Mackenzie Financial Corporation and Quadrus Investment Services Ltd.

Headnote

National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Revocation of prior relief – Relief granted from the requirement in s. 3.2(2) of NI 81-101 to deliver a fund facts document to investors for purchases of mutual fund securities of certain series under automatic switching programs – High net worth series offering lower combined management and administration fees than the retail series, as applicable, based on the size of a fund investment – Investment fund manager initiating automatic switches between series on behalf of investors when their investments satisfy or cease to meet eligibility requirements of High net worth series – Automatic switches between series of a fund triggering a distribution of securities which requires delivery of a fund facts document – Relief granted from the requirement to deliver a fund facts document to investors for purchases of series securities made under automatic switching programs subject to compliance with certain notification and disclosure requirements in the simplified prospectus and fund facts document – Relief granted from the requirement to prepare a fund facts document for each series of securities of a mutual fund in accordance with the form requirements in Form 81-101F3 and the requirement that the fund facts document contain only information that is specifically required or permitted to be in Form 81-101F3 so that fund facts document delivered to investors in the automatic switching program will provide disclosure relating to the automatic switching program and both series, subject to certain conditions – National Instrument 81-101 Mutual Fund Prospectus Disclosure.

Applicable Legislative Provisions

National Instrument 81-101 Mutual Fund Prospectus Disclosure, sections 2.1, 3.2.01(1) and 6.1.

June 28, 2019

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
MACKENZIE FINANCIAL CORPORATION
(Mackenzie)

AND

QUADRUS INVESTMENT SERVICES LTD.
(the Principal Distributor, and together with Mackenzie, the Filers)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from Mackenzie on behalf of the Funds (as defined below) and the Principal Distributor for a decision under the securities legislation of the Jurisdiction (the Legislation):

(a)           revoking the decision granted by the principal regulator (the Revocation) on June 28, 2018 (the Prior Decision);

(b)           exempting the Principal Distributor from the requirement in subsection 3.2.01(1) of National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) to deliver or send the most recently filed fund facts document (a Fund Facts) in the manner as required under the Legislation (the Fund Facts Delivery Requirement) in respect of the purchases of High Net Worth Series (as defined below) or Retail Series (as defined below) securities of the Quadrus Funds that are made pursuant to Switches (as defined below) (the Fund Facts Delivery Relief); and

(c)           exempting the Funds from the requirement in section 2.1 of 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 Switching Disclosure (as defined below) (the Consolidated Fund Facts Relief, and together with the Fund Facts Delivery 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 Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador (the Other 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 Filers:

Mackenzie

1.             Mackenzie is a corporation amalgamated under the laws of Ontario with its head office in Toronto, Ontario.

2.             Mackenzie is registered as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager in Ontario. Mackenzie is also registered as: (a) a portfolio manager and exempt market dealer in the Other Jurisdictions and each of the territories of Canada; and (b) an investment fund manager in Newfoundland and Labrador, and Québec.

3.             Mackenzie is not in default of the securities legislation of any of the provinces and territories of Canada.

The Principal Distributor

4.             The Principal Distributor is a member of the Mutual Fund Dealers Association of Canada and is registered in the category of mutual fund dealer in each of the provinces and territories of Canada.

5.             The Principal Distributor is not in default of the securities legislation of any of the provinces and territories of Canada.

The Quadrus Funds

6.             Mackenzie 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). Mackenzie may, in the future, become the manager of additional mutual funds (the Future Funds, and together with the Existing Funds, the Funds) that are subject to the requirements of NI 81-102.

7.             Certain of the Funds are, or will be, available for purchase only through the Principal Distributor (the Quadrus Funds).

8.             Each Quadrus Fund is, or will be, a reporting issuer under the laws of all of the provinces and territories of Canada. The securities of the Quadrus 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.

9.             Each Quadrus 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 incorporated under the laws of Ontario.

10.          The Quadrus Funds are not in default of the securities legislation of any of the provinces and territories of Canada.

11.          The Quadrus Funds currently offer up to 22 series of securities – D5 series, D8 series, H series, H5 series, H8 series, HW series, HW5 series, HW8 series, L series, L5 series, L8 series, N series, N5 series, N8 series, Quadrus series, QF series, QF5 series, QFW series, QFW5 series, RB series, I series and Series R – under simplified prospectuses, annual information forms and Fund Facts dated June 28, 2018 and October 12, 2018, as amended. Mackenzie may also offer additional series of the Quadrus Funds in the future.

