Securities Law & Instruments

Headnote

Calculation of fees payable by credit unionpursuant to OSC Rule 13-502 modified, subject to conditions.

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am.

Rules Cited

Ontario Securities Commission Rule 13-502 --Fees, ss. 2.2, 2.6, 6.1.

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, C.S.5 AS AMENDED

AND

IN THE MATTER OF

ONTARIO SECURITIES COMMISSIONRULE 13-502 (the Rule)

AND

IN THE MATTER OF

CREDIT UNION CENTRAL OF BRITISHCOLUMBIA

 

ORDER

(Section 6.1 of the Rule)

UPON the Director having received anapplication (the Application) from Credit Union Centralof British Columbia (CUCBC) seeking an order pursuantto Section 6.1 of the Rule to exempt, in part, CUCBC from therequirement to pay the participation fees calculated in themanner prescribed in Section 2.6 of the Rule, subject to conditions;

AND UPON considering the Applicationand the recommendation of staff to the Commission;

AND UPON CUCBC having represented tothe Director that:

1. CUCBC was incorporated on May 27, 1944,under the former Credit Unions Act (British Columbia)and is currently governed by the Credit Union IncorporationAct (British Columbia) (the CUIA). CUCBC is regulatedby the Office of the Superintendent of Financial Institutionsunder the Cooperative Credit Associations Act (Canada)(CCAA) and by the Financial Institutions Commissionunder the Financial Institutions Act (British Columbia)(FIA);

2. The primary business of CUCBC is to providepooled investment management of the statutory and excess liquidityreserves of the British Columbia credit union system and toprovide payment and settlement services to its member creditunions;

3. None of CUCBC's outstanding securitiesare traded on a marketplace as defined in National Instrument21-101;

4. As a result of the filing of a non-offeringprospectus dated August 29, 1995, CUCBC became a reportingissuer under the securities legislation of British Columbia,Alberta, Saskatchewan, Manitoba and Ontario (the ReportingProvinces). The purpose of obtaining reporting issuerstatus was to season CUCBC as a reporting issuer for the one-yearperiod necessary to qualify as a POP issuer under the formerNational Policy 47 with a view to issuing mid-term notes pursuantto a short-form base shelf prospectus (the Medium TermNotes). CUCBC subsequently filed renewal short form baseshelf prospectuses in the Reporting Provinces on December8, 1997, December 10, 1999 and December 21, 2001 respectively.To date, CUCBC has issued Medium Term Notes in the amountof $59 million pursuant to its $200 million medium term noteprogram;

5. CUCBC is also authorized to issue unsecuredshort-term promissory notes (the Short Term Notes),currently to a maximum of $400 million. As at March 31, 2003the issued and outstanding unsecured short-term promissorynotes of CUCBC total $223 million. Distributions of the ShortTerm Notes are exempt from the prospectus and registrationrequirements pursuant to Section 35(2) paragraph 4 and Section73(1)(a) of the Securities Act (Ontario);

6. Other than the Medium Term Notes and theShort Term Notes, the only other outstanding securities ofCUCBC are its Class A, B and C shares (collectively, the Shares);

7. As of March 31, 2003, CUCBC had 105,478,080outstanding Class A shares with a par value of $1.00 per shareheld by 63 credit unions, 3,700 outstanding Class B shareswith a par value of $1.00 per share held by 37 cooperativeassociations, and 3,300 Class C shares with a par value of$1.00 per share held by 33 other organizations;

8. Under the Rules of CUCBC, Class A sharesmay only be held by members (Class A Members) whichare credit unions, other than central credit unions, incorporatedunder the CUIA or predecessor credit union legislation. Issuesof Class A shares are exempt from the prospectus and registrationrequirements pursuant to Sections 46(i) and 75(a) of the SecuritiesAct (British Columbia);

