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 mutual funds.
Applicable Legislative Provisions
National Instrument 81-105 Mutual Fund Sales Practices, ss. 8.2(4), 9.1.
April 28, 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 MANULIFE SECURITIES INCORPORATED (MSI) AND MANULIFE SECURITIES INVESTMENT SERVICES INC. (MSISI) (collectively, the Filers)
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 an exemption under section 9.1 of National Instrument 81-105 Mutual Fund Sales Practices (NI 81-105) exempting the Filers and their sales representatives from the requirement that the Filers obtain written consent from clients prior to the completion of a trade in related mutual funds, in respect of trades of securities of certain related mutual funds by Existing Clients (as defined below) of the Filers (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, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon (the Passport Jurisdictions).
Terms defined in MI 11-102, National Instrument 14-101 Definitions and 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 Filers:
1. MSI is a corporation governed by the Business Corporations Act (Ontario) with its head office in Oakville, Ontario.
2. MSI is registered as an investment dealer in all provinces and territories of Canada. MSI is a member of the Investment Industry Regulatory Organization of Canada.
3. MSISI is a corporation governed by the Canada Business Corporations Act with its head office in Oakville, Ontario.
4. MSISI is registered as a mutual fund dealer in all provinces and territories of Canada except Nunavut, and is registered as an exempt market dealer in all provinces and territories of Canada except Nunavut and Northwest Territories. MSISI is a member of the Mutual Fund Dealers Association of Canada.
5. Each of the Filers is an indirect, wholly-owned subsidiary of Manulife Financial Corporation (MFC), a public company listed on the Toronto Stock Exchange.
6. The Filers are not in default of securities legislation in any jurisdiction of Canada.
7. Effective January 30, 2015, MFC, through its subsidiary The Manufacturers Life Insurance Company, acquired all of the issued and outstanding shares of Standard Life Financial Inc. (SLFI) and Standard Life Investments Inc. (SLII, now renamed Manulife Asset Management Accord (2015) Inc.), from subsidiaries of Standard Life plc (the Acquisition).
8. As a result of the Acquisition, the Filers are now related to a number of SLFI and SLII subsidiaries, including Standard Life Mutual Funds Ltd. (SLMF) a mutual fund manager, since each of these subsidiaries and the Filers are, directly or indirectly, wholly-owned by MFC. The Filers are also now "members of the organization" (within the meaning of NI 81-105) of the mutual funds managed by SLMF (the Standard Life Mutual Funds).
The Consent Requirement
9. The Filers act as participating dealers (within the meaning of NI 81-105) in respect of the Standard Life Mutual Funds as well as for mutual funds managed by other affiliates of the Filers and by unrelated fund managers.
10. Subsection 8.2(4) of NI 81-105 requires the Filers, as a result of the Acquisition, to obtain the written consent of their clients prior to completing the purchase of securities of a Standard Life Mutual Fund (the Consent Requirement). Prior to January 30, 2015, SLMF was not under the ownership and control of MFC and as such, the Consent Requirement did not apply to the Filers or their sales representatives in respect of the Standard Life Mutual Funds.
11. The Filers have amended their procedures such that any person who becomes a client of the Filers after January 30, 2015 is required to provide written consent for trades in Standard Life Mutual Funds prior to any trade of such funds being completed, pursuant to the Consent Requirement.
12. A significant number of the Filer's existing clients as at January 30, 2015 (Existing Clients), trade in mutual funds, including the Standard Life Mutual Funds. Certain of the Existing Clients have pre-authorized purchase plans (PAPs) which instruct the Filers to buy Standard Life Mutual Funds for these Existing Clients at a pre-determined amount and frequency.
13. Absent the Exemption Sought, the Filers would be forced to delay completion of any purchases of Standard Life Mutual Funds, including suspension of any PAPs involving Standard Life Mutual Funds until such time as they receive the necessary written consent from Existing Clients.
14. The Filers have developed a procedure for obtaining written consent on an "as needed" basis for all Existing Clients. However, given the large number of Existing Clients of the Filers, the requirement to obtain written consent from each Existing Client is onerous and administratively burdensome.
