Headnote
National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions - Novel exemptive relief granted to exchange-traded funds for initial and continuous distribution of units – Relief to vary elements of existing relief – Relief to permit the funds’ prospectus to not contain an underwriter’s certificate and to include a modified statement of investors rights – Relief granted subject to manager filing a prescribed summary document for each fund on SEDAR and other terms and conditions set out in decision document – Relief subject to sunset clause – Consistent with the implementation of the Canadian Securities Administrators Point of Sale Disclosure Initiative underway, rule-making contemplated to codify summary document - Securities Act (Ontario) and National Instrument 41-101 – General Prospectus Requirements
Applicable Legislative Provisions Securities Act, R.S.O. 1990, c. S. 5, as am., sections 59(1) and 144. National Instrument 41-101 – General Prospectus Requirements, s. 19.1 and Item 36.2 of Form 41-101F2.
July 19, 2013
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
THE EXISTING EXCHANGE-TRADED FUNDS MANAGED BY THE FILER (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 mutual funds as the Filer, or an affiliate of the Filer, may establish in the future (the Future Funds, and together with the Existing Funds, the ETFs and individually, an ETF) for a decision under the securities legislation of the principal regulator (the Legislation) that:
- exempts the Filer and each ETF from
(a) the requirement to include a certificate of an underwriter in an ETF’s prospectus (the Underwriter’s Certificate Requirement); and
(b) the requirement to include in an ETF’s prospectus the statement respecting purchasers’ statutory rights of withdrawal and remedies of rescission or damages in substantially the form prescribed in item 36.2 of Form 41-101F2 – Information Required in an Investment Fund Prospectus (the Prospectus Form Requirement)
(collectively, the Exemption Sought); and
- varies all previous decisions granted by the principal regulator prior to the date of this decision that exempted the Filer and the ETFs from the Underwriter’s Certificate Requirement (the Prior Underwriter’s Certificate Relief), by revoking the Prior Underwriter’s Certificate Relief and by revoking, as applicable, the representations relating to prospectus delivery contained in such decisions (the Prospectus Delivery Representations).
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 all of the provinces and territories of Canada other than Ontario (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and National Instrument 81-102 Mutual Funds (NI 81-102) have the same meaning if used in this decision, unless otherwise defined.
Affiliate Dealer means a registered dealer that is an affiliate of an Authorized Dealer or Designated Broker and that participates in the re-sale of Creation Units (as defined below) from time to time.
Authorized Dealer means a registered dealer that has entered, or intends to enter, into an agreement with the manager of an ETF (an ETF Manager) authorizing the dealer to subscribe for, purchase and redeem Creation Units from one or more ETFs on a continuous basis from time to time.
Designated Broker means a registered dealer that has entered, or intends to enter, into an agreement with an ETF Manager to perform certain duties in relation to the ETF, including posting a liquid two-way market for the trading of the ETF’s listed securities on the TSX or another marketplace.
ETF Security means a listed security of an ETF.
Other Dealer means a registered dealer that acts as authorized dealer or designated broker to other exchange-traded funds that are not managed by the Filer and that has received relief under a Prospectus Delivery Decision.
Prospectus Delivery Decision means a decision granting relief from the Prospectus Delivery Requirement to a Designated Broker, Authorized Dealer, Affiliate Dealer or Other Dealer dated, July 19, 2013, and any future decision granted to a Designated Broker, Authorized Dealer, Affiliate Dealer or Other Dealer that grants similar relief.
Prospectus Delivery Requirement means the requirement that a dealer, not acting as agent of the purchaser, who receives an order or subscription for a security offered in a distribution to which the prospectus requirement of the Legislation applies, send or deliver to the purchaser or its agent, unless the dealer has previously done so, the latest prospectus and any amendment either before entering into an agreement of purchase and sale resulting from the order or subscription, or not later than midnight on the second business day after entering into that agreement.
Summary Document means a document, in respect of one or more classes or series of ETF Securities being distributed under a prospectus, prepared in accordance with Schedule A.
TSX means the Toronto Stock Exchange.
Representations
This decision is based on the following facts represented by the Filer:
The Filer is a corporation organized under the federal laws of Canada, with a head office in Ontario.
Each ETF is, or will be, a mutual fund governed by the laws of the Province of Ontario and a reporting issuer under the laws of some or all of the Jurisdictions.
Each ETF is, or will be, subject to NI 81-102, subject to any exemptions therefrom that have been, or may be, granted by the applicable securities regulatory authorities.
Each ETF is, or will be, in continuous distribution. The ETF Securities of each ETF are, or will be, listed on the TSX or another marketplace in Canada.
The Filer has filed, or will file, a long form prospectus in accordance with National Instrument 41-101 General Prospectus Requirements on behalf of the ETFs, subject to any exemptions that have been or may be granted by the applicable securities regulatory authorities.
The Filer acts, and will act, as the trustee, investment fund manager and portfolio adviser to the ETFs. The Filer is registered in the Province of Ontario as an adviser for securities in the category of portfolio manager, as an adviser for commodities in the category of commodity trading manager, as a dealer in the category of exempt market dealer and as an investment fund manager.
ETF Securities are, or will be, distributed on a continuous basis in one or more of the Jurisdictions under a prospectus. ETF Securities may generally only be subscribed for or purchased directly from the ETFs by Authorized Dealers or Designated Brokers (Creation Units). Authorized Dealers or Designated Brokers subscribe for Creation Units for the purpose of facilitating investor purchases of ETF Securities on the TSX or another marketplace in Canada.
In addition to subscribing for and re-selling Creation Units, Authorized Dealers, Designated Brokers and Affiliate Dealers are also generally engaged in purchasing and selling ETF Securities of the same class or series as the Creation Units in the secondary market. Other Dealers may also be engaged in purchasing and selling ETF Securities of the same class or series as the Creation Units in the secondary market despite not being an Authorized Dealer, Designated Broker or Affiliate Dealer.
According to the Authorized Dealers and Designated Brokers, Creation Units are generally commingled with other ETF Securities purchased by the Authorized Dealers, Designated Brokers and Affiliate Dealers in the secondary market. As such, it is not practicable for the Authorized Dealers, Designated Brokers or Affiliate Dealers to determine whether a particular re-sale of ETF Securities involves Creation Units or ETF Securities purchased in the secondary market.
Designated Brokers perform certain other functions, which include standing in the market with a bid and ask price for ETF Securities for the purpose of maintaining liquidity for the ETF Securities.
Except for Authorized Dealer and Designated Broker subscriptions for Creation Units, as described above, and other distributions that are exempt from the Prospectus Delivery Requirement under the Legislation, ETF Securities generally may not be purchased directly from an ETF. Investors are generally expected to purchase and sell ETF Securities, directly or indirectly, through dealers executing trades through the facilities of the TSX or another marketplace in Canada. ETF Securities may also be issued directly to ETF investors upon the reinvestment of distributions of income or capital gains.
The Authorized Dealers and Designated Brokers do not provide the same services in connection with a distribution of Creation Units as would typically be provided by an underwriter in a conventional underwriting.
The Authorized Dealers and Designated Brokers are not involved in the preparation of an ETF’s prospectus, do not incur any marketing costs or receive any underwriting fees or commissions from the ETFs or the ETF Managers in connection with the distribution of Creation Units. The Authorized Dealers and Designated Brokers generally seek to profit from their ability to create and redeem ETF Securities by engaging in arbitrage trading to capture spreads between the trading prices of ETF Securities and their underlying securities and by making markets for their clients to facilitate client trading in ETF Securities.
The Filer generally conducts its own marketing, advertising and promotion of the ETFs. The Filer may, at its discretion, charge an administration fee on the issuance of Creation Units to Authorized Dealers or Designated Brokers.
The principal regulator has advised the Filer that it takes the view that the first re-sale of a Creation Unit on the TSX or another marketplace in Canada will generally constitute a distribution of Creation Units under the Legislation and that the Authorized Dealers, Designated Brokers and Affiliate Dealers are subject to the Prospectus Delivery Requirement in connection with such re-sales. Re-sales of ETF Securities in the secondary market that are not Creation Units would not ordinarily constitute a distribution of such ETF Securities.
Under a Prospectus Delivery Decision, Authorized Dealers, Designated Brokers and Affiliate Dealers are exempt from the Prospectus Delivery Requirement in connection with the re-sale of Creation Units to investors on the TSX or another marketplace in Canada. Under a Prospectus Delivery Decision, Other Dealers are also exempt from the Prospectus Delivery Requirement in connection with the re-sale of creation units of other exchange-traded funds that are not managed by the Filer.
The Prospectus Delivery Decision includes a condition that the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer undertakes that, beginning on or around September 1, 2013, it will, unless it has previously done so, send or deliver to each purchaser of an ETF Security who is a customer of the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer, and to whom a trade confirmation is required under the Legislation to be sent or delivered by the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer in connection with the purchase, the latest Summary Document filed in respect of the ETF Security, not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after the purchase of the ETF Security.
The Filer will file with the applicable Jurisdictions on the System for Electronic Document Analysis and Retrieval (SEDAR) a Summary Document for each class or series of ETF Securities offered by the Filer and provide or make available to the Authorized Dealers, Designated Brokers, Affiliate Dealers and Other Dealers, the requisite number of copies of the Summary Document for the purpose of facilitating their compliance with the Prospectus Delivery Decision.
The Filer will file a Summary Document for each class or series of ETF Securities offered by the Filer within the timeframe necessary to allow Authorized Dealers, Designated Brokers, Affiliate Dealers and Other Dealers to effect delivery of the Summary Document as contemplated in the Prospectus Delivery Decision by September 1, 2013.
The Exemption Sought from the Prospectus Form Requirement is required to reflect the relief provided in the Prospectus Delivery Decision. Accordingly, the Filer will include language in each ETF’s prospectus explaining the impact on a purchaser’s statutory rights as a result of the Prospectus Delivery Decision in replacement of the language prescribed by the Prospectus Form Requirement.
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, by the later of September 1, 2013 and the date a particular condition is first applicable to a Filer, and on an ongoing basis thereafter, the Filer will be in compliance with the following conditions:
The Filer files with the applicable Jurisdictions on SEDAR and displays on its website in a manner that would be considered prominent to a reasonable investor the Summary Document for each class or series of ETF Securities of an Existing Fund.
The Filer files concurrently on SEDAR the Summary Document for each class or series of ETF Securities when filing a final prospectus for that ETF.
The Filer amends the Summary Document at the same time it files any amendments to the ETF’s prospectus that affect the disclosure in the Summary Document and files the amended Summary Document with the applicable Jurisdictions on SEDAR and makes it available on its website in a manner that would be considered prominent to a reasonable investor.
The Filer provides or makes available to each Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer, the number of copies of the Summary Document of each ETF Security that the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer reasonably requests in support of compliance with its respective Prospectus Delivery Decision.
Each ETF’s prospectus, on the date which is the earliest of: (i) the filing of the ETF’s preliminary prospectus; (ii) the filing of the ETF’s pro forma prospectus; and (iii) when an amendment to the ETF prospectus is next filed,
(a) incorporates the relevant Summary Document by reference;
(b) contains the disclosure referred to in paragraph 20 above; and
(c) discloses both this decision and the Prospectus Delivery Decisions under Item 34.1 of Form 41-101F2 – Exemptions and Approvals.
- The Filer obtains an executed acknowledgement from each Authorized Dealer, Designated Broker and Affiliate Dealer, and uses its best efforts to obtain an acknowledgment from each Other Dealer:
(a) indicating its election, in connection with the re-sale of Creation Units on the TSX or another marketplace in Canada, to send or deliver the Summary Document in accordance with a Prospectus Delivery Decision or, alternatively, to comply with the Prospectus Delivery Requirement; and
(b) if the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer agrees to deliver the Summary Document in accordance with a Prospectus Delivery Decision:
(i) an undertaking that the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer will attach or bind one ETF’s Summary Document with another ETF’s Summary Document only if the documents are being sent or delivered under the Prospectus Delivery Decision at the same time to an investor purchasing ETF Securities of each such ETF; and
(ii) confirming that the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer has in place written policies and procedures to ensure that it is in compliance with the conditions of the Prospectus Delivery Decision.
The Filer will keep records of which Authorized Dealers, Designated Brokers, Affiliate Dealers and Other Dealers, have provided it with an acknowledgement under a Prospectus Delivery Decision, and which intend to rely on and comply with the Prospectus Delivery Decision or intend to comply with the Prospectus Delivery Requirement.
The Filer files with its principal regulator, to the attention of the Director, Investment Funds Branch, on or before January 31st in each calendar year, a certificate signed by an ultimate designated person certifying that, to the best of the knowledge of such person, after making due inquiry, the Filer has complied with the terms and conditions of this decision during the previous calendar year.
It is the further decision of the principal regulator under the Legislation that the Prior Underwriter’s Certificate Relief and the Prospectus Delivery Representations are revoked.
The Exemption Sought terminates on September 1, 2015.
As to the Exemption Sought from the Underwriter’s Certificate Requirement and the revocation of the Prior Underwriter’s Certificate Relief and Prospectus Delivery Representations:
“James E.A. Turner”
Name: James E.A. Turner Title: Vice-Chair Ontario Securities Commission
“Mary G. Condon”
Name: Mary G. Condon Title: Vice-Chair Ontario Securities Commission
As to the Exemption Sought from the Prospectus Form Requirement:
“Rhonda Goldberg”
Name: Rhonda Goldberg Title: Director, Investment Funds Branch Ontario Securities Commission
APPENDIX A
Contents of Summary Document
General Instructions:
Items 1 to 10 represent the minimum disclosure required in a Summary Document for a fund. The inclusion of additional information is not precluded so long as the Summary Document does not exceed a total of four pages in length (two pages double-sided).
Terms defined in National Instrument 81-102 Mutual Funds, National Instrument 81-105 Mutual Fund Sales Practices or National Instrument 81-106 Investment Fund Continuous Disclosure and used in this Summary Document have the meanings that they have in those national instruments.
Information in the Summary Document must be clear and concise and presented in plain language.
The format and presentation of information in the Summary Document is not prescribed but the information must be presented in a manner that assists in readability and comprehension.
The order of the Items outlined below is not prescribed, except for Items 1 and 2, which must be presented as the first 2 items in the Summary Document.
Each reference to a fund in this Appendix A refers to an ETF as defined in the decision above.
Item 1 - Introduction
Include at the top of the first page a heading consisting of:
(a) the title “Summary Document”;
(b) the name of the manager of the fund;
(c) the name of the fund to which the Summary Document pertains; and
(d) the date of the document.
Item 2 - Cautionary Language
Include a statement in italics in substantially the following form:
“The following is a summary of the principal features of this fund. You can find more detailed information about the fund in the prospectus. The prospectus is available on [insert name of the manager of the fund] website at [insert manager of the fund website], or by contacting [insert name of the manager of the fund] at [insert manager of the fund’s email address], or by calling [insert telephone number of the manager of the fund].”
Item 3 - Fund Details
Include the following disclosure:
(a) ticker symbol;
(b) fund identification code(s);
(c) index ticker (as applicable);
(d) exchange;
(e) currency;
(f) inception date;
(g) RSP eligibility;
(h) DRIP eligibility;
(i) expected frequency and timing of distributions, and if applicable, the targeted amount for distributions;
(j) management expense ratio, if available; and
(k) portfolio manager, when the fund is actively managed.
Item 4 - Investment Objectives
Include a description of the fundamental nature of the fund, or the fundamental features of the fund that distinguishes it from other funds.
INSTRUCTIONS:
Include a description of what the fund primarily invests in, or intends to primarily invest in, such as
(a) a description of the fund, including what the fund invests in, and if it is trying to replicate an index, the name of the index, and an overview of the nature of securities covered by the index or the purpose of the index; and
(b) the key investment strategies of the fund.
Item 5 – Investments of the Fund
- Include a table disclosing:
(a) the top 10 positions held by the fund; and
(b) the percentage of net asset value of the fund represented by the top 10 positions.
- Include at least one, and up to two, charts or tables that illustrate the investment mix of the fund’s investment portfolio.
INSTRUCTIONS:
(a) The information required under this Item is intended to give a snapshot of the composition of the fund’s investment portfolio. The information required to be disclosed under this Item must be as at a date within 30 days before the date of the Summary Document.
(b) The information required under Item 5(2) must show a breakdown of the fund’s investment portfolio into appropriate subgroups and the percentage of the aggregate net asset value of the fund constituted by each subgroup. The names of the subgroups are not prescribed and can include security type, industry segment or geographic location. The fund should use the most appropriate categories given the nature of the fund. The choices made must be consistent with disclosure provided under “Summary of Investment Portfolio” in the fund’s MRFP.
(c) For new funds where the information required to be disclosed under this Item is not available, provide a brief statement explaining why the required information is not available.
Item 6 - Risk
- Include a statement in italics in substantially the following form:
“All investments involve risk. When you invest in the fund the value of your investment can go down as well as up. For a description of the specific risks of this fund, see the fund’s prospectus.”
- If the cover page of the fund’s prospectus contains text box risk disclosure, also include a description of those risk factors in the Summary Document.
Item 7 – Fund Expenses
- Include an introduction using wording similar to the following:
“You don’t pay these expenses directly. They affect you because they reduce the fund’s returns.”
- Provide information about the expenses of the fund in the form of the following table:
Annual rate (as a % of the fund’s value)
Management expense ratio (MER) This is the total of the fund’s management fee and operating expenses.
Trading expense ratio (TER) These are the fund’s trading costs.
Fund expenses The amount included for fund expenses is the amount arrived at by adding the MER and the TER.
- If the information in (2) is unavailable because the fund is new including wording similar to the following:
“The fund’s expenses are made up of the management fee, operating expenses and trading costs. The fund’s annual management fee is [ ]% of the fund’s value. Because this fund is new, its operating expenses and trading costs are not yet available.”
INSTRUCTIONS:
Use a bold font or other formatting to indicate that fund expenses is the total of all ongoing expenses set out in the chart and is not a separate expense charged to the fund.
Item 8 – Trailing Commissions
If the manager of the fund or another member of the fund’s organization pays trailing commissions, include a brief description of these commissions.
The description of any trailing commission must include a statement in substantially the following words:
“The trailing commission is paid out of the management fee. The trailing commission is paid for as long as you own the fund.”
Item 9 - Other Fees
Provide information about the amount of fees payable by an investor, other than those already described or payable by designated brokers and underwriters.
Include a statement using wording similar to the following:
“You may pay brokerage fees to your dealer when you purchase and sell units of the fund.”
INSTRUCTIONS:
(a) Examples include any redemption charges, sales charges or other fees, if any, associated with buying and selling securities of the fund.
(b) Provide a brief description of each fee disclosing the amount to be paid as a percentage (or, if applicable, a fixed dollar amount) and state who charges the fee.
Item 10 – Statement of Rights
State in substantially the following words:
Under securities law in some provinces and territories, you have:
the right to cancel your purchase within 48 hours after you receive confirmation of the purchase, or
other rights and remedies if this document or the fund’s prospectus contains a misrepresentation. You must act within the time limit set by the securities law in your province or territory.
For more information, see the securities law of your province or territory or ask a lawyer.
Item 11 – Past Performance
If the fund includes past performance:
- Include an introduction using wording similar to the following:
This section tells you how the fund has performed over the past [insert the lesser of 10 years or the number of completed calendar years] years. Returns are after expenses have been deducted. These expenses reduce the fund’s returns.
It’s important to note that this doesn’t tell you how the fund will perform in the future as past performance may not be repeated. Also, your actual after-tax return will depend on your personal tax situation.
- Show the annual total return of the fund, in chronological order for the lesser of:
(a) each of the 10 most recently completed calendar years; and
(b) each of the completed calendar years in which the fund has been in existence and which the fund was a reporting issuer.
- Show the
(a) final value, of a hypothetical $1,000 investment in the fund as at the end of the period that ends within 30 days before the date of the Summary Document and consists of the lesser of:
(i) 10 years, or
(ii) the time since inception of the fund,
and
(b) the annual compounded rate of return that would equate the initial $1,000 investment to the final value.
INSTRUCTIONS:
In responding to the requirements of this Item, a fund must comply with the relevant sections of Part 15 of National Instrument 81-102 Mutual Funds as if those sections applied to a Summary Document.
Item 12 – Benchmark Information
If the Summary Document includes benchmark information, ensure this information is consistent with the fund’s MRFP and presented in the same format as Item 11.