Preferred and Derivatives
Structured products is a term applied to categorize an investment vehicle which is created using a dual security structure – Preferred Shares/Securities and Capital Shares/Units – to provide investors with greater ability to choose the tax character of distributions received.
Preferred Shares/Securities provide holders with (a) fixed quarterly dividend/interest payments and (b) repayment of the original subscription price at maturity.
Capital Shares/Units provide holders with (a) tax efficient monthly cash distributions, a significant portion of which is tax deferred; and (b) repayment of the original subscription price at maturity. Capital unit holders may also be entitled to an amount, at maturity, representing capital appreciation of the portfolio of securities held. These split shares are offered on a particular issuer (such as a bank) or a group of similar issuers (such as financial institutions or resource companies). The net proceeds of the offering are invested in specified securities, however, a portion of the investments (usually 15%-20% of net asset value) may be invested in other companies which meet stated investment criteria. The investment holdings may be rebalanced (or substituted for) on a quarterly basis or as necessary from time to time.
Investment criteria which limit the portfolio of securities to be acquired are set out in the Trust Agreement and may not be changed without the prior approval by the unitholders. Some examples of these criteria are: (a) qualifying assets for purchase; (b) asset/security weightings in the portfolio; and (c) minimum market capitalization of qualifying companies held in the portfolio. In certain cases, (a) cash or cash equivalents may be held; (b) covered call options may be written and also (c) borrowing may be allowed, from time to time, for working capital purposes, provided that the aggregate amount of such borrowings may not exceed a specified percentage of the total assets. The investment vehicle may be structured as a closed-end investment trust or as a mutual fund for securities law purposes:
Closed-end investment trusts differ from mutual funds in a number of respects, most notably as follows: (a) units may be surrendered for redemption only once a year, upon the holder providing notice, whereas the securities of most mutual funds are redeemable daily; (b) the units are to have a stock exchange listing, whereas the securities of most mutual funds do not; (c) unlike most mutual funds, the units will not be offered on a continuous basis; and (d) the trust is permitted to borrow, whereas mutual funds are not permitted to do so. For companies technically to be considered mutual fund corporations, they are not conventional mutual funds and have obtained exemptions from certain requirements, such as (a), (b) and (c) above.
Other Structured Products which have been issued as preferred securities are as follows:
Alliance Split Income Trust, BG Income + Growth Split Trust, Brascan SoundVest Rising Distribution Split Trust, Faircourt Income & Growth Split Trust, Faircourt Split Trust, Multi Select Income Trust, Oil Sands Split Trust, Sentry Select 40 Split Income Trust, Split REIT Opportunity Trust, STRATA Income Fund, Tax Optimized Return Oriented Securities Trust, Top 10 Split Trust, Utility Split Trust.