Bank of Nova Scotia and Scotiabank Subordinated Notes Trust - MRRS Decision

Decision

Headnote

Application by bank (the Bank) and subordinated notes trust subsidiary (the Trust) for an order granting the Trust relief from the requirement in OSC Rule 13-502 Fees (the Fees Rule) to pay participation fees -- Bank has paid, and will continue to pay, participation fees applicable to it under s. 2.2 of the Fee Rule, and includes capitalization of Trust in its calculation -- relief analogous to relief for "subsidiary entities" contained in s. 2.9(2) of the Fees Rule -- Trust may not, from a technical accounting perspective, be considered to be a "subsidiary entity" of Bank for Canadian GAAP purposes and may not be entitled to rely on the exemption in s. 2.9(2) of the Fees Rule -- Trust and Bank satisfy conditions of exemption in s. 2.9(2) but for definition of "subsidiary entity".

Rules Cited

OSC Rule 13-502 Fees, ss. 2.2, 2.9(2).

IN THE MATTER OF

ONTARIO SECURITIES COMMISSION

RULE 13-502 FEES

AND

IN THE MATTER OF

THE BANK OF NOVA SCOTIA AND

SCOTIABANK SUBORDINATED NOTES TRUST

 

ORDER

WHEREAS the Director has received an application from The Bank of Nova Scotia (the "Bank") and Scotiabank Subordinated Notes Trust (the "Trust") for an order, pursuant to Section 6.1 of Ontario Securities Commission Rule 13-502 - Fees (the "Fee Rule"), that the requirement to pay a participation fee under Section 2.2 of the Fee Rule will not apply to the Trust, subject to certain terms and conditions.

AND WHEREAS the Bank and the Trust have represented to the Ontario Securities Commission (the "Commission") that:

1. The Trust is a closed-end trust established under the laws of the Province of Ontario by Computershare Trust Company of Canada, as trustee (the "Trustee"), pursuant to a declaration of trust dated September 27, 2007, as amended and restated on October 31, 2007.

2. The Trust has a financial year-end of December 31.

3. The Trust is a reporting issuer in Ontario and, to its knowledge, is not in default of any requirement under the securities legislation of the Province of Ontario.

4. The Bank is the administrative agent of the Trust pursuant to an amended and restated administration agreement dated October 31, 2007 pursuant to which the Trustee has delegated to the Bank certain of its obligations in relation to the administration of the Trust, including the day-to-day operations of the Trust and such other matters as may be requested from time to time by the Trustee.

5. The outstanding securities of the Trust consist of: (i) $1,000,000,000 5.25% principal amount of Trust Subordinated Notes due November 1, 2017, representing subordinated indebtedness of the Trust ("Scotia TSNs -- Series A") and (ii) voting units of the Trust (the "Voting Trust Units" and, collectively with the Scotia TSNs -- Series A, the "Trust Securities"). The Scotia TSNs -- Series A are fully and unconditionally guaranteed on a subordinated basis by the Bank. All outstanding Voting Trust Units are held by the Bank. The Trust distributed the Scotia TSNs -- Series A in a public offering pursuant to a prospectus dated October 24, 2007 (the "Offering" and the "Prospectus"). Subject to certain conditions, the Trust may redeem the outstanding Scotia TSNs -- Series A. Upon the occurrence of any one of the following events, the Scotia TSNs -- Series A will be exchanged automatically, without the consent of the holders, into subordinated debt of the Bank: (i) an application for a winding-up order in respect of the Bank pursuant to the Winding-up and Restructuring Act (Canada) (the "Winding-Up Act") is filed by the Attorney General of Canada or a winding-up order in respect of the Bank pursuant to the Winding-Up Act is granted by a court; (ii) the Superintendent of Financial Institutions (Canada) (the "Superintendent") advises the Bank in writing that the Superintendent has taken control of the Bank or its assets pursuant to the Bank Act (Canada) (the "Bank Act"); (iii) the Superintendent advises the Bank in writing that the Bank has a risk-based Tier 1 capital ratio of less than 5.0% or a risk-based total capital ratio of less than 8.0%; (iv) the board of directors of the Bank advises the Superintendent in writing that the Bank has a risk-based Tier 1 capital ratio of less than 5.0% or a risk-based total capital ratio of less than 8.0%; or (v) the Superintendent directs the Bank, pur

6. The Trust's only business is to invest its assets and its objective is to acquire and hold deposit notes of the Bank and other eligible investments that will generate income for payment of principal, interest and any other amounts in respect of the Trust Securities. The Trust does not carry on any independent business activities other than to acquire and hold assets to generate income as described above.

7. Pursuant to and subject to the conditions in the MRRS Decision Document dated December 21, 2007 (the "Continuous Disclosure Exemption") granted to the Trust by the Commission, as principal regulator, and the other decision makers (collectively, the "Decision Makers"), the Decision Makers determined that the requirements contained in the securities legislation of the Province of Ontario and in other applicable jurisdictions (collectively, the "Legislation") to:

(i) file interim financial statements and audited annual financial statements and deliver same to the holders of the Trust Securities, pursuant to Sections 4.1, 4.3 and 4.6 of National Instrument 51-102 -- Continuous Disclosure Obligations ("N1 51-102");

(ii) file interim and annual management's discussion and analysis ("MD&A") of the financial conditions and results of operations and deliver same to the holders of the Trust Securities pursuant to Section 5.1 and 5.6 of NI 51-102;

(iii) file an annual information form pursuant to section 6.1 of NI 51-102; and

(iv) comply with any other requirements of NI 51-102.

(collectively, the "Continuous Disclosure Obligations"); and

(b) file interim and annual certificates contained in Parts 2 and 3 of Multilateral Instrument 52-109 -- Certification of Disclosure in Issuers' Annual and Interim Filings (MI 52-109) (the "Certification Obligations"):

will not apply to the Trust for so long as:

with respect to the Continuous Disclosure Obligations:

(i) the Bank remains a reporting issuer, or the equivalent, in each jurisdiction where such concept exits, under the Legislation and has filed all documents it is required to file;

(ii) the Bank files with the Decision Makers, in electronic format under the Trust's System for Electronic Document Analysis and Retrieval (SEDAR) profile all documents that the Bank is required to file under the Legislation, other than in connection with a distribution, at the same time as they are filed by the Bank with a Decision Maker;

(iii) the Trust pays all filing fees that would otherwise be payable by the Trust in connection with the filing of the documents referred to in paragraph (a) above;

(iv) the Trust sends or causes the Bank to send its interim and annual financial statements and interim and annual MD&A, as applicable, to holders of the Trust's debt securities all disclosure materials that are sent to holders of similar debt securities of the Bank in the manner and at the time required by the Legislation;

(v) all outstanding securities of the Trust are either Scotia TSNs -- Series A, additional series of debt securities having terms substantially similar to the Scotia TSNs - Series A or Voting Trust Units;

(vi) the rights and obligations of holders of additional series of debt securities of the Trust are the same in all material respects as the rights and obligations of the holders of the Scotia TSNs -- Series A, with the exceptions of economic terms such as the rate of interest, redemption dates and maturity dates;

(vii) the Bank is the beneficial owner of all issued and outstanding voting securities of the Trust, including the Voting Trust Units;

(viii) the Trust continues to have minimal or no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the Scotia TSNs -- Series A or additional series of debt securities having terms substantially similar to the Scotia TSNs -- Series A; and

(ix) the Trust issues a news release and files a material change report in accordance with Part 7 of NI 51-102 for all material changes in respect of the Trust that are not also material changes in the affairs of the Bank; and

with respect to the Certification Obligations:

(i) the Trust is and continues to be exempted from the Continuous Disclosure Obligations; and

(ii) the Bank files with the Decision Makers, in electronic format under the Trust's SEDAR profile, the interim and annual certificates filed by the Bank under MI 52-109 at the same time as such documents are required under the Legislation to be filed by the Bank.

The Continuous Disclosure Exemption will expire 30 days after the date a material adverse change occurs in the affairs of the Trust.

8. The Trust was established by the Trustee on the direction of the Bank in order to comply with the regulatory requirements of the Office of the Superintendent of Financial Institutions ("OSFI") relating to the issuance of innovative Tier 2B capital instruments (as contained in OSFI's Principles Governing Inclusion of Innovative Instruments in Tier 2B Capital (the "OSFI Guidelines")).

9. OSFI maintains strict guidelines and standards with respect to the capital adequacy requirements of federally regulated financial institutions, including the Bank, and, in particular, specifies minimum required amounts of regulatory capital maintained by such institutions. Tier 1 capital consist of common shareholders' equity, qualifying non-cumulative perpetual preferred shares, qualifying innovative instruments and qualifying non-controlling interests arising on consolidation from Tier 1 capital instruments while Tier 2 capital consists primarily of subordinated debt. Innovative instruments, such as the Scotia TSNs -- Series A, must satisfy the detailed requirements of the OSFI Guidelines to be included in Tier 2B capital. Accordingly, the innovative instruments (Scotia TSNs -- Series A) must be issued by a special purpose vehicle (the Trust), whose primary purpose is to raise innovative Tier 2B capital. OSFI approved the inclusion of the Scotia TSNs -- Series A as Tier 2B capital of the Bank.

10. No continuous disclosure documents concerning only the Trust will be filed with the Commission other than as contemplated by paragraph 7 hereof.

11. The Trust is a "Class 2 reporting issuer" under the Fee Rule and would be required (but for this Order) to pay participation fees under such rule.

12. The Bank, as a legal and factual matter, controls the Trust though its ownership of the Voting Trust Units issued by the Trust and its role as administrative agent of the Trust. The Bank has paid, and will continue to pay, participation fees applicable to it under Section 2.2 of the Fee Rule.

13. The Fee Rule includes an exemption for "subsidiary entities" in subsection 2.9(2) of the Fee Rule. The Bank and the Trust meet all of the substantive requirements to rely on the exemption in subsection 2.9(2) of the Fee Rule, but for the definition of "subsidiary entity". The Fee Rule defines "subsidiary entity" by reference to the accounting definition under Canadian generally accepted accounting principles ("GAAP"), rather than by reference to a legal definition based on control.

14. On November 1, 2004, the Canadian Institute of Chartered Accountants adopted Guideline 15, Consolidation of Variable Interest Entities. Accordingly, the Trust may not, from a technical accounting perspective, be considered to be a "subsidiary entity" of the Bank for Canadian GAAP purposes and may not be entitled to rely on the exemption in subsection 2.9(2) of the Fee Rule.

IT IS ORDERED under the Fee Rule that the requirement to pay a participation fee under Section 2.2 of the Fee Rule will not apply to the Trust, for so long as:

(i) the Bank and the Trust continue to satisfy all of the conditions contained in the Continuous Disclosure Exemption; and

(ii) the capitalization of the Trust represented by the Scotia TSNs -- Series A and any additional securities of the Trust that may be issued, from time to time, by the Trust is included in the participation fee calculation applicable to the Bank and the Bank has paid the participation fee calculated on this basis

DATED at Toronto this 27th day of December, 2007

"Cameron McInnis"
Manager, Corporate Finance Branch