Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from s. 13.5(2)(b) of NI 31-103 to permit in specie transfers between pooled funds and managed accounts, subject to certain conditions.

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5, 15.1.

March 11, 2016

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF BLACKROCK ASSET MANAGEMENT CANADA LIMITED (BlackRock Canada), BLACKROCK INSTITUTIONAL TRUST COMPANY, N.A. (BTC), AND BLACKROCK FINANCIAL MANAGEMENT, INC. (BFM) (each, a Filer and, collectively, the Filers) AND IN THE MATTER OF THE POOLED FUNDS (as defined below)

DECISION

Background

The securities regulatory authority or regulator in Ontario received an application (the Application) on behalf of the Filers and on behalf of the existing mutual funds and future mutual funds of which BlackRock Canada is the investment fund manager and to which NI 81-102 does not apply (each, a Pooled Fund and, collectively, the Pooled Funds) for a decision under section 15.1 of National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) providing relief from the following:

In Specie Transactions with Related Parties

from the requirement in section 13.5(2)(b)(ii) and (iii) of NI 31-103 that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, from purchasing or selling a security by way of an In Specie Transaction (defined below) from or to the investment portfolio of any of the following:

(a) an associate of a responsible person; or

(b) an investment fund for which a responsible person acts as an adviser;

in order to permit: (i) a Pooled Fund; or (ii) a fully managed account by BlackRock Canada, BTC or BFM for a Canadian resident client (each, a Managed Account) to engage in In Specie Transactions (as defined below) while revoking the Existing Relief (as defined below), only insofar as the Existing Relief pertains to In Specie Transactions between Pooled Funds and Managed Accounts (all terms as defined below).

(the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:

(a) the Ontario Securities Commission is the principal regulator for the Application; and

(b) the Filers have provided notice that section 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, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland & Labrador, Northwest Territories, Yukon and Nunavut (the Passport Jurisdictions).

Interpretation

Terms defined in MI 11-102, National Instrument 14-101 -- Definitions, NI 81-102 and NI 31-103 have the same meanings if used in this Decision, unless otherwise defined.

Representations

This Decision is based on the following facts represented by the Filers:

General

1. The head office of BlackRock Canada is located in Toronto, Ontario. The head office of BTC is located in San Francisco, California. The head office of BFM is located in New York, New York.

2. BlackRock Canada is registered as a portfolio manager, investment fund manager and exempt market dealer in Ontario and in each of the Passport Jurisdictions (together, the Jurisdictions) and as a commodity trading manager in Ontario.

3. BTC is relying on a combination of the international adviser exemption and the international sub-adviser exemption in NI 31-103 in all of the Jurisdictions of Canada.

4. BFM is relying on a combination of the international adviser exemption and the international sub-adviser exemption in NI 31-103 in all of the Jurisdictions of Canada.

5. BlackRock Canada is, or will be, the investment fund manager and trustee of each of the Pooled Funds, each of which is, or will be, organized under the laws of Ontario.

6. None of the Pooled Funds are, or will be, a reporting issuer in any of the Jurisdictions.

7. BlackRock Canada is, or will be, the primary portfolio manager of each of the Pooled Funds and the Managed Accounts.

8. BTC, BFM or another affiliate of BlackRock Canada is, or may be, the sub-adviser of each of the Pooled Funds and the Managed Accounts.

9. BlackRock Canada offers discretionary investment management services to investors through Managed Accounts.

10. Each Managed Account client wishing to receive discretionary investment management services has entered into, or will enter into, a written agreement (an Investment Management Agreement) whereby the client appoints BlackRock Canada to act as portfolio manager in connection with an investment portfolio of the client with full discretionary authority to trade in securities for the Managed Account, including authority to appoint a Filer or another affiliate as sub-adviser.

11. A Filer may, where authorized under the Investment Management Agreement, from time to time invest a Managed Account client's assets in units of a Pooled Fund (Units) to facilitate portfolio management or redeem a Managed Account client's Units to facilitate portfolio management.

12. Each Investment Management Agreement or other documentation in respect of a Managed Account contains, or will contain, the authorization of the client for the Managed Account to engage in In Specie Transactions.

13. Each of BlackRock Canada, BTC and BFM is currently a wholly-owned subsidiary of BlackRock, Inc.

NI 31-103 Representations

14. BlackRock Canada, BTC, BFM or another affiliate of BlackRock Canada may wish or be required to cause a Pooled Fund or a Managed Account to deliver securities from its investment portfolio (Portfolio Securities) to another Pooled Fund as the purchase consideration for Units of the other Pooled Fund, and for a Pooled Fund to deliver Portfolio Securities to another Pooled Fund or Managed Account as the proceeds of redemption for Units of the first Pooled Fund (each, an In Specie Transaction and collectively, In Specie Transactions).

15. As BlackRock Canada is the trustee of the Pooled Funds, each Pooled Fund is or will be an "associate" of BlackRock Canada and, accordingly, absent the grant of the Existing Relief or, with respect to In Specie Transactions between Pooled Funds, the Exemption Sought, BlackRock Canada would be precluded by the provisions of Section 13.5(2)(b)(ii) of NI 31-103 from effecting In Specie Transactions.

16. As BlackRock Canada is a registered adviser which is or will be the manager and primary portfolio manager of the Pooled Funds and Managed Accounts, BlackRock Canada is a "responsible person" of the Pooled Funds and Managed Accounts and, absent the Requested Relief, BlackRock Canada would be precluded by the provisions of Section 13.5(2)(b)(iii) of NI 31-103 from effecting In Specie Transactions.

17. As BTC, BFM and other affiliates of BlackRock Canada may act as sub-advisers to one or more Pooled Funds and Managed Accounts, BTC, BFM and other affiliates of BlackRock Canada may be considered a "responsible person" of such Pooled Funds and Managed Accounts and, absent the Requested Relief, BTC, BFM and other affiliates of BlackRock may be precluded by the provisions of Section 13.5(2)(b)(iii) of NI 31-103 from effecting In Specie Transactions.

18. BlackRock Canada, BTC, BFM and the Pooled Funds are not in default of securities legislation in any of the Jurisdictions.

19. None of BlackRock Canada, BTC, BFM or another affiliate of BlackRock Canada receive any compensation in respect of any sale or redemption of Units or in respect of any delivery of Portfolio Securities further to an In Specie Transaction. The only cost incurred by a Pooled Fund or a Managed Account for an In Specie Transaction will be a nominal administrative charge levied by the custodian of the Pooled Fund in recording the trades and/or any transfer costs charged by a dealer in transferring the Portfolio Securities in specie (the Transfer Charge). Normal transaction costs will be incurred in acquiring the Portfolio Securities prior to their delivery in specie or in disposing of the Portfolio Securities after a redemption in specie.

20. BlackRock Canada, as manager of the Pooled Funds, will value the Portfolio Securities transferred in an In Specie Transaction on the same valuation day on which the purchase price or redemption price of the Units is determined. With respect to the purchase of Units, the Portfolio Securities transferred to the Pooled Fund in an In Specie Transaction as purchase consideration for those Units will be valued as if the Portfolio Securities were assets of the Pooled Fund and as if the Pooled Fund was subject to subsection 9.4(2)(b)(iii) of NI 81-102. With respect to the redemption of Units, the Portfolio Securities transferred in consideration for the redemption price of those Units will have a value equal to the amount at which those Portfolio Securities were valued in calculating the net asset value per security used to establish the redemption price of the Units, as if the Pooled Fund was subject to subsection 10.4(3)(b) of NI 81-102.

21. In Specie Transactions will be subject to (i) compliance with the written policies and procedures of BlackRock Canada respecting In Specie Transactions that are consistent with applicable securities legislation, and (ii) the oversight of BlackRock Canada to ensure that the transaction represents the business judgment of BlackRock Canada acting in its discretionary capacity with respect to the Pooled Funds or Managed Accounts involved in the In Specie Transaction, uninfluenced by considerations other than the best interests of such Pooled Funds and Managed Accounts. The results of the oversight and review of BlackRock Canada will be submitted in a form of report to BlackRock Canada's Board of Directors on a semi-annual basis.

22. Should any Portfolio Securities which are transferred in an In Specie Transaction meet the definition of "illiquid asset" (as defined in NI 81-102) (Illiquid Portfolio Securities), the responsible portfolio manager or sub-adviser will obtain independent pricing for such Illiquid Portfolio Securities determined on the basis of reasonable inquiry immediately before effecting the In Specie Transaction.

23. If any Illiquid Portfolio Securities are the subject of an In Specie redemption, the Illiquid Portfolio Securities will be transferred on a basis that fairly represents the portfolio of the Pooled Fund. Pooled Funds generally invest in liquid securities. The Filers will not cause any Pooled Fund to accept an in specie subscription or pay out redemption proceeds in specie if, at the time of the proposed In Specie Transaction, Illiquid Portfolio Securities represent more than an immaterial portion of the portfolio of the Pooled Fund. The valuation of any Illiquid Portfolio Securities which would be the subject of an In Specie Transaction will be carried out according to the Filers' policies and procedures for the fair value of portfolio securities, including illiquid securities.

24. The Filers have determined that it is in the best interests of the Pooled Funds and the Managed Accounts to receive the Exemption Sought and engage in In Specie Transactions.

25. Effecting In Specie Transactions will allow the Filers to manage Portfolio Securities and Units more effectively and reduce transaction costs for the Managed Accounts and the Pooled Funds. For example, In Specie Transactions reduce market impact costs, which can be detrimental to the Managed Accounts and the Pooled Funds. In Specie Transactions also allow a portfolio to retain within its control institutional-size blocks of Portfolio Securities that otherwise would need to be broken and reassembled.

The Existing Relief

26. BlackRock Canada, BTC and BFM obtained exemptive relief dated November 30, 2009 (the 2009 Relief) to permit, subject to prescribed terms and conditions, certain related party transactions, including In Specie Transactions between (i) a Pooled Fund and a mutual fund of which BlackRock Canada is the investment fund manager and to which NI 81-102 applies (each, an NI 81-102 Fund); (ii) a Pooled Fund and a Managed Account; and (iii) an NI 81-102 Fund and a Managed Account.

27. BlackRock Investments Canada Inc. (BlackRock Investments) received similar exemptive relief on July 20, 2012 (together with the 2009 Relief, the Existing Relief). As a result of an amalgamation completed on December 1, 2012, BlackRock Canada became the corporate successor to BlackRock Investments.

28. The Existing Relief does not permit In Specie Transactions between a Pooled Fund and another Pooled Fund.

29. The Existing Relief permits In Specie Transactions between a Pooled Fund and a Managed Account, provided that such transactions are subject to review and approval by the independent review committee established by BlackRock Canada in respect of the Pooled Funds which rely on the Existing Relief (the IRC).

30. The Filers now wish to revoke and replace a part of the Existing Relief to permit In Specie Transactions between Managed Accounts and Pooled Funds without IRC approval.

31. As of the date of this decision, the Existing Relief will no longer be relied upon by the Filers in respect of the In Specie Transactions between Managed Accounts and Pooled Funds.

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 Existing Relief is revoked, only insofar as it pertains to In Specie Transactions between Pooled Funds and Managed Accounts.

The Decision of the principal regulator is that the Exemption Sought is granted on the following conditions:

1. in the case of an In Specie Transaction that involves the purchase by a Pooled Fund or a Managed Account (in such case, the Transferor) of Units of another Pooled Fund (in such case, the Transferee):

(a) the Transferee would at the time of payment be permitted to purchase the Portfolio Securities delivered in specie by the Transferor;

(b) the Portfolio Securities are acceptable to the portfolio adviser of the Transferee, and consistent with the investment objective of the Transferee;

(c) the Portfolio Securities transferred by the Transferor as purchase consideration will be valued: (i) on the same valuation day on which the purchase price of the Transferee's Units is determined; and (ii) at a value equal to the amount at which those Portfolio Securities were valued in calculating the net asset value per Unit used to establish the purchase price of the Transferee's Units, as if the Portfolio Securities were assets of the Transferee and as if the Transferee was subject by subsection 9.4(2)(b)(iii) of NI 81-102;

(d) should the In Specie Transaction involve the transfer of Illiquid Portfolio Securities, the portfolio adviser will obtain independent pricing determined on the basis of reasonable inquiry immediately before effecting the In Specie Transaction;

(e) if the Transferor is a Managed Account:

(i) prior written consent of the client of the Managed Account has been obtained before the In Specie Transaction is completed; and

(ii) the trade list, transaction report or similar report prepared by the Filer for the Managed Account for the period in which the In Specie Transaction took place will include a note describing the Portfolio Securities delivered to the Transferee and the value assigned to such Portfolio Securities;

(f) each of the Transferor and the Transferee will keep written records of an In Specie Transaction in a financial year of the Transferor and the Transferee, as applicable, reflecting details of the Portfolio Securities delivered to the Transferee, and the value assigned to such Portfolio Securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

2. in the case of an In Specie Transaction that involves the redemption of Units of a Pooled Fund (the Transferor) by another Pooled Fund or a Managed Account (the Transferee):

(a) the Portfolio Securities are acceptable to the portfolio adviser of the Transferee, and consistent with the investment objective of the Transferee;

(b) the Portfolio Securities transferred to the Transferee as proceeds of redemption for the Transferor's Units will be valued: (i) on the same valuation day on which the redemption price of the Transferor's Units is determined; and (ii) at a value equal to the amount at which those Portfolio Securities were valued in calculating the net asset value per Unit used to establish the redemption price of the Transferor's Units, as contemplated by subsection 10.4(3)(b) of NI 81-102;

(c) should the In Specie Transaction involve the transfer of Illiquid Portfolio Securities, the portfolio adviser will obtain independent pricing determined on the basis of reasonable inquiry immediately before effecting the In Specie Transaction;

(d) if any Illiquid Portfolio Securities are the subject of an In Specie redemption, the Illiquid Portfolio Securities will be transferred on a basis that fairly represents the portfolio of the Transferor;

(e) if the Transferee is a Managed Account:

(i) prior written consent of the client of the Managed Account has been obtained before the In Specie Transaction is completed;

(ii) the holder of the Managed Account has not provided notice to terminate its Investment Management Agreement with BlackRock Canada;

(iii) the trade list, transaction report or similar report prepared by the Filer for the Managed Account for the period in which the In Specie Transaction took place will include a note describing the Portfolio Securities delivered to the Managed Account and the value assigned to such Portfolio Securities; and

(f) each of the Transferor and the Transferee will keep written records of an In Specie Transaction in a financial year of the Transferor and the Transferee, as applicable, reflecting details of the Portfolio Securities delivered by the Transferor and the value assigned to such Portfolio Securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place.

3. The Filers do not receive any compensation in respect of any sale or redemption of Units of the Transferor and, in respect of any delivery of Portfolio Securities further to an In Specie Transactions, the only charge paid by the Transferor or the Transferee is the Transfer Charge.

"Vera Nunes"
Director (Acting)
Investment Funds and Structured Products
Ontario Securities Commission