Securities Law & Instruments


Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Revocation of prior relief – Relief from the requirement in s.3.2.01 of NI 81-101 to deliver a fund facts document to investors who purchase mutual fund securities of a high net worth series pursuant to switches from a regular retail series upon meeting certain eligibility requirements based on the amount of the investor’s investments – Relief is expansion of prior relief to include all existing, new and future series – Relief otherwise identical to prior relief – High net worth series securities are identical to regular retail series securities except that the high net worth series have lower combined management and administration fees – Investment fund manager initiating switches on behalf of investors when their investments satisfy eligibility requirements of high net worth series – Switches between series of a fund triggering a distribution of securities attracting the requirement to deliver a fund facts – Relief granted from requirement to deliver a fund facts to investors for purchases of high net worth series securities made pursuant to such switches subject to compliance with certain notification and prospectus/fund facts disclosure requirements – National Instrument 81-101 Mutual Fund Prospectus Disclosure.

Applicable Legislative Provisions

National Instrument 81-101 Mutual Fund Prospectus Disclosure, ss. 3.2.01, 6.1.

June 28, 2018

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
MACKENZIE FINANCIAL CORPORATION
(the Filer)

AND

IN THE MATTER OF
QUADRUS INVESTMENT SERVICES LTD.
(the Dealer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer and the Dealer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for the revocation (the Revocation) of the decision granted by the principal regulator on July 4, 2016 (the Previous Decision) and an exemption from the requirement in the Legislation for a dealer to deliver or send the most recently filed fund facts documents (Fund Facts) in the manner as required under the Legislation (the Fund Facts Delivery Requirement) in respect of purchases of High Net Worth Series (as defined below) securities of the Quadrus Funds (as defined below) that are made pursuant to Lower Fee Switches (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 this application; and

(b)           the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (the Other Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions, and MI 11-102 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:

1.             The Filer is a corporation amalgamated under the laws of the Province of Ontario. The Filer is registered as a portfolio manager, exempt market dealer and investment fund manager in Ontario. The Filer is also registered as a portfolio manager and exempt market dealer in the Other Jurisdictions, as well as an investment fund manager in each of Quebec and Newfoundland & Labrador. The manager is also registered under the Commodity Futures Act (Ontario) as a commodity trading manager.

2.             The head office of the Filer is located in Toronto, Ontario. The Filer is not in default of the securities legislation of Ontario or the Other Jurisdictions.

3.             The Filer is the manager of mutual funds (the Existing Funds), each of which is subject to the requirements of National Instrument 81-102 Mutual Funds (NI 81-102). The Filer may in the future become the manager of additional mutual funds that are subject to the requirements of NI 81-102 (the Future Funds, and together with the Existing Funds, the Funds, and individually, a Fund).

4.             Certain of the Funds are or will be available for purchase only through the Dealer (the Quadrus Funds), which is the principal distributor for the Quadrus Funds.

5.             Each Quadrus Fund is, or will be, an open-end mutual fund trust created under the laws of the Province of Ontario or an open-end mutual fund that is a class of shares of a mutual fund corporation.

6.             Each Quadrus Fund is, or will be, a reporting issuer under the laws of Ontario and the Other Jurisdictions, and subject to NI 81-102. The securities of the Quadrus Funds are, or will be qualified for distribution pursuant to a simplified prospectus, annual information form and Fund Facts that have been, or will be, prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101).

7.             The Quadrus Funds are not in default of the securities legislation of Ontario or the Other Jurisdictions.

8.             The Dealer is registered as a dealer in Ontario and each of the Other Jurisdictions. The Dealer is not in default of the securities legislation of Ontario or the Other Jurisdictions.

9.             The Quadrus Funds currently offer up to 16 series of securities – D5 series, D8 series, H series, H5 series, H8 series, L series, L5 series, L8 series, N series, N5 series, N8 series, Quadrus series, QF series, QF5 series, RB series and Series R – under a simplified prospectus, annual information form and Fund Facts dated June 28, 2017.

10.          Certain Quadrus Funds intend to also offer HW series, HW5 series, HW8 series, QFW series and QFW5 series (the New Series), which will be qualified for distribution by way of a simplified prospectus, annual information form and Fund Facts to be dated on or around June 28, 2018. The Filer may also offer additional series of the Quadrus Funds in the future.

11.          Securities in L series, L5 series, L8 series, HW series, HW5 series, HW8 series, QFW series, QFW5 series and any future applicable preferred pricing series of the Quadrus Funds (the High Net Worth Series) have, or will have, lower combined management and administration fees than securities in their corresponding retail series, specifically, Quadrus series, D5 series, D8 series, H series, H5 series, H8 series, QF series, QF5 series and any future applicable retail series securities of the Quadrus Funds (the Retail Series), as applicable. Securities in the High Net Worth Series are, or will be, only available to investors who have invested at least $100,000 in securities of the High Net Worth Series and who also have a minimum total holdings of $500,000 across a group of accounts of which the investor is a member, including segregated fund policies with the London Life Insurance Company or The Great-West Life Assurance Company (the Eligibility Criteria).

12.          The Filer currently has a program whereby investors holding Quadrus series, D5 series or D8 series are automatically switched into L series, L5 series or L8 series, as applicable, if they meet the Eligibility Criteria (the Current Lower Fee Switches). If an investor holding L series, L5 series or L8 series ceases to be eligible to hold that series, the Filer may switch the applicable High Net Worth Series into the applicable Retail Series securities.

13.          The Filer intends to extend this automatic switching program to all Retail Series and all High Net Worth Series on or about August 1, 2018 (the Implementation Date) so that upon meeting the Eligibility Criteria, investors holding Retail Series securities will automatically be switched into the corresponding High Net Worth Series (the Lower Fee Switches), and an investor who ceases to meet the Eligibility Criteria of the High Net Worth Series may be switched into the applicable Retail Series (the Higher Fee Switches, and together with the Lower Fee Switches, the Switches).

14.          Lower Fee Switches will generally take place when the investor purchases additional securities of Quadrus Funds or when positive market movement moves the investor into High Net Worth Series eligibility.

15.          Higher Fee Switches may occur because of redemptions that decrease the amount of total investments with the Filer for purposes of calculating the investor’s eligibility for High Net Worth Series. However, in no circumstances will market value declines lead to Higher Fee Switches.

16.          The Filer will aggregate total investments across the group of eligible accounts in order to determine whether investors are eligible to purchase and to continue to hold High Net Worth Series securities. London Life Insurance Company, as a service provider to the Filer, will monitor investors’ investments in each particular series and monitor the total investments across the group of eligible accounts in order to provide the Filer with the information necessary to determine whether investors are eligible to purchase and continue to hold High Net Worth Series securities. If an investor is no longer eligible to hold High Net Worth Series securities, the Filer may effect a Higher Fee Switch.

20.          Once an account has qualified for High Net Worth Series, the account will continue to enjoy the benefit of lower combined management and administration fees associated with the applicable High Net Worth Series, even if fund performance reduces the account value below the Eligibility Criteria.

21.          Investors may access High Net Worth Series securities by (a) initially investing in High Net Worth Series securities if they meet the Eligibility Criteria, or (b) initially investing in Retail Series securities and then, upon meeting the Eligibility Criteria, having those Retail Series securities switched into High Net Worth Series securities by way of a Lower Fee Switch.

22.          Investors may access Retail Series securities by (a) initially investing in Retail Series securities, or (b) initially investing in High Net Worth Series securities and then, upon no longer meeting the Eligibility Criteria for the High Net Worth Series securities, having those High Net Worth Series securities switched into Retail Series securities by way of a Higher Fee Switch.

23.          Further to each Lower Fee Switch, an investor’s account would continue to hold securities of the same Quadrus Fund(s) as before the Lower Fee Switch, with the only material difference to the investor being that the combined management and administration fees would be lower than those charged prior to the Lower Fee Switch.

24.          Further to each Higher Fee Switch, an investor’s account would continue to hold securities of the same Quadrus Fund(s) as before the Higher Fee Switch, with the only material difference to the investor being that the combined management and administration fees would be higher than those charged prior to the Higher Fee Switch.

25.          The trailing commissions for High Net Worth Series and Retail Series securities are, or will be, identical.

26.          Implementation of the Switches has, and will have, no adverse tax consequences on investors under current Canadian tax legislation.

27.          There are, and will be, no sales charges, switch fees or other fees payable by the investor upon a Switch.

28.          Each Switch will entail (a) a redemption of the applicable Retail Series security, immediately followed by a purchase of the corresponding High Net Worth Series security, or (b) a redemption of the applicable High Net Worth Series security, immediately followed by a purchase of the corresponding Retail Series security. Each purchase of a Quadrus Fund security done as part of a Switch will be a “distribution” under the Legislation that triggers the Fund Facts Delivery Requirement.

29.          Pursuant to the Fund Facts Delivery Requirement, a dealer is required to deliver the most recently filed Fund Facts of a series of a fund to an investor before the dealer accepts an instruction from the investor for the purchase of securities of that series of the fund.

30.          While the Filer will initiate each trade done as part of a Switch, the Filer and the Dealer do not propose to deliver the Fund Facts to investors in connection with the purchase of High Net Worth Series securities made pursuant to a Lower Fee Switch for the following reasons:

(a)           at no time will an account that qualifies for High Net Worth Series securities pay more than the combined management and administration fees of the Retail Series securities for which it initially subscribed; and

(b)           since Retail Series securityholders would have received a prospectus or Fund Facts disclosing the higher level of fees which applied to the Retail Series for which they initially subscribed, the investor would derive little benefit from receiving a further Fund Facts relating to the applicable High Net Worth Series for each Lower Fee Switch.

31.          The Dealer will deliver the Retail Series Fund Facts to investors in connection with the purchase of Retail Series securities made pursuant to a Higher Fee Switch, as required by the Fund Facts Delivery Requirement.

32.          The Filer or the Dealer will deliver, or will arrange for the delivery of, trade confirmations to investors in connection with each trade done further to a Switch. Furthermore, details of the changes in series of securities held will be reflected in the account statements sent to investors for the quarter in which the change occurred.

33.          The Filer will communicate extensively with the Dealer and London Life Insurance Company about the Switches so that the Filer will be equipped to appropriately notify existing investors in H series, H5 series, H8 series, QF series and QF5 series of the changes applying to their Retail Series investments and appropriately advise new Retail Series investors about the Switches.

34.          The Filer and the Dealer previously received exemptive relief from the Fund Facts Delivery Requirement for the Current Lower Fee Switches pursuant to the Previous Decision.

35.          However, the Filer’s intention to extend the automatic switching program to all Retail Series and all High Net Worth Series, including the New Series, has triggered the need for the Revocation and the Exemption Sought.

36.          In the absence of the Exemption Sought, the Filer may not carry out the Lower Fee Switches aside from the Current Lower Fee Switches without compliance with the Fund Facts Delivery Requirement.

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:

1.             the Revocation is granted; and

2.             the Exemption Sought is granted provided that:

(a)           for investors invested in H series, H5 series, H8 series, QF series and QF5 series prior to the Implementation Date, the Filer will liaise with the Dealer to devise and implement a notification plan for such investors regarding the Switches to communicate:

(i)            that their investment may be switched to a High Net Worth Series with lower fees upon meeting the Eligibility Criteria;

(ii)           that, other than a difference in fees, there will be no other material difference between the Retail Series and the High Net Worth Series;

(iii)           that if they cease to meet the Eligibility Criteria for the High Net Worth Series, their investment will be switched into a series with higher management and administration fees which will not exceed the management and administration fees associated with the Retail Series; and

(iv)          that they will not receive the Fund Facts when they purchase High Net Worth Series securities further to a Lower Fee Switch, but that:

a.             they may request the most recently filed Fund Facts for the relevant series by calling a specified toll-free number or by sending a request via email to a specified address;

b.             the most recently filed Fund Facts will be sent or delivered to them at no cost;

c.             the most recently filed Fund Facts may be found either on the SEDAR website or on the Quadrus website; and

d.             they will not have a right to withdraw from an agreement of purchase and sale (a Withdrawal Right) in respect of a purchase of series securities made pursuant to a Switch, but they will have the right of action for damages or rescission in the event any Fund Facts or document incorporated by reference into a simplified prospectus for the relevant series contains a misrepresentation, whether or not they request the Fund Facts;

(b)           the Filer will incorporate disclosure in the simplified prospectus for the Retail Series and the High Net Worth Series that sets out:

(i)            the eligibility requirements for both the Retail Series and the High Net Worth Series;

(ii)           the fees applicable to investments in both the Retail Series and the High Net Worth Series; and

(iii)           that if investors cease to meet the Eligibility Criteria, their investment may be switched into a series with higher management and administration fees which will not exceed the applicable Retail Series fees;

(c)           in each Fund Facts of each Retail Series and each High Net Worth Series of the Quadrus Funds, as applicable, the Filer will disclose:

(i)            under the heading “How much does it cost?”, a summary of the Switches consisting of:

a.             a statement explaining that the Filer offers combined management and administration fee decreases upon meeting the Eligibility Criteria;

b.             in the case of the Retail Series only, a statement explaining the scenarios in which the Lower Fee Switches will be made;

c.             a statement that Higher Fee Switches may be made due to the investor no longer meeting the Eligibility Criteria;

d.             a cross-reference to the disclosure described below under paragraph 2(c)(ii);

e.             a cross-reference to specific sections of the simplified prospectus of the Quadrus Funds for more details about the Switches; and

f.              a statement disclosing that investors should speak to their representative for more details about the Switches; and

(ii)           at the end of the disclosure under the sub-heading “Fund expenses”, a statement that discloses the combined management and administration fee decrease of the applicable High Net Worth Series from the combined management and administration fee of the applicable Retail Series, shown in percentage terms; and

(d)           for Retail Series investors, the Filer sends these investors an annual reminder notice advising that they will not receive the Fund Facts when they purchase High Net Worth Series securities further to a Lower Fee Switch, but that:

(i)            they may request the most recently filed Fund Facts for the relevant series by calling a specified toll-free number or by sending a request via email to a specified address;

(ii)           the most recently filed Fund Facts will be sent or delivered to them at no cost;

(iii)           the most recently filed Fund Facts may be found either on the SEDAR website or on the Quadrus website; and

(iv)          they will not have a Withdrawal Right in respect of a purchase of securities made pursuant to a Switch, but they will have a right of action for damages or rescission in the event any Fund Facts or document incorporated by reference into a simplified prospectus for the relevant series contains a misrepresentation, whether or not they request the Fund Facts.

“Stephen Paglia”
Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission