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BlackRock Asset Management Canada Limited
Headnote
National Policy 11-203 -- Existing and future mutual funds granted exemption to invest in specified Dublin iShares Funds listed in the decision document whose securities would meet the definition of index participation unit in NI 81-102, but for the fact that they are listed on the London Stock Exchange -- relief is subject to certain conditions and requirements including Dublin iShares Funds are not synthetic ETFs and each top fund will invest either (a) no more than 10% in any one Dublin iShares Fund and no more than 20% in Dublin iShares Funds, in aggregate, or (b) all or substantially all the assets of the top fund in units of a single Dublin iShares Fund.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.2(1) and 2.5(2)(a), (c) (e) and (f).
July 22, 2013
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
BLACKROCK ASSET MANAGEMENT CANADA
LIMITED
(the “Filer”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the New Funds (as defined below) and such other exchange-traded funds as the Filer may manage, now or in the future, that are operated on a similar basis to the New Funds (together with the New Funds, the "Funds") for a decision (the "Exemption Sought") under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") providing an exemption from the prohibitions in subsections 2.1(1) and 2.2(1) and paragraphs 2.5(2)(a), (c), (e) and (f) of National Instrument 81-102 -- Mutual Funds ("NI 81-102") to permit the Funds to invest up to 100% of their assets in securities of one or more Dublin iShares Funds (as defined below) that, but for the fact that they are listed on a stock exchange in the United Kingdom and not on a stock exchange in Canada or the United States, would otherwise qualify as index participation units (as defined in NI 81-102).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the "OSC") is the principal regulator for this application; and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System ("MI 11-102") is intended to be relied upon in the jurisdictions of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon Territory and Nunavut (together with Ontario, the "Jurisdictions").
Interpretation
Terms defined in National Instrument 14-101 -- Definitions, NI 81-102 and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
"Basket" means in relation to a particular Fund, a group of one or more Dublin iShares Funds and/or other securities determined by the Filer from time to time for the purpose of subscription orders, exchanges or redemptions or for other purposes.
"Canadian iShares® Fund" means any ETF, other than a Fund, that is listed on a Canadian stock exchange and managed by the Filer or an affiliate of the Filer.
"Designated Brokers" means Underwriters that enter into agreements with the Funds to perform certain duties in relation to the Funds and "Designated Broker" means any one of them.
"Dublin iShares Fund" means any ETF which is listed on Appendix "A".
"ETF" means an exchange-traded fund.
"iShares® Funds" means the family of ETFs that are subject to NI 81-102 and qualified for distribution to the public in all provinces and territories of Canada and to which the Filer acts as trustee, manager and portfolio adviser.
"New Funds" means new iShares Funds that the Filer is planning to launch that will seek to replicate the performance of an index or pursue an active investment by investing up to 100% of their assets in the securities of one or more Dublin iShares Funds.
"Prescribed Number of Units" means, in relation to a Fund, the number of Units of the Fund determined by the Filer from time to time for the purpose of subscription orders, exchanges or redemptions or for other purposes.
"Underwriters" means registered brokers and dealers that have entered into underwriting agreements with the Funds and that subscribe for and purchase Units from the Funds and "Underwriter" means any one of them.
"Unit" means, in relation to a particular Fund, a unit of beneficial interest in that Fund.
"U.S. iShares Fund" means any ETF that is listed on a recognized U.S. stock exchange and managed by an affiliate of the Filer.
Representations
This decision is based on the following facts represented by the Filer:
Filer and Funds
1. Each Fund will be a mutual fund trust governed by the laws of Ontario and a reporting issuer under the laws of all of the Jurisdictions.
2. Each Fund will be subject to NI 81-102, subject to any exemptions therefrom that have been or may be granted by securities regulatory authorities.
3. Each Fund will be an ETF.
4. Units of each Fund will be listed on the Toronto Stock Exchange (the "TSX") or another stock exchange recognized by the OSC.
5. The investment objective of each of the Funds will be to provide income, long-term capital growth or another specified investment result by replicating, to the extent possible, the performance of an index.
6. In order to achieve its investment objective, each Fund may invest in securities issued by one or more Dublin iShares Funds and/or other issuers. The Funds may also invest in or use derivative instruments in a manner that complies with NI 81-102 and is consistent with their investment objectives.
