Mutual Reliance Review System for Exemptive Relief Applications -- subdivided offering exempted from certain requirements of National Instrument 81-102 Mutual Funds since issuer is fundamentally different from a conventional mutual fund.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.1(1), 3.3, 10.3, 10.4(1), 12.1(1), 14.1, 19.1.
January 25, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUEBEC, NEW BRUNSWICK,
NOVA SCOTIA, PRINCE EDWARD ISLAND,
NEWFOUNDLAND AND LABRADOR, NORTHWEST
TERRITORIES, YUKON AND NUNAVUT
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
CANADIAN FINANCIALS & UTILITIES SPLIT CORP.
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application (the "Application") from the Filer dated November 17, 2006 for a decision under section 19.1 of National Instrument 81-102 -- Mutual Funds (the "Legislation") for exemptive relief from sections 2.1(1), 2.6(a), 3.3, 10.3, 10.4, 12.1(1) and 14.1 of the Legislation (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 this Filer:
1. The Filer is a mutual fund corporation incorporated under the laws of Ontario.
2. Connor, Clark & Lunn Capital Markets Inc. (the "Manager") is the promoter and manager of the Filer and will perform administrative services on behalf of the Filer.
3. A Canadian trust company will act as custodian (the "Custodian") of the assets of the Filer and will be responsible for certain aspects of the day-to-day administration of the Filer.
4. RBC DS (the "Leverage Agent") will perform services for the Filer pursuant to the Leverage Management Agreement described in the Preliminary Prospectus.
5. An amended and restated preliminary prospectus, dated November 15, 2006 (the "Preliminary Prospectus"), has been filed with the securities regulatory authorities in each of the Provinces and Territories of Canada.
6. The Filer will be issuing preferred shares (the "Preferred Shares") and class A shares (the "Class A Shares") (together, referred to as the "Shares").
7. The offering of Shares by the Filer is a one-time offering and the Filer will not continuously distribute the Shares.
8. The Filers investment objectives are:
(i) In the case of the Preferred shares: (a) to provide their holders with quarterly fixed cumulative distributions equal to $0.10625 per Preferred Share ($0.425 per year or 4.25% of the Preferred Share offering price); and (b) to repay the original issue price of $10.00 per Preferred Share on redemption of the Preferred Shares on January 31, 2012.
(ii) In the case of the Class A Shares: (a) to provide their holders with tax efficient regular monthly distributions, expected to be primarily returns of capital; and (b) to provide their holders with the opportunity for capital appreciation and dividend growth on a leveraged basis.
9. The net proceeds from the offering will be invested in the equity securities of the six largest Canadian banks (42% weight), Canadian utilities and pipeline issuers (23% weight) and Canadian non-bank financial issuers (including real estate investment trusts) (35% weight) (collectively referred to as the "Portfolio").
10. The initial offering price is $10 per Preferred Share and $15 per Class A Share. Based on these prices the initial leverage inherent in the capital structure of the Filer is 40% (the "Initial Leverage").
11. It is proposed that the initial costs of formation and organization of the Filer, including the preparation and filing of the Preliminary Prospectus and final prospectus, be borne by the Filer.
12. To the extent permitted by Canadian securities regulators from time to time, the Filer may purchase put options in order to protect the Filer from declines in the market prices of the individual Portfolio securities or in the value of the Portfolio as a whole. The Filer may enter into trades to close out positions in such permitted derivatives.
13. From time to time, in the event of de-leveraging as described in the Preliminary Prospectus, the Filer may hold a portion of its assets in cash and cash equivalents (as defined in the Preliminary Prospectus).
14. The Filer intends to establish a credit facility (the "Working Capital Credit Facility") which may be used by the Filer for working capital purposes. The Filer expects that the maximum amount it borrows thereunder will be limited to 2.5% of the Filer's net asset value. To the extent permitted by Canadian securities regulators, the Filer may pledge Portfolio shares as collateral for amounts borrowed under the Working Capital Credit Facility.
15. The Filer may establish a credit facility (the "Additional Leverage Credit Facility") for the sole purpose of providing the Filer with the ability to add additional leverage to restore the Initial Leverage.
16. The maximum limit on total borrowing, which includes all amounts borrowed under both the Working Capital Credit Facility and the Additional Leverage Credit Facility, will be 20% of the net assets of the Filer at all times.
