National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from subsection 7.1(3) of NI 81-105 Mutual Fund Sales Practices granted to dealers and their representatives to permit them to pay commission rebates to clients when clients are switched from third-party mutual funds to related funds -- Representatives providing commission rebates may have equity interest not exceeding 10% in parent company of related fund manager -- Relief granted subject to a 3-year sunset clause and conditions that mitigate conflicts.
Applicable Legislative Provisions
National Instrument 81-105 Mutual Fund Sales Practices, ss. 7.1(3), 9.1.
March 31, 2015
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 MANDEVILLE PRIVATE CLIENT INC. AND MANDEVILLE WEALTH SERVICES INC. (the Filers)
The principal regulator in the Jurisdiction (the Principal Regulator) has received an application from the Filers for a decision under the securities legislation of the Jurisdiction (the Legislation) for an exemption under Section 9.1 of National Instrument 81-105 Mutual Fund Sales Practices (NI 81-105) exempting the Filers and any other future dealer affiliates of Portland Investment Counsel Inc. (collectively, the Mandeville Dealers) and their present and future representatives (the Representatives) from the prohibitions contained in subsection 7.1(3) of NI 81-105 prohibiting the Mandeville Dealers and their Representatives from paying all or any part of a fee or commission (Commission Rebate) payable by a securityholder on the redemption of securities of a mutual fund that occurs in connection with the purchase by the securityholder of securities of another mutual fund that is not in the same mutual fund family where the Mandeville Dealer is a member of the organization of the mutual fund the securities of which are being acquired (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 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, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Nunavut, Northwest Territories and Yukon Territories.
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-105 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filers:
1. Mandeville Private Client Inc. is registered in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Ontario, Nova Scotia, Prince Edward Island and Québec. It is also a member of the Investment Industry Regulatory Organization of Canada.
2. Mandeville Wealth Services Inc. is registered in each of the provinces (but not the Territories) of Canada as a dealer in the category of mutual fund dealer and exempt market dealer. It is also a member of the Mutual Fund Dealers Association of Canada.
3. The head office of the Filers is located in Burlington, Ontario.
4. The Filers are "members of the organization" (within the meaning of NI 81-105) of mutual funds managed by Portland Investment Counsel Inc. (Portland), known as "Portland Mutual Funds". The Filers act as principal distributors of the Portland Mutual Funds. The Filers may, in the future, become, "members of the organization" of other mutual funds, since the parent company or an affiliate of the Filers may establish or acquire interests in corporations that are managers of mutual funds (Future Affiliated Funds).
5. The Filers are direct wholly-owned subsidiaries of Mandeville Holdings Inc. (Mandeville Holdings) which is also the parent company of Portland.
6. The Filers are not in default of securities legislation in any jurisdiction of Canada.
7. The Filers have been selling third-party managed mutual funds for a certain number of years and currently distribute third-party managed mutual funds from more than 63 unaffiliated fund manufacturers. The Filers have been selling the Portland Mutual Funds since May 2013 (Mandeville Private Client Inc.) and January 2014 (Mandeville Wealth Services Inc.), without allowing any commission rebates for such funds.
8. The Filers act independently from Portland. The Filers and the Representatives are free to choose which mutual funds to recommend to their clients and consider recommending the Portland Mutual Funds to their clients in the same way as they consider recommending other third party mutual funds. The Filers and the 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 and financial circumstances. Portland provides the Filers with the compensation described in the prospectus of the Portland Mutual Funds in the same manner as Portland does for any participating dealer selling securities of the Portland Mutual Funds to their clients. All compensation and sales incentives paid to the Filers by any member of the organization of the Portland Mutual Funds or any Future Affiliated Funds comply and will continue to comply with NI 81-105.
9. Representatives may own voting or equity securities of Mandeville Holdings (an "Equity Interest") including common shares of Mandeville Holdings. No Representative owns more than 10% of the outstanding voting or equity securities of Mandeville Holdings and no Representative owns any of the outstanding voting or equity securities of any other member of the organization of the Portland Mutual Funds, including Portland or any of the Mandeville Dealers.
10. Neither the Filers, nor any Representative, are or will be subject to quotas, whether express or implied, in respect of selling the Portland Mutual Funds. Except as permitted by NI 81-105, none of the Filers, Portland nor any other member of their organizations, provides any incentive (whether express or implied) to any Representative, or to the Filers, to encourage the Representative or the Filers to recommend the Portland Mutual Funds over third party managed mutual funds, other than the holding by a Representative of an Equity Interest.
11. The Filers comply with NI 81-105, including the rules dealing with internal dealer incentive practices prescribed under Part 4 of NI 81-105 in its compensation practices with the Representatives. The Filers and the Representatives also comply with the rules concerning commission rebates provided for in section 7.1 of NI 81-105.
