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), 2.6(a), 3.3, 10.3, 10.4(1), 12.1(1), 14.1, 19.1.
January 18, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUEBEC, NEW BRUNSWICK,
NOVA SCOTIA, NEWFOUNDLAND AND LABRADOR
AND PRINCE EDWARD ISLAND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
LAWRENCE FINANCIAL LEADERS
AND LAGGARDS SPLIT CORP.
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the "Legislation") pursuant to section 19.1 of National Instrument 81-102 -- Mutual Funds ("NI 81-102") for a decision exempting the Filer from the following provision of NI 81-102 (the "Requested Relief"):
(a) section 2.1(1), which prohibits a mutual fund from purchasing a security of an issuer if more than 10% of the net assets of the mutual fund will be invested in the securities of any issuer;
(b) section 2.6(a), which prohibits a mutual fund from borrowing cash unless certain provisions are met;
(c) section 3.3, which prohibits a mutual fund or its security holders from bearing the costs of the preparation and filing of any prospectus;
(d) section 10.3, which requires that the redemption price of a security of a mutual fund to which a redemption order pertains shall be the net asset value of a security of that class, or series of class, next determined after the receipt by the mutual fund of the order;
(e) section 10.4(1), which requires that a mutual fund shall pay the redemption price for securities that are the subject of a redemption order within three business days after the date of calculation of the net asset value per security used in establishing the redemption price;
(f) section 12.1(1), which requires a mutual fund that does not have a principal distributor to complete and file a compliance report, and accompanying letter of the auditor, in the form and within the time period mandated by subsection 12.1(1); and
(g) section 14.1, which requires that the record date for determining the right of securityholders of a mutual fund to receive a dividend or distribution by the mutual fund shall be calculated in accordance with section 14.1.
Under the Mutual Reliance Review System for Exemptive Relief Applications:
1. the Ontario Securities Commission is the principal regulator for this application; and
2. 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 Filer:
1. The Filer was incorporated on December 20, 2006 under the Business Corporations Act (Ontario) and is expected to become a reporting issuer in the Jurisdictions. The head office of the Filer is located in Toronto, Ontario.
2. The Filer is authorized to issue an unlimited number of Preferred Shares, an unlimited number of Class A Shares and 100 common shares (the "Common Shares"), having the attributes set forth under the headings "Description of Share Capital" and "Details of the Offering" in the preliminary long form prospectus of the Filer dated December 21, 2006 (the "Preliminary Prospectus") filed in each of the provinces of Canada.
3. The Filer intends to file a (final) long form prospectus in each of the provinces of Canada to make an offering of Class A Shares and Preferred Shares (the "Offering"). The Filer will not continuously distribute Class A Shares or Preferred Shares.
4. Lawrence Asset Management Inc. (the "Manager") is the promoter, manager and investment manager of the Filer.
5. The Filer has been created to provide investors with value-added exposure to the Canadian financial services sector by overweighting issuers that have underperformed over the past six months, and underweighting issuers that have outperformed over the past six months, on the expectation that this strategy will outperform an equal weight strategy over the long term.
6. The Filer will invest in a portfolio (the "Portfolio") consisting of common shares of the following Canadian financial institutions:Bank of MontrealThe Toronto Dominion BankThe Bank of Nova ScotiaGreat-West Lifeco Inc.Canadian Imperial Bank of CommerceIndustrial Alliance Insurance and Financial Services Inc.National Bank of CanadaManulife Financial CorporationRoyal Bank of CanadaSun Life Financial Inc.
(the "Financial Institutions"). The Portfolio will be constructed by applying a 15% weighting to each of the five Financial Institutions with the lowest stock price performance over the previous six month period (the "Lagging Financial Institutions"), and applying a 5% weighting to each of the five Financial Institutions with the highest stock price performance over the previous six month period (the "Leading Financial Institutions"). The six month period will commence January 1 and July 1 of each year (the "Six Month Period"). The Portfolio will be rebalanced as soon as practicable following each Six Month Period.
7. The Filer's investment objectives with respect to the Preferred Shares are: (a) to provide holders of the Preferred Shares with fixed cumulative preferential quarterly cash distributions in the amount of $0.125 per Preferred Share to yield 5.0% per annum on the original issue price; and (b) on or about December 31, 2013, or such other date as the Filer may terminate (the "Termination Date"), to pay the holders of the Preferred Shares the original issue price of the Preferred Shares.
8. The Filer's investment objectives with respect to the Class A Shares are: (a) to provide holders of Class A Shares with regular monthly cash distributions targeted to be $0.04 per Class A Share to yield 4.0% per annum on the original issue price; and (b) on or about the Termination Date, to pay the holders of Class A Shares at least the original issue price of the Class A Shares. Holders of the Class A Shares will also be entitled to receive, on the Termination Date, the balance, if any, of the value of the Portfolio remaining after returning original issue price to the holders of the Preferred Shares and the Common Shares of the Filer.
9. The Preliminary Prospectus discloses that the initial costs of formation and organization of the Filer, including the preparation and filing of the Preliminary Prospectus and final prospectus, will be borne by the Filer from the proceeds of the Offering rather than by the Manager.
10. The Filer intends to establish a revolving credit facility for working capital purposes. The Filer expects that the maximum amount it would borrow under the credit facility will be limited to 5% of its net asset value. The Filer may pledge Portfolio shares as collateral for amounts borrowed under the credit facility.
11. The Preferred Shares and the Class A Shares are expected to be listed and posted for trading on the Toronto Stock Exchange (the "TSX").
12. The Preferred Shares and the Class A 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 applicable securities legislation.
13. The description of the retraction process in the Preliminary Prospectus contemplates that the retraction price for the Preferred Shares and the Class A Shares will be determined as of the last business day of each 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 (twenty 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.
14. The retraction procedures described in the Preliminary Prospectus provide that shareholders will receive payment within 15 business days of the applicable Retraction Date.
15. The investment objectives of the Filer are to make quarterly distributions to holders of the Preferred Shares and monthly distributions to holders of the Class A Shares. The record date for shareholders entitled to receive such distributions will be determined in accordance with the requirements of the TSX.
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:
(a) section 2.1(1) -- to enable the Filer to invest all of its net assets in the Portfolio provided the Filer does not become an insider of any issuer of common shares in the Portfolio as a result of such investment;
(b) section 2.6(a) -- to enable the Filer to obtain a credit facility for working capital purposes and provide a security interest over its assets, as stated in paragraph 10 above, so long as the outstanding amount of any such borrowings of the Filer does not exceed 5% of the net assets of the Filer taken at market value at the time of the borrowing;
(c) section 3.3 -- to permit the Filer to bear the expenses of the Offering as described in paragraph 9 above;
(d) 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;
(e) section 10.4(1) -- to permit the Filer to pay the retraction price for the Class A Shares and the Preferred Shares within 15 business days of the applicable Retraction Date, as defined in the Preliminary Prospectus;
(f) section 12.1(1) -- to relieve the Filer from the requirement to file the prescribed compliance reports; and
(g) 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.