Headnote National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions – Exemptive relief granted to exchange-traded funds for initial and continuous distribution of units. – 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 – Relief subject to sunset clause. – Securities Act (Ontario). Applicable Legislative Provisions Securities Act,R.S.O. 1990, c.S.5, as am., Sections 74(1), 95-100, 104(2)(c) and 147.
October 21, 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
VANGUARD INVESTMENTS CANADA INC.
(the Filer)
DECISION
Background
The principal regulator has received an application from the Filer under the securities legislation of the Jurisdiction (the Legislation) for a decision (the Exemption Sought) that:
(a) Exempts all purchasers of units (Units) of Vanguard Canadian Aggregate Bond Index ETF, Vanguard Canadian Short-Term Bond Index ETF, Vanguard MSCI Canada Index ETF, Vanguard MSCI U.S. Broad Market Index ETF (CAD-hedged), Vanguard MSCI EAFE Index ETF (CAD-hedged) and Vanguard MSCI Emerging Markets Index ETF (the Proposed Funds) and any additional exchange-traded funds of which the Filer, or an affiliate or associate of the Filer, may be the trustee and/or manager and which operate on a similar basis as the Proposed Funds (the Future Funds, which together with the Proposed Funds are collectively referred to as the Funds and each is singularly referred to as a Fund) from the requirements of the Legislation related to take-over bids, including the requirement to file a report of a take-over bid and to pay the accompanying fee with each applicable jurisdiction (the Take-over Bid Requirements) in respect of take-over bids for the Funds; and
(b) Exempts the Funds from the requirement that the prospectus of the Funds contain a certificate of the underwriter or underwriters who are in a contractual relationship with the Funds.
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 section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (collectively, the Passport Jurisdictions).
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.
Basket of Securities means (i) a group of the specific securities of the issuers included from time to time in the applicable Index (“Constituent Securities”) held, to the extent reasonably possible, in approximately the same proportion as they are reflected in the applicable Index; (ii) a broadly diversified subset of Constituent Securities and/or other securities selected by the sub-advisor of the applicable Fund from time to time that, in the aggregate, approximates the applicable Index in terms of primary risk factors and other key index characteristics; or (iii) securities of one or more Underlying Vanguard ETFs.
Designated Broker means a registered dealer that has entered into a designated broker agreement with the Filer, on behalf of one or more of the Funds, to perform certain duties in relation to the Funds.
Dealer means a registered broker or dealer that has entered into a continuous distribution dealer agreement with the Filer, on behalf of one or more of the Funds, and that subscribes for and purchases Units from the Funds.
Index means the benchmark or index that is used by a Fund in relation to that Fund’s investment objective.
Prescribed Number of Units means the number of Units of a Fund determined by the Filer from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.
Take-over Bid Requirements means the requirements of the Legislation relating to take-over bids, including the requirement to file a report of a take-over bid and to pay the accompanying fee, in each of the Jurisdiction and Passport Jurisdictions.
Underlying Vanguard ETF means an exchanged-traded share class of a fund managed by the Filer or an affiliate or associate of the Filer that either seeks to track the applicable Index or an unhedged version of the applicable Index or that has a similar investment objective or strategies.
Unitholders means beneficial or registered holders of Units, as applicable.
Units means the redeemable, transferable units of the Funds.
Representations
This decision is based on the following facts represented by the Filer:
The Funds will be mutual fund trusts governed by the laws of Ontario and will be reporting issuers under the laws of each of the Jurisdiction and Passport Jurisdictions. The Filer is not, and the Funds will not be, in default of securities legislation in any of the Jurisdiction or Passport Jurisdictions.
The Filer will apply to list the Units of the Proposed Funds on the Toronto Stock Exchange (TSX). The Filer will not file a final prospectus for any of the Funds until the TSX or another recognized stock exchange has conditionally approved the listing of Units.
The Filer will be a registered investment fund manager, portfolio manager and commodity trading manager in Ontario. The Filer will be the trustee and the manager of the Funds and will be responsible for the administration of the Funds.
The Filer is a wholly-owned indirect subsidiary of The Vanguard Group, Inc., which in turn is wholly-owned by approximately 35 U.S. registered investment companies that are part of the Vanguard family of mutual funds.
Each Fund will seek investment results that seek to track the performance of an Index, net of fees and expenses, by investing, directly or indirectly, in the securities that constitute, from time to time, the applicable Basket of Securities.
Generally, units of the Funds may only be subscribed for or purchased directly from the Funds by Designated Brokers or Dealers and orders may only be placed for Units in the Prescribed Number of Units (or a multiple thereof) on any day where there is a trading session on the TSX.
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 the Funds for the purpose of maintaining liquidity for the Units.
Each Designated Broker or Dealer that subscribes for Units agrees to deliver, in respect of each Prescribed Number of Units to be issued, a Basket of Securities and/or cash in an amount sufficient so that the value of the securities and/or the cash received is equal to the aggregate net asset value per Unit of the Prescribed Number of Units next determined following the receipt of the subscription order.
The net asset value per Unit of a Fund will be calculated and published daily on the Filer’s website.
The Filer may from time to time and, in any event not more than once quarterly, require a Designated Broker to subscribe for Units of a Fund in cash in an amount not to exceed 0.30% of the net asset value of the Fund or such other amount established by the Filer and disclosed in the prospectus of the Funds.
Neither the Designated Brokers nor the Dealers will receive any fee or commission in connection with the issuance of Units of the Funds to them. On the issuance of Units of a Fund, the Filer or the Fund may, in the Filer’s discretion, charge a fee to a Designated Broker or a Dealer to offset the expenses incurred in issuing the Units.
Except as described in paragraphs 6 through 11 above, Units may not be purchased directly from the Funds. Persons that are not Designated Brokers or Dealers are generally expected to purchase Units through the facilities of the TSX. However, Units may be issued directly to all Unitholders upon the reinvestment of distributions.
Unitholders that are not Designated Brokers or Dealers that wish to dispose of their Units may generally do so by selling their Units on the TSX, through a registered dealer, subject only to customary brokerage commissions. A Unitholder that holds a Prescribed Number of Units or a multiple thereof may exchange such Units for Baskets of Securities and/or cash, in the Fund’s discretion. Unitholders may also redeem their Units for cash at a redemption price equal to 95% of the closing price of the Units on the TSX on the effective date of redemption.
Unitholders will have the right to vote at a meeting of Unitholders in respect of the matters prescribed by National Instrument 81-102 Mutual Funds.
The Filer, on behalf of the Funds, may enter into various continuous distribution dealer agreements with registered dealers (that may or may not be Designated Brokers) pursuant to which the Dealers may subscribe for Units of one or more of the Funds. However, no Dealer would be involved in the preparation of the Funds’ prospectus and no Dealer would perform any review or any independent due diligence of the contents of the Funds’ prospectus. In addition, the Funds will not pay any commission to the Dealers. As the Dealers will not receive any remuneration for distributing Units and as the Dealers will change from time to time, it is not practical to provide an underwriters’ certificate in the prospectus of the Funds.
Although Units of the Funds will trade on the TSX and the acquisition of Units can therefore be subject to the Take-over Bid Requirements:
(a) it will not be possible for one or more Unitholders to exercise control or direction over a Fund as the declaration of trust of the Funds will provide that a person who holds (either alone or jointly with another person or persons) 20% or more of the Units of a Fund may not exercise any voting rights attached to Units that represent more than 20% of the votes attached to all outstanding Units of that Fund;
(b) it will be difficult for purchasers of Units of a Fund 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 each Fund; and
(c) the way in which Units of a Fund will be priced deters anyone from either seeking to acquire control, or offering to pay a control premium, for outstanding Units because Unit pricing for each Fund will be dependent upon the performance of the portfolio of the Fund as a whole.
The application of the Take-over Bid Requirements to the Funds would have an adverse impact on Unit liquidity because they could cause 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.
This decision shall not be construed as granting relief from any prospectus delivery requirement under the Legislation.
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 so long as a purchaser of Units of a Fund (Unit Purchaser), and any person or company acting jointly or in concert with the Unit Purchaser (a Concert Party), prior to making any take-over bid for Units of the Fund that is not otherwise exempt from the Take-over Bid Requirements, provides the Filer with an undertaking not to exercise any votes attached to the Units held by the Unit Purchaser and any Concert Party that represent more than 20% of the votes attached to the outstanding Units of the Fund.
This decision shall terminate on the earlier of (a) one year from the date of this decision and (b) an amendment to this decision that is agreed to by staff of the principal regulator and the Filer and that addresses the applicable prospectus delivery obligations.
“James Turner”
__________________________________
Name: James Turner
Title: Vice Chair
Ontario Securities Commission
“Edward P. Kerwin”
___________________________________
Name: Edward P. Kerwin
Title: Commissioner
Ontario Securities Commission