Securities Law & Instruments

Headnote

NP 11-203 -- Exemptive relief granted to exchange-traded funds for initial and continuous distribution of units, including: relief to permit the funds' prospectus to not contain an underwriter's certificate and relief from take-over bid requirements in connection with normal course purchases of units on the Toronto Stock Exchange subject to undertaking by unitholders not to exercise any votes attached to units which represent more than 20% of the votes attached to all outstanding units of the funds -- Securities Act (Ontario).

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 59(1), 95-100, 104(2)(c), 147.

September 7, 2011

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 GLOBAL ASSET MANAGEMENT INC.

(the Filer or RBC GAM)

AND

RBC TARGET 2013 CORPORATE BOND ETF

RBC TARGET 2014 CORPORATE BOND ETF

RBC TARGET 2015 CORPORATE BOND ETF

RBC TARGET 2016 CORPORATE BOND ETF

RBC TARGET 2017 CORPORATE BOND ETF

RBC TARGET 2018 CORPORATE BOND ETF

RBC TARGET 2019 CORPORATE BOND ETF

RBC TARGET 2020 CORPORATE BOND ETF

(the Existing Funds)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Existing Funds and such other exchange-traded funds as the Filer, or an affiliate of the Filer, may establish in the future (together with the Existing Funds, the Funds) for a decision (the Exemption Sought) under the securities legislation (the Legislation) of the Jurisdictions (as defined below) for exemptive relief from:

(a) the requirement to include a certificate of the Underwriters in the prospectus of the Funds; and

(b) the Take-Over Bid Requirements (as defined below) in connection with the purchases of units of the Funds (Units) in the normal course through the facilities of the Toronto Stock Exchange (TSX).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission (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 is intended to be relied upon in all of the provinces and territories of Canada other than Ontario (together with Ontario, the Jurisdictions).

Interpretation

Basket of Securities means, in relation to a Fund, a group of securities determined by RBC GAM from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.

Designated Brokers means registered brokers and dealers that enter into agreements with the Funds to perform certain duties in relation to the Funds and Designated Broker means any one of them.

Prescribed Number of Units means, in relation to a Fund, the number of Units of the Fund determined by RBC GAM from time to time for the purpose of subscription orders, exchanges, redemptions or for such other purposes as RBC GAM may determine.

Take-Over Bid Requirements means the requirements of the Legislation relating to take-over bids, as set out in Schedule B, including the requirement to file a report of a take-over bid and the accompanying fee in each Jurisdiction.

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.

Unitholders means beneficial and registered holders of Units.

Terms defined in National Instrument 14-101 -- Definitions (NI 41-101) or in National Instrument 81-102 -- Mutual Funds have the same meaning in this decision as in NI 41-101 or NI 81-102. Certain other defined terms have the meanings given to them below under Representations.

Representations

This decision is based on the following facts represented by the Filer:

(a) The Filer is a corporation organized under the federal laws of Canada, with a head office in Ontario.

(b) Each Fund is, or will be, a mutual fund governed by the laws of the Province of Ontario and a reporting issuer under the laws of all of the Jurisdictions.

(c) Each Fund is, or will be, subject to NI 81-102, subject to any exemptions therefrom that may be granted by securities regulatory authorities.

(d) Units of each Fund will be listed on the TSX or another stock exchange recognized by the OSC. RBC GAM has applied to list the Units of each Fund on the TSX.

(e) Each of the Funds has, or will have, an investment objective to replicate, to the extent possible, the performance of a specified index (the Index), net of expenses. In meeting its investment objective, a Fund holds, or will hold, the securities of the constituent issuers of the applicable Index.

(f) RBC GAM or its affiliate will act as the trustee, investment fund manager and portfolio adviser to the Funds. RBC GAM is registered as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer under the securities legislation of each of the Jurisdictions and is registered under the Securities Act (Ontario) as an investment fund manager.

(g) RBC GAM is an indirect, wholly-owned subsidiary of the Royal Bank of Canada.

(h) Units may only be subscribed for or purchased directly from the Funds by Underwriters or Designated Brokers 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. Under Designated Broker and Underwriter agreements, the Designated Brokers and Underwriters agree to offer Units for sale to the public only as permitted by applicable Canadian securities legislation, which require a prospectus to be delivered to purchasers buying Units as part of a distribution. Designated Brokers and Underwriters will deliver a copy of the prospectus of the Funds to the first purchasers of Units in the distribution on the TSX.

