BlackRock Asset Management Canada Limited
Brookfield Place, 161 Bay Street
Suite 2500, P.O. Box 614
Toronto, ON
M5J 2S1
Tel 416.643.4000
Fax 416.643.4001
BY E-MAIL
October 27, 2014
Lisa Pezzack
Director
Financial Sector Division
Department of Finance Canada
th
90 Elgin Street, 13 Floor
Ottawa, Ontario
K1A 0G5
E-mail: [email protected]
RE:
Submissions concerning the “Regulations Amending Certain Regulations Relating to Pensions”,
published in the Canada Gazette, Part I, Vol. 148, No. 39, September 27, 2014 (the “Proposed
Amendments”)
Dear Ms. Pezzack:
BlackRock Asset Management Canada Limited (“BlackRock Canada”) is pleased to have the opportunity to
make submissions concerning the Proposed Amendments, as they relate to Schedule III “Permitted
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Investments” (“Schedule III”) of the Pension Benefits Standards Regulations.
BlackRock Canada fully supports the Department of Finance’s objective of modernizing the pension fund
2
investment rules, with an aim to ensuring the “adequate diversification of a pension plan’s investments” and
3
protecting plan members by “ensuring that their pensions are invested in a safe and responsible manner”.
However, we do have some concerns regarding the drafting of certain of the Proposed Amendments relating to
4
5
the “10% Rule” and “Related Party Rule” , as we believe that they may, contrary to the Department of
Finance’s objectives, decrease the ability of pension plans to invest their assets in a diversified and prudent
manner. We appreciate the opportunity to highlight these concerns and, where appropriate, have suggested
alternative proposals for the Department of Finance’s consideration.
A.
About BlackRock
BlackRock is one of the world’s leading asset management firms, managing approximately $4.525 trillion (as of
September 30, 2014) on behalf of institutional and individual clients worldwide, including governments, pension
funds, and corporations.
BlackRock Canada is an indirect, wholly-owned subsidiary of BlackRock, Inc. As a registrant under Canadian
1
SOR 87-19.
Canada, Department of Finance, News Release: “Harper Government Takes Action to Strengthen Existing Framework for
Federally Regulated Private Pension Plans” (Ottawa, Ontario: Department of Finance, September 19, 2014), online:
http://www.fin.gc.ca/n14/14-123-eng.asp.
3
Ibid.
4
The limitation, under current section 9 of Schedule III, on directly or indirectly lending, or investing, monies of a plan equal
to more than 10% of the total book value of a plan’s assets to, or in, any one person, two or more associated persons or two
or more affiliated corporations.
5
The prohibition, under current section 16 of Schedule III, on directly or indirectly lending, or investing, the moneys of a plan
to, or in the securities of, a related party of the plan, or entering into a transaction with a related party on behalf of the plan.
2
1
securities laws, BlackRock Canada offers a variety of investment management services and products to
institutional clients including numerous pension plans that are subject to Schedule III. Our pension clients vary
in size and structure, and include single and multi-employer plans in the public and private sectors that are
structured as defined benefit, target benefit or defined contribution plans or master trusts. As at December 31,
2013, BlackRock Canada’s AUM was approximately $142.4 billion, of which about $66.3 billion consisted of
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Canadian pension assets, making us the second largest pension investment manager in Canada by AUM. Our
pension plan clients frequently look to us for assistance in complying with the pension fund investment rules in
Schedule III.
B.
BlackRock Canada’s Submissions on the Proposed Amendments
Pension plans are significant participants in the capital markets. As an asset manager, BlackRock Canada
understands that both diversification and safe and responsible investing are of paramount importance in building
an investment portfolio that meets the risk and return objectives of a pension plan. We are of the view that the
Proposed Amendments must strike the right balance between protecting the interests of pension plans and
ensuring that pension plans can continue to meet their liabilities effectively by participating in the markets, and
have made our submissions on that basis.
Index Exceptions to the 10% Rule and Related Party Rule (Proposed Sections 9(4) and 17(3))
BlackRock Canada supports the proposed new exceptions to the 10% Rule and the Related Party Rule,
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respectively, for investments in an index derivative instrument. However, we note that as currently drafted,
proposed subsections 9(4) and 17(3) of Schedule III would permit a plan to invest in, or gain exposure to a
related party through, derivative instruments that provide synthetic exposure to an index, while lacking clarity as
to whether the exceptions would also apply to an equivalent investment in an investment fund that seeks to
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replicate the performance of the same index as the derivative instrument, which is currently permitted. From a
policy perspective, there appears to be little basis to distinguish between an index derivative, such as an
S&P/TSX 60 Index futures contract (e.g., ticker SXF on the Toronto Stock Exchange), and an investment fund
which, directly or indirectly, replicates the performance of the S&P/TSX 60 Index (e.g., the iShares S&P/TSX 60
Index ETF), as both investment vehicles are equally able to meet the Department of Finance’s stated objectives
of mitigating risk through diversification and safe and responsible investing.
If the Department of Finance intended to provide an index investment fund exception from the 10% Rule and
Related Party Rule, BlackRock Canada recommends clarifying the language of proposed subsection 9(4) of
Schedule III by replacing it with the following:
(4)
Subsections (1) and (1.1) do not apply in respect of investments
(a)
involving the purchase of a contract or agreement in respect of which the return is
based on the performance of a widely recognized index of a broad class of securities
traded at a marketplace;
(b)
in an investment fund that replicates the performance of a widely recognized index of a
broad class of securities traded at a marketplace; or
(c)
in an investment fund that invests solely in contracts, agreements or securities
described in paragraphs (a) or (b).
We also recommend that proposed subsection 17(3) of Schedule III be revised to read as follows:
(3)
Section 16 does not apply in respect of investments
(a)
involving the purchase of a contract or agreement in respect of which the return is
based on the performance of a widely recognized index of a broad class of securities
traded at a marketplace;
(b)
in an investment fund that replicates the performance of a widely recognized index of a
6
Vikram Barhat, “2014 Top 40 Money Managers Report: In it to Win It”, Benefits Canada, May 2014, online:
http://www.benefitscanada.com/wp-content/uploads/2014/05/05.Top40MonMan.pdf, at page 32.
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Proposed sections 9(4) and 17(3) of Schedule III refer to “a contract or agreement in respect of which the return is based
on the performance of a widely recognized index of a broad class of securities traded at a marketplace”.
8
Current section 9(3)(f) of Schedule III.
2
(c)
broad class of securities traded at a marketplace; or
in an investment fund that invests solely in contracts, agreements or securities
described in paragraphs (a) or (b).
Alternatively, if the intent was not to provide exceptions from the 10% Rule and Related Party Rule for index
investment funds, we strongly urge the Department of Finance to reconsider its decision. As noted above, an
index derivative based on, and an index investment fund benchmarked to, the same index share many
characteristics and are both equally capable of meeting the stated objectives of the 10% Rule and Related Party
Rule.
Specifically, for purposes of the 10% Rule, both an index derivative and index investment fund:
1.
2.
3.
4.
Provide exposure to the same securities and seek to achieve the same return;
Mitigate risk through diversification by providing exposure to the broad class of securities comprising the
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index;
Are a cost-effective and efficient means for pension plans to gain diversified exposure through a single
transaction that can be completed at a fraction of the cost of purchasing the securities in the index
individually; and
Provide access to securities and markets that may be costly or administratively difficult to transact in
directly.
For purposes of the Related Party Rule, both an index investment fund and an index derivative:
1.
2.
3.
Mitigate the conflict of interest associated with transacting in or with a related party by removing the
decision to invest in related party securities from the direct control of the plan administrator;
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Reduce the risk of undue exposure to a related party due to the diversified composition of the index ,
which is determined independently of the pension plan and its investment managers by a third party
index provider through the application of established criteria; and
Place the decision regarding investments in related party securities in the hands of an investment fund
manager that has a fiduciary obligation to make investment decisions in the best interests of the fund as
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a whole.
In addition to meeting the objectives of the 10% Rule and Related Party Rule, index investment funds are highly
regulated by securities and tax laws and offer the added benefits of lower counterparty risk and, generally,
better tracking of their benchmark index than their derivative counterparts. Extending proposed subsections 9(4)
and 17(3) of Schedule III to include index investment funds would also be consistent with the approaches taken
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by the Canadian securities and tax regulators. For example, NI 81-102 restricts a mutual fund from investing
more than 10% of its net asset value (determined at the time of the transaction) in a single issuer, except for
certain funds or issuers which are essentially analogous to index investment funds. There is a similar exception
13
for fund of fund structures, where the underlying fund is an index fund.
We also believe that the Canadian
Association of Pension Supervisory Authorities (“CAPSA”) implicitly supports the NI 81-102 framework, as it
recommends in the Guidelines for Capital Accumulation Plans that capital accumulation plans (“CAPs”) limit
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investments in mutual funds to mutual funds that comply with NI 81-102. While both pension plans and CAPs
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For example, an investment in a derivative instrument or investment fund that seeks to replicate the performance of the
S&P/TSX Composite Index would provide a pension plan with exposure to the securities of 253 issuers at September 30,
2014, with the largest single issuer having a weight of 6.2 percent of the index. Source: FactSet Research Systems Inc.
10
Ibid.
11
For example, section 116 of the Securities Act (Ontario), R.S.O. 1990, c. S.5, as amended, provides:
Every investment fund manager,
(a) shall exercise the powers and discharge the duties of their office honestly, in good faith and in the best interests
of the investment fund; and
(b) shall exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the
circumstances. [Emphasis added]
12
Though pension plans are permitted to, and typically do, participate in the securities exempt market available only to
sophisticated investors, we refer specifically to National Instrument 81-102 – Mutual Funds (“NI 81-102”), the primary body of
rules which govern mutual funds that are offered publicly to individual investors and registered retirement savings plans.
13
See sections 2.1(1), 2.5 of NI 81-102 and the definition of “index participation unit” in section 1.1 of NI 81-102.
14
CAPSA Guideline No.3 - Guidelines for Capital Accumulation Plans.
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are retirement vehicles, pension plans generally are more sophisticated and have access to more resources
than CAPs. Accordingly, pension plans should not be subject to more stringent requirements than CAPs.
In light of the foregoing, we submit that there is no policy reason to distinguish between index derivatives and
index investment funds under the 10% Rule and Related Party Rule and recommend amending the language of
proposed subsections 9(4) and 17(3) of Schedule III as discussed above.
Investments in Related Party Securities on Market Terms and Conditions (Proposed Section 17)
BlackRock Canada agrees with the Department of Finance’s efforts to protect plan members by ensuring that a
pension plan’s assets are invested in a safe and responsible manner. We appreciate that pension plans could
become vulnerable if they are inappropriately invested in related party securities and, from a policy perspective,
support the Department of Finance’s attempts to mitigate the inherent conflict of interest that arises when a
pension plan purchases related party securities. However, we do not agree that achieving this objective should
preclude a pension plan from investing in related party securities (such as employer or investment manager
securities) at arm’s length.
From our perspective, the broad definition of a related party is problematic. In many instances, investment
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managers do not have access to, and are not permitted under law to obtain, information on a plan’s related
parties. Accordingly, in the absence of an exception from the Related Party Rule, it would be difficult, if not
impossible, for investment managers to assist pension plans in meeting their obligations. It would be similarly
difficult for an investment fund to rely on the proposed exception in section 17(2)(a)(ii). For example, if an index
investment fund were restricted from investing in the securities of publicly traded companies included in its
benchmark index because the pension plans of one or more of those companies had invested in the fund, the
investment fund would not be able to meet its investment objectives. As a result, pension plans of public
companies would either be prohibited from investing in widely diversified index funds or only able to invest less
diversified funds, both scenarios that are contrary to the Department of Finance’s stated intent. The existing
exception to the Related Party Rule for investments in securities of a related party that are acquired on a public
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exchange permits many investment funds to meet their investment objectives while, at the same time, allowing
the pension plans invested in such funds to meet their obligations under the Related Party Rule. In the absence
of a public exchange exception, we strongly recommend that the new exception in proposed section 17(2)(a) of
Schedule III be revised to ensure that investment funds remain viable options for pensions plans. In particular,
we understand that proposed section 17(2)(a)(ii) is intended to apply to investment funds that satisfy the
requirements of Schedule III, other than the Related Party Rule, and recommend that the language of the
provision be clarified to this effect.
We are also concerned that the words “and are invested” in the preamble to section 17(2)(a) are unduly
restrictive as they exclude the scenario where a pension plan provides the initial seed capital for a new
investment fund that is intended to be offered to multiple clients. In addition, a pension plan that acquired
securities of an investment fund at a time when it satisfied the exception in proposed section 17(2)(a) could later
find itself offside of the Related Party Rule, through no fault or action of its own, if other investors redeem from
the investment fund.
In light of the foregoing we recommend that Section 17(2)(a) be amended as follows:
(2)
Section 16 does not apply in respect of investments in
(a)
an investment fund or a segregated fund in which the administrator, its affiliates and
other investors may invest and that complies with
[…]
(ii)
in the case of any other investments, sections 9 and 11 of this Schedule.
15
The definition of “related party” includes natural persons such as plan members and their immediate family members.
Collection, use and disclosure of personal information of these natural persons may be subject to restrictions under
Canadian privacy laws.
16
Current section 17(2) of Schedule III.
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Alternatively, if the Department of Finance’s intent was not to provide an exception from the Related Party Rule
for investment funds or segregated funds that otherwise comply with Schedule III, we recommend that the
Department of Finance maintain an exception for securities purchased on market terms and conditions (similar
to that currently found in section 17(2) of Schedule III).
We believe that, the conflicts of interest arising from purchasing related party securities generally are sufficiently
mitigated when such transactions occur at arm’s length, under standard market terms and conditions. We note
that the Department of Finance has recognized the appropriateness of the market terms and conditions
standard in proposed subsection 17(1) of Schedule III, in connection with services provided by related parties.
