Exemption granted to labour sponsored investment fund corporation to permit it to pay certain specified distribution costs out of fund assets contrary to section 2.1 of National Instrument 81-105 Mutual Fund Sales Practices. Exemption granted on the condition that the distribution costs so paid are permitted by, and otherwise paid in accordance with the National Instrument, and that the Exemption expires on November 30, 2004.
Securities Act, R.S.O. 1990, c. S.5, as amended.
National Instrument 81-105 Mutual Fund Sales Practices.
IN THE MATTER OF
THE SECURITIES ACT, R.S.O. 1990,
CHAPTER S.5, AS AMENDED (THE ACT)
IN THE MATTER OF
NATIONAL INSTRUMENT 81-105
MUTUAL FUND SALES PRACTICES
IN THE MATTER OF
COVINGTON STRATEGIC CAPITAL FUND INC.
(Section 9.1 of NI 81-105)
WHEREAS Covington Strategic Capital Fund Inc. (the Fund) has made an application (the Application) with the Ontario Securities Commission (the Commission) for an exemption pursuant to section 9.1 of National Instrument 81-105 -- Mutual Fund Sales Practices (NI 81-105) from section 2.1 of NI 81-105 to permit the Fund to make certain distribution costs payments to registered dealers;
AND WHEREAS the Commission has considered the Application and the recommendation of staff of the Commission;
AND WHEREAS the Fund has represented to the Commission as follows:
1. The Fund was incorporated under the laws of the Province of Ontario by articles of incorporation dated November 18, 2003. The sponsor of the Fund is the Canadian Professional Police Association (CPPA) (the Sponsor).
2. The Fund has applied for registration as a labour sponsored investment fund corporation under the Community Small Business Investment Funds Act (the Ontario Act), and when so registered will be a prescribed labour-sponsored venture capital corporation under the Income Tax Act (Canada), as amended.
3. The Fund filed the Preliminary Prospectus on November 21, 2003 in connection with the initial and continuous public offering of the Class A Shares, Series I (the Series I Shares) and the Class A Shares, Series II (the Series II Shares) to the public in Ontario. The Fund will be a mutual fund pursuant to the securities legislation of the Province of Ontario.
4. The authorized capital of the Fund consists of an unlimited number of Class A Shares issuable in series of which the Series I Shares and the Series II Shares have been created as of the date hereof, an unlimited number of Class B Shares and an unlimited number of Class C Shares, issuable in series, of which no Class A Shares or Class C Shares are issued or outstanding and 200 Class B Shares are issued and outstanding and held by the Sponsor.
5. The Fund and the Fund's manager (the Manager) propose to pay directly to participating dealers certain costs associated with the distribution of the Class A Shares. These costs are:
(a) with respect to the Series I Shares:
(i) the Manager will pay to registered dealers selling Series I Shares a commission of 10% of the offering price, and
(ii) after a period of eight years, the Fund will pay a service fee to registered dealers equal to 0.5% annually of the Net Asset Value of the Series I Shares held by clients of the sales representatives of such registered dealers (the Series I Service Fees); and
(b) with respect to the Series II Shares,
(i) the Fund's Manager will pay to registered dealers selling Series II shares a commission of 6% of the offering price, and
(ii) the Fund will pay a service fee to registered dealers equal to 0.5% annually of the Net Asset Value of the Series II Shares held by clients of the sales representatives of such registered dealers (the Series II Service Fees).
6. The Fund will pay the following monthly distribution services fee to the Manager intending to reimburse the Manager for financing costs incurred to fund the payment of sales commissions, including an amount for interest and a one-time financing commitment:
(a) with respect to the Series I Shares, a monthly distribution services fee equal to 0.160% of the original issue price of the issued and unredeemed Series I Shares, and
(b) with respect to the Series II Shares, a monthly distribution services fee equal to 0.096% of the original issue price of the issued and unredeemed Series I Shares.
7. Section 2.1 of NI 81-105 would prohibit the Fund from paying the Series I Service Fees and the Series II Service Fees registered dealers directly.
8. The Preliminary Prospectus discloses and will continue to disclose the payment by the Fund of the Series I Service Fees and Series II Service Fees, and that the Fund is responsible for payment of those expenses.
9. The Fund undertakes to comply with all other provisions of NI 81-105. In particular, the Fund undertakes that all distribution costs paid by it will be compensation permitted to be paid to participating dealers under NI 81-105.
AND WHEREAS the Commission is satisfied that to do so would not be prejudicial to the public interest;
NOW THEREFORE pursuant to section 9.1 of NI 81-105, the Commission hereby exempts the Fund from section 2.1 of NI 81-105 to permit the Fund to pay the Series II Service Fees, provided that:
(a) The Series II Service Fees are otherwise permitted by, and paid in accordance with, NI 81-105;
(b) the Fund will in its financial statements expense the Series II Service Fees in the fiscal period when incurred; and
(c) this Exemption shall cease to be operative on November 30, 2004.
January 9, 2004.
"Paul M. Moore"
"Robert L. Shirriff"