(i) 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.

(j) Each Underwriter or Designated Broker that subscribes for Units must deliver, in respect of each Prescribed Number of Units to be issued, a Basket of Securities and cash in an amount sufficient so that the value of the Basket of Securities and cash delivered is equal to the net asset value of the Units subscribed for next determined following the receipt of the subscription order. In the discretion of RBC GAM, the Funds may also accept cash only subscriptions for Units in an amount equal to the net asset value of the Units subscribed for next determined following the receipt of the subscription order.

(k) All subscriptions and redemptions for Units may be submitted on any day on which there is a trading session on the TSX and will settle by the third day after that date.

(l) The net asset value per Unit of each Fund will be calculated and published by RBC GAM on any day when there is a trading session of the TSX and will be made available at www.rbcgam.com/etfs.

(m) Neither the Underwriters nor the Designated Brokers will receive any fees or commissions in connection with the issuance of Units to them. RBC GAM may, at its discretion, charge an administration fee on the issuance of Units to the Designated Brokers or Underwriters.

(n) Except as described 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.

(o) 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 of Securities and cash. Unitholders may also redeem their Units directly from the Funds for cash at a redemption price equal to 95% of the net asset value of the Units on the date of redemption.

(p) As trustee, investment fund manager and portfolio adviser to the Funds, RBC GAM will be entitled to receive a management fee from each Fund. Such annual fee is calculated as a fixed percentage of the net asset value of each Fund. As investment fund manager, RBC GAM is responsible for all costs and expenses of the Funds except the fees and expenses payable by the Funds, which are the management fee, fees and expenses incurred in complying with National Instrument 81-107 Independent Review Committee for Investment Funds, including the fees payable and expenses reimbursed to members of the Board of Governors, brokerage expenses and commissions, income tax, GST, HST, withholding and other taxes, the costs of complying with any new governmental or regulatory requirement introduced after the Fund was established and extraordinary expenses.

(q) Unitholders of a Fund will have the right to vote at a meeting of Unitholders of the Fund prior to any change in the fundamental investment objectives of the Fund; any change to their voting rights; the introduction of a fee or expenses to be charged to the Fund or to Unitholders; a change in the basis of the calculation of a fee or expenses charged to the Fund or Unitholders where such change could result in an increase in the amount of fees or expenses payable by the Fund or Unitholders; and in certain other circumstances as described in the Preliminary Prospectus.

(r) Although Units will trade on the TSX and the acquisition of Units can therefore be subject to the Take-Over Bid Requirements:

(i) it will not be possible for one or more Unitholders to exercise control or direction over a Fund as the constating document of the Funds will ensure that there can be no changes made to the Fund which do not have the support of RBC GAM;

(ii) it will be difficult for purchasers of Units to monitor compliance with Take-Over Bid Requirements because the number of outstanding Units will always be in flux as a result of the ongoing issuance and redemption of Units by the Funds; and

(iii) the way in which Units will be priced deters anyone from either seeking to acquire control, or offering to pay a control premium, for outstanding Units because Unit pricing will generally reflect the net asset value of the Funds.

(s) The application of the Take-Over Bid Requirements to the Funds would have an adverse impact upon Unit liquidity because they could cause Underwriters, Designated Brokers and other large Unitholders to cease trading Units once prescribed take-over bid thresholds are reached. This, in turn, could serve to provide conventional mutual funds with a competitive advantage over the 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 such that:

1. in connection with the distribution of Units of a Fund pursuant to a prospectus or any renewal prospectus, the Fund is exempt from the requirement of the Legislation that the prospectus or renewal prospectus contain a certificate of the Underwriters; and

2. the purchase of Units by a person or company (a Unit Purchaser) in the normal course through the facilities of the TSX is exempt from the Take-over Bid Requirements for so long as the Funds remain exchange-traded funds, provided that, prior to making any take-over bid for Units that are not otherwise exempt from the Take-over Bid Requirements, the Unit Purchaser, and any person or company acting jointly or in concert with the Unit Purchaser (a Concert Party), provide RBC GAM, as trustee, investment fund manager and portfolio advisor of the Funds, with an undertaking not to exercise any votes attached to the Units held by the Unit Purchaser and any Concert Party which represent more than 20% of the votes attached to all outstanding Units.

"Christopher Portner"
Commissioner
Ontario Securities Commission
 
"Mary G. Condon"
Vice-Chair
Ontario Securities Commission