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 series only sold under an initial sales charge pursuant to automatic switches from certain series only sold under deferred sales charge options – Mutual fund securities of series that are only sold under deferred sales charge options will, after a minimum holding period, be automatically switched to the initial sales charge series – Upon the automatic switch, investors will benefit from lower management fees as well as from possible tiered management fee reductions – Automatic switches between series of a fund triggering a distribution of securities and the requirement to deliver a fund facts document – Relief granted from the requirement to deliver a fund facts document upon the automatic switch subject to compliance with certain notification, prospectus and fund facts document disclosure requirements.

 

Applicable Legislative Provisions

 

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

 

December 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

FIDELITY INVESTMENTS CANADA ULC

(the Filer)

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application (the 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 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 the requirement in subsection 3.2.01(1) of National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) for a dealer to deliver the most recently filed fund facts documents (Fund Facts) to a purchaser before the dealer accepts an instruction from the purchaser for the purchase of a security of a mutual fund (the Fund Facts Delivery Requirement) in respect of purchases of Series B, Series S5 and Series S8 securities of the Funds that are made pursuant to the Automatic Conversions (as defined below) (the Requested Relief).

 

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

 

(a)           the Ontario Securities Commission is the principal regulator for the 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 of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon Territory and Nunavut (together with Ontario, the 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 amalgamated under the laws of Alberta as an unlimited liability company 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 the investment fund manager and trustee of the Trust Funds and the investment fund manager of the Class Funds. The Filer may, in the future, establish and manage additional mutual funds.

 

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

 

5.             In a previous decision dated December 23, 2004 (the 2004 Decision), the Filer obtained exemptive relief from the dealer registration and prospectus requirements set out in the Legislation in connection with the automatic conversions (the Automatic Conversions) of securities of the Funds sold on a deferred sales charge (DSC) basis to securities sold on an initial sales charge (ISC) basis to permit investors to benefit from lower management fees and operating expenses once their DSC securities had matured. The 2004 Decision expired upon the coming into force of the Point of Sale Stage 2 amendments and the Fund Facts have not been delivered in respect of the Automatic Conversions from DSC to ISC securities due to the Filer relying on the rationale underlying the exemptive relief granted in the 2004 Decision. Accordingly, the Filer requires the Requested Relief in order to continue the Automatic Conversions without compliance with the Fund Facts Delivery Requirement.

 

6.             On October 28, 2015 and May 30, 2016, the Filer obtained exemptive relief from the Fund Facts Delivery Requirement in respect of purchases of securities of the Funds in a set of tiered series with progressively lower combined management and administration fees, made pursuant to automatic conversions. On February 10, 2017, the Filer obtained exemptive relief from certain requirements in NI 81-102, relating to the inclusion of performance data of the original series in the sales communications of the tiered series and from NI 81-101 and Form 81-101F3 Contents of Fund Facts Documents (Form 81-101F3) to permit the Funds to prepare a consolidated Fund Facts for each set of tiered series.

 

7.             Based on the Filer’s limited review of the relevant data, the Filer anticipates that a small number of those that buy securities on a DSC or low load basis and are automatically switched to an ISC account will meet the threshold for tiered pricing.

 

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 in some or all of the provinces and territories of Canada and subject to National Instrument 81-102 Investment Funds. 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.

 

10.          The Trust Funds are open-end mutual fund trusts established under the laws of the Province of Ontario under an Amended and Restated Master Declaration of Trust dated October 28, 2016, as amended.


11.          The Class Funds are classes of shares of Fidelity Capital Structure Corp., which was incorporated under the laws of the Province of Alberta on August 30, 2001.

 

12.          Units of the Trust Funds are currently offered under simplified prospectuses, Fund Facts and annual information forms dated September 29, 2016, as 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 September 29, 2016, as amended and March 28, 2017, as may be amended.

 

13.          The Trust Funds and Class Funds are not in default of securities legislation in any of the Jurisdictions.

 

14.          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 securities.

 

15.          Securities of the Trust Funds and Class Funds may be purchased through the Filer, as representative dealer, and may also be purchased from other dealers (Dealers) that may or may not be affiliated with the Filer.

