Subsection 74(1) - Exemption from sections 25 and 53 of the Act in connection with the writing of over-the-counter covered call options by the issuer, subject to certain conditions.
Securities Act, R.S.O. 1990, c. S.5, as am. 25, 53 and 74(1).
IN THE MATTER OF
THE SECURITIES ACT
R.S.O. 1990, CHAPTER S.5, AS AMENDED (the "Act")
IN THE MATTER OF
FINANCIAL 15 SPLIT CORP. II
(Subsection 74(1) of the Act)
UPON the application (the "Application") of Financial 15 Split Corp. II (the "Company") to the Ontario Securities Commission (the "Commission") for a ruling, pursuant to subsection 74(1) of the Act, that the writing of certain over-the-counter covered call options ("OTC Options") by the Company shall not be subject to section 25 or 53 of the Act;
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON the Company having represented to the Commission that:
1. The Company is a mutual fund corporation, incorporated under the laws of Ontario. Quadravest Inc. (the "Manager") is the manager of the Company.
2. The Company is a mutual fund within the meaning of that term in subsection 1(1) of the Act.
3. In connection with an offering of Preferred Shares and Class A Shares of the Company, the Company filed a preliminary prospectus (the "Preliminary Prospectus") dated September 8, 2004 with the Commission and with the securities regulatory authority in each of the other provinces of Canada under SEDAR Project No. 688268.
4. Quadravest Capital Management Inc. ("Quadravest") will act as the portfolio adviser of the Company.
5. Quadravest is registered under the Act as an adviser in the categories of investment counsel and portfolio manager and as a dealer in the category of mutual fund dealer.
6. The Company's objectives are (i) in respect of its Preferred Shares, to provide holders of the Preferred Shares with fixed cumulative preferential monthly cash dividends in the amount of $0.04375 per Preferred Share to yield 5.25% per annum on the original issue price; and on or about December 1, 2009 (the "Termination Date"), to pay such holders of such shares the original issue price of those shares pursuant to their redemption on the Termination Date; and (ii) in respect of the Class A Shares, to provide holders of Class A Shares with regular monthly cash dividends initially targeted to be $0.10 per Class A Share to yield 8.0% per annum on the original issue price; and on or about the Termination Date, to pay holders of Class A Shares the original issue price of those shares pursuant to their redemption on the Termination Date. Holders of the Class A Shares will also be entitled to receive, on the Termination Date, the balance, if any, of the remaining assets of the Company after returning the original issue price to the holders of each class of shares of the Company.
7. The proceeds of the Offering, net of expenses, will be primarily invested in a portfolio of common shares (the "Portfolio") which will include each of the 15 financial services companies listed below:
Bank of Montreal
National Bank of Canada
Bank of America Corp.
The Bank of Nova Scotia
Manulife Financial Corporation
Canadian Imperial Bank of
Sun Life Financial Services of
JP Morgan Chase & Co.
Royal Bank of Canada
Great-West Lifeco Inc.
Merrill Lynch & Co. Inc.
The Toronto-Dominion Bank
CI Fund Management Inc.
Wells Fargo & Co.
8. To supplement the dividends received on the portfolio and to reduce risk, the Company will from time to time write covered call options in respect of all or part of the common shares in the Portfolio. Such call options may be either exchange traded options or OTC Options. OTC Options will be written by the Company only in respect of securities that are in the Portfolio and the investment restrictions of the Company prohibit the sale of securities that are subject to an outstanding option.
9. The writing of covered call options by the Company will be managed by Quadravest in a manner consistent with the investment objectives of the Company.
10. The individual securities in the Portfolio which are subject to call options and the terms of such call options will vary from time to time based on Quadravest's assessment of market conditions.
11. The purchasers of OTC Options written by the Company will generally be major Canadian financial institutions and all purchasers of OTC Options will be persons or entities described in Appendix A attached hereto.
12. The writing of OTC Options by the Company will not be used as a means for the Company to raise new capital.
AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;
IT IS RULED, pursuant to subsection 74(l) of the Act, that the writing of OTC Options by the Company, as contemplated by this ruling, shall not be subject to section 25 or 53 of the Act, provided that
(a) the portfolio adviser advising the Company with respect to such activities is registered as an adviser under the Act and meets the proficiency requirements for advising with respect to options;
(b) each purchaser of an OTC Option written by the Company is a person or entity described in Appendix A to this ruling; and
(c) a receipt for the (final) prospectus has been issued by the Director under the Act.
September 21, 2004.
"Paul M. Moore"
"H. Lorne Morphy"
(1) The terms "subsidiary" and "holding body corporate" used in paragraphs (w), (x) and (y) of subsection (3) of this Appendix have the same meaning as they have in the Business Corporations Act.
(2) All requirements contained in this Appendix that are based on the amounts shown on the balance sheet of an entity apply to the consolidated balance sheet of the entity.