7. The investment objective of each Fund, as well as its investment strategy, will be disclosed on an ongoing basis in the prospectus of the Fund.
8. The Filer will act as trustee, manager and portfolio adviser of the Funds. BlackRock Institutional Trust Company, N.A. or another affiliate of the Filer may be appointed as the sub-advisor of the Funds. The Filer is registered in the categories of Portfolio Manager, Investment Fund Manager and Exempt Market Dealer in all of the Jurisdictions. The Filer is also registered as a Commodity Trading Manager in Ontario.
9. The Filer is a corporation amalgamated under the laws of the Province of Ontario and is an indirect, wholly-owned subsidiary of BlackRock, Inc., a leader in investment management, risk management and advisory services for institutional and retail clients worldwide.
10. The principal office of the Filer and the Funds is located at 161 Bay Street, Suite 2500, Toronto, Ontario, M5J 2S1.
11. Units may only be subscribed for or purchased directly from the Funds by Underwriters and orders may only be placed for Units in the Prescribed Number of Units (or an integral multiple thereof) on any day when there is a trading session on the TSX and the primary market or exchange for the securities held by the Fund is open for trading.
12. The Funds will appoint Designated Brokers to perform certain functions which include standing in the market with a bid and ask price for Units of each Fund for the purpose of maintaining liquidity for the Units.
13. Each Underwriter that subscribes for Units must deliver, in respect of each Prescribed Number of Units to be issued, a Basket, other securities and/or cash in an amount sufficient so that the value of the Basket, other securities and/or cash delivered is equal to the net asset value of the Units next determined following the receipt of the subscription order. In the discretion of the Filer, the Funds may also accept cash only subscriptions for Units in an amount equal to (i) the net asset value of the Units next determined following the receipt of the subscription order and (ii) a fee representing, as applicable, brokerage expenses, commissions, transaction costs and other costs or expenses that the Fund incurs or expects to incur in purchasing securities on the market with such cash proceeds.
14. The net asset value per Unit of each Fund will be calculated and published on any day when there is a trading session on the TSX.
15. Underwriters will not receive any fees or commissions in connection with the issuance of Units to them. The Filer may, at its discretion, charge an administration fee on the issuance of Units to Underwriters.
16. Except as described in paragraphs 11 through 13 above, Units may not be purchased directly from the Funds. Investors are generally expected to purchase Units through the facilities of the TSX. However, Units may be issued directly to unitholders upon the reinvestment of distributions of income or capital gains.
17. Unitholders that wish to dispose of their Units may generally do so by selling their Units on the TSX, through a registered broker or dealer, subject only to customary brokerage commissions. A unitholder that holds a Prescribed Number of Units or an integral multiple thereof of a Fund may exchange such Units with the Fund for Baskets and cash; unitholders may also redeem their Units directly from the Fund for cash at a redemption price equal to 95% of the closing price of the Units on the TSX on the date of redemption.
18. The Filer may, upon the request of a unitholder and the consent of the Filer, satisfy an exchange request by delivering cash only in an amount equal to the net asset value of the Units of the applicable Fund next determined following the receipt of the exchange request. However, the Filer will satisfy an exchange request only in cash if the unitholder agrees to pay a fee representing, as applicable, brokerage expenses, commissions, transaction costs and other costs or expenses that an iShares Fund incurs or expects to incur in selling securities on the market to obtain the necessary cash for the exchange.
19. The Filer will be entitled to receive a fee from each Fund for acting as trustee, manager and portfolio adviser of the Fund. In addition to the management fee, the Filer or an affiliate will be entitled to receive a fee for acting as trustee or manager of each Dublin iShares Fund in which a Fund may invest. The fee arrangements for a Fund will be disclosed in the Fund's prospectus and will be structured to ensure that no management fees are payable by a Fund that, to a reasonable person, would duplicate a fee payable by a Dublin iShares Fund in which the Fund may invest for the same service. Each Fund will also pay certain other fees and expenses disclosed in the prospectus of the Fund.
Dublin iShares Funds
20. Each Dublin iShares Fund is a portfolio, with segregated liability, of an umbrella open-ended investment company with variable capital.{1} An investment company is incorporated with limited liability under the Irish Companies Act, 1963 to 2009 and is authorized by the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2003, as amended (the "UCITS Regulations"). Each Dublin iShares Fund is therefore a "UCITS" and will therefore comply with UCITS requirements.
21. A Dublin iShares Fund is a "mutual fund" within the meaning of applicable Canadian securities legislation.
22. Securities of a Dublin iShares Fund acquired by a Fund are listed on the London Stock Exchange (the "LSE"). The LSE is subject to regulatory oversight by the UK Listing Authority which is part of the Financial Conduct Authority of the United Kingdom (the "FCA"). The securities of a Dublin iShares Fund may also be listed on one or more additional stock exchanges.
23. The investment objective of a Dublin iShares Fund is to provide investors with a total return, taking into account both capital and income returns, which reflects the return of the applicable index which would be a "permitted index" within the meaning of NI 81-102.
24. A Dublin iShares Fund achieves its investment objective by holding the component securities of the applicable index or otherwise investing in securities in a manner that will enable the Dublin iShares Fund to track the performance of the applicable index in accordance with the rules on eligible assets prescribed by the UCITS Regulations. While the Dublin iShares Funds that the Funds invest in may invest in futures contracts and other derivatives, they do not use derivatives as the primary means to replicate the performance of the applicable index and as such are not considered to be "synthetic ETFs" (as that term is commonly used).
25. As noted, a Dublin iShares Fund is restricted to investments permitted by the UCITS Regulations and/or authorized by the Central Bank of Ireland.
26. A Dublin iShares Fund is subject to investment restrictions designed to limit holdings of illiquid securities which are not listed on a stock exchange or regulated market to 10% or less of the Dublin iShares Fund's net asset value. In addition, a Dublin iShares Fund will hold no more than 10% of its net asset value in securities of other collective investment undertakings.
27. Each Dublin iShares Fund is subject to restrictions concerning the use of derivatives, including the types of derivatives in which it may transact, limits on counterparty risk and limits on increases to overall market risk resulting from the use of derivatives. Each Dublin iShares Fund will have procedures in place relating to the use of derivatives and risk modelling of derivative positions.
28. The Dublin iShares Funds are "index mutual funds" within the meaning of NI 81-102.
29. The following affiliates of the Filer are involved in the management of the Dublin iShares Funds:
(a) BlackRock Asset Management Ireland Limited ("BlackRock Ireland") is the manager and has responsibility for the management and administration and the oversight of all service providers or other delegates. BlackRock Ireland is regulated by the Central Bank of Ireland; and
(b) BlackRock Advisors (UK) Limited ("BlackRock UK") is the investment manager and has responsibility for the investment and re-investment of the assets. BlackRock UK is regulated by the FCA.
30. The following third parties are involved in the administration of the Dublin iShares Funds:
(a) State Street Fund Services (Ireland) Limited is the administrator;
(b) Computershare Investor Services (Ireland) Ltd. is the registrar and transfer agent;
(c) State Street Custodial Services (Ireland) Limited is the custodian; and
(d) Affiliates of BlackRock UK may be retained by BlackRock UK to act as sub-advisors in respect of certain Dublin iShares Funds, which investment managers remain subject to the oversight of BlackRock UK.
31. The Dublin iShares Funds are operated in all material respects on a substantially equivalent basis to the Canadian iShares Funds and the U.S. iShares Funds.
32. Securities of a Dublin iShares Fund are offered in their primary market in a manner similar to the Funds, the Canadian iShares Funds and the U.S. iShares Funds pursuant to a prospectus for each investment company filed with the Central Bank of Ireland.
33. Each Dublin iShares Fund prepares key investor information documents which will provide disclosure that is substantially similar to the disclosure required to be included in the fund facts document required to be prepared by National Instrument 81-101 -- Mutual Fund Prospectus Disclosure. Each Dublin iShares Fund is subject to continuous disclosure obligations which are substantially similar to disclosure obligations under National Instrument 81-106 -- Investment Fund Continuous Disclosure. In addition, each Dublin iShares Fund is required to update information of material significance in the prospectus and to prepare management reports and an audited set of financial statements at least annually.
34. If the Exemption Sought is granted, a Fund will receive securities of a Dublin iShares Fund by the delivery of a Basket or Baskets from an Underwriter as subscription proceeds and may also purchase securities of a Dublin iShares Fund in the secondary market.
35. Under NI 81-102, a Fund would not be permitted to invest in securities of a Dublin iShares Fund unless the requirements of section 2.5(2) are satisfied.
36. If the securities of a Dublin iShares Fund were "index participation units" within the meaning of NI 81-102, a Fund would be permitted under the requirements of NI 81-102 to invest in such securities as the securities of the Dublin iShares Fund would fall within the exceptions to the prohibitions in subsection 2.1(1), 2.2(1) and 2.5(2) of NI 81-102.
37. But for the requirement in the definition of index participation unit that a security be traded on a stock exchange in Canada or the United States, securities of a Dublin iShares Fund would be index participation units.
38. The regulatory regime, administration, operation, investment objectives and restrictions applicable to the Dublin iShares Funds are substantially equivalent to those applicable to the Canadian iShares Funds and U.S. iShares Funds.
39. BlackRock Ireland, the manager of the Dublin iShares Funds, being subject to regulatory oversight by the Central Bank of Ireland, is subject to substantially equivalent regulatory oversight to the Filer, the manager of the Canadian iShares Funds, which is primarily regulated by the OSC, and BlackRock Fund Advisors, the manager of the U.S. iShares Funds, which is regulated by the U.S. Securities and Exchange Commission.
40. The boards (the "Boards") of iShares I-Vi plc, being the relevant fund companies of the Dublin iShares Funds (the "Companies"), are committed to maintaining the highest standards of corporate governance and are accountable to shareholders for the governance of the Companies' affairs. The corporate governance framework adopted by the Companies is designed to comply with the relevant provisions of the UK Financial Reporting Council's Corporate Governance Code. The Boards recognise their responsibility to shareholders for the overall management of the Companies. The Boards also approve the prospectus, circulars to shareholders, listing particulars and other relevant legal documentation relating to the Dublin iShares Funds. Moreover, the Boards are also responsible for ensuring that the Companies keep proper accounting records which disclose with reasonable accuracy at any time the financial positions of the Companies and which enable them to ensure that the financial statements comply with applicable laws and accounting standards. The Boards present balanced and understandable assessments of the Companies' financial position, which extends to interim financial statements and other publicly available financial reports. The Boards are also responsible for safeguarding the assets of the Companies and for taking reasonable steps in the prevention and detection of fraud and other irregularities. In addition, BlackRock Ireland is subject to a duty of care and a duty to act honestly and fairly in the best interests of the Dublin iShares Funds, their shareholders and the integrity of the market.
41. The LSE is subject to substantially equivalent regulatory oversight to securities exchanges in Canada and the United States and the listing requirements to be complied with by the Dublin iShares Funds are consistent with the TSX listing requirements.
42. The investment structure of the Dublin iShares Funds, which consists of investments in underlying securities and the ability to invest in derivative instruments as an ancillary investment strategy and not as the primary means to track the performance of the applicable index, is similar to the investment structure of the Canadian iShares Funds and U.S. iShares Funds that meet the definition of index mutual fund in NI 81-102.
43. The index tracked by a Dublin iShares Fund is transparent, in that the methodology for the selection and weighting of index components is publicly available. Details of the components of the index tracked by a Dublin iShares Fund, such as issuer name, ISIN and weighting within the index, are publicly available by the applicable index provider and updated from time to time or when requested of the applicable index provider. In addition, the index tracked by a Dublin iShares Fund will include sufficient component securities so as to be broad based and is distributed and referenced sufficiently so as to be broadly utilized.
44. Each Dublin iShares Fund will make the net asset value of its holdings available to the public through at least one price information system associated with the stock exchange on which it is listed. The amount of a loss that could result from an investment by a Fund in a Dublin iShares Fund is limited to the amount invested by the Fund in such Dublin iShares Fund.
45. The Filer considers that investments in Dublin iShares Funds provide a very cost effective way to obtain exposure to the markets and asset classes in which the Dublin iShares Funds invest and in which the investment objectives and strategies of the Funds may contemplate investment.
46. The Filer considers that investments in Dublin iShares Funds would enable the Funds to obtain tax-efficient exposure to international investments by avoiding a 'layer' of withholding tax. In general, an existing iShares Fund that is exposed to non-North American income-generating investments and U.S fixed income investments via holdings in securities of U.S. iShares Funds could be subject to an extra level of withholding tax which could be avoided if a Fund was able to invest directly in securities of one or more Dublin iShares Funds. The first level of withholding tax could be applied by the country of origin and the second by the Internal Revenue Service when the U.S. iShares Fund pays a distribution to its unitholders, including the existing iShares Fund. The second level of withholding tax could be avoided if a Fund was able to invest directly in the securities of one or more Dublin iShares Funds.
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 under the Legislation is that the Exemption Sought is granted provided that:
a) the investment by a Fund in securities of a Dublin iShares Fund is in accordance with the fundamental investment objectives of the Fund;
b) none of the Dublin iShares Funds are "synthetic ETFs", meaning that they will not principally rely on an investment strategy that makes use of swaps or other derivatives to gain an indirect financial exposure to the return of an index;
c) the relief from paragraphs 2.5(2)(e) and (f) of NI 81-102 will only apply to brokerage fees incurred for the purchase or sale of Dublin iShares Funds;
d) the prospectus of each Fund discloses the fact that the Fund has obtained relief to invest in Dublin iShares Funds;
e) a Fund shall not invest more than 10% of its net asset value in securities issued by a single Dublin iShares Fund or invest more than 20% of its net asset value in securities issued by Dublin iShares Funds in aggregate; provided, however, that a Fund may invest all or substantially all of its assets in securities of one Dublin iShares Fund if the Fund names such Dublin iShares Fund in its investment objectives;
f) any Funds shall not acquire any additional securities of a Dublin iShares Fund, and shall dispose of any securities of a Dublin iShares Fund then held, in the event that the regulatory regime applicable to the Dublin iShares Fund is changed in any material way; and
g) the Exemption Sought will terminate six months after the coming into force of any amendments to paragraphs 2.5(a), (c), (e) or (f) of NI 81-102 that restrict or regulate a Fund's ability to invest in Dublin iShares Funds.
"Darren McKall"
Manager, Investment Fund Branch
Ontario Securities Commission
{1} In this respect a Dublin iShares Fund is like a class of a Canadian corporate class mutual fund but has the benefit of segregated liability.
APPENDIX "A"
Dublin iShares Funds
iShares Barclays Emerging Market Local Govt Bond
iShares Barclays Euro Aggregate Bond
iShares Barclays Euro Corporate Bond
iShares Barclays Euro Corporate Bond ex-Financials
iShares Barclays Euro Corporate Bond ex-Financials 1-5
iShares Barclays Euro Government Bond 1-3
iShares Barclays Euro Government Bond 3-5
iShares Barclays Global Inflation-Linked Bond
iShares EURO STOXX 50
iShares EURO STOXX Select Dividend 30
iShares FTSE 100
iShares J.P. Morgan $ Emerging Markets Bond Fund
iShares Markit iBoxx $ Corporate Bond
iShares Markit iBoxx $ High Yield Capped Bond
iShares Markit iBoxx £ Corporate Bond
iShares Markit iBoxx £ Corporate Bond ex-Financials
iShares Markit iBoxx Euro Corporate Bond
iShares Markit iBoxx Euro High Yield Bond
iShares MSCI Europe
iShares MSCI Europe ex-UK
iShares STOXX Europe 50
iShares Barclays EM Asia Local Govt Capped Bond
iShares Barclays Euro Corporate Bond 1-5
iShares Citigroup Global Government Bond
iShares DJ Asia/Pacific Select Dividend 30
iShares Dow Jones Emerging Markets Select Dividend
iShares FTSE EPRA/NAREIT Asia Property Yield Fund
iShares FTSE EPRA/NAREIT Developed Markets Property Yield Fund
iShares FTSE EPRA/NAREIT UK Property Fund
iShares FTSE UK Dividend Plus
iShares FTSE/EPRA European Property Index Fund
iShares Morningstar $ Emerging Markets Corporate Bond
iShares MSCI Emerging Markets
iShares MSCI World