RBC Global Asset Management Inc. and The Top Funds
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from the control restriction in section 2.2(1) of NI 81-102 to permit top funds subject to NI 81-102 to invest and hold more than 10% of the outstanding equity securities of related underlying private funds providing exposure to private alternative investment strategies -- Underlying private funds are not investment funds and not reporting issuers -- Relief is subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.2(1) and 19.1.
December 11, 2023
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. (the Filer) AND THE TOP FUNDS (as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the funds listed in Schedule "A" hereto (the Existing Top Funds) and any additional mutual funds of which the Filer, or an affiliate of the Filer, may be the trustee and/or manager in the future (the Future Top Funds and together with the Existing Top Funds, the Top Funds), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Top Funds from subsection 2.2(1) (the Control Restriction) of National Instrument 81-102 Investment Funds (NI 81-102) in order to permit each of the Top Funds to purchase a security of an RBC Private Fund (as defined below) if immediately after the purchase, the Top Fund would hold securities representing more than 10% of (a) the votes attaching to the outstanding voting securities of the RBC Private Fund or (b) the outstanding equity securities of the RBC Private Fund (the Requested Relief).
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 section 4.7(1) of Multilateral Instrument 11- 102 Passport System (Ml 11-102) is intended to be relied upon in all of the provinces and territories of Canada other than Ontario (together with Ontario, the 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
1. The Filer is a corporation formed by amalgamation under the federal laws of Canada and its head office is located in Toronto, Ontario.
2. The Filer is an indirect, wholly-owned subsidiary of Royal Bank of Canada.
3. The Filer 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.
4. The Filer is not in default of securities legislation in any of the Jurisdictions.
The Top Funds
5. Each Top Fund is, or will be, an open-ended mutual fund established as a trust under the laws of the Province of Ontario.
6. Each Top Fund distributes, or will distribute, its securities under a simplified prospectus (each, a "Prospectus") prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101).
7. Each Top Fund is, or will be, a reporting issuer in each of the Jurisdictions. Each Existing Top Fund is not in default of any of the requirements of securities legislation in any of the Jurisdictions.
8. Each Top Fund is, or will be, permitted by NI 81-102 to invest up to 10% of its net assets in illiquid assets, which includes the RBC Private Funds (as defined below). A Top Fund's investment in securities of the RBC Private Funds is, or will be, consistent with its investment objectives. The Prospectus of each Top Fund discloses, or will disclose, in its investment strategies that the Top Fund may invest up to 10% of its net assets directly or indirectly in illiquid assets, measured at the time of investment, including in RBC Private Funds.
9. Each Top Fund is, or will be, subject to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) and the Filer has established, or will establish, an independent review committee (IRC) to review conflict of interest matters pertaining to the Top Funds as required by NI 81-107.
The RBC Private Funds
10. RBC GAM is the asset management division of Royal Bank of Canada (RBC). RBC GAM provides a comprehensive range of investment management services and solutions to individual, high-net-worth and institutional investors through mutual funds, exchange-traded funds, hedge funds and pooled funds, separate accounts and specialty investment strategies.
11. RBC GAM currently manages two open-ended private funds, namely, RBC Canadian Core Real Estate Fund and RBC Global Infrastructure Fund LP (collectively, the Existing RBC Private Funds), each of which offer securities on a private placement basis pursuant to an exemption from the prospectus requirement under applicable Canadian securities laws.
12. The Filer, or an affiliate of the Filer, may act as manager to one or more private funds in the future (each, a Future RBC Private Fund, together with the Existing RBC Private Funds, the RBC Private Funds). Each Future RBC Private Fund will offer its securities on a private placement basis pursuant to an exemption from the prospectus requirement under applicable Canadian securities laws.
13. Each RBC Private Fund provides, or will provide, exposure to private equity, private real estate, private infrastructure, private credit investments or other private alternative investment strategies.
14. The RBC Private Funds are not, or will not be, subject to NI 81-102, and have not, and will not, prepare a prospectus in accordance with NI 81-101 or National Instrument 41-101 General Prospectus Requirements.
15. The RBC Private Funds are not, and will not be, reporting issuers in any of the Jurisdictions or listed on any recognized stock exchange.
16. No RBC Private Fund is, or will be, an "investment fund" pursuant to the securities legislation of the Jurisdictions.
17. The RBC Private Funds are, or will be, sold only to investors who qualify to invest in the RBC Private Funds pursuant to an exemption from the prospectus requirement under applicable Canadian securities laws.
18. The Existing RBC Private Funds are not in default of the securities legislation of any of the Jurisdictions.
19. The RBC Private Funds are, or will be, primarily held by accredited investors who are not affiliated with the Filer.
20. There is no, and it is not expected that there will be, an established, publicly available secondary market for securities of the RBC Private Funds and the redemption rights applicable to investors in the RBC Private Funds are, or will be, more limited than those applicable to mutual funds subject to NI 81-102. Accordingly, investors in the RBC Private Funds may not be able to readily dispose of their securities in an RBC Private Fund and any securities that a Top Fund holds in an RBC Private Fund is, or will be, considered an "illiquid asset" under NI 81-102.
21. On an annual basis the financial statements of each RBC Private Fund, are, or will be, audited by the RBC Private Fund's external auditors, being an internationally recognized independent accounting and audit firm (typically PricewaterhouseCoopers LLP (Canada), Ernst & Young LLP or Deloitte LLP), as part of their annual independent audit. The applicable audit firm also audits the controls and processes in place to ensure the RBC Private Fund's portfolio investments are accurately valued in accordance with the RBC Private Fund's valuation policy.
Reasons for Requested Relief
22. Absent the Requested Relief, a Top Fund would be prohibited by subsection 2.2(1)(a) of NI 81-102 from investing in an RBC Private Fund beyond the confines of the Control Restriction. Due to the expected size disparity between the Top Funds and the RBC Private Funds, with the Top Funds expected be significantly larger than the RBC Private Funds, it is likely that a relatively small investment, on a percentage of net asset value basis, by a relatively larger Top Fund in an RBC Private Fund could result in such Top Fund holding securities representing more than 10 percent (10%) of (a) the votes attaching to the outstanding voting securities of the RBC Private Fund or (b) the outstanding equity securities of the RBC Private Fund, contrary to the Control Restriction.
23. A Top Fund will not invest in any RBC Private Fund for the purpose of exercising control over, or management of, the RBC Private Fund. The securities of each RBC Private Fund that would be held by the Top Funds do not, and will not, provide a Top Fund with any right to (a) appoint directors or observers to any board of the applicable RBC Private Fund or its manager, (b) restrict management of any RBC Private Fund or be involved in the decision-making with respect to the investments made by the applicable RBC Private Fund or (c) restrict the transfer of securities of the applicable RBC Private Fund by other investors in the RBC Private Fund. Any voting rights associated with the securities of the RBC Private Funds that would be held by the Top Funds do not, and will not, provide a Top Fund with any right to approve, or otherwise participate in the decision-making process associated with the investments made by the RBC Private Funds.
24. The Top Funds will not have any look-through rights with respect to the individual portfolio investments held by any of the RBC Private Funds. Further, the Top Funds will not have any rights to, or responsibility for, administering any of the portfolio investments held by any of the RBC Private Funds.
25. Each RBC Private Fund is expected to have, following the completion of its initial investment period, certain diversification requirements which may include limiting the indirect exposure of the Top Funds to any single underlying portfolio company, asset class, sector or geography, as the case may be.
26. The Filer believes that a meaningful allocation to private markets investments will provide the Top Funds' investors with unique diversification opportunities and represents an appropriate investment tool for the Top Funds that has not been widely available in the past. Private equity, private real estate, private infrastructure, private credit investments and other private alternative investment strategies have historically performed well in down markets; the Filer believes that permitting a Top Fund to increase its allocation to such strategies, offers the potential to improve a Top Fund's risk adjusted returns.
27. The Filer believes that an optimal way to access such investment strategies is through investments in the RBC Private Funds. Investing in the RBC Private Funds will provide the Top Funds with access to investments in these strategies that the Top Funds would not otherwise have exposure to through portfolios diversified across different strategies, industry sectors and geographies constructed by the Filer's experienced investment professionals.
28. Investments in the RBC Private Funds are considered illiquid investments under NI 81-102 and are therefore included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102 for the Top Funds. Furthermore, the Filer has its own liquidity policy and manages, or will manage, the Top Funds' liquidity prudently under these policies.
29. Investments by a Top Fund in the RBC Private Funds do not, or will not, qualify for the exemption from the Control Restriction in paragraph 2.2(1.1)(a) of NI 81-102 as the RBC Private Funds are not, or will not be, "investment funds" subject to NI 81-102.
30. The Filer believes that granting the Requested Relief is in the best interests of the Top Funds as it would provide the Top Funds with more flexibility to increase their allocation to the private markets.
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 Requested Relief is granted provided that:
(a) no Top Fund is actively participating or will actively participate in the business or operations of any RBC Private Fund;
(b) each Top Fund is, or will be, treated as an arm's-length investor in each RBC Private Fund in which it invests, on the same terms as all other third-party investors;
(c) a Top Fund does not, or will not, hold more than 20% of the outstanding equity or voting securities of any RBC Private Fund;
(d) investments in the RBC Private Funds are considered illiquid investments under NI 81-102 and therefore are not permitted to exceed, in aggregate, 10% of the net asset value of the Top Fund;
(e) in respect of an investment by a Top Fund in an RBC Private Fund, no sales or redemption fees are, or will be, paid as part of the investment in the RBC Private Fund;
(f) in respect of an investment by a Top Fund in an RBC Private Fund, no management fees or incentive fees are, or will be, payable by the Top Fund that, to a reasonable person, would duplicate a fee payable by an RBC Private Fund for the same service;
(g) where applicable, a Top Fund's investment in an RBC Private Fund is, or will be, disclosed to investors in the Top Fund's financial statements and/or fund facts documents;
(h) the manager of each of the Top Funds complies with section 5.1 of NI 81-107 and the manager and the IRC of the Top Funds will comply with section 5.4 of NI 81-107 for any possible standing instructions concerning an investment by a Top Fund in an RBC Private Fund; and
(i) the Prospectus of each Top Fund discloses, or will disclose, in the next renewal or amendment, as applicable, the fact that the Top Fund may invest in the RBC Private Funds.
SCHEDULE A
LIST OF EXISTING TOP FUNDS
RBC Select Very Conservative Portfolio
RBC Select Conservative Portfolio
RBC Select Balanced Portfolio
RBC Select Growth Portfolio
RBC Select Aggressive Growth Portfolio
RBC Select Choices Conservative Portfolio
RBC Select Choices Balanced Portfolio
RBC Select Choices Growth Portfolio
RBC Select Choices Aggressive Growth Portfolio