Dividend 15 Split Corp. II - 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. 3.3, 7.1, 10.3, 10.4, 12.1, 14.1.

October 26, 2006

IN THE MATTER OF THE

SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

MANITOBA, ONTARIO, QUÉBEC, NOVA SCOTIA,

NEW BRUNSWICK, NEWFOUNDLAND AND

LABRADOR, 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

DIVIDEND 15 SPLIT CORP. II

(the "Fund")

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 Dividend Split Corp. II (the Filer) for a decision under the securities legislation of the Jurisdictions (the Legislation) that exempts the Filer from the following requirements of National Instrument 81-102 Mutual Funds (NI 81-102) in connection with the Class A and Preferred Shares to be issued by the Filer and described in the preliminary prospectus dated September 28, 2006 (the Preliminary Prospectus):

(a) section 3.3, which prohibits a mutual fund or its security holders from bearing the costs of the preparation and filing of any prospectus;

(b) section 7.1, which provides that if a mutual fund is to pay an incentive fee, such fee must, among other requirements, be calculated with reference to a publicly available total return benchmark that reflects the market sectors in which the mutual fund invests;

(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, 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, 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 Filer:

1. The Company is a mutual fund corporation established under the laws of Ontario. The Company's manager is Quadravest Inc. (the "Manager"), and its portfolio advisor is Quadravest Capital Management Inc. ("Quadravest").

2. The Company will make an offering (the Offering) to the public, on a best efforts basis, of Class A Shares and of Preferred Shares in each of the provinces of Canada.

3. The Class A Shares and the Preferred Shares are expected to be listed and posted for trading on the Toronto Stock Exchange (the "TSX").

4. The Company will invest the net proceeds of the Offering primarily in a portfolio of equity securities (the "Portfolio") of 15 major publicly traded dividend-paying Canadian issuers (collectively, the "Portfolio Companies").

5. The Company expects that common shares of a particular Portfolio Company will generally represent no less than 4% and no more than 8% of the net asset value ("Net Asset Value") of the Company. Up to 15% of the Net Asset Value of the Company may be invested in equity securities of issuers other than the Portfolio Companies.

6. The Company's objectives in respect of its Preferred Shares are to provide holders of the Preferred Shares with fixed cumulative preferential monthly cash dividends in the amount of $0.04375 per Preferred Share to yield 5.25% per annum on the original issue price; and, on or about December 1, 2014 or such other date as the Company may terminate (the "Termination Date"), to pay such holders of such shares the original issue price of those shares on the Termination Date. The Preferred Shares have been provisionally rated Pfd-2 by Dominion Bond Rating Service Limited ("DBRS").

7. In respect of the Class A Shares, the Company's objectives are to provide holders of Class A Shares with regular monthly cash dividends targeted to be $0.10 per Class A Share to yield 8.0% per annum on the original issue price; and, on or about the Termination Date, to pay holders of Class A Shares at least the original issue price of those shares.

8. The record date for shareholders of the Company entitled to receive dividends will be established in accordance with the requirements of the TSX from time to time.

9. To supplement the dividends earned on the Portfolio and to reduce risk, the Company will from time to time write covered call options in respect of all or part of the Portfolio.

10. The Preferred Shares and Class A Shares may be surrendered for retraction at any time and will be retracted on a monthly basis on the last business day of each month (a "Retraction Date"), provided such shares are surrendered for retraction not less than 20 business days prior to the Retraction Date. The Company will make payment for any shares retracted within 15 business days of the Retraction Date.

11. Under the investment management agreement between the Company and Quadravest, Quadravest is entitled to a base management fee payable monthly in arrears at an annual rate equal to 0.65% of the Company's Net Asset Value calculated as at the last Valuation Date in each month.

12. Quadravest is also entitled to a performance fee equal to 20% of the amount by which the total return per Unit (consisting of one Preferred Share and one Class A Share) of the Company for a financial year exceeds 112% of the Bonus Threshold. The "Bonus Threshold", for any financial year immediately following a year for which a performance fee is payable, is equal to the Net Asset Value per Unit at the beginning of that financial year. The "Bonus Threshold", for any financial year immediately following a year for which a performance fee is not payable, is equal to the greater of (i) the Net Asset Value per Unit at the end of the immediately prior financial year; and (ii) the Bonus Threshold for the prior year, minus the Adjustment Amount. The "Adjustment Amount" for any financial year is the amount, if any, by which the Net Asset Value per Unit at the end of the immediately prior financial year plus dividends paid in that prior year exceeds the Bonus Threshold for that prior year.

13. No performance fee may be paid in any year (i) if the Net Asset Value per Unit, at the end of such year, is less than $25.00; (ii) if the Preferred Shares are then rated by DBRS at less than Pfd-2 (or, if DBRS has not then rated such shares, then the equivalent ratings of another rating agency that has rated such shares shall apply); or (iii) if the Company has not earned a total annual return of at least the Base Return on a cumulative basis since inception.

14. The T-Bill Index reflects income yields available to investors who acquire risk-free 91-day Treasury bills. The Manager believes that the T-Bill Index is an appropriate benchmark against which to assess the performance of the total return per Unit as the investment objective of the Company is to achieve targeted returns for the Preferred Shares and the Class A Shares. Although the actual returns may be achieved in part through the capital appreciation of equity securities, the principal objective, as evidenced by the Company's intention to write covered call options, is to achieve the targeted returns and not track the performance of an investment in the equity securities. As a result, the Manager believes that the most appropriate benchmark is one that focuses on yield and not on the investment performance of equity securities.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Makers under the Legislation is that an exemption is granted from the following requirements of NI 81-102:

a) section 3.3 - so that the organizational costs and the expenses of the Offering can be borne by the Company;

b) sub-clause 7.1(a)(i) - to permit the Company to pay an incentive fee calculated with reference to the T-Bill Index and in the manner disclosed in the Company's (final) prospectus (the "Prospectus"), provided that the Manager considers the T-Bill Index to be an appropriate benchmark against which to measure the performance of the Company and both the Manager's consideration and the reasons therefore are disclosed in the Prospectus;

c) section 10.3 - to permit the Company to calculate the Preferred Share Retraction Price and the Class A Share Retraction Price in the manner described in the Prospectus and on the applicable Retraction Date, as defined in the Prospectus, following the surrender of Units for retraction;

d) section 10.4 - to permit the Company to pay the Preferred Share Retraction Price and the Class A Share Retraction Price on the Retraction Payment Date, as defined in the Prospectus;

e) section 12.1 - to relieve the Company from the requirements to file the prescribed compliance report; and

f) section 14.1 - to relieve the Company from the requirement relating to the record date for payment of dividends or other distributions of the Company, provided that it complies with the applicable requirements of the TSX.