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.

March 14, 2017

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)

AND

IPC INVESTMENT CORPORATION
(the Representative Dealer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from the requirement in the Legislation for a dealer to deliver or send the most recently filed fund facts document (Fund Facts) in the manner as required under the Legislation (the Pre-sale Fund Facts Delivery Requirement) in respect of the purchases of High Net Worth Series (as defined below) securities of the Funds (as defined below) that are made pursuant to Lower Fee Switches (as defined below) (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 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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (the Other Jurisdictions, together with the Jurisdiction, the Jurisdictions).

Interpretation

Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 have the same meaning 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 Ontario with its head office in Toronto, Ontario.

2.             The Filer is registered as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager in Ontario. The Filer is also registered as a portfolio manager and exempt market dealer in the Other Jurisdictions and as an investment fund manager in Newfoundland and Labrador and Québec.

3.             The Filer is the manager of the mutual funds (the Existing Funds), each of which is subject to the requirements of National Instrument 81-102 Investment Funds (NI 81-102). The Filer may in the future become the manager of additional funds that are subject to the requirements of NI 81-102 (the Future Funds, and together with the Existing Funds, the Funds and, individually a Fund).

4.             The head office of the Filer is located in Toronto, Ontario.

5.             The head office of the Representative Dealer is located in Mississauga, Ontario.

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

7.             The Representative Dealer is registered as a mutual fund dealer in the Jurisdictions and registered as an exempt market dealer in Alberta, British Columbia, New Brunswick, Newfoundland and Labrador, Ontario and Saskatchewan.

The Funds

8.             Each Fund is, or will be, an open-end mutual fund trust created under the laws of the Province of Ontario or an open-end mutual fund that is a class of shares of a mutual fund corporation.

9.             Each Fund is, or will be, a reporting issuer under the laws of the Jurisdictions. The securities of the Funds have, are, or will be, qualified for distribution pursuant to a simplified prospectus, Fund Facts and annual information form that have been, or will be, prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101).

10.          The units and shares of the Funds are referred to herein, collectively, as Securities. The majority of the Securities of the Funds are currently offered under simplified prospectus, Fund Facts and annual information form dated September 29, 2016. Certain Securities of the Funds, as more fully outlined in paragraph 12 below, are not offered under simplified prospectus.

11.          The Funds currently offer up to 39 series of Securities – Series A, AR, B, C, D, DA, F, F5, F6, F8, FB, FB5, G, GP, I, O, O6, PW, PWB, PWF, PWF5, PWF8, PWT5, PWT8, PWX, PWX5, PWX8, S6, S8, SC, SP, T5, T6, T8, U, U5, W, B-Series, and Investor Series securities. The Filer may offer additional series in the future.

12.          Certain Funds have series that were previously offered under simplified prospectus and are currently closed to new investors or were created for implementing mergers but were never offered to the public by way of simplified prospectus. These series include A, B, C, DZ, E, E5, E6, E8, J, J6, J8 and Advisor Series.

13.          Certain Funds intend to offer Series PWB, PWFB, PWFB5, PWT5, PWT6, PWF5 and PWF6, which will be qualified for distribution by way of an amendment to the simplified prospectus to be filed on or around March 10, 2017 (the Prospectus).

14.          Series PW, PWB, PWF, PWF5, PWF6, PWFB, PWFB5, PWF8, PWT5, PWT6, PWT8 and any future applicable high net worth series securities (the High Net Worth Series) of the Funds generally have or will have lower combined management and administration fees than Series A, B, C, DZ, E, E6, E8, F, F5, F6, F8, FB, FB5, G, I, J, J6, J8, SC, S6, S8, T5, T6, T8, U, U5, Advisor Series and Investor Series and any future applicable retail series securities (the Retail Series) and are or will be only available to investors who have invested at least $100,000 in one series of a Fund or $250,000 across a group of eligible investments (Eligibility Criteria).

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

Automatic Switches

16.          The Filer is starting a program effective April 13, 2017 (the Implementation Date) whereby investors holding Retail Series securities will automatically be switched into the corresponding High Net Worth Series securities if they meet the Eligibility Criteria and would benefit from lower fees, subject to certain exceptions outlined in paragraph 17 below. The Filer will automatically switch these Retail Series holders into the High Net Worth Series (the Lower Fee Switches) without the dealer or investor having to initiate the trade. If an investor holding High Net Worth Series securities ceases to meet the Eligibility Criteria, the Filer may switch the High Net Worth Series back into the applicable Retail Series securities without the dealer or investor initiating the trade (the Higher Fee Switches, and together with the Lower Fee Switches, the Automatic Switches).

17.          The following Securities will be excluded from the Automatic Switches:

(a)           Securities held in the Filer’s Portfolio Architecture Service program (the PAS Program). The majority of securities in this program are held in High Net Worth Series or Series O. Series O securities have a minimum investment of $500,000; the fees are negotiable and payable directly to the Filer outside of the Fund; and, the series is only available for purchase if the investor has entered into a Series O account agreement with the Filer. While investors in the PAS Program hold High Net Worth Series securities and/or Series O securities, some investors may also hold a portion of their assets in Retail Series. This would generally be due to the investor holding some securities that are subject to a redemption fee schedule that has not yet expired. Investors holding Retail Series securities in this program will be manually monitored by the Filer and, when they meet the Eligibility Criteria and their redemption fee schedule has expired, they will be manually moved to either Series O (if they have entered into a Series O account agreement) or High Net Worth Series. This manual switching will occur in the same frequency as the Automatic Switches.

(b)           Deferred sales charge securities purchased between 1987 and 1994 where the Filer issued limited partnership units to the public in order to finance the sales commissions paid to the dealers. These partnerships were consolidated into one partnership called Mackenzie Master Limited Partnership (MMLP) which trades on the Toronto Stock Exchange under the symbol “MKZ.UN”.

When these partnership units were issued, a subsidiary of the Filer entered into a contractual agreement with MMLP whereby the limited partners would receive payments from the Filer that consisted of: (i) any deferred sales commissions earned from clients upon the redemption of the mutual fund units where MMLP had financed the sales commission (the MMLP Linked Mutual Fund Units); and (ii) an annual distribution payment based on the total value of the outstanding MMLP Linked Mutual Fund Units. Pursuant to this contractual agreement, the Filer cannot take any action that would decrease the value of the units of MMLP. The Automatic Switches would reduce the value of the MMLP Linked Mutual Fund Units and would therefore violate the contractual agreement between the subsidiary of the Filer and MMLP.

(c)           Series C of Mackenzie Canadian Money Market Fund, because this series offers chequing privileges and the Filer does not offer chequing privileges on the High Net Worth Series. The ability to write cheques directly from their investment is a program many investors benefit from and the Filer does not want to unilaterally take this benefit away from those investors by automatically switching them into a High Net Worth Series.

(d)           Securities held in a Mackenzie Registered Disability Savings Plan (RDSPs). The Filer uses a third-party system to support the RDSPs due to the complexities of these plans. Currently the Filer has determined that there is insufficient demand to warrant the offering of RDSPs in a high net worth series security and therefore the Filer cannot automatically move these assets to a High Net Worth Series while they are part of the RDSP program.

18.          The Lower Fee Switches will generally take place when the investor purchases additional securities 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.

20.          Once an account has qualified for the High Net Worth Series, the account will continue to enjoy the benefit of lower fees associated with the applicable High Net Worth Series, even if fund performance reduces the account value below the Eligibility Criteria.

21.          Investors may access High Net Worth Series securities of a Fund by (a) initially investing in High Net Worth Series securities if they meet the Eligibility Criteria or (b) initially investing in Retail Series securities and then, upon meeting the Eligibility Criteria, having those Retail Series securities be 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 Criteria for the High Net Worth Series securities, having those High Net Worth Series securities be switched into Retail Series securities by way of a Higher Fee Switch.

23.          For the majority of investors, the trailing commissions for the High Net Worth Series and Retail Series securities are or will be identical. For a small number of investors (for example investors that are invested in legacy series through certain acquisitions or investors that hold series that were created for the purposes of effecting a fund merger) the trailing commission for the High Net Worth Series will be higher than the trailing commission on the Retail Series. While the trail may increase in certain circumstances, the total cost to the investors will always be lower as a result of the Lower Fee Switch.

24.          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 differences to the investor being that (i) the combined management and administration fees charged for the High Net Worth Series securities would be lower than those charged for Retail Series securities and (ii) as more fully described in paragraph 23 above, for a small number of investors the trailing commission would be higher for the High Net Worth Series securities than the Retail Series securities.

25.          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 differences to the investor being that the combined management and administration fees charged for the Retail Series securities would be higher than those charged for High Net Worth Series securities.

26.          Although the maximum sales charge that may be charged upon an initial investment in Retail Series securities is higher than the maximum sales charge that may be charged upon an initial investment in High Net Worth Series securities, there are no sales charges, switch fees or other fees payable by the investor upon an Automatic Switch.

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

28.          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 Securities Act (Ontario), which triggers the Pre-Sale Fund Facts Delivery Requirement.

29.          Pursuant to the Pre-Sale 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.

30.          While the Filer will initiate each trade done as part of an Automatic Switch, the Filer does not propose to deliver the Fund Facts to investors in connection with the purchase of 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 simplified 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 document for each Lower Fee Switch.

31.          The dealer will be required to deliver the Retail Series Fund Facts to investors in connection with the purchase of Retail Series securities made pursuant to a Higher Fee Switch, as required by the Pre-Sale Fund Facts Delivery Requirement.

32.          The Filer 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.

33.          The Filer will disclose (a) 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) a summary of the eligibility requirements, the management and administration fees or the management expense ratios, as applicable, and the fee discounts applicable to the High Net Worth Series in the Retail Series Fund Facts of the Funds.

34.          The Filer will communicate extensively with dealers about the Lower Fee Switches so that dealers 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.

35.          In the absence of the Exemption Sought, the Filer may not carry out the Automatic Switches without compliance with the Pre-Sale 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 of the Automatic Switches, the Filer will liaise with dealers to devise a notification plan for such investors regarding the Automatic Switches that addresses the following:

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

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

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

(d)           that they will not receive the Fund Facts when they purchase 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 Filer’s website; 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 Prospectus for the Retail Series and the High Net Worth Series that sets out the following:

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

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

(iii)          in the event investors cease to meet the Eligibility Criteria of a specified High Net Worth Series, that their investment may be switched into a series with higher management and administration fees which will not exceed the applicable Retail Series fees.

3.             each Fund Facts for the Retail Series will

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

(ii)           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

(iii)          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 Pre-sale 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 Filer’s website; 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.

6.             For High Net Worth Series investors who cease to meet the Eligibility Criteria and who will be switched into the applicable Retail Series, the Fund Facts for the applicable Retail Series will be required to be delivered in accordance with the Pre-Sale Fund Facts Delivery Requirement.

“Darren McKall”
Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission