Sentry Select MBS Adjustable Rate Income Fund II and Sentry Select Capital Inc.

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions --relief from National Instrument 81-102 granted to an investment fund upon its conversion from its existing closed-end structure to an open-end structure -- fund delisting units from the Toronto Stock Exchange and offering monthly redemptions at net asset value -- fund invests in securities and uses investment strategies not permitted by National Instrument 81-102 -- fund never marketed as a publicly offered mutual fund and in the future will not be marketed to the public -- current investors purchased securities of the fund when it operated as a closed-end fund -- new units of the fund will only be distributed in exempt market and not to the public under a prospectus -- securities held by the fund are not illiquid assets -- at inception of the fund, manager did not intend to undertake a conversion into an open-end fund -- manager will bear all the costs and expenses associated with converting the fund into an open-end mutual fund -- National Instrument 81-102.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds.

March 23, 2009

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

SENTRY SELECT MBS ADJUSTABLE RATE

INCOME FUND II

(the Fund)

AND

IN THE MATTER OF

SENTRY SELECT CAPITAL INC.

(SSCI or the Manager)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption (the Exemption Sought) from National Instrument 81-102 Mutual Funds (the Instrument) upon the implementation of the Proposed Changes (as defined below).

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

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

(b) the Manager has provided notice that section 4.7(2) 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, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon Territory, Nunavut and the Northwest Territories.

Interpretation

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

Representations

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

1. The Fund is an investment trust established under the laws of Ontario under an amended and restated declaration of trust dated as of January 1, 2009 (the Declaration of Trust). SSCI is the trustee (the Trustee) and manager of the Fund. The head office of the Manager is located in Ontario.

2. The Fund is a non-redeemable investment fund that made an initial public offering by way of prospectus dated March 29, 2005 raising total gross proceeds of approximately $323 million (the Offering).

3. The Fund's units (the Units) are listed on the Toronto Stock Exchange (the TSX).

4. The Fund's current net asset value as of March 19, 2009 was approximately $65.2 million.

5. The Fund is a reporting issuer in each of the provinces and territories of Canada. The Fund is not in default of securities legislation in any jurisdiction.

6. The Fund has the following investment objectives:

(a) to provide holders of Units (Unitholders) with a tax efficient stream of monthly cash distributions; and

(b) to preserve the net asset value (the NAV) of the Fund.

Cash distributions from the Fund are not fixed and may vary from month to month. However, distributions in any year are targeted to approximate the average 10-Year U.S. Treasury Note yield for that year plus 3%.

7. In order to meet its investment objectives, the Fund obtains exposure to the performance of Mortgage-Backed Securities Limited Partnership (the Partnership) by virtue of one or more forward purchase and sale agreements (collectively, the Forward Agreement) with Royal Bank of Canada (the Counterparty). The Fund does not invest directly in the Partnership. The Fund invested the net proceeds of the Offering in a portfolio of common shares of Canadian public companies (the Common Share Portfolio). The value of the Forward Agreement is related to the value of MBS Investment Trust II. MBS Investment Trust II invests in limited partnership interests of the Partnership. As a result, Unitholders' returns correlate with the net returns realized by the MBS Investment Trust II on its investment in the Partnership.

8. Under the Forward Agreement, the Fund is entitled to sell securities in the Common Share Portfolio from time to time to fund monthly distributions, redemptions and repurchases of Units and its operating expenses. In the case of securities sold to fund monthly distributions and expenses, the purchase price payable by the Counterparty is calculated by reference to the monthly yield of a notional investment (the Notional Investment) at the time of the closing of the Offering of an amount equal to the U.S. dollar equivalent of the net proceeds of the Offering in MBS Investment Trust II. In the case of securities sold to fund the redemption or repurchase of Units (including at the Termination Date (as defined below)), the purchase price payable by the Counterparty is calculated by reference to the value of the Notional Investment in MBS Investment Trust II. The Notional Investment is reduced proportionately to reflect the redemption and repurchase of Units.

