National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemptive relief granted to closed-end fund technically converting to a mutual fund from borrowing prohibition in National Instrument 81-102 Mutual Funds to borrow up to 15% of net assets -- Exemptive relief also granted from certain mutual fund requirements concerning: transmission of purchase or redemption orders, issuing units for cash or securities, calculation and payment of redemptions, and date of record for payment of distributions -- Conversion a result of circumstances beyond filer's control -- Fund trades on TSX, but no longer in distribution.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.6(a), 5, 9.1, 10, 12.1, 14.1, 19.1.
June 30, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
DIVERSITRUST STABLE INCOME FUND
(the Fund) AND GOODMAN & COMPANY,
INVESTMENT COUNSEL LTD. (the Manager,
and together with the Fund, the Filers)
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for a decision under the Legislation that exempts the Fund from the following provisions of National Instrument 81-102 -- Mutual Funds (NI 81-102):
1. Subsection 2.6(a) to permit the Fund to borrow cash to a limit of 15% of its net asset value and provide a security interest over its portfolio assets in connection therewith, in accordance with the terms of the Declaration of Trust (as defined herein);
2. Sections 9.1 and 10.2 to permit purchases and sales of the Fund's trust units on the Toronto Stock Exchange (the TSX), instead of through order receipt offices;
3. Sections 10.1, 10.3, 10.4, 10.5 and 10.6 to permit the Fund to process redemption orders, determine the redemption price of securities, pay redemption proceeds, and suspend redemptions in accordance with the terms of the Declaration of Trust;
4. Subsection 12.1(1) to exempt the Fund from the requirement to file compliance reports or audit reports in accordance with Appendix B-1 of NI 81-102; and
5. Section 14.1 to permit the Fund to establish a record date for distributions in accordance with the rules of the TSX and the terms of the Declaration of Trust.
Paragraphs 1 through 5 above are collectively referred to in this decision as the Requested Relief.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission is the principal regulator for this application; and
2. the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the provinces of Canada, other than the province of Ontario (the Non-Principal Jurisdictions).
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless they are otherwise defined in this decision.
This decision is based on the following facts represented by the Filers:
1. The Fund is a closed-end investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated August 22, 2003, as amended January 7, 2004 and October 31, 2007 (collectively, the Declaration of Trust). The Fund is expected to terminate on December 31, 2013 unless terminated earlier. Goodman & Company, Investment Counsel Ltd. is the manager and trustee (the Manager) of the Fund.
2. On September 26, 2003, pursuant to the final prospectus dated August 22, 2003 (the Prospectus) in respect of the Fund's initial public offering of trust units (the Trust Units), the Fund completed its initial public offering of 19,000,000 transferable, redeemable Trust Units, each of which represents a beneficial interest in the Fund's net assets.
3. The Fund is no longer in distribution and the Fund will not conduct any further public offerings, provided however that any other fund (a Continuing Fund) into which the Fund merges or amalgamates may conduct further public offerings of its securities. To the extent the Continuing Fund is subject to the requirements of NI 81-102, the Continuing Fund will comply with the terms thereof.
4. The Fund's investment objectives (the Investment Objectives) are set out in the Prospectus and Declaration of Trust and described as follows:
(a) Monthly Distributions: to provide unitholders of the Fund (Unitholders) with a stable stream of monthly cash distributions;
(b) Stability Rating: to maintain a Standard & Poor's SR-1 Stability Rating; and
(c) Return of Capital: to return the original issue price of the Trust Units (which in respect of Trust Units issued on the initial public offering of the Fund is $10.00 per Trust Unit) to Unitholders on December 31, 2013, as well as to provide Unitholders some opportunity for capital appreciation above the original issue price.
5. The Fund invested the proceeds received under its initial public offering and borrowings under its loan facility in accordance with its investment objectives.
6. Until December 19, 2008, the Fund had received and maintained a stability rating of SR-1 from Standard & Poor's Corporation (S&P) for the Trust Units based on the composition of the Fund's portfolio of income securities, its Investment Objectives, investment strategy, and investment restrictions.
7. A stability rating reflects S&P's current opinion on the prospective relative stability of distributable cash flow generation on a scale running from 'SR-1' to 'SR-7'. An SR-1 rating, S&P's highest available rating for trusts, limited partnerships or other entities formed to own debt and/or equity, or entitled to a royalty on revenues, of an underlying company or other entity, carrying on, directly or indirectly, an active business that generally makes regular and predictable distributions of substantially all its distributable cash flow to securityholders (Income Trusts), signifies S&P's assessment that the Trust Units have the highest level of distribution sustainability and the lowest level of distribution variability in relation to other Canadian rated Income Trusts.
8. Until December 19, 2008, the Manager retained S&P to provide a stability rating for the Fund on an aggregate basis, which would include the effect of certain Income Trusts, the securities of which may be purchased for the Fund. S&P was paid a fee for these services, but had no other relationship with, or economic interest in, either the Fund or the Manager.
9. On and effective December 19, 2008, S&P unilaterally announced that it had withdrawn and would no longer provide six fund-of-fund stability ratings, including the SR-1 stability rating utilized in the Investment Objectives of the Fund (the Triggering Event).
10. On December 29, 2008, the Manager issued a press release and announced that, despite the withdrawal of the stability rating, the Manager would continue to manage the Fund as it was managed prior to the Triggering Event by investing in a diversified portfolio of high income securities including business trusts, resource trusts, utility trusts and REITs, as well as other high-yielding securities, to provide investors with a stable stream of monthly distributions. The Manager has no reason to believe that the Fund would not continue to receive an SR-1 stability rating if S&P had continued to provide such ratings.
11. Section 6.25(1) of the Declaration of Trust provides that Trust Units may be surrendered for redemption at net asset value at least 10 business days prior to September 30 in each year (the Redemption Date), subject to the Fund's right to suspend redemptions. In addition, section 6.25(1) of the Declaration of Trust also provides that in the event that the Fund's stability rating is less than SR-1 for a period of 180 consecutive days or more, Trust Units may be surrendered for redemption at net asset value on or before the last day of the month following the expiry of such 180 day period and on each six month anniversary of such redemption date until such time as an SR-1 stability rating is reinstated for the Trust Units (each an Additional Redemption Date). This right was created to ensure that the Unitholders had the opportunity to redeem their Trust Units if the Fund was subject to a downgrade for a period of 180 consecutive days and then to provide a further opportunity every 180 days until such time as the Fund is able to "cure" any downgrade in its SR-1 stability rating.
12. The Manager does not believe that the absence of a stability rating system is tantamount to the Fund maintaining a stability rating of less than SR-1 under s. 6.25 of the Declaration of Trust. To avoid any uncertainty, however, on June 30, 2009 and each successive Additional Redemption Date, Unitholders will be entitled to surrender their Trust Units for redemption by the Fund. Consequently, the Fund would entertain redemptions three times per year.
13. The absence of a stability rating system or the SR-1 rating of the Fund does not constitute a breach of the investment strategies or restrictions of the Fund. The Triggering Event also does not constitute a change in the investment objectives of the Fund.
14. Consistent with its investment strategies, the Fund has borrowed cash under a loan facility up to 15% of its net asset value and provided a security interest over its portfolio assets.
15. The Trust Units trade on the TSX.
16. In accordance with the Declaration of Trust, the redemption price per Trust Unit is an amount equal to the net asset value per Trust Unit determined as of the applicable redemption date, less any out-of-pocket expenses directly incurred by the Manager to satisfy such redemption. Unitholders receive payment of redemption proceeds on or before the tenth business day following the applicable redemption date.
17. Pursuant to Section 6.25(3) of the Declaration of Trust, the Trustee, at the direction of the Manager, may suspend the redemption of Trust Units or payment of redemption proceeds (a) during periods in which normal trading is suspended on one or more stock exchanges on which more than 50% of the Fund's investments (by value) are listed and traded; or (b) for any period not exceeding 120 days during which the Manager determines, with the approval of the board of governors of the Fund, that conditions exist which render impractical the sale of assets of the Fund or which impair the ability of the Manager to determine the value of the assets of the Fund.
18. A summary of the material provisions of the Declaration of Trust governing redemptions of Units and fundamental changes to the Fund was included in the Prospectus.
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 Requested Relief is granted on the following conditions:
(a) if trading of the Fund's Trust Units on the TSX is suspended for a period exceeding thirty days, the Fund will begin taking all necessary steps to ensure that all amounts borrowed under the loan facility are fully repaid as soon as commercially reasonable but no later than sixty days from the date of suspension, provided that such repayment need not be completed if the suspension is lifted within sixty days from the date of the suspension; and
(b) the Fund does not make a distribution to Unitholders where that distribution would impair the ability of the Fund to repay the funds borrowed under the loan facility.
2. Except as set out in representation 3 above, the Fund does not conduct any further public offerings.