Securities Law & Instruments

Headnote

National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief from the requirement in s.3.2.01 of NI 81-101 to deliver a fund facts document to investors who purchase mutual fund securities of a high net worth series pursuant to switches from a regular retail series upon meeting certain eligibility requirements based on the amount of the investor’s investments – High net worth series securities are identical to regular retail series securities except that the high net worth series have lower combined management and administration fees – Investment fund manager initiating switches on behalf of investors when their investments satisfy eligibility requirements of high net worth series – Switches between series of a fund triggering a distribution of securities attracting the requirement to deliver a fund facts – Relief granted from requirement to deliver a fund facts to investors for purchases of high net worth series securities made pursuant to such switches subject to compliance with certain notification and prospectus/fund facts disclosure requirements – National Instrument 81-101 Mutual Fund Prospectus Disclosure.

Applicable Legislative Provisions

National Instrument 81-101 Mutual Fund Prospectus Disclosure, ss. 3.2.01, 6.1.

December 9, 2016

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

FRANKLIN TEMPLETON INVESTMENTS CORP.

(the Filer)

AND

IN THE MATTER OF

FTC INVESTOR SERVICES INC.

(the Dealer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of Templeton Growth Fund, Ltd. (TGF) and each mutual fund listed in Schedule “A” (each, a Trust Fund and collectively, the Trust Funds) and Schedule “B” (each, a Corporate Fund and collectively, the Corporate Funds and together with TGF and the Trust Funds, the Existing Funds) and any mutual fund for which the Filer may act as investment fund manager in the future (each, a Future Fund and collectively, the Future Funds and together with the Existing Funds, the Funds and each, a Fund) for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Funds from the requirement in subsection 3.2.01(1) of National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) for a dealer to deliver or send the most recently filed fund facts documents (the Fund Facts) to a purchaser before the dealer accepts an instruction from the purchaser for the purchase of a security of a mutual fund (the Fund Facts Delivery Requirement) in respect of purchases of High Net Worth Series securities (as defined below) of the Funds that are made pursuant to the Automatic Switches (as defined below) (the Exemption Sought).

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 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 in each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 – Definitions and MI 11-102 have the same meanings if used in this decision, unless otherwise defined.

Representations

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

The Filer

1.             The Filer is a corporation amalgamated under the laws of the Province of Ontario having its head office in Toronto, Ontario.

2.             The Filer is registered under securities legislation in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland & Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec, Saskatchewan and Yukon as an adviser in the category of portfolio manager and as a dealer in the categories of mutual fund dealer and exempt market dealer. The Filer is registered under securities legislation in Alberta, British Columbia, Manitoba, Newfoundland & Labrador, Nova Scotia, Ontario and Québec as an investment fund manager. The Filer is also registered under the Commodity Futures Act (Ontario) as a commodity trading manager.

3.             The Filer is the investment fund manager, promoter and portfolio manager of the Existing Funds and the trustee of the Trust Funds and may become the investment fund manager of Future Funds.

4.             The Filer is not in default of securities legislation in any of the Jurisdictions.

5.             The Funds are or will be available through the Dealer, which is a principal distributor and a participating dealer for certain series of the Funds, and all future dealers.

6.             The Dealer is registered under securities legislation in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland & Labrador, Nova Scotia, Ontario, Prince Edward Island, Saskatchewan and Yukon as a dealer in the category of mutual fund dealer.

The Funds

7.             Each Fund is, or will be, a reporting issuer in one or more of the Jurisdictions and subject to the requirements of National Instrument 81-102 – Investment Funds.

8.             The securities of each of the Funds are, or will be, qualified for distribution pursuant to a simplified prospectus, Fund Facts and annual information form that has been, or will be, prepared and filed in accordance with National Instrument 81-101 – Mutual Fund Prospectus Disclosure.

9.             The securities of the Existing Funds are currently offered under a simplified prospectus dated May 27, 2016, as amended.

10.          Each of the Existing Funds currently offers up to 12 series – Series A, A (Hedged), F, FT, I, O, OT, PF, PFT, T, T-USD and V.

11.          The Existing Funds are not in default of securities legislation in any of the Jurisdictions.

High Net Worth Series (Series PF and PFT) and Retail Series (Series F and FT)

12.          Series F, FT, PF and PFT have lower fees than Series A, A (Hedged), I, T, T-USD and V, and are only available to investors who have fee-based accounts or to any other investors for whom the Filer does not incur distribution costs. Instead of paying sales charges, investors pay their dealer a fee for investment advice and other services the dealer provides in respect of Series F, FT, PF and PFT. In addition, the Filer does not pay any commissions or trailing commissions to dealers who sell Series F, FT, PF and PFT securities.