17. The Shares are expected to be listed and posted for trading on the Toronto Stock Exchange (the "TSX").
18. The Shares will be retractable at the option of the holder on a monthly and annual basis at a price computed by reference to the value of a proportionate interest in the net assets of the Filer. As a result, the Filer will be a "mutual fund" under the applicable securities legislation.
19. The description of the retraction process in the Preliminary Prospectus contemplates that the retraction price for the Shares will be determined as of the valuation date, being the second last business day of the month (the "Retraction Date"). As requests for retractions may be made at any time during the month and are subject to a cut-off date (ten business days prior to the Retraction Date), and as the net asset value is calculated weekly, retractions may not be implemented at a price equal to the net asset value next determined after receipt of the retraction request.
20. The retraction procedures described in the Preliminary Prospectus provide that shareholders will receive payment on or before the 15th day of the month following the Retraction Date.
21. The Preferred Shares have been provisionally rated Pfd-1 by Dominion Bond Rating Service Limited ("DBRS") in accordance with the rating criteria applicable to conventional preferred shares issued by a non-mutual fund issuer.
22. The Filer will make quarterly distributions to holders of Preferred Shares and monthly distributions to holders of Class A Shares. The record date for shareholders entitled to receive distributions will be determined in accordance with the requirements of the TSX.
23. The Filer has adopted guidelines to help mitigate the implicit risks of leverage related borrowing. The Guidelines dictate the circumstances under which borrowing may be employed. They also dictate the circumstances under which such borrowing shall be removed.
24. The Filer's ability to borrow under the Additional Leverage Credit Facility will be subject to confirmation from DBRS that the Pfd-1 rating of the Preferred Shares will not be impacted.
25. A decline in the value of the Portfolio of 34% or more relative to the initial Portfolio, will constitute a de-leveraging event as described in the Preliminary Prospectus.
26. A drop in the Interest Coverage Ratio, as defined in the Preliminary Prospectus, below 1.5 for any calendar quarter, will constitute a de-leveraging event as described in the Preliminary Prospectus.
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 of the Decision Makers under the Legislation is that relief is granted from the following requirements of the Legislation:
I. subsection 2.1(1) -- to enable the Filer to invest all of its net assets in the Portfolio and to re-balance the Portfolio as necessary provided the Filer does not become an insider of any issuer of common shares in the Portfolio as a result of such investment;
II. clause 2.6(a) -- to enable the Filer to obtain:
(a) A Working Capital Credit Facility, as described in paragraph 14 above, so long as the outstanding amount of any such borrowings of the Filer does not exceed 2.5% of the net assets of the Filer taken at market value at the time of the borrowing; and
(b) An Additional Leverage Credit Facility, as described in paragraph 15, so long as:
i. the total amount borrowed by the Filer, including amounts borrowed under the Working Capital Credit Facility, is limited to a maximum of 20% of the net assets of the Filer at all times;
ii. borrowing under the Additional Leverage Credit Facility does not adversely impact the Pfd-1 rating of the Preferred Shares;
iii. borrowing under the Additional Leverage Credit Facility does not cause the Filer to exceed the Initial Leverage;
iv. the Shares are trading on the TSX and if such trading is suspended for a period exceeding thirty days, the Filer 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;
v. the Filer does not make a distribution to Unitholders where that distribution would materially impair the ability of the Filer to repay the funds borrowed under the Additional Leverage Credit Facility; and
vi. the Filer's final prospectus to be filed in connection with the Offering discloses the maximum percentage of the Filer's net assets that the borrowing may represent, the Filer's intended use of amounts borrowed under the loan facility and the risks arising from the borrowing under the loan facility;
vii. the terms of the Additional Leverage Credit Facility will be disclosed by the Filer pursuant to its continuous disclosure obligations.
III. section 3.3 -- to permit the Filer to bear the expenses of the offerings as described in paragraph 9 above;
IV. section 10.3 -- to permit the Filer to calculate the retraction price for the Class A Shares and Preferred Shares in the manner described in the Preliminary Prospectus and on the applicable Retraction Date as defined in the Preliminary Prospectus;
V. section 10.4 -- to permit the Filer to pay the retraction price for the Class A Shares and the Preferred Shares on the Retraction Payment Date, as defined in the Preliminary Prospectus;
VI. subsection 12.1(1) -- to relieve the Filer from the requirement to file the prescribed compliance reports; and
VII. section 14.1 -- to relieve the Filer from the requirement relating to the record date for the payment of dividends or other distributions, provided that it complies with the applicable requirements of the TSX.