November 16, 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. (the Filer)
and
In the Matter of the existing and future mutual funds to which National Instrument 81-102 (NI 81-102) applies and of which the Filer or an affiliate or associate of the Filer is now or in the future the manager and/or a portfolio adviser (each, a Fund and, collectively, the Funds)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer, in respect of the Filer, any associate or affiliate of the Filer and each Fund, for a decision under the securities legislation of the Jurisdiction (the Legislation) for a decision:
(a) for relief (the Requested Relief) from the prohibition in section 4.1(1) of NI 81-102 (the Investment Prohibition) to permit the investment by the Funds in debt securities of an issuer during the period of the distribution (the Distribution) or during the period of 60 days after the Distribution (the 60-Day Period, together with the Distribution, the Distribution Period), notwithstanding the involvement of the Filer or an associate or affiliate of the Filer as an underwriter in the Distribution and notwithstanding that the debt securities do not have a designated rating by a designated rating organization as contemplated by section 4.1(4)(b) of NI 81-102; and
(b) to revoke and replace the relief granted by the principal regulator dated July 30, 2010 as it pertains to the Filer and any associate or affiliate of the Filer and the Funds (the Existing Relief) by the decision herein.
Under the Process for Exemptive Relief Applications in Multiple Jurisdiction (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 on in each of the other provinces and territories of Canada (together with the Jurisdiction, the Jurisdictions).
Interpretation
Unless otherwise defined herein, terms defined in MI 11-102, in National Instrument 14-101 Definitions, in NI 81-102 and in National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), have the same meaning in this decision.
Representations
This decision is based on the following facts represented by the Filer:
The Filer is organized under the Canadian Business Corporations Act with its head office located in Toronto, 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 securities legislation in Ontario, Quebec and Newfoundland and Labrador as an investment fund manager. The Filer is also registered as a commodity trading manager in Ontario only.
The Filer or an affiliate or associate of the Filer is or will be the manager and/or portfolio adviser or both of the Funds.
Each of the Funds is or will be a mutual fund established under the laws of Ontario or one of the other Jurisdictions. None of the Funds are or will be a “money market fund” as defined in NI 81-102.
The securities of the Funds are or will be offered for sale pursuant to a prospectus filed in one or more of the Jurisdictions. Each of the Funds is or will be a dealer managed mutual fund that is or will be a reporting issuer in one or more of the Jurisdictions.
Each of the Funds has or will have an independent review committee (IRC) appointed under NI 81-107.
None of the Filer and any of the Funds is in default of securities legislation in any Jurisdiction.
RBC GAM is currently an affiliate of RBC Dominion Securities Inc. and RBC Capital Markets Corporation as well as certain other dealers, and the Filer may become an affiliate or associate of additional dealers in the future (each, a Related Dealer and, collectively, the Related Dealers), any of which may act as an underwriter in a Distribution.
The Existing Relief, among other things, exempts the Filer and any affiliate and associate of the Filer and the Funds from the prohibition in section 4.1(1) of NI 81-102 (previously defined as the Investment Prohibition) to permit the investment by the Funds in debt securities of an issuer during the Distribution or the 60-Day Period, notwithstanding the involvement of the Filer or any associate or affiliate of the Filer as an underwriter in the Distribution and notwithstanding that the debt securities do not have a “designated rating” by a “designated rating organization”.
Under the Existing Relief, if securities are acquired in the Distribution, a Fund and any related Funds for which the Filer or its affiliate or associate acts as manager and/or portfolio adviser can collectively acquire no more than 20% of the securities distributed under the Distribution in which a Related Dealer acts as underwriter (the 20% Limit).
The Filer is seeking to revoke the Existing Relief and replace it with the Requested Relief in order to replace the 20% Limit with a condition that permits a Fund and any related Funds for which the Filer or its affiliate or associate acts as manager and/or portfolio adviser to acquire up to 50% of the securities distributed under the Distribution in which a Related Dealer acts as underwriter (the 50% Limit).
The Funds need the Requested Relief from the Investment Prohibition because:
(a) there is a limited supply of debt securities issued by an issuer other than the federal or a provincial government (Non-Government Debt Securities);
(b) frequently, the only source of new issues of Non-Government Debt Securities will be offerings that are, in whole or in part, underwritten by a Related Dealer; and
(c) frequently, Non-Government Debt Securities that the Filer wishes to purchase for the Funds do not have an “designated rating” by an “designated rating organization”.
In practice, the Filer is rarely able to purchase 20% of an offering on behalf of the Funds pursuant to the Existing Relief. This is due to the fact that high yield debt securities offerings are routinely oversubscribed and the Filer cannot submit an order for more than 20% of the offering due to the 20% Limit. As a result, much less than 20% of the securities offered are purchased on behalf of the Funds. The 50% Limit reflects the offering participation rate that the Filer believes is required to enhance the ability of the Funds to obtain meaningful exposure to high yield debt securities in order to meet the Funds’ investment objectives based on the average size of offerings of high yield debt securities and the assets under management of the Funds that invest in high yield debt securities.
The Filer makes investment decisions independently of their Related Dealers concerning Distributions in which Related Dealers act as underwriters, and this is reflected in policies and procedures approved by the IRCs of the Funds.
In almost all Distributions in respect of which the Requested Relief is required, the details of the Distribution and a Related Dealer’s involvement as an underwriter in the particular Distribution will not be known by the Filer sufficiently long enough in advance to make an application for relief on a case-by-case basis.
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 as follows:
(a) the Existing Relief, as it pertains to the Filer and any associate or affiliate of the Filer and the Funds, is revoked; and
(b) the Requested Relief is granted in respect of purchases of Non-Government Debt Securities by each Fund provided that:
(i) at the time of each investment, the purchase is consistent with, or is necessary to meet, the investment objective of a Fund and represents the business judgment of the manager and/or portfolio adviser of a Fund uninfluenced by considerations other than the best interests of that Fund or in fact is in the best interests of that Fund;
(ii) the manager of a Fund complies with section 5.1 of NI 81-107 and the manager and IRC of a Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the investment in the securities;
(iii) the IRC of a Fund has approved the transaction in accordance with section 5.2(2) of NI 81-107;
(iv) if the Non-Government Debt Securities are acquired during the Distribution,
(1) at least one underwriter acting as underwriter in the Distribution is not a Related Dealer,
(2) at least one purchaser who is independent and arm’s length to the Fund(s) and the Related Dealers must purchase at least 5% of the securities distributed under the Distribution,
(3) the price paid for the securities by a Fund in the Distribution shall be no higher than the lowest price paid by any of the arm’s length purchasers who participate in the Distribution, and
(4) a Fund and any related Funds for which the Filer or any of the affiliate or associate of the Filer acts as manager and/or portfolio adviser can collectively acquire no more than 50% of the securities distributed under the Distribution in which a Related Dealer acts as underwriter;
(v) if the Non-Government Debt Securities are acquired in the 60-Day Period,
(1) the ask price of the securities is readily available as provided in Commentary 7 to section 6.1 of NI 81-107,
(2) the price paid for the securities by a Fund is not higher than the available ask price of the security, and
(3) the purchase is subject to market integrity requirements as defined in NI 81-107;
(vi) the Non-Government Debt Securities acquired by the Funds pursuant to the Requested Relief cannot be asset backed commercial paper; and
(vii) no later than the time a Fund files its annual financial statements, the manager of the Fund will file the particulars of each investment made by the Fund pursuant to the Requested Relief during its most recently completed financial year.
“Stephen Paglia”
Stephen Paglia - Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission