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RBC Global Asset Management Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Existing and future mutual funds granted relief to invest in specified ETFs whose securities would meet the definition of index participation unit under NI 81-102 but for the fact that they are listed on the London Stock Exchange (London iShares ETFs) -- relief is subject to certain conditions and requirements including that none of the London iShares ETFs are synthetic ETFs and that each top fund will not invest more than 10% of its net asset value in any single London iShares ETF and will not invest more than 20% in London iShares ETFs in the aggregate.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(a), (a.1) (c) and (c.1), and 19.1.
June 26, 2018
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. (RBC GAM)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from RBC GAM on behalf of each of the investment funds (each a Fund and collectively, the Funds) for which RBC GAM or an affiliate (the Filer) acts or may in the future act as manager that are subject to National Instrument 81-102 Investment Funds (NI 81-102), for a decision under the securities legislation of the jurisdiction of the principal regulator (the Legislation) providing an exemption from paragraphs 2.5(2)(a), (a.1), (c) and (c.1) of NI 81-102, to permit the Funds to invest in securities of one or more exchange traded funds (the London iShares ETFs) listed on the London Stock Exchange 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 qualify as "index participation units" (IPU) as defined in NI 81-102 (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the application; and
(b) the Filer has provided notice that Subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 81-102 have the same meanings if used in this decision unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
RBC GAM, the Filer, and the Funds
1. RBC GAM is a corporation formed by amalgamation under the federal laws of Canada and its head office is located in Toronto, Ontario.
2. RBC GAM is an indirect, wholly-owned subsidiary of the Royal Bank of Canada.
3. 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, as an investment fund manager in British Columbia, Newfoundland and Labrador, Ontario and Québec, and as a commodity trading manager in Ontario.
4. The Filer acts, or will act, as manager of each of the Funds.
5. Each Fund is, or will be, an investment fund under the laws of a Jurisdiction of Canada and a reporting issuer under the laws of some or all of the Jurisdictions.
6. Each Fund is, or will be, governed by NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.
7. The securities of each Fund are, or will be, qualified for distribution in some or all of the Jurisdictions under a prospectus or simplified prospectus.
8. Neither the Filer nor any of the existing Funds are in default of securities legislation in any of the Jurisdictions.
The London iShares ETFs
9. Each Fund proposes, from time to time, to invest up to 10% of its net asset value in securities of a single London iShares ETF. At no time will a Fund invest more than 20% of its net asset value in securities issued by London iShares ETFs in aggregate.
10. Each London iShares ETF is, or will be, a portfolio, with segregated liability, of an umbrella open-ended investment company with variable capital. Such investment company is incorporated with limited liability in Ireland and is authorized by the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended (the UCITS Regulations). Each London iShares ETF therefore is, or will be, a "UCITS" and will therefore comply with UCITS requirements.
11. The investment objective of a London iShares ETF is, or will be, to provide investors with a total return, taking into account both capital and income returns, which reflects the returns of the applicable index which would be a "permitted index" within the meaning of NI 81-102.
12. Securities of each London iShares ETF are, or will be, listed on the London Stock Exchange (the LSE). The securities of a London iShares ETF may also be listed on more or more additional stock exchanges.
13. The UK Financial Conduct Authority, in its role as the UK Listing Authority (UKLA), is the regulator for the LSE. The UKLA has the responsibility for overseeing the admission process to the LSE.
14. The LSE is subject to substantially equivalent regulatory oversight to securities exchanges in Canada and the requirements to be complied with by the London iShares ETFs in order to be admitted to trading on the LSE are consistent with the Toronto Stock Exchange listing requirements.
15. Each London iShares ETF is, or will be, an "investment fund" and a "mutual fund" within the meaning of applicable Canadian securities legislation.
16. Securities of each London iShares ETF would be IPUs within the meaning of NI 81-102, but for the fact that they are not traded on a stock exchange in Canada or the United States.
17. Each London iShares ETF will either: (a) hold securities that are included in a specified widely-quoted market index in substantially the same proportion as those securities are reflected in that index; or (b) invest in a manner that causes the issuer to replicate the performance of that index.
18. BlackRock Asset Management Ireland Limited is the manager of the London iShares ETFs and has responsibility for the management and administration and overall oversight of all service providers and other delegates and for the investment and reinvestment of assets of the London iShares ETFs. BlackRock Asset Management Ireland Limited is not an affiliate or associate of the Filer.
19. BlackRock Advisors (UK) Limited is the investment manager and has responsibility for the investment and reinvestment of assets held by the London iShares ETFs.
20. The following third parties are currently involved in providing services in respect of the existing London iShares ETFs:
(a) State Street Fund Services (Ireland) Limited is the administrator and registrar;
(b) State Street Custodial Services (Ireland) Limited is the depository of the London iShares ETFs; and
(c) PricewaterhouseCoopers are the auditors and reporting accountant.
21. The London iShares ETFs are, or will be, regulated by the Central Bank of Ireland and are, or will be, subject to the following regulatory requirements and restrictions:
(a) Each London iShares ETF is subject to a robust risk management framework through prescribed rules on governance, risk, regulation of service providers and safekeeping of assets.
(b) No London iShares ETF is a "synthetic ETF", meaning that no London iShares ETF will 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) Each London iShares ETF is restricted to investments permitted by the UCITS Regulations and/or authorized by the Central Bank of Ireland.
(d) Each London iShares ETF is subject to investment restrictions generally designed to limit holdings of illiquid securities which are not listed on a stock exchange or regulated market to 10% or less of its net asset value. In addition, a London iShares ETF will hold no more than 10% of its net asset value in securities of other investment funds, including other collective investment undertakings.
(e) Each London iShares ETF 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. Any use of derivatives is also subject to the oversight of, and requires prior approval from, the Central Bank of Ireland.
(f) Each London iShares ETF has procedures in place relating to the use of derivatives and risk modelling of derivative positions.
(g) Each London iShares ETF may enter into securities lending, repurchase and/or reverse repurchase agreements for the purposes of efficient portfolio management subject to the conditions and limits set out in the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 (as the same may be amended or replaced) and in accordance with the requirements of the Central Bank of Ireland.
(h) Each London iShares ETF has a prospectus that discloses material facts and that is similar to the disclosure required to be included in a prospectus or simplified prospectus of a Fund.
(i) Each London iShares ETF has a key investor information document which forms part of the prospectus and a factsheet which together contain disclosure similar to that required to be included in an ETF Facts document prepared under National Instrument 41-101 General Prospectus Requirements.
(j) Each London iShares ETF is subject to continuous disclosure obligations which are similar to the disclosure obligations under National Instrument 81-106 Investment Fund Continuous Disclosure, including the requirement to prepare unaudited semi-annual reports and audited annual reports.
(k) Each London iShares ETF is required to update information of material significance in the prospectus.
(l) Each London iShares ETF has an investment manager that is subject to a governance framework which sets out a duty of care and a standard of care requiring the management board of the investment manager to act in the best interest of unitholders.
22. Each index tracked by each London iShares ETF is, or will be, transparent, in that the methodology for the selection and weighting of index components is, or will be, publicly available.
23. Details of the components of each index tracked by each London iShares ETF, such as issuer name, ISIN and weighting of index components are, or will be, publicly available and updated from time to time.
24. Each index tracked by each London iShares ETF includes sufficient component securities so as to be broad-based and is distributed and referenced sufficiently so as to be broadly utilized.
25. Each London iShares ETF makes, or will make, the net asset value of its holdings available to the public through at least one price information system associated with the London Stock Exchange. Each London iShares ETF makes, or will make, its net asset value available to the public on the website of its manager.
Investment by Funds in London iShares ETFs
26. The investment objective and strategies of each Fund will be disclosed in each Fund's prospectus or simplified prospectus.
27. The Funds will provide all disclosure mandated for investment funds investing in other investment funds.
28. There will be no duplication of management fees or incentive fees as a result of an investment by a Fund in a London iShares ETF.
29. The amount of loss that could result from an investment by a Fund in a London iShares ETF will be limited to the amount invested by the Fund in such London iShares ETF.
30. The majority of trading in securities of the London iShares ETFs occurs in the secondary market rather than by subscribing or redeeming such securities directly from the London iShares ETF.
31. As is the case with the purchase or sale of any other equity security made on an exchange, brokers are typically paid a commission in connection with trading in securities of exchange-traded funds, such as the London iShares ETFs.
32. Securities of the London iShares ETFs are typically only directly subscribed or redeemed from a London iShares ETF in large blocks and it is anticipated that many of the trades conducted by the Funds in London iShares ETFs would not be the size necessary for a Fund to be eligible to directly subscribe for securities from the London iShares ETF.
33. It is proposed that the Funds will purchase and sell securities of the London iShares ETFs on the London Stock Exchange.
34. Where a Fund purchases or sells securities of a London iShares ETF in the secondary market, it will pay commissions to brokers in connection with the purchase and sale of such securities.
35. There will be no duplication of fees payable by an investor in the Funds and the Filer will ensure that there are appropriate restrictions on sales fees and redemption charges for any purchase or sale of securities of a London iShares ETF.
Rationale for Investment in London iShares ETFs
36. A Fund is not permitted to invest in securities of a London iShares ETF unless the requirements of subsection 2.5(2) of NI 81-102 are satisfied.
37. If securities of a London iShares ETF were IPUs within the meaning of NI 81-102, a Fund would be permitted by subsections 2.5(3), (4) and (5) of NI 81-102 to invest in securities of that London iShares ETF.
