Securities Law & Instruments

Headnote

Application by bank (the Bank) and capital trust subsidiary (the Trust) for an order varying a previous order granting the Trust relief from the requirement in OSC Rule 13-502 Fees(the Fees Rule) to pay participation fees -- relief in previous order no longer available due to condition in previous order no longer being satisfied -- Bank has paid, and will continue to pay, participation fees applicable to it under s. 2.2 of the Fee Rule, and includes capitalization of Trust in its calculation -- relief analogous to relief for "subsidiary entities" contained in s. 2.9(2) of the Fees Rule -- Trust may not, from a technical accounting perspective, be considered to be a "subsidiary entity" of Bank for Canadian GAAP purposes and may not be entitled to rely on the exemption in s. 2.9(2) of the Fees Rule -- Trust and Bank satisfy conditions of exemption in s. 2.9(2) but for definition of "subsidiary entity" -- previous order varied to delete the condition and to permit fee relief to continue.

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., s. 144.

Rules Cites

OSC Rule 13-502 Fees, ss. 2.2, 2.9(2).

IN THE MATTER OF

ONTARIO SECURITIES COMMISSION

RULE 13-502 FEES

AND

IN THE MATTER OF

ROYAL BANK OF CANADA AND

RBC SUBORDINATED NOTES TRUST

 

ORDER

WHEREAS the Director has received an application from Royal Bank of Canada (the Bank) and RBC Subordinated Notes Trust (the Trust) for an order, pursuant to Section 6.1 of Ontario Securities Commission (the Commission) Rule 13-502 Fees (the Fees Rule), that the requirement to pay a participation fee under Section 2.2 of the Fees Rule shall not apply to the Trust, subject to certain terms and conditions.

AND WHEREAS the Bank and the Trust have represented to the Commission that:

1. The Trust is a closed-end trust established under the laws of the Province of Ontario by Royal Trust Corporation of Canada as trustee (the Trustee), pursuant to a declaration of trust dated April 3, 2007.

2. The Trust has a financial year-end of December 31.

3. The Trust is a reporting issuer in Ontario and, to its knowledge, is not in default of any requirement under the securities legislation of the Province of Ontario.

4. The Bank is the administrative agent of the Trust pursuant to an administration agreement pursuant to which the Trustee has delegated to the Bank certain of its obligations in relation to the administration of the Trust, including the day-to-day operations of the Trust and such other matters as may be requested from time to time by the Trustee.

5. The outstanding securities of the Trust consist of (i) $1,000,000,000 principal amount of 4.58% subordinated notes due April 30, 2017 representing subordinated indebtedness of the Trust (the RBC TSNs -- Series A) and (ii) voting units of the Trust (the Voting Trust Units). The RBC TSNs -- Series A are fully and unconditionally guaranteed on a subordinated basis by the Bank. All outstanding Voting Trust Units are held by the Bank. The Trust distributed the RBC TSNs -- Series A in a public offering pursuant to a prospectus dated April 24, 2007 (the Offering). Subject to certain conditions, the Trust may redeem the outstanding RBC TSNs -- Series A. Upon the occurrence of any one of the following events, the RBC TSNs -- Series A will be exchanged, without the consent of the holders, into subordinated debt of the Bank.: (i) an application for a winding-up order in respect of the Bank pursuant to the Winding-up and Restructuring Act (Canada) (the Winding-Up Act) is filed by the Attorney General of Canada or a winding-up order in respect of the Bank pursuant to the Winding-Up Act is granted by a court; (ii) the Superintendent of Financial Institutions (Canada) (the Superintendent) advises the Bank in writing that the Superintendent has taken control of the Bank or its assets pursuant to the Bank Act (Canada) (the Bank Act); (iii) the Superintendent advises the Bank in writing that the Bank has a risk-based Tier 1 capital ratio of less than 5.0% or a risk-based total capital ratio of less than 8.0%; (iv) the board of directors of the Bank advises the Superintendent in writing that the Bank has a risk-based Tier 1 capital ratio of less than 5.0% or a risk-based total capital ratio of less than 8.0%; or (v) the Superintendent directs the Bank, pursuant to the Bank Act, to increase its capital or provide additional liquidity and the Bank elects to cause the automatic exchange as a consequence of

6. The Trust's only business is to invest its assets and its objective is to acquire and hold deposit notes of the Bank and other eligible investments that will generate income for payment of principal, interest and other amount in respect of its securities, including the RBC TSNs -- Series A. The Trust does not carry on any independent business activities other than to acquire and hold assets to generate income as described above.

7. Pursuant to the MRRS decision document dated August 14, 2007 (the Continuous Disclosure Exemption) granted to the Trust by the Autorité des marchés financiers, as principal regulator, on behalf of itself and other decision makers (collectively, the Decision Makers), the Decision Makers determined that the requirement contained in the securities legislation of the Province of Québec and in other applicable jurisdictions (collectively, the Legislation) to:

(a)

(i) file interim financial statements and audited annual financial statements and deliver same to the security holders of the Trust, pursuant to Sections 4.1, 4.3 and 4.6 of National Instrument 51-102 - Continuous Disclosure Obligations (NI 51-102);

(ii) file interim and annual management's discussion and analysis (MD&A) of the financial conditions and results of operations and deliver same to the security holders of the Trust pursuant to Section 5.1 and 5.6 of NI 51-102;

(iii) file an annual information form pursuant to Section 6.1 of NI 51-102;

(the obligations set out in paragraph (a) are collectively defined as the Continuous Disclosure Obligations), and

(b) file interim and annual certificates contained in Sections 2.1 and 3.1 of Multilateral Instrument 52-109 - Certification of Disclosure in Issuer's Annual and Interim Filings (MI 52-109) (the Certification Obligations);

shall not apply to the Trust for so long as:

with respect to the Continuous Disclosure Obligations:

(i) the Bank remains a reporting issuer, or the equivalent, in each jurisdiction where such concept exists, under the Legislation and has filed all documents it is required to file;

(ii) the Bank files with the Decision Makers, in electronic format under the Trust's System for Electronic Document Analysis and Retrieval (SEDAR) profile, the documents listed in paragraph (a) above, at the same time as they are required under the Legislation to be filed by the Bank;

(iii) the Trust pays all filing fees that would otherwise be payable by the Trust in connection with the filing of the documents referred to in paragraph (a) above;

(iv) the Trust sends or causes the Bank to send its interim and annual financial statements and interim and annual MD&A, as applicable, to holders of its securities, other than the holders of debt securities, at the same time and in the same manner as if its holders of securities were holders of common shares of the Bank;

(v) all outstanding securities of the Trust are either RBC TSNs -- Series A, additional series of debt securities having terms substantially similar to the RBC TSNs Series A or Voting Trust Units;

(vi) the rights and obligations of holders of additional series of debt securities are the same in all material respects as the rights and obligations of the holders of the RBC TSNs -- Series A, with the exceptions of economic terms such as the rate of interest, redemption dates and maturity dates;

(vii) the Bank is the beneficial owner of all issued and outstanding voting securities of the Trust, including the Voting Trust Units, and

with respect to the Certification Obligations:

(i) the Trust is and continues to be exempted from the Continuous Disclosure Obligations; and

(ii) the Bank files with the Decision Makers, in electronic format under the Trust's SEDAR profile, the interim and annual certificates filed by the Bank under MI 52-109 at the same time as such documents are required under the Legislation to be filed by the Bank.

The Continuous Disclosure Exemption shall expire 30 days after the date a material adverse change occurs in the affairs of the Trust.

8. The Trust was established by the Bank in order to comply with the regulatory requirements of the Office of the Superintendent of Financial Institutions (OSFI) relating to the issuance of innovative capital instruments (as contained in OSFI's Principles Governing Inclusion of Innovative Instruments in Tier 1 Capital (the OSFI Guidelines)).

9. OSFI maintains strict guidelines and standards with respect to the capital adequacy requirements of federally regulated financial institutions, including the Bank, and, in particular, specifies minimum required amounts of regulatory capital to be maintained by such institutions. Tier 1 capital consists of common shareholders' equity, qualifying non-cumulative perpetual preferred shares, qualifying innovative instruments and qualifying non-controlling interests arising on consolidation from Tier 1 capital instruments while Tier 2 capital consists primarily of subordinated debt. Innovative instruments, such as the RBC TSNs -- Series A, must satisfy the detailed requirements of the OSFI Guidelines to be included in Tier 2B capital. Accordingly, the innovative instruments (RBC TSNs -- Series A) must be issued by a special purpose vehicle (the Trust), whose primary purpose is to raise innovative Tier 2B capital. OSFI approved the inclusion of the RBC TSNs -- Series A as Tier 2B capital of the Bank.

10. No continuous disclosure documents concerning only the Trust will be filed with the Commission.

11. The Trust is a "Class 2 reporting issuer" under the Fees Rule and would be required (but for this Order) to pay participation fees under such rule.

12. The Bank, as a legal and factual matter, controls the Trust though its ownership of the Voting Trust Units issued by the Trust and its role as administrative agent of the Trust. The Bank has paid, and will continue to pay, participation fees applicable to it under section 2.2 of the Fees Rule.

13. The Fees Rule includes an exemption for "subsidiary entities" in subsection 2.9(2) of the Fees Rule. The Bank and the Trust meet all of the substantive requirements to rely on the exemption in subsection 2.9(2) of the Fees Rule, but for the definition of "subsidiary entity". The Fees Rule defines "subsidiary entity" be reference to the accounting definition under Canadian generally accepted accounting principles (GAAP), rather than by reference to a legal definition based on control.

14. On November 1, 2004, the Canadian Institute of Chartered Accountants adopted Guideline 15, Consolidation of Variable Interest Entities. Accordingly, the Trust may not, from a technical accounting perspective, be considered to be a "subsidiary entity" of the Bank for Canadian GAAP purposes and may not be entitled to rely on the exemption in subsection 2.9(2) of the Fees Rule.

IT IS ORDERED by the Commission under the Fees Rule that the requirement to pay a participation fee under Section 2.2 of the Fees Rule shall not apply to the Trust, for so long as:

(i) the Bank and the Trust continue to satisfy all of the conditions contained in the Continuous Disclosure Exemption; and

(ii) the capitalization of the Trust represented by the RBC TSNs -- Series A and any additional securities of the Trust that may be issued, from time to time, by the Trust is included in the participation fee calculation applicable to the Bank and the Bank has paid the participation fee calculated on this basis.

DATED at Toronto this 27th day of November, 2007.

"Cameron McInnis"
Manager, Corporate Finance Branch