National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief to permit exchange-traded mutual fund prospectus to omit an underwriter’s certificate – relief from take-over bid requirements for normal course purchases of securities on a marketplace – relief granted to facilitate the offering of exchange-traded mutual funds.
Applicable Legislative Provisions
Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., ss. 59(1), 147.
National Instrument 62-104 Take-Over Bids and Issuer Bids, Part 2 and s. 6.1.
September 21, 2018
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
FIRST BLOCK CAPITAL INC.
IN THE MATTER OF
FBC DISTRIBUTED LEDGER TECHNOLOGY ADOPTERS ETF
(the Proposed ETF)
1 The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer on behalf of the Proposed ETF and any additional exchange-traded mutual funds (the Future ETFs, and together with the Proposed ETF, the ETFs and individually, an ETF) established in the future for which the Filer acts as the manager, for a decision under the securities legislation of the Jurisdictions (the Legislation) that:
(a) exempts the Filer and each ETF from the requirement to include a certificate of an underwriter in an ETF’s prospectus (the Underwriter’s Certificate Requirement); and
(b) exempts a person or company purchasing Listed Securities (as defined below) in the normal course through the facilities of a Marketplace (as defined below) from the Take-over Bid Requirements (as defined below)
(collectively, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the British Columbia Securities Commission is the principal regulator for this application;
(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 Alberta, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec, Saskatchewan and Yukon; and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
2 Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Affiliate Dealer means a registered dealer that is an affiliate of an Authorized Dealer or Designated Broker and that participates in the re-sale of Creation Units (as defined below) from time to time.
Authorized Dealer means a registered dealer that has entered, or intends to enter, into an agreement with the Filer authorizing the dealer to subscribe for, purchase and redeem Creation Units from one or more ETFs on a continuous basis from time to time.
Basket of Securities means, in relation to an ETF, a group of securities that collectively reflect the constituents of the portfolio of the ETF.
Designated Broker means a registered dealer that has entered, or intends to enter, into an agreement with the Filer to perform certain duties in relation to an ETF, including the posting of a liquid two-way market for the trading of the ETF’s Listed Securities on a Marketplace.
ETF Facts means a prescribed summary disclosure document required in respect of one or more classes or series of Listed Securities being distributed under a prospectus.
Marketplace means a “marketplace” as defined in National Instrument 21-101 Marketplace Operation that is located in Canada.
NI 81-102 means National Instrument 81-102 Investment Funds.
Other Dealer means a registered dealer that acts as authorized dealer or designated broker to exchange-traded funds that are not managed by the Filer and that has received relief under a Prospectus Delivery Decision.
Prescribed Number of Listed Securities means the number of Listed Securities of an ETF determined by the Filer from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.
Prospectus Delivery Decision means a decision granting relief from the Prospectus Delivery Requirement to a Designated Broker, Authorized Dealer, Affiliate Dealer or Other Dealer dated August 24, 2015 and any subsequent decision granted to a Designated Broker, Authorized Dealer, Affiliate Dealer or Other Dealer that grants similar relief.
Prospectus Delivery Requirement means the requirement that a dealer, not acting as agent of the purchaser, who receives an order or subscription for a security offered in a distribution to which the prospectus requirement applies, send or deliver to the purchaser or its agent, unless the dealer has previously done so, the latest prospectus and any amendment either before entering into an agreement of purchase and sale resulting from the order or subscription, or not later than midnight on the second business day after entering into that agreement.
Securityholders means beneficial or registered holders of Listed Securities or Unlisted Securities (as defined below), as applicable.
Take-over Bid Requirements means the requirements of National Instrument 62-104 Take-Over Bids and Issuer Bids relating to take-over bids.
3 This decision is based on the following facts represented by the Filer:
1. the Filer is a corporation organized under the laws of Canada with its head office located at 3318 – 1055 Dunsmuir Street, Vancouver, British Columbia, V7X 1KB;
2. the Filer is registered as an investment fund manager and exempt market dealer in British Columbia, Ontario, Quebec and Newfoundland and Labrador and as a portfolio manager in British Columbia;
3. the Filer will be the investment fund manager, trustee and portfolio manager of the Proposed ETF; the Filer will be the investment fund manager of the Future ETFs and may be the trustee and/or portfolio manager of the Future ETFs;
4. the Filer is not in default of securities legislation in any jurisdiction of Canada;
5. the Proposed ETF will be a mutual fund structured as a trust that is governed by the laws of the Province of British Columbia; each of the Future ETFs will be either a trust governed by the laws of a province or territory of Canada or corporation or class thereof governed by the laws of a province or territory of Canada or by the laws of Canada; each ETF will be a reporting issuer in the Canadian jurisdiction(s) in which its securities are distributed;
6. subject to any exemptions that have been, or may be, granted by the applicable securities regulatory authorities, each ETF will be an open-ended mutual fund subject to NI 81-102 and Securityholders of each ETF will have the right to vote at a meeting of Securityholders in respect of matters prescribed by NI 81-102;
7. each ETF may issue more than one series of securities, including, but not limited to:
(a) a series of securities distributed pursuant to a long form prospectus prepared pursuant to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and Form 41-101F2 Information Required in an Investment Fund Prospectus that is listed on a Marketplace (Listed Securities); and
(b) a series of securities offered only on a private placement basis pursuant to available prospectus exemptions, including the accredited investor exemption, under securities laws (Unlisted Securities).
8. the Listed Securities will be listed on a Marketplace;
9. the Filer has filed, or will file, a long form prospectus prepared in accordance with NI 41-101 in respect of the Listed Securities of the ETFs, subject to any exemptions that may be granted by the applicable securities regulatory authorities;
10. Listed Securities will be distributed on a continuous basis in one or more jurisdictions of Canada under a prospectus; Listed Securities may generally only be subscribed for or purchased directly from the ETFs (Creation Units) by Authorized Dealers or Designated Brokers; generally, subscriptions or purchases may only be placed for a Prescribed Number of Listed Securities (or a multiple thereof) on any day when there is a trading session on a Marketplace; Authorized Dealers or Designated Brokers subscribe for Creation Units for the purpose of facilitating investor purchases of Listed Securities on a Marketplace;
11. in addition to subscribing for and re-selling Creation Units, Authorized Dealers, Designated Brokers and Affiliate Dealers will also generally be engaged in purchasing and selling Listed Securities of the same class or series as the Creation Units in the secondary market; other Dealers may also be engaged in purchasing and selling Listed Securities of the same class or series as the Creation Units in the secondary market despite not being an Authorized Dealer, Designated Broker or Affiliate Dealer;
12. each ETF will appoint, at any given time, a Designated Broker to perform certain other functions, which include standing in the market with a bid and ask price for Listed Securities for the purpose of maintaining liquidity for the Listed Securities;
13. except for Authorized Dealer and Designated Broker subscriptions for Creation Units, as described above, and other distributions that are exempt from the Prospectus Delivery Requirement under applicable securities legislation, Listed Securities generally will not be able to be purchased directly from an ETF; investors are generally expected to purchase and sell Listed Securities, directly or indirectly, through dealers executing trades through the facilities of a Marketplace; Listed Securities may also be issued directly to Securityholders upon a reinvestment of distributions of income or capital gains;
14. Securityholders that are not Designated Brokers or Authorized Dealers that wish to dispose of their Listed Securities may generally do so by selling their Listed Securities on a Marketplace, through a registered dealer, subject only to customary brokerage commissions; a Securityholder that holds a Prescribed Number of Listed Securities or multiple thereof may exchange such Listed Securities for Baskets of Securities, cash and/or securities and cash; Securityholders may also redeem Listed Securities for cash at a redemption price equal to 95% of the closing price of the Listed Securities on a Marketplace on the date of redemption, subject to a maximum redemption price of the applicable net asset value per Listed Security;
Underwriter’s Certificate Requirement
15. Authorized Dealers and Designated Brokers will not provide the same services in connection with a distribution of Creation Units as would typically be provided by an underwriter in a conventional underwriting;
16. the Filer will generally conduct its own marketing, advertising and promotion of the ETFs;
17. Authorized Dealers and Designated Brokers will not be involved in the preparation of an ETF’s prospectus, will not perform any review or any independent due diligence as to the content of an ETF’s prospectus, and will not incur any marketing costs or receive any underwriting fees or commissions from the ETFs or the Filer in connection with the distribution of Listed Securities; the Authorized Dealers and Designated Brokers generally seek to profit from their ability to create and redeem Listed Securities by engaging in arbitrage trading to capture spreads between the trading prices of Listed Securities and their underlying securities and by making markets for their clients to facilitate client trading in Listed Securities;
18. securities regulatory authorities have advised that they take the view that the first re-sale of a Creation Unit on a Marketplace will generally constitute a distribution of Creation Units under applicable securities legislation and that the Authorized Dealers, Designated Brokers and Affiliate Dealers are subject to the Prospectus Delivery Requirement in connection with such re-sales; re-sales of Listed Securities in the secondary market that are not Creation Units would not ordinarily constitute a distribution of such Listed Securities;
19. according to Authorized Dealers and Designated Brokers, Creation Units will generally be commingled with other Listed Securities purchased by the Authorized Dealers, Designated Brokers and Affiliate Dealers in the secondary market; as such, it is not practicable for the Authorized Dealers, Designated Brokers or Affiliate Dealers to determine whether a particular re-sale of Listed Securities involves Creation Units or Listed Securities purchased in the secondary market;
20. under the applicable Prospectus Delivery Decision, Authorized Dealers, Designated Brokers and Affiliate Dealers are exempt from the Prospectus Delivery Requirement in connection with the re-sale of Creation Units to investors on a Marketplace; under a Prospectus Delivery Decision, Other Dealers are also exempt from the Prospectus Delivery Requirement in connection with the re-sale of creation units of other exchange-traded funds that are not managed by the Filer;
21. each Prospectus Delivery Decision includes a condition that the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer undertakes that it will, unless it has previously done so, send or deliver to each purchaser of a Listed Security who is a customer of the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer and to whom a trade confirmation is required under applicable securities legislation to be sent or delivered by the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer in connection with the purchase, the latest ETF Facts filed in respect of the Listed Security not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after the purchase of the Listed Security;
22. the Filer will prepare and file with the applicable jurisdictions an ETF Facts for each class or series of Listed Securities and will make available to the applicable Authorized Dealers, Designated Brokers, Affiliate Dealers and Other Dealers the requisite number of copies of the ETF Facts for the purpose of facilitating their compliance with the Prospectus Delivery Decision within the timeframe necessary to allow Authorized Dealers, Designated Brokers, Affiliate Dealers and Other Dealers to effect delivery of the ETF Facts as contemplated in the Prospectus Delivery Decision;
Take-over Bid Requirements
23. as equity securities that will trade on a Marketplace, it is possible for a person or company to acquire such number of Listed Securities so as to trigger the application of the Take-over Bid Requirements; however:
(a) even if a person or company were to acquire such number of Listed Securities of an ETF so as to trigger the application of the Take-over Bid Requirements, it would not be possible for such person or company to exercise control or direction over the ETF because under the constating documents of each ETF, Securityholders will not have the ability to (i) call a meeting of the Securityholders, (ii) make a proposal for consideration at a meeting of Securityholders, or (iii) require a change to the ETF’s trustee, investment fund manager or portfolio manager;
(b) it will be difficult for the purchasers of Listed Securities to monitor compliance with the Take-over Bid Requirements because the number of outstanding Listed Securities will always be in flux as a result of the ongoing issuance and redemption of Listed Securities by each ETF; and
(c) the way in which the Listed Securities will be priced deters anyone from either seeking to acquire control, or offering to pay a control premium for outstanding Listed Securities because pricing for each Listed Security will generally reflect the net asset value of the Listed Securities; and
24. the application of the Take-over Bid Requirements to the ETFs would have an adverse impact on the liquidity of the Listed Securities because they could cause the Designated Brokers and other large Securityholders to cease trading Listed Securities once the Securityholder has reached the prescribed threshold at which the Take-over Bid Requirements would apply; this, in turn, could serve to provide conventional mutual funds with a competitive advantage over the ETFs.
3 Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought from the Underwriter’s Certificate Requirement is granted provided that:
(a) the Filer provides or makes available to each Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer, the number of copies of the ETF Facts of each Listed Security that the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer reasonably requests in support of compliance with its respective Prospectus Delivery Decision;
(b) each ETF’s prospectus, as the same may be amended from time to time, will disclose both the relief granted pursuant to the Exemption Sought and the Prospectus Delivery Decision under Item 34.1 of Form 41-101F2 Information Required in an Investment Fund Prospectus, as applicable;
(c) the Filer obtains an executed acknowledgement from each Authorized Dealer, Designated Broker and Affiliate Dealer, and uses its best efforts to obtain an acknowledgment from each Other Dealer:
(i) indicating each dealer’s election, in connection with the re-sale of Creation Units on a Marketplace, to send or deliver the ETF Facts in accordance with a Prospectus Delivery Decision or, alternatively, to comply with the Prospectus Delivery Requirement; and
(ii) if the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer agrees to deliver the ETF Facts in accordance with a Prospectus Delivery Decision:
a. an undertaking that the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer will attach or bind one ETF’s ETF Facts with another ETF’s ETF Facts only if the documents are being sent or delivered under the Prospectus Delivery Decision at the same time to an investor purchasing Listed Securities of each such ETF; and
b. confirming that the Authorized Dealer, Designated Broker, Affiliate Dealer or Other Dealer has in place written policies and procedures to ensure that it is in compliance with the conditions of the Prospectus Delivery Decision;
(d) the Filer will keep records of which Authorized Dealers, Designated Brokers, Affiliate Dealers and Other Dealers have provided it with an acknowledgement under a Prospectus Delivery Decision, and which intend to rely on and comply with the Prospectus Delivery Decision or intend to comply with the Prospectus Delivery Requirement;
(e) the Filer files with its principal regulator, to the attention of the Director of Corporate Finance, on or before January 31st in each calendar year, a certificate signed by its ultimate designated person certifying that, to the best of the knowledge of such person, after making due inquiry, the Filer has complied with the terms and conditions of this decision during the previous calendar year; and
(f) conditions (a), (b), (c), (d) and (e) above do not apply to the Exemption Sought after any new legislation or rule dealing with the Prospectus Delivery Decision takes effect and any applicable transition period has expired.
The decision of the Decision Makers under the Legislation is that the Exemption Sought from the Take-over Bid Requirements is granted.
Director, Corporate Finance
British Columbia Securities Commission