BlackRock Asset Management Canada Limited
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted to permit ETFs to invest in underlying US ETFs that may hold more than 10% of their net asset value in securities of U.S. money market funds -- relief subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(b) and 19.1.
July 27, 2021
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 in respect of four new exchange-traded funds to be established by the Filer (the New Funds and each, a New Fund and together with the exchange-traded funds currently managed by the Filer and such other exchange-traded funds of which the Filer or an affiliate of the Filer acts as manager in the future, the Funds and each, a Fund), each of which will be a mutual fund subject to National Instrument 81-102 -- Investment Funds (NI 81-102) and offer one or more classes of units, for a decision under the securities legislation of the principal regulator (the Legislation) that exempts the Filer and the Funds from paragraph 2.5(2)(b) of NI 81-102 in order to permit the Funds to purchase and hold shares of one or more U.S. iShares ETFs (as defined below) that may hold more than 10% of its net asset value (NAV) in securities of U.S. Money Market Funds (as defined below) (the Exemption 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 the 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 Jurisdictions).
Interpretation
"Jurisdictions" means collectively, the provinces and territories of Canada.
"Unit" means, in relation to a particular Fund, as applicable, a unit of a class which represents an equal, undivided interest in the net assets of the Fund.
"U.S. iShares ETF" means a U.S. domiciled exchange-traded fund managed by BlackRock Fund Advisors (BFA) and includes AGG and MBB (each as defined below).
Terms defined in NI 81-102 have the same meaning in this decision as in NI 81-102, unless otherwise defined. Certain other defined terms have the meanings given to them above and below.
Representations
The Filer
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 or an affiliate of the Filer acts or will act as trustee, manager and portfolio adviser of the Funds.
3. The Filer is registered in the categories of Portfolio Manager, Investment Fund Manager and Exempt Market Dealer in all of the Jurisdictions. The Filer is also registered as a Commodity Trading Manager in Ontario and an Adviser under the Commodity Futures Act in Manitoba.
The Funds
4. Each Fund is or will be an exchange-traded fund governed by the laws of the Province of Ontario.
5. Each Fund distributes or will distribute its Units 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 and is or will be governed by the applicable provisions of NI 81-102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities.
6. Each Fund is or will be a reporting issuer in each of the Jurisdictions.
7. Units of each Fund are or will be listed on the Toronto Stock Exchange (the TSX), the NEO Exchange Inc. (the NEO Exchange) or another stock exchange recognized by the OSC.
8. The investment objective of each of the New Funds will be to provide income by replicating, to the extent possible, the performance, net of expenses, of an index (Index) that tracks the broad U.S. investment grade bond market or investment grade mortgage-backed securities issued and/or guaranteed by U.S. government agencies, as applicable, net of expenses, and, for two of the New Funds to the extent possible, hedge any resulting U.S. dollar currency exposure back to Canadian dollars.
9. In order to achieve its investment objective, each New Fund will purchase and hold up to 100% of its NAV in shares of iShares Core U.S. Aggregate Bond ETF (AGG) or iShares MBS ETF (MBB) and may engage in a currency hedging strategy by entering into currency forward contracts or other derivative instruments in order to hedge each New Fund's exposure to U.S. dollars back to Canadian dollars.
10. In order to achieve its investment objective, each Fund will purchase and hold up to 100% of its NAV in shares of one or more U.S. iShares ETFs and may engage in a currency hedging strategy by entering into currency forward contracts or other derivative instruments in order to hedge each Fund's exposure to U.S. dollars or other foreign currency back to Canadian dollars.
U.S. iShares ETFs
11. Each U.S. iShares ETF is a U.S. domiciled exchange-traded fund managed by BFA, an indirect wholly-owned subsidiary of BlackRock, Inc. and an affiliate of the Filer.
12. BFA is regulated as an investment advisor by the U.S. Securities and Exchange Commission (the SEC).
13. Each U.S. iShares ETF is subject to the U.S.Investment Company Act of 1940, as amended (the U.S. Investment Company Act) and is an "investment fund" within the meaning of applicable Canadian securities legislation.
14. The shares of each U.S. iShares ETF are or will be offered pursuant to a prospectus filed with the SEC.
15. The shares of each U.S. iShares ETF are or will be listed on a stock exchange in the U.S.
16. The investment strategies of each U.S. iShares ETF permit it to invest its assets in high quality, liquid short-term instruments, including securities of other investment funds.
17. Pursuant to the U.S. Investment Company Act, each U.S. iShares ETF may from time to time hold more than 10% of its NAV in securities of U.S. registered money market funds advised by BFA or an affiliate (each, a U.S. Money Market Fund).
18. Each U.S. iShares ETF currently holds securities of U.S. Money Market Funds, namely: (a) BlackRock Cash Funds: Institutional (BR Institutional), a series of BlackRock Funds III and (b) BlackRock Cash Funds: Treasury (BR Treasury), a series of BlackRock Funds III or of one or more other U.S. Money Market Funds managed by BFA or an affiliate.
BR Institutional
19. BR Institutional is a series of BlackRock Funds III, a statutory trust existing under the laws of the State of Delaware. BR Institutional is considered to be, and invests its assets in accordance with, the maturity, credit and liquidity requirements of, a U.S. money market fund under Rule 2a-7 of the U.S. Investment Company Act.
20. The investment objective of BR Institutional is to seek a high level of income consistent with liquidity and preservation of capital.
21. BR Institutional seeks to achieve its investment objective by investing all of its assets in the Money Market Master Portfolio, a series of Master Investment Portfolio (the Master I Portfolio), a statutory trust existing under the laws of the State of Delaware and registered under the U.S. Investment Company Act as an open-ended management investment company. BFA is the investment advisor to the Master I Portfolio. BR Institutional, through its investment in the Master I Portfolio, invests in high quality, short-term money market instruments that, at the time of investment, have remaining maturities of 397 calendar days or less from the date of acquisition. BR Institutional's portfolio maintains a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life of 120 days or less. Under normal circumstances, BR Institutional expects to invest at least 95% of its assets in any combination of investments, which may include certificates of deposit, high-quality debt obligations, such as corporate debt and certain asset-backed securities, certain obligations of U.S. and foreign banks, certain repurchase agreements and certain obligations of the U.S. Government, its agencies and instrumentalities (including government-sponsored enterprises).
BR Treasury
22. BR Treasury is a series of BlackRock Funds III. BR Treasury is considered to be, and invests its assets in accordance with the maturity, credit and liquidity requirements of, a U.S. "government money market fund" under Rule 2a-7 of the U.S. Investment Company Act. The investment objective of BR Treasury is to seek current income as is consistent with liquidity and stability of principal.
23. BR Treasury seeks to achieve its investment objective by investing all of its assets in the Treasury Money Market Master Portfolio, a series of Master Investment Portfolio (the Master T Portfolio), a statutory trust existing under the laws of the State of Delaware and registered under the U.S. Investment Company Act as an open-ended management investment company. BFA is the investment advisor to the Master T Portfolio. BR Treasury, through its investment in the Master T Portfolio, invests at least 99.5% of its total assets in cash, U.S. Treasury bills, notes and other direct obligations of the U.S. Treasury, and repurchase agreements secured by such obligations or cash. BR Treasury invests in securities maturing in 397 days or less (with certain exceptions) and the portfolio has a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life of 120 days or less.
U.S. Money Market Funds
24. U.S. Money Market Funds are subject to the investment restrictions prescribed under Rule 2a-7 of the U.S. Investment Company Act, and other rules of the U.S. Securities and Exchange Commission, including certain restrictions relating to portfolio quality, maturity, diversification and liquidity.
25. The investment restrictions prescribed by Rule 2a-7 of the U.S. Investment Company Act are substantively similar to the requirements for "money market fund[s]" under NI 81-102, subject to certain non-material differences including:
(a) as outlined above, the portfolio of a U.S. Money Market Fund must maintain a dollar-weighted average portfolio maturity appropriate to its investment objective provided that the fund must not: (i) acquire any instrument with a remaining maturity of greater than 397 calendar days or (ii) maintain a dollar-weighted average portfolio maturity that (A) exceeds 60 calendar days or (B) exceeds 120 calendar days (determined without reference to the exceptions in (i) above regarding interest rate readjustments);
(b) the advisor to a U.S. Money Market Fund must determine that any investment by the fund creates a minimal credit risk for the fund; and
(c) the U.S. Money Market Fund(s), in which a U.S. iShares ETF will invest, must not have less than: (i) 10% of its assets invested in cash, direct obligations of the U.S. Government, government securities under certain conditions or securities that will mature within one business day and (ii) 30% of its assets invested in cash, direct obligations of the U.S. Government, government securities under certain conditions or securities that will mature in five business days.
26. The Filer believes that any risks associated with an indirect investment in a U.S. Money Market Fund compared to a Canadian money market fund are mitigated by the fact that the U.S. Money Market Fund is subject to the U.S. Investment Company Act and oversight by the SEC and any loss that could result from an investment in a U.S. Money Market Fund by a U.S. iShares ETF will be limited to the amount invested by the U.S. iShares ETF in such U.S. Money Market Fund.
Reasons for Exemption Sought
27. Each Fund would be permitted to invest in shares of a U.S. iShares ETF pursuant to section 2.5(2) of NI 81-102 in reliance on the exceptions provided for in:
(a) subsection 2.5(3)(a) as the shares of the U.S. iShares ETFs meet the definition of "index participation units" under NI 81-102;
(b) subsection 2.5(5) of NI 81-102 as each Fund purchases or will purchase, shares of a U.S. iShares ETF in the secondary market; and
(c) subsection 2.5(4)(b)(i) of NI 81-102, but for the fact that a U.S. iShares ETF may from time to time purchase or hold more than 10% of its NAV in one or more U.S. Money Market Funds, which as outlined in representation 25, may not meet all of the investment restrictions prescribed in section 2.18 of NI 81-102 and the securities of which do not qualify as "index participation units".
28. The U.S. Money Market Funds in which the U.S. iShares ETFs may invest are subject to the investment restrictions prescribed under Rule 2a-7 of the U.S. Investment Company Act, which are substantially similar to the investment restrictions applicable to a money market fund under NI 81-102.
29. Additionally, the Filer submits that the exception in Section 2.5(4)(b)(ii) would permit a Fund to purchase and hold securities of a U.S. iShares ETF if such U.S. iShares ETF held more than 10% of its NAV in securities of other U.S. iShares ETFs, provided the securities of each underlying U.S. iShares ETF met the definition of "index participation units" under NI 81-102. However, since the bottom tier of the proposed structure is one or more U.S. Money Market Funds the securities of which do not qualify as "index participation units" (rather than a U.S. iShares ETF that issues "index participation units"), the exception to the 10% limit in Section 2.5(2)(b) of NI 81-102 is not available. The Filer submits that this may produce an unintended result given the eligible U.S. iShares ETFs and U.S. Money Market Funds are regulated under the U.S. Investment Company Act and the U.S. Money Market Funds are generally required by the applicable U.S. Investment Company Act regulations to have a more conservative investment strategy than many U.S. iShares ETFs that would be eligible for the aforementioned exception.
30. The U.S. Money Market Funds in which the U.S. iShares ETFs may invest will be subject to the oversight of the SEC.
31. 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 U.S. iShares ETF.
32. The amount of loss that could result from an investment by a Fund in a U.S. iShares ETF will be limited to the amount invested by the Fund in the U.S. iShares ETF.
33. The investment by a Fund in a U.S. iShares ETF will be made in accordance with the fundamental investment objectives of the Fund.
34. The Filer submits that employing a fund-of-fund structure as described herein achieves efficiencies from an operational perspective and will allow the Funds to obtain exposure to the U.S. iShares ETF on a cost-effective basis.
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 Exemption Sought is granted, provided that:
(a) the investment by a Fund in securities of a U.S. iShares ETF is in accordance with the fundamental investment objectives of the Fund;
(b) the U.S. iShares ETF is an exchange-traded fund subject to the U.S. Investment Company Act in good standing with the SEC;
(c) the U.S. iShares ETF will not, at the time securities of the U.S. iShares ETF are acquired by a Fund, hold more than 10% of its NAV in securities of any other investment funds other than securities of one or more U.S. Money Market Funds or investment funds that issue index participation units;
(d) the prospectus of each Fund discloses, or will disclose in the next renewal of its prospectus following the date of this decision, in the investment strategy section, the fact that the Fund has obtained the Exemption Sought to permit the Fund to purchase and hold shares of a U.S. iShares ETF that may hold more than 10% of its NAV in securities of one or more U.S. Money Market Funds.