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), 2.6(a), 2.7(1)(a), 2.7(4), 3.3, 10.3, 10.4(1), 12.1(1), 14.1.
June 6, 2007
IN THE MATTER OF
THE SECURITIES LEGASLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN
MANITOBA, ONTARIO, QUEBEC,
NEWFOUNDLAND AND LABRADOR, NEW BRUNSWICK,
NOVA SCOTIA, PRINCE EDWARD ISLAND,
NORTHWEST TERRITORIES, YUKON, AND NUNAVUT
IN THE MATTER OF
NATIONAL INSTRUMENT 81-102 - MUTUAL FUNDS
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
GLOBALBANC ADVANTAGED 8 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") that the following sections of the Legislation (collectively, the "Requested Relief") will not apply to the Filer with respect to the Preferred Shares and the Class A Shares (each as defined below):
(a) subsection 2.1(1), which prohibits a mutual fund from entering into a specified derivatives transaction if, immediately after the transaction, more than 10% of the net assets of the mutual fund, taken at market value at the time of the transaction, would be invested in securities of any issuer;
(b) subsections 2.4(2) and (3), which contain prohibitions on the amount of illiquid assets that may be held by a mutual fund;
(c) 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);
(d) subsection 2.7(1)(a), which prohibits a mutual fund from purchasing an option that is not a clearing corporation option or entering into a swap or a forward contract unless specified criteria are complied with;
(e) subsection 2.7(4), which prohibits a mutual fund from having the mark-to-market value of its exposure to any one counterparty in respect of its specified derivatives positions in excess of 10% of the net assets of the mutual fund for a period of 30 days or more;
(f) section 3.3, which prohibits the costs of incorporation, formation or initial organization of a mutual fund from being borne by the mutual fund or its securityholders;
(g) 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;
(h) 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;
(i) 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
(j) 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 ("MRRS"):
(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 document unless they are otherwise defined in this decision document.
This decision is based on the following facts represented by the Filer:
1. The Filer is a mutual fund corporation incorporated under the laws of Ontario pursuant to articles of incorporation dated May 1, 2007.
2. National Bank Financial Inc. (the "Administrator") will be the administrator of the Filer and will be responsible for providing or arranging for the provision of administrative services required by the Filer. The head office of the Administrator is in Ontario.
3. The Filer will be issuing preferred shares (the "Preferred Shares") and class A shares (the "Class A Shares") (together referred to as the "Shares").
4. The offerings of Preferred Shares and Class A Shares by the Filer are a one-time offering and the Filer will not continuously distribute the Shares.
(a) The Filer's investment objectives with respect to the Preferred Shares are:
(i) to provide holders of Preferred Shares with fixed cumulative preferential quarterly cash distributions that are expected to consist of non-taxable returns of capital and capital gains in the amount of $0.1125 per Preferred Share, representing a yield on the issue price of the Preferred Shares of 4.5% per annum; and
(ii) to return the original issue price of the Preferred Shares at the time of redemption of such Preferred Shares on December 15, 2012; and
with respect to the Class A Shares are:
(ii) to provide holders of Class A Shares with the opportunity for leveraged growth in net asset value per Class A Share after the repayment of the original issue price of the Preferred Shares; and
(iv) to provide holders of Class A Shares with cash distributions that are expected to consist of non-taxable returns of capital and capital gains as and when declared by the board of directors.
5. The Shares will be redeemable 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.
6. The Filer was created to provide holders of its shares with tax-efficient exposure to the price performance and dividend payments (including any increases thereof) of an initially equally weighted basket of securities consisting of eight of the world's largest banks (each a "Bank" and all of them collectively, the "Banks"). Each of the Banks will initially constitute approximately 12.5% of the market value of the portfolio securities (the "Bank Portfolio"). Each of the Banks (i) is rated AA- or better by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. or an equivalent rating agency (ii) is one of the 30 largest banks in the world by market capitalization and (iii) pays a dividend which has had a compound annual growth rate over the last 5 years of in excess of 10%.
7. In order to gain exposure to the price performance and dividend payments (including any increases thereof) of the Bank Portfolio, the Filer will apply the net proceeds of the offering to purchase a portfolio (the "Canadian Securities Portfolio") consisting of securities of certain Canadian public issuers listed on the TSX that qualify as "Canadian securities" for purpose of the Income Tax Act. The Filer will then enter into a Forward Agreement (the "Forward Agreement") with National Bank of Canada ("NBC") and/or one of its affiliates whose obligations are guaranteed by NBC (the "Counterparty") pursuant to which the Filer will agree to transfer on or about December 15, 2012 the Canadian Securities Portfolio to the Counterparty in exchange for an amount determined by reference to the Canadian dollar value of the Bank Portfolio. In order to secure its obligation under the Forward Agreement, the Canadian Securities Portfolio will be pledged to the Counterparty.
8. A preliminary prospectus of the Filer dated May 1, 2007 (the "Preliminary Prospectus") has been filed with the securities regulatory authorities in each of the Jurisdictions and the Ontario Securities Commission, as principal regulator, has issued a preliminary decision document dated May 1, 2007.
9. The Filer is authorized to borrow an amount not exceeding 5% of the net assets of the Filer at the time of borrowing for the purpose of paying redemptions and for working capital purposes and is authorized to pledge its assets to secure such borrowings.
10. The Shares are expected to be listed and posted for trading on the Toronto Stock Exchange (the "TSX").
11. The description of the redemption process in the Preliminary Prospectus contemplates that the redemption price for the Preferred Shares and the Class A Shares will be determined as of the redemption date, being the second last business day of the month (the "Redemption Date"). As requests for redemptions may be made at any time during the month and are subject to a cut-off date (at least five business days prior to the Redemption Date), redemptions may not be implemented at a price equal to the net asset value next determined after receipt of the redemption request.
12. The redemption procedures described in the Preliminary Prospectus provide that shareholders will receive payment on or before the eighth business day following the applicable Redemption Date.
13. The Preferred Shares have been provisionally rated Pfd-2 by DBRS Limited.
14. The Filer will make quarterly distributions to holders of Preferred Shares and will make distributions to holders of Class A Shares as and when declared by the board of directors. 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 on the following basis:
(a) Subsection 2.1(1) -- to permit the Filer to enter into and maintain a position in the Forward Agreement (and any replacement or assignment of that agreement) for which the payment obligations of the Counterparty will be determined by reference to the performance of the Bank Portfolio;
(b) Subsections 2.4(2) and (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, shall not exceed 30 percent of the net assets of the Filer;
(c) Subsection 2.6(a) -- (i) to enable the Filer to obtain a credit facility for paying redemptions and 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 at the time of borrowing and (ii) to permit the Filer to pledge the Canadian Securities Portfolio in order to secure the Filer's obligations under the Forward Agreement;
(d) Subsection 2.7(1)(a) - to permit the Filer to enter into the Forward Agreement (and any replacement or assignment of that agreement) that has a remaining term to maturity of greater than 5 years on the condition that the Filer does not and will not enter into any other specified derivative transaction that does not satisfy the requirement of subsection 2.7(1)(a);
(e) Subsection 2.7(4) -- to exempt the Filer from 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, shall not exceed 30 percent of the net assets of the Filer;
(f) Section 3.3 -- to permit the organizational costs and expenses of the offerings of the Shares to be borne by the Filer;
(g) Section 10.3 -- to permit the Filer to calculate the redemption price for the Shares in the manner described in the Preliminary Prospectus and on the applicable Redemption Date as defined in the Preliminary Prospectus;
(h) Subsection 10.4(1) - to permit the Filer to pay the redemption price for the Shares on the Redemption Payment Date, as defined in the Preliminary Prospectus;
(i) Subsection 12.1(1) - to relieve the Filer from the requirement to file the prescribed compliance reports; and
(j) Section 14.1requirement - to relieve the Filer from the requirement relating to the record date for the payment of dividends or other distributions of the Filer, provided that it complies with the applicable requirements of the TSX.