Securities Law & Instruments

Headnote

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.

March 19, 2007

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO, BRITISH COLUMBIA, ALBERTA,

SASKATCHEWAN, MANITOBA, QUÉBEC,

NEW BRUNSWICK, NEWFOUNDLAND AND

LABRADOR, NOVA SCOTIA, PRINCE EDWARD

ISLAND AND THE NORTHWEST TERRITORIES

(the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

R SPLIT III CORP.

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application (the "Application") from R Split III Corp. (the "Filer") for a decision under National Instrument 81-102 Mutual Funds ("NI 81-102") that the following sections of NI 81-102 (collectively, the "NI 81-102 Requirements") will not apply to the Filer with respect to the Capital Shares and Preferred Shares proposed to be issued by the Filer as described in a preliminary prospectus dated February 2, 2007 (the "Preliminary Prospectus"):

(a) subsection 2.1(1), which prohibits a mutual fund from purchasing a security of an issuer if, immediately after the transaction, more than 10 percent of the net assets of the mutual fund, taken at market value at the time of the transaction, would be invested in securities of the issuer;

(b) subsection 2.6(a), which prohibits a mutual fund from borrowing cash or providing a security interest over any of its portfolio assets except in compliance with subsection 2.6(a);

(c) section 3.3, which prohibits a mutual fund or its securityholders from bearing the costs of incorporation, formation or initial organization of a mutual fund, or 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) subsection 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) subsection 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:

(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.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1. The Filer was incorporated under the Business Corporations Act (Ontario) on January 30, 2007. Its head office is located in Toronto, Ontario. The Filer is a mutual fund corporation. Scotia Capital Inc. ("Scotia Capital") will administer the ongoing operations of the Filer under an administration agreement with the Filer. Scotia Capital has taken the initiative in organizing the Filer and, accordingly, may be considered the promoter of the Filer under the Legislation.

2. The Filer will make offerings to the public (the "Offerings") on a best efforts basis, of class A capital shares (the "Capital Shares") and class A preferred shares (the "Preferred Shares") pursuant to a final prospectus (the "Final Prospectus") in respect of which the Preliminary Prospectus has already been filed.

3. The Capital Shares and the Preferred Shares will be listed for trading on the Toronto Stock Exchange (the "TSX"). An application requesting conditional listing approval has been made by the Filer to the TSX.

4. The Filer is a passive investment company whose principal investment objective is to invest in a portfolio of common shares of Royal Bank of Canada (the "Royal Bank Shares") in order to generate fixed cumulative preferential distributions for holders of the Filer's Preferred Shares, and to allow the holders of the Filer's Capital Shares to participate in capital appreciation of the Royal Bank Shares after payment of administrative and operating expenses of the Filer. It will be the policy of the Board of Directors of the Filer to pay dividends on the Capital Shares in an amount equal to the dividends received by the Filer on the Royal Bank Shares minus the distributions payable on the Preferred Shares and all administrative and operating expenses of the Filer.

5. The expenses incurred in connection with the Offerings (the "Expenses of the Offerings"), being the costs of incorporation, formation and initial organization of the Filer, including the preparation and filing of the Preliminary Prospectus and the Final Prospectus, will be borne by the Filer. The Preliminary Prospectus discloses and the Final Prospectus will disclose that the Expenses of the Offerings will be borne by the Filer. The Offerings will not be continuous distributions.

6. The net proceeds of the Offerings (after deducting the agents' fees, Expenses of the Offerings and the Filer's interest and other expenses relating the acquisition of the Royal Bank Shares) will be used by the Filer to fund the purchase of Royal Bank Shares.

7. The Filer has established a credit facility with Scotia Capital which may be used by the Filer to purchase the Royal Bank Shares and which will be repaid in full on the closing of the Offerings. The maximum rate of interest payable on such credit facility will be set out in the Final Prospectus. The Filer also intends to establish a revolving credit facility after the closing of the Offerings, which may be used to fund the payment of a portion of the fixed distributions on the Preferred Shares on a temporary basis if necessary. To the extent that either credit facility is used, the Filer will pledge Royal Bank Shares as collateral for amounts borrowed thereunder.

8. It will be the policy of the Filer to hold the Royal Bank Shares and to not engage in any trading of the Royal Bank Shares, except:

(i) to fund retractions or redemptions of Capital Shares and Preferred Shares;

(ii) following receipt of stock dividends on the Royal Bank Shares;

(iii) in the event of a take-over bid for any of the Royal Bank Shares;

(iv) if necessary, to fund any shortfall in the distribution on Preferred Shares;

(v) to meet obligations of the Filer in respect of liabilities including extraordinary liabilities; or

(vi) certain other limited circumstances as described in the Preliminary Prospectus.

9. Preferred Share distributions will be funded primarily from the dividends received on the Royal Bank Shares and, if necessary, any shortfall will be funded with proceeds from the sale of Royal Bank Shares.

10. The record date for the payment of Preferred Share distributions, Capital Share dividends or other distributions of the Filer will be set in accordance with the applicable requirements of the TSX.

11. The Capital Shares and Preferred Shares may be surrendered for retraction at any time. Retraction payments for Capital Shares and Preferred Shares will be made on the Retraction Payment Date (as defined in the Preliminary Prospectus) provided the Capital Shares and the Preferred Shares have been surrendered for retraction at least five business days prior to the Valuation Date (as defined in the Preliminary Prospectus). While the Filer's Unit Value (as defined in the Preliminary Prospectus) is calculated weekly, the retraction price for the Capital Shares and the Preferred Shares will be determined based on the Unit Value in effect as at the Valuation Date.

12. Any Capital Shares and Preferred Shares outstanding on a date approximately five years from the closing of the Offerings, which date will be specified in the Final Prospectus, will be redeemed by the Filer on such date.

Decision

Each of the Decision Makers is satisfied that the test contained in NI 81-102 that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Makers is that an exemption is granted from the NI 81-102 Requirements, as follows:

(a) subsection 2.1(1) -- to enable the Filer to invest all of its net assets in the Royal Bank Shares, provided that the Filer does not become an insider of the Royal Bank as a result of such investment;

(b) clause 2.6(a) --

(i) to enable the Filer to obtain a short-term loan from Scotia Capital to finance the initial acquisition of the Royal Bank Shares and provide a security interest over its assets as stated in paragraph 7 above, provided that the loan is paid in full on the closing of the Offerings;

(ii) to enable the Filer to provide a security interest over its assets in connection with the revolving credit facility after the closing of the Offerings to permit the Filer to fund the payment of a portion of the fixed distribution of the Preferred Shares on a temporary basis if necessary, 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 Offerings;

(d) section 10.3 -- to permit the Filer to pay the retraction price for the Capital Shares and Preferred Shares in the manner described in the Preliminary Prospectus and on the applicable Valuation Date as defined in the Preliminary Prospectus;

(e) subsection 10.4(1) -- to permit the Filer to pay the retraction price for the Capital Shares and the Preferred Shares on the Retraction Payment Date, as defined in the Preliminary Prospectus;

(f) subsection 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.

"Leslie Byberg"
Manager -- Investment Funds
Ontario Securities Commission