 

16.          Each Dealer is, or will be, registered as a dealer in one or more of the Jurisdictions.

 

Automatic Conversions

 

17.          Prior to January 10, 2005 (the Implementation Date), Series A and Series T securities of the Funds were offered on an ISC and DSC basis. Under the ISC purchase option, investors paid a commission to their dealer at the time they purchased securities of the Funds. Under the DSC purchase option, no commission was paid by the investors at the time of purchase, but investors were required to pay a redemption fee if they redeemed within six years from the date of the purchase.

 

18.          On the Implementation Date, the Filer reduced the management fees and operating expenses charged on securities sold on an ISC basis (which would be lower than those charged on securities sold on a DSC basis), and re-designated DSC securities to ISC securities after investors held them for a period of seven years, so that investors in the DSC securities would also receive the benefit of the lower fees and expenses of the ISC securities (the Changes).

 

19.          As a result of the 2004 Decision and for purposes of implementing the Changes, effective from the Implementation Date, the following steps were taken by the Filer:

 

(i)            Series A was split into Series A (DSC) and Series B (ISC) securities for each of the Funds;

 

(ii)           Series T was split into Series T (DSC) and Series S (ISC) securities for each of the Funds that offer Series T;

 

(iii)          the new Series B and Series S securities were only available on an ISC basis, with lower management fees and operating expenses than Series A and Series T;

 

(iv)          Series A and Series T securities were only available on a DSC and low load (LL) basis;

 

(v)           on the Implementation Date, the securities of investors who owned Series A and Series T securities on an ISC basis were re designated as Series B and Series S securities, respectively, of the same Fund; and

 

(vi)          Series A and Series T securities purchased on a DSC or LL basis prior to or after the Implementation Date were automatically converted into Series B and Series S securities, respectively, of the same Fund once investors held their securities for the minimum period as specified in the simplified prospectus.

 

20.          In advance of the Implementation Date, the Filer communicated the details of the Changes in client account statements.

 

21.          For Series A, Series T5 or Series T8 securities held or purchased under the deferred sales option, the Automatic Conversions occur after investors have held their securities for a period of seven years, for Series A, Series T5 or Series T8 securities held or purchased on a low load deferred sales option, the Automatic Conversions occur after investors have held their securities for a period of three years, and for Series A, Series T5 or Series T8 securities held or purchased under a low load 2 deferred sales option, the Automatic Conversions occur after investors have held their securities for a period of four years (each, a Minimum Period). The Filer proposes to continue the Automatic Conversions of Series A, Series T5 or Series T8 securities to Series B, Series S5 or Series S8, respectively, after the expiration of the Minimum Period.

 

22.          The only differences (the Series Differences) between Series A, Series B, Series T5, Series S5, Series T8 and Series S8 securities of the same Fund, in addition to the feature that allows Automatic Conversions, are that:


(i)            Series B, Series S5 and Series S8 securities are available for purchase and are sold on an ISC basis, while Series A, Series T5 and Series T8 securities are available for purchase and are sold on a DSC basis;

 

(ii)           the management fees for Series B, Series S5 and Series S8 are lower than the respective management fees for Series A, Series T5 and Series T8 securities;

 

(iii)          investors in Series B and Series S5 securities are able to potentially benefit from tiered management and administration fee reductions; and

 

(iv)          upon the Automatic Conversion, the investor’s representative will receive a trailing commission that is higher than the rates disclosed for Series A, Series T5 and Series T8, but the overall management fee applicable to the investment will decrease.

 

23.          The Automatic Conversions have no adverse tax consequences on investors under current Canadian tax legislation.

 

24.          Series A, Series T5 or Series T8 securities will automatically convert into Series B, Series S5 or Series S8 securities, respectively, after the expiration of the Minimum Period.

 

25.          Each Automatic Conversion entails a redemption of Series A, Series T5 or Series T8 securities, immediately followed by a purchase of Series B, Series S5 or Series S8 securities, respectively. Each purchase of securities done as part of the Automatic Conversion is a “distribution” under the Legislation that triggers the Fund Facts Delivery Requirement.

 

26.          While the Filer initiates each trade done as part of the Automatic Conversions, the Filer does not currently deliver the Fund Facts to investors in connection with the purchase of Series B, Series S5 or Series S8 securities made pursuant to Automatic Conversions, since such investors would have received a Fund Facts disclosing that, after the Series A, Series T5 or Series T8 securities were held for the applicable Minimum Period, such securities would be switched to Series B, Series S5 or Series S8 securities of the same Fund.

 

27.          The investment of investors of Series B, Series S5 or Series S8 securities will be in securities of the same Fund with the same underlying pool of assets, the same investment objectives and investment strategies and the same valuation procedures and will be otherwise identical, except for the feature that allows Automatic Conversions and the Series Differences.

 

28.          As each investor who has received a Series A, Series T5 or Series T8 Fund Facts will be fully informed of the Series Differences and the Automatic Conversions, there would be no benefit for such investor to receive a Fund Facts in connection with the purchase of Series B, Series S5 or Series S8 securities made pursuant to an Automatic Conversion.

 

29.          The simplified prospectus and Series A, Series T5 and Series T8 Fund Facts discloses, or will disclose:

 

(i)            that the Series A, Series T5 and Series T8 securities, as applicable, will be automatically switched following the expiry of the applicable Minimum Period on the applicable switch date, to Series B, Series S5 and Series S8 securities (which is an initial sales change series), as the case may be, of the same Fund;

 

(ii)           that such Series B, Series S5 or Series S8 securities will have a lower management fee than the corresponding Series A, Series T5 or Series T8 securities, will not be subject to a deferred/low load sales charge with a redemption fee, and in the case of Series B and Series S5, may qualify for tiered management fee reductions based on the level of assets invested;

 

(iii)          the rate of the management fee for Series B, Series S5 or Series S8 securities, as applicable; and

 

(iv)          the trailing commission rates payable by the Filer in respect of the Series B, Series S5 or Series S8 securities, upon the Automatic Conversion.

 

30.          In the absence of the Requested Relief, the Automatic Conversions are not capable of being implemented without compliance with the 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 Requested Relief is granted provided that:

 

1.             For investors who purchase Series A, Series T5 and Series T8 securities:


a.             each Fund Facts for Series A, Series T5 and Series T8, filed on the earlier of the next renewal of or amendment filing, and thereafter, each subsequent renewal of, or amendment filing for, each Fund shall disclose:

 

i.              that the Series A, Series T5 and Series T8 securities, as applicable, will be automatically switched following the expiry of the applicable Minimum Period on the applicable switch date, to Series B, Series S5 and Series S8 securities (which is an initial sales charge series), as the case may be, of the same Fund;

 

ii.             that such Series B, Series S5 or Series S8 securities will have a lower management fee than the corresponding Series A, Series T5 or Series T8 securities, will not be subject to a deferred/low load sales charge with a redemption fee, and in the case of Series B and Series S5 securities, may qualify for tiered management fee reductions based on the level of assets invested;

 

iii.            the rate of the management fee for Series B, Series S5 or Series S8 securities, as applicable; and

 

iv.            the trailing commission rates payable by the Filer in respect of the Series B, Series S5 or Series S8 securities upon the Automatic Conversion (collectively with items (i), (ii) and (iii), the Series A, Series T5 and Series T8 Disclosure);

 

b.             the Fund Facts for Series A, Series T5 and Series T8 securities, as applicable, containing the Series A, Series T5 and Series T8 Disclosure is delivered to prospective Series A, Series T5 and Series T8 investors before a dealer accepts an instruction from such investors to purchase Series A, Series T5 and Series T8 securities in accordance with the Fund Facts Delivery Requirement;

 

c.             the Filer incorporates the Series A, Series T5 and Series T8 Disclosure in the simplified prospectus of the Funds;

 

2.             for investors in Series A, Series T5 and Series T8 securities, the Filer sends to such investors an annual reminder notice advising that they will not receive the Fund Facts upon an Automatic Conversion, 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 or email 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 the right to withdraw from an agreement of purchase and sale in respect of a purchase of Series B, Series S5 and Series S8 securities made pursuant to an Automatic Conversion, 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 Series B, Series S5 and Series S8 securities, as applicable, contains a misrepresentation, whether or not they request the Fund Facts;

 

3.             the Filer provides to the principal regulator beginning 60 days after the date upon which the Requested Relief is first relied upon by a Dealer, and thereafter, annually within 60 days of the calendar year end, either:

 

a.             a current list of all such Dealers that are relying on the Requested Relief, or

 

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

 

4.             prior to a Dealer relying on the Requested Relief, the Filer provides to the Dealer a disclosure statement informing the Dealer of the implications of this decision.

 

“Vera Nunes”

Manager

Investment Funds and Structured Products Branch

Ontario Securities Commission