Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Funds from the requirement in subsection 6.1(1) of NI 81-102, namely that all portfolio assets of an investment fund be held under the custodianship of one custodian that satisfies the requirements of section 6.2 of NI 81-102, solely to permit each Fund to appoint more than one custodian, each of which is qualified to be a custodian under section 6.2 of NI 81-102 and each of which is subject to all of the other requirements in Part 6 of NI 81-102 other than the prohibition against the Fund appointing more than one custodian in subsection 6.1(1) of NI 81-102 (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is 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 all of the provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 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:

The Filer and the Funds

BlackRock is a corporation amalgamated under the laws of the Province of Ontario and is an indirect, wholly-owned subsidiary of BlackRock, Inc, with its head office located in Toronto, Ontario.
BlackRock is registered in the categories of Portfolio Manager, Investment Fund Manager and Exempt Market Dealer in all of the Jurisdictions. BlackRock is also registered as a Commodity Trading Manager in Ontario and an Adviser under the Commodity Futures Act in Manitoba.
The Filer acts, or will act, as trustee, manager and portfolio adviser of the Funds. BlackRock Institutional Trust Company, N.A. or another affiliate of BlackRock is or may be appointed as the sub-advisor of the Funds.
Each Fund is, or will be, an open-ended mutual fund governed by the laws of the Province of Ontario. Each Fund is, or will be, a reporting issuer in each of the Jurisdictions.
Neither the Filer nor any of the existing Funds is in default of securities legislation in any of the Jurisdictions.
Securities of each existing Fund are, and it is expected that securities of each future Fund will be, qualified for distribution in some or all of the Jurisdictions under a simplified prospectus, annual information form, and fund facts and/or prospectus and ETF facts prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure or National Instrument 41-101 General Prospectus Requirements. Each Fund is, or will be, governed by NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.
Units of each Fund that is an exchange-traded mutual fund (an ETF) are, or will be, listed and traded on the Toronto Stock Exchange, Neo Exchange Inc. or another stock exchange recognized by the Ontario Securities Commission.

Reasons for the Exemption Sought

The Bank of Nova Scotia (Scotia) is the current custodian of the Physical Bullion ETFs, each of which, in seeking to achieve its investment objective, invests in long-term holdings of unencumbered bullion, gold bullion in 100 or 400 troy ounce international bar sizes in the case of iShares Gold Bullion ETF, and silver bullion in 1,000 troy ounce international bar sizes in the case of iShares Silver Bullion ETF. Scotia currently retains The Brinks Company and Via Mat International Ltd. as sub-custodians pursuant to exemptive relief from certain provisions of NI 81-102 that would otherwise prohibit the use of such entities as sub-custodians granted to iShares Silver Bullion ETF in a decision dated July 14, 2009 In the matter of Claymore Silver Bullion Trust et al. and to iShares Gold Bullion ETF in a decision dated January 15, 2010 In the matter of Claymore Gold Bullion ETF et al. (together, the Claymore Decisions).
Scotia is exiting the bullion custody business and is expected to cease to be the custodian of the Physical Bullion ETFs effective during the first quarter of 2021. The Filer intends to appoint State Street Trust Company Canada (SSTCC), or such other entity selected by the Filer which qualifies to act as a custodian under Section 6.2 of NI 81-102, as the custodian of the Physical Bullion ETFs in respect of all fund assets other than bullion. SSTCC has advised that it is unable to store the Physical Bullion ETFs’ bullion as it does not own a vault facility or have a sub-custodian structure in place which could accommodate the Physical Bullion ETFs’ bullion. Subject to receipt of the Exemption Sought and unitholder approval to make certain changes to the investment restrictions of the Physical Bullion ETFs in order to permit each Physical Bullion ETF to store all of the bullion owned by the Physical Bullion ETF in the vault facilities of one or more entities that meet the requirements to act as a custodian or sub-custodian for assets as described in NI 81-102 (or are permitted to act as a custodian or sub-custodian pursuant to exemptive relief from the applicable requirements granted by the securities regulatory authorities) and to clarify the required insurance arrangements in respect of bullion owned by each Physical Bullion ETF, the Filer intends to appoint CIBC Mellon Trust Company (CIBC Mellon), a qualified custodian under 6.2 of NI 81-102, as bullion custodian to the Physical Bullion ETFs. Following the appointment of CIBC Mellon, it is expected that the bullion owned by the Physical Bullion ETFs will be stored in the vault facilities of the Royal Canadian Mint (the RCM), as CIBC Mellon’s sub-custodian and/or International Depository Services of Canada Inc. (IDS), if applicable, as the RCM’s sub-custodian. The RCM and IDS are entities permitted to be appointed pursuant to a decision dated April 30, 2019 In the matter of Ninepoint Gold Bullion Fund et al. (the April 30, 2019 Ninepoint Decision) which granted exemptive relief from the requirements of NI 81-102 that would otherwise prohibit the use of such entities as sub-custodians and can be relied upon by other investment fund managers, including the Filer, willing to comply with the terms and conditions of the decision. CIBC Mellon and its sub-custodians may appoint other sub-custodians in the future, subject to compliance with NI 81-102 or receipt of exemptive relief.
In addition, for a short transitional period while bullion custody is being moved from Scotia to CIBC Mellon, bullion will be held within both the custody network of Scotia and CIBC Mellon. During this transitional period, BlackRock would rely on the Exemption Sought, the Claymore Decisions with respect to bullion custodied with Scotia, and the April 30, 2019 Ninepoint Decision with respect to bullion custodied with CIBC Mellon. Once all bullion is moved from Scotia to CIBC Mellon, BlackRock will no longer rely upon the Claymore Decisions to custody the bullion. The conditions of the Exemption Sought would be complied with during the term of the transitional period and thereafter.
The Filer would like the flexibility for each Fund to engage more than one custodian, each of which will be qualified to act as a custodian under section 6.2 of NI 81-102 (each, an Additional Custodian) in order to provide flexibility for the Filer to appoint custodians for Funds based on the custodian’s experience and operational capabilities.
It can be operationally challenging for a custodian to appoint Additional Custodians not forming part of a custodian’s existing custodial network, as sub-custodians.
The appointment of an Additional Custodian will allow the Filer and the Physical Bullion ETFs and other Funds to access a robust bullion custody network through an Additional Custodian while maintaining the efficiencies associated with using SSTCC for other assets in a manner consistent with the custody arrangements currently in place for other investment funds managed by the Filer that are subject to NI 81-102. The appointment of an Additional Custodian would allow the Filer and the Funds to access a robust custody network for other specialized asset classes or to obtain operational efficiencies as determined by the Filer.
If the Exemption Sought is granted, an Additional Custodian's responsibility for custody of the Funds’ assets will apply only to the assets held by the Additional Custodian on behalf of the Funds (the Relevant Assets). The custodial arrangements between the Funds and each Additional Custodian will comply with the requirements of Part 6 of NI 81-102 other than subsection 6.1(1), subject to any other exemptive relief that has been granted from Part 6.
The appointment of an Additional Custodian should have no impact on the safety of the portfolio assets of the Funds while enhancing the ability of the Funds to use experienced custodians for the Relevant Assets and for operational efficiency.
Disclosure regarding the Exemption Sought and the particulars of the appointment of any Additional Custodian of the Funds with respect to the Relevant Assets will be included in the prospectus of the applicable Funds that is filed at the next annual renewal.
For purposes of complying with the conditions of the Exemption Sought, a single service provider, which provides a consolidated service offering to each Fund, together with or directly or indirectly through its affiliates and/or other delegates, shall reconcile all the portfolio assets of the Fund and provide the Fund with valuation services and complete daily reconciliations amongst the custodians before striking a daily net asset value for the Fund.

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 Fund may appoint one or more Additional Custodians if:

(a) a single entity reconciles all the portfolio assets of the Fund and provides the Fund with valuation services and will complete daily reconciliations amongst the custodians before striking a daily net asset value for the Fund;

(b) the Filer maintains such operational systems and processes, as between two or more custodians and the single entity referred to in condition (a) above, in order to keep a proper reconciliation of all the portfolio assets that will move amongst the custodians, as appropriate; and

(c) each Additional Custodian will act as custodian only for the portion of portfolio assets of the Fund transferred to it.

“Darren McKall”

Darren McKall, Manager,

Investment Funds and Structured Products Ontario Securities Commission

Application #2020/0605 SEDAR Project # 3141836

BlackRock Asset Management Canada Limited (Re), 2021 CanLII 23892

Case Summary