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RBC Global Asset Management Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions -- Relief granted to permit public mutual funds and pooled funds, and managed accounts to engage in principal trading in debt securities with certain related parties that are principal dealers in the Canadian debt securities market and/or an international debt securities market on terms which include compliance with market integrity requirements or equivalent transparency and trade reporting requirements which attach to international debt securities.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(b)(i), 15.1.
National Instrument 81-102 Investment Funds, ss. 4.2, 19.1.
April 4, 2016
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 NI 81-102 FUNDS, PRIVATE FUNDS AND MANAGED ACCOUNTS (as defined below)
DECISION
Background
The principal regulator has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) granting exemptive relief from the following investment fund self-dealing restrictions (collectively, the NI 81-102 Principal Trade Related Account Prohibition) to permit certain related party transactions made by the Filer, or an affiliate of the Filer, on behalf of: (i) the existing mutual funds and any future mutual funds to which National Instrument 81-102 Investment Funds (NI 81-102) applies (each, a NI 81-102 Fund and, collectively, the NI 81-102 Funds) for which the Filer, or an affiliate of the Filer, acts as the investment fund manager and/or portfolio adviser; (ii) the existing mutual funds and any future mutual funds to which NI 81-102 does not apply (each, a Private Fund and, collectively, the Private Funds) for which the Filer, or an affiliate of the Filer, acts as the investment fund manager and/or portfolio adviser; and (iii) the discretionary managed accounts of clients (each, a Managed Account and, collectively, the Managed Accounts) for which the Filer, or an affiliate of the Filer, acts as the portfolio adviser:
(a) subsection 4.2(1) of NI 81-102, which prohibits an investment fund from purchasing a security from, or selling a security to, any of the following persons or companies:
(i) the manager, portfolio adviser or trustee of the investment fund;
(ii) a partner, director or officer of the investment fund or of the manager, portfolio adviser or trustee of the investment fund;
(iii) an associate or affiliate of a person or company referred to in paragraph (i) or (ii); and
(iv) a person or company, having fewer than 100 securityholders of record, of which a partner, director or officer of the investment fund or a partner, director or officer of the manager or portfolio adviser of the investment fund is a partner, director, officer or securityholder; and
if such persons or companies (each, a Related Person and collectively, the Related Persons) are acting as principal, in order to permit a NI 81-102 Fund to purchase from or sell to a Related Person that is a principal dealer (a Principal Dealer) in the Canadian debt securities market (Canadian Debt Securities Market) and/or an international debt securities market that exists outside of Canada (an International Debt Securities Market), debt securities of an issuer other than the federal or a provincial government of Canada, the federal or a state government of the United States of America, the government of another sovereign state or a permitted supranational agency (as defined in NI 81-102) (collectively, Non-Government Debt Securities) or debt securities issued or fully and unconditionally guaranteed by the federal or a provincial government of Canada, the federal or a state government of the United States of America, the government of another sovereign state or a permitted supranational agency (collectively, Government Debt Securities) in the secondary market; and
(b) clause 13.5(2)(b)(i) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) (the NI 31-103 Principal Trade Related Account Prohibition), which prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security of any issuer from or to the investment portfolio of a responsible person (as defined in NI 31-103),
in order to permit a NI 81-102 Fund, a Private Fund or a Managed Account to purchase from or sell to a Related Person that is a Principal Dealer in the Canadian Debt Securities Market and/or an International Debt Securities Market, Non-Government Debt Securities or Government Debt Securities in the secondary market;
((a) and (b) are collectively, the Exemptions Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator for this application; and
(ii) 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (the Passport Jurisdictions).
Interpretation
Terms defined in the securities legislation of Ontario and the Passport Jurisdictions, National Instrument 14-101 Definitions, NI 31-103, NI 81-102 or National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) have the same meanings in this decision. Certain other defined terms have the meanings given to them above or below under "Representations".
Representations
1. The Filer and each of the NI 81-102 Funds and the Private Funds are not in default of securities legislation in any of the provinces and territories of Canada (the Jurisdictions).
2. The Filer is an indirect wholly-owned subsidiary of the Royal Bank of Canada, a Schedule 1 Canadian chartered bank. The head office of the Filer is located in Toronto, Ontario.
3. The Filer is registered in each of the Jurisdictions as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer. The Filer is also registered in British Columbia, Ontario, Québec, and Newfoundland and Labrador in the category of investment fund manager. The Filer is also registered in Ontario in the category of commodity trading manager.
