Securities Law & Instruments

Headnote

 

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 and 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.

 

Applicable Legislative Provisions

 

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

 

[Translation]

 

September 22, 2017

 

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

QUEBEC AND ONTARIO

(the Jurisdictions)

 

AND

 

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS

IN MULTIPLE JURISDICTIONS

 

AND

 

IN THE MATTER OF

IA CLARINGTON INVESTMENTS INC.

(the Filer)

 

AND

 

INVESTIA FINANCIAL SERVICES INC.

(the Representative Dealer)

 

DECISION

 

Background

 

The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (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 dual application):

 

(a)           the Autorité des marches financiers is the principal regulator for this application;

 

(b)           the Filer has provided notice that section 4.7 (1) of Regulation 11-102 respecting Passport System, CQLR, c. V-1.1, r.1 (Regulation 11-102) is intended to be relied upon in the provinces of Canada other than the Jurisdictions; and

 

(c)           the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

 

Interpretation

 

Terms defined in Regulation 14-101 respecting Definitions, CQLR, c. V-1.1, r.3, Regulation 11-102, Regulation 81-101 respecting Mutual Funds Prospectus Disclosure, CQLR, c.V-1.1, r. 38 (Regulation 81-101) and Regulation 81-102 respecting Investment Funds, CQLR, c. V-1.1, r.39 (Regulation 81-102) 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’s head office is in Québec City, Québec.

 

2.             The Filer is registered as an investment fund manager in Québec, Ontario and Newfoundland and Labrador, as an exempt market dealer in the Jurisdictions, and as a portfolio manager in all of the provinces of Canada.

 

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

 

4.             The Representative Dealer is an affiliate of the Filer, registered as an exempt market dealer and a mutual fund dealer in the Jurisdictions.

 

5.             Securities of the Funds are, or will be, distributed through dealers (“Dealers” or individually, a “Dealer”) who may or may not be affiliated with the Filer, including the Representative Dealer. The Representative Dealer is an affiliate of the Filer.

 

6.             Each Dealer is, or will be, registered as:

 

(a)           a dealer in the category of mutual fund dealer under the Legislation and, other than mutual fund dealers registered in Quebec, is also a member of the Mutual Fund Dealers Association of Canada; or

 

(b)           a dealer in the category of investment dealer under the Legislation and a member of the Investment Industry Regulatory Organization of Canada.

 

7.             Neither the Filer nor the Representative Dealer is in default of securities legislation in any of the jurisdiction of Canada.

 

The Funds

 

8.             Each Fund is, or will be, an open-end mutual fund trust 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.

 

10.          The securities of the Funds have been, 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 Regulation 81-101. The units and shares of the Funds are referred to herein collectively as “Securities” and individually as a “Security”.

 

11.          Certain Funds offer Series E and EF Securities that are offered for sale under a simplified prospectus, Fund Facts and annual information form dated June 20, 2017, as amended August 8, 2017. Series E and EF Securities, 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, F, L and T, and any future applicable retail series securities (the “Retail Series”). The High Net Worth Series are, or will be, only available to investors who have invested at least $100,000 in a Fund (the “Eligibility Threshold”), and where a High Net Worth Series is available for the applicable Fund.

 

12.          The Existing Funds are not in default of securities legislation in any of the jurisdictions of Canada.


Automatic Switches

 

13.          The Filer is starting a program effective on or about September 15, 2017 (the “Implementation Date”), whereby investors holding Retail Series will automatically be switched into the High Net Worth Series of the same Fund (where a High Net Worth Series is available) if they meet the Eligibility Threshold, subject to certain exceptions. The Filer will automatically switch these Retail Series investors into High Net Worth Series (the “Lower Fee Switches” or each a “Lower Fee Switch”) without the Dealer or investor having to initiate the trade. If an investor holding High Net Worth Series ceases to meet the Eligibility Threshold, the Filer may switch the investor from High Net Worth Series to the applicable Retail Series without the Dealer or investor initiating the trade (the “Higher Fee Switches” or each a “Higher Fee Switch”, and together with the Lower Fee Switches, the “Automatic Switches”).

 

14.          The Lower Fee Switches will generally take place when the investor purchases additional Securities or when positive market movement moves the investor’s investment into High Net Worth Series eligibility.

 

15.          The Higher Fee Switches may occur because of redemptions by the investor that decrease the amount of total investments with the Filer for purposes of calculating the investor’s eligibility for High Net Worth Series. However, in no circumstance will market value declines lead to Higher Fee Switches.

 

16.          Once an investor’s Retail Series Investment in a Fund meets the Eligibility Threshold, the investor will receive lower fees associated with the applicable High Net Worth Series, even if fund performance reduces the account value below the Eligibility Threshold.

 

17.          Investors may access High Net Worth Series of a Fund by (a) initially investing in High Net Worth Series if they meet the Eligibility Threshold or (b) initially investing in Retail Series and then, upon meeting the Eligibility Threshold, having those Retail Series switched to High Net Worth Series securities by way of a Lower Fee Switch.

 

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

 

19.          The trailing commissions for the High Net Worth Series and Retail Series of the Existing Funds are identical. While the trailing commission may increase in certain circumstances for Future Funds, the total cost to the investor will always be lower as a result of the Lower Fee Switch.

 

Delivery requirements

 

20.          An Automatic Switch will entail either (a) a redemption of the Retail Series, immediately followed by a purchase of the High Net Worth Series of the same Fund, or (b) a redemption of the High Net Worth Series, immediately followed by a purchase of the Retail Series of the same Fund. Each purchase of Securities done as part of an Automatic Switch will be a “distribution” under the Legislation, which triggers the Pre-Sale Fund Facts Delivery Requirement.

 

21.          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.

 

22.          In the absence of the Exemption Sought, the Filer may not carry out the Lower Fee Switches without compliance with the Pre-Sale Fund Fact Delivery Requirement.

 

Reasons supporting the Exemption Sought

 

23.          While the Filer will initiate each trade done as part of an Automatic Switch, each Dealer does not propose to deliver the Fund Facts to investors in connection with the purchase of High Net Worth Securities made pursuant to a Lower Fee Switch for the following reasons:

 

(a)           at no time will an investor 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 for which it initially subscribed;

 

(b)           subsequent to each Lower Fee Switch, an investor 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 Higher Net Worth Series Securities would be lower than those charged for the Retail Series; and

 

(c)           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.

 

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

 

25.          The Filer will deliver or will arrange for the delivery of the 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.

 

26.          Based on current Canadian tax legislation, implementation of the Automatic Switch between series of the same Fund will have no adverse tax consequences on investors.

 

27.          For Higher Fee Switches , the Fund Facts for the applicable Retail Series will be required to be delivered in accordance with the Pre-Sale Fund Fact Delivery Requirement.

 

Decision

 

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

 

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:

 

1.             the Filer will provide to the Principal Regulator on an annual basis beginning 60 days after the date upon which the Exemption Sought is first relied upon by a Dealer, either

 

(a)           a current list of all such Dealers that are relying on the Exemption Sought, or

 

(b)           an update to the list of such Dealers or confirmation that there has been no change to such list;

 

2.             prior to a Dealer relying on this Decision, the Filer provides to the Dealer a disclosure statement informing the Dealer of the implications of this Decision,.

 

3.             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 Threshold;

 

(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 Threshold 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 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.

 

4.             The Filer incorporates disclosure in the prospectus for the Retail Series and the High Net Worth Series that sets out the following:

 

(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)           in the event investors cease to meet the Eligibility Threshold 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.

 

5.             Each Fund Facts for the Retail Series:

 

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

 

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

 

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

 

6.             The Retail Series Fund Facts containing the disclosure described in paragraph 5 above will be delivered to investors at the time of first purchase of Retail Series in accordance with the Pre-sale Fund Facts Delivery Requirement.

 

7.             The Filer will send the Retail Series 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.

 

“Gilles Leclerc”

Superintendent, Securities Markets