Headnote NP 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Exemptive relief granted to an exchange traded fund from certain mutual fund requirements and restrictions on: organizational costs, calculation and payment of redemptions, preparation of compliance reports, and date of record for payment of distributions – One-time offering of securities - investors expected to buy and sell units through the TSX – National Instrument 81-102 – Mutual Funds
Applicable Legislative Provisions National Instrument 81-102 – Mutual Funds, subsections 3.3, 10.3, 10.4(1), 12.1(1), 14.1 and 19.1.
October 27, 2010
In the Matter of the Securities Legislation of the Province of Ontario (the Jurisdiction)
and
In the Matter of the Process for Exemptive Relief Applications in Multiple Jurisdictions
and
In the Matter of Dividend Select 15 Corp. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from the following requirements of National Instrument 81-102 – Mutual Funds (NI 81-102):
(a) section 3.3, which prohibits a mutual fund or its securityholders from bearing any of the costs of the incorporation, formation or initial organization of the mutual fund, or of the preparation and filing of any of the preliminary simplified prospectus, preliminary annual information form, initial simplified prospectus or annual information form;
(b) section 10.3, which requires that the redemption price of a security of a mutual fund to which a redemption order pertains be the net asset value of a security of that class, or series of that class, next determined after the receipt by the mutual fund of the order;
(c) subsection 10.4(1), which requires that a mutual fund 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 that a mutual fund that does not have a principal distributor complete and file a compliance report, and accompanying letter of the auditors of the mutual fund, 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 securityholders of a mutual fund to receive a dividend or distribution by the mutual fund be calculated in accordance with section 14.1.
(the Exemption Sought).
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) the Filer has provided notice that Section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.
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 Filer:
The Filer is an investment fund established under the laws of Ontario. The Filer’s investment fund manager and portfolio advisor is Quadravest Capital Management Inc. (the Investment Manager), whose head office is located in Toronto, Ontario. At the time of this application, the Filer is not in default of securities legislation in any of the jurisdictions of Canada.
The Filer will make an offering (the Offering) to the public, on a best efforts basis, of equity shares (the Shares) at a price of $10.00 per Share in each of the provinces of Canada. A preliminary prospectus dated September 17, 2010 (the Preliminary Prospectus) in respect of the Offering has been filed with the securities regulatory authorities in each of the provinces of Canada under SEDAR Project No. 1636538. The Ontario Securities Commission is the principal regulator with respect to the Preliminary Prospectus.
The Filer’s investment objectives are to provide holders of the Shares of the Filer (the Shareholders) with: (i) monthly cash distributions, initially targeted to be $0.0583 per Share to yield 7.00% per annum on the original issue price of $10.00 per Share; plus (ii) the opportunity for capital appreciation by investing in a portfolio (the Portfolio) of 15 high quality Canadian companies (the Portfolio Companies) listed on the Toronto Stock Exchange (TSX) whose shares offer investors an attractive dividend yield, and which have shown solid earnings growth and have a history of capital appreciation.
The Offering of Shares by the Filer is a one-time offering and the Filer will not continuously distribute Shares.
The Shares are expected to be listed and posted for trading on the TSX, and an application for conditional listing approval has been made by the Filer to the TSX.
The Shares will be redeemable monthly at a redemption price equal to the lesser of (i) 95% of the weighted average trading price of the Shares on the principal exchange or market on which the Shares are quoted for trading (expected to be the TSX) for the 10 business days immediately preceding the applicable monthly retraction date, (ii) 100% of the closing market price of a Share on the applicable monthly retraction date, and (iii) 95% of the net asset value of a Share on the last business day of the month; less in each case any costs associated with the redemption including commissions and other such costs, if any, related to the liquidation of any portion of the Portfolio required to fund such retraction; and on an annual basis at a redemption price based on the net asset value per Share.
The Filer is a mutual fund within the meaning of Canadian securities legislation, by virtue of offering monthly retractions of the Shares at a price which, in certain circumstances, is based on the net asset value per Share. Although the Filer will thus become subject to the provisions of NI 81-102 upon the filing of a final prospectus (the Prospectus), it is intended that a certain aspect of its operations not be conducted in accordance with NI 81-102.
The initial costs of formation and organization of the Filer, including the preparation and filing of the Preliminary Prospectus and final prospectus (the Expenses of the Offering) will be borne by the Filer (to a maximum of 1.5% of the gross proceeds of the Offering) rather than the promoter or manager of the Filer. The estimated costs of organization will be fully disclosed in the Prospectus.
The Preliminary Prospectus contemplates that the redemption price for the Shares will be determined as of a specified valuation date, being the last business day of the month (the Valuation Date). As requests for redemptions may be made at any time during the month and are subject to a cut-off date (20 business days prior to the Valuation Date), and as the net asset value of the Shares is also calculated on or about the 15th day of each month, redemptions received during the first 15 days of a month will not be implemented at a price equal to the net asset value next determined after receipt of the redemption request.
The redemption procedures described in the Preliminary Prospectus provide that Shareholders will receive payment within 15 business days following the Valuation Date (the Redemption Payment Date).
In addition, because the Shares are issued in non-certified form to CDS Clearing and Depository Services Inc. (CDS), upon receipt of a redemption request from a client, an investment advisor must send a redemption request to CDS. CDS aggregates all redemption requests received during the month and must ensure the information is submitted to the registrar and transfer agent for the Filer (the Registrar and Transfer Agent). The Registrar and Transfer Agent then informs the Investment Manager of the amount owing under these requests and this is submitted to the Filer’s custodian. The custodian then provides appropriate funds to the Registrar and Transfer Agent (requiring a sale of a portion of securities of the Portfolio Companies by the Investment Manager) who provides it to CDS for distribution to CDS participants, who in turn distribute the redemption proceeds to their clients.
As the mechanics for a redemption request of Shares of the Filer are more complicated than the redemption mechanics for units of a conventional mutual fund which are not handled through CDS, the requests may take more time to process than for a conventional mutual fund.
The Filer expects to distribute monthly cash distributions to Shareholders. The record date for Shareholders entitled to receive such dividends will be established in accordance with the requirements of the TSX from time to time.
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 Exemption Sought is granted as follows:
(a) section 3.3 – to permit the Filer to bear the Expenses of the Offering as described in paragraph 9 above;
(b) section 10.3 – to permit the Filer to calculate the redemption price for the Shares in the manner described in the Preliminary Prospectus and on the applicable Valuation Date;
(c) subsection 10.4(1) – to permit the Filer to pay the redemption price for the Shares on the Redemption Payment Date;
(d) subsection 12.1(1) – to relieve the Filer from the requirements to file the prescribed compliance reports; and
(e) section 14.1 – to relieve the Filer from the requirements relating to the record date for the payment of dividends or other distributions, provided that it complies with the applicable requirements of the TSX.
“Darren McKall”
Darren McKall
Assistant Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR Project #1637231
Headnote
NP 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Exemptive relief granted to an exchange traded fund from certain mutual fund requirements and restrictions on: organizational costs, calculation and payment of redemptions, preparation of compliance reports, and date of record for payment of distributions – One-time offering of securities - investors expected to buy and sell units through the TSX – National Instrument 81-102 – Mutual Funds
Applicable Legislative Provisions
National Instrument 81-102 – Mutual Funds, subsections 3.3, 10.3, 10.4(1), 12.1(1), 14.1 and 19.1.