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), 2.4(2), 2.4(3), 2.7(2), 2.7(4), 3.3, 10.3, 10.4(1), 12.1(1), 14.1.
May 29, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUÉBEC, NOVA SCOTIA,
NEW BRUNSWICK,NEWFOUNDLAND AND LABRADOR,
AND PRINCE EDWARD ISLAND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
CIX 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 for a decision under section 19.1 of the securities legislation of the Jurisdictions (the Legislation) that exempts the Filer from the following requirements of National Instrument 81-102 - Mutual Funds (NI 81-102) (the Requested Relief) in connection with the Priority equity shares (Priority Equity Shares) and Class A shares (Class A Shares) (collectively, the Shares) to be issued by the Filer and described in the preliminary prospectus dated April 30, 2007 (the Preliminary Prospectus):
(a) subsection 2.1(1), which prohibits a mutual fund from purchasing a security of an issuer, or entering into a specified derivatives transaction, 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 an issuer;
(b) subsections 2.4(2) and 2.4(3), which (i) prohibit a mutual fund from having invested, for a period of 90 days or more, more than 15% of its net assets, taken at market value, in illiquid assets, and (ii) require a mutual fund that has more than 15% of its net assets, taken at market value, invested in illiquid assets to take all necessary steps, as quickly as commercially reasonable, to reduce the percentage of its net assets made up of illiquid assets to 15% or less;
(c) subsections 2.7(2) and 2.7(4), which (i) prohibit a mutual fund from having the mark-to-market value of its exposure to any one counterparty in respect of its specified derivative positions in excess of 10% of the net assets of the mutual fund for a period of 30 days or more, and (ii) require a mutual fund to close out, in an orderly and timely fashion, its position in any forward contract if the credit rating of the debt of the provider of the forward contract falls below the level of an approved credit rating under NI 81-102;
(d) section 3.3, which prohibits a mutual fund or its securityholders from bearing the costs of the incorporation, formation or initial organization of the mutual fund or the preparation and filing of the preliminary prospectus or initial prospectus of the mutual fund;
(e) section 10.3, which requires that the redemption price of a security of a mutual fund to which a redemption order pertains be the net asset value (NAV) of a security of that class, or series of class, next determined after the receipt by the mutual fund of the order;
(f) subsection 10.4(1), which requires that a mutual fund 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 NAV per security used in establishing the redemption price;
(g) 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
(h) 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 to 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.
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. The Filer's manager is CI Investments Inc. (the Manager).
2. The Filer will make an offering (the Offering) to the public, on a best efforts basis, of Priority Equity Shares and Class A Shares in each of the provinces of Canada.
3. The Preliminary Prospectus has been filed with the Jurisdictions under Sedar Project No. 1094297.
4. The Priority Equity Shares and Class A Shares are expected to be listed and posted for trading on the Toronto Stock Exchange (the TSX). An application for conditional listing approval has been made by the Filer to the TSX.
5. The expenses incurred in connection with the Offering (the Offering Expenses), including the costs of the incorporation, formation or initial organization of the Filer and of the preparation and filing of the Preliminary Prospectus and prospectus of the Filer, will be borne by the Filer rather than the Manager or promoter of the Filer, provided however, that such expenses will not exceed 1.5% of the gross proceeds of the Offering,
6. The Filer was created to provide tax-efficient exposure to the total return on trust units (Trust Units) of CI Financial Income Fund (CIX) through the Filer's two classes of Shares. Holders of the Priority Equity Shares will be provided with a stable yield and downside protection on their initial investment while holders of Class A Shares will be provided with leveraged exposure to the performance of CIX.
7. The net proceeds of the Offering will be invested in a portfolio of common shares of Canadian public companies (the Common Share Portfolio) and Trust Units. The Filer also will enter into one or more forward purchase and sale agreements (collectively, the Forward Agreement) with the Canadian Imperial Bank of Commerce or an affiliate thereof (the Counterparty) to obtain economic exposure to the total return on a notional investment in Trust Units.
8. Under the Forward Agreement, the Counterparty will agree to pay to the Filer on or about January 31, 2011 (the Termination Date), as the purchase price for the Common Share Portfolio, an amount calculated by reference to the market value of the Reference Number (as defined below) of Trust Units and the distributions paid on such Trust Units during the term of the Forward Agreement (such aggregate amount being referred to as the CIX Total Return Value). The "Reference Number" initially will be equal to the number of Trust Units that could be acquired in the market on or about the effective date of the Forward Agreement for an amount approximately equal to the net proceeds of the Offering, as determined by the Filer and the Counterparty, not including the amount of the net proceeds of the Offering invested by the Filer directly in Trust Units. It is possible that, over time, the value of the Forward Agreement will appreciate to a level where it constitutes more than 10% of the net assets of the Filer.
9. The Filer will partially settle the Forward Agreement prior to the Termination Date in order to fund distributions on Shares, redemptions and retractions of Shares, the payment for purchases of Shares in the market, and expenses of the Filer. The CIX Total Return Value will be adjusted after each partial settlement of the Forward Agreement, generally by first reducing that portion of the CIX Total Return Value determined by reference to the distributions paid on Trust Units.
10. The Counterparty has, and will have at all times, an approved credit rating under NI 81-102. In the event that the Counterparty ceases to have an approved credit rating, the terms of the Forward Agreement will permit the Filer to seek an assignment of the obligations of the Counterparty to a replacement counterparty or counterparties in order to minimize adverse tax consequences to the Filer that may be associated with closing out the Forward Agreement.
11. The Filer may invest directly in Trust Units when the Manager considers it efficient for the Filer to do so. The Filer also may hold a portion of its assets in cash, cash equivalents and other evidences of indebtedness provided such instruments have an approved credit rating under NI 81-102.
12. As disclosed in the Preliminary Prospectus, the Filer's objectives in respect of its Priority Equity Shares are (a) to provide holders of the Priority Equity Shares with tax-efficient fixed cumulative preferential monthly cash distributions in the amount of $0.04167 per Priority Equity Share to yield approximately 5.0% per annum on the original issue price, and (b) on or about the Termination Date, to pay holders of Priority Equity Shares the original issue price of those Shares.
13. As disclosed in the Preliminary Prospectus, the Filer's objectives in respect of the Class A Shares are (a) to provide holders of Class A Shares with regular tax-efficient monthly cash distributions targeted to be $0.0875 per Class A Share to yield 7.0% per annum on the original issue price, and (b) on or about the Termination Date, to pay holders of Class A Shares at least the original issue price of those Shares.
14. The record date for shareholders of the Filer entitled to receive dividends will be established in accordance with the requirements of the TSX from time to time.
15. The Class A Shares and Priority Equity 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 Filer will make payment for any Shares retracted within 15 business days after the Retraction Date.
16. Holders of Priority Equity Shares whose shares are surrendered for retraction will be entitled to receive a price per share (the Priority Equity Share Retraction Price) equal to the lesser of (i) $10.00; and (ii) 96% of the NAV per Unit determined as of the Retraction Date less the cost to the Filer of acquiring a Class A Share for cancellation. A "Unit" is one Priority Equity Share and one Class A Share, together.
17. Holders of Class A Shares whose shares are surrendered for retraction will be entitled to receive a price per share (the Class A Share Retraction Price) equal to 96% of the NAV per Unit determined as of the Retraction Date less the cost to the Filer of acquiring a Priority Equity Share for cancellation.
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 NI 81-102:
(a) subsection 2.1(1) - to enable the Filer to invest all of its net assets in Trust Units through its exposure under the Forward Agreement (and any replacement or assignment of that agreement) and through its direct investments in Trust Units, provided the Filer does not become an insider of CIX as a result of such investment;
(b) subsections 2.4(2) and 2.4(3) - to permit the Filer's exposure under the Forward Agreement (and any replacement or assignment of that agreement) to exceed the limitations relating to investment in illiquid assets; provided that the mark-to-market exposure to the Counterparty under the Forward Agreement (and any replacement or assignment of that agreement), for a period of 60 days or more, does not exceed 30% of the asset of the Filer;
(c) subsection 2.7(2) - to exempt the Filer from the requirement to close out the Forward Agreement in the event that the Counterparty ceases to have an approved credit rating;
(d) subsection 2.7(4) - to permit the Filer to exceed the prescribed exposure limit under the Forward Agreement (and any replacement or assignment of that agreement), provided that the mark-to-market exposure to the Counterparty under the Forward Agreement (and any replacement or assignment of that agreement), for a period of 60 days or more, does not exceed 30% of the assets of the Filer;
(e) section 3.3 -- to permit the Filer to bear the Offering Expenses, provided that such expenses will not exceed 1.5% of the gross proceeds of the Offering;
(f) section 10.3 - to permit the Filer to calculate the Priority Equity Share Retraction Price and the Class A Share Retraction Price in the manner described in the Preliminary Prospectus and on the applicable Retraction Date following the surrender of Priority Equity Shares and Class A Shares for retraction;
(g) subsection 10.4(1) - to permit the Filer to pay the Priority Equity Share Retraction Price and the Class A Share Retraction Price up to fifteen business days following the Retraction Date;
(h) subsection 12.1(1) - to relieve the Filer from the requirement to file the prescribed compliance report; and
(i) section 14.1 - to relieve the Filer from the requirement relating to the record date for payment of dividends or other distributions of the Filer, provided that it complies with the applicable requirements of the TSX.