RBC Asset Management Inc. et al. - NI Investment Fund Continuous Disclosure, s. 17.1
Headnote
Mutual funds in Ontario (non-reporting issuers) granted an extension of the annual financial statement filing deadline and delivery requirement as they are wholly invested in offshore investment funds for which audited financial information is not yet available.
Rules Cited
National Instrument 81-106 Investment Fund Continuous Disclosure, ss. 2.2, 5.1(2), 17.1.
April 9, 2008
IN THE MATTER OF
NATIONAL INSTRUMENT 81-106
INVESTMENT FUND CONTINUOUS DISCLOSURE
AND
IN THE MATTER OF
RBC ASSET MANAGEMENT INC.
(the Applicant)
AND
IN THE MATTER OF
RBC $C ARC FUND
RBC $U.S. ARC FUND
(the Funds)
ORDER
Background
The Ontario Securities Commission has received an application from the Applicant, on behalf of the Funds for a decision, pursuant to section 17.1 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106), varying a prior decision dated March 30, 2007 (the Existing Decision), pursuant to section 17.1 of NI 81-106, exempting the Funds from:
(a) the requirement in section 2.2 of NI 81-106 (the Filing Requirement) that the Funds file their audited annual financial statements on or before the 90th day after their most recently completed financial year (the Filing Deadline), and
(b) the requirement in subsection 5.1(2) of NI 81-106 that the Funds deliver their audited annual financial statements to securityholders by the Filing Deadline (the Delivery Requirement);
to extend the Filing Deadline.
Representations
This Decision is based on the following facts represented by the Applicant:
The Applicant
1. The Applicant is a corporation incorporated under the laws of Canada.
2. The Applicant is registered as an investment counsel and portfolio manager and as a limited market dealer under the Securities Act (Ontario) (the Act).
3. The Applicant is the manager of the Funds.
The Funds
4. Each of the Funds is a trust that is one of the RBC Absolute Return Concepts Funds established under a master trust agreement between the Applicant and The Royal Trust Company under the laws of Ontario. Each of the Funds is a mutual fund.
5. The RBC Absolute Return Concept Funds are offered only to clients (the Clients) of RBC Private Counsel Inc., RBC Dominion Securities Inc., other members of the RBC Financial Group or other entities permitted by the Applicant pursuant to exemptions from the prospectus requirement of the Act. Clients receive an offering memorandum (the Offering Memorandum), which describes the investment objectives, strategies, management and other relevant information about the Funds.
6. The investment objective of RBC $U.S. ARC Fund ($U.S. ARC) is to generate absolute returns, generally independent of market direction, through investments in hedge funds (the Hedge Funds) that employ a variety of alternative investment styles. $U.S. ARC is required to be invested in at least 15 Hedge Funds at anyone time but may be invested in more than 15 Hedge Funds and is generally invested in approximately 20 to 40 Hedge Funds.
7. The investment objective of RBC $C ARC Fund ($C ARC) is to generate absolute returns, similar to the returns of $U.S. ARC, but hedged with respect to changes in the value of the Canadian dollar in relation to the value of the U.S. dollar. $C ARC invests in units of $U.S. ARC and uses derivative instruments to implement the hedge.
Preparing the Funds' Annual Financial Statements
8. The Funds have a financial year-end of December 31.
9. Section 2.2 and subsection 5.1(2) of NI 81-106 require the Funds to file and deliver their audited annual financial statements by the Filing Deadline.
10. Section 2.11 of NI 81-106 provides an exemption (the Filing Exemption) from the Filing Requirement if, among other things, the Funds deliver their annual financial statements in accordance with Part 5 of NI 81-106 by the Filing Deadline.
11. The Hedge Funds in which $U.S. ARC invests prepare annual audited financial statements in accordance with the applicable accounting principles -- such as International Financial Reporting Standards or U.S. GAAP. Almost all of the Hedge Funds have a financial year end of December 31 and they are subject to financial reporting deadlines of varying length in the different jurisdictions outside Canada.
12. One of the key audit procedures that the auditor of $U.S. ARC relies on to obtain reasonable assurance whether the financial statements are free of material misstatement is to confirm the net asset values of the Hedge Funds in the valuation reports provided by the administrators of the Hedge Funds with the net asset values reported on their respective annual audited financial statements. The benchmark position for the auditor is to obtain confirmation of at least 80% of the net assets of $U.S. ARC. This requires a review of the audited financial statements of the Hedge Funds in which $U.S. ARC invests.
13. The auditor of the Funds is the same Canadian firm but it is not the auditor of the Hedge Funds. The Funds' auditors will not provide an audit opinion on the Funds' annual financial statements unless it can perform the audit procedures referred to in paragraph 12. Based on past experience, the Applicant expected that it would have the financial statements of most of the Hedge Funds by the end of May. Accordingly, in the Existing Decision the Filing Deadline was extended to the 150th day after the Funds' most recently completed financial year.
14. The Applicant has determined that it is unlikely that it will have the necessary information to prepare the financial statements of the Funds for the year ending December 31, 2007 by the end of May, 2008 for the following reasons:
(i) the turnover in the portfolio of Hedge Funds held by $U.S. ARC has meant that there are 9 new Hedge Funds in the portfolio and the Applicant must deal with 9 new administrators who are not familiar with the Filing Deadline of the Funds and may not be able to deliver the annual audited financial statements of the Hedge Funds on a basis that will permit the Funds to meet the Filing Deadline as extended in the Existing Decision;
(ii) general market conditions mean that it is more likely that even Hedge Funds which previously provided their annual audited financial statements by the end of May will take longer to deliver them; and
(iii) the auditor of the $U.S. ARC Fund has reiterated its requirement that it must be able to review the audited annual financial statements of at least 80% of the Hedge Funds held by the $U.S. ARC in order to complete the audit of the annual financial statements of the $U.S. ARC.
15. Given the above, the Applicant has requested that the Existing Decision be amended.
16. The Funds may want to rely on the Filing Exemption. Subsection 2.11(b) of the Filing Exemption requires that the Funds deliver the financial statements to securityholders in accordance with Part 5 of NI 81-106 by the Filing Deadline. As noted in paragraph 14, the Funds will not be able to meet the Filing Deadline and will not be able comply with the Delivery Requirement. As a result, the Funds will not be able to satisfy the condition in subsection 2.11(b) and therefore will not be able to rely on the Filing Exemption.
17. Since the $C ARC invests in $U.S. ARC, the auditor of $C ARC will not be able to complete the audit work for $C ARC until the financial statements of $U.S. ARC have been finalized.
18. The Funds will include a note in the Offering Memorandum of the Funds that they have received and intend to rely on relief from the Filing Requirement and the Delivery Requirement.
19. The Funds will notify Unitholders that they have received and intend to rely on relief from the Filing Requirement and the Delivery Requirement.
Decision
The Director is satisfied that the test contained in NI 81-106 that provides the Director with the jurisdiction to make the decision has been met.
The decision of the Director under NI 81-106 is that the Existing Decision is amended such that:
(a) the Funds are exempted from the Filing Requirement provided that:
(i) the audited annual financial statements of the Funds are filed on or before the 180th day after the Funds' most recently completed financial year, or
(ii) the conditions in section 2.11 of NI 81-106 are met, except for subsection 2.11(b), and the audited annual financial statements of the Funds are delivered to securityholders in accordance with Part 5 of NI 81-106 on or before the 180th day after the Funds' most recently completed financial year; and
(b) the Funds are exempted from the Delivery Requirement provided that the audited annual financial statements of the Funds are delivered to securityholders in accordance with Part 5 of NI 81-106 on or before the 180th day after the Funds' most recently completed financial year.