9. Under the Rules of CUCBC, Class B sharesmay only be held by members (Class B Members) whichare co-operative associations incorporated under the CooperativeAssociation Act (British Columbia) or corporations incorporatedunder the legislation of British Columbia or any other jurisdictionwhich, in the opinion of CUCBC's directors, conduct theiroperations on a co-operative basis and are designated as co-operativeassociations by the directors for the purposes of membershipin CUCBC. Issues of Class B shares are exempt from the prospectusand registration requirements pursuant to Sections 46(i) and75(a) of the Securities Act (British Columbia);

10. Under the Rules of CUCBC, Class C sharesmay only be held by members (Class C Members) whichare incorporated organizations other than Class A Membersor Class B Members whose membership have been approved inaccordance with CUCBC's rules and practices. Generally, thegroup of Class C Members consists of:

(a) organizations that have some relationshipwith the credit union system, namely as providers and recipientsof services to and from CUCBC, its member credit unionsor their subsidiaries, which services are supportive tothe operation of the credit union system, and

(b) organizations with which CUCBC is familiarbut which in order for CUCBC to have dealings with, mustbecome members pursuant to CUCBC's governing legislation;

Issues of Class C shares are exempt from theprospectus and registration requirements pursuant to Sections46(i) and 75(a) of the Securities Act (British Columbia);

11. CUCBC does not intend any distributionof Shares that would be subject to the prospectus and registrationrequirements of the Securities Act (Ontario), other than pursuantto an exemption from the prospectus and registration requirementsof the Securities Act (Ontario);

12. The CUIA and the FIA are the British Columbiastatutes that regulate credit unions in British Columbia,including CUCBC, and the Credit Unions and Caisses PopulairesAct is the statute that regulates credit unions in Ontario.If CUCBC was a credit union or league to which the CreditUnions and Caisses Populaires Act, 1994 (Ontario) applies,the Shares would be exempt from the prospectus and registrationrequirements pursuant to Sections 35(2) paragraphs 9, 9.1,or 9.2, and Section 73(1)(a) of the Securities Act(Ontario);

13. CUCBC's capital is regulated pursuantto the provincial regulatory capital requirements under theFIA and the federal requirements under the CCAA. Under theFIA, CUCBC is subject to a risk-weighted capital adequacyrequirement, where the level of capital required is basedon a prescribed percentage of the total value of CUCBC's risk-weightedassets, each asset of CUCBC being assigned a prescribed riskfactor. A minimum capital to risk weighted assets ratio of8% is prescribed by regulation; it is CUCBC's internal policyto maintain a capital to risk-weighted assets ratio of atleast 10%, which is the level necessary under the FIA's CapitalRequirements Regulation to permit its member credit unionsto zero-risk-weight their deposits with CUCBC;

14. In order to meet CUCBC's targeted capitalrequirements, the member credit unions are required to holdClass A shares in proportion to their assets. Currently, theClass A members are collectively required to hold approximately$105.5 million in contributed share capital. Over the pastseveral years CUCBC has targeted maintaining an equal balanceof retained earnings to contributed capital. That goal hasbeen achieved in this fiscal year;

15. Class A shares are reallocated annually,through a process of issuance and redemption based on theassets of the credit unions at their preceding year ends.A Class A member is not permitted to reduce the number ofits Class A shares below the minimum requirement. While CUCBChas the authority to issue share calls and request its creditunion members to increase their overall share investmentsin CUCBC, generally, this would only occur under extraordinarycircumstances, for example, in the event of a liquidity crisis;

16. Although the rules of CUCBC permit membersto hold an unlimited number of shares, CUCBC has fixed thenumber of Class B and C shares that may be held by any onesuch member at 100 shares each at $1.00 per share. It is unlikelythat CUCBC would permit any Class B or C member to subscribefor shares in excess of this fixed amount, as these sharesare not issued with the intention of creating a significantequity interest in CUCBC, but only to evidence membershipin CUCBC or participation in the British Columbia credit unionsystem;

17. The Shares are only transferable amongmembers holding the same class and with the consent of CUCBC'sdirectors (the Transfer Restrictions). The Shares arenot transferable to the public;

