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RBC Global Asset Management Inc. et al.
Headnote
National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions --Approval of mutual fund merger, change of manager and change of custodian -- merger approval required because the mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- certain mergers not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- manager of a continuing fund is not an affiliate of the manager of the terminating funds -- unitholders of the terminating funds are provided with timely and adequate disclosure regarding the mergers -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(a) and (b), 5.5(1)(c), 19.1.
March 20, 2019
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) AND IN THE MATTER OF RBC CANADIAN SHORT TERM BOND INDEX ETF, RBC CANADIAN BOND INDEX ETF, RBC CANADIAN EQUITY INDEX ETF, RBC U.S. EQUITY INDEX ETF, RBC INTERNATIONAL EQUITY INDEX ETF, RBC GLOBAL GOVERNMENT BOND (CAD HEDGED) INDEX ETF (collectively, the Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from RBC GAM, on behalf of the Funds, for a decision under the securities legislation of the Jurisdiction (the Legislation) approving:
(a) the change in manager of the RBC Global Government Bond (CAD Hedged) Index ETF to BlackRock Asset Management Canada Limited (BlackRock Canada) under section 5.5(1)(a) of National Instrument 81-102 Investment Funds (NI 81-102) (the Change in Manager);
(b) the merger of the Terminating Funds (collectively, the Mergers and each, a Merger) into the relevant Continuing Fund (collectively, the Continuing Funds and each, a Continuing Fund) as set forth in the table below under section 5.5(1)(b) of NI 81-102; and
Terminating Funds
Continuing Funds
RBC Canadian Short Term Bond Index ETF
iShares Core Canadian Short Term Bond Index ETF
RBC Canadian Bond Index ETF
iShares Core Canadian Universe Bond Index ETF
RBC Canadian Equity Index ETF
iShares Core S&P/TSX Capped Composite Index ETF
RBC U.S. Equity Index ETF
iShares Core S&P 500 Index ETF
RBC International Equity Index ETF
iShares Core MSCI EAFE IMI Index ETF
(c) as a result of the Change in Manager, the change in custodian of the RBC Global Government Bond (CAD Hedged) Index ETF from RBC Investor Services Trust to State Street Trust Company Canada (the "Change in Custodian").
The Change in Manager together with the Mergers and the Change in Custodian, the Approval Sought.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) the Filer has provided notice that subsection 4.7(1) of Multinational Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in all of the provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions (NI 14-101), MI 11-102 and NI 81-102 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:
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. RBC GAM is an indirect, wholly-owned subsidiary of Royal Bank of Canada with its head office located at 155 Wellington Street West, Suite 2200, Toronto, Ontario M5V 3K7.
2. 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 Jurisdiction, is registered as an investment fund manager in each of British Columbia, Ontario, Québec and Newfoundland and Labrador and is also registered in Ontario as a commodity trading manager.
3. RBC GAM is the trustee and manager of the Funds.
4. RBC GAM is not in default of the securities legislation of any province or territory of Canada.
BlackRock Canada
5. BlackRock Canada is a corporation amalgamated under the laws of the Province of Ontario and is an indirect, wholly-owned subsidiary of BlackRock, Inc., with its head office located at 161 Bay Street, Suite 2500, Toronto, Ontario M5J 2S1.
6. BlackRock Canada is registered in the categories of portfolio manager, investment fund manager and exempt market dealer in all of the Jurisdictions. BlackRock Canada is also registered as a commodity trading manager in Ontario and an adviser under the Commodity Futures Act in Manitoba.
7. BlackRock Canada is the trustee and manager of the Continuing Funds.
8. BlackRock Canada has appointed BlackRock Institutional Trust Company, N.A. ("BTC") as sub-advisor of the Continuing Funds. As sub-advisor, BTC is responsible for the investment management activities of the Continuing Funds, subject to the policies, control and supervision of BlackRock Canada.
9. BlackRock Canada is not in default of the securities legislation of any province or territory of Canada.
The Funds
10. Each of the Funds is an exchange traded fund established under the laws of the Province of Ontario.
11. Each of the Funds is a reporting issuer under the laws of all of the Jurisdictions.
12. None of the Funds are in default of the securities legislation of any province or territory of Canada.
13. The CAD Units of the Funds are distributed in each of the Jurisdictions pursuant to a long-form prospectus prepared in accordance with Form 41-101F2 Information Required in an Investment Fund Prospectus ("Form 41-101F2") dated August 16, 2018, as amended by amendment no. 1 dated January 16, 2019.
14. The CAD Units of the Funds are currently listed on the Aequitas NEO Exchange Inc. (the "NEO Exchange").
15. Although prospectus qualified, no USD units of the RBC U.S. Equity Index ETF and RBC International Equity Index ETF have been issued as at the date hereof and RBC GAM does not intend to issue or list USD units of the RBC U.S. Equity Index ETF and RBC International Equity Index ETF prior to the effective date of the Mergers.
16. The Funds are subject to, among other laws and regulations, NI 81-102, National Instrument 81-106 Investment Funds Continuous Disclosure ("NI 81-106") and National Instrument 81-107 Independent Review Committee for Investment Funds ("NI 81-107").
Continuing Funds
17. Each of the Continuing Funds is an exchange traded fund established under the laws of the Province of Ontario.
18. Each of the Continuing Funds is a reporting issuer under the laws of all of the Jurisdictions.
19. None of the Continuing Funds is in default of the securities legislation of any province or territory of Canada.
20. The units of the Continuing Funds are distributed in each of the Jurisdictions pursuant to a long-form prospectus prepared in accordance with Form 41-101F2 dated March 29, 2018, as amended by amendment no. 1 dated January 3, 2019.
21. The units of the Continuing Funds are currently listed on the Toronto Stock Exchange.
22. The custodian of the Continuing Funds is State Street Trust Company Canada.
23. The Continuing Funds are subject to, among other laws and regulations, NI 81-102, NI 81-106 and NI 81-107.
Proposed Transaction
24. On January 8, 2019 RBC GAM announced that it has entered into a strategic alliance with BlackRock Canada (the "Strategic Alliance") whereby the ETF families offered in Canada by RBC GAM and BlackRock Canada are being brought together under one new brand -- RBC iShares (the "RBC iShares Solution Suite").
25. Subject to receiving all necessary unitholder and regulatory approvals, it is proposed that (a) the trustee, manager and portfolio manager of the RBC Global Government Bond (CAD Hedged) Index ETF be changed from RBC GAM to BlackRock Canada on or about April 5, 2019, (b) each Terminating Fund be merged into the applicable Continuing Fund, on or about April 8, 2019 (except the RBC International Equity Index ETF which will be merged on or about April 9, 2019) and (c) the custodian of the RBC Global Government Bond (CAD Hedged) Index ETF be changed on or about April 5, 2019, from RBC Investor Services Trust to State Street Trust Company Canada.
26. The terms of the Change in Manager and the Mergers were presented to the independent review committee (the "RBC IRC") of the Funds for its review and recommendation. After considering the potential conflict of interest matters related to the Change in Manager and the Mergers, the RBC IRC provided its positive recommendation for the Change in Manager and the Mergers.
Securities Law Requirements for Pre-Approval
27. Under section 5.5(1)(a), 5.5(1)(b) and 5.5(1)(c) of NI 81-102, the approval of the regulator is required before (a) the manager of an investment fund is changed, unless the new manager is an affiliate of the current manager, (b) a reorganization or transfer of assets of an investment fund is implemented if the transaction will result in the securityholders of the investment fund becoming securityholders in another issuer, respectively and (c) a change in custodian of an investment fund is implemented in connection with a Change in Manager.
28. Under section 5.6 of NI 81-102, approval of a merger by the regulator is not required if all of the criteria for pre-approval of the merger listed in paragraphs 5.6(1)(a) through (k) of NI 81-102, as applicable, are satisfied.
29. The Mergers will satisfy all the requirements of paragraphs 5.6(1)(a) through (k), as applicable, of NI 81-102 with the exception of:
(a) paragraph 5.6(1)(a)(i) of NI 81-102 as BlackRock Canada is the manager of the Continuing Funds; and
(b) paragraph 5.6(1)(b) of NI 81-102 as the Mergers (other than the Merger involving the RBC U.S. Equity Index ETF) will not be a "qualifying exchange" (within the meaning of section 132.2 of the Income Tax Act (Canada)) or implemented on a tax-deferred basis.
Unitholder Disclosure
30. A press release was issued by RBC GAM on January 8, 2019 and a material change report was filed on SEDAR on January 17, 2019 relating to the proposed Change in Manager and the Mergers.
31. An amendment dated January 16, 2019 to the long form prospectus of the Funds dated August 16, 2018 announcing the proposed Change in Manager and the Mergers has been filed on SEDAR.
32. Unitholders of each of the Funds have been asked to approve the Change in Manager or the applicable Merger, as applicable, at joint special meetings of unitholders of the Funds (collectively, the "Meetings" and each, a "Meeting") to be held on March 22, 2019, as required pursuant to NI 81-102. At each Meeting, the affirmative vote of not less than a majority of the votes cast by unitholders of the applicable Fund present in person or represented by proxy at that Meeting is required for approval of the Change in Manager or the applicable Merger, as applicable
33. A notice-and-access document (the "Notice-and-Access Document") which outlined the procedures for accessing the management information circular which contains full details of the proposed Change in Manager and Mergers (including information regarding the income tax considerations for unitholders of the Funds and forms of proxy (collectively, the "Meeting Materials")) in respect of the Meetings was mailed on February 20, 2019 to unitholders of record of the Funds as of February 6, 2019. A copy of the Meeting Materials was filed on SEDAR following the mailing. The Meeting Materials contain all information necessary to allow unitholders to make an informed decision about the Change in Manager and the Mergers (and include a copy of the ETF Facts of the Continuing Funds) as well as describe the ways in which unitholders may obtain a copy of the Meeting Materials at no cost.
34. The material terms, rationale, benefits and tax consequences of the Change in Manager and the Mergers have been disclosed to unitholders in the Meeting Materials in advance of the Meetings. The Meeting Materials also describe where unitholders of the Funds may obtain, free of charge, the most recent annual financial statements, interim financial statements, management reports of fund performance, ETF Facts and the current prospectuses of the Funds and the Continuing Funds.
Merger Steps
35. As soon as reasonably practicable, prior to the effective time of the Merger in respect of each of the Terminating Funds, each Terminating Fund will distribute a sufficient amount of its net income and net realized capital gains, if any, to ensure that it will not be subject to tax for its current tax year.
36. At the effective time of the Mergers, each Terminating Fund will, after satisfying or providing for any outstanding liabilities, transfer all of its portfolio securities and other assets (i.e. its net assets) to the relevant Continuing Fund in consideration for an amount (the "Purchase Price") equal to (a) in respect of the Mergers (other than the Merger in respect of the RBC International Equity Index ETF) the net asset value of the Terminating Fund calculated on the trading day immediately prior to the effective date of the applicable Merger and (b) in respect of the Merger involving the RBC International Equity Index ETF the net asset value of the Terminating Fund calculated on the day which is two trading days prior to the effective date of such Merger (in order to account for the time it will take to arrange for the transfer of certain international securities and time zone differences).
37. Each relevant Continuing Fund will satisfy the applicable Purchase Price by issuing to the relevant Terminating Fund that number of units (rounded down to the nearest whole unit) equal to Purchase Price divided by the net asset value per unit of the Continuing Fund.
38. Following the payment of the Purchase Price, all of the units of each of the Terminating Funds will be redeemed and the redemption price therefor will be paid by delivering the applicable number of units of the applicable Continuing Fund on the trading day following the date on which the Purchase Price has been paid in full (i.e. in respect of the Mergers (other than the Merger involving the RBC International Equity Index ETF) being April 9, 2019 and in respect of the Merger involving the RBC International Equity Index ETF being April 10, 2019) to unitholders of the applicable Terminating Fund as is equal to the applicable Exchange Ratio multiplied by the number of units of the applicable Terminating Fund held by such unitholder immediately prior to the completion of the applicable Merger.
39. Holders of CAD units of each of the Terminating Funds will receive Canadian dollar denominated units of the applicable Continuing Fund (i.e. securities of a similar series) in connection with the Mergers.
40. All of the Mergers are expected to be implemented on a taxable basis other than the merger of the RBC U.S. Equity Index ETF with the iShares Core S&P 500 Index ETF which is expected to be implemented on a tax-deferred basis.
41. The RBC U.S. Equity Index ETF will, following the effective time of its merger with the iShares Core S&P 500 Index ETF, file a joint tax election in respect of the transfer to the iShares Core S&P 500 Index ETF of all of its assets.
42. As soon as reasonably possible following the Mergers, the Terminating Funds will be wound up and the Continuing Funds will continue as exchange traded funds existing under the laws of the Province of Ontario.
Business Reasons for the Proposed Transaction
43. The RBC iShares Solution Suite represents Canada's largest and most comprehensive ETF offering, including index, factor, quantitative and active strategies and includes a total of 150 ETFs: 106 high-quality, liquid, cost competitive index solutions managed by BlackRock Canada, and 44 index, smart beta and actively managed solutions managed by RBC GAM.
44. The proposed Mergers will streamline the RBC iShares Solution Suite and result in tangible benefits to unitholders of the Terminating Funds, including greater liquidity associated with the Continuing Funds and historically more favorable spreads on the secondary market, which will ultimately reduce transactional costs for unitholders.
45. The proposed Change in Manager will allow the RBC Global Government Bond (CAD Hedged) Index ETF to draw on BlackRock Canada's strength and expertise in relation to the management of index-tracking investment solutions, which is one of BlackRock Canada's core capabilities.
Additional Information with Respect to the Mergers
46. Each Merger will involve the Terminating Fund transferring all or substantially all of its net assets to the applicable Continuing Fund in consideration for the issuance by the applicable Continuing Fund to the Terminating Fund of a whole number of units of the applicable Continuing Fund.
47. Following the transfer of assets of the Terminating Fund to the applicable Continuing Fund and the issuance of units of the applicable Continuing Fund to the Terminating Fund, all of the CAD Units of the Terminating Fund will be redeemed. Each unitholder of the Terminating Fund will receive, through the facilities of CDS, such number of units of the applicable Continuing Fund as is equal to the number of CAD Units of the Terminating Fund held by such unitholder multiplied by the Exchange Ratio (as defined below) of such units.
48. The Exchange Ratio (a) in respect of each of the Mergers (other than the Merger in respect of the RBC International Equity Index ETF) will be calculated by dividing the net asset value per unit of the Terminating Fund by the net asset value per unit of the relevant Continuing Fund as at the close of trading on the business day immediately preceding the effective date of the applicable Merger and (b) in respect of the Merger involving the RBC International Equity Index ETF will be calculated by dividing the net asset value per unit of the Terminating Fund by the net asset value per unit of the relevant Continuing Fund as at the close of trading on the day which is two business days prior to the effective date of the such Merger in order to account for time it will take to arrange for the transfer of certain international securities and time zone differences (the "Exchange Ratio").
49. Units of the Funds will continue to be redeemable on a daily basis up to the business day immediately prior to the effective date of the Change in Manager and the Mergers other than the Merger in respect of the RBC International Equity Index ETF which will be redeemable on a daily basis up to the second business day preceding the effective date of the Merger, primarily through the designated broker and dealers of the Funds.
50. In addition, unitholders of the Funds will be able to trade their CAD Units on the NEO Exchange in the ordinary course at least until the close of business on the business day immediately preceding the effective date of the Change in Manager or the applicable Merger, as applicable.
51. The cash and any other assets of the Terminating Funds acquired by the applicable Continuing Fund in connection with the Mergers will be acquired in compliance with NI 81-102.
52. No redemption fee, sales charges, commissions or other fees will be payable by unitholders of the Terminating Funds in connection with the Mergers.
53. The Terminating Funds have complied with Part 11 of NI 81-106 in connection with the making of the decision by the board of directors of RBC GAM to proceed with the Mergers.
54. The Mergers are not expected to have any material impact on the business, operations or affairs of the Continuing Funds or the unitholders of the Continuing Funds.
55. RBC GAM is advised by BlackRock Canada that the Mergers are not considered to be a material change for any of the Continuing Funds.
The Change of Manager
56. BlackRock Canada is wholly-owned subsidiary of BlackRock, Inc. BlackRock, Inc. is an experienced ETF-focused asset manager with a global presence. As of December 31, 2018, BlackRock, Inc. managed approximately US$5.98 trillion in assets on behalf of investors worldwide. BlackRock, Inc., together with its worldwide affiliates, is the world's largest ETF provider by assets under management as of September 30, 2018.
57. It is expected that all of the current officers and directors of BlackRock Canada will continue on in their current capacities.
58. Upon completion of the Mergers and the Change in Manager, the individuals that comprise the RBC IRC of the Terminating Funds and the RBC Global Government Bond (CAD Hedged) Index ETF will cease to be members of such independent review committee by operation of subsection 3.10(1)(a) of NI 81-107. Immediately following the completion of the Change in Manager, BlackRock Canada has confirmed that the new members of the RBC Global Government Bond (CAD Hedged) Index ETF IRC will be the same individuals that currently comprise the independent review committee for the Continuing Funds and the other exchange-traded funds managed by BlackRock Canada, namely: Martha Fell, Paul Batho, Geoffrey Creighton and Kevin Coldiron.
59. The members of the BlackRock Canada management team have the requisite integrity and experience as required under NI 81-102.
60. Following the completion of the Change in Manager, BlackRock Canada will manage the RBC Global Government Bond (CAD Hedged) Index ETF in a manner consistent with the management of the existing ETFs managed by BlackRock Canada.
61. BlackRock Canada anticipates that on the effective date of the Change in Manager, the RBC Global Government Bond (CAD Hedged) Index ETF will be migrated to and governed by the terms of the iShares Funds Master Declaration of Trust amended and restated as of January 1, 2019 (the "BlackRock DOT"), which will be amended and restated in order to add the RBC Global Government Bond (CAD Hedged) Index ETF.
62. BlackRock Canada does not currently intend to make any material changes to the RBC Global Government Bond (CAD Hedged) Index ETF's investment strategy. Certain non-material changes may be made to better align the RBC Global Government Bond (CAD Hedged) Index ETF's strategy with the strategies of similarly managed iShares ETFs. Any such changes will be consistent with the RBC Global Government Bond (CAD Hedged) Index ETF's investment objectives and will be disclosed in the prospectus that BlackRock Canada intends to file in connection with the assumption of management responsibilities for the RBC Global Government Bond (CAD Hedged) Index ETF.
The Change in Custodian
63. As the Change in Custodian will be implemented in connection with the Change in Manager, approval of the principal regulator is required under paragraph 5.5(1)(c) of NI 81-102.
64. It is anticipated that the Change in Custodian in respect of the RBC Global Government Bond (CAD Hedged) Index ETF will be implemented on or about April 5, 2019, the effective date of the Change in Manager.
65. RBC GAM believes that the Change in Custodian will be beneficial to unitholders of the RBC Global Government Bond (CAD Hedged) Index ETF as it will create administrative efficiencies by having custody of all of the exchange-traded funds managed by BlackRock Canada (other than its bullion exchange-traded funds) with the same custodian once the Change in Manager is implemented.
66. The current custodian of the RBC Global Government Bond (CAD Hedged) Index ETF is RBC Investor Services Trust. Its most recent custodian report in respect of the RBC Global Government Bond (CAD Hedged) Index ETF was filed on February 9, 2018.
67. The custodian of the RBC Global Government Bond (CAD Hedged) Index ETF will be changed to State Street Trust Company Canada. State Street Trust Company Canada may engage sub-custodians in connection with the assets of the RBC Global Government Bond (CAD Hedged) Index ETF.
68. State Street Trust Company Canada is qualified to act as a custodian in Canada in accordance with Part 6 of NI 81-102.
69. Neither RBC GAM nor BlackRock Canada is an affiliate of State Street Trust Company Canada.
70. State Street Trust Company Canada's most recent custodian report for the iShares exchange-traded funds has been filed on SEDAR. This report was provided to RBC GAM.
71. The Change in Custodian and the custodial agreements and arrangements between the RBC Global Government Bond (CAD Hedged) Index ETF and State Street Trust Company Canada will be implemented in compliance with Part 6 of NI 81-102.
72. RBC GAM believes that the Change in Custodian and the addition of the RBC Global Government Bond (CAD Hedged) Index ETF to the existing custodial arrangements between the Continuing Funds and State Street Trust Company Canada will have no adverse impact on the continued compliance with Part 6 of NI 81-102.
73. RBC GAM does not regard the Change in Custodian as either a "material change" as defined in section 1.1 of NI 81-102, or as a "conflict of interest matter" as defined in section 1.2 of NI 81-107.
74. Disclosure regarding State Street Trust Company Canada as custodian will be included in the first prospectus filed for the RBC Global Government Bond (CAD Hedged) Index ETF by BlackRock Canada shortly after the implementation of the Change in Manager.
General
75. None of the Terminating Funds, the RBC Global Government Bond (CAD Hedged) Index ETF or the Continuing Funds or the unitholders thereof will bear any costs or expenses associated with calling and holding the Meetings and implementing the Change in Manager, Mergers or Change in Custodian including costs related to legal and accounting fees, proxy solicitation, printing, mailing and regulatory fees. RBC GAM may however, in anticipation of a Merger, liquidate certain portfolio securities held by a Terminating ETF, which may result in a taxable capital gains distribution for unitholders of the Terminating ETF.
76. There is no intention to change the officers, directors or registered individuals of BlackRock Canada as a result of the Change in Manager or the Mergers.
77. The Change in Manager and Mergers will not adversely affect the financial positions of RBC GAM and BlackRock Canada or their ability to fulfill their regulatory obligations.
78. In the event that the Change in Manager or a Merger is not approved by unitholders of the applicable Fund, the Manager currently intends to terminate such Fund in accordance with its declaration of trust. In the event of termination of a Fund, the Manager will provide not less than 60 days' notice to unitholders of the applicable Fund and will issue a press release in advance thereof.
79. The Requested Approval will not be detrimental to the protection of investors in the Funds or the Continuing Funds or prejudice the public interest.
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 is that the Approval Sought is granted provided that RBC GAM obtains the prior approval of unitholders of the Funds for the Change in Manager and Mergers, as applicable.
"Darren McKall"
Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission