National Policy 11-203, Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from conflict of interest provisions to allow mutual funds to purchase equity securities pursuant to offerings made in the United Kingdom, the European Union, Switzerland, Norway, Australia, Hong Kong and Singapore in which a related dealer acts as underwriter -- relief required as growing status of filer's related dealers in equity underwriting activities in these jurisdictions was limiting ability of funds to acquire securities in these jurisdictions pursuant to a distribution -- impact of this created a "market necessity" for relief -- all purchases subject to independent review committee approval and securities must be distributed pursuant to prospectus qualified in these jurisdictions or by private placement of securities of a public issuer in these jurisdictions -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 4.1, 19.1.
July 22, 2015
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 FUNDS (as defined below)
The principal regulator in the Jurisdiction received an application (the Application) from the Filer on behalf of existing mutual funds and any additional or future mutual funds to which National Instrument 81-102 Investment Funds (NI 81-102) applies (each, a Fund and, collectively, the Funds) for which the Filer, or an affiliate of the Filer, acts as the investment fund manager and/or the portfolio adviser for a decision (the Exemption Sought) under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Funds from the prohibition in subsection 4.1(1) of NI 81-102 (the Prohibition) to permit the Funds to make an investment in a class of equity securities (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), notwithstanding that an associate or an affiliate of the Filer acts as an underwriter in the Distribution.
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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (the Passport Jurisdictions).
Terms defined in National Instrument 14-101 Definitions, NI 81-102, National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) and MI 11-102 have the same meaning if used in this Decision, unless otherwise defined. Certain other defined terms have the meanings given to them above or below under "Representations".
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation formed by amalgamation pursuant to articles of amalgamation dated November 1, 2013 under the federal laws of Canada. The head office of the Filer is located in Toronto, Ontario.
2. The Filer is registered: (a) as an adviser in the category of portfolio manager in each of the Jurisdictions, (b) as a dealer in the category of exempt market dealer in each of the Jurisdictions, (c) as an investment fund manager in each of British Columbia, Ontario, Québec and Newfoundland and Labrador and (d) as a commodity trading manager in Ontario.
3. The Filer, or an affiliate of the Filer, is, or will be, the investment fund manager and/or the portfolio adviser of each of the Funds.
4. Each of the Funds is, or will be, an open-ended mutual fund trust or corporation established under the laws of the Province of Ontario or another of the provinces and territories of Canada (the Jurisdictions). The securities of each of the Funds are or will be qualified for distribution in the Jurisdictions pursuant to a prospectus or a simplified prospectus and annual information form prepared and filed in accordance with the securities legislation of the Jurisdictions. Each of the Funds is, or will be, a reporting issuer in each of the Jurisdictions in which its securities are distributed.
5. The Filer is a "dealer manager" (as such term is defined in NI 81-102) with respect to the Funds for which they act as a portfolio manager and/or portfolio adviser and each of the Funds is, or will be, a "dealer managed investment fund" (as such term is defined in NI 81-102).
6. The Filer and each of the existing Funds are not in default of securities legislation in any of the Jurisdictions.
7. An independent review committee (the IRC) has been, or will be, appointed for each of the Funds under NI 81-107.
8. The Filer is currently an affiliate of RBC Dominion Securities Inc. (RBCDSI), RBC Capital Markets, LLC (RBCCML) and RBC Europe Limited (RBCEL), any of which may act as an underwriter in a Distribution.
9. Each of the Filer, RBCDSI, RBCCML and RBCEL is an affiliate of the Royal Bank of Canada (RBC, and collectively with RBCDSI, RBCCML and RBCEL, the Current Related Dealers) which is a global financial institution. RBC may also act as an underwriter in a Distribution.
10. The Current Related Dealers currently carry on their investment banking businesses in Canada, the United States and in other countries. The Current Related Dealers have been expanding their investment banking businesses in the United Kingdom, the European Union, Switzerland, Norway, Australia, Hong Kong and Singapore (the Foreign Jurisdictions), among other countries and regions.
11. The Current Related Dealers may, from time to time, expand their investment banking businesses in the Foreign Jurisdictions such that the Filer, or an affiliate of the Filer, may become an affiliate or associate of additional dealers (each, a Future Related Dealer and, collectively with the Current Related Dealers, the Related Dealers), any of which may act as an underwriter in a Distribution.
12. The Funds would not be restricted by the Prohibition if, in accordance with subsection 4.1(4) of NI 81-102, certain conditions are met, including that the Distribution is made by a prospectus filed in one or more of the Jurisdictions and the IRC of the Funds has approved the transaction in accordance with subsection 5.2(2) of NI 81-107.
13. As a prospectus will not be filed in any Jurisdiction in connection with a Distribution, the Funds cannot rely on the exemption from the Prohibition contained in subsection 4.1(4) of NI 81-102. However, the issuer of the Distribution will be, or will concurrently with the closing of the Distribution become, a public issuer in the Foreign Jurisdiction (and will therefore be required to maintain a continuous disclosure record that is publicly available as it would be required to if it was a reporting issuer in a Jurisdiction) and the Filer will comply with subparagraphs 4.1(4)(a), (c)(ii) and (d) of NI 81-102 when purchasing Securities.
14. The Filer previously received (i) exemptive relief granted In the Matter of RBC Asset Management Inc. et al. dated November 20, 2007, permitting the Funds to participate in Distributions by way of private placement in Canada where a Related Dealer acted as an underwriter subject to complying with the terms and conditions of such exemptive relief (the 2007 Decision), (ii) exemptive relief granted In the Matter of RBC Asset Management Inc., Phillips, Hager & North Investment Management Ltd. and the Index Funds dated November 11, 2009 permitting certain Funds that are index mutual funds to participate in Distributions by way of a public offering or a private placement in the jurisdiction in which the Distribution primarily takes place where a Related Dealer acted as an underwriter subject to complying with the terms and conditions of such exemptive relief (the Index Funds Decision), and (iii) exemptive relief granted In the Matter of RBC Asset Management Inc., Phillips, Hager & North Investment Management Ltd. and the Funds dated July 30, 2010 permitting the Funds to participate in Distributions in the United States where a Related Dealer acted as an underwriter subject to complying with the terms and conditions of such exemptive relief (the U.S. Decision, and with the 2007 Decision and Index Funds Decision, the Prior Decisions).
15. Since July 30, 2010 there have been many Distributions in the Foreign Jurisdictions in which a Current Related Dealer acted as an underwriter and in which the Funds could not purchase Securities in the Distribution or during the 60-Day Period because the Distribution was not made by a prospectus filed with one or more securities regulatory authorities or regulators in Canada, the issuers were not reporting issuers in a Jurisdiction, the Funds did not qualify as index mutual funds or the Distribution was not in the United States and, accordingly, neither subsection 4.1(4) of NI 81-102 nor the Prior Decisions could be relied upon.
16. The issue for the Funds continues to be significant as the Related Dealers continue to significantly expand their activities in the Foreign Jurisdictions. It is anticipated that the Related Dealers will become increasingly active during 2015 and beyond in the Foreign Jurisdictions due to the growing presence of RBC's global investment banking business in the global equity markets. As a result, the Funds will be restricted from a significantly larger number of Distributions in the Foreign Jurisdictions.
17. In addition, the number of, and the assets under management for, Funds that are classified as global or international equity funds and global balanced funds have grown significantly since July 30, 2010. During the period from July 31, 2010 to June 30, 2015, the number of Funds that were classified as global or international equity funds and global balanced funds increased from 24 to 35. During the same period, assets under management for these Funds together with all other Funds that may invest in equity securities outside of Canada and the United States have grown significantly. These increases have had a direct impact on the Funds since there is a limited supply of Distributions in the Foreign Jurisdictions where no Related Dealer is participating as an underwriter that may be allocated to the Funds. The Funds are competing with themselves for these investment opportunities as well as with other competitor retail investment funds.
18. The Funds have been negatively impacted by not being able to purchase, during a Distribution or in the 60-Day Period, in a Foreign Jurisdiction Securities that are consistent with each Fund's investment objective. Forgoing participation in these investment opportunities represents a significant opportunity cost for the relevant Funds, as they are being denied access to investment opportunities from a pricing and liquidity perspective as described in representation 19 during a Distribution or the 60-Day Period as a result of the coincidental participation of a Related Dealer in the relevant transaction, particularly when there is a regulatory and governance framework in place to oversee participation in similar transactions.
19. The significant opportunity cost referred to above is two-fold. First, Securities issued in a Distribution are frequently "underpriced" to ensure that all Securities are sold in the Distribution and the Securities often trade at a significantly higher price shortly after public trading begins. Because the Funds are prevented from purchasing Securities in the Distribution and during the 60-Day Period, they are not able to profit from any price increases during that period. Second, Distributions are a source of liquidity for the Funds. A portfolio manager of a Fund may obtain a block of Securities in a Distribution in one trade, at a competitive price. If a portfolio manager were to purchase a similar size block of Securities in the secondary market, this may take time (often several trades over several days) and prices may rise in the process (often solely due to limited liquidity in the market and the trading activity undertaken by the portfolio manager to purchase a large block of Securities).
20. The Prohibition is also detrimental for the Funds as their position in an issuer is diluted as the Funds are prevented from supplementing existing positions when issuers whose securities the Funds already hold are raising capital by distributing additional securities (for instance, pursuant to a rights offering). In addition, while the Funds are not index mutual funds and their investment objectives do not require that the Funds track the performance of an index, the performance of the Funds is benchmarked against an index. The Prohibition prevents the Funds from maintaining either their strategic percentage holdings in a given issuer relevant to their overall portfolio holdings or their percentage holdings in a given issuer relevant to the benchmark index holdings.
21. The prejudice that results for a Fund that is restricted from purchasing Securities is that the portfolio manager's discretion with respect to managing the portfolio is negatively impacted. If the portfolio manager cannot make appropriate commitments or expressions of interest in respect of Securities due to the participation of a Related Dealer in the Distribution, the portfolio manager is delayed in making appropriate decisions for a Fund. The portfolio manager would be delayed in that purchases may not be made in the 60-Day Period even though the Filer would want to immediately acquire such Securities. The portfolio manager would then have to decide whether to make an investment in another issuer altogether until the 60-Day Period expires in respect of the Securities.
22. The prejudice that results for a Fund also puts the Funds at a competitive disadvantage to almost all other Canadian funds since the Filer is among the few firms, if not the only firm, with a related party dealer that is involved on a frequent basis in these types of Distributions in the Foreign Jurisdictions.
23. Since the Funds are dealer managed investment funds because of the relationship between the Filer and the Related Dealer, the Prohibition is applicable even in circumstances where a sub-adviser is exercising discretion with respect to a purchase if the sub-adviser becomes aware of the involvement of a Related Dealer.
24. When the Filer makes a decision to purchase Securities in a Distribution, it is based on its view of the issuer, the investment merits and pricing of the Distribution and the proposed use of the capital raised in the Distribution by the issuer. This decision is free from any influence from any third-party dealer or Related Dealer. The involvement of a Related Dealer in the underwriting has no bearing on the investment decision made by the Filer.
25. The Filer has generally, to date, been made aware of a Distribution in a Foreign Jurisdiction and been invited to participate on behalf of a Fund by an underwriter which is not a Related Dealer. However, the Filer, upon learning about the involvement of a Related Dealer in the underwriting, has nonetheless been unable to participate in Distributions even in cases where the Filer's intention was to supplement existing positions on behalf of certain Funds.
26. In almost all Distributions in respect of which the Exemption Sought is required, a Related Dealer's involvement as an underwriter in a particular Distribution will not be known by the Filer, or an affiliate of the Filer, sufficiently long enough in advance to make an application for exemptive relief on a case-by-case basis. A majority of Distributions in the Foreign Jurisdictions require a response within 12 hours and in other cases within one or two days, which does not permit an exemptive relief application.
27. The Filer engages with Related Dealers and third-party dealers equally. Despite the affiliation between the Filer and a Related Dealer, they operate independently of each other. In particular, the investment banking and related dealer activities of the Related Dealer and the investment portfolio management activities of the Filer on behalf of the Funds are separated by information barriers or "ethical" walls. Accordingly, no information flows from one to the other concerning the above activities generally, except in the following or similar circumstances:
(a) in respect of compliance matters (for example, the Filer and a Related Dealer may communicate to enable the Filer to maintain an up to date restricted-issuer list to ensure that the Filer complies with applicable securities laws);
(b) in respect of normal-course dealer activities (for example, a Related Dealer is on the list of brokers that may execute normal course trades in securities in the secondary market);
(c) the Filer, on behalf of the Funds as investors in RBC securities, may meet with RBC in respect of RBC securities in accordance with policies and procedures that govern such meetings; and
(d) the Filer and a Related Dealer may share general market information such as discussion on general economic conditions, bank rates, etc.
28. Each of the Funds relying on the Exemption Sought will follow the following policies and procedures:
(a) the IRC will receive confirmation from portfolio managers that have purchased Securities in a Distribution or during the 60-Day Period on behalf of a Fund that each transaction has met the requirements of subsection 5.2(2) of NI 81-107;
(b) the IRC will receive a written analysis with respect to each issuer of Securities purchased in a Distribution or during the 60-Day Period. Each written analysis will include: a description of the business of the issuer; the reason for investing in the issuer; the particular Funds involved; the number of Securities purchased or sold; and Fund holdings and weight of the issuer relative to the overall holdings in the Fund at the start and the end of each reporting period;
(c) the IRC will receive regular presentations from portfolio managers, including from investment sub-advisers, to review and discuss purchases made in a Distribution or during the 60-Day Period on behalf of a Fund; and
(d) the IRC will receive confirmation from the Filer that the investment by the Fund is consistent with sub-paragraph (a) above; that there were no NI 81-102 compliance, valuation, trading or settlement issues for the Securities purchased in the Distribution or the 60-Day Period; and that all transactions were effected in accordance with the standing instructions of the IRC.
29. The Funds will not be required or obligated to purchase any Securities under a Distribution or during the 60-Day Period.
30. The investment by a Fund in the Securities purchased in a Distribution or during the 60-Day Period will be made in furtherance of the Fund's investment objective(s) and will be consistent with its investment objectives and strategies.
31. At the time of purchase by a Fund, the Securities will be equity securities of a public issuer in a Foreign Jurisdiction (or an entity that will become a public issuer in a Foreign Jurisdiction at the time of purchase of the Securities by the Fund).
32. A Distribution in respect of which the Exemption Sought is requested will be made by means of a prospectus, or similar public offering document (a Public Offering), or by means of a private placement (a Private Placement) in the Foreign Jurisdiction in which the Distribution is taking place. The Securities issued in the Distribution will be listed on a stock exchange.
33. The Filer has implemented policies and procedures and obtained the approval and standing instructions from the IRC of the Funds in order to rely on the Prior Decisions and paragraph 4.1(4)(c) of NI 81-102 where the issuer of Securities has filed a prospectus in Canada.
34. The Filer has discussed this matter with its IRC in anticipation of the Funds receiving exemptive relief to participate in Distributions in a Foreign Jurisdiction where a Related Dealer will act as an underwriter. The Filer's IRC indicated that it would give its approval (subject to complying with the terms and conditions of applicable exemptive relief) to permit the Funds to act in accordance with similar policies and procedures applicable to situations where Related Dealers act as an underwriter (i) in a Distribution of an issuer of Securities that has filed a prospectus in Canada, and (ii) in a Distribution in the United States.
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 the Securities purchased in a Distribution or during the 60-Day Period is made in furtherance of the Fund's investment objective(s) and is consistent with its investment objectives and strategies;
(b) the IRC of the Fund must approve the transaction in accordance with the requirements of subsection 5.2(2) of NI 81-107;
(c) the Distribution must be made by way of a Public Offering or a Private Placement in the Foreign Jurisdiction in which the Distribution is taking place;
(d) any Related Dealer that is involved as an underwriter in the Distribution must be regulated in respect of its underwriting activities in Canada, the United States or the Foreign Jurisdiction in which the Distribution is taking place;
(e) the Securities issued in the Distribution must be listed on a stock exchange;
(f) if the Securities are acquired during the 60-Day Period they must be acquired on a stock exchange;
(g) no later than the time the Funds file their annual financial statements, the Filer will include the particulars of each investment made by the Funds in reliance on the Exemption Sought during their most recently completed financial year in the report of purchases of securities underwritten by a related party in accordance with section 4.1 (4) (d) of NI 81-102 filed on SEDAR; and
(h) appropriate disclosure of the terms of the Exemption Sought is made.