National Bank of Canada and NBC Asset Trust

MRRS Decision

Headnote

National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions - Trust permitted to issue trust capital securities using a short form prospectus -- Relief granted from certain eligibility requirements enabling an issuer to file a short form prospectus, subject to certain conditions -- Relief granted from earnings coverage disclosure requirements and certain requirements relating to documents incorporated by reference.

Confidentiality of application and decision document granted for limited period of time.

Applicable National Instrument

National Instrument 41-101 - Short Form Prospectus Distributions.

June 10, 2008

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

QUÉBEC AND ONTARIO

(the "Jurisdictions")

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

NATIONAL BANK OF CANADA (the "Bank") AND

NBC ASSET TRUST (the "Trust" and,

together with the Bank, the "Filers")

 

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (the "Decision Maker") has received an application from the Filers for a decision under the securities legislation of the Jurisdictions (the "Legislation") exempting the Trust (the "Exemption Sought") from the following requirements in connection with offerings by the Trust from time to time of Trust Capital Securities (as defined herein) in the form of a short form prospectus:

(a) the requirements of Section 2.2 of Regulation 44-101 respecting Short Form Prospectus Distributions, (elsewhere National Instrument 44-101 Short Form Prospectus Distributions ("Regulation 44-101")), which set forth the eligibility requirements to enable an issuer to file a prospectus in the form of a short form prospectus; and

(b) the disclosure requirements in Item 6 (Earnings Coverage Ratios) and Item 11 (Documents Incorporated by Reference), with the exception of Item 11.1(1)(5), of Form 44-101F1 of Regulation 44-101 ("Form 44-101F1") in respect of the Trust.

The Filers request that the application and the decision be held in confidence by the Decision Makers, subject to certain conditions.

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a) the Autorité des marchés financiers is the principal regulator for this application;

(b) the Filers have provided notice that section 4.7(1) of Regulation 11-102 respecting Passport System, elsewhere Multilateral Instrument 11-102 Passport System ("Regulation 11-102") is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon; and

(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

The terms defined in Regulation 14-101 respecting Definitions, (elsewhere National Instrument 14-101 Definitions) and Regulation 11-102 have the same meaning if used in this decision, unless otherwise defined.

"Automatic Exchange" means that the NBC CapS II -- Series 2 will be automatically exchanged, without the consent of the holder, for a new series of newly issued First Preferred Shares of the Bank (the "New Series of Bank Preferred Shares") upon the occurrence of a Loss Absorption Event.

"Loss Absorption Event" means the occurrence of any one of the following events: (i) an application for a winding-up order in respect of the Bank pursuant to the Winding-Up and Restructuring Act (Canada) (the "Winding-Up Act") is filed by the Attorney General of Canada or a winding-up order in respect of the Bank pursuant to the Winding-Up Act is granted by a court; (ii) the Superintendent advises the Bank in writing that the Superintendent has taken control of the Bank or its assets pursuant to the Bank Act (Canada); (iii) the Superintendent advises the Bank in writing that the Superintendent is of the opinion that the Bank has a risk-based Tier 1 Capital Ratio of less than 5.0% or a risk-based Total Capital Ratio of less than 8.0%; (iv) the board of directors of the Bank advises the Superintendent in writing that the Bank has a risk-based Tier 1 Capital Ratio of less than 5.0% or a risk-based Total Capital Ratio of less than 8.0%; or (v) the Superintendent directs the Bank, pursuant to the Bank Act (Canada), to increase its capital or provide additional liquidity and the Bank elects to cause the Automatic Exchange as a consequence of the issuance of such direction or the Bank does not comply with such direction to the satisfaction of the Superintendent within the time specified.

"Superintendent" means the Superintendent of Financial Institutions (Canada).

"SEDAR" means the System for Electronic Document analysis Retrieval.

Representations

This decision is based on the following facts represented by the Filers:

The Bank

1. The Bank is a Schedule I chartered bank subject to the provisions of the Bank Act (Canada). The head and registered office of the Bank is located in Montreal, Quebec.

2. The authorized share capital of the Bank consists of: (i) an unlimited number of common shares ("Bank Common Shares"), without par value; (ii) an unlimited number of First Preferred Shares, without par value, issuable for a maximum aggregate consideration of $5 billion or the equivalent thereof in foreign currencies; and (iii) 15 million Second Preferred Shares, without par value, issuable for a maximum aggregate consideration of $300 million or the equivalent thereof in foreign currencies.

3. The Bank Common Shares are listed on the Toronto Stock Exchange.

4. The Bank is a reporting issuer in each province of Canada where such concept exists and is not in default of any requirement of the securities legislation in such provinces.

5. The Bank is qualified to use the short form prospectus system provided under Regulation 44-101.

The Trust

6. The Trust is a trust established under the laws of Ontario pursuant to a declaration of trust dated as of December 17, 2007, as amended and restated and supplemented from time to time. The capital of the Trust consists of an unlimited number of special trust securities (the "Special Trust Securities") all of which are held by the Bank, and an unlimited number of trust capital securities (the "Trust Capital Securities" and collectively with the Special Trust Securities the "Trust Securities") issuable in series.

7. The Trust completed a public offerings of $400,000,000 of Trust Capital Securities-- Series 1 (the "NBC CapS II -- Series 1") pursuant to the prospectus dated January 16, 2008 (the "Previous Offering"). The Trust is proposing to issue a new series of Trust Capital Securities to the public in each province of Canada pursuant to a short form prospectus (the "Offering"). It is currently anticipated that the new series of Trust Capital Securities will be designated Trust Capital Securities -- Series 2 ("NBC CapS II -- Series 2"). The NBC CapS II -- Series 1 are not listed and it is not expected that the NBC CapS II -- Series 2 will be listed on any stock exchange.

8. The objective of the Trust is to acquire (with the proceeds of offerings of its securities) and hold assets ("Trust Assets") primarily from the Bank or its affiliates, generally on a fully-serviced basis, which may consist of: (a) undivided co-ownership interests in one or more pools of Canada Mortgage and Housing Corporation ("CMHC") insured first mortgages on residential property situated in Canada; (b) certain mortgage-backed securities; (c) CMHC -- insured first mortgage on residential property; and (d) to the extent that the proceeds of the assets of the Trust are not invested in the assets referred to above in (a), (b) or (c), money and certain debt obligations that are qualified investments under the Income Tax Act (Canada) for trusts governed by certain deferred income plans.

9. The Trust is a reporting issuer in each province of Canada where such concept exists and is not in default of any requirement of the securities legislation in such provinces. The head office of the Trust is located in Montreal, Quebec.

10. The Bank holds all of the Special Trust Securities. The Trust may, from time to time, issue further series of Trust Capital Securities having terms substantially similar to the NBC CapS II -- Series 1 and NBC CapS II -- Series 2.

11. The NBC CapS II -- Series 2 will be non-voting securities of the Trust (except in limited circumstances where holders can vote if changes to the terms of the NBC CapS II -- Series 2 are made). The Special Trust Securities are voting securities of the Trust.

12. The Trust is a single purpose vehicle established for the purpose of effecting offerings of Trust Securities in order to provide the Bank with a cost effective means of raising capital for Canadian financial institutions and regulatory purposes by means of: (i) creating and selling the Trust Securities; and (ii) acquiring and holding Trust Assets, acquired with the proceeds of the offering of the NBC CapS II -- Series 2 and the Previous Offering. The Trust will not carry on any operating activity other than in connection with offerings of Trust Securities and in connection with the Trust Assets.

13. On May 29, 2008 the Canadian securities regulatory authorities in each of the provinces of Canada (except the Prince Edward Island Securities Office of the Attorney General) granted an MRRS Decision Document to the Trust (the "Continuous Disclosure Relief") exempting the Trust from most of the continuous disclosure requirements under the Legislation upon certain conditions, including that the Bank provide its financial statements and management's discussion and analysis of financial condition and operating results to holders of Trust Capital Securities and file its financial statements, management's discussion and analysis of financial condition and operating results, certification of annual and interim filings and annual information form ("AIF") on the Trust's SEDAR profile.

14. On May 27, 2008 the Trust filed a notice declaring its intention to be qualified to file a short form prospectus pursuant to Section 2.8 of Regulation 44-101 and such notice has not been withdrawn.