9. The Forward Agreement includes a currency hedge which minimizes the effects of changes in the Canadian dollar NAV of the Fund which would otherwise occur because of any change in the value of the U.S. dollar relative to the Canadian dollar.

10. MBS Investment Trust II is an investment trust that is established under the laws of the Province of Ontario pursuant to a declaration of trust dated March 29, 2005. MBS Investment Trust II will terminate on or about April 30, 2015 (or such later date upon which the Fund terminates) if not terminated earlier in accordance with its terms.

11. The Manager acts as trustee of MBS Investment Trust II. Units of MBS Investment Trust II are redeemable at the demand of its unitholders. MBS Investment Trust II's distribution policy is to pay monthly distributions to its unitholders equal to the distributions received from its investment in the Partnership. In addition, MBS Investment Trust II distributes all of its net income and net realized capital gains earned in each fiscal year to ensure that it is not liable for income tax under the Income Tax Act (Canada).

12. MBS Investment Trust II is restricted to, among other things:

(a) investing in limited partnership interests of the Partnership;

(b) investing in limited partnership units of a limited partnership subject to the same investment restrictions as the Partnership;

(c) investing directly in securities subject to the same investment restrictions as the Partnership; and

(d) holding cash in interest bearing accounts, short-term government debt or investment grade corporate debt.

13. The Partnership was established on March 28, 2003 under the laws of the State of Delaware. The general partner of the Partnership is MBS GP, Inc. (the General Partner), a Delaware corporation and a wholly-owned subsidiary of Sentry Select Capital Corp., the parent corporation of the Manager. The directors and officers of the General Partner are employees of Sentry Select Capital Corp. As at March 19, 2009, MBS Investment Trust II is the only limited partner of the Partnership. Pacific Income Advisers, Inc. (PIA or the Investment Manager) acts as investment manager of the Partnership.

14. In accordance with its investment strategies and investment restrictions, the Partnership borrows for the purpose of making investments and pledges its assets to secure such borrowings. The Partnership uses the proceeds from the sale of limited partnership interests and the proceeds from borrowings via repurchase agreements to invest in a portfolio of mortgage-backed securities issued by U.S. agencies having an implied AAA rating (the Portfolio). The Partnership's investment strategy, which includes the use of what the Investment Manager believes is an appropriate amount of leverage, is to generate net income for distribution from (i) earnings on the equity portion of the Portfolio used to purchase securities plus (ii) the spread between the interest income on the leveraged portion of the Portfolio and the cost of repurchase agreements used to finance this portion of the Portfolio (as described in paragraphs 17 and 18 below). The Investment Manager seeks to enhance returns while limiting exposure to interest rate risk and credit risk.

15. The Portfolio consists of:

(a) mortgage-backed securities, having an implied AAA rating, issued by U.S. agencies commonly known as Ginnie Mae, Fannie Mae and Freddie Mac, including mortgage pass-through certificates, collateralized mortgage obligations and other securities representing interests in or obligations backed by pools of U.S. residential mortgage loans; and

(b) to a limit of an aggregate of 10% of the Portfolio, (i) other mortgage-backed securities which are rated AAA by one or more U.S. Nationally Recognized Statistical Ratings Organizations, (ii) debentures issued by Fannie Mae, Freddie Mac and Federal Home Loan Bank System and (iii) U.S. Treasury securities,

(collectively, the Securities).

The Partnership invests primarily in mortgage-backed securities collateralized by adjustable rate mortgages in order to minimize potential fluctuations in price and interest spread on the borrowing costs due to changes in market interest rates. The Investment Manager does not intend to cause the Partnership to invest in collateralized debt obligations or similarly structured instruments.

16. The assets of the Fund are held by its custodian, State Street Trust Company Canada, in compliance with Part 14 of National Instrument 41-101 General Prospectus Requirements.

17. To effect its borrowings in a cost-efficient manner, the Partnership enters into master repurchase agreements with various major financial institutions (the Repurchase Agreements). The borrowing via Repurchase Agreements is collateralized by the Securities in the Portfolio.

18. The Partnership has established repurchase agreement credit lines with several financial institutions. The Partnership uses these repurchase agreement credit lines to purchase Securities for the Portfolio, with these Securities being used to secure such borrowing. It is anticipated that over the life of the Portfolio, all of the assets of the Partnership may be used as collateral for Repurchase Agreements. While the Investment Manager expects to operate the Partnership with a debt-to-equity ratio of between 7:1 and 12:1, it believes that this ratio will average between 8:1 and 10:1 over the life of the Fund. If at any time the Partnership's debt-to-equity ratio exceeds 12:1, the Investment Manager will, in a timely manner, take all commercially reasonable steps as are necessary to reduce the Partnership's debt-to-equity ratio to 12:1 or less.

19. Under the Declaration of Trust, the Units may be redeemed at NAV annually in April. Units may be surrendered during the period from April 1 until 5:00 p.m. (Toronto time) on the tenth business day before the last business day in April (the Notice Period) for redemption by the registered Unitholder to Computershare Investor Services Inc., the registrar and transfer agent of the Fund, subject to the Fund's right to suspend redemptions as described in paragraph 20 below. Units surrendered for redemption by a Unitholder during the Notice Period will be redeemed on the last business day of April (the Valuation Date) and the Unitholder will receive payment on or before the 15th day following the applicable Valuation Date. Redeeming Unitholders are entitled to receive a redemption price per Unit equal to 100% of the NAV per Unit determined as of the Valuation Date.

20. The Declaration of Trust currently provides that the Manager may direct the Trustee to suspend the redemption of Units or payment of redemption proceeds (a) during any period when normal trading is suspended on a stock exchange or other market on which securities owned by the Fund are listed and traded, if these securities represent more than 50% by value or underlying market exposure of the total assets of the Fund, without allowance for liabilities and if these securities are not traded on any other exchange that represents a reasonably practical alternative for the Fund, (b) with the prior permission of the applicable securities regulatory authorities, for any period not exceeding 30 days during which the Manager determines that conditions exist which render impractical the sale of assets of the Fund or which impair the ability of the Trustee to determine the value of the assets of the Fund. Except as set out in paragraph 28 below, the Manager does not intend to change this provision.

21. The Declaration of Trust of the Fund prohibits the Fund from issuing additional Units except:

(a) where the net proceeds per Unit is not less than the NAV per Unit calculated on the date immediately prior to the pricing of the offering; or

(b) by way of Unit distributions.

22. Except when redemptions have been suspended, the Fund is required to undertake a mandatory market purchase program (the Mandatory Market Purchase Program) pursuant to which the Fund will purchase any Units offered in the market at prices that are less than 95% of the latest published NAV per Unit, up to a maximum amount in any calendar quarter of 1.25% of the number of Units outstanding at the beginning of such calendar quarter if on any business day the closing price of a Unit is less than 95% of the latest determined NAV per Unit.

23. The Fund will terminate on April 30, 2015 (the Termination Date), whereupon the Forward Agreement will be settled, any non-cash assets of the Fund will be liquidated, and the net assets of the Fund will be distributed to Unitholders unless Unitholders determine to continue the Fund by a majority of the votes cast at a meeting of Unitholders called for such purpose. Immediately prior to the Termination Date, the Trustee will, to the extent possible, convert the assets of the Fund to cash and the Trustee shall, after paying or making adequate provision for all of the Fund's liabilities, distribute the net assets of the Fund to Unitholders as soon as practicable after the Termination Date. A meeting of Unitholders to extend the Fund shall be held at least 30 days prior to the then scheduled Termination Date.

24. If the term of the Fund is extended beyond the Termination Date, Unitholders may redeem their Units on the Termination Date for the NAV per Unit as of that date.

