Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from subsection 2.1(1) and paragraphs 2.2(1)(a), 2.5(2)(a), 2.5(2)(e) and 2.5(2)(f) of NI 81-102 to allow certain conventional open-end mutual funds and ETFs to invest without restriction in ETFs under common management or managed by an affiliate, and to allow the top funds to pay brokerage commissions for the purchase and sale of the securities of the underlying ETFs -- Relief needed because underlying ETFs are mutual funds that do not file a simplified prospectus under NI 81-101 and are not index participation units eligible for exemptions under the rule -- Underlying ETFs are subject to NI 81-102, are not commodity pools under NI 81-104, and do not rely on any exemptive relief from the restrictions regarding the purchase of physical commodities, the use of derivatives and the use of leverage -- Top funds to apply "look-through" requirement in subsections 2.1(3) and (4) to each investment in securities of an Underlying ETF.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.2(1)(a), 2.5(2)(a), 2.5(2)(e), 2.5(2)(f).

July 21, 2014

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) AND IN THE MATTER OF THE TOP FUNDS (as defined below)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) granting an exemption to the existing mutual funds listed at Schedule "A" (the Existing Top Funds) and such mutual funds that may be managed by the Filer or its affiliates in the future (the Future Top Funds, and together with the Existing Top Funds, the Top Funds and individually, a Top Fund) that are subject to National Instrument 81-102 -- Mutual Funds (NI 81-102) from the following prohibitions in NI 81-102 (the Exemption Sought):

(a) subsection 2.1(1) of NI 81-102 (the Concentration Restriction), to permit each Top Fund to purchase a security of an Underlying ETF (as defined below) or enter into a specified derivatives transaction with respect to an Underlying ETF even though, immediately after the transaction, more than 10 percent of the net asset value of the Top Fund would be invested, directly or indirectly, in the securities of the Underlying ETF;

(b) paragraph 2.2(1)(a) of NI 81-102 to permit each Top Fund to purchase securities of an Underlying ETF such that, after the purchase, the Top Fund would hold securities representing more than 10 percent of:

(i) the votes attaching to the outstanding voting securities of the Underlying ETF; or

(ii) the outstanding equity securities of the Underlying ETF;

(c) paragraph 2.5(2)(a) of NI 81-102, to permit each Top Fund to invest in exchange traded mutual funds that are not subject to 81-101 -- Mutual Fund Prospectus Disclosure (NI 81-101);

(d) paragraphs 2.5(2)(e) and 2.5(2)(f) of NI 81-102, to permit each Top Fund to pay brokerage commissions in relation to its purchase and sale on a recognized exchange of exchange traded mutual funds that are managed by the Filer or an affiliate of the Filer.

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

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

(b) the Filer has provided notice that paragraph 4.7(1)(c) 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 and Labrador, Yukon, Northwest Territories and Nunavut.

Interpretation

Terms defined in National Instrument 14-101 -- Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

The Filer

1. The Filer is a corporation formed by amalgamation pursuant to articles of amalgamation dated November 1, 2010 under the federal laws of Canada. The head office of the Filer is located in Toronto, Ontario.

2. The Filer or an affiliate of the Filer acts or will act as the investment fund manager of the Top Funds.

3. None of the Filer, the existing Top Funds or the Existing Underlying ETFs (as defined below), is in default of any of its obligations under the securities legislation of any of the provinces and territories of Canada.

The Top Funds

4. The Top Funds are, or will be, open-ended mutual funds organized and governed by the laws of a jurisdiction of Canada.

5. The Top Funds are, or will be, governed by the provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities.

6. Each Top Fund distributes, or will distribute, securities pursuant to a simplified prospectus prepared pursuant to National Instrument 81-101 Investment Fund Distributions (NI 81-101) and Form NI 81-101F1 Contents of Simplified Prospectus or a long form prospectus prepared pursuant to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and Form 41-101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2).

7. The Top Funds are, or will be, reporting issuers in the provinces and territories of Canada in which their securities are distributed.

8. Each Top Fund wishes to have the ability to invest up to 100% of its net asset value in the exchange traded mutual funds whose units are not index participation units (the Existing Underlying ETFs) listed in Schedule "B" and other exchange traded mutual funds that may be established and managed by the Filer or an affiliate of the Filer in the future (the Future Underlying ETFs and, together with the Existing Underlying ETFs, the Underlying ETFs or individually, an Underlying ETF).

9. Each investment by a Top Fund in securities of an Underlying ETF will be made in accordance with the fundamental investment objectives of the Top Fund and will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund.

10. The Top Funds do not, and will not, sell short securities of any Underlying ETF.

11. Each Top Fund is not, and will not be, a commodity pool governed by National Instrument 81-104 Commodity Pools (NI 81-104).

12. No Top Fund has, or will have, a net market exposure greater than 100% of its net asset value.

The Underlying ETFs

13. The Filer, or an affiliate of the Filer acts, or will act, as the investment fund manager of each Underlying ETF.

14. Each Underlying ETF is, or will be:

(a) an open-ended mutual fund, subject to NI 81-102 and NI 41-101, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities;

(b) a reporting issuer in the provinces and territories of Canada in which its securities are distributed; and

(c) listed on the Toronto Stock Exchange (the TSX) or another "recognized exchange" in Canada as that term is defined in securities legislation.

15. Each Underlying ETF distributes, or will distribute, its securities pursuant to a long form prospectus prepared pursuant to Form 41-101F2.

16. Each Underlying ETF does not or will not, at the time securities of that Underlying ETF are acquired by a Top Fund, hold more than 10 percent of its net asset value in securities of any other mutual fund other than the securities of a money market fund or a mutual fund that issues index participation units.

17. The Underlying ETFs do not or will not issue "index participation units" as defined in NI 81-102.

18. Each Underlying ETF does not, or will not, pay management or incentive fees which to a reasonable person would duplicate a fee payable by the Top Fund for the same service.

19. If the investment fund manager of a Top Fund (the Top Fund Manager) determines that the management fees and incentive fees payable by an Underlying ETF to its investment fund manager (the Underlying ETF Manager) would duplicate a fee payable by the Top Fund for the same service, the Underlying ETF Manager will pay a management fee rebate to the Top Fund that will not exceed the management fee payable by the Top Fund to the Top Fund Manager in respect of the Top Fund's investment in the Underlying ETF.

20. Holders of securities of an Underlying ETF may:

(a) sell securities of the Underlying ETF on the TSX or another recognized exchange in Canada on which the securities are listed for trading;

(b) redeem securities of the Underlying ETF in any number for cash at a redemption price equal to 95% of the net asset value of the security of the Underlying ETF on the effective day of redemption; or

(c) exchange a prescribed number of securities (e.g., units) (a PNU) of the Underlying ETF for cash and/or securities equal to the net asset value of each security of the Underlying ETF tendered for exchange.

21. Each Underlying ETF is not, or will not be, a commodity pool governed by NI 81-104.

22. No Underlying ETF has, or will have, a net market exposure greater than 100% of its net asset value.

23. The Existing Underlying ETFs primarily achieve, and any Future Underlying ETFs will primarily achieve, their investment objectives through direct holdings of cash and securities and, in some circumstances, through investment in specified derivatives for hedging and non-hedging purposes, in accordance with their investment objectives and strategies and the requirements of NI 81-102.

24. All brokerage costs related to trades in securities of an Underlying ETF by a Top Fund will be borne by the Top Funds in the same manner as any other portfolio transaction made on an exchange.

25. Each Top Fund is, or will be, subject to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) including in respect of conflicts of interest matters arising from trades in securities of an Underlying ETF.

26. If a Top Fund makes a trade in securities of an Underlying ETF with or through an affiliate or associate of the Filer acting as dealer, the Filer will comply with its obligations under NI 81-107 Independent Review Committee for Investment Funds in respect of any proposed related party transactions. All such related party transactions will be disclosed to securityholders of the applicable Top Fund in its management report of fund performance.

Reasons for the Exemption Sought

27. An investment in an Underlying ETF by a Top Fund is an efficient and cost effective alternative to administering one or more investment strategies directly.

28. Absent the Exemption Sought, an investment by a Top Fund in an Underlying ETF would be restricted by the concentration restriction in subsection 2.1(1) of NI 81-102 to no more than 10% of the net asset value of the Top Fund. Due to the potential size disparity between the various Top Funds and the Underlying ETFs, it is possible that a relatively small investment, on a percentage of net asset value basis, by a relatively large Top Fund in a relatively small Underlying ETF could result in that Top Fund holding securities representing more than 10% of (i) the votes attaching to the outstanding voting security of an Underlying ETF, or (ii) the outstanding equity securities of that Underlying ETF, contrary to the control restriction in paragraph 2.2(1)(a) of NI 81-102.