NBC CapS II -- Series 2

15. Holders of NBC CapS II -- Series 2 will be entitled to receive fixed non-cumulative distribution (the "Indicated Distribution") on the last day of June and December in each year. Each semi-annual payment date for the Indicated Distribution in respect of the NBC CapS II -- Series 2 (a "Distribution Date") will be either a Regular Distribution Date or a Distribution Diversion Date. A Distribution Date will be a "Distribution Diversion Date" with the result that the Indicated Distribution will not be paid in respect of the NBC CapS II -- Series 2 but, instead, the Trust will pay the net distributable funds of the Trust to the Bank as holder of the Special Trust Securities if: (i) the Bank has failed in the period to be described in the short form prospectus for the NBC CapS II -- Series 2 (the "Prospectus") to declare regular dividends on the Bank Preferred Shares of any series; or (ii) if no Bank Preferred Shares are then outstanding, the Bank has failed in the period described in the Prospectus to declare regular dividends on the Bank Common Shares. In all other cases, a Distribution Date will be a Regular Distribution Date, in which case holders of NBC CapS II -- Series 2 will be entitled to receive the Indicated Distribution and the Bank, as holder of the Special Trust Securities, will be entitled to receive the net distributable income, if any, of the Trust remaining after payment of the Indicated Distribution. The Bank Preferred Shares and the Bank Common Shares are hereinafter collectively referred to as the "Bank Dividend Restricted Shares".

16. Under a share exchange agreement to be entered into among the Bank, the Trust and a party acting as exchange trustee (the "Bank Share Exchange Agreement"), the Bank will agree, for the benefit of the holders of NBC CapS II -- Series 2, that in the event that the Trust fails on any Regular Distribution Date to pay the Indicated Distribution on the NBC CapS II -- Series 2 in full, the Bank will not pay dividends on the Bank Dividend Restricted Shares until a specified period of time has elapsed, unless the Trust first pays such Indicated Distribution (or the unpaid portion thereof) to holders of NBC CapS II -- Series 2 (the "Dividend Stopper Undertaking"). Accordingly, it is in the interest of the Bank to ensure, to the extent within its control, that the Trust complies with the obligation to pay the Indicated Distribution on each Regular Distribution Date so as to avoid triggering the Dividend Stopper Undertaking.

17. Pursuant to the Automatic Exchange, the NBC CapS II -- Series 2 will be automatically exchanged, without the consent of the holder, for New Series of Bank Preferred Shares upon the occurrence of a Loss Absorption Event.

18. The Trust may, subject to regulatory approval, on a date to be described in the Prospectus not prior to five years after the date of issue of the NBC CapS II -- Series 2 and on each Distribution Date thereafter, redeem the NBC CapS II -- Series 2. The price payable in respect of any such redemption will include an early redemption compensation component (such price being the "Early Redemption Price") in the event of redemption prior to a date to be specified in the Prospectus (the "Early Redemption Date"). The price payable in all other cases will be an amount equal to the original issue price per NBC CapS II -- Series 2 together with any unpaid Indicated Distribution thereon (the "Redemption Price").

19. Upon the occurrence of certain regulatory or tax events affecting the Bank or the Trust (a "Special Event"), in each case prior to the Early Redemption Date, the Trust may, subject to regulatory approval, redeem all but not less than all of the NBC CapS II -- Series 2 at the Early Redemption Price.

20. The Bank has covenanted that all of the outstanding Special Trust Securities will be held by it at all times.

21. As long as any Trust Capital Securities are outstanding and are held by any person other than the Bank, the Trust may only be terminated with the approval of the Bank as the unique holder of the Special Trust Securities and with the approval of the Superintendent: (i) upon the occurrence of a Special Event prior to a date to be specified in the Prospectus; or (ii) for any reason on a date to be specified in the Prospectus or any Distribution Date thereafter. Holders of each series of outstanding Trust Capital Securities will rank pari passu in the distribution of the property of the Trust in the event of a termination of the Trust after the discharge of any creditor claims. As long as any NBC CapS II -- Series 2 are outstanding and held by any person other than the Bank, the Bank will not approve the termination of the Trust unless the Trust has sufficient funds to pay the Early Redemption Price in the case of a termination prior to the Early Redemption Date, or the Redemption Price in the case of a termination at any other time.

22. Except to the extent that the Indicated Distribution is payable to holders of NBC CapS II -- Series 2, and other than in the event of a termination of the Trust, the NBC CapS II -- Series 2 holders will have no claim or entitlement to the income of the Trust or the Trust Assets.