15. Under the "as needed" approach, for each proposed trade to be made in a Standard Life Mutual Fund by a client, the Filers are required to first identify whether the client has signed a document evidencing his/her acknowledgement of the relationships between the Filers and the Standard Life Mutual Funds and consenting to the trade. If the Filers do not yet have the requisite consent for the client, they must then deliver a consent form to the client and wait for it to be executed and returned to the Filers. This "as needed" approach requires the Filers to monitor and follow up to ensure they receive the required consent for each relevant trade.
16. As a result of the additional steps and potential delays in executing a trade in a Standard Life Mutual Fund compared to trading in a third party mutual fund, the Filers are concerned that this procedure will create a disincentive for many of their clients and sales representatives from trading in Standard Life Mutual Funds.
17. In addition, the "as needed" approach is not systems driven and necessitates manually reviewing each trade to determine if consent from the client is required. Such a process is much more prone to error and also creates a substantial burden on the Filers' compliance team.
18. The Filers have considered alternatives to the "as needed" approach, such as re-documenting the accounts of all Existing Clients. This would involve a mail-out to all Existing Clients, tracking whether or not the client has executed a consent form and following up with all clients who failed to return the form prior to any such Existing Client trading in Standard Life Mutual Funds. The printing and mailing costs for this approach, without consideration given to the staff resources and time, are significant.
19. The Filers have delivered a disclosure document to all of their Existing Clients to make them aware of the Filers' affiliation with the Standard Life Mutual Funds. This document discloses the relationships between the Filers, MFC, SLMF and the Standard Life Mutual Funds.
20. A press release was issued at the time of announcing the proposed Acquisition and a second press release was issued upon closing of the Acquisition. These press releases were filed on SEDAR and posted on the website of SLMF as required by applicable securities legislation. In addition, there is also a rotating banner prominently located on the Manulife website (www.manulife.ca) which, once clicked on, provides additional information on the Acquisition and directs the user to contact Manulife Customer Service with any further enquiries.
21. Lastly, the Acquisition was well publicised and received extensive news coverage in the Canadian media. Given the prominence of the Acquisition, the Filers believe that the Canadian market as a whole is well aware of the fact that the Standard Life business in Canada has been acquired by Manulife, and thus the Existing Clients of the Filers who invest in Standard Life Mutual Funds are aware of the relationships between the Filers, MFC, SLMF and the Standard Life Mutual Funds.
22. The Filers act independently from SLMF and have no connection with SLMF, other than through their common ultimate parent company.
23. The Filers are free to choose which mutual funds to recommend to their clients and consider recommending the Standard Life Mutual Funds to their clients in the same way as they consider recommending other third party mutual funds.
24. The Filers only recommend mutual funds that they believe would be suitable for their clients and in accordance with the clients' investment objectives in compliance with obligations as registered dealers.
25. SLMF provides the Filers with the compensation described in the prospectus of the Standard Life Mutual Funds in the same manner as SLMF does for any participating dealer selling securities of the Standard Life Mutual Funds to its clients.
26. All compensation and sales incentives paid to the Filers by any member of the organization of the Standard Life Mutual Funds complies with and will continue to comply with NI 81-105.
27. Neither the Filers, nor any sales representative of the Filers, are or will be subject to quotas (whether express or implied) in respect of selling the Standard Life Mutual Funds.
28. Except as permitted by NI 81-105, none of the Filers or SLMF or any other member of the organization of the Standard Life Mutual Funds, provide any incentive (whether express or implied) to any sales representative of the Filers or to the Filers to encourage those sales representatives or the Filers to recommend to clients the Standard Life Mutual Funds over third-party managed mutual funds.
29. No sales representative of either Filer has an equity interest in the Filer (within the meaning of NI 81-105) or in any other member of the organization of the Standard Life Mutual Funds.
30. The Standard Life Mutual Funds comply with the disclosure obligations that apply to them as required by subsections 8.2(1) and (2) of NI 81-105.
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.