25. As the Fund is a non-redeemable investment fund, it was not established in compliance with the Instrument. The Fund currently invests and operates in a manner not permitted for conventional mutual funds under the Instrument.

26. Since its inception, the Fund has experienced a high level of redemptions annually in April. The Units trade thinly on the TSX and they generally trade at a discount to the NAV per Unit. The volume of redemptions is typically higher than the volume of trading. The Manager believes that much of the redemption activities comes from arbitrageurs and other short term investors taking advantage of the discount of the market price from the redemption price.

27. The Manager believes that it would be in the best interests of the Unitholders for the Fund to be continued and revitalized by raising more funds because:

(a) this is an opportune time for the Fund's strategy because the spread between borrowing costs and return on the investments is improving;

(b) increasing the size of the Fund would enable the Partnership to obtain financing on more favourable terms to carry out its leveraged investments in accordance with its investment objectives and would also help spread the fixed operating costs over a larger base, thereby reducing the management expense ratio of the Fund;

(c) the Fund has significant tax losses which can be used to make distributions to the Unitholders in a tax efficient manner for the benefit of the Unitholders;

(d) a number of registered representatives who have clients invested in the Fund have told the Manager so; and

(e) the actions taken by the U.S. government recently with respect to Fannie Mae and Freddie Mac, including the recapitalization of such entities, should not adversely affect, and in fact should positively affect, the Fund's ability to execute its investment strategy.

28. The Manager believes that it would be difficult to issue new Units in a public offering at the NAV per Unit because the Units trade at a discount to the NAV per Unit. The Manager is proposing to make the following changes to the Fund:

(a) the Fund would delist its Units from the TSX;

(b) because after the delisting, there would be no market, the Mandatory Market Purchase Program would be eliminated;

(c) in order to provide some liquidity to Unitholders after the delisting of the Units from the TSX, the Units would become redeemable at NAV per Unit on a monthly basis on the last business day in each month with the same notice period and payment period that currently apply in respect of the annual redemption as described in paragraph 19 above;

(d) the existing Units will be redesignated as Class X Units. The Manager would be authorized to create new classes of Units. The classes of Units would differ based upon their fee structure and accordingly, the net asset value would differ from class to class. Other than the foregoing, the other classes of Units would be identical to the Class X Units;

(e) at the discretion of the Manager, the Fund could invest all or a portion of its assets directly in the Partnership and it could maintain the currency hedge or eliminate it in whole or in part; and

(f) the words "with the prior permission of the applicable securities regulatory authorities" would be deleted from the provision referred to in paragraph 20(b) above;

(collectively, the Proposed Changes).

Proposed Changes (b) -- (f) would require amendments to the Declaration of Trust which require the approval of the Unitholders by a two-thirds majority. Proposed Change (f) is being made because the prior permission of the applicable securities regulatory authorities is not currently required.

29. The Fund will remain a reporting issuer in each of the provinces and territories of Canada after the implementation of the Proposed Changes.

30. The Manager intends to call a meeting of Unitholders to be held on or about May 29, 2009 to seek approval for the Proposed Changes (the Unitholder Meeting). In connection with the Unitholder Meeting, the Fund will send Unitholders an information circular containing details of the Proposed Changes.

31. The Fund does not intend to distribute any securities pursuant to a prospectus. The Manager is of the view that there would be a demand for the Fund's securities in the exempt market. Therefore, upon the implementation of the Proposed Changes, the Fund intends to distribute Units of different classes at the applicable NAV per Unit on a continuous basis to accredited investors pursuant to exemptions from the prospectus requirement set out in the Legislation. Units of the Fund would be sold in the exempt market by investment dealers who are members of the Investment Industry Regulatory Organization of Canada and by dealers registered in the category of "limited market dealer". The Manager is registered as a limited market dealer and expects to sell Units.

