Diversified Dividend Growth Split Inc. - MRRS Decision

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.

January 16, 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

DIVERSIFIED DIVIDEND GROWTH SPLIT INC.

 

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 Diversified Dividend Growth Split Inc. (the Company) for a decision under National Instrument 81-102 Mutual Funds (NI 81-102) that the following sections of NI 81-102 (collectively the NI 81-102 Requirements) will not apply to the Company with respect to the Capital Shares and Preferred Shares proposed to be issued by the Company as described in a preliminary prospectus dated December 14, 2005 (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 incorporation, formation or initial organization of a mutual fund, or of the preparation and filing of any preliminary simplified 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 Company:

The Company

1. The Company was incorporated under the Business Corporations Act (Ontario) on December 14, 2005.

2. The Company will make offerings to the public (the Offerings) on a best efforts basis, of class A capital shares (the Capital Shares) and class A preferred shares (the Preferred Shares) pursuant to a final prospectus (the Final Prospectus) in respect of which the Preliminary Prospectus has already been filed with the securities regulatory authority in each of the Provinces of Canada.

3. The Capital Shares and the Preferred Shares will be listed for trading on the Toronto Stock Exchange (the TSX). An application requesting conditional listing approval will be made by the Company to the TSX.

4. The Company is a passive investment company whose principal investment objective is to invest in a portfolio of equity shares (the Portfolio Shares) of 16 publicly listed issuers, namely: The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, Great-West Lifeco Inc., Manulife Financial Corporation, Sun Life Financial Inc., Power Corporation of Canada, Power Financial Corporation, IGM Financial Inc., Loblaw Companies Limited, George Weston Limited, Canadian National Railway Company, Brookfield Properties Corporation, Metro Inc., and SNC-Lavalin Group Inc. in order to generate fixed cumulative preferential distributions for holders of the Company's Preferred Shares, and to allow the holders of the Company's Capital Shares to participate in capital appreciation of the Portfolio Shares after payment of administrative and operating expenses of the Company and funding of any portion of the Preferred Share Dividend Amount. Holders of Capital Shares are entitled to receive any dividends that the Board of Directors of the Company may declare.

5. The expenses incurred in connection with the Offerings (the Expenses of the Offerings), being the costs of the incorporation, formation and initial organization of the Company, including the preparation and filing of the Preliminary Prospectus and the Final Prospectus, will be borne by the Company.

6. The net proceeds of the Offerings (after deducting the agents' fees, the Expenses of the Offerings, the interest paid by the Company under the credit facility described in paragraph 7 below, and other expenses relating to the acquisition of the Portfolio Shares) will be used by the Company to fund the purchase of Portfolio Shares.

7. The Company has established a credit facility with TD Securities Inc. (TD Securities) which may be used by the Company to purchase the Portfolio Shares and which will be repaid in full on the closing of the Offerings. The maximum rate of interest payable on such credit facility will be 5.0%. To the extent that the credit facility is used, the Company will pledge Portfolio Shares as collateral for amounts borrowed thereunder.

8. Holders of Preferred Shares will be entitled to receive quarterly fixed cumulative preferential distributions targeted to a specific dollar amount per Preferred Share to be set out in the Final Prospectus.

9. It will be the policy of the Company to hold the Portfolio Shares and to not engage in any trading of the Portfolio Shares, except:

(i) to fund retractions or redemptions of Capital Shares and Preferred Shares;

(ii) following receipt of stock dividends on the Portfolio Shares;

(iii) in the event of a take-over bid for any of the Portfolio Shares;

(iv) if necessary, to fund any shortfall in the distribution on Preferred Shares;

(v) to meet obligations of the Company in respect of liabilities including extraordinary liabilities; or

(vi) certain other limited circumstances as described in the Preliminary Prospectus.

10. Preferred Share distributions will be funded primarily from the dividends received on the Portfolio Shares and, if necessary, any shortfall will be funded with proceeds from the sale of Portfolio Shares.

11. The record date for the payment of Preferred Share distributions, Capital Share dividends or other distributions of the Company will be set in accordance with the applicable requirements of the TSX.

12. The Capital Shares and Preferred Shares may be surrendered for retraction at any time. Retraction payments for Capital Shares and Preferred Shares will be made on the Retraction Payment Date (as defined in the Preliminary Prospectus) provided the Capital Shares and the Preferred Shares have been surrendered for retraction by the Valuation Date (as defined in the Preliminary Prospectus). While the Company's Unit Value (as defined in the Preliminary Prospectus) is calculated weekly, the retraction price for the Capital Shares and the Preferred Shares will be determined based on the Unit Value in effect as at the Valuation Date.

13. The retraction payments for the Capital Shares and Preferred Shares surrendered under the Regular Retraction or Concurrent Retraction (both as defined in the Preliminary Prospectus) will be calculated at a discount to the Unit Value of the Company on the applicable Valuation Date, in the manner described in the Preliminary Prospectus.

14. Any Capital Shares and Preferred Shares outstanding on a date approximately five years from the closing of the Offerings, which date will be specified in the Final Prospectus, will be redeemed by the Company on such date.

Decision

Each of the Decision Makers is satisfied that the test contained in NI 81-102 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 NI 81-102 Requirements, as follows:

(a) subsection 2.6(a), to enable the Company to establish a credit facility with TD Securities that may be used by the Company to purchase the Portfolio Shares and to provide a security interest over its assets, as stated in paragraph 7 above, provided that the credit facility is repaid immediately following the closing of the Offerings;

(b) section 3.3, to permit the Company to bear the Expenses of the Offerings;

(c) section 10.3, to permit the Company to calculate the retraction price for the Capital Shares and Preferred Shares in the manner described in the Preliminary Prospectus and on the applicable Valuation Date as defined in the Preliminary Prospectus;

(d) subsection 10.4(1), to permit the Company to pay the retraction price for the Capital Shares and Preferred Shares on the Retraction Payment Date as defined in the Preliminary Prospectus;

(e) subsection 12.1(1), to relieve the Company from the requirement to file the prescribed compliance reports; and

(f) section 14.1, to relieve the Company 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.

"Leslie Byberg"
Manager, Investment Funds Branch
Ontario Securities Commission