38. Securities of each London iShares ETF would be IPUs, but for the requirement in the definition of IPU that the securities be traded on a stock exchange in Canada or the United States.
39. The Filer considers that investments in a London iShares ETF provide an efficient and cost-effective way for the Funds to achieve diversification and obtain exposure to the markets and asset classes in which the London iShares ETFs invest.
40. The investment objectives and strategies of each Fund, which contemplate or will contemplate investment in global or international securities, permit or will permit the allocation of assets to global or international securities. As economic conditions change, the Funds may reallocate assets, including on the basis of asset class or geographic region. A Fund will invest in the London iShares ETFs to gain exposure to certain unique equity and fixed income strategies in global or international markets in circumstances where it would be in the best interests of the Fund to do so through exchange-traded funds rather than through investments in individual securities. For example, a Fund will invest in the London iShares ETF in circumstances where certain investment strategies preferred by the Fund are either not available or are not cost-effective to be implemented through investments in individual securities.
41. The Filer is not aware of any mutual fund that:
(a) is subject to NI 81-102;
(b) issues securities that are traded on a Canadian or U.S. stock exchange; and
(c) focuses primarily on the European bond market and is able to trade in local UK time (thereby providing for tighter and more relevant execution).
The Filer therefore believes that the London iShares ETFs will be able to provide the Funds with unique exposures.
42. By investing in the London iShares ETFs, the Funds will obtain the benefits of diversification, which would be more expensive and difficult to replicate using individual securities. This will reduce single issuer risk.
43. Investment by a Fund in a London iShares ETF meets, or will meet, the investment objectives of such Fund.
44. An investment by the Funds in securities of each London iShares ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Funds.
45. In the absence of the Exemption Sought:
(a) the investment restriction in paragraph 2.5(2)(a) of NI 81-102 would prohibit a Fund that is a mutual fund from purchasing or holding securities of a London iShares ETF because such London iShares ETF is not subject to NI 81-102 and neither would such London iShares ETF offer securities under a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (or a prospectus in accordance with National Instrument 41-101 General Prospectus Requirements) and, because IPUs are currently defined to be securities that are traded on a stock exchange in Canada or the United States only, a Fund would not be able to rely upon the IPU exemption set forth in paragraph 2.5(3)(a) of NI 81-102;
(b) the investment restriction in paragraph 2.5(2)(a.1) of NI 81-102 would prohibit a Fund that is a non-redeemable investment fund from purchasing or holding securities of a London iShares ETF because such London iShares ETF is not subject to NI 81-102 and neither would such London iShares ETF be a reporting issuer in any of the Jurisdictions and, because IPUs are currently defined to be securities that are traded on a stock exchange in Canada or the United States only, a Fund would not be able to rely upon the IPU exemption set forth in paragraph 2.5(3)(a) of NI 81-102; and
(c) the investment restrictions in paragraph 2.5(2)(c) and 2.5(2)(c.1) of NI 81-102 would prohibit a Fund that is a mutual fund and a Fund that is a non-redeemable investment fund, respectively, from purchasing or holding securities of the London iShares ETFs unless the London iShares ETFs are reporting issuers in the local Jurisdiction or in the Jurisdiction in which the Fund is a reporting issuer and, because IPUs are currently defined to be securities that are traded on a stock exchange in Canada or the United States only, a Fund would not be able to rely upon the IPU exemption in paragraph 2.5(3)(a) of NI 81-102.
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 the London iShares ETFs is in accordance with the fundamental investment objectives of the Fund;
(b) none of the London iShares ETFs 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 prospectus of each Fund that is relying on the Exemption Sought discloses the fact that the Fund has obtained relief to invest in the London iShares ETFs and, in the case of a Fund that is a mutual fund, the matters required to be disclosed under NI 81-101 in respect of fund of fund investments, provided that:
(i) any Fund that is a mutual fund and in existence as of the date of this decision makes the required disclosure no later than the next time the simplified prospectus of the Fund is renewed after the date of this decision, and
(ii) any Fund that is a non-redeemable investment fund and in existence as of the date of this decision makes the required disclosure no later than the next time the annual information form of the Fund is filed after the date of this decision;
(d) the investment by a Fund in the London iShares ETFs otherwise complies with section 2.5 of NI 81-102;
(e) a Fund does not invest more than 10% of its net asset value in securities issued by a single London iShares ETF and does not invest more than 20% of its net asset value in securities issued by London iShares ETFs in aggregate;
(f) a Fund shall not acquire any additional securities of a London iShares ETF, and shall dispose of any securities of a London iShares ETF then held in the event the regulatory regime applicable to the London iShares ETF 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), (a.1), (c) or (c.1) of NI 81-102 that further restrict or regulate a Fund's ability to invest in the London iShares ETFs.
"Darren McKall"
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission