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 in sales communications

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 15.3(2) and (4)(c), 15.6(1)(a)(i) and (d), 15.8(2)(a) and (a.1), 15.8(3)(a) and (a.1), and 19.1.

June 21, 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
CI INVESTMENTS INC.
(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of existing mutual funds that are managed by the Filer and future mutual funds that are managed by the Filer or an affiliate of the Filer (the Funds), for a decision (the Exemption Sought) under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting each Fund from the requirements in subsections 15.3(2), paragraph 15.3(4)(c), subparagraph 15.6(1)(a)(i) and (d), and paragraphs 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 each Fee Tier Class (as defined below), the performance data of the corresponding Main Class (as defined below) for the time period prior to the Commencement Date (as defined below) of the applicable Fee Tier Class.

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 subsection 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 (the Other Jurisdictions and, together with the Jurisdiction, the Jurisdictions).

Interpretation

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

Representations

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

The Filer

1.             The Filer is a corporation subsisting under the laws of Ontario with its head office located in Toronto, Ontario. The Filer is registered:

(a)           under the securities legislation of all provinces of Canada as a portfolio manager;

(b)           under the securities legislation of Ontario, Québec, and Newfoundland and Labrador as an investment fund manager;

(c)           under the securities legislation of Ontario as an exempt market dealer; and

(d)           under the Commodity Futures Act (Ontario) as a commodity trading counsel and a commodity trading manager.

2.             The Filer is not in default of securities legislation in any Jurisdiction.

3.             The Filer, or an affiliate of the Filer, is or will be the manager of each Fund.

The Funds

4.             Each Fund is, or will be, an open-end mutual fund trust created under the laws of Ontario or an open-end mutual fund that is a class of shares of a mutual fund corporation. The Funds are, or will be, offered under two main families, namely “CI Funds” and “United Funds”.

5.             Each Fund is, or will be, a reporting issuer under the laws of the Jurisdictions and is or will be subject to NI 81-102. The securities of each existing Fund are qualified for distribution pursuant to an amended and restated simplified prospectus, Fund Facts and annual information form dated March 10, 2017 or March 13, 2017, as applicable (together, the Prospectus) and as amended, that have been, or will be, prepared, filed and receipted in accordance with applicable securities legislation. The units or shares of each Fund are referred to herein collectively as Securities.

6.             In addition to the Fee Tier Classes, CI Funds are currently offered in over 30 classes of Securities, including Class A, AT5, AT8, F, FT5 and FT8 (the Class A and F Securities).

7.             In addition to the Fee Tier Classes, United Funds are currently offered in approximately ten classes of Securities, including Class E, ET8, F and FT8 (the Class E and F Securities and together with Class A and F Securities, the Main Class).

8.             Class A Securities of CI Funds and Class E Securities of United Funds are currently offered on an initial sales charge (ISC) basis or on a deferred sales charge (DSC) basis, at the option of the investor. Under the ISC purchase option, investors pay a commission to their dealer at the time they purchase Securities, while under the DSC purchase option, no commission is paid by the investor at the time of purchase, but the investor will be required to pay a redemption fee if he or she redeems within seven years from the date of purchase (under standard DSC and intermediate DSC) or three years from the date of purchase (under low load) (the DSC Periods). Class A Securities of CI Funds and Class E Securities of United Funds purchased under the ISC option are herein referred to as the Main Class ISC Securities, and Class A Securities of CI Funds and Class E Securities of United Funds purchased under the DSC option are herein referred to as the Main Class DSC Securities.

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

The Program

10.          The Filer has created a new set of classes of securities of the Funds offering tiered management and fixed administration fees (the Fee Tier Classes) corresponding to each Main Class (e.g., A1, A2, A3, A4 and A5, F1, F2, F3, F4 and F5, and E1, E2, E3, E4 and E5). Investors could qualify for lower combined management and fixed administration fees under the Filer’s preferred pricing program (the Program). Under the Program, each set of Fee Tier Classes will offer progressively lower combined management and fixed administration fees compared to their respective Main Classes, based on the value of Fund holdings in the investor’s account or, in certain instances, the group of related accounts of which the investor is a member (the Asset Levels).

11.          The Fee Tier Classes of a Fund are identical amongst themselves and to their respective Main Classes other than having different combined management and fixed administration fees.

12.          Investors may only access Fee Tier Classes of a Fund by initially investing in Class F securities or Main Class ISC Securities, or acquiring Main Class ISC Securities upon a conversion from qualifying Main Class DSC Securities of that Fund after the expiration of the DSC Period. The Filer will program its system to monitor each investor’s Asset Level on a weekly basis to determine which Fee Tier Class the investor qualifies for and automatically switch the investor’s investments to the appropriate Fee Tier Class, without the dealer or investor having to initiate the trade.

13.          Once an investor has qualified for a Fee Tier Class, he or she will continue to enjoy the benefit of lower combined management and fixed administration fees associated with such Fee Tier Class, even if fund performance reduces his or her Asset Level below such Fee Tier Class’ minimum threshold.

14.          For investors that qualify for a Fee Tier Class, the Filer will automatically switch:

(a)           Class F Securities and Main Class ISC Securities into the appropriate Fee Tier Class of the same Fund;

(b)           Securities in one of the Fee Tier Classes to the appropriate lower-fee Fee Tier Class of the same Fund based on increases in Asset Level as a result of additional purchases and/or positive fund performance; and

(c)           Securities in one of the Fee Tier Classes to the applicable higher-fee Fee Tier Class of the same Fund or back to the corresponding Main Class of the same Fund, when the investor no longer meets the applicable Asset Level threshold as a result of redemptions

(collectively, the Automatic Switches).

15.          The Filer will also automatically convert Main Class DSC Securities purchased into Main Class ISC Securities of the same Fund once investors who qualify for the Program have held their Securities for the DSC Period, after which an Automatic Switch to the appropriate Fee Tier Class of the same Fund will be implemented.

16.          Further to each Automatic Switch to the appropriate Fee Tier Class, an investor would continue to hold Securities in the same Fund(s) with the only material difference to the investor being that the combined management and fixed administration fees associated with the Fee Tier Class will be lower than those associated with the previously-held Main Class. In no event will an investor who qualifies for a Fee Tier Class pay more than the combined management and fixed administration fees associated with the Main Class, for which the investor originally subscribed or acquired.      

17.          On February 10, 2017, the Filer obtained relief from certain requirements in Form 81-101F3 to permit the Funds to prepare consolidated fund facts documents for the Main Classes that includes information relating to the eligibility requirements for the Program and Fee Tier Classes.

18.          On March 31, 2017, the Filer obtained receipts for the Prospectus of each existing Fund to qualify the Fee Tier Class Securities for distribution and to reflect the lower combined management and administration fees charged in respect of the Fee Tier Classes.

Fee Tier Class Performance Data

19.          Each of the Fee Tier Classes, being new, will not have performance data for the time period prior to the start date of the Fee Tier Class (the Commencement Date). However, as each Fee Tier Class corresponds to a Main Class of the same Fund prior to the Commencement Date, the actual performance of each Fee Tier Class, for the time period prior to the Commencement Date, is identical to the performance of the corresponding Main Class of the same Fund during that time period.

20.          The Filer proposes to:

(a)           show, in the sales communications of the Funds, as the performance data for each Fee Tier Class of the Funds, the performance data of the corresponding Main Class, for the time period prior to the Commencement Date of the applicable Fee Tier Class; and

(b)           disclose, in those sales communications:

(i)            that the performance data displayed for the period occurring prior to the Commencement Date of the applicable Fee Tier Class is that of the corresponding Main Class;

(ii)           that the corresponding Main Class has higher combined management and administration fees than the applicable Fee Tier Class; and

(iii)          if there is a material effect on performance of the applicable Fee Tier Class, how the difference in combined management and administration fees between the applicable Fee Tier Class and the corresponding Main Class would have affected the past performance shown had the Fee Tier Class existed as a separate class during that period

(collectively, the Past Performance Disclosure).

21.          The Filer submits that the past performance data of the Main Class is significant and meaningful information for existing investors that are switched to the Fee Tier Classes upon Program qualification, who, prior to the Automatic Switch, were investors in the Main Class Securities for which they originally subscribed or acquired. Such information is meaningful to prospective investors in the Program as well, as it provides a fuller picture upon which investors can make an informed investment decision.

22.          The Filer submits that investors will not be misled if the past performance data of the applicable Main Class is shown for the corresponding Fee Tier Class of the same Fund for the period prior to the Commencement Date.

23.          In the absence of the Exemption Sought, the Funds’ sales communications cannot show, as the performance data of the Fee Tier Classes, performance data of their corresponding Main Classes, where such performance data relates to the time period prior to the Commencement Dates of the Fee Tier Classes.

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, for any sales communications presenting performance data relating to a Fee Tier Class for a time period prior to the Commencement Date of such Fee Tier Class, the sales communication includes the Past Performance Disclosure.

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