Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions - Relief granted from sections 2.3(f), 2.3(h), 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 Mutual Funds to permit mutual funds to invest in silver and to invest up to 10% of net assets in leveraged ETFs, inverse ETFs, gold ETFs, silver ETFs, leveraged gold ETFs and leveraged silver ETFs traded on Canadian or US stock exchanges, subject to 10 % total exposure in gold and silver, and certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, paragraphs 2.3(f), 2.3(h), 2.5(2)(a), 2.5(2)(c) and section 19.1.
February 22, 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 or RBC GAM)
DECISION
Background
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of each of the mutual funds of which RBC GAM, or an affiliate thereof, is, or in the future will be, the manager, that are subject to the provisions of National Instrument 81-102 – Mutual Funds (NI 81-102) and that have investment objectives and strategies that contemplate exposure to European equities (each, a Fund and collectively, the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) providing an exemption (the Exemption Sought) from paragraphs 2.5(2)(a), (c) and (f) of NI 81-102 to permit the Funds to purchase the exchange-traded investment funds (ETFs) listed in Appendix “A” (the Foreign ETFs).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator (the Principal Regulator) for the 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 the Jurisdiction and in each of the other provinces and territories of Canada (collectively with the Jurisdiction, the 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.
Representations
This decision is based on the following facts represented by the Filer:
General
RBC GAM is a corporation formed by amalgamation pursuant to articles of amalgamation dated November 1, 2010 under the federal laws of Canada and its head office is located in Toronto, Ontario.
RBC GAM is an indirect, wholly-owned subsidiary of the Royal Bank of Canada.
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 and is registered under the Securities Act (Ontario) as an investment fund manager.
RBC GAM or an affiliate thereof acts, or will act, as investment fund manager of each of the Funds.
Each Fund is, or will be: (i) an open-ended mutual fund organized and governed by the laws of Canada or a Jurisdiction, (ii) a reporting issuer under the laws of one or more of the Jurisdictions and (iii) governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities of any Jurisdiction.
The securities of each Fund are, or will be, qualified for distribution in one or more of the Jurisdictions under a simplified prospectus and annual information form filed in accordance with National Instrument 81-101 – Mutual Fund Prospectus Disclosure (NI 81-101) and receipted by the securities regulators in the applicable Jurisdiction or Jurisdictions.
Neither RBC GAM nor any of the existing Funds is in default of securities legislation in any Jurisdiction.
Reasons for Exemption Sought
The investment objectives and strategies of each Fund, which contemplate or will contemplate investment in global equities, international equities, EAFE equities or European equities, permit or will permit the allocation of assets to European equities. As economic conditions change, the Funds may reallocate assets, including on the basis of industrial sector or geographic region. A Fund will use the Foreign ETFs to gain exposure to European equity market performance in circumstances where it would be in the best interests of the Fund to do so through ETFs rather than through investments in individual securities.
RBC GAM is not aware of any mutual funds that (i) are subject to NI 81-102, (ii) issue securities that are traded on Canadian or U.S. stock exchanges and (iii) focus on European issuers at the sectoral level. The performance of North American sectoral ETFs does not follow European industrial sectors closely enough to make such ETFs suitable substitutes for the Foreign ETFs. Therefore, the targeted asset allocation made possible by investment in the Foreign ETFs would be beneficial to the Funds in meeting their investment objectives and strategies.
By investing in Foreign 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.
Foreign ETFs
The Foreign ETFs are qualified as Undertakings for Collective Investment in Transferable Securities (UCITS) pursuant to the UCITS IV Directive (2009/65/EC) and managed by BlackRock Asset Management Deutschland AG. The securities of each Foreign ETF would, but for the fact that they are not traded on a stock exchange in Canada or the United States, qualify as index participation units as defined in NI 81-102.