We submit that the same should apply with regard to the purchase of related party securities particularly when
acquired through an investment fund. We further submit that the terms, conditions and price at which securities
can be acquired at a marketplace are an appropriate indicator of arm’s length, standard market terms and
conditions for these purposes.
As a general point, we note that the concept of a related party and the risks and concerns associated with
transacting in securities of a related party are not unique to pension law. Tax and securities laws include a
number of regulations that are intended to mitigate the risks arising from such conflict of interest. As is the case
with the 10% Rule, given the increased complexity of global markets, harmonization between all market
participants is of greater importance than ever before. As such, we strongly urge the Department of Finance to
consider harmonizing certain of the investment restrictions applicable to pension plans with investment
restrictions already contained in securities laws as well as certain tax restrictions included in the Income Tax Act
17
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(Canada) (“ITA”) and Income Tax Regulations (“ITR”). For example, we note that both the ITA and NI 81102 do not restrict mutual funds from investing in securities issued by their related parties where those securities
are (a) essentially purchased on an exchange, (b) debt of an issuer listed on an exchange, or (c) on market
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terms and conditions. We highly recommend harmonization between pension, securities and tax restrictions
on investing in related parties for increased ease of implementation and to help achieve the stated policy
objectives of the Proposed Amendments.
In addition, we submit that a robust framework already exists to help ensure that the assets of a pension plan
are invested in a safe and responsible manner and that conflicts of interest are mitigated. Pension plans are
sophisticated investors, as evidenced by their status under Canadian securities law as both accredited investors
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and permitted clients. They often employ one or more individuals, dedicated to administering the investments
of the plan, in addition to professional advisers (such as consultants, investment managers, custodians, auditors
and legal counsel) to assist them in setting and achieving the investment objectives of the plan. The
administrator of a pension plan also has a fiduciary duty to the plan that involves, among other things, investing
the assets of the plan in the best interests of the plan and its members. All transactions in the marketplace are
at arm’s length from the pension plan, as the involvement of at least one intermediary (i.e., a registered dealer)
is required. In the case of an investment fund or a discretionary managed account, the plan has even less
influence over the direction of any investment, as all investment decisions are made by the investment manager
subject to its fiduciary obligations. Further, a pension plan is already limited from investing more than 10% of its
net assets in a single issuer, two or more associated persons or two or more affiliated corporations, subject only
to very limited exceptions, under the 10% Rule. In our view, these checks and balances provide ample
protection for pension plans and their members.
In conjunction with our proposal in respect of section 17(2)(a), we therefore propose that the an exception to the
Related Party Rule for securities purchased on market terms and conditions (similar to that currently found in
section 17(2) of Schedule III) be added to the Proposed Amendments as new section 17(5) of Schedule III, as
follows:
(5) Section 16 does not apply in respect of investments in securities of a related party if those securities
are acquired at a marketplace.
17
R.S.C., 1985, c. 1 (5th Supp.), as amended.
C.R.C., c. 945. In particular, we refer to sections 8502 “Conditions Applicable to All Plans” and 8514 “Prohibited
Investments” of the ITR.
19
We refer to sections 8514 of the ITA and sections 4.2 and 4.3 of NI 81-102.
20
National Instrument 45-106 – Prospectus and Registration Exemptions, section 1.1 “accredited investor” and National
Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations, section 1.1 “permitted
client”.
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C.
Conclusion
BlackRock Canada appreciates the opportunity to make submissions in regards to the Proposed Amendments.
We support the Department of Finance’s efforts to modernize the pension fund investment rules, and believe
that many of the Proposed Amendments represent positive steps towards meeting this goal. However, for the
reasons discussed above, we recommend that the Proposed Amendments be revised as follows:
1.
2.
3.
Amend the language of proposed sections 9(4) and 17(3) of Schedule III to clarify that these exceptions
to the 10% Rule and Related Party Rule, respectively, apply equally to index derivative instruments and
index investment funds;
Amend the language of proposed section 17(2)(a) to
a.
Clarify that the exception will apply to any investment fund that is intended to be available to the
plan administrator, its affiliates and other investors; and
b.
Exclude investment funds from the requirement to comply with the Related Party Rule; and
Reinstate an exception to the Related Party Rule for investments in securities of a related party (such as
the employer or investment manager) that are acquired at arm’s length and on market terms and
conditions.
BlackRock Canada believes that implementing the above proposals will lead to greater harmonization between
the investment restrictions under pension, tax and securities laws. We believe that such harmonization will help
to ensure that a wide variety of investment options remain available to pension plans, assist with a plan’s
compliance obligations, reduce the potential for errors and, ultimately, help pension plans meet their investment
objectives in a safe and responsible manner.
BlackRock Canada would be pleased to make appropriate representatives available to discuss any of these
comments with you.
Yours very truly,
BlackRock Asset Management Canada Limited
Noel Archard
Chief Executive Officer
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