RBC Asset Management Inc. and Phillips, Hager & North Investment Management Ltd.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from conflict of interest provisions to allow index mutual funds to purchase offerings of equity securities in which a related dealer acts as underwriter -- relief required in order to permit index funds to track their index and meet investment objectives -- portfolio advisor has little discretion over which securities to purchase and when -- purchases must be necessary to track the index and be subject to independent review committee approval.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 4.1(1), 19.1.

November 11, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

RBC ASSET MANAGEMENT INC. AND

PHILLIPS, HAGER & NORTH

INVESTMENT MANAGEMENT LTD.

(each, a Filer and, collectively, the Filers)

AND

IN THE MATTER OF

THE INDEX FUNDS

(as defined below)

DECISION

Background

The principal regulator in the Jurisdiction received an application (the Application) from the Filers on behalf of the RBC Canadian Index Fund, the RBC U.S. Index Fund and any additional or future index mutual funds (as defined below) to which National Instrument 81-102 -- Mutual Funds (NI 81-102) applies (each, an Index Fund and, collectively, the Index Funds) for which a Filer, or an affiliate of a Filer, acts as the manager or portfolio adviser for a decision (the Exemption Sought) under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Index Funds from the prohibition in Section 4.1(1) of NI 81-102 (the Prohibition) to permit the Index Funds to make an investment in a class of equity securities (Securities) of an issuer during the period of the distribution (the Distribution) or during the period of 60 days after the Distribution (the 60-Day Period), notwithstanding that an associate or affiliate of a Filer acts as an underwriter in the Distribution.

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:

(a) the Ontario Securities Commission is the principal regulator for the Application; and

(b) the Filers have provided notice that Section 4.7 of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland & Labrador, Northwest Territories, Yukon and Nunavut (the Passport Jurisdictions. The Passport Jurisdictions and the Jurisdiction are referred to collectively as the Jurisdictions).

Interpretation

Terms defined in, National Instrument 14-101 -- Definitions and MI 11-102 have the same meanings if used in this decision. Certain other defined terms have the meanings given to them in this decision.

Representations

1. The Filers and the Index Funds are not in default of securities legislation in any of the Jurisdictions.

2. Each of the Index Funds is, or will be, an open-ended mutual fund trust or mutual fund corporation established under the laws of the Province of Ontario or another Jurisdiction.

3. Each of the Index Funds is, or will be, a 'dealer managed mutual fund' (as that term is defined in section 1.1 of NI 81-102) that is a reporting issuer in each of the Jurisdictions.

4. A Filer, or an affiliate of a Filer, is, or will be, the manager or portfolio adviser of each of the Index Funds.

5. An independent review committee (the IRC) has been, or will be appointed for each of the Index Funds under National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).

6. Each Filer is currently an affiliate of RBC Dominion Securities Inc. and RBC Capital Markets Corporation (each, a Related Dealer), either of which may act as an underwriter in a Distribution. Each of the Related Dealers is an affiliate of the Royal Bank of Canada (RBC) which is a global financial institution. RBC may also act as an underwriter in a Distribution. (RBC and each Related Dealer are collectively, the Related Dealers).

7. Each of the Index Funds is or will be an 'index mutual fund' pursuant to part (a) of that definition in section 1.1 of NI 81-102.

8. The investment objective of the RBC Canadian Index Fund is to track the performance of a generally recognized index of Canadian equity market performance, currently being the S&P/TSX Composite Total Return Index (the S&P/TSX Composite Index). The fund achieves its investment objective by directly investing in Securities comprising the S&P/TSX Composite Index in substantially the same proportion as those Securities are represented in the S&P/TSX Composite Index.

9. The investment objective of the RBC U.S. Index Fund is to track the performance of a generally recognized index of U.S. equity market performance, currently being the Standard & Poor's 500 Total Return Index (Cdn$) (the S&P 500 Index). The fund achieves its investment objective by directly investing in Securities comprising the S&P 500 Index in substantially the same proportion as those Securities are represented in the S&P 500 Index.

10. The S&P/TSX Composite Index and the S&P 500 Index are each a 'permitted index' as that term is defined in section 1.1 of NI 81-102 (a Permitted Index).

11. Similar to the current Index Funds, any future Index Funds to which the Exemption Sought will apply will have an investment objective to track the performance of an index of equity market performance that is a Permitted Index. Any future Index Fund to which the Exemption Sought will apply will achieve its investment objective by investing directly in Securities comprising its Permitted Index in substantially the same proportion as those Securities are represented in the index.

12. The RBC Canadian Index Fund and the RBC U.S. Index Fund received relief (the Prior Relief) on February 27, 2002 from the Prohibition to permit these Index Funds to invest in Securities during a Distribution or during the 60-Day Period notwithstanding that a Related Dealer acts as an underwriter in the Distribution, subject to certain conditions. The Prior Relief expired on November 1, 2007 pursuant to the terms of Section 7.2 of NI 81-107.

13. RBC currently carries on its investment banking business outside of Canada primarily in the United States, but carries on its investment banking business in other countries, such as the United Kingdom and Australia, as well.

14. Each of the Index Funds has, or will have, an investment objective that permits it to invest in Securities of issuers that are not reporting issuers in a Jurisdiction.

15. Each Filer considers that an Index Fund may be prejudiced because the Index Fund's tracking error will be negatively impacted if it cannot acquire Securities represented in the Index Fund's Permitted Index during a Distribution or the 60-Day Period and as a result cannot hold the Securities in its Permitted Index in substantially the same proportion as they are held in the index. This will also impede the ability of an Index Fund to meet its investment objective.

16. In almost all Distributions in respect of which the Exemption Sought is required, a Related Dealer's involvement as an underwriter in a particular Distribution will not be known by a Filer, or an affiliate of a Filer, sufficiently long enough in advance to make an application for relief on a case-by-case basis.

17. The prejudice that may result for an Index Fund also puts the Index Funds at a competitive disadvantage to almost all other index mutual funds in Canada since the Filers are among the few firms, if not the only firms, with a related party dealer in the U.S. and other jurisdictions outside of Canada that is involved on a frequent basis in these types of underwritings.

18. A Distribution in respect of which the Exemption Sought is requested will be made by means of a prospectus, or similar public offering document (a Public Offering), or by means of a private placement (a Private Placement) in the jurisdiction in which the Distribution primarily takes place. The Securities issued in the Distribution will be listed on a stock exchange that is a "recognized stock exchange" within the meaning of section 248(1) of the Income Tax Act (Canada) (a Recognized Exchange).

19. A Distribution in respect of which the Exemption Sought is requested will be made by means of a Private Placement in the Jurisdictions.

20. The Prohibition is not applicable unless a dealer managed fund "knowingly" makes an investment in which a Related Dealer was involved in the underwriting. However, the Filers have adopted policies and procedures such that they will not generally be able to make an investment in a Distribution and argue that it did not "knowingly" make a prohibited investment, even in circumstances where a Filer has very little notice that a Related Dealer may be involved in a particular Distribution. In that regard, when it expresses its interest in a Distribution, the Filer asks the underwriter that is soliciting interest if a Related Dealer is a participant in the syndicate. It advises that, although it is expressing interest, it will not participate in the Distribution if, when the underwriting syndicate is finalized, a Related Dealer is a participant.

21. Since the Index Funds are dealer-managed funds because of the relationship between a Filer and the Related Dealer, the Prohibition is applicable even in circumstances where a sub-advisor is exercising discretion with respect to a purchase if the sub-advisor has knowledge of the involvement of a Related Dealer, which is currently the situation with the current Index Funds. Accordingly, the policies and procedures referred to in paragraph 20 will apply to Index Funds that have a sub-advisor.

22. There was no requirement in the Prior Relief that Securities had to be offered by a prospectus in Canada (as is the case in section 4.1(4) of NI 81-102) or that the issuer be a reporting issuer in a Jurisdiction (as is the case in the relief from the Prohibition granted to mutual funds managed by the Filers in the decision document dated November 20, 2007).

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator is that the Exemption Sought is granted, provided that the following conditions are satisfied:

(a) each Index Fund is an index mutual fund pursuant to part (a) of the definition of 'index mutual fund' in section 1.1 of NI 81-102;

(b) the IRC of the Index Fund must approve the transaction in accordance with the requirements of subsection 5.2(2) of NI 81-107;

(c) the Distribution must be made by way of a Public Offering or a Private Placement in the jurisdiction in which the Distribution primarily takes place;

(d) the Securities to be acquired must be represented in the Index Fund's Permitted Index and the acquisition is necessary for the Index Fund to meet its investment objectives;

(e) the Securities issued in the Distribution must be listed on a Recognized Exchange;

(f) if the Securities are acquired in the Distribution, they must be acquired from an underwriter that is not a Related Dealer;

(g) if the Securities are acquired in the 60-Day Period they must be acquired on a Recognized Exchange;

(h) no later than the time the Index Funds file their annual financial statements, the Filers file the particulars of each investment made by the Index Funds during their most recently completed financial year; and

(i) appropriate disclosure of the terms of the Exemption Sought is made in accordance with the Legislation.

"Rhonda Goldberg"
Manager, Investment Funds Branch
Ontario Securities Commission