National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from the dealer registration requirement granted to portfolio manager in respect of trades in securities of prospectus-qualified funds in a model portfolio product sold by both affiliated and unaffiliated dealers. Relief from the know-your-client and suitability requirements granted to portfolio manager in respect of investors in model portfolio product sold by both affiliated and unaffiliated dealers.
Applicable Legislative Provisions
Securities Act, R.S.O., c.S.5, as am., ss. 25(1) and 74(1).
Multilateral Instrument 11-102 Passport System, s. 4.7(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.2, 13.3, 15.1.
September 23, 2014
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")
The securities regulatory authority or regulator in Ontario (the "Decision Maker") has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the "Legislation") exempting the Filer from:
(a) the requirement in the Legislation that the Filer be registered as a dealer in order to effect Rebalancing Trades (as defined below);
(b) with respect to investors in the PAS (as defined below), the requirement in the Legislation that the Filer must take reasonable steps to:
(i) establish the identity of a client and, if the Filer has cause for concern, make reasonable inquiries as to the reputation of the investor;
(ii) establish whether the investor is an insider of a reporting issuer or any other issuer whose securities are publicly traded;
(iii) ensure that the Filer has sufficient information regarding the investor's investment needs, objectives, financial circumstances and risk tolerance to enable the Filer to meet its obligations under the Legislation; and
(iv) keep the information described above current
(the "Know Your Client Requirement"); and
(c) with respect to investors in the PAS (as defined below), the requirement in the Legislation that the Filer must take reasonable steps to ensure that, before it makes a recommendation to or accepts an instruction from an investor to buy or sell a security, or makes a purchase or sale of a security for an investor's account, the purchase or sale is suitable for the investor (the "Suitability Requirement")
(together, the "Requested Relief").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for this application;
(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 by the Filer in all the provinces and territories of Canada in respect of the Requested Relief; and
(c) this decision is the decision of the principal regulator.
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning 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 the laws of the Province of Ontario. The Filer is registered under the Securities Act (Ontario) as a portfolio manager, exempt market dealer and investment fund manager, and is also registered as a portfolio manager and exempt market dealer in the other provinces and territories of Canada, including as an investment fund manager in each of Quebec and Newfoundland & Labrador. The Filer 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 requires the Requested Relief to not be in default of the Legislation.
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 (the "Future Funds") that are subject to the requirements of NI 81-102. The Existing Funds and Future Funds are referred to collectively as the "Funds" and, individually, as a "Fund".
4. The Filer offers a service called The Portfolio Architecture Service (the "PAS") to investors in the Funds. To be eligible for this service an investor must:
(a) invest a minimum of $500,000 in the Funds, exclusive of any investments in Series AR securities of the Funds; and
(b) invest at least 51% of their portfolio in Series I, O, O6 and/or one or more of the Private Wealth Series of securities of the Funds.
The particular series to be invested in and the minimum investment amount may be changed from time to time in the discretion of the Filer.
5. The Filer has developed 30 style neutral model portfolios (the "Model Portfolios") each of which is comprised exclusively of securities of a selection of the Funds. Each Model Portfolio has its own unique allocation of equity and fixed income investments and some consist exclusively of either equity or fixed income investments (the "Asset Classes"). There are Model Portfolios suitable for investors with short, medium or long-term investment horizons and with different tolerances for risk.
6. Under the PAS, an investor meets with his or her financial Adviser (the "Adviser") to consider the investor's financial circumstances, investment knowledge, investment objectives, investment time horizon and their level of risk tolerance. To aid in this process, the Filer makes available a questionnaire for completion by the investor and for discussion with the Adviser. The Adviser will use the information obtained from the investor, including discussions held with the investor and the Adviser's knowledge of the investor's affairs, to complete a know your client and suitability assessment on the investor's affairs as required under sections 13.2 and 13.3 of National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103").
7. The Advisers will be registered representatives of dealers (the "Dealers") that are either:
(a) registered as dealers in the category of mutual fund dealer under the Legislation and members of the Mutual Fund Dealers Association of Canada (the "MFDA"); or
(b) registered as dealers in the category of investment dealer under the Legislation and members of the Investment Industry Regulatory Organization of Canada.
The Dealers may include affiliates of the Filer, including IPC Investment Corporation, IPC Securities Corporation and Quadrus Investment Services Ltd., as well as Dealers that are not affiliates of the Filer.
8. Once the requirements of the investor have been determined, the Filer provides the Adviser with a suggested equity to income weighting for the portfolio, which is subject to change at the request of the investor which is communicated to the Filer by the investor's Adviser following consultation with the investor. The Filer will then provide a strategically designed Model Portfolio that the Filer considers to be suitable for the investor based on the investor's communicated investment objective, tolerance to risk and investment time horizon. The Filer will also provide the investor and the Adviser with an investment strategy proposal if requested.
9. Exposure to the different Asset Classes in the Model Portfolio will be achieved using a recommended list of Funds with specified minimum and maximum percentage permitted ranges (the "Permitted Ranges") to be invested in each Fund. The Adviser reviews the proposed Model Portfolio with the investor and modifications may be made with respect to Fund selection, Permitted Ranges and Asset Class weightings. Consequently, the investor, with assistance from his or her Adviser, will determine the composition of the initial Model Portfolio suitable for the investor.
10. If the investor decides to proceed with investing in a Model Portfolio, an agreement (the "Agreement") is entered into between the investor, the investor's Dealer and the Filer that:
(a) will authorize the Filer to manage the investor's investment on a discretionary basis with a view to ensuring that the investor's account is managed in accordance with the agreed upon Model Portfolio and within the Permitted Ranges which may be adjusted in the discretion of the Filer;
(b) will authorize the Filer to use its discretion to replace a Fund due to it being terminated, or for any other similar reason that no longer allows the Fund to participate as part of a Model Portfolio and which will also authorize the Filer to use its discretion to replace a Fund with another Fund considered by the Filer to be more appropriate provided the investment objectives and strategies of the Fund are substantially consistent with the Asset Class of the Fund being replaced;
(c) provides that a change to the Model Portfolio accepted by the investor arising from:
(i) changes in the investor's financial circumstances or risk profile communicated to the Filer by the Dealer or Adviser will not be made without the investor's prior written approval; or
(ii) changes to the Asset Classes or Permitted Ranges will not be made without first providing the investor with 60 days' prior written notice;
(d) will authorize the Filer to reallocate securities of the Funds held in the agreed upon Model Portfolio to:
(i) reflect changes made by the Filer to the selected Model Portfolio; and
(ii) to rebalance holdings in the Funds from time to time within the Permitted Ranges,
(collectively, the "Rebalancing Trades");
(e) provides that the Filer will be responsible to the investor for ensuring that the selected Model Portfolio is managed in accordance with the terms agreed upon by the investor and without reference to the investor's circumstances;
(f) provides that the Know Your Client Requirement and Suitability Requirement will not be the responsibility of the Filer but instead will be that of the Dealer who will be responsible for gathering and periodically updating the know your client information concerning the investor and confirming the suitability of the selected Model Portfolio;
(g) provides that the Dealer will not have discretionary authority from the investor to participate in the management of the Model Portfolio or to effect Rebalancing Trades;
(h) provides that the Filer will not be required to issue trade confirmations in respect of Rebalancing Trades; and
(i) provides for the payment of fees under the PAS to the Dealer and Filer as set out in the Agreement within the parameters described in the simplified prospectus for the Funds.
