Premium Income Corporation and Strathbridge Asset Management Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Mutual fund corporation and its investment fund manager exempted from the dealer registration requirement for certain limited trading activities to be carried out by these parties in connection with a rights offering by the mutual fund corporation -- The limited trading activities involve: i) the forwarding of a short form prospectus, and the distribution of rights to acquire securities of the mutual fund corporation, to existing holders of securities of the mutual fund corporation, and ii) the subsequent distribution of securities to holders of these rights, upon the holders' exercise of the rights, through an appropriately registered dealer.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1), 74(1).
Multilateral Instrument 11-102 Passport System, s. 4.7(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 8.5.
National Instrument 45-106 Prospectus and Registration Exemptions, ss. 3.1, 3.42.
October 30, 2012
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
(the Jurisdiction)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
PREMIUM INCOME CORPORATION
(the Fund)
AND
STRATHBRIDGE ASSET MANAGEMENT INC.
(the Manager and, together with the Fund, the Filers)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filers from the dealer registration requirement in the Legislation in respect of certain trades (the Rights Offering Activities) to be carried out by the Manager, on behalf of the Fund, in connection with a proposed offering (the Rights Offering) of rights (the Rights and each, a Right) to acquire units (Units) of the Fund, such offering to be made in the Jurisdiction and each of the Passport Jurisdictions (as defined below) pursuant to a (final) short form prospectus (the Rights Prospectus).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) each Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon by the Filers in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Prince Edward Island, Nova Scotia and Newfoundland and Labrador (collectively, the Passport Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filers:
1. The Fund is a mutual fund corporation incorporated under the laws of the Jurisdiction by articles of incorporation dated August 27, 1996, as amended September 29, 2010. The Fund is a reporting issuer in the Jurisdiction and each of the Passport Jurisdictions.
2. The Manager is amalgamated under the federal laws of Canada by articles of amalgamation dated September 1, 2010, as amended September 14, 2011.
3. The Manager acts as the investment fund manager and portfolio manager for the Fund. The Manager is registered as an investment fund manager, portfolio manager and exempt market dealer under the Legislation.
4. The head office of each of the Filers is located in Toronto, Ontario.
5. The Filers are not in default of any of their obligations under securities legislation in any jurisdiction.
6. The authorized share capital of the Fund consists of an unlimited number of preferred shares (the Preferred Shares), an unlimited number of class A shares (the Class A Shares), an unlimited number of class C shares, class D shares, class E shares, class C preferred shares, class D preferred shares, class E preferred shares and 1,000 class B shares. The Preferred Shares and the Class A Shares are listed and posted for trading on the Toronto Stock Exchange (the TSX) under the symbols PIC.PR.A and PIC.A, respectively.
7. The investment portfolio of the Fund consists primarily of common shares of: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank (the Banks). The Fund is subject to certain investment restrictions that, among other things, limit the securities it may acquire for its portfolio.
8. The investment objectives of the Fund are: (a) to provide holders of its Preferred Shares with cumulative preferential quarterly cash distributions in the amount of $0.215625 per Preferred Share representing a yield on the original issue price of $15.00 per Preferred Share of 5.75% per annum; (b) to provide holders of its Class A Shares with quarterly cash distributions equal to the amount, if any, by which the net realized capital gains, dividends and option premiums (other than option premiums in respect of options outstanding at year-end) earned on the Fund's portfolio in any year, net of expenses and loss carryforwards, exceed the amount of the distributions paid on the Preferred Shares; and (c) to return the original issue price to holders of both Preferred Shares and Class A Shares at the time of redemption of such shares.
9. On October 30, 1996, the Fund completed its initial public offering of 4,000,000 Preferred Shares and 4,000,000 Class A Shares pursuant to a (final) prospectus dated October 17, 1996. Class A Shares and Preferred Shares are issued only on the basis that an equal number of Class A Shares and Preferred Shares will be issued and outstanding at all times.
10. The Fund may, from time to time, write covered call options in respect of all or part of the common shares in its portfolio. From time to time, the Fund may also hold a portion of its assets in cash equivalents, which may be used to provide cover in respect of the writing of cash-covered put options in respect of securities in which the Fund is permitted to invest. From time to time, the Fund may also hold short-term debt instruments issued by the Government of Canada or a province of Canada or by one or more of the Banks.
11. The Fund does not engage in the continuous distribution of its securities.
12. Under the Rights Offering, each holder of a Class A Share or Preferred Share will be entitled, as at a specific record date, to receive, for no consideration, one Right for each Class A Share held and each Preferred Share held by the holder. Two Rights will entitled the holder to subscribe for one Unit (consisting of one Preferred Share and one Class A Share), under a basic subscription privilege, at a subscription price to be specified in the Rights Prospectus, prior to the expiry of the Rights. Holders of Rights in Canada are permitted to sell or transfer their Rights instead of exercising their Rights to subscribe for Units. Holders of Rights who exercise their Rights under the basic subscription privilege may also subscribe, pro rata, for additional Units that are not subscribed for by other holders under the basic subscription privilege, pursuant to the terms of an additional subscription privilege. The term of the Rights is expected to be between 21 and 60 days.
13. The Fund intends to apply to list the Rights to be distributed under the Rights Prospectus on the TSX.
14. The Rights Offering Activities will consist of:
(a) the distribution of the Rights Prospectus and the issuance of Rights to the holders of Class A Shares and Preferred Shares (as at the record date specified in the Rights Prospectus), after the Rights Prospectus has been filed, and receipts obtained, under the Legislation and the securities legislation of each Passport Jurisdiction; and
(b) the distribution of Units to holders of the Rights, upon the exercise of Rights by their holders, through a registered dealer that is registered in categories that permit the registered dealer to make such distributions.
15. Because each of the Filers is in the business of trading, the Rights Offering Activities would require each of the Filers to register as a dealer in the appropriate category in the absence of this decision (or another available exemption from the dealer registration requirement).
16. Section 8.5 of National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) provides that, after March 26, 2010, the exemptions from the dealer registration requirements set out in section 3.1 [Rights offering] and section 3.42 [Conversion, exchange, or exercise] of NI 45-106 no longer apply.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Fund, and the Manager acting on behalf of the Fund, are not subject to the dealer registration requirement in respect of the Rights Offering Activities.