Mutual Reliance Review System for Exemptive Relief Applications – exemptions granted from the mutual fund conflict of interest investment restrictions and management reporting requirements of the Securities Act (Ontario) and self-dealing prohibition of National Instrument 31–103 – Registration Requirements to permit pooled funds to invest with fund-of-fund structure – revocation and replacement of prior relief to remove the multi-tier restriction only in respect of certain top pooled funds that were formed and structured without such restriction – not a precedent decision.

Securities Act, R.S.O. 1990, c.S.5, as amended, sections 111(2)(b), 111(2)(c), 111(3), 113, 117(1)(a), 117(1)(d), 117(2).

National Instrument 31–103 – Registration Requirements, sections 13.5(2)(a), 15.1.

October 19, 2012

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND

AND

IN THE MATTER OF RBC GLOBAL ASSET MANAGEMENT INC. (the Filer)

AND

THE TOP FUNDS (as defined below)

Background

The principal regulator in the Jurisdiction has received an application from the Filer on its behalf and on behalf of the Top Funds (as defined below) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):

(a) to revoke and replace the Existing Relief (as defined below);

(b) under the securities legislation of the Investment Restriction Relief Jurisdictions (defined below) for an exemption from the restriction (the Investment Restriction) prohibiting a mutual fund in Ontario, or a mutual fund, as the case may be, from knowingly making or holding an investment in: (i) any person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder; or (ii) an issuer in which any officer or director of the mutual fund, its management company or distribution company or an associate of any of them, or any person or company who is a substantial security holder of the mutual fund, its management company or its distribution company, has a significant interest (the Investment Restriction Relief);

(c) under the securities legislation of the Consent Relief Jurisdictions (defined below) for an exemption from the restriction (the Consent Requirement) that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase securities of an issuer in which a responsible person or an associate of the responsible person is a partner, director or officer unless the fact is disclosed to the client and the written consent of the client to the purchase is obtained before the purchase (the Consent Relief); and

(d) under the securities legislation of the Reporting Relief Jurisdictions (defined below), for an exemption from the requirement (the Reporting Requirement) of a management company or, in the case of British Columbia, a mutual fund manager, to file a report of every transaction of purchase or sale of securities between a mutual fund it manages and any related person or company and any transaction in which, by arrangement other than an arrangement relating to insider trading in portfolio securities, a mutual fund is a joint participant with one or more of its related persons or companies, in respect of each mutual fund to which it provides services or advice, within 30 days after the end of the month in which it occurs (the Reporting Relief),

(collectively, the Requested Relief).

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;

(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 (i) in respect of the Investment Restriction Relief, in British Columbia and Alberta (collectively with Ontario, the Investment Restriction Relief Jurisdictions), (ii) in respect of the Consent Relief, in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, Yukon, Northwest Territories and Nunavut (collectively with Ontario, the Consent Relief Jurisdictions), and (iii) in respect of the Reporting Relief, in British Columbia, Alberta, Saskatchewan, Nova Scotia, New Brunswick and Newfoundland and Labrador (collectively with Ontario, the Reporting Relief 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. The following additional terms shall have the following meanings:

BC Underlying Pooled Funds means the Underlying Pooled Funds organized or to be organized as trusts governed by the laws of British Columbia.

Specified Top Funds means, collectively, the Phillips, Hager & North Enhanced Total Return Bond Fund, Phillips, Hager & North PRisM Balanced Fund, Phillips, Hager & North Enhanced PRisM Long Fund, Phillips, Hager & North Extended Duration Long Bond Pension Trust and Phillips, Hager & North Long Bond Pension Trust, each of which is an existing mutual fund organized as a trust governed by the laws of British Columbia that is managed by the Filer, and that is offered for sale on a private placement basis pursuant to prospectus exemptions under applicable securities legislation.

Top Funds means, collectively, the mutual funds organized or to be organized as trusts governed by the laws of British Columbia or Ontario that are managed now or in the future by the Filer or an affiliate of the Filer, and that are or will be offered for sale on a private placement basis pursuant to prospectus exemptions under applicable securities legislation, including without limitation the Specified Top Funds.

Underlying Funds means the Underlying Pooled Funds, the Underlying 81-102 Funds and Underlying Offshore Funds.

Underlying Offshore Funds means, collectively, the investment funds organized or to be organized under the laws of a jurisdiction outside of Canada that are managed or promoted now or in the future by the Filer or an affiliate of the Filer, the securities of which are or will be primarily offered for sale to investors outside of Canada either on a private placement basis or pursuant to a prospectus or similar document filed with securities regulators outside of Canada.

Underlying Pooled Funds means, collectively, the investment funds organized or to be organized as trusts governed by the laws of British Columbia or Ontario that are managed now or in the future by the Filer or an affiliate of the Filer, and that are or will be offered for sale on a private placement basis pursuant to prospectus exemptions under applicable securities legislation.

Underlying 81-102 Funds means, collectively, the mutual funds organized or to be organized as trusts governed by the laws of British Columbia or Ontario that are managed now or in the future by the Filer or an affiliate of the Filer, and that are or will be offered for sale pursuant to a simplified prospectus and annual information form.

Representations

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

The Filer

The Filer is organized under the Canada Business Corporations Act with its head office in Ontario.
The Filer is registered under securities legislation in each of the jurisdictions of Canada as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer, and under the Securities Act (Ontario) as an investment fund manager. The Filer is also registered as a commodity trading manager in Ontario only.
The Filer or an affiliate of the Filer is or will be the manager and principal portfolio adviser of the Top Funds, and the manager, promoter or portfolio adviser of the Underlying Funds.
The Filer is not a reporting issuer in any jurisdiction of Canada and is not in default of any securities legislation of any jurisdiction of Canada.

Prior Relief and Existing Relief

A predecessor entity of the Filer, Phillips, Hager & North Investment Management Ltd., was granted an exemption from the Investment Restriction and the Reporting Requirement in the legislation of British Columbia and Alberta to exempt the Top Funds from the Investment Restriction and the Reporting Requirement pursuant to a decision dated January 31, 2007 (the Prior Relief).
The Filer was granted an exemption from the Investment Restriction in the legislation of the Investment Restriction Relief Jurisdictions, the Consent Requirement in the legislation of the Consent Relief Jurisdictions and the Reporting Requirement in the legislation of the Reporting Relief Jurisdictions to exempt the Top Funds from the Investment Restriction, the Consent Requirement and the Reporting Requirement pursuant to a decision dated October 20, 2011 (the Existing Relief).
The Filer is seeking to remove the restriction in the Existing Relief which prohibits a Specified Top Fund from investing in an Underlying Fund unless the Underlying Fund invests less than 10% of its net assets in other mutual funds other than mutual funds that are “money market funds” (as defined in National Instrument 81-102 Mutual Funds (NI 81-102)) or that issue “index participation units” (as defined in NI 81-102) (the 10% Restriction).
The Prior Relief did not include the 10% Restriction. Accordingly, under the terms of the Prior Relief, an investment by a Specified Top Fund in an Underlying Fund was not subject to the 10% Restriction. The investment objectives and strategies of the Specified Top Funds and Underlying Funds were structured based on the terms of the Prior Relief and a fund-on-fund structure that does not impose the 10% Restriction on Underlying Funds and certain of the existing Underlying Funds have strategies that use a fund-on-fund investment structure for all or a substantial portion of their assets. Depending on a number of factors including the size and frequency of purchases and redemptions, imposing the 10% Restriction on Specified Top Funds and existing Underlying Funds could undermine the structure of such funds, and require those funds to alter their investment strategies in a way that the Filer believes could be detrimental to investors. For example, it may require a Specified Top Fund to attempt to recreate significantly smaller versions of some or all of the Underlying Funds’ portfolios in the Specified Top Fund’s portfolio on a segregated basis. Due to their small size, such segregated portfolios may not be able to replicate the performance or diversification characteristics of the reference Underlying Fund(s). Consequently, this would be particularly problematic for the Specified Top Funds that invest in a broad range of investment options through multiple investment funds.
Varying the Existing Relief to remove the 10% Restriction in relation to the Specified Top Funds will allow the Specified Top Funds to continue to follow their existing investment objectives and strategies and avoid changes thereto that the Filer believes may undermine the structure of these funds or be detrimental to investors.
As of the date of this decision, the Filer will no longer rely on the Existing Relief.

Underlying Funds

Each of the Underlying 81-102 Funds is or will be an open-ended trust organized under the laws of British Columbia or Ontario, the securities of which are or will be offered for sale to the public pursuant to simplified prospectuses and annual information forms qualified in some or all of the jurisdictions of Canada.
Each of the Underlying 81-102 Funds is, or will be, subject to NI 81-102, including restrictions with respect to investing in other mutual funds.
Each of the Underlying Pooled Funds is or will be an open-ended trust organized under the laws of British Columbia or Ontario, the securities of which are or will be offered for sale on a private placement basis pursuant to available prospectus exemptions under applicable securities legislation in some or all of the jurisdictions of Canada.
Each of the Underlying Pooled Funds is or will be an “investment fund” as defined in securities legislation of the jurisdictions in which the Underlying Pooled Funds are distributed.
Each of the Underlying Offshore Funds is or will be an investment fund organized under the laws of a jurisdiction outside of Canada, the securities of which are or will be primarily offered for sale to investors outside of Canada either on a private placement basis or pursuant to a prospectus or similar document filed with securities regulators in a jurisdiction outside of Canada.
Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.
Each of the Underlying 81-102 Funds is or will be a reporting issuer in some or all of the jurisdictions of Canada. None of the Underlying Pooled Funds or Underlying Offshore Funds is or will be a reporting issuer in any jurisdiction of Canada.
None of the Underlying Funds is in default of any securities legislation of any jurisdiction of Canada.
The Underlying Funds invest in equity securities, fixed income securities, mortgages and other types of permitted investments. To the extent the Underlying Pooled Funds and Underlying Offshore Funds invest in equity securities and fixed income securities, they will generally have liquid portfolios. However, certain Underlying Pooled Funds and Underlying Offshore Funds, including those that invest primarily in mortgages, may have restrictions or delays with respect to redemptions in order to allow adequate time to dispose of portfolio holdings needed to fund redemptions.

Top Funds

Each of the Top Funds is or will be an open-ended trust organized under the laws of British Columbia or Ontario, the securities of which are or will be offered for sale on a private placement basis pursuant to available prospectus exemptions under applicable securities legislation in some or all of the jurisdictions of Canada.
Each of the Top Funds is or will be a “mutual fund” as defined in securities legislation of the jurisdictions in which the Top Funds are distributed.
None of the Top Funds is or will be a reporting issuer in any jurisdiction of Canada.
None of the Top Funds is in default of any securities legislation of any jurisdiction of Canada.
Investors in the Top Funds are primarily sophisticated investors such as pension plans, foundations, crown agencies, other institutions and high net worth individuals; the Top Funds are primarily used to execute discretionary investment mandates for these investors. Units in the Top Funds are sold primarily in reliance on the accredited investor exemption, the minimum amount exemption, and the additional investment in investment funds exemption contained in National Instrument 45-106 Prospectus and Registration Exemptions.

Fund on Fund Structure

Each Top Fund may invest all or a certain portion of its assets in securities of one or more of the Underlying Funds (Fund-on-Fund Investing). The percentage invested in an Underlying Fund may fluctuate on a daily basis based on the investment decisions made by the portfolio advisor in order to meet the investment objectives of the Top Fund.
The actual weighting of the investment by each Top Fund in an Underlying Fund will be reviewed on a regular basis and adjusted to ensure that the investment weightings continue to be appropriate for that Top Fund’s investment objectives. The portfolio advisor will actively manage the investment made by each Top Fund in an Underlying Fund on a regular basis.
An investment by a Top Fund in an Underlying Fund is or will be compatible with the investment objectives of the Top Fund.
Certain of the Underlying Funds calculate their net asset value daily and are redeemable daily. However, certain other of the Underlying Funds calculate their net asset value on a weekly or monthly basis, and are redeemable on a weekly or monthly basis. A Top Fund will not invest in an Underlying Fund that calculates net asset value with less frequency than the Top Fund. Similarly, a Top Fund will generally not invest in an Underlying Fund that is redeemable with less frequency than the Top Fund, unless the portfolio adviser of the Top Fund believes that the liquidity of the Top Fund’s portfolio is adequately managed through other strategies.
Through the Fund-on-Fund Investing, each Top Fund benefits from greater portfolio diversification. The structure of the Top Funds also allows investors with smaller investments to have access to a larger variety of investments than would otherwise be available.
The Fund-on-Fund Investing creates larger pools of assets for the Underlying Funds which should also provide additional benefits to investors of the Top Funds and the Underlying Funds, including, in particular, more favourable pricing and transaction costs on portfolio trades, increased access to investments where there is a minimum subscription or purchase amount and better economies of scale through lower custodian fees and greater administrative efficiency.
Clients who hold securities of a Top Fund will receive an account statement, prepared and delivered in accordance with National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, showing the client’s holdings of securities of a Top Fund.
Each of the Top Funds will prepare annual audited financial statements and interim audited financial statements in accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and will otherwise comply with the requirements of NI 81-106 applicable to them. Each of the Underlying Funds that are subject to NI 81-106 will prepare annual audited financial statements and interim unaudited financial statements. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund.
No sales fees or redemption charges will be payable in connection with the acquisition, disposition or redemption by the Top Funds of securities of the Underlying Funds.
No management or other fee will be payable by the Top Funds that, to a reasonable person, would duplicate a fee payable by the applicable Underlying Fund for the same service.
Where a matter relating to an Underlying Fund requires a vote of security holders of the Underlying Fund, the Filer will not cause the securities of the Underlying Fund held by a Top Fund to be voted at such meeting. However, the Filer may pass on the right to vote to holders of the Top Fund.
Any investment by a Top Fund in securities of an Underlying Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund and the Underlying Fund.
The investment objectives and strategies of Specified Top Funds were structured based on the terms of the Prior Relief. Under the terms of the Prior Relief (as defined below), an investment by a Specified Top Fund in an Underlying Fund was not subject to the 10% Restriction.

Generally

As a result of the 10% Restriction in the Existing Relief, the Top Funds are prohibited from investing in Underlying Funds except in accordance with the 10% Restriction.
As a result of the Fund-on-Fund Investing, a Top Fund, alone or in combination with other Top Funds, may own more than 20% of the outstanding units of an Underlying Fund and therefore be a “substantial security holder” (as defined in the Legislation) of an Underlying Fund. In addition, an officer or director of the Filer or associates of any of them, or a substantial security holder of the Top Fund or the Filer may have a significant interest in an Underlying Fund as a result of investing seed capital in, or as a result of making significant investments in, such Underlying Fund. Accordingly, in the absence of the Investment Restriction Relief, each Top Fund will be prohibited from investing in such Underlying Fund.
Since the Filer or an officer and/or director of the Filer may also be an officer and/or director of, or may perform a similar function for or occupy a similar position with, the Underlying Fund, in the absence of the Consent Relief, the portfolio manager of the Top Funds would be prohibited from knowingly causing the Top Funds to invest in the Underlying Funds in which a responsible person or an associate of a responsible person is an officer or director unless the specific fact is disclosed to security holders of the Top Funds and the written consent of the security holders of the Top Funds to the investment is obtained before the purchase.
In the absence of the Reporting Relief, the Filer would be required to file, in the Reporting Relief Jurisdictions, a report on every purchase or sale of securities of the Underlying 81-102 Funds by the Top Funds and, in British Columbia, a report on every purchase or sale of securities of the BC Underlying Pooled Funds by the Top Funds.

Decision

The principal regulator is satisfied that the decision meets the test contained in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Requested Relief is granted as follows:

(a) in the Investment Restriction Relief Jurisdictions under the legislation of the Investment Restriction Relief Jurisdictions, the Investment Restriction shall not apply to the Top Funds in respect of each Top Fund’s investment in securities of the Underlying Funds;

(b) in the Consent Relief Jurisdictions under the legislation of the Consent Relief Jurisdictions, the Consent Requirement shall not apply to the Filer, or an affiliate of the Filer, as the manager of the Top Funds in respect of each Top Fund’s investment in securities of the Underlying Funds;

(c) in the Reporting Relief Jurisdictions under the legislation of the Reporting Relief Jurisdictions, the Reporting Requirement shall not apply to the Filer, or an affiliate of the Filer, in respect of each Top Fund’s purchase or sale of securities of an Underlying 81-102 Fund and in British Columbia in respect of each Top Fund’s purchase or sale of securities of a BC Underlying Pooled Fund;

provided that, in each case:

(i) securities of each Top Fund are distributed only on a private placement basis pursuant to available prospectus exemptions in National Instrument 45-106 Prospectus and Registration Exemptions;

(ii) the investment by each Top Fund in an Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;

(iii) each Top Fund does not vote any of the securities it holds of an Underlying Fund except that the Top Fund may, if the Filer so chooses, arrange for all the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;

(iv) no management or other fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service;

(v) no sales fees or redemption charges are payable by the Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund;

(vi) except in the case of a Specified Top Fund, no Top Fund will invest in an Underlying Fund unless the Underlying Fund invests less than 10% of its net assets in other mutual funds other than mutual funds that are “money market funds” (as defined by NI 81-102) or that issue “index participation units” (as defined by NI 81-102);

(vii) the offering memorandum, statement of investment policy and procedure or a similar offering document of a Top Fund, or, if no offering memorandum, statement of investment policy and procedure or similar offering document is prepared, another document provided to investors in a Top Fund, will disclose:

(1) the intent of the Top Fund to invest its assets in securities of the Underlying Funds;

(2) that the Underlying Funds are managed by the Filer or an affiliate of the Filer;

(3) the approximate or maximum percentage of net assets of the Top Fund that is intended to be invested in securities of the Underlying Funds; and

(4) the process or criteria used to select the Underlying Funds;

(viii) investors in each Top Fund are entitled to receive from the Filer or its affiliate, on request and free of charge, a copy of the offering memorandum or other disclosure documents (if any), or the annual or semi-annual financial statements (if any) relating to all Underlying Funds in which the Top Fund may invest its assets; and

(ix) prior to the time of investment, investors in a Top Fund will (if applicable) be provided with disclosure that certain officers or directors of the Filer or associates of any of them may have a significant interest in the Underlying Funds through investments made in securities of such Underlying Funds and will be advised of the potential conflicts of interest which may arise from such relationships. The foregoing disclosure will be contained in any offering memorandum, statement of investment policy and procedure or similar offering document of the Top Fund or, if no offering memorandum, statement of investment policy and procedure or similar offering document is prepared, in another document provided to investors in a Top Fund.

“Darren McKall”

Darren McKall

Manager, Investment Funds Branch

Ontario Securities Commission

“James E.A. Turner” “Margot C. Howard”

Name: James E.A. Turner Name: Margot C. Howard

Title: Vice-Chair Title: Commissioner

Ontario Securities Commission Ontario Securities Commission

Headnote

Applicable Legislative Provisions