12. The prohibition in subsection 7.1(3) of NI 81-105 means that neither the Filers nor their Representatives can reimburse their clients for any fees or commissions incurred by those clients when they decide to switch into a Portland Mutual Fund or a Future Affiliated Fund from another mutual fund. Subsection 7.1(1) of NI 81-105 allows the Filers and the Representatives to pay Commission Rebates only when the client decides to switch from one third party fund to another third party fund, and provided the disclosure and consent procedure established in section 7.1 is followed. Payment of Commission Rebates by the Filers and the Representatives benefit the client so that the client does not incur costs in switching from one fund to another.
13. In the absence of the Exemption Sought, a client of the Filers who effects a redemption of mutual fund securities that are subject to a redemption charge and who uses the proceeds thereof to purchase securities of a Portland Mutual Fund or Future Affiliated Fund would not have the benefit of a Commission Rebate from the Filers or a Representative, while a client who uses the proceeds of such redemption to purchase securities of a mutual fund unaffiliated to the Filers could have the benefit of a Commission Rebate from the Filers or a Representative. In circumstances where a Representative believes that a Portland Mutual Fund or Future Affiliated Fund is the most suitable fund for the client, the Filers believe that the prohibition in subsection 7.1(3) of NI 81-105 may discourage the client from trading in the recommended Portland Mutual Fund or Future Affiliated Fund. This may not be in the client's best interests.
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 provided that:
(a) For each switch made by a Mandeville Dealer client to a Portland Mutual Fund or Future Affiliated Fund from another mutual fund where the Mandeville Dealer or a Representative agrees to pay a Commission Rebate, the Mandeville Dealer and the Representative will:
(i) comply with the provisions of paragraph 7.1(1)(a) of NI 81-105;
(ii) comply with the disclosure and consent provisions of Part 8 of NI 81-105;
(iii) ensure that at the time of the switch to a Portland Mutual Fund or Future Affiliated Fund, the sales commissions and trailing commissions payable on the Portland Mutual Fund or Future Affiliated Fund do not exceed the sales commissions and trailing commissions payable on the third-party fund from which the client is switching; and
(iv) advise the client, in writing and in advance of finalizing a switch to a Portland Mutual Fund or Future Affiliated Fund, that any Commission Rebate proposed to be made available in connection with the purchase of securities of the Portland Mutual Funds or Future Affiliated Funds will:
(A) be available to the client regardless of whether the redemption proceeds are invested in a Portland Mutual Fund or a Future Affiliated Fund, as the case may be, or a third party fund;
(B) not be conditional upon the purchase of securities of a Portland Mutual Fund or a Future Affiliated Fund; and
(C) in all cases, be not more than the amount of the gross sales commission earned by the Mandeville Dealer on the client's purchase of a Portland Mutual Fund or a Future Affiliated Fund.
(b) The actual amount of the Commission Rebate paid in respect of the switch will be not more than the amount referred to in paragraph (a)(iv)(C) above.
(c) A Mandeville Dealer and/or the Representative that provides Commission Rebates will not be reimbursed directly or indirectly in respect of the Commission Rebates in connection with a switch to a Portland Mutual Fund or a Future Affiliated Fund by any member of the organization of that fund other than through the commissions earned on the purchase of that fund.
(d) No Mandeville Dealer nor any Representative is, or will be in the future, subject to quotas, whether express or implied, in respect of selling the Portland Mutual Funds or any Future Affiliated Funds.
(e) No Representative having an Equity Interest representing more than 10% of any class of voting or equity securities of Mandeville Holdings and no Representative having any Equity Interest in any other member of the organization of the Portland Mutual Funds, including Portland or any of the Mandeville Dealers, will be permitted to provide a Commission Rebate in connection with a switch to a Portland Mutual Fund or a Future Affiliated Fund.
(f) Except as permitted by NI 81-105, no Mandeville Dealer and no member of the respective organization of the Portland Mutual Funds or of any Future Affiliated Funds provides or will provide any incentive, whether express or implied, to the Mandeville Dealer or any Representatives to encourage the Representatives to recommend to clients the Portland Mutual Funds or Future Affiliated Funds over third party funds, other than the holding of an Equity Interest.
(g) Each Mandeville Dealer'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 Portland Mutual Fund or a Future Affiliated Fund and will be made available to the client if the client wishes to switch to an unaffiliated third party fund.
(h) This decision shall cease to be operative on the date that is three years from the date of this decision or the date that a rule replacing or amending section 7.1 of NI 81-105 comes into force, whichever date comes first.