4. Each of the NI 81-102 Funds and the Private Funds is, or will be, a mutual fund established under the laws of the Province of Ontario or another Jurisdiction.
5. Each of the NI 81-102 Funds distributes, or will distribute, its securities in one or more of the Jurisdictions pursuant to a simplified prospectus or a long form prospectus prepared and filed in accordance with applicable securities legislation. Each of the NI 81-102 Funds is, or will be, a reporting issuer in one or more of the Jurisdictions.
6. Each of the Private Funds distributes, or will distribute, its securities in one or more of the Jurisdictions pursuant to available exemptions from the prospectus requirements under applicable securities legislation. None of the Private Funds is, or will be, a reporting issuer in the Jurisdictions.
7. The Filer, or an affiliate of the Filer, provides discretionary investment management services to the Managed Accounts of private clients and institutional groups such as corporate pension plans, foundations and endowments (collectively, Clients, each, a Client). Each of these Clients enters into a discretionary investment management agreement (Discretionary Management Agreement) with the Filer, or an affiliate of the Filer, which sets out the investment objective, strategies and restrictions applicable to the Managed Account.
8. No Managed Account Client will be a "responsible person", as defined in NI 31-103.
9. 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 NI 81-102 Funds and the Private Funds, and the portfolio adviser of the Managed Accounts.
10. An independent review committee (the IRC) has been, or will be, established for the NI 81-102 Funds in accordance with the requirements of NI 81-107.
11. An IRC has been, or will be, established for the Private Funds that is composed in accordance with the requirements of section 3.7 of NI 81-107 and has complied, or will comply, with the standard of care set out in section 3.9 of NI 81-107, as if NI 81-107 applied to the Private Funds. The mandate of the IRC established, or to be established, for the Private Funds includes reviewing and approving purchases and sales of securities by the Private Funds with Related Persons.
12. The Filer has informed the IRC of the existing Funds and Private Funds of the Filer's intention to make the Application, and the IRC supports the making of the Application and the Filer's request for the Exemptions Sought.
13. Related Persons of the Filer, or an affiliate of the Filer, are Principal Dealers in the Canadian Debt Securities Market and/or an International Debt Securities Market, both primary and secondary.
14. The purchase or sale of debt securities by a NI 81-102 Fund from or to a Related Person in the secondary market is subject to the NI 81-102 Principal Trade Related Account Prohibition. The purchase or sale of debt securities by a NI 81-102 Fund, a Private Fund or a Managed Account from or to a Related Person in the secondary market is subject to the NI 31-103 Principal Trade Related Account Prohibition.
15. The NI 81-102 Funds, Private Funds and Managed Accounts previously obtained relief to permit them to purchase and sell debt securities to a Related Person that is a Principal Dealer in the Canadian Debt Securities Market. Such relief was granted by way of decisions dated October 31, 2007, November 1, 2007, April 25, 2008, April 28, 2008 and April 29, 2008 (the Existing Related Person Purchase Relief). The Existing Related Person Purchase Relief, however, did not contemplate principal trades specifically between an NI 81-102 Fund, Private Fund or Managed Account and a Related Person that is a Principal Dealer in an International Debt Securities Market.
16. The Filer is seeking to expand the Existing Related Person Purchase Relief so that a NI 81-102 Fund or a Private Fund for which the Filer, or an affiliate of the Filer, acts as the investment fund manager and/or portfolio adviser, or a Managed Account for which the Filer, or an affiliate of the Filer, acts as the portfolio adviser, may purchase from or sell to a Related Person that is a Principal Dealer in the Canadian Debt Securities Market and/or an International Debt Securities Market, Non-Government Debt Securities or Government Debt Securities. Further, the Filer is seeking to expand the Existing Related Person Purchase Relief so as to include a broader scope of securities that may be traded, on a principal basis, between a NI 81-102 Fund, Private Fund or Managed Account and a Related Person, for example, both Canadian debt securities and international debt securities. Accordingly, the Filer is seeking new relief, in the form of the Decision granting the Exemptions Sought, to reflect this expansion of the Existing Related Person Purchase Relief.
17. Should the Exemptions Sought be granted, the Filer, or its affiliate as appropriate, will no longer rely on the Existing Related Person Purchase Relief to the extent such relief contemplates principal trades in debt securities between an NI 81-102 Fund, a Private Fund or a Managed Account and Related Persons that are Principal Dealers in the Canadian Debt Securities Market.
18. Absent the Exemptions Sought, the NI 81-102 Funds, the Private Funds and the Managed Accounts cannot purchase from or sell to a Related Person that is a Principal Dealer in the Canadian Debt Securities Market and/or an International Debt Securities Market, Non-Government Debt Securities or Government Debt Securities in the secondary market.
19. There is a limited supply of Non-Government Debt Securities and Government Debt Securities available to the NI 81-102 Funds, the Private Funds and the Managed Accounts in the Canadian Debt Securities Market and/or an International Debt Securities Market, and frequently the only source of Non-Government Debt Securities and Government Debt Securities for a NI 81-102 Fund, a Private Fund or a Managed Account is a Related Person.
20. Related Persons that act as Principal Dealer in International Debt Securities Markets are currently major or growing participants in the US, UK, European, Australian and Asian debt markets in various types of debt securities.
21. Related Persons that are Principal Dealers in the Canadian Debt Securities Market and/or an International Debt Securities Market do not influence the business judgement of the Filer, or its affiliate, in connection with the determination of the suitability of investments and information, and influence barriers are in place. Decisions made by the Filer as to which investments a NI 81-102 Fund, Private Fund or Managed Account should hold are based on the best interest of such Fund or Managed Account, without consideration given to the interest of the party with whom a purchase or sale is transacted. This principle is reflected in the policies and procedures that have been and will be implemented and approved by the IRC for dealing with related parties.
22. The IRC of the NI 81-102 Funds and the Private Funds will not approve purchases and sales of Non-Government Debt Securities or Government Debt Securities from or to a Related Person that is a Principal Dealer in the Canadian Debt Securities Market and/or an International Debt Securities Market in the secondary market, unless the IRC has made the determination set out in subsection 5.2(2) of NI 81-107 as if NI 81-107 applied to the Private Funds.
23. The NI 81-102 Funds, the Private Funds and the Managed Accounts require the Exemption Sought in order to pursue their investment objectives and strategies effectively.
24. The investment strategies of each of the NI 81-102 Funds, the Private Funds and the Managed Accounts that rely on the Exemptions Sought permit, or will permit, them to invest in securities purchased from Related Persons, either as a principal strategy in achieving its investment objective or as a temporary strategy, pending the purchase of other securities.
25. The Filer considers granting the Exemption Sought to not be prejudicial to the public interest, given that the decision to transact security purchases and sales with a Related Person that is a Principal Dealer in the Canadian Debt Securities Market and/or an International Debt Securities Market will be made in the best interests of the NI 81-102 Funds, Private Funds and Managed Accounts and free from the influence of such Related Person.
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 Exemptions Sought are granted, provided that:
(a) the purchase or sale is consistent with, or is necessary to meet, the investment objectives of each NI 81-102 Fund, Private Fund and Managed Account;
(b) the IRC of the NI 81-102 Funds and the Private Funds has approved the transaction in accordance with subsection 5.2(2) of NI 81-107 as if NI 81-107 applied to the Private Funds;
(c) the manager of the NI 81-102 Funds and the Private Funds complies with the conflict of interest matter requirements of section 5.1 of NI 81-107 as if NI 81-107 applied to the Private Funds;
(d) the manager and the IRC of the NI 81-102 Funds and the Private Funds complies with section 5.4 of NI 81-107 as if NI 81-107 applied to the Private Funds for any standing instructions the IRC provides in connection with the transactions;
(e) a purchase is not executed at a price which is higher than the available ask price of the security and a sale is not executed at a price which is lower than the available bid price of the security;
(f) the bid and ask price of the Non-Government Debt Security or the Government Debt Security is readily available, as provided in Commentary 7 to section 6.1 of NI 81-107;
(g) the purchase or sale is subject to "market integrity requirements" as defined in clause 6.1(1)(b) of NI 81-107 and any equivalent transparency and trade reporting requirements applicable to the purchase or sale of debt securities in International Debt Securities Markets;
(h) the NI 81-102 Funds and the Private Funds keep the written records required by clause 6.1(2)(g) of NI 81-107 as if NI 81-107 applied to the Private Funds; and
(i) if the transaction is by a Managed Account, the Discretionary Management Agreement or other documentation in respect of the Managed Account authorizes the transaction.
"Raymond Chan"
Manager, Investment Funds & Structured Products Branch
Ontario Securities Commission