SNP Split Corp. - MRRS Decision
Headnote
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.
Rules Cited:
National Instrument 81-102 Mutual Funds, ss. 2.6(a), 3.3, 10.3, 10.4(1), 12.1(1), 14.1.
May 26, 2006
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
SNP 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 SNP Split Corp. (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 Series 1 Preferred Shares to be issued by the Filer and described in its amended preliminary prospectus dated May 9, 2006 (the Preliminary Prospectus):
(a) 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);
(b) section 3.3, which prohibits a mutual fund or its securityholders from bearing the costs of the preparation and filing of any prospectus;
(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 is a passive investment company whose principal undertaking is the holding of a portfolio of publicly listed common shares of companies that make up the S&P 100 Index (the Portfolio Shares). The Portfolio Shares are the only material assets of the Filer. The purpose of the Filer is to provide a vehicle through which different investment objectives with respect to participation in the Portfolio Shares may be satisfied.
2. The Filer completed its initial public offering of Class A Capital Shares (the Capital Shares) and Class A Preferred Shares (the Preferred Shares) in June 2001. The Filer used the net proceeds of its initial public offering to acquire the Portfolio Shares. In connection with its initial public offering, the Filer applied for and obtained an exemption (the Original Exemption) from certain provisions of N1-81-102. Some aspects of the Original Exemption are based on facts and share attributes which have changed.
3. The Filer is in the process of a capital reorganization (the Reorganization) which will result in the issuance of Class B Preferred Shares, Series 1 (the Series 1 Preferred Shares). The Reorganization was approved by the holders of Capital Shares of the Filer on April 17, 2006. The Reorganization will only be implemented if a minimum of 4,000,000 Capital Shares remain issued and outstanding following exercise of the Special Retraction Right by holders of Capital Shares on or before May 5, 2006. By the close of business on May 5, 2006, 4,560,650 Capital Shares had been tendered for retraction under the Special Retraction Right. As a result, 5,585,208 Capital Shares will remain outstanding following June 4, 2006. All of the outstanding Preferred Shares will be redeemed on June 2, 2006 in accordance with their terms.
4. The Filer filed the Preliminary Prospectus on May 9, 2006 in respect of the offering (the Offering) of Series 1 Preferred Shares. The Filer expects to file the final prospectus in respect of the Offering (the Final Prospectus) on or about May 26, 2006 and to close the Offering on or about June 1, 2006.
5. The Original Exemption does not deal with the Series 1 Preferred Shares and the date by which shares must be surrendered for retraction has been changed under the Reorganization.
6. The Capital Shares may still be surrendered for retraction at any time for a price based on "Unit Value", which is derived from a formula that is similar to a net asset value computation. Therefore, the Filer may be considered a mutual fund within the meaning of NI 81-102.
7. It is expected that no additional Series 1 Preferred Shares will be issued once the Filer is out of primary distribution.
8. The Filer invests in the Portfolio Shares. The policy of the Filer is to maintain the portfolio and not engage in any trading, except in the limited circumstances described in the Preliminary Prospectus and the Final Prospectus, including to ensure that the portfolio tracks the composition of the S&P 100 Index and the weightings of the constituent companies thereof and to fund retractions or redemptions of Capital Shares and Series 1 Preferred Shares.
9. The Series 1 Preferred Shares are expected to be, and the Capital Shares are, listed and posted for trading on The Toronto Stock Exchange (TSX) and therefore holders of such shares will not be relying solely on the retraction privileges to provide liquidity for their investment.
10. The Filer has established a revolving credit facility (the Revolving Credit Facility) with Scotia Capital Inc. which may be used by the Filer to fund the payment of a portion of the fixed distribution on the Series 1 Preferred Shares. To the extent that the Filer uses the Revolving Credit Facility, it will pledge Portfolio Shares as collateral for amounts borrowed. The balance outstanding under the Revolving Credit Facility will be no greater than 5% of the Filer's net assets and the Filer will repay any amounts borrowed within 12 months of the date of such borrowing.
11. Series 1 Preferred Share distributions will be funded primarily from the dividends received on the Portfolio Shares and sales of Portfolio Shares in order to pay the Series 1 Preferred Share distribution and the expenses of the Filer.
12. The Filer will bear the expenses incurred in connection with the preparation and filing of the Preliminary Prospectus and the Final Prospectus and the marketing of the Offering (the Expenses of the Offering).
13. The Capital Shares and Series 1 Preferred Shares may be surrendered for retraction at any time. Retraction payments for Capital Shares and Series 1 Preferred Shares will be made on the Retraction Payment Date (as defined in the Preliminary Prospectus and the Final Prospectus) provided the Capital Shares and the Series 1 Preferred Shares have been surrendered for retraction at least ten business days prior to the relevant Valuation Date (as defined in the Preliminary Prospectus and the Final Prospectus).
14. The Filer will redeem any Capital Shares and Series 1 Preferred Shares outstanding on June 4, 2011.
15. The record date for the payment of Series 1 Preferred Share distributions, Capital Share dividends or other distributions of the Filer will be set in accordance with the applicable requirements of the TSX.
Decision
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 is that an exemption is granted from the following requirements of NI 81-102:
(a) clause 2.6(a) -- to enable the Filer to provide a security interest over its assets in connection with the Revolving Credit Facility to permit the Filer to fund the payment of a portion of the fixed distribution on the Series 1 Preferred Shares on a temporary basis, if necessary, so long as the outstanding amount of any such borrowings of the Filer does not exceed 5% of the net assets of the Filer taken at market value at the time of the borrowing;
(b) section 3.3 -- to permit the Filer to bear the Expenses of the Offering;
(c) section 10.3 -- to permit the Filer to calculate the retraction price for the Capital Shares and Series 1 Preferred Shares in the manner described in the Preliminary Prospectus and the Final Prospectus and on the applicable Valuation Date as defined in the Preliminary Prospectus and the Final Prospectus;
(d) subsection 10.4(1) -- to permit the Filer to pay the retraction price for the Capital Shares and the Series 1 Preferred Shares on the Retraction Payment Date, as defined in the Preliminary Prospectus and the Final 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.