23. Pursuant to an administrative and advisory agreement entered into between Natcan Trust Company (the "Trustee") and the Bank, the Trustee has delegated to the Bank certain of its obligations in relation to the administration of the Trust. The Bank, as advisor and administrative agent, provides advice and counsel with respect to the management of the Trust Assets and administers the day-to-day operations of the Trust and provides other advice or counsel as may be requested by the Trustee from time to time.

24. Subject to the Superintendent approval, the proceeds of the Offering will be included in the Tier 1 capital of the Bank.

25. It is expected that the NBC CapS II -- Series 2 will receive an approved rating from an approved rating organization, as defined in Regulation 44-101.

26. Because of the terms of the Trust Capital Securities, the Bank Share Exchange Agreement and the various covenants of the Bank, information about the affairs and financial performance of the Bank, as opposed to that of the Trust, is meaningful to holders of Trust Capital Securities.

27. At the time of the filing of any short form prospectus in connection with offerings of Trust Capital Securities (including the Offering):

(a) the Trust Capital Securities will be non convertible except in the context of Automatic Exchange;

(b) the short form prospectus will be prepared in accordance with the short form prospectus requirements of Regulation 44-101, except as varied by this decision or as permitted by the Legislation;

(c) the Trust will comply with all of the filing requirements and procedures set out in Regulation 44-101 except as varied by this decision or as permitted by the Legislation;

(d) the short form prospectus will incorporate by reference the documents of the Bank that would be required to be incorporated by reference under Item 11 of Form 44-101F1 if the Bank were the issuer of such securities;

(e) the short form prospectus disclosure required by Item 11 (other than Item 11.1 (1) (5)) of Form 44-101F1 in respect of the Trust) will be addressed by incorporating by reference the Bank's public disclosure documents referred to in paragraph 27 (d) above;

(f) the Continuous Disclosure Relief, as amended, supplemented or replaced from time to time, is in effect; and

(g) the Bank will satisfy the criteria in section 2.2 of Regulation 44-101.

Decision

Each of the Decision Makers is satisfied that the exemptive relief application meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:

1. the Trust and the Bank, as applicable, comply with paragraph 27 above;

2. the Bank remains the direct or indirect beneficial owner of all of the outstanding Special Trust Securities;

3. the Bank, as holder of the Special Trust Securities, will not propose changes to the terms and conditions of any outstanding Trust Capital Securities offered and sold pursuant to a short form prospectus of the Trust filed under this decision that would result in such Trust Capital Securities being exchangeable for securities other than New Series of Bank First Preferred Shares;

4. the Trust is not required to, and does not, file its own AIF and annual financial statements in a jurisdiction in which it is a reporting issuer;

5. the Trust has minimal assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the Trust Securities;

6. the Trust issues a news release and files a material change report in accordance with Part 7 of Regulation 51-102 respecting Continuous Disclosure Obligations, (elsewhere National Instrument 51-102 Continuous Disclosure Obligations), as amended, supplemented or replaced from time to time, in respect of any material change in the affairs of the Trust that is not also a material change in the affairs of the Bank;

7. if the Trust files a preliminary short form prospectus more than 90 days after the end of the most recently completed financial year end of the Bank, the Bank has filed audited financial statements for that year;

8. the Trust is an electronic filer under Regulation 13-101 respecting the System for Electronic Document Analysis and Retrieval (SEDAR), (elsewhere National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR));

9. the Trust is a reporting issuer in at least one jurisdiction of Canada;

10. the Trust files with the securities regulatory authority or regulator in each jurisdiction in which it is a reporting issuer all periodic and timely disclosure documents that it is required to have filed in that jurisdiction: (a) under all applicable securities legislation; (b) pursuant to an order issued by the securities regulatory authority or regulator; or (c) pursuant to an undertaking to the securities regulatory authority or regulator; and

11. the securities to be distributed to the public by the Trust: (a) have received an approved rating on a provisional basis; (b) are not the subject of announcement by an approved rating organization, of which the Trust is or ought to reasonably be aware, that the approved rating given by the organization is to be downgraded to a rating category that would not be an approved rating; and (c) have not received a provisional or final rating lower than an approved rating from any approved rating organization.

"Marie-Christine Barrette"
Manager of Financial Disclosure
Autorité des marchés financiers

The further decision of the Decision Makers under the Legislation is that the application and this decision shall be held in confidence by the Decision Makers until the date that the Prospectus is filed in respect of the Offering and at the latest on July 31, 2008.

"Anne-Marie Beaudoin"
Corporate Secretary
Autorité des marchés financiers