18. A Class A member is entitled to vote onany matter, unless the rules of CUCBC provide otherwise. Initially,each holder of Class A shares has one vote regardless of thenumber of shares held, but any holder of Class A shares mayrequest a vote in which each holder of Class A shares hasa number of votes proportional to the number of members ofthe particular credit union in relation to total credit unionmembership in British Columbia;

19. Each Class B and Class C member has onevote on certain issues regardless of the number of sharesheld. A Class B member is only entitled to vote with respectto certain matters as specified in CUCBC's rules and withrespect to those matters which the directors in their discretiondetermine relate to Class B members. A Class C member is onlyentitled to vote only with respect to those matters whichthe directors of CUCBC in their discretion determine relateto that class of shareholders;

20. With respect to elections of directors,the constitution and rules of CUCBC provide that one directormay be appointed by each Class A member having in excess of15% of the total membership of all B.C. credit unions. Onedirector from each of the six peer groups established pursuantto the rules of CUCBC is elected by the delegates of the ClassA members that comprise each peer group, other than ClassA members that have appointed directors. Currently, the rulesprovide for three directors to be elected at-large by thedelegates of Class A members, other than Class A members thathave appointed directors. A delegate is a person appointedas such by a member. Class B and C members do not have rightsto elect or appoint directors;

21. Subject to certain restrictions containedin the CUIA, the CCAA and the constitution and rules of CUCBC,all Shares are redeemable by CUCBC, at its option and on theapproval of its directors, at the amount paid up on such Shares.However, except upon withdrawal from or termination of membershipor the exercise of a lien pursuant to the rules of CUCBC,no redemption of shares of any class is permitted which wouldreduce the total number of shares held by any member belowthe number of such shares required to be held by that member;

22. In the event of liquidation, dissolutionor winding up, all of the Shares participate equally in thesurplus of CUCBC;

23. Generally, CUCBC's policy is to pay atargeted annual dividend to its members based on an interestrate equal to the average Government of Canada 90-day treasurybill rate. In 2000 CUCBC adopted a policy whereby it considerspaying, in addition to the targeted dividend, a bonus dividendin an aggregate amount of its remaining earnings in excessof what would be required to reach the retained earnings targetfor that year;

24. In 1996, CUCBC obtained an order (theOld Order) from the British Columbia Securities Commissionwhich, among other things, exempted CUCBC's insiders fromthe insider reporting requirements of the Securities Act(British Columbia);

25. In August 2002, the Old Order was replacedby an MRRS decision document (the MRRS Decision Document)which extended exemptive relief from the insider reportingrequirements to the other Reporting Provinces;

26. To the best of its knowledge, CUCBC isnot in default of any of the requirements of the securitieslegislation of the Reporting Provinces.

AND UPON the Director being satisfiedthat to do so would not be prejudicial to the public interest;

IT IS ORDERED, pursuant to Section 6.1of the Rule, that for the purposes of paying the annual participationfees under Section 2.2 of the Rule, the calculation of CUCBC'scapitalization under Section 2.6 of the Rule shall be modifiedso that items (a) to (h) under Section 2.6 of the Rule shallnot be included in determining CUCBC's capitalization, and insubstitution therefor, the calculation of CUCBC's capitalizationunder Section 2.6 of the Rule shall be determined solely onthe basis of the aggregate amount of Medium Term Notes thatare issued and outstanding as at the end of CUCBC's most recentfinancial year end, provided that:

1. CUCBC continues to be regulated by theOffice of the Superintendent of Financial Institutions underthe CCAA and by the Financial Institutions Commission underthe FIA;

2. CUCBC continues to have no outstandingsecurities traded on a marketplace as defined in NationalInstrument 21-101;

3. CUCBC continues to satisfy all of the conditionscontained in the MRRS Decision Document;

4. The Shares continue to be subject to theTransfer Restrictions;

5. CUCBC continues to have no securities,including debt securities, outstanding, other than the MediumTerm Notes, the Short Term Notes and the Shares; and

6. CUCBC otherwise continues to comply withthe Rule.

September 22, 2003.

"Charlie MacCready"