Headnote National Policy 11-203 Process for Exemptive relief Applications in Multiple Jurisdictions –Exemptive relief granted to an exchange traded mutual fund from certain mutual fund requirements and restrictions on borrowing and form of payment of redemptions – Since investors will generally buy and sell shares through the TSX, requirements intended principally for conventional mutual funds in continuous distribution are largely not applicable –requested relief would not be prejudicial to investors – National Instrument 81-102 – Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, sections 2.6(a), 10.4(3), and 19.1.
February 12, 2013
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 Global Champions Split 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) that the following provisions of National Instrument 81‑102 Mutual Funds (NI 81‑102) and will not apply to the Filer with respect to the Offering of the Preferred Shares (as defined below) (the Exemption Sought):
section 2.6(a) of NI 81‑102, which restricts a mutual fund in borrowing cash or providing a security interest over its portfolio assets; and
section 10.4(3) of NI 81‑102, which requires a mutual fund to pay the redemption price for securities that are the subject of a redemption order in cash or, with consent of the holder, by delivery of portfolio assets.
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 Alberta, British Columbia, Quebec, Nova Scotia, New Brunswick, Saskatchewan, Newfoundland and Labrador, Manitoba and Prince Edward Island.
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
The Filer is a mutual fund corporation incorporated under the Business Corporations Act (Ontario) on November 27, 2012 with its head office in Toronto, Ontario. Brookfield Investment Management (Canada) Inc. (the Manager) is the manager of the Filer with its head office in Toronto, Ontario.
The Filer is a “mutual fund” under applicable securities legislation because it is an issuer of securities which entitle the holder to receive an amount computed by reference to the value of a proportionate interest in the whole or part of the net assets of the Filer, within a specified period after demand.
The Filer and any other relevant party are not in default of securities legislation in any jurisdiction.
The Offering
The Filer will make an offering (the Offering) to the public of Class A Preferred Shares, Series 1 (the Preferred Shares) of the Filer. Concurrently with the Offering of the Preferred Shares, the Filer will issue one capital share (the Capital Shares) to BAM Investments Corp. (BAM Investments) and one or more affiliates of Brookfield Asset Management Inc. for each Preferred Share sold. BAM Investments will acquire at least a majority of the Capital Shares issued.
The Filer intends to file a long form final prospectus to be dated shortly after the date of this decision (the Prospectus) in respect of the Offering of the Preferred Shares with the securities regulatory authorities in each of the provinces of Canada.
The Offering is a one‑time offering and the Filer will not offer the Preferred Shares on a continuous basis.
The proceeds of the Offering and the proceeds from the issuance of the Capital Shares will be invested in a diversified portfolio (the Portfolio) of large capitalization companies that the Manager believes are best in class within their respective industries. The Portfolio and any cash held by the Filer will be the only material assets of the Filer.
The Filer is authorized to borrow money required to fund the payment of dividends on the Preferred Shares on a temporary basis and may pledge its assets as collateral for such loans. The Filer will limit this borrowing to a maximum of 5% of the Filer’s net assets. This borrowing is disclosed in the Prospectus.
All of the Preferred Shares will be redeemed by the Filer on or about July 31, 2019.
The Preferred Shares
- The Filer’s investment objectives with respect to the Preferred Shares are:
(a) to provide holders of Preferred Shares with fixed cumulative preferential quarterly cash distributions in the amount set out in the Prospectus; and
(b) on or about July 31, 2019, to pay the holders of Preferred Shares the original issue price of $25.00 of those shares, through the redemption of each Preferred Share held on such date.
The Filer’s investment objectives with respect to the Capital Shares are to provide their holders with a leveraged investment, the value of which is linked to changes in the market price of the Portfolio.
The Preferred Shares will be listed and posted for trading on the Toronto Stock Exchange (TSX).
The record date for quarterly distributions to holders of Preferred Shares will be the last business day of March, June, September and December in each year with payments being made on or before the 15th day of the following month.
The Preferred Shares will be retractable at the option of the shareholder on a monthly basis at a price computed with reference to the value of a proportionate interest in the net assets of the Filer.
Shares may be surrendered at any time for retraction by the Filer and shareholders will receive payment pursuant to a retraction request on the 15th day of each month (the Retraction Payment Date), provided they are surrendered at least 5 business days before last business day of the preceding month (the Retraction Valuation Date).
In lieu of receiving the retraction price in cash, a retracting holder of a Preferred Share will receive an unsecured debenture of the Filer or BAM Investments (in either case, a Debenture), with a principal amount equal to the retraction price. Each Debenture will have a principal amount of $25.00, an interest rate which is higher than the yield per annum on the Preferred Shares and will mature on the final redemption date for the Preferred Shares. The Debentures will be redeemable by the issuer at any time for cash. As a debt security, the Debentures, if issued by the Filer, will rank ahead of the Preferred Shares.
The Debentures will be issued in compliance with registration and prospectus requirements under the Legislation or exemption therefrom. The Debentures will not be listed on the TSX. BAM Investments possesses and is expected to possess a credit profile with respect to the Debentures at least as strong as the credit profile that the Filer is expected to possess.
As described in the Prospectus, the issuance of Debentures by the Filer will be subject to certain terms and conditions, including a limitation that the Debentures may not be issued by the Filer if following such issuance (i) the aggregate principal amount of Debentures outstanding would be greater than 5% of the net asset value of the Filer determined as of the date of issuance, or (ii) such issuance would cause the annual income of the Company for the following year, net of expected operating expenses and interest obligations on the Debentures for that period, to fall below the amount required to pay distributions to holders of Preferred Shares, unless in either case DBRS or its successor has confirmed that such issuance would not affect the then current rating of the Preferred Shares. Accordingly, the issuance of Debentures by the Filer is not expected to have any material adverse impact on the ability of the Filer to make dividend payments to the remaining holders of Preferred Shares.
The principal terms of the Debentures will be equivalent in all material respects regardless of whether the Debentures are issued by the Filer or by BAM Investments. The terms of each of the indentures under which the Debentures will be issued and which will be put in place by the Filer and by BAM Investments will also be equivalent in all material respects.
If any Debentures are issued and outstanding, the Filer will provide investors (in the same manner as the net asset value is made available to investors as described in the Prospectus) on a monthly basis with the outstanding amount of Debentures which have been issued by the Filer as well as the par value of the outstanding Preferred Shares.
The Prospectus contains disclosure of the terms of the Preferred Shares, including the fact that upon retraction a holder of Preferred Shares will receive Debentures as the retraction consideration. The Prospectus also contains a risk factor relating to the payment of the retraction price in Debentures that also explains that the Debentures will be illiquid investments. The Prospectus will also give holders of Preferred Shares a contractual right of rescission against the Filer in case of retractions of their Preferred Shares and will include information about the method of exercising the right and cautionary language about the limited nature of such right. The tax opinion provided in the Prospectus under “Principal Canadian Federal Income Tax Considerations” will include disclosure regarding the tax implications of holding and selling Debentures. Once entered into, any trust indenture or supplemental trust indenture for the Debentures will be filed on SEDAR. The Prospectus also incorporates by reference information on BAM Investments. Accordingly, the Prospectus contains all material disclosure pertaining to the Preferred Shares such that potential investors may make an informed decision.
Since the Preferred Shares will be listed on the TSX, holders of such shares will not be relying solely on the retraction privilege to provide liquidity for their investment.
Section 10.4(3) of NI 81-102 allows for the payment of redemption proceeds other than with cash, subject to obtaining securityholder consents. With regards to the Preferred Shares, since the Prospectus contains all material disclosure pertaining to the Preferred Shares an investor who purchases Preferred Shares will do so with full knowledge that they would be issued Debentures if they request a retraction of their investment in the Preferred Shares and thereby implicitly consents to the payment of retraction proceeds by the Filer with Debentures.
The Manager is of the view that the retraction feature is a fundamental term of the Preferred Shares and that it would be onerous to add such feature subsequent to the Offering as the Filer would incur significant additional costs in order to obtain the requisite shareholder consents and approvals.
As of the date hereof, BAM Investments is not an affiliate of the Manager or an associate of any partner, director or officer of the Filer or the Manager. In addition, as of the date hereof, no substantial securityholder of the Manager has a significant interest in BAM Investments and no responsible person or an associate of a responsible person at the Manager is a partner, officer or director of BAM Investments.
The Offering of Preferred Shares of the Filer is not an indirect offering of Debentures of the Filer or BAM Investments, which are issuable by the Filer or BAM Investments, as applicable, upon retraction of the Preferred Shares since neither the Filer nor BAM Investments has any control over whether any holder of Preferred Shares excises their retraction rights.
Other than the Exemption Sought, the Filer will otherwise comply with NI 81-102.
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 on the following basis:
(a) section 2.6(a) of NI 81‑102 ‑ to enable the Filer to borrow money for working capital purposes and provide a security interest over its assets, as described in paragraph 8 above, so long as the outstanding amount of any such borrowing by the Filer does not exceed 5% of the net assets of the Filer taken at market value at the time of the borrowing, not including the aggregate principal amount of Debentures issued by the Filer; and
(b) sections 2.6(a) and 10.4(3) of NI 81‑102 ‑ to permit the Filer to pay the retraction price for the Preferred Shares in the form of Debentures, so long as the issuance of Debentures meets all terms and conditions as specified in the Prospectus and that the cover page of the prospectus contains prominent disclosure indicating that, upon retraction, holders of Preferred Shares will receive payment in the form of Debentures rather than cash.
“Raymond Chan”
Raymond Chan Manager, Investment Funds Branch Ontario Securities Commission