29. Absent the Exemption Sought, an investment by a Top Fund in securities of an Underlying ETF would be prohibited by paragraph 2.5(2)(a) of NI 81-102 solely because the Underlying ETF is not governed by NI 81-101.

30. Absent the Exemption Sought, an investment by a Top Fund in securities of an Underlying ETF would not qualify for the exemptions in

(a) paragraph 2.1(2)(d) of NI 81-102 from paragraph 2.1(1) of NI 81-102;

(b) paragraph 2.2(1.1)(b) of NI 81-102 from paragraph 2.2(1)(a) of NI-81-102; and

(c) subsection 2.5(3) of NI 81-102 from paragraph 2.5(2)(a) of NI 81-102;

because the securities of the Underlying ETF would not be index participation units.

31. The only material difference between the securities of an Underlying ETF and the securities of any other mutual fund governed by NI 81-102 is the method of distribution. If the Exemption Sought is granted, the Top Funds will be permitted to purchase securities of a mutual fund that is listed on the TSX or another recognized exchange in Canada in the same manner that they are permitted to invest in securities of a mutual fund that is not listed on such an exchange.

32. It is anticipated that many of the trades conducted by a Top Fund will not be of the size necessary for the Top Fund to be eligible to purchase or redeem a PNU of an Underlying ETF directly from or to the Underlying ETF, as applicable. As a result, it is anticipated that many of the trades in securities of an Underlying ETF by a Top Fund will be conducted in the secondary market through the TSX or another recognized exchange in Canada.

33. Absent the Exemption Sought, when a Top Fund buys or sells securities of an Underlying ETF on the TSX or another recognized exchange in Canada, paragraphs 2.5(2)(e) and 2.5(2)(f) of NI 81-102 would not permit the Top Fund to pay any brokerage fees incurred in connection such a trade.

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) a Top Fund does not short sell securities of an Underlying ETF;

(b) the Underlying ETF does not rely on exemptive relief from:

(i) the requirements of section 2.3 of NI 81-102 regarding the purchase of physical commodities;

(ii) the requirements of sections 2.7 and 2.8 of NI 81-102 regarding the purchase, sale or use of specified derivatives; or

(iii) subsections 2.6(a) or 2.6(b) of NI 81-102 with respect to the use of leverage.

(c) each Top Fund and each Underlying ETF is not a commodity pool governed by NI 81-104 and neither the Top Funds nor the Underlying ETFs will use leverage;

(d) in connection with the relief from subsection 2.1(1) under this decision allowing a Top Fund to invest more than 10% of its net asset value in the securities of an Underlying ETF, the Top Fund shall, for each investment it makes in securities of an Underlying ETF, apply subsections 2.1(3) and 2.1(4) of NI 81-102 as if those provisions applied to a Top Fund's investments in securities of an Underlying ETF, and accordingly limit a Top Fund's indirect holdings in securities of an issuer held by one or more Underlying ETFs to no more than 10% of the Top Fund's net asset value;

(e) the relief from paragraphs 2.5(2)(e) and 2.5(2)(f) will only apply to the brokerage fees incurred for the purchase and sale of securities of Underlying ETFs by the Top Funds; and

(f) the prospectus of each Top Fund that relies on the relief discloses, or will disclose the next time it is renewed after the date of this decision, the fact that the Top Funds have obtained the Exemption Sought to permit the relevant transactions on the terms described in this decision.

"Raymond Chan"
Manager, Investment Funds and Structured Products
Ontario Securities Commission

 

SCHEDULE "A"

EXISTING TOP FUNDS

RBC Funds
RBC Private Pools
RBC Corporate Class Funds
RBC ETFs
RBC Institutional Cash Funds
PH&N Funds
PH&N Pension Trusts

 

SCHEDULE "B"

EXISTING UNDERLYING ETFs

RBC Quant Canadian Dividend Leaders ETF
RBC Quant U.S. Dividend Leaders ETF
RBC Quant EAFE Dividend Leaders ETF