National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief from the requirement in s.3.2(2), NI 81-101 to deliver a fund facts document to investors for subsequent purchases of mutual fund securities made pursuant to model portfolios, subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-101 Mutual Fund Prospectus Disclosure, ss. 3.2(2), 6.1.
March 30, 2017
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
BMO INVESTMENTS INC.
(the “Filer” and the “Dealer”)
The principal regulator (“Principal Regulator”) in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the “Legislation”) for an exemption (the “Exemption Sought”) from the requirement (the “Fund Facts Delivery Requirement”) in the Legislation to send or deliver the most recently filed fund facts document (the “Fund Facts”) in the manner as required under the Legislation in respect of purchases of securities of the Funds that are made in connection with Permitted Target Changes, and Rebalancing Activities executed with respect to a Model Portfolio (the “Exemption Sought”) (each of the capitalized terms as defined below).
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 by the Filer in all the provinces and territories of Canada (together with Ontario, the “Jurisdictions”) in respect of the Exemption Sought.
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation governed by the laws of Canada. The Filer is registered as a mutual fund dealer or its equivalent in the Jurisdictions and is a member of the Mutual Fund Dealers Association of Canada. The Filer is also registered as an investment fund manager in Ontario, Quebec and Newfoundland & Labrador.
2. The head office of the Filer is located in Toronto, Ontario.
3. The Filer is the manager of 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 mutual funds (the “Future Funds”) that are subject to the requirements of NI 81-102. The Existing Funds and Future Funds are referred to, collectively, as the “Funds” and, individually, as a “Fund”.
4. The Funds are, or will be, reporting issuers in one or more of the Jurisdictions. Securities of the Funds are, or will be, qualified for sale pursuant to a simplified prospectus.
5. The Products (as defined below) may be purchased only through the Dealer.
6. The Filer and the Existing Funds are not in default of securities legislation in any Jurisdiction.
7. The Filer offers two model portfolio programs to investors (“Investors”): BMO Matchmaker Investment Service and BMO Intuition Investment Service (the “Products”). The Products are not managed accounts. The BMO Intuition Investment Service is provided to RESPs and the BMO Matchmaker Investment Service is provided to non-RESPs.
8. For the Products, the Filer has currently developed five model portfolios (together with model portfolios developed for the Products in the future, the “Model Portfolios”), four of which is comprised exclusively of securities of a selection of the Funds (“Fund Selection”). and one of which (the “Savings Portfolio”) is comprised of the Funds and GICs There are Model Portfolios suitable for Investors with different tolerances for risk, from conservative, income-maintenance investing to aggressive growth investing. BMO Asset Management Inc. is the portfolio manager involved with the Model Portfolios.
9. Each Model Portfolio has its own unique allocation of equity and fixed income investments and some consist exclusively of equity investments (the “Asset Classes”).
10. Exposure to the different Asset Classes in each Model Portfolio will be achieved using a list of Funds, each with a target percentage weighting and a target range (“Target Allocation”) for determining when the Model Portfolio, other than the Savings Portfolio, will be rebalanced through a series of purchase and redemption trades (the “Rebalancing Activities”) effected by the Filer on behalf of all Investors invested in the Funds through a Model Portfolio. The Model Portfolio will only be automatically rebalanced if the percentage weighting of at least one of the Funds in the Model Portfolio varies by more than its Target Allocation. Target Allocations are reviewed during the last month of each calendar quarter.
11. Under the Products, an Investor meets with his or her financial advisor (the “Advisor”) who is a registered representative of the Dealer. The Advisor will determine the Investor’s financial circumstances, investment knowledge, investment objectives, investment time horizon and their level of risk tolerance. The Advisor will then recommend a Model Portfolio that the Advisor considers to be suitable for the Investor based on the Investor’s investment objectives, investment time horizon and risk tolerance. The Advisor reviews the proposed Model Portfolio with the Investor. Neither the Advisor nor the Investor may modify the Model Portfolios.
12. If the Investor decides to invest in a Model Portfolio, an account agreement (the “Agreement”) is entered into between the Investor and the Filer that sets out, amongst other matters, the following:
(a) Model Portfolio – The Investor authorizes the Filer to manage the Investor’s investment with a view to ensuring that the Investor’s account is managed in accordance with the agreed upon Model Portfolio based on the Asset Classes and the Target Allocation of the Asset Classes.
(b) Fund Facts – The Investor receives the Fund Facts of the current Funds in a Model Portfolio (each a “Current Fund”) at the time the Investor enters into the Agreement.
(c) Rebalancing Activities – The Investor authorizes the Filer to make purchases or sales of investments in Funds in accordance with the Rebalancing Activities with a view to ensuring that the Investor’s account is managed in accordance with the agreed upon Model Portfolio based on the Target Allocations. The Savings Portfolio will not conduct Rebalancing Activities.
(d) Target Allocation – The Investor will authorize the Filer to use its discretion to change the Target Allocation, being the relative weightings of the Funds within an Asset Class (“Permitted Target Changes”) of the Model Portfolio. The Filer will not change the target allocation of the Asset Classes.
(e) Fund Selection – The Investor authorizes the Filer to use its discretion to replace a Current Fund in a Model Portfolio either with another Current Fund or with another Fund (a “New Fund”) when another Fund is considered by the Filer to be more appropriate (“Fund Selection Changes”). The Investor receives the Fund Facts for the New Fund(s) at the time of the Fund Selection Change with an explanatory notice.
(f) Termination – The Investor can terminate the Agreement at any time without any notice or fees payable.
The Fund Facts Delivery Requirement
13. The Fund Facts Delivery Requirement requires that a dealer not acting as agent of the Investor, unless it has previously done so, deliver to the Investor the Fund Facts most recently filed before the dealer accepts an instruction from the Investor for the purchase of securities of a Fund.
14. For Fund Selection Changes resulting in one or more New Funds being added to the Model Portfolio, there will be redemptions of securities of one or more Current Funds in the Model Portfolio and purchases of securities of one or more New Funds in the Model Portfolio. Such purchases trigger the Fund Facts Delivery Requirement for the New Fund(s) in the Model Portfolio. The Dealer will provide the Investor with the most recently filed Fund Facts for the New Fund(s) at the time of the Fund Selection Changes.
15. In the absence of the Exemption Sought, the Dealer is required to deliver the most recently filed Fund Facts in accordance with the Fund Facts Delivery Requirement in respect of purchases of securities of the Funds that are made in connection with Permitted Target Changes and Rebalancing Activities executed with respect to a Model Portfolio.
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:
(a) each Investor in a Model Portfolio is sent or delivered a notice that states:
(i) subject to paragraph (b), and except as provided for in representation 14 above, the Investor will not receive the Fund Facts for the Funds in the Model Portfolio after the date of the notice, unless the Investor specifically requests it,
(ii) the Investor is entitled to receive upon request, at no cost to the Investor, the most recently filed Fund Facts for the Funds in the Model Portfolio by calling a specified toll-free number, or by sending a request by mail or e-mail to a specified address or e-mail address,
(iii) how to access the Fund Facts for the Funds in the Model Portfolio electronically,
(iv) the Investor will not have a right of withdrawal under the Legislation for Permitted Target Changes and Rebalancing Activities for the Funds in the Model Portfolio, but will continue to have a right of action if there is a misrepresentation in the prospectus or any document incorporated by reference into the prospectus, and
(v) the Investor may terminate the Agreement at any time;
(b) at least annually, the Investor will be advised in writing of how they can request the most recently filed Fund Facts;
(c) the most recently filed Fund Facts is sent or delivered to the Investor if the Investor requests it; and
(d) the Products may be purchased only through the Dealer.
Investment Funds and Structured Products Branch
Ontario Securities Commission