unitholders, dispose of such Units and, in the interim, shall suspend the voting and distribution rights attached to such Units. Upon such disposition, the affected Unitholders shall cease to be beneficial holders of Units and their rights shall be limited to receiving the net proceeds of disposition of such Units. Notwithstanding the foregoing, the Manager may determine not to take any of the actions described above if the Manager has been advised by legal counsel that failure to take any of such actions would not adversely impact the status of the Fund as a mutual fund trust for purposes of the Tax Act or, alternatively, may take such other action or actions as may be necessary to maintain the status of the Fund as a mutual fund trust for purposes of the Tax Act. Calculation of Net Asset Value CALCULATION OF NET ASSET VALUE The NAV per Unit is calculated by the Valuation Agent (as defined herein) as of the close of business, each business day, and includes any other day on which the Manager elects, in its discretion to calculate the NAV per Unit (each, a 11
Valuation Date ). See Valuation of Portfolio Securities regarding the valuation policies and procedures of the Fund. Reporting of Net Asset Value The most recently calculated NAV per Unit of a class is posted daily at www.purposeinvest.com. Valuation Agent CIBC Mellon Global Securities Services Company (the Valuation Agent ) has been appointed as the valuation agent of the Fund at its offices in Toronto. The Valuation Agent is responsible for providing administration services to the Fund, including fund valuation and financial reporting services. The Valuation Agent is responsible for providing valuation services to the Fund and will calculate the NAV of the Fund and the NAV per Unit pursuant to the terms of a fund administration agreement. VALUATION OF PORTFOLIO SECURITIES The NAV of the Fund on a particular date is equal to the aggregate fair value of the assets of the Fund less the aggregate fair value of the liabilities of the Fund, expressed in Canadian dollars. The NAV per Unit on any day is obtained by dividing the NAV of the Fund attributable to the relevant class of Units on such day by the number of Units of such class then outstanding. In determining the NAV of the Fund on a Valuation Date: (a) the value of any cash on hand or deposit, bill, demand note, account receivable, prepaid expense, distribution, or other amount receivable (or declared to holders of record of securities owned on a date before the Valuation Date as of which the value of the assets is being determined, and to be receivable) and interest accrued and not yet received is deemed to be the full amount thereof provided that if the Valuation Agent has determined that any such deposit, bill, demand note, account receivable, prepaid expense, distribution, or other amount receivable (or declared to holders of record of securities owned on a date before the Valuation Date as of which the value of the assets is being determined, and to be receivable) or interest accrued and not yet received is not otherwise worth the full amount thereof, the value thereof is deemed to be such value as the Valuation Agent determines to be the fair value thereof; (b) the value of any bonds, debentures or other debt obligations is valued by taking the average of the bid and ask prices quoted by a major dealer or recognized information provider in such securities on a Valuation Date at such times as the Valuation Agent, in its discretion, deems appropriate. Short-term investments including notes and money market instruments are valued at cost plus accrued interest, which approximates their fair market value; (c) the value of any security which is listed or traded upon a stock exchange (or if more than one, on the principal stock exchange for the security, as determined by the Valuation Agent) is determined by taking the latest available sale price of recent date, or lacking any recent sales or any record thereof, the simple average of the latest available offer price and the latest available bid price (unless in the opinion of the Valuation Agent such value does not reflect the value thereof and in which case the latest offer price or bid price is used), as at the Valuation Date on which the value of the assets is being determined, all as reported by any means in common use; (d) the value of any security which is traded over-the-counter is priced at the average of the last bid and asked prices quoted by a major dealer or recognized information provider in such securities; (e) the value of any security or other asset for which a market quotation is not readily available is its fair value on the Valuation Date on which the value of the assets is being determined as determined by the Valuation Agent (generally the Valuation Agent will value such security at cost until there is a clear indication of an increase or decrease in value); 12