13.          Series FT is the same as Series F, except that Series FT is designed for investors seeking regular monthly distributions. Series PFT is the same as Series PF, except that Series PFT is designed for investors seeking regular monthly distributions.

14.          Series PF and Series PFT (High Net Worth Series) have the same attributes as Series F and Series FT (Retail Series), except that the High Net Worth Series are only available to investors who have in total invested a minimum of $100,000 in securities of the Funds or who purchase through a discretionary managed account.

15.          The High Net Worth Series have a combined management and administration fee that is lower than that of the Retail Series of the same Fund.

Automatic Switches

16.          The Filer filed an amendment to the simplified prospectus of the Funds on September 9, 2016 to announce certain changes to allow Retail Series investors to more easily access the lower fees associated with the High Net Worth Series, which changes took effect on October 3, 2016.

17.          Beginning on or about December 15, 2016 (the Implementation Date), each month, without the dealer/investor having to initiate the trade, the Filer will automatically switch Retail Series investors with $100,000 or more invested in securities of all Funds held in a single account to the corresponding High Net Worth Series securities of the same Fund (Lower Fee Switches). If an investor holding High Net Worth Series securities ceases to be eligible to hold that series, the Filer may switch the High Net Worth Series securities into the applicable Retail Series securities (Higher Fee Switches, and together with the Lower Fee Switches, the Automatic Switches).

18.          The Lower Fee Switches will generally take place when the investor purchases additional securities of the Funds or when positive market movement moves the investor into High Net Worth Series eligibility.

19.          The Higher Fee Switches may occur because of redemptions that decrease the amount of total investments with the Filer for purposes of calculating the investor’s eligibility for High Net Worth Series securities. However, in no circumstances will market value declines lead to Higher Fee Switches. Once an account has qualified for the High Net Worth Series, the account will continue to enjoy the benefit of lower management and administration fees associated with the applicable High Net Worth Series, even if the Fund performance reduces the account value below the minimum eligibility requirement for that series.

20.          As disclosed in the simplified prospectus, prior to effecting a Higher Fee Switch the Filer will give the investor 30 days’ notice if their balance has fallen below the minimum requirement. The investor may increase the amount of total investments with the Filer to maintain the minimum investment balance requirement for the High Net Worth Series during this period. If an investor increases their investment with the Filer to the minimum investment balance requirement for the High Net Worth Series within the notice period then no Higher Fee Switch will occur, but if an investor fails to meet the minimum investment balance requirement then the dealer will be obligated to deliver the Fund Facts for the relevant Retail Series pursuant to the Fund Facts Delivery Requirement and, following expiration of the notice period, the Filer will effect the Higher Fee Switch.

21.          Investors may access High Net Worth Series securities of a Fund by (a) initially investing in High Net Worth Series securities or (b) initially investing in Retail Series securities and then, upon meeting the eligibility requirements, having those Retail Series securities switched into High Net Worth Series securities by way of a Lower Fee Switch.

22.          Investors may access Retail Series securities of a Fund by (a) initially investing in Retail Series securities, or (b) initially investing in High Net Worth Series securities and then, upon no longer meeting the eligibility requirements for the High Net Worth Series securities, having those High Net Worth Series securities switched into Retail Series securities by way of a Higher Fee Switch.

23.          Further to each Lower Fee Switch, an investor’s account would continue to hold securities in the same Fund(s) as before the Automatic Switch, with the only material difference to the investor being that the combined management and administration fees charged for the High Net Worth Series securities will be lower than those charged for Retail Series securities.

24.          Further to each Higher Fee Switch, an investor’s account would continue to hold securities in the same Fund(s) as before the Automatic Switch, with the only material difference to the investor being that the combined management and administration fees charged for the Retail Series securities will be higher than those charged for High Net Worth Series securities.

25.          There are no sales charges, switch fees or other fees payable by the investor upon an Automatic Switch.


26.          Implementation of the Automatic Switches will have no adverse tax consequences on investors under Canadian tax legislation.

27.          Each Automatic Switch will entail (a) a redemption of the Retail Series security, immediately followed by a purchase of the corresponding High Net Worth Series security, or (b) a redemption of the High Net Worth Series security immediately followed by a purchase of the corresponding Retail Series security. Each purchase of securities done as part of an Automatic Switch will be a “distribution” under the Legislation, which triggers the Fund Facts Delivery Requirement.

Fund Facts Delivery Requirement and Rationale for Exemption Sought

28.          Pursuant to the Fund Facts Delivery Requirement, a dealer is required to deliver the most recently filed Fund Facts of a series of a Fund to an investor before the dealer accepts an instruction from the investor for the purchase of securities of that series of the Fund.

29.          While the Filer will initiate each trade done as part of an Automatic Switch, the Fund Facts will not be delivered to investors in connection with the purchase of High Net Worth Series securities made pursuant to a Lower Fee Switch for the following reasons:

(a)           at no time will an account that qualifies for High Net Worth Series securities pay combined management and administration fees at a rate higher than the rate of the combined management and administration fees of the Retail Series securities for which it initially subscribed; and

(b)           since Retail Series securityholders would have received a prospectus or Fund Facts disclosing the higher level of fees which applied to the Retail Series for which they initially subscribed, the investor would derive little benefit from receiving a further Fund Facts relating to the High Net Worth Series upon each Lower Fee Switch.

30.          The Fund Facts for the Retail Series will be delivered to investors in connection with the purchase of Retail Series securities made pursuant to a Higher Fee Switch, as required by the Fund Facts Delivery Requirement.

31.          The Filer or Dealer will deliver or will arrange for the delivery of trade confirmations to investors in connection with each trade done further to an Automatic Switch. Furthermore, details of the changes in series of securities held will be reflected in the account statements sent to investors for the quarter in which the change occurred.

32.          The Filer will (a) disclose the eligibility requirements and the management and administration fees applicable to the Retail Series and the High Net Worth Series in the simplified prospectus of the Funds and (b) disclose a summary of the eligibility requirements and the fee discounts applicable to the High Net Worth Series in the Fund Facts of the Retail Series of the Funds.

33.          The Filer will communicate extensively with dealers about the Automatic Switches so that they will be equipped to appropriately notify existing Retail Series investors of the changes applying to their Retail Series investments and appropriately advise new Retail Series investors about the Lower Fee Switches.

34.          In the absence of the Exemption Sought, the Filer may not carry out the Lower Fee Switches without compliance with the Fund Facts Delivery Requirement.

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 the Exemption Sought is granted provided that:

1.             For investors invested in Retail Series prior to the Implementation Date, the Filer will devise a notification plan for such investors regarding the Switches that addresses the following:

(a)           that their investment may be switched to a High Net Worth Series with lower fees upon meeting applicable eligibility requirements;

(b)           that, other than a difference in fees, there will be no other material difference between the Retail Series and the High Net Worth Series;

(c)           that if they cease to meet the eligibility requirements for High Net Worth Series, their investment will be switched into a series with higher management and administration fees which will not exceed the management and administration fees associated with the Retail Series; and

(d)           that they will not receive the Fund Facts when they purchase High Net Worth Series securities further to a Lower Fee Switch, but that:

(i)            they may request the most recently filed Fund Facts for the relevant series by calling a specified toll-free number or by sending a request via email to a specified address;

(ii)           the most recently filed Fund Facts will be sent or delivered to them at no cost;

(iii)          the most recently filed Fund Facts may be found either on the SEDAR website or on the website of the Filer; and

(iv)          they will not have the right to withdraw from an agreement of purchase and sale (a Withdrawal Right) in respect of a purchase of series securities made pursuant to a Lower Fee Switch, but they will have the right of action for damages or rescission in the event any Fund Facts or document incorporated by reference into a simplified prospectus for the relevant series contains a misrepresentation, whether or not they request the Fund Facts;

2.             The Filer will incorporate disclosure in the simplified prospectus for the Retail Series and the High Net Worth Series that sets out:

(a)           the eligibility requirements for both the Retail Series and the High Net Worth Series;

(b)           the fees applicable to investments in both the Retail Series and the High Net Worth Series; and

(c)           that if investors cease to meet the eligibility requirements of a specified High Net Worth Series, their investment may be switched into a series with higher management and administration fees which will not exceed the Retail Series fees;

3.             Each Fund Facts for the Retail Series will:

(a)           disclose a summary of the eligibility requirements and the fee discounts applicable to the High Net Worth Series;

(b)           disclose that if investors cease to meet the eligibility requirements of a specified High Net Worth Series, their investment may be switched into the corresponding Retail Series, with higher management and administration fees; and

(c)           contain a cross-reference to the more detailed disclosure in the simplified prospectus;

4.             The Retail Series Fund Facts containing the disclosure described in paragraph 3 above is delivered to investors at the time of first purchase of Retail Series securities in accordance with the Fund Facts Delivery Requirement;

5.             For Retail Series investors, the Filer sends these investors an annual reminder notice advising that they will not receive the Fund Facts when they purchase High Net Worth Series securities further to a Lower Fee Switch, but that:

(a)           they may request the most recently filed Fund Facts for the relevant series by calling a specified toll-free number or by sending a request via email to a specified address;

(b)           the most recently filed Fund Facts will be sent or delivered to them at no cost;

(c)           the most recently filed Fund Facts may be found either on the SEDAR website or on the website of the Filer; and

(d)           they will not have a Withdrawal Right in respect of a purchase of series securities made pursuant to a Lower Fee Switch, but they will have a right of action for damages or rescission in the event any Fund Facts or document incorporated by reference into a simplified prospectus for the relevant series contains a misrepresentation, whether or not they request the Fund Facts; and

6.             For High Net Worth Series investors who cease to meet the eligibility requirements and who will be switched into the applicable Retail Series, the Fund Facts for the applicable Retail Series will be delivered in accordance with the Fund Fact Delivery Requirement.

“Darren McKall”

Manager,

Investment Funds and Structured Products Branch

Ontario Securities Commission


SCHEDULE “A”

TRUST FUNDS

Templeton Asian Growth Fund

Templeton EAFE Developed Markets Fund

Templeton Emerging Markets Fund

Templeton Frontier Markets Fund

Templeton Global Balanced Fund

Templeton Global Bond Fund

Templeton Global Bond Fund (Hedged)

Templeton Global Smaller Companies Fund

Templeton Growth Fund, Ltd.

Templeton International Stock Fund

Franklin Global Growth Fund (formerly Franklin World Growth Fund)

Franklin Global Small-Mid Cap Fund

Franklin High Income Fund

Franklin Strategic Income Fund

Franklin U.S. Core Equity Fund

Franklin U.S. Monthly Income Fund

Franklin U.S. Opportunities Fund (formerly Franklin Flex Cap Growth Fund)

Franklin U.S. Rising Dividends Fund

Franklin Bissett All Canadian Focus Fund

Franklin Bissett Canadian All Cap Balanced Fund

Franklin Bissett Canadian Balanced Fund

Franklin Bissett Canadian Dividend Fund

Franklin Bissett Canadian Equity Fund

Franklin Bissett Canadian Government Bond Fund

Franklin Bissett Canadian Short Term Bond Fund

Franklin Bissett Core Plus Bond Fund

Franklin Bissett Corporate Bond Fund

Franklin Bissett Dividend Income Fund

Franklin Bissett Microcap Fund

Franklin Bissett Money Market Fund

Franklin Bissett Monthly Income and Growth Fund

Franklin Bissett Small Cap Fund

Franklin Bissett U.S. Focus Fund

Franklin Mutual European Fund

Franklin Mutual Global Discovery Fund

Franklin Mutual U.S. Shares Fund

Franklin Quotential Balanced Growth Portfolio

Franklin Quotential Balanced Income Portfolio

Franklin Quotential Diversified Equity Portfolio

Franklin Quotential Diversified Income Portfolio

Franklin Quotential Fixed Income Portfolio

Franklin Quotential Growth Portfolio

Franklin Templeton Canadian Large Cap Fund


SCHEDULE “B”

CORPORATE CLASS FUNDS

Templeton Asian Growth Corporate Class

Templeton Emerging Markets Corporate Class

Templeton Frontier Markets Corporate Class

Templeton Global Smaller Companies Corporate Class

Templeton Growth Corporate Class

Templeton International Stock Corporate Class

Franklin Global Growth Corporate Class (formerly Franklin World Growth Corporate Class)

Franklin U.S. Monthly Income Corporate Class

Franklin U.S. Monthly Income Hedged Corporate Class

Franklin U.S. Opportunities Corporate Class (formerly Franklin Flex Cap Growth Corporate Class)

Franklin U.S. Rising Dividends Corporate Class

Franklin U.S. Rising Dividends Hedged Corporate Class

Franklin Bissett All Canadian Focus Corporate Class

Franklin Bissett Canadian All Cap Balanced Corporate Class

Franklin Bissett Canadian Balanced Corporate Class

Franklin Bissett Canadian Dividend Corporate Class

Franklin Bissett Canadian Equity Corporate Class

Franklin Bissett Dividend Income Corporate Class

Franklin Bissett Energy Corporate Class

Franklin Bissett Money Market Corporate Class

Franklin Bissett Small Cap Corporate Class

Franklin Bissett U.S. Focus Corporate Class

Franklin Mutual Global Discovery Corporate Class

Franklin Mutual U.S. Shares Corporate Class

Franklin Quotential Balanced Growth Corporate Class Portfolio

Franklin Quotential Balanced Income Corporate Class Portfolio

Franklin Quotential Diversified Equity Corporate Class Portfolio

Franklin Quotential Diversified Income Corporate Class Portfolio

Franklin Quotential Growth Corporate Class Portfolio