The Foreign ETFs are subject to the following regulatory requirements:
a) each Foreign ETF is subject to a robust risk management framework through the prescribed UCITS rules on governance, risk, regulation of service providers and the safekeeping of assets;
b) none of the Foreign ETFs are synthetic ETFs, meaning that they do 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) each Foreign ETF is subject to investment restrictions designed to limit its holdings of illiquid securities to 10% or less of its net asset value;
d) each Foreign ETF can hold no more than 10% of its net asset value in securities of other investment funds;
e) each Foreign ETF’s use of derivatives is subject to the oversight of the Bundesanstalt für Finanzdienstleistungsaufsicht (Bafin), the German regulator of securities markets and investment funds;
f) each Foreign 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;
g) each Foreign ETF has procedures in place relating to the use of derivatives and risk modelling of derivatives positions;
h) each Foreign ETF is required to prepare a prospectus that discloses material facts similar to the disclosure required by NI 81-101;
i) each Foreign ETF prepares fact sheets and/or key investor information documents which, taken together, provide disclosure that is substantially similar to the disclosure required to be included in fund facts documents required to be prepared by NI 81-101;
j) each Foreign ETF is subject to continuous disclosure obligations which are substantially similar to the disclosure obligations under National Instrument 81-106 – Investment Fund Continuous Disclosure;
k) each Foreign ETF is required to update information of material significance in the prospectus and to prepare management reports and an audited set of accounts at least annually;
l) each Foreign 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 sole interest of shareholders and in the best interest of the assets managed by the management board;
m) each Foreign ETF has an investment manager that has a supervisory board that reviews the annual management report and the auditing of the annual accounts;
n) each Foreign ETF has an investment fund manager that is subject to registration with Bafin permitting it to manage UCITS directive compliant investment funds;
o) the index tracked by each Foreign ETF is transparent, in that the methodology for the selection and weighting of index components is publicly available;
p) details of the components of the index tracked by each Foreign ETF, such as issuer name, ISIN and weighting within the index is publicly available and updated from time to time;
q) the index tracked by a Foreign ETF includes sufficient component securities so as to be broad-based and is distributed and referenced sufficiently so as to be broadly utilized;
r) each Foreign ETF is listed on the Frankfurt Stock Exchange; and
s) each Foreign ETF makes the net asset value of its holdings available to the public through at least one price information system associated with the Frankfurt Stock Exchange.
The amount of loss that could result from an investment by a Fund in a Foreign ETF will be limited to the amount invested by the Fund in such Foreign ETF.
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 from purchasing or holding units of the Foreign ETFs because the Foreign ETFs are not subject to NI 81-102 or NI 81-101 and, because index participation units are currently defined to be securities that are traded in Canada or the United States only, a Fund would not be able to rely on the exemption set forth in paragraph 2.5(3)(a) of NI 81-102 in respect of its investments and holdings of Foreign ETFs;
(b) the investment restriction in paragraph 2.5(2)(c) of NI 81-102 would prohibit a Fund from purchasing or holding units of the Foreign ETFs because the Foreign ETFs are not qualified for distribution in the local jurisdiction and, because index participation units are currently defined to be securities that are traded in Canada or the United States only, a Fund would not be able to rely on the exemption set forth in paragraph 2.5(3)(a) of NI 81-102 for its investments and holdings of Foreign ETFs; and
(c) the investment restriction in paragraph 2.5(2)(f) would restrict a Fund from paying sales fees or redemption fees in relation to its purchases or redemptions of securities of the Foreign ETFs that, to a reasonable person, would duplicate a fee payable by an investor in a Fund, including brokerage fees that must be paid by a Fund to purchase or sell securities of a Foreign ETF and, because index participation units are currently defined to be securities that are traded in Canada or the United States only, a Fund would not be able to rely on the exemption set forth in Subsection 2.5(5) of NI 81-102 for its investments and holdings of Foreign ETFs.
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 a Foreign ETF is in accordance with the fundamental investment objectives of the Fund;
b) none of the Foreign 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 simplified prospectus of a Fund that is relying on the Exemption Sought will disclose, the next time it is renewed after the date of this decision, the fact that the Fund has obtained relief to invest in the Foreign ETFs and will disclose the matters required to be disclosed under NI 81-101 in respect of fund of fund investments;
d) the investment by a Fund in a Foreign ETF 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 Foreign ETF and does not invest more than 20% of its net asset value in securities issued by Foreign ETFs in aggregate;
f) a Fund shall not acquire any additional securities of a Foreign ETF, and shall dispose of any securities of a Foreign ETF then held, in the event the regulatory regime applicable to the Foreign 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), (c) or (f) of NI 81-102 that further restrict or regulate a Fund’s ability to invest in the Foreign ETFs.
“Darren McKall”
Darren McKall
Manager, Investment Funds Branch
Ontario Securities Commission No. 1848989
APPENDIX “A”
Foreign ETFs
iShares STOXX Europe 600 Automobiles & Parts
iShares STOXX Europe 600 Banks
iShares STOXX Europe 600 Basic Resources
iShares STOXX Europe 600 Chemicals
iShares STOXX Europe 600 Construction & Materials
iShares STOXX Europe 600 Financial Services
iShares STOXX Europe 600 Food & Beverage
iShares STOXX Europe 600 Health Care
iShares STOXX Europe 600 Industrial Goods & Services
iShares STOXX Europe 600 Insurance
iShares STOXX Europe 600 Media
iShares STOXX Europe 600 Oil & Gas
iShares STOXX Europe 600 Personal & Household Goods
iShares STOXX Europe 600 Retail
iShares STOXX Europe 600 Technology
iShares STOXX Europe 600 Telecommunications
iShares STOXX Europe 600 Travel & Leisure
iShares STOXX Europe 600 Utilities