Allbanc Split Corp. - MRRS Decision
Headnote
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, 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.
Applicable Legislative Provisions
National Instrument 81-102 -- Mutual Funds, ss. 2.1(1), 2.6(a), 10.3, 10.4(1), 12.1(1), 14.1, 19.1.
March 7, 2008
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO, BRITISH COLUMBIA, ALBERTA,
SASKATCHEWAN, MANITOBA, QUÉBEC,
NEW BRUNSWICK, NEWFOUNDLAND AND
LABRADOR, NOVA SCOTIA AND
PRINCE EDWARD ISLAND
(the "Jurisdictions")
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
ALLBANC SPLIT CORP.
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application (the "Application") from Allbanc Split Corp. (the "Filer") for a decision under National Instrument 81-102 Mutual Funds ("NI 81-102") that the following sections of NI 81-102 (collectively, "the NI 81-102 Requirements") will not apply to the Filer with respect to the class B preferred shares (the "Class B Preferred Shares") proposed to be issued by the Filer as described in a preliminary prospectus dated January 30, 2008 (the "Preliminary Prospectus"):
(a) subsection 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) 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);
(c) 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;
(d) 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;
(e) 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
(f) 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
(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.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer was incorporated under the Business Corporations Act (Ontario) on December 17, 1997 and completed an initial public offering of capital shares and preferred shares on February 25, 1998.
2. On January 25, 2008, the holders of class A capital shares (the "Capital Shares") of the Company approved a share capital reorganization (the "Reorganization") which permits holders of Capital Shares, at their option, to retain their investment in the Company after the originally scheduled redemption date of March 10, 2008. In order for the Reorganization to proceed, holders of at least 180,000 Capital Shares must retain their Capital Shares and not exercise their special retraction right (the "Special Retraction Right"). All of the class A preferred shares (the "Class A Preferred Shares") and those Capital Shares for which holders have exercised their Special Retraction Right, will be redeemed on March 10, 2008. Should the Reorganization not proceed, all of the Capital Shares and all of the Class A Preferred Shares will be redeemed on March 10, 2008.
3. The Class B Preferred Shares are being offered in order to maintain the leveraged "split share" structure of the Company and will be issued on March 10, 2008 (the "Offering") such that there will be an equal number of Capital Shares and Class B Preferred Shares outstanding on and after March 10, 2008.
4. The Filer will make the Offering to the public pursuant to a final prospectus (the "Final Prospectus") in respect of which the Preliminary Prospectus has already been filed.
5. The Capital Shares will continue to be listed and posted for trading on The Toronto Stock Exchange (the "TSX") and the Class B Preferred Shares are expected to be listed and posted for trading on the TSX. An application requesting conditional listing approval has been made by the Filer to the TSX.
6. The Filer is a passive investment company whose principal investment objective is to invest in a portfolio (the "Portfolio") of common shares (the "Portfolio Shares") of Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank in order to generate fixed cumulative preferential distributions for holders of the Filer's Class B Preferred Shares, and to allow the holders of the Filer's Capital Shares to participate in the capital appreciation of the Portfolio Shares after payment of administrative and operating expenses of the Filer. It will be the policy of the Board of Directors of the Filer to pay dividends on the Capital Shares in an amount equal to the dividends received by the Filer on the Portfolio Shares minus the distributions payable on the Class B Preferred Shares and all administrative and operating expenses of the Filer.
7. The net proceeds of the Offering (after deducting the agents' fees and expenses of the issue), depending upon the number and value of Capital Shares redeemed pursuant to the Special Retraction Right, will be used by the Filer either: (i) to fund the redemption of all of the issued and outstanding Class A Preferred Shares of the Filer on March 10, 2008 as well as those Capital Shares being redeemed pursuant to the Special Retraction Right (together, with the net proceeds from the sale of a portion of the portfolio, if necessary); or (ii) to purchase additional Portfolio Shares to the extent that the net proceeds of the offering exceed the funding requirements associated with the redemption of all of the issued and outstanding Class A Preferred Shares of the Filer on March 10, 2008 as well as those Capital Shares being redeemed pursuant to the Special Retraction Right.
8. It will be the policy of the Filer to hold the Portfolio Shares and to not engage in any trading of the Portfolio Shares, except:
(i) to complete the one-time rebalancing of the Portfolio as described in the Preliminary Prospectus;
(ii) to fund retractions or redemptions of Capital Shares and Class B Preferred Shares;
(iii) following receipt of stock dividends on the Portfolio Shares;
(iv) if necessary, to fund any shortfall in the distribution on Class B Preferred Shares; and
(v) to meet obligations of the Filer in respect of liabilities including extraordinary liabilities.
9. Class B Preferred Share distributions will be funded from the dividends received on the Portfolio Shares and, if necessary, the revolving credit facility. If necessary, any shortfall in the distributions on the Class B Preferred Shares will be funded by proceeds from the sale of or, if determined appropriate by the Board of Directors, premiums earned from writing covered call options on, Portfolio Shares.
10. The record date for the payment of Class B Preferred Share distributions, Capital Share dividends or other distributions of the Filer will be set in accordance with the applicable requirements of the TSX.
11. The Capital Shares and Class B Preferred Shares may be surrendered for retraction at any time. Retraction payments for Capital Shares and Class B Preferred Shares will be made on the Retraction Payment Date (as defined in the Preliminary Prospectus) provided the Capital Shares and the Class B Preferred Shares have been surrendered for retraction on or before the 11th day of the preceding month before the Valuation Date (as defined in the Preliminary Prospectus). While the Filer's Unit Value (as defined in the Preliminary Prospectus) is calculated weekly, the retraction price for the Capital Shares and the Class B Preferred Shares will be determined based on the Unit Value in effect as at the Valuation Date.
12. Any Capital Shares and Class B Preferred Shares outstanding on a date approximately five years from the closing of the Offering, which date will be specified in the Final Prospectus, will be redeemed by the Filer on such date.
Decision
Each of the Decision Makers is satisfied that the test contained in NI 81-102 that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers is that an exemption is granted from the NI 81-102 Requirements, as follows:
(a) subsection 2.1(1) -- to enable the Filer to invest all of its net assets in the Portfolio Shares, provided that the Filer does not become an insider of any issuer of the Portfolio Shares as a result of such investment;
(b) clause 2.6(a) --to enable the Filer to obtain a short-term loan from Scotia Capital to finance the initial acquisition of the Portfolio Shares and provide a security interest over its assets as stated in paragraph 6 above, provided that the loan is paid in full on the closing of the Offering;
(c) section 10.3 -- to permit the Filer to calculate the retraction price for the Class B Preferred Shares in the manner described in the Preliminary Prospectus and on the applicable Valuation Date as defined in the Preliminary Prospectus;
(d) subsection 10.4(1) -- to permit the Filer to pay the retraction price for the Class B Preferred Shares on the Retraction Payment Date, as defined in the Preliminary Prospectus;
(e) subsection 12.1(1) -- to relieve the Filer from the requirement to file the prescribed compliance reports; and
(f) 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.