MRRS exemptive relief granted to an exchange traded fund from certain mutual fund requirements and restrictions on: organizational costs, incentive fees, calculation and payment of redemptions, compliance reports and date of record for payment of distributions.
National Instrument 81-102 - Mutual Funds, ss. 3.3, 7.1(a)(i), 10.3, 10.4, 12.1, 14.1, 19.1.
October 31, 2005
IN THE MATTER OF
NATIONAL INSTRUMENT 81-102 MUTUAL FUNDS
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
PRIME DIVIDEND CORP.
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (each, a Decision Maker, and together, the Decision Makers) in each of the provinces of Canada except Québec (together, the Jurisdictions) has received an application (the Application) from the Company under securities legislation of the Jurisdictions (the "Legislation") for an exemption from certain provisions of NI 81-102.
Under the Mutual Reliance Review System for Exemptive Relief Applications (the "System"):
(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 Company:
1. The Company is a mutual fund corporation established under the laws of Ontario. The Company's manager is Quadravest Inc. (the Manager), and its portfolio adviser is Quadravest Capital Management Inc. (Quadravest).
2. The Company will make an offering (the Offering) to the public, on a best efforts basis, of class A shares (the Class A Shares) and of preferred shares (the Preferred Shares) in each of the provinces of Canada.
3. The Class A Shares and the Preferred Shares (together, a "Unit") will be listed for trading on the Toronto Stock Exchange (the TSX).
4. The Company will invest the net proceeds of the Offering primarily in a portfolio of equity securities (the Portfolio) which will include each of the following publicly traded Canadian dividend-paying companies (collectively, the "Portfolio Companies"):
Bank of Montreal
The Bank of Nova Scotia
Canadian Imperial Bank of Commerce
National Bank of Canada
Royal Bank of Canada
The Toronto-Dominion Bank
Investment Management Companies
AGF Management Limited
CI Fund Management Inc.
IGM Financial Inc.
Life Insurance Companies
Great-West Lifeco Inc.
Manulife Financial Corporation
Sun Life Financial Inc.
Utilities & Other
Power Financial Corporation
TSX Group Inc.
5. The Company expects that common shares of a particular Portfolio Company will generally represent no less than 4% and no more than 8% of the net asset value (Net Asset Value) of the Company. Up to 20% of the Net Asset Value of the Company may be invested in equity securities of issuers in the financial services or utilities sectors in Canada or the United States, other than the Portfolio Companies.
6. Holders of Preferred Shares will be entitled to receive, as and when declared by the Board of Directors of the Company, fixed cumulative preferential monthly cash dividends at a rate per year equal to the prime rate in Canada (the Prime Rate) plus 0.75% with a minimum annual rate of 5.0% and a maximum annual rate of 7.0% of the original issue price. On or about December 1, 2012 (the Termination Date), the Company will redeem the Preferred Shares and holders will receive the original issue price. The Preferred Shares have been provisionally rated Pfd-2 by Dominion Bond Rating Service Limited (DBRS).
7. In respect of the Class A Shares, the Company's objectives are to provide holders of Class A Shares with regular floating rate monthly cash distributions initially targeted to be at a rate per annum equal to the Prime Rate plus 2.0%, with a minimum targeted annual rate of 5.0% and a maximum targeted annual rate of 10.0% of the original issue price. On or about the Termination Date, the Company's objective is to redeem the Class A Shares and provide holders the original issue price. Holders of 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 the Preferred Shares and Class A Shares.
8. Preferred Share distributions will be funded primarily from the dividends received on the Portfolio.
9. The record date for shareholders of the Company entitled to receive dividends will be established in accordance with the requirements of the TSX from time to time.
10. To supplement the dividends earned 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 Portfolio.
11. The Preferred Shares and Class A Shares may be surrendered for retraction at any time and will be retracted on a monthly basis on the last business day of each month (a Retraction Date), provided such shares are surrendered for retraction not less than 20 business days prior to the Retraction Date. The Company will make payment for any shares retracted within fifteen business days of the Retraction Date.
12. Under the investment management agreement between the Company and Quadravest, Quadravest is entitled to a base management fee payable monthly in arrears at an annual rate equal to 0.65% of the Company's Net Asset Value calculated as at each monthly Retraction Date.
13. Quadravest is also entitled to a performance fee equal to 20% of the amount by which the total return per Unit of the Company for a financial year (which includes all cash distributions per Unit made during the year and any increase in the Net Asset Value per Unit from the beginning of the year after the deduction on a per Unit basis of all fees, other expenses and distributions) exceeds 112% of the Bonus Threshold. The Bonus Threshold for any financial year immediately following a year for which a performance fee is payable, is equal to the Net Asset Value per Unit at the beginning of that financial year. The Bonus Threshold for any financial year for which a performance fee is not payable, is equal to the greater of (i) the Net Asset Value per Unit at the end of the immediately prior financial year; and (ii) the Bonus Threshold for the prior year, minus the Adjustment Amount. The Adjustment Amount for any financial year is the amount, if any, by which the Net Asset Value per Unit at the end of the immediately prior financial year plus dividends paid in that prior year exceeds the Bonus Threshold for that prior year.
14. No performance fee may be paid in any year, (i) the Net Asset Value per Unit is less than $25.00; (ii) if the Preferred Shares are rated by DBRS at less than Pfd-2 (or, if DBRS has not rated such shares, then the equivalent rating of another rating agency that has rated such shares shall apply); or (iii) if the Company has not earned a total annual return of at least the Base Return on a cumulative basis since inception. The Base Return in any year is the greater of 5% and the annual total return for such year as measured by the Scotia Capital 91-day T-Bill Index (the T-Bill Index).
15. The T-Bill Index reflects income yields available to investors who acquire risk-free 91-day Treasury bills. The Manager believes that the T-Bill Index is an appropriate benchmark against which to assess the performance of the total return per Unit as the investment objective of the Company is to achieve targeted returns for the Preferred Shares and the Class A Shares. Although the actual returns may be achieved in part through the capital appreciation of equity securities, the principal objective, as evidenced by the Company's intention to write covered call options, is to achieve the targeted returns and not track the performance of an investment in the equity securities. As a result, the Manager believes that the most appropriate benchmark is one that focuses on yield and not on the investment performance of equity securities.
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met. The Decision under the Legislation is that the Decision Makers hereby exempt the Company from the following requirements of NI 81-102:
(a) section 3.3 - so that the organizational costs and the expenses of the Offering can be borne by the Company;
(b) sub-clause 7.1(a)(i) - to permit the Company to pay an incentive fee calculated with reference to the T-Bill Index and in the manner disclosed in the Company's (final) prospectus (the Prospectus), provided that the Manager believes the T-Bill Index to be an appropriate benchmark against which to measure the performance of the Company and both the Manager's belief and the reasons therefore are disclosed in the Prospectus;
(c) section 10.3 - to permit the Company to calculate the Preferred Share Retraction Price and the Class A Share Retraction Price in the manner described in the Prospectus and on the applicable Retraction Date, as defined in the Prospectus, following the surrender of Units for retraction;
(d) section 10.4 - to permit the Company to pay the Preferred Share Retraction Price and the Class A Share Retraction Price on the Retraction Payment Date, as defined in the Prospectus;
(e) section 12.1 - to relieve the Company from the requirements to file the prescribed compliance report; and
(f) section 14.1 - to relieve the Company from the requirement relating to the record date for payment of dividends or other distributions of the Company, provided that it complies with the applicable requirements of the TSX.