Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to permit mutual funds to invest in underlying ETFs whose securities would meet the definition of index participation unit in NI 81-102, but for the fact that they are traded in the United Kingdom -- relief also granted to permit mutual funds to invest in other mutual funds that hold more than 10% of NAV in securities of one or more of the United Kingdom-traded ETFs to form a three-tier structure -- relief is subject to certain conditions and requirements including that the underlying funds are not synthetic exchange-traded mutual funds -- National Instrument 81-102 Investment Funds.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.1(1), 2.2(1)(a), 2.5(2)(a), 2.5(2)(b) and 2.5(2)(c), and 19.1.

February 5, 2020

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 BLACKROCK ASSET MANAGEMENT CANADA LIMITED (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the mutual funds that are subject to National Instrument 81-102 Investment Funds (NI 81-102) that it currently manages (the Existing Funds) and the mutual funds that are subject to NI 81-102 that the Filer or an affiliate of the Filer may manage in the future (the Future Funds, and together with the Existing Funds, the Funds, and each, a Fund) for a decision under the securities legislation of the principal regulator (the Legislation):

(a) revoking the decision granted on July 22, 2013 (the Prior Decision) by the principal regulator (the Revocation); and

(b) exempting the Funds from:

(i) subsection 2.1(1) of NI 81-102 to permit each Fund to purchase securities of a Dublin iShares Fund (as defined below) even though, immediately after the transaction, more than 10% of the Fund's net asset value (NAV) would be invested in securities of the Dublin iShares Fund;

(ii) paragraph 2.2(1)(a) of NI 81-102 to permit each Fund to purchase securities of a Dublin iShares Fund even though, immediately after the purchase, the Fund would hold securities representing more than 10% of (i) the votes attaching to the outstanding voting securities of the Dublin iShares Fund, or (ii) the outstanding equity securities of the Dublin iShares Fund;

(iii) paragraph 2.5(2)(a) of NI 81-102 to permit each Fund to purchase and/or hold securities of a Dublin iShares Fund, even though the Dublin iShares Fund is not subject to NI 81-102;

(iv) paragraph 2.5(2)(c) of NI 81-102 to permit each Fund to purchase and/or hold securities of a Dublin iShares Fund, even though the Dublin iShares Fund is not a reporting issuer in a Canadian Jurisdiction (as defined below) (together with paragraphs (i), (ii) and (iii) above, the Two Tier Relief); and

(v) paragraph 2.5(2)(b) of NI 81-102 to permit each Fund to purchase and/or hold a security of another Fund that holds more than 10% of its NAV in securities of one or more Dublin iShares Funds (a Middle Fund, and collectively, the Middle Funds) (the Three Tier Relief, and together with the Two Tier Relief, the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission (the OSC) is the principal regulator for this 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 all of the provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, the Canadian Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions, 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 the Filer:

The Filer and the Funds

1. The Filer 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 in Toronto, Ontario.

2. The Filer is registered in the categories of Portfolio Manager, Investment Fund Manager and Exempt Market Dealer in all of the Canadian Jurisdictions. The Filer is also registered as a Commodity Trading Manager in Ontario and an Adviser under the Commodity Futures Act in Manitoba.

3. The Filer or an affiliate of the Filer acts, or will act, as trustee, manager and portfolio adviser of the Funds. BlackRock Institutional Trust Company, N.A. or another affiliate of the Filer may be appointed as the sub-advisor of the Funds.

4. Each Fund is, or will be, an open-ended mutual fund governed by the laws of the Province of Ontario.

5. Each Fund distributes, or will distribute, its securities pursuant to either a (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 (Form 41-101F2), or (b) simplified prospectus prepared pursuant to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1), as applicable, and is, or will be, governed by the applicable provisions of NI 81-102, subject to any exemptions therefrom granted by the securities regulatory authorities.

6. Units of each Fund that is an exchange-traded mutual fund (an ETF) are, or will be, listed and traded on the Toronto Stock Exchange (the TSX), Neo Exchange Inc. (the NEO Exchange) or another stock exchange recognized by the OSC.

7. Each Fund is, or will be, a reporting issuer in each of the Canadian Jurisdictions.

8. The Filer and the Existing Funds are not in default of securities legislation in any of the Canadian Jurisdictions.

9. In order to achieve its investment objectives, each Fund may, from time to time, (a) invest up to 100% of its NAV in securities of one or more ETFs which are, or will be, listed and traded on the London Stock Exchange (the LSE) and managed by BlackRock Asset Management Ireland Limited (BlackRock Ireland) or another affiliate of the Filer (each, a Dublin iShares Fund, and collectively, the Dublin iShares Funds), and/or (b) invest up to 100% of its NAV in securities of one or more Middle Funds.

The Dublin iShares Funds

10. Each Dublin iShares Fund is, or will be, a portfolio with segregated liability of an umbrella open-ended investment company with variable capital which is incorporated as a public limited company under the Companies Act 2014 (Ireland), as amended.

11. Each Dublin iShares Fund is, or will be, authorized by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2011, as amended by the European Union (Undertakings for Collective Investment in Transferable Securities) (Amendment) Regulations 2016, as may be amended or replaced (the UCITS Regulations) and therefore is, or will be, a "UCITS" that must comply with all UCITS requirements, subject to any relief therefrom.

12. The following affiliates of the Filer are currently involved in the management of the Dublin iShares Funds:

(a) BlackRock Ireland, which is regulated by the Central Bank of Ireland, is the manager and has responsibility for the management and administration of the Dublin iShares Funds, as well as the oversight of all service providers or other delegates; and

(b) BlackRock Advisors (UK) Limited (BlackRock UK), which is regulated by the Financial Conduct Authority of the United Kingdom (the FCA), is the investment manager and has responsibility for the investment and re-investment of the assets.

13. The following third parties are currently involved in the administration of the Dublin iShares Funds:

(a) State Street Fund Services (Ireland) Limited is the administrator, registrar and transfer agent; and

(b) State Street Custodial Services (Ireland) Limited is the depositary.

14. Affiliates of BlackRock UK may be retained by BlackRock UK to act as sub-advisors or to perform other services in respect of certain Dublin iShares Funds. BlackRock UK's affiliates remain subject to the oversight of BlackRock UK.

15. BlackRock Ireland is subject to substantially equivalent regulatory oversight as the Filer, which is primarily regulated by the OSC, as well as BlackRock Fund Advisors, the manager of ETFs managed by an affiliate of the Filer that are listed and traded on a recognized U.S. stock exchange (the U.S. iShares Funds), which is regulated by the U.S. Securities and Exchange Commission.

16. Securities of each Dublin iShares Fund are, or will be, offered in their primary market in a manner similar to the Funds and U.S. iShares Funds pursuant to a prospectus for each investment company filed with the Central Bank of Ireland.

17. In addition to being listed on the LSE, the securities of a Dublin iShares Fund may also be listed on one or more additional stock exchanges.

18. The LSE is subject to regulatory oversight by the FCA. The LSE is subject to substantially equivalent regulatory oversight to securities exchanges in Canada and the United States, and the listing requirements to be complied with by the Dublin iShares Funds are consistent with the listing requirements of the TSX and NEO Exchange.

19. The fundamental investment objective of each of the Dublin iShares Funds, is or will be, to seek to track the performance of an index, net of expenses, and to provide investors with a total return, or net total return, taking into account both capital and income returns.

20. Each Dublin iShares Fund achieves, or will achieve, its investment objective by holding the component securities of the applicable index or otherwise investing in securities in a manner that will enable the Dublin iShares Fund to track the performance of the applicable index in accordance with the rules on eligible assets prescribed by the UCITS Regulations.