11. In addition to the Agreement, the investor is also provided:
(a) with an investment policy statement for signature at the time the Agreement is entered into which sets out the composition of the Model Portfolio selected by the investor, the percentage allocation of the Asset Classes, Permitted Ranges to be invested in each Fund, fees payable to the Dealer and the Filer as well as the rules governing the investment and management of the Model Portfolio; and
(b) prior to the Agreement being entered into, or within two days of trades being implemented for the Model Portfolio, with the Fund Facts or other document required by Legislation, in respect of the Funds included in the Model Portfolio. In the event that as part of the Rebalancing Trades a new replacement Fund is incorporated as part of the Model Portfolio, the investor will similarly be provided with the Fund Facts or other document required by Legislation for the replacement Fund.
12. The securities of the Funds that comprise each Model Portfolio are directly held by each investor in their own account established through their Dealer and if the investor has not already established such an account with their Dealer, the investor will complete an account application to establish such an account.
13. The Rebalancing Trades will be reflected in the investor's account on the day following the Rebalancing Trades. Investors will be able to access their accounts via the internet on a daily basis.
14. Consolidated statements of account will be sent to the investor by the Filer on a quarterly basis. Such statements of account will identify the assets managed on behalf of the investor through the PAS and will include, for each Rebalancing Trade made during the period, the information that the Dealer would otherwise have been required to include in a trade confirmation in accordance with applicable legislation. Such statements of account will also reconfirm that the investor will not receive trade confirmations for Rebalancing Trades. In addition, the Filer will provide the investor with an annual tax reporting package.
15. The Dealer will also be required to send statements of account to the investor on a monthly basis if transactions have occurred in the PAS account during the month, otherwise on a quarterly or more frequent basis if required under applicable legislation.
16. The fees and expenses charged in respect of the PAS will be disclosed in the simplified prospectus and Fund Facts of the Funds and in the Agreement. The sales charges, redemption fees and other fees charged to investors for investing in securities of a Fund using the PAS will otherwise be the same as those charged to investors that purchase or hold the same series of securities of other Funds outside a PAS. The Filer will receive management, administration and other fees from the Funds and/or from the investor in the usual manner for securities of the Funds included in the PAS. No sales charges, redemption fees, switch fees or early trading fees will be charged in connection with Rebalancing Trades. Accordingly, there will be no duplication of any fees or charges as a result of an investor's decision to utilize the PAS.
17. The Filer carries out the following monitoring and oversight procedures in connection with the investor's account:
(a) A formal annual portfolio review is conducted in conjunction with the Adviser to determine whether there have been any changes in the investor's circumstances that would warrant modifications to the Model Portfolio; and
(b) The Mackenzie Asset Allocation Team, consisting of portfolio managers, have ongoing oversight responsibilities on the composition of the Model Portfolios and make recommendations for changes where considered appropriate.
There may be changes made to the Model Portfolio at any time at the request of the investor and the investor's Adviser.
18. In the absence of the Requested Relief the Filer will be required:
(a) to register as a dealer in the category of mutual fund dealer under the Legislation and become a member of the MFDA in order to effect the Rebalancing Trades;
(b) to gather and update the information contemplated by the Know Your Client Requirement in section 13.2 of NI 31-103 for each investor with a PAS; and
(c) by the Suitability Requirement in section 13.3 of NI 31-103, to ensure that each Rebalancing Trade in an investor's PAS is suitable for the investor, rather than invested in accordance with the terms of the investor's PAS.
19. The Dealers do not require an exemption from the adviser registration requirement under the Legislation as a result of their involvement in the PAS as they will not be engaged in providing discretionary management advice to investors in connection with the management of the Model Portfolios nor will they be participating in the Rebalancing Trades.
The Decision Maker 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 Maker under the Legislation is that the Requested Relief is granted provided that:
(a) the Filer is, at the time of the Rebalancing Trade, registered under the Legislation as an adviser in the category of portfolio manager;
(b) the Rebalancing Trade is made in accordance with the terms of the Model Portfolio of the PAS account in which the Rebalancing Trade occurs; and
(c) the Filer has taken reasonable steps to assure itself that the investor's Dealer has complied with the Know Your Client Requirement and Suitability Requirement with respect to the investor.