Securities Law & Instruments

 

Headnote

National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Investment fund manager offering multiple sets of mutual fund series with tiered management and administration fees. – Investment fund manager administers automatic switching program through which investors are automatically switched into the appropriate tiered series when the investor’s account value satisfies or ceases to meet the eligibility requirements of a particular tiered series. – Relief granted to allow new tiered series in each series set to show past performance of the original series of that series set in the management report of fund performance.

Applicable Legislative Provisions

National Instrument 81-106 Investment Fund Continuous Disclosure, sections 4.4 of and 17.1.

February 10, 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
FIDELITY INVESTMENTS CANADA ULC
(the Filer)

AND

IN THE MATTER OF
THE FUNDS
(as defined below)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of each existing mutual fund established as a mutual fund trust (each, a Trust Fund and collectively, the Trust Funds) and each existing class fund established as a class of shares of a mutual fund corporation (each, a Class Fund and collectively, the Class Funds) and any mutual fund that the Filer may establish in the future (together with the Trust Funds and the Class Funds, the Funds and each, a Fund), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Funds from:

(a)           the requirements in subsections 15.3(2) and (4)(c), 15.6(1)(a)(i) and (d), 15.8(2)(a) and (a.1) and 15.8(3)(a) and (a.1) of National Instrument 81-102 Investment Funds (NI 81-102), to permit the Funds to show in sales communications, as the performance data for P Series (as defined below) and E Series (as defined below) securities, the performance data of the corresponding F Series (as defined below) and ISC Series (as defined below) securities for the time period prior to the launch date of the applicable P Series or E Series securities (the Sales Communication Relief); and

(b)           the requirement in section 2.1 of National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) to prepare a fund facts in the form of Form 81-101F3 Contents of Fund Facts Document (Form 81-101F3), to permit the Funds to deviate from certain requirements in Form 81-101F3 in order to prepare a Consolidated Fund Facts Document (as defined below) that includes the Program Disclosure (as defined below) (the Consolidated Fund Facts Relief, and together with the Sales Communication Relief, 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 each of the other provinces and territories of Canada (collectively, the Passport Jurisdictions).

Interpretation

Terms defined in 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 duly amalgamated and validly existing under the laws of the Province of Alberta with its head office in Toronto, Ontario.

2.             The Filer is registered in Ontario, Québec and Newfoundland and Labrador in the category of investment fund manager.  The Filer is also registered as a portfolio manager and mutual fund dealer in each of the provinces and territories of Canada and is registered under the Commodity Futures Act (Ontario) in the category of commodity trading manager. 

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

4.             The Filer is, or will be, the manager of the Funds.

The Funds

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

6.             Each Fund is, or will be, a reporting issuer under the laws of some or all of the provinces and territories of Canada and subject to NI 81-102. The securities of the Funds 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 NI 81-101.

7.             Units of the Trust Funds are currently offered under simplified prospectuses, fund facts and annual information forms dated September 29, 2016, as may be amended, and October 28. 2016, as amended, and shares of the Class Funds are currently offered under simplified prospectuses, fund facts and annual information forms dated March 28, 2016, as amended, September 29, 2016, as may be amended, and January 3, 2017, as may be amended.

8.             The Funds currently offer up to 35 series of securities, as applicable – series A, B, E1, E2, E3, E4, E5, F, P1, P2, P3, P4, P5, O, T5, T8, S5, E1T5, E2T5, E3T5, E4T5, E5T5, S8, F5, P1T5, P2T5, P3T5, P4T5, P5T5 F8, I, I5, I8, C and D.

9.             Series F, F5 and F8 (collectively, F Series) securities of the Funds have lower fees than series A, B, I, T5, T8, I5, I8, S5, S8, C and D securities and are usually purchased by investors who have fee-based accounts with dealers who sign an eligibility agreement with the Filer. Instead of paying sales charges, investors pay their dealer a fee for investment advice and other services they provide. In addition, the Filer does not pay any commission or trailing commission to dealers who sell F Series securities. Series F5 and Series F8 securities have the same attributes as Series F securities, except that Series F5 and Series F8 are designed to provide tax efficient cash flow to investors by making monthly distributions of an amount comprised of a return of capital and/or net income. The only difference between Series F5 and Series F8 is in the value of the monthly distribution amounts.

10.          Series B, S5 and S8 (collectively, ISC Series) securities of the Funds are purchased by investors on an initial sales charge basis. ISC Series securities of certain of the Funds may also be acquired upon the automatic switch of Series A, T5 or T8 securities after the expiration of the deferred sales charge period on those securities. Trailing commissions are paid to dealers who sell ISC Series securities. Series S5 and Series S8 securities have the same attributes as Series B securities, except that Series S5 and Series S8 are designed to provide tax efficient cash flow to investors by making monthly distributions of an amount comprised of a return of capital and/or net income. The only difference between Series S5 and Series S8 is in the value of the monthly distribution amounts.

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

The Fidelity Preferred Program

12.          On October 29, 2015, the Filer established two sets of series of securities which offer tiered management and administration fees for Series F and Series F5 holders. The first set, which corresponds to Series F, includes Series P1, P2, P3, P4 and P5, and may also include additional similar tiered series that the Filer may establish in the future. The second set, which corresponds to Series F5, includes Series P1T5, P2T5, P3T5, P4T5 and P5T5, and may also include additional similar tiered series that the Filer may establish in the future. The Filer may also, in the future, establish a set of series of securities which offers tiered management and administration fees for Series F8 holders. The tiered series described in this paragraph are collectively referred to as P Series.

13.          On December 15, 2015, the Filer established two sets of series of securities which offer tiered management and administration fees for Series B and Series S5 holders. The first set, which corresponds with Series B, includes Series E1, E2, E3, E4 and E5, and may also include additional similar tiered series that the Filer may establish in the future. The second set, which corresponds with Series S5, includes Series E1T5, E2T5, E3T5, E4T5 and E5T5, and may include additional similar series that the Filer may establish in the future. The Filer may also, in the future, establish a set of series of securities which offers tiered management and administration fees for Series S8 holders. The tiered series described in this paragraph are collectively referred to as E Series, and together with P Series, as the Tiered Sets.

14.          Each set of series comprising the Tiered Sets offers progressively lower combined management and administration fees than the corresponding F Series or ISC Series based on the size of the holdings of securities of the Funds in the investor’s account or, in certain instances, the group of related accounts of which the investor is a member (the Account Value). The Filer automatically switches these F Series or ISC Series holders into, among and out of the various corresponding P Series or E Series in the corresponding Tiered Set based on the Account Value without the dealer or investor having to initiate the trade (the FPP Automatic Switching Program).

15.          Once an account has qualified for one of the Tiered Series, the account continues to enjoy the benefits of lower management and administration fees associated with that particular series even if fund performance causes the Account Value to fall below the minimum threshold for that Tiered Series.

16.          Investors may only access any of the P Series of a Fund by initially purchasing the corresponding F Series securities of a Fund.  Investors may only access any of the E Series of a Fund by initially purchasing the corresponding ISC Series securities of a Fund or by acquiring the corresponding ISC Series securities of a Fund upon the automatic switch of Series A, T5 or T8 after the expiration of their corresponding deferred sales charge period.  Once an investor holds a particular Tiered Series of a Fund, the investor can then directly buy the applicable Tiered Series of the same Fund or any other Fund. 

17.          For holders of F Series and ISC Series who have qualified for P Series securities or E Series securities, as the case may be, the Filer automatically switches:

(a)           F Series or ISC Series securities into the appropriate P Series or E Series securities of the same Fund;

(b)           once in the P Series or E Series, the holder’s securities among the appropriate series in the applicable Tiered Set of the same Fund based on increases in the Account Value resulting from additional purchases and/or positive fund performance; and

(c)           the holder’s securities to the applicable higher cost P Series or E Series, or from the P Series or E Series back into the corresponding F Series or ISC Series of the same Fund, where the holder’s Account Value falls below the minimum threshold as a result of redemptions.

(each an Automatic Switch).

18.          Following an Automatic Switch, an investor’s account(s) continues to hold securities in the same Fund(s) with the only material difference to the investor being that the combined management and administration fees of each Tiered Series in a Tiered Set are progressively lower than those charged for the corresponding F Series or ISC Series, as the case may be. In no event will: (a) an account that qualifies for the P Series ever pay more than the F Series management and administration fees for which it initially subscribed; or (b) an account that qualifies for the E Series ever pay more than the ISC Series management and administration fees for which it initially subscribed or acquired upon an automatic switch of certain securities after the expiration of a deferred sales charge period. 

19.          The Automatic Switches have no adverse tax consequences to investors under current Canadian tax legislation.

20.          Each Automatic Switch entails a redemption of F Series, P Series, ISC Series or E Series securities, as the case may be, immediately followed by a purchase of the applicable F Series, P Series, ISC Series or E Series, as the case may be.  Each purchase of securities done as part of the Automatic Switch is a “distribution” under the Legislation that triggers the requirement to deliver a Fund Facts document.

21.          On October 28, 2015, the Filer obtained relief from the requirement in the Legislation for a dealer to deliver or send the most recently filed Fund Facts at the same time and in the same manner as otherwise required for the prospectus in respect of purchases of mutual fund securities of the Tiered Series that are made pursuant to the Automatic Switches.

22.          On May 30, 2016, the Filer obtained relief from the requirement in the Legislation for a dealer to deliver or send the most recently filed Fund Facts before the dealer accepts an instruction from the purchaser for the purchase of the security in respect of purchases of mutual fund securities of the Tiered Series that are made pursuant to Automatic Switches (the Pre-Sale Fund Facts Delivery Relief).

E Series and P Series Performance Data

23.          The Funds cannot currently disclose any past performance data for the P Series and E Series for the time period prior to their date of creation. However, as (a) each P Series security corresponds to an F Series security of the same Fund prior to the date that the applicable P Series was created, and (b) each E Series security corresponds to an ISC Series security of the same Fund prior to the date that the applicable E Series was created, the actual past performance of each of the P Series or E Series, for the time period prior to the date of the creation of the applicable P Series or E Series of that Fund is identical to the past performance of the corresponding F Series and ISC Series of the same Fund in that time period.

24.          The Filer proposes to:

(a)           show, in the sales communications of the Funds, as the performance data of each of the P Series or E Series of the Funds, the performance data of the corresponding F Series or ISC Series, as the case may be, for the time period prior to the launch date of the applicable P Series or E Series; and

(b)           disclose, in those sales communications:

(i)            that the performance data displayed for the period occurring prior to the launch date of the applicable P Series or E Series, as the case may be, is that of the corresponding F Series or ISC Series, as the case may be;

(ii)           that the applicable F Series or ISC Series, as the case may be, has higher combined management and administration fees than the applicable P Series or E Series; and

(iii)          f there is a material effect on performance of the applicable P Series or E Series, how the difference in combined management and administration fees between the applicable F Series or ISC Series and the applicable P Series or E Series would have affected the performance had the P Series or E Series been a separate series during that time period

                (collectively, the Past Performance Disclosure).

25.          The Filer submits that the performance data of the F Series and ISC Series securities is significant and meaningful information for existing investors in the FPP Automatic Switching Program who hold P Series or E Series securities, as the case may be, who, prior to the launch date of the P Series or E Series, were investors in the corresponding F Series or ISC Series, as well as prospective investors in the FPP Automatic Switching Program.

26.          The Filer submits that investors will not be misled if the performance data of the applicable F Series or ISC series is shown for the corresponding P Series or E Series, as the case may be, of the same Fund for the time period prior to the launch date of the applicable P Series or E Series, as the case may be.

27.          The Filer has also applied for exemptive relief from certain provisions of National Instrument 81-106 Investment Fund Continuous Disclosure to enable the Funds to show, in their annual and interim management reports of fund performance (the MRFPs) of the P Series and E Series, the past performance of the corresponding F Series or ISC Series, as the case may be, where such past performance relates to the time period prior to the launch date of the applicable P Series or E Series, as the case may be.

28.          In absence of the Sales Communications Relief, the Funds' sales communications cannot show, as the performance data of the P Series and E Series, performance data of their corresponding F Series or ISC Series, as the case may be, where such performance data relates to the time period prior to the launch date of the applicable P Series or E Series, as the case may be.

Consolidated Fund Facts Documents

29.          The Filer proposes to prepare, for each of their Funds, a single, consolidated Fund Facts document (a Consolidated Fund Facts Document) for each Tiered Set and its corresponding F Series or ISC Series securities (each, a Program Set).

30.          Each Consolidated Fund Facts Document will include the information required by Form 81-101F3 for each of the series in the applicable Program Set, except for the past performance section, which will only disclose past performance data of the applicable F Series or ISC Series, as the case may be, as further described below.

31.          Specifically, for each Consolidated Fund Facts Document, the Filer proposes to deviate from:

(a)           General Instructions (10) and (16) of Form 81-101F3, to permit the Consolidated Fund Facts Document to be the Fund Facts document for, and disclose information relating to, each of the series in the applicable Program Set, except as further described below;

(b)           Item 1(c.1) of Part I of Form 81-101F3, to permit the Consolidated Fund Facts Document to name each of the series in the applicable Program Set in the heading;

(c)           Item 1(e) of Part I of Form 81-101F3, to permit the Consolidated Fund Facts Document to name each of the series in the applicable Program Set in the introduction to the Fund Facts document;

(d)           Instruction (0.1) of Item 2 of Part I of Form 81-101F3, to permit the Consolidated Fund Facts Document to identify the fund codes for each of the series in the applicable Program Set;

(e)           Instruction (1) of Item 2 of Part I of Form 81-101F3, to permit the Consolidated Fund Facts Document to list the date that each of the series in the applicable Program Set became available to the public;

(f)            Instruction (3) of Item 2 of Part I of Form 81-101F3, to permit the Consolidated Fund Facts Document to disclose the management expense ratio (the MER) for only the applicable F Series or ISC Series, as the case may be;

(g)           Instruction (6) of Item 2 of Part I of Form 81-101F3, to permit the Consolidated Fund Facts Document to specify the minimum investment amount for only the applicable F Series or ISC Series, as the case may be;

(h)           General Instruction (8) of Form 81-101F3, to permit the Consolidated Fund Facts Document to include a footnote under the “Quick Facts” table mandated by Item 2 of Part I of Form 81-101F3 that:

(i)            states that the Fund Facts document pertains to all of the series in the applicable Program Set;

(ii)           cross-references to the “How Much Does It Cost?” section of the Fund Facts document for further details about the FPP Automatic Switching Program;

(iii)          cross-references to the fund expenses table under the “Fund expenses” subsection of the Fund Facts document for further details about the MER for all the other series in the applicable Program Set; and

(iv)          cross-references to the fee decrease table under the “Fund expenses” subsection of the Fund Facts document for further details about the minimum investment amount for all the other series in the applicable Program Set;

(i)            Item 5(1) of Part I of Form 81-101F3, to permit the Consolidated Fund Facts Document to:

(i)            reference only the applicable F Series or ISC Series, as the case may be, in the introduction to the past performance data; and

(ii)           include, as a part of the introduction, disclosure explaining that the performance for each of the applicable Tiered Series in the Program Set would be similar to the performance of the F Series or ISC Series, as the case may be, but would vary as a result of the difference in fees compared to the F Series or ISC Series, as the case may be, as set out in the fee decrease table under the “Fund expenses” subsection of the Fund Facts document;

(j)            Instruction (4) of Item 5 of Part I of Form 81-101F3, to permit a Consolidated Funds Facts Document to show the required performance data under the sub-headings “Year-by-year returns,” “Best and worst 3-month returns,” and “Average return” relating only to the applicable F Series or ISC Series, as the case may be;

(k)           Item 1.1 of Part II of Form 81-101F3, to permit a Consolidated Fund Facts Document to:

(i)            refer to all of the series in the applicable Program Set in the introductory statement under the heading “How much does it cost?”; and

(ii)           include, as a part of the introductory statement, a summary of the FPP Automatic Switching Program, consisting of:

a.             a statement explaining that the FPP Automatic Switching Program offers separate series of units that charge progressively lower combined management and administration fees than the F Series or ISC Series units, as applicable;

b.             a statement explaining the scenarios in which the Automatic Switches will be made, including Automatic Switches made due to the investor no longer meeting the eligibility requirements for a particular Tiered Series;

c.             a statement explaining that an investor will not pay higher combined management and administration fees than those charged to the F Series or ISC Series, as applicable, as a result of the Automatic Switches;

d.             a cross-reference to the fee decrease table under the “Fund expenses” subsection of the Fund Facts document;

e.             a cross-reference to specific sections of the simplified prospectus of the Funds for more details about the FPP Automatic Switching Program; and

f.              a statement disclosing that investors should speak to their representative for more details about the FPP Automatic Switching Program;

(l)            Instruction (1) of Item 1 of Part II of Form 81-101F3, to permit a Consolidated Fund Facts Document to refer to all of the series in the applicable Program Set in the introduction under the sub-heading “Sales charges”, if applicable;

(m)          Item 1.3(2) of Part II of Form 81-101F3, to permit a Consolidated Fund Facts Document, where the applicable Fund is not new, to disclose the MER and fund expenses of each of the series in the applicable Program Set, and where certain information is not available for a particular series, to state “not available” in the corresponding part of the table;

(n)           Item 1.3(3) of Part II of Form 81-101F3, to permit a Consolidated Fund Facts Document, where the applicable Fund is not new, to include, before the statement above the fund expenses table, disclosure explaining that the applicable F Series or ISC Series, as applicable, has the highest combined management and administration fees among all of the series in the applicable Program Set;

(o)           Item 1.3(3) of Part II of Form 81-101F3, to permit a Consolidated Fund Facts Document, where the applicable Fund is not new but where some of the series in the applicable Program Set are new, to disclose that the fund expenses information below is not available for certain series because they are new, as indicated below;

(p)           Item 1.3(4) of Part II of Form 81-101F3, to permit a Consolidated Fund Facts Document, where the applicable Fund is new, to:

(i)            include disclosure explaining that the applicable F Series or ISC Series, as the case may be, has the highest combined management and administration fees among all of the series in the applicable Program Set;

(ii)           disclose the rates of the management fee and administration fee of only the F Series or ISC Series, as applicable; and

(iii)          disclose that the operating expenses and trading costs are not yet available for only the F Series or ISC Series, as applicable; and

(q)           General Instruction (8) of Form 81-101F3, to permit a Consolidated Fund Facts Document to include, at the end of the disclosure under the sub-heading “Fund expenses”:

(i)            a table that discloses: 

a.             the name of, and investment amounts associated with, each of the series in the applicable Program Set; and

b.             the combined management and administration fee decrease of each of the Tiered Series in the applicable Program Set from the combined management and administration fee of the applicable F Series or ISC Series, as the case may be, shown in percentage terms; and

(ii)           an introduction to the table stating that the table below lists out the combined management and administration fee decrease of each of the Tiered Series in the applicable Program Set from the combined management and administration fee of the applicable F Series or ISC Series, as the case may be

(collectively, the Program Disclosure).

32.          The Filer submits that, given that each of the F Series, ISC Series and Tiered Series belong to the FPP Automatic Switching Program, a Consolidated Fund Facts Document containing the Program Disclosure will provide investors in the FPP Automatic Switching Program with disclosure about the FPP Automatic Switching Program and each of the series in the applicable Program Set in a single Fund Facts document, in contrast to multiple Fund Facts documents for each of the series in the applicable Program Set.

33.          Since the Fund Facts documents for each of the Tiered Series are not currently delivered in connection with an Automatic Switch pursuant to the Pre-Sale Fund Facts Delivery Relief, the Filer submits that there is little benefit to preparing separate Fund Facts documents for each of the series in the applicable Program Set. The Filer submits that the Consolidated Fund Facts Document containing the Program Disclosure, which would be delivered to investors when they first enter the FPP Automatic Switching Program (through the purchase of F Series or ISC Series securities, as the case may be), provides investors with better disclosure than if investors only received the Fund Facts document pertaining to the F Series or ISC Series, as the case may be, that they initially purchased upon their entry into the FPP Automatic Switching Program, which would not contain information relating to the Tiered Series.

34.          In the absence of the Consolidated Fund Facts Relief, the Filer would be required to prepare separate Fund Facts documents for each of the F Series, ISC Series and Tiered Series. The Filer submits that this results in administrative inefficiencies and a lack of comparability for investors in the FPP Automatic Switching Program. If the Filer could produce one Consolidated Fund Facts Document for each Program Set, investors would benefit from having all the relevant information concerning the FPP Automatic Switching Program in one place.

35.          The Filer submits that the Program Disclosure, including upon the launch of additional tiered series within each Tiered Set, will not detract from the readability and comprehension of the Consolidated Fund Facts.

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 Sales Communication Relief is granted provided that, for any sales communications presenting performance data relating to Series P or E Series for a time period prior to the launch date of that P Series or E Series, the sales communications include the Past Performance Disclosure.

The decision of the principal regulator under the Legislation is that the Consolidated Fund Facts Relief is granted provided that each Consolidated Fund Facts Document contains the Program Disclosure.

“Vera Nunes”
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission