National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Existing and future mutual funds granted relief from paragraphs 15.3(4)(c) and (f) of National Instrument 81-102 Investment Funds to permit references to Fundata A+ Awards and relief from paragraph 15.3(4)(c) to permit references to FundGrade Ratings in sales communications – Relief subject to conditions requiring specified disclosure and the requirement that the Fundata A+ Awards being referenced not have been awarded more than 365 days before the date of the sales communication.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 15.3(4)(c) and (f), 19.1.
June 27, 2017
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
DESJARDINS INVESTMENTS INC.
THE DESJARDINS QUÉBEC BALANCED FUND
(the “Québec Balanced Fund”)
The securities regulatory authority or regulator in each of the Jurisdictions (“Decision Maker”) has received an application from the Filer on the behalf of the Funds (as defined below) for a decision under the securities legislation of the Jurisdictions (the “Legislation”) for an exemption under section 19.1 of Regulation 81-102 Investment Funds (c. V-1.1, r.39) (“Regulation 81-102”) for exemptive relief from the requirements set out in paragraphs 15.3(4)(c) (in respect of both the FundGrade A+ Awards presented annually by Fundata Canada inc. (“Fundata”) and the FundGrade Ratings) and paragraph 15.3(4)(f) (in respect of the FundGrade A+ Awards only) of Regulation 81-102 (“Requested Relief”), which provide that a sales communication must not refer to a performance rating or ranking of a mutual fund or asset allocation service unless:
A) the rating or ranking is provided for each period for which standard performance data is required to be given, except the period since the inception of the mutual fund; and
the rating or ranking is to the same calendar month end that is:
(i) not more than 45 days before the date of the appearance or use of the advertisement in which it is included, and
(ii) not more than three months before the date of first publication of any other sales communication in which it is included; in order to permit the FundGrade A+ Awards and the FundGrade Ratings to be referenced in sales communications relating to the Funds (as defined below).
Under the Process of Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Autorité des marchés financiers is the principal regulator for this application,
(b) the Filer has provided notice that section 4.7(1) of Regulation 11-102 respecting Passport System (c. V-1.1, r.1) (“Regulation 11-102”) is intended to be relied upon in the jurisdictions of Canada other than in the Jurisdictions, and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in Regulation 14-101 respecting Definitions (c. V-1.1, r.3), Regulation 11-102 and Regulation 81-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
1. The Filer is registered as an investment fund manager in the Provinces of Québec, Ontario, Newfoundland and Labrador. The head office of the Filer is in Montreal, Québec.
2. The Filer acts as the investment fund manager of the Québec Balanced Fund and also acts as the investment fund manager of certain other mutual funds (the “Existing Mutual Funds”). The Filer may, in the future, become the investment fund manager of additional mutual funds (the “Future Mutual Funds”). The Quebec Balanced Fund, and any Existing Mutual Fund or Future Mutual Fund that is awarded a prize by Fundata in the future will herein be referred to as a “Fund” and collectively referred to as the “Funds”.
3. Each Fund is, or will be, a reporting issuer in each of the jurisdictions of Canada and is or will be subject to Regulation 81-102 including Part 15 thereof which governs sales communications.
4. None of the Existing Mutual Funds nor the Filer are in default of securities legislation in any of the jurisdictions of Canada.
Fundata FundGrade A+ Awards Program and FundGrade Ratings
5. The Québec Balanced Fund had been awarded a FundGrade A+ Award.
6. FundGrade A+ Awards and FundGrade Ratings are awarded by Fundata, a company that is not a member of the Funds’ organization. Fundata is a “mutual fund rating entity”, as that term is defined in Regulation 81-102. Fundata is a supplier of mutual fund information and analytical tools to advisors, media and investors worldwide.
7. The FundGrade A+ Awards are awarded to funds in most individual fund classifications for the previous calendar year, and the awards are announced in January of each year. The categories for fund classification used by Fundata are those maintained by the Canadian Investment Funds Standards Committee (“CIFSC”) (or a “successor to CIFSC”), a Canadian organization that is independent of Fundata.
8. The FundGrade A+ Awards are based on a rating methodology, the FundGrade Rating system which evaluates funds based on their risk-adjusted performance. The metrics for evaluating fund performance are calculated for the two through ten year time periods for each fund. The FundGrade Ratings are letter grades determined each month and are released on the seventh business day of the following month. Because the overall score of a fund is calculated by equally weighting the periodic rankings, to receive an A grade, a fund must show consistently high scores for all ratios across all time periods.
9. At the end of each calendar year, Fundata calculates a “fund GPA” for each fund based on the full year’s performance. The fund GPA is calculated by converting each month’s FundGrade Rating letter grade into a numerical score. Any fund earning a GPA of 3.5 or greater earns a FundGrade A+ Award.
10. When a fund is awarded a FundGrade A+ Award, Fundata will permit such fund to make reference to the award in its sales communications.
Reasons for the Exemption Sought
11. The FundGrade Ratings fall within the definition of “performance data” under Regulation 81-102, as they constitute “a rating, ranking, quotation, discussion or analysis regarding an aspect of the investment performance of an investment fund”. Therefore, references to FundGrade Ratings and FundGrade A+ Awards in sales communications relating to the funds need to meet the applicable requirements in Part 15 of Regulation 81-102.
12. Paragraph 15.3(4)(c) of Regulation 81-102 imposes a “matching” requirement, for performance ratings or rankings that are included in sales communications for mutual funds, it must be provided for, or “match”, each period for which standard performance data is required to be given for the fund, except for the period since the inception of the fund (i.e., for one, three, five and ten year periods, as required by section 15.8 of Regulation 81-102).
13. While FundGrade Ratings are based on calculations for a minimum of two years through to a maximum of ten years, and the FundGrade A+ Awards are based on a yearly average of monthly FundGrade Ratings, specific ratings for the three, five and ten year periods within the two to ten year measurement period are not given. This means that a sales communication referencing FundGrade Ratings and the FundGrade A+ Awards cannot comply with the “matching” requirement contained in paragraph 15.3(4)(c) of Regulation 81-102. Relief from paragraph 15.3(4)(c) of Regulation 81-102 is, therefore, required in order for a fund to use FundGrade Ratings and the FundGrade A+ Awards in sales communications.
14. Paragraph 15.3(4)(f) of Regulation 81-102 provides that in order for a rating or ranking such as a FundGrade A+ Award to be used in an advertisement, it must be published within 45 days of the calendar month end to which the rating or ranking applies. Further, in order for the rating or ranking to be used in any other sales communication, the rating or ranking must be published within three months of the calendar month end to which the rating or ranking applies.
15. Because the evaluation of funds for the FundGrade A+ Awards will be based on data aggregated until the end of December in any given year and the results will be published in January of the following year, by the time a fund receives a FundGrade A+ Award in January, paragraph 15.3(4)(f) of Regulation 81-102 will only allow the FundGrade A+ Award to be used in an advertisement until the middle of February and in other sales communications until the end of March.
16. The Filer wishes to include, in sales communications of the Funds, references to the FundGrade Ratings and the FundGrade A+ Awards, where such Funds have been awarded a FundGrade A+ Award.
17. The Filer submits that the Requested Relief is not detrimental to the protection of investors.
18. Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision. The decision of the Decision Makers under the Legislation is that the Requested Relief is granted to permit the FundGrade A+ Awards and the FundGrade Ratings to be referenced in sales communications relating to a Fund, provided that:
I) the sales communication that refers to the FundGrade A+ Awards and the FundGrade Ratings complies with Part 15 of Regulation 81-102 other than as set out herein and contains the following disclosure in at least 10 point type:
(i) the name of the category for which the Fund has received the award or rating;
(ii) the number of mutual funds in the category for the applicable period;
(iii) the name of the ranking entity, (i.e., Fundata);
(iv) the length of period and the ending date, or, the first day of the period and the ending date on which the FundGrade A+ Awards or the FundGrade Rating is based;
(v) a statement that FundGrade Ratings are subject to change every month;
(vi) in the case of a FundGrade A+ Award, a brief overview of the FundGrade A+ Awards;
(vii) in the case of a FundGrade Rating (other than FundGrade Ratings referenced in connection with a FundGrade A+ Award), a brief overview of the FundGrade Rating;
(viii) disclosure of the meaning of the FundGrade Ratings from A to E (e.g., rating of A indicates a fund is in the top 10% of its category); and
(ix) reference to Fundata’s website (www.fundata.com) for greater detail on the FundGrade A+ Awards and the FundGrade Ratings;
II) the FundGrade A+ Award being referenced must not have been awarded more than 365 days before the date of the sales communication; and
III) the FundGrade A+ Awards and the FundGrade Ratings being referenced are calculated based on comparisons of performance of mutual funds within a specified category established by the CIFSC (or a successor to the CIFSC).
Senior Director Investment Funds
Autorité des marchés financiers