Blackmont Capital Inc. et al.

MRRS Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 81-105 Mutual Fund Sales Practices -- relief from subsection 7.1(3) NI 81-105 granted to participating dealers and principal distributors and their representatives to pay a commission rebate to clients when clients switch into related mutual funds -- relief subject to conditions that mitigate conflicts -- relief also granted from subsections 8.2(3) and (4) of NI 81-105 in respect of trades by certain existing clients in related mutual funds -- the dealers and their representatives act autonomously and independently of the related mutual fund managers -- the relief will not be prejudicial to clients of the dealers. Revocation of a prior order under section 144 of the Securities Act (Ontario).

Applicable Legislative Provisions

National Instrument 81-105 Mutual Funds Sales Practices, ss. 7.1(3), 8.2(3) and (4), 9.1.

Securities Act, R.S.O. 1990, c. S.5, as am., s. 144.

April 11, 2008

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

BLACKMONT CAPITAL INC.

ASSANTE CAPITAL MANAGEMENT LTD.

AND

ASSANTE FINANCIAL MANAGEMENT LTD.

(the Filers)

 

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for:

1. an exemption under section 9.1 of National Instrument 81-105 Mutual Fund Sales Practices (NI 81-105) exempting:

(a) each Filer, together with each future affiliate of the Filer that is registered in a province or territory of Canada as a dealer (such affiliates being considered the Filer for the purposes of the Commission Rebate Relief as defined below), and each Filer's representatives (the Representatives) from the prohibition contained in subsection 7.1(3) of NI 81-105 prohibiting a Filer and its Representatives from paying to a client of the Filer all or any part of a fee or commission payable by the client on the redemption of securities of a mutual fund that occurs in connection with the purchase by the client of securities of another mutual fund that is not in the same mutual fund family (a commission rebate) where the Filer is a member of the organization of the mutual fund the securities of which are being acquired (the Commission Rebate Relief);

(b) Assante Capital Management Ltd. and Assante Financial Management Ltd. from the equity interest disclosure and client consent requirements of subsections 8.2(3) and (4) of NI 81-105 in respect of trades of applicable Related Funds by clients who had an account with the Assante Dealers prior to September 1, 2004; and

(c) Blackmont Capital Inc. from the equity interest disclosure and client consent requirements of subsections 8.2(3) and (4) of NI 81-105 in respect of trades of applicable Related Funds by clients who had an account with Blackmont prior to May 1, 2008

(paragraphs (b) and (c) are referred to as the Disclosure and Consent Relief); and

2. an order revoking and replacing the Existing Decision (as such term is defined herein) with this Decision (the Replacement Relief).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:

(a) The Ontario Securities Commission is the principal regulator for this application; and

(b) The Filers have 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, Quebec, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, the Yukon Territory and Nunavut Territory.

Interpretation

Terms defined in NI 81-105, National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this Decision, unless otherwise defined.

1. "Assante Dealers" means Assante Capital Management Ltd. and Assante Financial Management Ltd., collectively, and "Assante Dealer" means one of them.

2. "Blackmont" means Blackmont Capital Inc.

3. "CI Funds" means those mutual funds managed from time to time by CI Investments Inc.

4. "Existing Decision" means the decision of all the securities regulatory authorities in Canada represented by a MRRS Decision Document dated February 10, 2004 in favour of Assante Corporation.

5. "IDA" means the Investment Dealers Association of Canada.

6. "MFDA" means the Mutual Fund Dealers Association of Canada.

7. "Related Fund Managers" means those investment fund managers that are affiliated, from time to time, with CI Financial Income Fund, and include CI Investments Inc. and United Financial Corporation, as well as any future investment fund manager that may become affiliated with CI Financial Income Fund.

8. "Related Funds" means those mutual funds managed, from time to time, by the Related Fund Managers and include the CI Funds and the United Funds.

9. "United Funds" means those mutual funds managed from time to time by United Financial Corporation.

10. "Unrelated Fund Managers" means investment fund managers that are not Related Fund Managers.

11. "Unrelated Funds" means mutual funds that are not Related Funds.

Representations

This decision is based on the following facts represented by the Filers:

1. Each of the Filers is registered in all of the provinces and territories of Canada as a dealer and has its head office located in Toronto, Ontario:

(a) Blackmont is registered as an investment dealer (or equivalent) and is a member of the IDA.

(b) Assante Capital Management Ltd. is registered as an investment dealer (or equivalent) and is a member of the IDA.

(c) Assante Financial Management Ltd. is registered as a mutual fund dealer and is a member of the MFDA.

2. Each of the Filers is an affiliate of CI Financial Income Fund, an income trust listed for trading on the Toronto Stock Exchange. The Assante Dealers became so affiliated in 2003 and Blackmont became so affiliated in May 2007, all as a result of acquisitions.

3. As a result of the affiliations with CI Financial Income Fund, the Filers are "members of the organization" of

(a) the CI Funds; and

(b) the United Funds.

As of the date of this Decision, the Related Funds collectively consist of approximately 150 mutual funds, all of which are currently offering or did offer, securities under a prospectus or simplified prospectus and are presently reporting issuers.

The Filers may become in the future "members of the organization" of other mutual funds, since CI Financial Income Fund or its affiliates may establish or acquire interests in corporations that are managers of mutual funds.

4. The Assante Dealers act as principal distributors in respect of the United Funds and as participating dealers in respect of the CI Funds and Unrelated Funds. Approximately 15 percent of the assets under administration held by clients of the Assante Dealers is held in the CI Funds.

5. Blackmont acts as a participating dealer in respect of the CI Funds and Unrelated Funds, as well as a principal distributor of a newly established CI Fund. Blackmont does not trade in securities of the United Funds as of the date of this Decision. Approximately 3 percent of the assets under administration held by clients of Blackmont is held in the CI Funds.

6. Although the Filers are affiliates of the Related Fund Managers, the Filers operate independently from, and autonomously of, the Related Fund Managers. The Filers and their Representatives are free to choose which mutual funds to recommend to their clients and consider recommending the Related Funds to their clients in the same way as they consider recommending Unrelated Funds. The Filers and their Representatives comply with their obligations at law and only recommend mutual funds that they believe would be suitable for their clients and in accordance with the clients' investment objectives.

7. CI Investments Inc. provides the Filers with the compensation described in the prospectuses of the CI Funds for trading in securities of the CI Funds in the same manner as CI Investments Inc. does for any participating dealer trading in securities of the CI Funds with their clients. The United Funds are exclusively distributed through the Assante Dealers and United Financial Corporation provides the Assante Dealers with the compensation described in the prospectus of the United Funds for trading in securities of the United Funds and in compliance with NI 81-105. All compensation and sales incentives paid to the Filers by the Related Fund Managers comply with NI 81-105.

8. No Representative owns an equity interest (as that term is defined in NI 81-105) in a member of the organization of the Related Funds. The compensation of the Representatives is not tied to the performance of the Related Fund Managers. A Representative may participate in an equity program which gives him or her rights to invest in securities of CI Financial Income Fund, but not to the extent that the Representative would have an "equity interest" (within the meaning of NI 81-105) in CI Financial Income Fund. The performance of these securities is related to the performance of the overall group of companies controlled by CI Financial Income Fund and not specifically to the performance of the Related Fund Managers.

9. Section 7.1 of NI 81-105 allows the Filers and the Representatives to pay commission rebates when the client decides to switch from an Unrelated Fund to another Unrelated Fund, provided the disclosure and consent procedure established in subsection 7.1(1) is followed. Payment of commission rebates by the Filers and by the Representatives benefit the client so that the client does not incur costs in switching from one fund to another.

10. The prohibition in section 7.1 of NI 81-105 means that, without the relief provided by the Existing Decision or as contemplated in this Decision, neither the Filers nor the Representatives can provide commission rebates to their clients when those clients decide to switch into a Related Fund from an Unrelated Fund. Subsection 7.1(3) of NI 81-105 prohibits the Related Fund Managers from paying any portion of the commission rebates.

11. Following the publication of NI 81-105 in final form in 1998, dealers in the Assante group of companies, as it was then known and constituted, considered the prohibition contained in section 7.1 and applied to certain of the securities regulatory authorities in Canada for an exemption from the prohibition to allow sales representatives of those dealers to pay commission rebates to clients of those dealers who switch from third-party mutual funds to a mutual fund related to those Assante dealers, provided certain conditions were met. This exemption was granted by the specified securities regulatory authorities pursuant to an MRRS Decision Document dated April 15, 1999, which decision was replaced by the Existing Decision. The Assante Dealers rely on the Existing Decision and comply with all conditions to the relief provided therein. The Existing Decision does not extend to Blackmont.

12. The Existing Decision exempts, on specified conditions, Representatives of the Assante Dealers from the prohibitions on payment of certain commission rebates contained in section 7.1 of NI 81-105 to the extent necessary to allow Representatives of the Assante Dealers to pay the fees and commissions payable by clients upon redemption of Unrelated Funds when the clients wish to switch from those Unrelated Funds to the Related Funds, to a maximum amount of the commission earned by the Representatives on the purchase of the Related Fund. The Assante Dealers are prohibited from paying, directly or indirectly, any portion of the commission rebate in these circumstances, which means that the Assante Dealers cannot "top-up" any payment to a client by a Representative. Clients switching into the Related Funds from an Unrelated Fund therefore may not receive the full amount of the commission rebate to which they would otherwise be entitled under section 7.1 of NI 81-105 if the switch were not to a Related Fund.

13. The Existing Decision creates a "reverse" incentive for clients to move from an Unrelated Fund to another Unrelated Fund, rather than into a Related Fund, since then, the Filers and the Representatives will be permitted to give those clients a full commission rebate. In circumstances where the Representative believes that a Related Fund is the most suitable mutual fund for the client, which may often be the case, given the range and diversity of the Related Funds, the Filers believe this prohibition inherent in the Existing Decision to be not in the best interests of clients.

14. The Filers comply with NI 81-105, in particular, Part 4 of NI 81-105 in their compensation practices with their Representatives.

15. The Filers believe that by imposing conditions that prohibit the members of the mutual fund organization, which would include the Related Fund Managers, from reimbursing the Filers or the Representatives for the commission rebates paid to the Filers' clients and requiring the Filers and the Representatives to offer commission rebates on identical terms to the Filers' clients without having such commission rebates conditional upon a switch to a Related Fund and regardless of whether the client switches to an Unrelated Fund or a Related Fund, any potential for undue influence on the client is sufficiently mitigated. The conditions will not allow a Filer or the Representatives to give commission rebates only when a client is switching to a Related Fund, or a Filer or its Representatives to pay more of a commission rebate provided that the client switches to a Related Fund.

16. None of the Filers nor the Representatives are or will be subject to quotas (whether express or implied) in respect of selling the Related Funds. None of the Related Fund Managers and the Filers or any other member of the respective organizations, provide any incentive (whether express or implied) to any Representative, or to the Filers to encourage the Representatives or the Filers to recommend the Related Funds over Unrelated Funds.

17. Subsection 8.2(3) of NI 81-105 requires that each Filer deliver to a purchaser of a Related Fund a document that discloses the amount of any equity interest that a member of the organization of a Related Fund has in the Filer. Subsection 8.2(4) of NI 81-105 provides that a participating dealer may not complete the trade to which subsection 8.2(3) applies unless the participating dealer obtains the prior written consent of the purchaser to the completion of the trade after the purchaser has received the document required to be delivered under subsection 8.2(3).

18. Since approximately September 1, 2004, the Assante Dealers have provided disclosure of their affiliation with the Related Fund Managers in their new account application form. Therefore, clients of the Assante Dealers who have signed a new account application form since approximately September 1, 2004 have been provided with the disclosure of the relevant relationships in that form and by executing the form, also have consented to investing in the Related Funds.

19. Blackmont will revise its new account application form by May 1, 2008. Clients of Blackmont who sign a new account application form after May 1, 2008 will be given disclosure of Blackmont's relationship with the Related Fund Managers in that form and will provide their consent to investing in the Related Funds through executing the form.

20. Clients of the Filers who did not sign a new account application form have knowledge of the relationships between the Related Fund Managers and the Filers through:

(a) disclosure contained in the simplified prospectuses of the Related Funds made in accordance with subsections 8.2(1) and (2) of NI 81-105. In this way, clients of the Filers making investments in Related Funds have access to complete information about the relationships between the Filers and the Related Fund Managers; and

(b) disclosure provided to clients in accordance with applicable securities regulation about "related" and "connected" issuers to the Filers. Disclosure about the Related Funds is included in the Assante Dealers' applicable client disclosure documents, and will be included, by July 10, 2008, in the Blackmont applicable client disclosure documents.

21. In the absence of the Disclosure and Consent Relief, the Assante Dealers and Blackmont will have to send each client who did not sign a new account application form that contained the required equity interest disclosure, a separate disclosure document explaining the relationships, together with a consent form and work to ensure that each client signs and sends back the consent form. This would mean a mailing to approximately 330,000 clients, which would amount to mailing and printing costs in excess of $150,000 and the human resources necessary to obtain the signed consents back from each such client.

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 Replacement Relief and the Commission Rebate Relief is granted, on the conditions that:

(a) For each switch made by a client of a Filer from an Unrelated Fund to a Related Fund where the Filer or the Representative agrees to pay a commission rebate to that client, the Filer and the Representative will:

(i) comply with the informed written consent provisions of paragraph 7.1(1)(a) of NI 81-105;

(ii) advise the client, in writing and in advance of finalizing the switch, that any commission rebate proposed to be made available in connection with the purchase of a Related Fund will

(A) be available to the client regardless of which mutual fund the redemption proceeds are to be invested in,

(B) not be conditional on a purchase of a Related Fund, and

(C) in all cases, be not more than the amount of the gross sales commission earned by the Filer on the client's purchase of a Related Fund; and

(iii) in respect of the switch, not pay a commission rebate more than the amount referred to in paragraph (ii)(C) above.

(b) A Filer or its Representatives that provides commission rebates will not be reimbursed directly or indirectly in respect of that commission rebate in connection with a switch to a Related Fund by any member of the organization of that fund, other than the Filer which may make the reimbursement under this Decision.

(c) Each Filer's compliance policies and procedures that relate to this Decision will emphasize that any commission rebate agreed to be paid to a client by a Representative cannot be conditional on the client acquiring a Related Fund and will be made available to the client if the client wishes to switch to an Unrelated Fund.

(d) None of the Filers nor any of their Representatives is, or will be, subject to quotas (whether express or implied) in respect of selling securities of the Related Funds.

(e) Except as permitted by NI 81-105, none of the Filers, or any member of the organization of the Related Funds provides or will provide any incentive (whether express or implied) to any applicable Representative or to the Filers to encourage the Representatives to recommend to clients the Related Funds over Unrelated Funds.

(f) The Commission Rebate Relief will only apply

(i) to a Filer that is not a member of the organization of the Related Funds as of the date of this Decision, if, when that Filer becomes such a member, the business of that Filer and its Representatives and their relationships with the Related Fund Managers and the Related Funds is substantially similar to the business of the Assante Dealers and/or Blackmont and their relationships with the Related Fund Managers and the Related Funds described in this Decision; and

(ii) in respect of a Related Fund Manager or a Related Fund that is not a Related Fund Manager or a Related Fund as of the date of this Decision, if, when that Related Fund Manager or Related Fund becomes such, the business of that Related Fund Manager and Related Fund and their relationships with the Filers is substantially similar to the business of CI Investments Inc., United Financial Corporation, the CI Funds and the United Funds and their relationships with the Assante Dealers and Blackmont described in this Decision.

2. The Disclosure and Consent Relief is granted, provided that each Filer causes to be sent, with the next regular general mailings of the Filer, to all clients of the Filer, who the Filer reasonably determines did not receive disclosure of, or provide written consent to, the relationships between the Filer and the Related Funds and the Related Fund Managers in any new account opening form, a disclosure statement outlining those relationships.

This Decision shall cease to be operative following the coming into force of a rule of the principal regulator that replaces or amends section 7.1 or 8.2 of NI 81-105.

"Carol S. Perry"
Commissioner
Ontario Securities Commission
 
"Suresh Thakrar"
Commissioner
Ontario Securities Commission