32. The Proposed Changes are in the best interests of the Fund because their combined effect should enable the Fund to distribute new Units at NAV per Unit and should eliminate the arbitrage opportunities that result in high levels of annual redemptions. In particular, the Manager wishes to provide Unitholders with a monthly redemption right to compensate them for the loss of liquidity on the TSX. The addition of this right is for the benefit of the Unitholders of the Fund.

33. The Proposed Changes have been referred to the Independent Review Committee of the Fund (the IRC) in accordance with Part 5 of National Instrument 81-107 Independent Review Committee for Investment Funds. The IRC provided a positive recommendation to the Manager with respect to the Proposed Changes on the basis that the Proposed Changes achieve a fair and reasonable result for the Fund.

34. If the monthly redemption right is added to the attributes of the Units of the Fund, the Fund would be considered to be a "mutual fund" under the Legislation and would be subject to the Instrument. Absent the Exemption Sought, the Fund would not be able to provide Unitholders with a monthly redemption right and continue to execute its current investment strategies to achieve its investment objectives.

35. The investment strategy and other attributes of the Fund were established without regard to the Instrument, as the Fund was not subject to that Instrument. Current investors in the Fund either purchased Units upon the initial public offering or on the TSX to gain exposure to the investment objectives and strategies of the Fund. Future investors will purchase Units pursuant to exemptions from the prospectus requirement. Therefore, unlike investors in publicly offered mutual funds, current investors do not have, and future investors should not have, any expectation that the Instrument will apply to the Fund.

36. The Securities in which the Partnership invests do not fall within the definition of "illiquid securities" contained in the Instrument. U.S. Agency mortgage-backed securities are very liquid securities. Accordingly, it is not difficult for the Investment Manager to sell assets when required, especially given the short term nature of the Partnership's borrowings and given that the Investment Manager would have effectively 20 or 21 business days between the time that the notice of redemption must be given and the date when the redemption price must be paid in order to raise the necessary cash. The Partnership has never had difficulty raising the cash necessary for the Fund and the similarly managed funds that have subsequently been merged with the Fund to redeem units on each fund's annual redemption date or to pay for purchases of units under the mandatory market purchase program of each fund.

37. The Manager and PIA intend to ensure that the Partnership is managed in a manner that would enable the Fund to satisfy any redemption obligations. PIA has assured the Manager that it can manage the proposed monthly redemptions. The fact that there is leverage used by the Partnership and a security interest granted to lenders over the Securities to secure the Partnership's obligations under the Repurchase Agreements will not affect the ability of the Partnership to liquidate assets to satisfy monthly redemption requests.

38. It was not the intention of the Manager to convert the Fund to a mutual fund when it was created. The Manager's proposal to add monthly redemptions was due to the Fund's loss of assets through the arbitrage opportunities arising from the Units trading at a discount to NAV and the annual redemption feature and through investment losses.

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:

1. The Fund does not distribute any securities pursuant to a prospectus.

2. The information circular of the Fund to be delivered to Unitholders in connection with the Unitholder Meeting discloses the terms of this Decision and prominently discloses the proposed delisting of the Units, the next redemption date and the Manager's ability to suspend redemptions.

3. The first redemption date after the delisting is no later than 45 days after the date of delisting.

4. The delisting occurs not earlier than five business days after the date of the Unitholder Meeting.

5. The Manager provides notice to Unitholders before the Units are delisted to inform them that, after the delisting, there will be no market for the Units and the only method of liquidating the Units is pursuant to the redemption right, stating the next redemption date.

6. The Manager bears the costs and expenses associated with implementing the Proposed Changes.

7. This Decision terminates upon: (i) the reorganization of the Fund with another investment fund or the transfer of the Fund's assets to another investment fund pursuant to which securityholders of the Fund would become securityholders of the other investment fund, or (ii) the reorganization of the Fund with another investment fund or the acquisition by the Fund of the assets of another investment fund pursuant to which the securityholders of the other investment fund would become securityholders of the Fund.