Relief granted to an investment fund listed on the Toronto Stock Exchange from the concentration restriction contained in s. 2.1(1) of National Instrument 81-102 Mutual Funds subject to certain conditions and requirements.
National Instrument 81-102 -- Mutual Fund, ss 2.1(1), 19.1.
August 2, 2005
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA,
ONTARIO, NEW BRUNSWICK, NOVA SCOTIA,
PRINCE EDWARD ISLAND, and NEWFOUNDLAND and LABRADOR
IN THE MATTER OF
NATIONAL INSTRUMENT 81-102 MUTUAL FUNDS (NI 81-102)
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
DIGITAL WORLD TRUST
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from Digital World Trust (the "Trust") for a decision under the securities legislation of the Jurisdictions (the "Legislation") exempting the Trust from the concentration restriction contained in subsection 2.1(1) of NI 81-102 (the "Requested Relief").
Under the Mutual Reliance Review System for Exemptive Relief Applications
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
This decision is based on the following facts represented by the Trust:
1. The Trust is an investment trust established under the laws of the Province of Ontario pursuant to a Trust Agreement dated as of February 15, 2000 (the "Trust Agreement") between Mulvihill Fund Services Inc. ("Mulvihill"), as manager, and The Royal Trust Company, as trustee. Mulvihill is a wholly-owned subsidiary of Mulvihill Capital Management Inc. ("MCM"), the Trust's investment manager pursuant to an investment management agreement between the Trust and MCM dated February 15, 2000.
2. The Trust is a reporting issuer in each of the Provinces of Canada. Units of the Trust ("Units") are listed for trading on the TSX.
3. On February 23, 2000, the Trust completed its initial public offering of 7,500,000 Units pursuant to a final prospectus dated February 15, 2000. In connection with its initial public offering the Trust obtained an exemption from certain provisions of NI 81-102 (the "Previous Exemption"). The Previous Exemption did not contain an exemption from the concentration restriction contained in subsection 2.1(1) of NI 81-102 as it was unnecessary at that time.
The Current Portfolio
4. The Trust currently invests in a diversified portfolio (the "Current Portfolio") consisting principally of common shares issued by leading "digitally-based" companies defined as those companies with products, services or functions which are provided or can be converted, transmitted or processed in a digital format or which provide, supply or facilitate digitization. Companies whose shares are included in the Current Portfolio must be listed on a major North American stock exchange or quoted on NASDAQ with a market capitalization in excess of US$5.0 billion and operate within the sectors of Telecommunication Services; Telecommunication Equipment Suppliers; Enabling Hardware and Software; and Related Digital Commerce, Services and Products.
5. The Trust's current investment objective is to provide unitholders of the Trust ("Unitholders") with superior returns through active management of the Trust's portfolio. The Trust expects to provide returns to Unitholders through (a) quarterly distributions and (b) appreciation in the value of the Trust's portfolio.
6. To generate returns above the dividend income earned on the Current Portfolio, the Trust writes covered call options in respect of all or a part of the securities in the Current Portfolio from time to time. From time to time, the Trust may also hold a portion of its assets in cash equivalents, which may be used to provide cover in respect of the writing of cash covered put options in respect of securities in which the Trust is permitted to invest.
7. The Trust will terminate on December 31, 2009 and its net assets will be distributed thereafter to Unitholders unless the term is extended as part of the Proposal (defined below).
8. As a result of the significant decline in the value of technology stocks since April 2000, the net asset value ("NAV") of the Trust has declined to approximately $15 million. At this level it is becoming uneconomical to Unitholders from an expense perspective to continue to operate the Trust. Since inception, the Trust has accumulated approximately $65.8 million of capital losses for which it would receive no value if the Trust ceased to operate. With the appropriate changes to the Trust, management believes the Trust could increase NAV and utilize these losses for the benefit of Unitholders. In an effort to provide the Trust with the ability to grow in size, increase in value and utilize these tax losses, Unitholders are being asked to approve a proposal (the "Proposal") to reposition the Trust and its portfolio in the following respects:
(a) amend the investment strategy and investment restrictions of the Trust. The Trust will invest exclusively in the six largest Canadian banks and the four largest Canadian life insurance companies by market capitalization (the "Financial Portfolio"). The Trust will generally invest not less than 5% and not more than 15% of its assets in the securities of each issuer in the Financial Portfolio;
(b) amend the investment objectives of the Trust. The Trust's new investment objectives will be to provide Unitholders with a stable stream of quarterly cash distributions targeted to be 7.5% per annum on the NAV of the Trust and to return the NAV per Unit as of the date the Proposal is adopted upon termination of the Trust on December 31, 2010;
(c) extend the termination date of the Trust to December 31, 2010 from December 31, 2009;
(d) consolidate the remaining Units of the Trust immediately following the effective date of the Proposal on a 5 to 1 basis;
(e) add a one-time redemption right to permit Unitholders to redeem their Units at 100% of NAV for the August 31, 2005 redemption. The annual redemption right available in December of each year at 100% of the NAV per Unit will remain in place and will not be affected;
(f) permit the Trust to issue additional Units on a non-dilutive basis; and
(g) provide for the payment of an annual service fee of 0.30% of NAV if the Trust completes a public offering of additional Units after the Proposal has been approved.
In connection with the Proposal, if approved, the Trust will change its name to Top 10 Canadian Financial Trust to reflect better its new investment strategy and Mulvihill, as manager, and MCM, as investment manager, will reduce their fees from a total of 1.20% to 1.10% of the Trust's NAV from and after the effective date of the Proposal.
9. The Trust's Advisory Board and the Board of Directors of Mulvihill have approved the Proposal and have called a special meeting (the "Special Meeting") of Unitholders to be held on August 2, 2005 to approve the proposed amendments to the Trust Agreement.
10. The Proposal must be approved by a two-thirds majority vote of Unitholders present in person or represented by proxy at the Special Meeting in order to be implemented.
11. In connection with the Special Meeting the Trust has prepared and is mailing to Unitholders the Information Circular describing the Proposal.
12. The Proposal will not affect in any material way the substantive basis upon which the Previous Exemption was applied for and granted. The Trust will continue to require the Previous Exemption in order to continue its operations under the Proposal.
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make this decision has been met.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that the Proposal receives Unitholder approval and for so long as the Trust generally invests not less than 5% and not more than 15% of its assets exclusively in the securities of each issuer in the Financial Portfolio.