21. The index tracked by each Dublin iShares Fund is, or will be, transparent, in that the methodology for the selection and weighting of index components is, or will be, publicly available. Details of the components of the index tracked by each Dublin iShares Fund, such as issuer name, ISIN and weighting within the index, are, or will be, publicly available by the applicable index provider and updated from time to time or when requested of the applicable index provider.

22. Each Dublin iShares Fund makes, or will make, the NAV of its holdings available to the public through at least one price information system associated with the stock exchange on which it is listed.

23. No Dublin iShares Fund is a "synthetic ETF", meaning that no Dublin iShares Fund will principally rely on an investment strategy that makes use of swaps or other derivatives to gain an indirect financial exposure to the return of an index.

24. Each Dublin iShares Fund is, or will be, an "investment fund" and a "mutual fund" within the meaning of applicable Canadian securities legislation.

25. The Dublin iShares Funds are, or will be, subject to the following regulatory requirements:

(a) each Dublin iShares Fund is subject to a robust risk management framework through prescribed rules on governance, risk, regulation of service providers and safekeeping of assets;

(b) each Dublin iShares Fund is restricted to investments permitted by the UCITS Regulations and/or authorized by the Central Bank of Ireland (including any exemptive relief obtained by the Dublin iShares Funds therefrom);

(c) each Dublin iShares Fund is subject to investment restrictions limiting its holdings of illiquid securities which are not listed on a stock exchange or regulated market to no more than 10% of the Dublin iShares Fund's NAV;

(d) each Dublin iShares Fund is subject to investment restrictions limiting its holdings of other collective investment undertakings to no more than 10% of the Dublin iShares Fund's NAV;

(e) each Dublin iShares Fund is subject to restrictions regarding the use of derivatives, including the types of derivatives in which it may transact, limits on counterparty risk, and limits on increases to overall market risk resulting from the use of derivatives, which are similar to those contained in NI 81-102;

(f) each Dublin iShares Fund is required to prepare a prospectus which discloses material facts, similar to the disclosure requirements under Form 41-101F2 and Form 81-101F1;

(g) each Dublin iShares Fund is required to prepare key investor information documents which provide disclosure that is substantially similar to the disclosure required to be included in the ETF facts document required by Form 41-101F4 Information Required in an ETF Facts Document;

(h) each Dublin iShares Fund is subject to continuous disclosure obligations which are substantially similar to the disclosure obligations under National Instrument 81-106 -- Investment Fund Continuous Disclosure;

(i) each Dublin iShares Fund is required to update information of material significance in the prospectus, to prepare management reports and an unaudited set of financial statements at least semi-annually, and to prepare management reports and an audited set of financial statements annually; and

(j) each Dublin iShares Fund has a board of directors and a manager that are subject to a governance framework which sets out the duty of care and standard of care, which require the board of directors of both the manager and the Dublin iShares Fund to act in the best interest of securityholders of the Dublin iShares Fund.

The Two Tier Relief

26. Each Fund may, from time to time, wish to invest up to 100% of its NAV in securities of one or more Dublin iShares Funds. Specifically, each Fund may wish to invest up to 100% of its NAV in securities of a single Dublin iShares Fund, or, up to 50% of its NAV in securities of multiple Dublin iShares Funds.

27. The Filer considers that an investment in a Dublin iShares Fund by a Fund is an efficient and cost-effective alternative to administering one or more investment strategies similar to that of the applicable Dublin iShares Fund. The Filer also considers that an investment in Dublin iShares Funds would enable a Fund to obtain exposure to the markets and asset classes in which the applicable Dublin iShares Fund invests and in which the investment objectives and strategies of the Fund may contemplate.

28. The Filer believes that investments in securities of Dublin iShares Funds may enable the Funds to obtain tax-efficient exposure to international investments by avoiding a layer of withholding tax. In general, a Fund that is exposed to non-North American income-generating investments via holdings in securities of U.S. iShares Funds could be subject to an extra layer of withholding tax which could be avoided if a Fund was able to invest directly in securities of one or more Dublin iShares Funds. The first layer of withholding tax could be applied by the country of origin and the second by the Internal Revenue Service when the U.S. iShares Fund pays a distribution to its unitholders, including the Fund. The second layer of withholding tax could be avoided if a Fund were able to invest directly in the securities of Dublin iShares Funds.

29. In the absence of the Two Tier Relief, the Funds would not be permitted to:

(a) purchase a security of a Dublin iShares Fund:

(i) if, immediately after the transaction, more than 10% of the Fund's NAV would be invested in securities of the Dublin iShares Fund, as prohibited by subsection 2.1(1) of NI 81-102; or

(ii) if, immediately after the purchase, the Fund would hold securities representing more than 10% of (A) the votes attaching to the outstanding voting securities of the Dublin iShares Fund, or (B) the outstanding equity securities of the Dublin iShares Fund, as prohibited by paragraph 2.2(1)(a) of NI 81-102; or

(b) purchase or hold securities of a Dublin iShares Fund:

(i) since the Dublin iShares Fund is not subject to NI 81-102 as prohibited by paragraph 2.5(2)(a) of NI 81-102; and

(ii) since the Dublin iShares Fund is not a reporting issuer in a Canadian Jurisdiction, as prohibited by paragraph 2.5(2)(c) of NI 81-102.

30. But for the fact that the securities of the Dublin iShares Funds are traded on a stock exchange in the United Kingdom and not on a stock exchange in Canada or the United States, such securities would otherwise qualify as "index participation units" (IPUs) within the meaning of NI 81-102.

31. If the securities of a Dublin iShares Fund were IPUs within the meaning of NI 81-102, a Fund would be permitted to purchase and/or hold securities of one or more Dublin iShares Funds up to 100% of its NAV, since the Funds would be able to rely on the exceptions to the prohibitions in subsection 2.1(1), 2.2(1) and 2.5(2) of NI 81-102 for investments in IPUs.

32. The investment structure of the Dublin iShares Funds, which consists of investments in underlying securities and the ability to invest in derivative instruments as an ancillary investment strategy and not as the primary means to track the performance of the applicable index, is similar to the investment structure of the Funds and U.S. iShares Funds, whose securities qualify as IPUs in NI 81-102.

33. The Filer wishes to invest assets of the Funds in securities of Dublin iShares Funds on the same basis as would be permitted under NI 81-102 if the securities of the Dublin iShares Funds were traded on a stock exchange in Canada or the United States and were therefore IPUs.

34. Each Fund that is relying on the Two Tier Relief will provide the disclosure required by the securities legislation of the Canadian Jurisdictions for investment funds investing in other investment funds.

35. The prospectus of each Fund that is relying on the Two Tier Relief will, no later than the next time that the prospectus of the Fund is renewed after the date of this decision, disclose the fact that the Fund has obtained the Two Tier Relief to permit investments in one or more Dublin iShares Funds on the terms described in this decision.

36. There will be no duplication of management fees or incentive fees for the same service as a result of an investment by a Fund in a Dublin iShares Fund.

37. The amount of loss that could result from an investment by a Fund in a Dublin iShares Fund will be limited to the amount invested by the Fund in the Dublin iShares Fund.

38. An investment by a Fund in one or more Dublin iShares Funds will be made in accordance with the fundamental investment objectives of the Fund.

39. An investment by a Fund in a Dublin iShares Fund represents, or will represent, the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Fund.

The Three Tier Relief

40. Each Fund may, from time to time, wish to invest up to 100% of its NAV in securities of one or more Middle Funds.

41. The Filer submits that employing a three-tier fund-of-fund structure in this way achieves efficiencies from both an investment diversification and operational perspective. Such a structure will allow a Fund to obtain exposure to one or more Dublin iShares Funds on a cost-effective basis, including by allowing a Fund to purchase a currency-hedged Fund that employs a fund-of-fund structure.

42. In the absence of the Three Tier Relief, the Funds would not be permitted to purchase or hold a security of a Middle Fund since the Middle Fund holds more than 10% of its NAV in securities of Dublin iShares Funds, as prohibited by paragraph 2.5(2)(b) of NI 81-102.

43. But for the fact that the securities of the Dublin iShares Funds are traded on a stock exchange in the United Kingdom and not on a stock exchange in Canada or the United States, such securities would otherwise qualify as IPUs within the meaning of NI 81-102.

44. If the securities of a Dublin iShares Fund were IPUs within the meaning of NI 81-102, a Fund would be permitted to purchase and/or hold securities of one or more Middle Funds up to 100% of its NAV, since the Funds would be able to rely on the exception to the prohibition in subsection 2.5(2)(b) of NI 81-102 for investments in funds that hold IPUs.

45. The Filer wishes to invest assets of the Funds in securities of Middle Funds on the same basis as would be permitted under NI 81-102 if the securities of the Dublin iShares Funds were traded on a stock exchange in Canada or the United States and were therefore IPUs.

46. Each Fund that is relying on the Three Tier Relief will provide the disclosure required by the securities legislation of the Canadian Jurisdictions, if any, for investment funds investing in other investment funds that themselves invest in other investment funds.

47. The prospectus of each Fund that is relying on the Three Tier Relief will, no later than the next time that the prospectus of the Fund is renewed after the date of this decision, disclose the fact that the Fund has obtained the Three Tier Relief to permit investments in one or more Middle Funds on the terms described in this decision.

48. There will be no duplication of management fees or incentive fees for the same service as a result of an investment by a Fund in a Middle Fund.

49. The amount of loss that could result from an investment by a Fund in a Middle Fund will be limited to the amount invested by the Fund in the Middle Fund.

50. An investment by a Fund in one or more Middle Funds will be made in accordance with the fundamental investment objectives of the Fund.

51. An investment by a Fund in a Middle Fund represents, or will represent, the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Fund.

The Exemption Sought

52. The ETF market continues to develop and evolve in the United Kingdom and Europe, and new Dublin iShares Funds continue to be launched that provide exposure to different and unique asset classes and markets. The Exemption Sought will enable the Funds to invest directly or indirectly in the expanding suite of Dublin iShares Funds on a more flexible basis than the exemption granted in the Prior Decision.

53. In the absence of the Exemption Sought, the Funds would not be permitted to:

(a) purchase and/or hold securities of one or more Dublin iShares Funds; or

(b) purchase and/or hold securities of one or more Middle 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 decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:

(a) the investment by a Fund in securities of the Dublin iShares Funds is made in accordance with the fundamental investment objectives of the Fund;

(b) securities of the Dublin iShares Funds qualify as IPUs within the meaning of NI 81-102 but for the fact that they are traded on a stock exchange in the United Kingdom and not a stock exchange in Canada or the United States;

(c) none of the Dublin iShares Funds are synthetic ETFs, meaning that they will not principally rely on an investment strategy that makes use of swaps or other derivatives to gain an indirect financial exposure to the return of an index;

(d) investments by a Fund, directly or indirectly, in securities of one or more Dublin iShares Funds comply with NI 81-102 as if securities of the Dublin iShares Funds were IPUs within the meaning of NI 81-102; and

(e) in the event there is a significant change to the regulatory regime applicable to the Dublin iShares Funds that results in a less restrictive regulatory regime compared to the current regime and that has a material impact on the management or operation of the Dublin iShares Funds in which the Funds are invested, the Funds do not acquire any additional securities of such Dublin iShares Funds, and dispose of any securities of such Dublin iShares Funds in an orderly and prudent manner.

The Exemption Sought will terminate six months after the coming into force of any amendments to NI 81-102 that restrict or regulate a Fund's ability to invest in Dublin iShares Funds or Middle Funds.

"Darren McKall"
Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission