National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- Dealer granted relief from requirement under subsection 8.2(4) to obtain client consent to purchase mutual funds managed by a related entity in respect of certain clients resulting from acquisition of a 3rd party dealer -- affected clients provided with disclosure document explaining relationship between dealer and related mutual funds.
Applicable Legislative Provisions
National Instrument 81-105 Mutual Fund Sales Practices, ss. 8.2(4), 9.1(2).
December 11, 2012
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
MANULIFE SECURITIES INVESTMENT SERVICES INC.
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Filer from the requirement that the Filer obtain written consent from those clients who opened an account with Wellington West Financial Services Inc. (Wellington West) on or before October 26, 2012 (Affected Clients), prior to the completion of a trade in related mutual funds (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,
(b) the Filer has provided notice that Subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Quebec, New Brunswick, Nova Scotia, Manitoba, Newfoundland and Labrador, Prince Edward Island, Northwest Territories and Yukon (the Passport Jurisdictions).
Terms defined in MI 11-102, National Instrument 14-101 Definitions and National Instrument 81-105 Mutual Fund Sales Practices (NI 81-105) have the same meanings if used in this decision unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation amalgamated under theCanada Business Corporations Act (CBCA) with its head office in Burlington, Ontario.
2. On November 1, 2012, Wellington West was combined with Manulife Securities Investment Services Inc. (MSISI) by way of horizontal amalgamation (the Combination) to form the Filer.
3. Wellington West, prior to the Combination, was registered as a mutual fund dealer in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario and was a member of the Mutual Fund Dealers Association of Canada (MFDA).
4. MSISI, prior to the Combination, was registered as a mutual fund dealer in all provinces and territories of Canada except Nunavut, was registered as an exempt market dealer in all provinces and territories of Canada except Nunavut and Northwest Territories, and was a member of the MFDA.
5. As a result of the Combination, the Filer is registered as a mutual fund dealer in all provinces and territories of Canada except Nunavut, is registered as an exempt market dealer in all provinces and territories of Canada except Nunavut and Northwest Territories, and is a member of the MFDA.
6. The Manufacturers Life Insurance Company (MLI) is a corporation incorporated under theInsurance Companies Act (Canada). MLI is a Canadian life insurance company and a wholly owned subsidiary of Manulife Financial Corporation (MFC).
7. MFC is a public company listed on the Toronto Stock Exchange. MFC is a reporting issuer in all provinces and territories of Canada.
8. Manulife Asset Management Limited (MAML) is the manager of certain mutual funds known as the Manulife Mutual Funds (the Funds).
9. Each of the Filer and MAML are wholly owned subsidiaries of MLI. As a result of this relationship, the Filer is a "member of the organization" (within the meaning of NI 81-105) of the Funds managed by MAML.
10. On August 15, 2012, MLI entered into an agreement to acquire all of the issued and outstanding shares in the capital of Wellington West from National Bank Financial & Co. Inc. (the Transaction). The Transaction closed on October 26, 2012, following receipt of all required regulatory approvals.
11. In connection with the closing of the Transaction, Wellington West became a direct wholly owned subsidiary of MLI and an indirect wholly owned subsidiary of MFC and thus Wellington West became a "member of the organization" (within the meaning of NI 81-105) of the Funds managed by MAML.
12. In connection with the Combination, Wellington West was continued under the CBCA, which was the governing statute of MSISI. Following such continuance, Wellington West and MSISI effected a horizontal amalgamation pursuant to the CBCA, with the Filer being the continuing corporation and acquiring all of Wellington West's assets and assuming all of Wellington West's liabilities by operation of law.
13. As a result of the Combination, Wellington West no longer exists as a separate legal entity and therefore no longer requires MFDA membership or registration as a mutual fund dealer and all permitted individuals, registered representatives and business locations that were previously associated with Wellington West's business as a mutual fund dealer have been assumed by the Filer as a result of the Combination. Accordingly, the business and operations of the Filer now consist of the combined business and operations of MSISI and Wellington West.
Relationship with MAML and the Funds
14. The Filer acts as a participating dealer (within the meaning of NI 81-105) in respect of the Funds, as well as for mutual funds managed by unrelated fund managers.
15. The Filer acts independently from MAML and has no connection with MAML, other than through their common ultimate parent company.
16. The Filer is free to choose which mutual funds to recommend to its clients and considers recommending the Funds to its clients in the same way as it considers recommending other third party mutual funds.
17. The Filer complies with its obligations at law and only recommends mutual funds that it believes would be suitable for its clients and in accordance with its clients' investment objectives.
18. MAML provides the Filer with the compensation described in the prospectus of the Funds in the same manner as MAML does for any other participating dealer selling securities of the Funds to its clients.
19. Neither the Filer, nor any sales representatives of the Filer is, or will be, subject to quotas (whether express or implied) in respect of selling the Funds.
20. Except as permitted by NI 81-105, none of the Filer or MAML or any other member of the organization of the Funds provide any incentive (whether express or implied) to any sales representative of the Filer or to the Filer to encourage those sales representatives or the Filer to recommend the Funds over third-party managed mutual funds.
Equity Interest Consent Requirement
21. Subsections 8.2(3), (4) and (5) of NI 81-105 requires the following in respect of trades in securities of the Funds:
(a) pursuant to subsection 8.2(3), the Filer is required to disclose to the purchasers of securities of a Fund, the amount of equity interest that MLI and any other member of the organization of the Funds, has in the Filer;
(b) pursuant to subsection 8.2(4), a purchaser of securities of a Fund from the Filer must consent to the trade after he or she receives the disclosure document described under (a) before the trade can be completed; and
(c) pursuant to subsection 8.2(5), the Filer is not required to deliver the disclosure document to obtain the consent of a purchaser of securities of the Funds if that purchaser has previously acquired such securities and received a disclosure document, if the information contained in that disclosure document has not changed.
22. All clients of Wellington West were sent a disclosure document on or about November 16, 2012, which included a link to the Filer's website for purposes of accessing the Filer's "Important Client Information Brochure" free of charge and which set out the ownership of the Filer (i.e. the combined entity resulting from the Combination) and MAML by MLI and the relationship between the Filer and the Funds. In this way, all clients of Wellington West who remained clients following the closing of the Transaction and completion of the Combination had access to complete information about the relationships between the relevant parties.
23. As described above, each of MAML and the Filer are wholly owned subsidiaries of MLI, which in turn is a wholly owned subsidiary of MFC. Prior to the closing of the Transaction, Wellington West was not under the ownership and control of MLI and as such, section 8.2 of NI 81-105 did not apply to Wellington West or its sales representatives in respect of trades in securities of the Funds to its clients.
24. MSISI complied with the requirements of subsection 8.2 of NI 81-105 by obtaining written consent of its clients (either at the time of account opening or through a separate disclosure document) or by relying upon exemptive relief granted to MSISI by the securities regulators for a specified group of clients pursuant to decision documents dated December 27, 2007 and December 7, 2011.
25. The Filer's current policy is to obtain written consent to the purchase of the Funds from all clients during the account opening process. During the period between closing of the Transaction and completion of the Combination, the Filer adopted a new account opening policy of requiring all new clients to sign a form which included the NI 81-105 consent language to purchase any Fund.
26. As of the closing of the Transaction, the Filer had a total of approximately 21,000 Affected Client accounts. A significant number of these Affected Clients trade in mutual funds.
27. Certain Affected Clients have preauthorized purchase plans which instruct the Filer (as successor to Wellington West) to buy the Funds for the Affected Clients at a pre-determined amount and frequency. Without the Exemption Sought, the Filer would be forced to suspend these plans until such time as it receives the necessary written consent from these Affected Clients.
28. The Filer has developed a procedure for Affected Clients to obtain written consent to trade in securities of the Funds on an "as needed" basis. However, the Filer is concerned that the procedure creates a disincentive for many of the Affected Clients and sales representatives from trading in securities of the Funds and potentially creates trade delays.
29. The Filer believes that its clients are aware of the relationship between the Filer and the Funds given the shared use of the name "Manulife" and that many of the Affected Clients would view the requirement to provide written consent evidencing such knowledge as administratively burdensome so as to cause them to invest in unrelated mutual funds.
30. The Filer has considered alternatives to the "as needed" approach, such as re-documenting all Affected Clients' accounts. This would involve a mail-out to all Affected Clients, tracking whether or not the Affected Client has executed a consent form and following up with any Affected Client who failed to return the form prior to any such Affected Client trading in securities of the Funds. The initial printing and mailing costs for this approach, including staff resources and time necessary to effect the mailing (but not including staff resources and time to track receipt of the signed consent form or follow up with any Affected Client who failed to return the form), amount to an estimated $85,000.
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 Exemption Sought is granted.