Securities Law & Instruments

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, ss. 2.3(f), 2.3(h), 2.5(2)(a), 2.5(2)(c), 19.1.

May 10, 2012

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.

(RBC GAM)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of each of the mutual funds of which the Filer, or an affiliate thereof, is, or in the future will be, the manager and that are subject to the provisions of National Instrument 81-102 -- Mutual Funds (NI 81-102), other than "money market funds" as defined in NI 81-102, (each, a Fund and collectively, the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption (the Exemption Sought) from:

1. Paragraph 2.3(f) of NI 81-102 (the Silver Exemption) to permit the Funds to:

(a) purchase silver (Physical Silver); and

(b) purchase a certificate representing silver that is:

(i) available for delivery in Canada, free of charge, to or to the order of the holder of such silver certificate;

(ii) of a minimum fineness of 999 parts per 1,000;

(iii) held in Canada;

(iv) in the form of either bars or wafers; and

(v) if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a jurisdiction

(the Permitted Silver Certificates).

2. Paragraph 2.3(h) of NI 81-102 (the Silver Derivative Exemption) to permit the Funds to purchase, sell or use a specified derivative the underlying interest of which is Physical Silver or a specified derivative of which the underlying interest is Physical Silver on an unlevered basis (the Silver Derivatives and together with Physical Silver and Permitted Silver Certificates, Silver).

3. Paragraphs 2.3(h) and 2.5(2)(a) and (c) of NI 81-102 (the ETF Exemption) to permit the Funds to purchase and hold securities of:

(a) exchange-traded funds that seek to provide daily results that replicate the daily performance of a specified widely-quoted market index (the exchange-traded fund's Underlying Index) by a multiple of up to 200% (the Leveraged Bull ETFs) or an inverse multiple of up to 200% (the Leveraged Bear ETFs and together with the Leveraged Bull ETFs, the Leveraged ETFs);

(b) exchange-traded funds that seek to provide daily results that replicate the daily performance of their Underlying Index by an inverse multiple of 100% (the Inverse ETFs);

(c) exchange-traded funds that seek to replicate the performance of gold or silver or the value of a specified derivative the underlying interest of which is gold or silver on an unlevered basis (the Gold ETFs and the Silver ETFs, as the case may be, and collectively, the Commodity ETFs); and

(d) exchange-traded funds that seek to provide daily results that replicate the daily performance of gold or silver or the value of a specified derivative the underlying interest of which is gold or silver on an unlevered basis (the exchange-traded fund's Underlying Gold Interest or the exchange-traded fund's Underlying Silver Interest) by a multiple of up to 200% (the Leveraged Gold ETFs and the Leveraged Silver ETFs, respectively and collectively, the Leveraged Commodity ETFs).

Leveraged ETFs, Inverse ETFs, Commodity ETFs and the Leveraged Commodity ETFs are referred to collectively in this application as the Underlying 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 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 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 RBC GAM:

1. 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.

2. RBC GAM is an indirect, wholly-owned subsidiary of the Royal Bank of Canada.

3. 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.

4. RBC GAM or an affiliate thereof acts, or will act, as manager of each of the Funds.

5. 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 some or each 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.

6. The securities of each Fund are, or will be, qualified for distribution in some or each of the Jurisdictions under a simplified prospectus and annual information form filed in accordance with National Instrument 81-101 -- Mutual Fund Prospectus Disclosure and receipted by the securities regulators in the applicable Jurisdiction and/or Jurisdictions.

7. Neither RBC GAM nor any of the existing Funds is in default of securities legislation in any Jurisdiction.

Silver

8. In addition to investing in gold, the Funds may wish to invest directly in silver.

9. To obtain exposure to gold or silver indirectly, the Funds may also wish to use specified derivatives the underlying interest of which is gold or silver and invest in the Commodity ETFs (which together with gold, permitted gold certificates and Silver are collectively referred to herein as the Gold and Silver Products).

10. RBC GAM understands that NI 81-102 permits mutual funds to purchase gold or permitted gold certificates or enter into a specified derivative the underlying interest of which is gold on the basis that gold is a very liquid commodity. RBC GAM is requesting a similar investment flexibility that would permit a Fund to make investments in silver on the rationale that silver is, like gold, a very liquid commodity.

11. Permitting the Funds to invest in Gold and Silver Products will provide RBC GAM with the opportunity to increase gains for the Funds in certain market conditions which could otherwise cause the Funds to have significant cash positions and therefore could prohibit the Funds from achieving their investment objectives.

12. If the investment in Gold and Silver Products represents a material change for any existing Fund, RBC GAM will comply with the material change reporting obligations for that Fund prior to investing in Gold and Silver Products.

13. Any investment by a Fund in Silver will be made in compliance with the applicable custodian requirements in Part 6 of NI 81-102.

The Underlying ETFs

14. Each Leveraged ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed +/-200% of the corresponding daily performance of its Underlying Index.

15. Each Inverse ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Index will not exceed -100% of the corresponding daily performance of its Underlying Index.

16. Each Leveraged Gold ETF and each Leveraged Silver ETF will be rebalanced daily to ensure that its performance and exposure to its Underlying Gold Interest or its Underlying Silver Interest, respectively, will not exceed +200% of the corresponding daily performance of its Underlying Gold Interest or its Underlying Silver Interest, respectively.

17. In addition to investing in securities of exchange traded funds that are "index participation units" as defined in NI 81-102 (IPUs), the Funds propose to have the ability to invest in the Underlying ETFs, whose securities are not IPUs.

18. The amount of the loss that can result from an investment by a Fund in an Underlying ETF will be limited to the amount invested by the Fund in securities of the Underlying ETF.

Investments in Silver and the Underlying ETFs

19. Each Fund that relies on the Requested Relief will be permitted, in accordance with its investment objectives and investment strategies, to invest in Silver and/or Underlying ETFs, as the case may be.

20. Each Fund will only purchase gold, permitted gold certificates, Silver and specified derivatives with such underlying interests (including the Gold ETFs, Silver ETFs, Leveraged Gold ETFs and Leveraged Silver ETFs), if immediately after such purchase, no more than 10% of the net assets of the Fund, taken at market value at the time of such purchase, would consist of such assets in aggregate.

21. Silver and the Underlying ETFs are attractive investments for the Funds because such investments provide an efficient and cost effective means of achieving diversification and exposure.

22. In the absence of an exemption with respect to Silver, the restrictions in Subsection 2.3(f) and Subsection 2.3(h) of NI 81-102 would prohibit a Fund from purchasing Physical Silver, Permitted Silver Certificates and Silver Derivatives.

23. In the absence of an exemption with respect to the Underlying ETFs:

(a) the restrictions in paragraph 2.3(h) would prohibit a Fund from purchasing a Silver ETF or a Leveraged Silver ETF;

(b) the restrictions in paragraph 2.5(2)(a) would prohibit a Fund from purchasing or holding a security of an Underlying ETF, because the Underlying ETFs are not subject to each of NI 81-102 and NI 81-101; and

(c) the restrictions in paragraph 2.5(2)(c) would prohibit a Fund from purchasing or holding securities of some Underlying ETFs, because some Underlying ETFs may not be qualified for distribution in at least one of the Jurisdictions.

24. An investment by a Fund in Silver or in securities of an Underlying ETF will represent the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Fund.

25. The simplified prospectus of each Fund discloses, or will disclose the next time it is renewed after the date hereof, (i) in the Investment Strategy section of the prospectus, the fact that the Fund has obtained relief to invest in the Underlying ETFs and Silver, together with an explanation of what each Underlying ETF is, and (ii) the risks associated with investments in the Underlying ETFs and Silver.

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 securities of an Underlying ETF and/or Silver is in accordance with the fundamental investment objectives of the Fund;

(b) the Fund does not sell short securities of an Underlying ETF;

(c) the securities of the Underlying ETFs are traded on a stock exchange in Canada or the United States;

(d) the securities of the Underlying ETFs are treated as specified derivatives for the purposes of Part 2 of NI 81-102;

(e) a Fund does not purchase securities of an Underlying ETF if, immediately after such purchase, more than 10% of the net assets of the Fund in aggregate, taken at market value at the time of the purchase, would consist of securities of Underlying ETFs;

(f) a Fund does not enter into any transaction if, immediately after such transaction, more than 20% of the net assets of the Fund, taken at market value at the time of the transaction, would consist of, in aggregate, securities of Underlying ETFs and all securities sold short by the Fund;

(g) a Fund does not purchase Gold and Silver Products if, immediately after such purchase, more than 10% of the net assets of the Fund, taken at market value at the time of such purchase, would consist of Gold and Silver Products; and

(h) a Fund does not purchase Gold and Silver Products if, immediately after such purchase, the market value exposure to gold or silver through the Gold and Silver Products is more than 10% of the net assets of the Fund, taken at market value at the time of such purchase.

"Sonny Randhawa"
Manager, Investment Funds Branch
Ontario Securities Commission