Mutual Reliance Review System for Exemptive Relief Applications -- Exemptive relief granted to an exchange traded fund from certain mutual fund requirements and restrictions on: borrowing, investments, organizational costs, calculation and payment of redemptions, preparation of compliance reports, and date of record for payment of distributions -- Since investors will generally buy and sell units through the TSX, there are adequate protections and it would not be prejudicial to investors -- National Instrument 81-102 -- Mutual Funds.
March 28, 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
BROMPTON LIFECO 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 section 19.1 of National Instrument 81-102 Mutual Funds (the "Legislation") exempting the Filer from the requirements of section 2.1(1), 2.6(a), 3.3, 10.3, 10.4(1), 12.1(1) and 14.1 of the Legislation (the "Requested Relief").
Under the Mutual Reliance Review System ("MRRS") 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 Filer:
1. The Filer is a mutual fund corporation established under the laws of Ontario.
2. Brompton Funds Management Limited (the "Manager") is the promoter and manager of the Filer and will perform administrative services on behalf of the Filer.
3. The Filer will be making an offering (the "Offering") to the public of preferred shares (the "Preferred Shares") and class A shares (the "Class A Shares") (collectively, "Shares").
4. The Offering of Shares by the Filer is a one-time offering and the Filer will not continuously distribute Shares.
5. A preliminary prospectus of the Filer dated February 22, 2007 (the "Preliminary Prospectus") has been filed with the securities regulatory authorities in each of the Jurisdictions.
6. The Filer's investment objectives are: (i) to provide holders of Preferred Shares with fixed cumulative preferential quarterly cash distributions in the amount of $0.13125 per Preferred Share representing a yield on the issue price of the Preferred Shares of 5.25% per annum; (ii) to provide holders of Class A Shares with regular monthly cash distributions targeted to be $0.075 per Class A Share representing a yield on the issue price of the Class A Shares of 6.0% per annum; (iii) to return the original issue price to holders of Preferred Shares at the time of redemption of such shares on April 30, 2014; and (iv) to provide holders of Class A Shares with the opportunity for growth in net asset value per Class A Share.
7. The net proceeds from the Offering will be invested in an equally weighted portfolio consisting of common shares of the four publicly traded Canadian life insurance companies (the "Portfolio"). Initially, therefore, approximately 25% of the Filer's net assets will be invested in the common shares of each issuer in the Portfolio.
8. The Filer may from time to time selectively write covered call options on the shares included in the Portfolio in order to generate additional distributable income for the Filer.
9. The Filer will hold the shares included in the Portfolio and will not trade them except in accordance with the Rebalancing Criteria set out in the Preliminary Prospectus. Accordingly, the Portfolio will be rebalanced (i) at least annually, to adjust for changes in the market value of investments; and (ii) to reflect the impact of a merger, acquisition or other significant corporate actions or events of or affecting one or more of the companies in the Portfolio. In addition, between the rebalancing dates, the Filer may sell Portfolio securities for working capital purposes or replace Portfolio securities with proceeds from the exercise of covered call options previously written.
10. The initial costs of formation and organization of the Filer, including the preparation and filing of the Preliminary Prospectus and final prospectus (the "Expenses of the Offering") will be borne by the Filer rather than the promoter or manager of the Filer.
11. The Filer intends to establish a 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 5% of net asset value. The Filer may pledge Portfolio shares as collateral for amounts borrowed thereunder.
12. The Shares are expected to be listed and posted for trading on the Toronto Stock Exchange (the "TSX"). An application requesting conditional listing approval has been made by the Filer to the TSX.
13. 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 applicable securities legislation.
14. 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.
15. The retraction procedures described in the Preliminary Prospectus provide that shareholders will receive payment on or before the tenth business day of the month following the Retraction Date (the "Retraction Payment Date").
16. The Preferred Shares have been provisionally rated Pfd-2 (low) by Dominion Bond Rating Service Limited in accordance with the rating criteria applicable to conventional preferred shares issued by a non-mutual fund issuer.
17. The Filer will make distributions to holders of the Preferred Shares on the last business day of January, April, July and October 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 the Requested Relief is granted from the following requirements of the Legislation:
(a) subsection 2.1(1) -- to enable the Filer to invest all of its net assets in the Portfolio;
(b) clause 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 11 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 10 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;
(e) subsection 10.4(1) -- to permit the Filer to pay the retraction price for the Class A Shares and the Preferred Shares on the Retraction Payment Date;
(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.