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), 10.3, 10.4(1), 12.1(1), 14.1, 19.1.
July 5, 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
PREMIUM INCOME CORPORATION II
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") that exempts the Filer from the following requirements of National Instrument 81-102 -- Mutual Funds ("NI 81-102") in connection with the Class A Shares and the Preferred Shares (as defined below) to be issued by the Filer and described in the preliminary prospectus dated May 25, 2007 (the "Preliminary Prospectus"):
(a) section 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) 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;
(c) 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;
(d) 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
(e) section 14.1, which requires that the record date for determining the right of security holders 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.
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 promoter and investment manager is Mulvihill Capital Management Inc. ("MCM"), and its manager is Mulvihill Fund Services Inc. (the "Manager"), a wholly-owned subsidiary of MCM. The head office of the Manager is located in the province of Ontario.
2. The Filer will make an offering (the "Offering") to the public, on a best efforts basis, of class A shares (the "Class A Shares") and preferred shares (the "Preferred Shares") (collectively, the "Shares") in each province of Canada. A unit will consist of one Class A Share and one Preferred Share (a "Unit").
3. 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.
4. The Filer's objectives in respect of the Class A Shares are: (i) to provide holders of Class A Shares with regular monthly cash distributions in an amount targeted to be 5.00% per annum on the net asset value of the Class A Shares; and (ii) to provide holders of Class A Shares with the opportunity for leveraged growth in net asset value and distributions per Class A Share.
5. The Filer's objectives in respect of the Preferred Shares are: (i) to provide holders of Preferred Shares with fixed cumulative preferential monthly cash distributions in the amount of $0.04375 per Preferred Share ($0.525 per year) representing a yield on the issue price of the Preferred Shares of 5.25% per annum; and (ii) to return the issue price of $10.00 per Preferred Share to holders of Preferred Shares at the time of redemption of such shares on December 1, 2014 (the "Termination Date").
6. The net proceeds from the Offering will be invested in a portfolio of common shares ("Bank Shares") of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank (each, a "Bank").
7. To generate additional distributable income for the Filer, the Filer will from time to time write covered call options in respect of all or part of its Bank Shares.
8. The 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 "Valuation Date"), provided such Shares are surrendered for retraction not less than 10 business days prior to the Valuation Date. The Filer will make payment for any Shares retracted on or before the fifteenth business day of the following month.
9. Shareholders also have an annual retraction right under which they may concurrently retract an equal number of Class A Shares and Preferred Shares on the November Valuation Date of each year, commencing on the November 2008 Valuation Date. The price paid by the Filer for such a concurrent retraction will be equal to the net asset value per Unit calculated as of such date, less any costs associated with the retraction.
10. The retraction payments for the Shares surrendered for retraction on the Valuation Date will be calculated at a discount to the net asset value per Unit of the Filer on the applicable Valuation Date in the manner described in the Preliminary Prospectus.
11. Any Shares outstanding on the Termination Date will be redeemed by the Filer on such date.
12. The Offering of the Shares by the Filer is a one-time offering and the Filer will not continuously distribute the Shares.
13. It will be the policy of the Filer to invest exclusively in Bank Shares and, from time to time, to write covered call options and cash-covered put options in respect of Bank Shares.
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 an exemption is granted from the following requirements of NI 81-102:
(a) section 2.1(1) - to enable the Filer to invest all of its net assets in the Bank Shares, provided that the Filer does not become an insider of any Bank as a result of such investment;
(b) section 10.3 - to permit the Filer to calculate the retraction price for the Class A Shares and the Preferred Shares in the manner described in the Preliminary Prospectus and on the applicable Valuation Date as defined in the Preliminary Prospectus, following the surrender of Class A Shares and Preferred Shares for retraction;
(c) 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, as defined in the Preliminary Prospectus;
(d) subsection 12.1(1) - to relieve the Filer from the requirement to file the prescribed compliance reports; and
(e) 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.