Qualified Parties Acting as Principal
(3) The following are qualified parties for all OTC derivatives transactions, if acting as principal:
(a) a bank listed in Schedule I, II or III to the Bank Act (Canada);
(b) the Business Development Bank of Canada incorporated under the Business Development Bank of Canada Act (Canada);
(c) a bank subject to the regulatory regime of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules set out in the Basel Accord, if the bank has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency;
Credit Unions and Caisses Populaires
(d) a credit union central, federation of caisses populaires, credit union or regional caisse populaire, located, in each case, in Canada;
Loan and Trust Companies
(e) a loan corporation or trust corporation registered under the Loan and Trust Corporations Act or under the Trust and Loan Companies Act (Canada), or under comparable legislation in any other province or territory of Canada;
(f) a loan company or trust company subject to the regulatory regime of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules set out in the Basel Accord, if the loan company or trust company has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency;
(g) an insurance company licensed to do business in Canada or a province or territory of Canada;
(h) an insurance company subject to the regulatory regime of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules set out in the Basel Accord, if the insurance company has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency;
(i) a person or company that, together with its affiliates,
(i) has entered into one or more transactions involving OTC derivatives with counterparties that are not its affiliates, if
(A) the transactions had a total gross dollar value of or equivalent to at least $1 billion in notional principal amount; and
(B) any of the contracts relating to one of these transactions was outstanding on any day during the previous 15-month period, or
(ii) had total gross marked-to-market positions of or equivalent to at least $100 million aggregated across counterparties, with counterparties that are not its affiliates in one or more transactions involving OTC derivatives on any day during the previous 15-month period;
(j) an individual who, either alone or jointly with the individual's spouse, has a net worth of at least $5 million, or its equivalent in another currency, excluding the value of his or her principal residence;
(k) Her Majesty in right of Canada or any province or territory of Canada and each crown corporation, instrumentality and agency of a Canadian federal, provincial or territorial government;
(l) a national government of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules of the Basel Accord, and each instrumentality and agency of that government or corporation wholly-owned by that government;
(m) any Canadian municipality with a population in excess of 50,000 and any Canadian provincial or territorial capital city;
Corporations and other Entities
(n) a company, partnership, unincorporated association or organization or trust, other than an entity referred to in paragraph (a), (b), (c), (d), (e), (f), (g) or (h), with total revenue or assets in excess of $25 million or its equivalent in another currency, as shown on its last financial statement, to be audited only if otherwise required;
Pension Plan or Fund
(o) a pension fund that is regulated by either the Office of the Superintendent of Financial Institutions (Canada) or a provincial pension commission, if the pension fund has total net assets, as shown on its last audited balance sheet, in excess of $25 million, provided that, in determining net assets, the liability of a fund for future pension payments shall not be included;
Mutual Funds and Investment Funds
(p) a mutual fund or non-redeemable investment fund if each investor in the fund is a qualified party;
(q) a mutual fund that distributes its securities in Ontario, if the portfolio manager of the fund is registered as an adviser, other than a securities adviser, under the Act or securities legislation elsewhere in Canada;
(r) a non-redeemable investment fund that distributes its securities in Ontario, if the portfolio manager of the fund is registered as an adviser, other than a securities adviser, under the Act or securities legislation elsewhere in Canada;
(s) a person or company registered under the Act or securities legislation elsewhere in Canada as a broker or an investment dealer or both;
(t) a person or company registered under the Act as an international dealer if the person or company has total assets, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency;
Futures Commission Merchants
(u) a person or company registered under the CFA as a dealer in the category of futures commission merchant, or in an equivalent capacity elsewhere in Canada;
(v) a registered charity under the Income Tax Act (Canada) with assets not used directly in charitable activities or administration, as shown on its last audited balance sheet, of at least $5 million or its equivalent in another currency;
(w) a wholly-owned subsidiary of any of the organizations described in paragraph (a), (b), (c), (d), (e), (f), (g), (h), (j), (n), (o), (s), (t) or (u);
(x) a holding body corporate of which any of the organizations described in paragraph (w) is a wholly-owned subsidiary;
(y) a wholly-owned subsidiary of a holding body corporate described in paragraph (x);
(z) a firm, partnership, joint venture or other form of unincorporated association in which one or more of the organizations described in paragraph (w), (x) or (y) have a direct or indirect controlling interest; and
(aa) a party whose obligations in respect of the OTC derivatives transaction for which the determination is made is fully guaranteed by another qualified party.
Qualified Party Not Acting as Principal
(4) The following are qualified parties, in respect of all OTC derivative transactions:
1. Accounts of a person, company, pension fund or pooled fund trust that are fully managed by a portfolio manager or financial intermediary referred to in paragraphs (a), (d), (e), (g), (s), (t), (u) or (w) of subsection (3) or a broker or investment dealer acting as a trustee or agent for the person, company, pension fund or pooled fund trust under section 148 of the Regulation.
Subsequent Failure to Qualify
(5) A party is a qualified party for the purpose of any OTC derivatives transaction if it, he or she is a qualified party at the time it, he or she enters into the transaction.