12.          Securities in L series, L5 series, L8 series, HW series, HW5 series, HW8 series, QFW series, QFW5 series, and any future applicable preferred pricing series (the High Net Worth Series) of the Quadrus Funds have, or will have, lower combined management and administration fees than securities in their corresponding retail series, specifically, Quadrus series, D5 series, D8 series, H series, H5 series, H8 series, QF series and QF5 series, and any future applicable retail series of the Quadrus Funds (the Retail Series). Securities in the High Net Worth Series are only available to investors who have invested at least $100,000 in the High Net Worth Series and who also have a minimum total holdings amount of $500,000 across a group of accounts of which the investor is a member, including segregated fund policies with London Life Insurance Company, The Great-West Life Assurance Company and/or The Canada Life Assurance Company (the Eligibility Criteria).

13.          Each pair of series, namely Quadrus series and L series, D5 series and L5 series, D8 series and L8 series, H series and HW series, H5 series and HW5 series, H8 series and HW8 series, QF series and QFW series, QF5 series and QFW5 series, and any future pairs of series (each, a Pair) are each made up of a Retail Series and a High Net Worth Series. Each High Net Worth Series in a Pair is identical to its corresponding Retail Series but for the Eligibility Criteria and the fact that it has lower combined management and administration fees than the Retail Series.

Switches

14.          Mackenzie currently has a program whereby investors holding Retail Series securities are automatically switched into the corresponding High Net Worth Series if they meet the Eligibility Criteria (the Lower Fee Switches), without the Principal Distributor or investor having to initiate the trade. If an investor holding High Net Worth Series securities ceases to meet the Eligibility Criteria, Mackenzie may switch the applicable High Net Worth Series securities into the applicable Retail Series securities without the Principal Distributor or investor initiating the trade (the Higher Fee Switches, and together with the Lower Fee Switches, the Switches).

15.          Lower Fee Switches take place when the investor purchases additional securities of the Quadrus Funds or when positive market movement moves the investor into High Net Worth Series eligibility.

16.          Higher Fee Switches may occur because of redemptions that decrease the amount of total investments with the Filer for purposes of calculating the investor’s eligibility for High Net Worth Series securities. However, market value declines will not trigger Higher Fee Switches.

17.          Mackenzie will aggregate total investments across the group of eligible accounts in order to determine whether investors are eligible to purchase and to continue to hold High Net Worth Series securities. London Life Insurance Company, as a service provider to Mackenzie, will monitor investors’ investments in each particular series and monitor the total investments across the group of eligible accounts in order to provide Mackenzie with the information necessary to determine whether investors are eligible to purchase and continue to hold High Net Worth Series securities. If an investor is no longer eligible to hold High Net Worth Series securities, Mackenzie may effect a Higher Fee Switch.

18.          Once an account has qualified for High Net Worth Series, the account will continue to enjoy the benefit of lower combined management and administration fees associated with the applicable High Net Worth Series, even if fund performance reduces the account value below the Eligibility Criteria.

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

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

21.          Further to each Lower Fee Switch, an investor’s account would continue to hold securities of the same Quadrus Fund(s) as before the Lower Fee Switch, with the only material difference to the investor being that the combined management and administration fees charged for the High Net Worth Series securities would be lower than those charged for Retail Series securities.

22.          Further to each Higher Fee Switch, an investor’s account would continue to hold securities of the same Quadrus Fund(s) as before the Higher Fee Switch, with the only material difference to the investor being that the combined management and administration fees charged for the Retail Series securities would be higher than those charged for High Net Worth Series securities.

23.          The trailing commissions for High Net Worth Series and Retail Series securities are, or will be, identical.

24.          There are no sales charges, switch fees or other fees payable by the investor upon a Switch.

25.          The Switches have no adverse tax consequences on investors under current Canadian tax legislation.

Consolidated Fund Facts Relief

26.          Mackenzie proposes to prepare, for each of the Quadrus Funds, a consolidated Fund Facts for each Pair (a Consolidated Fund Facts Document).

27.          Each Consolidated Fund Facts Document will include the information required by Form 81-101F3 for both of the series in the applicable Pair, except as set out below in paragraph 28.

28.          Specifically, for each Consolidated Fund Facts Document, Mackenzie proposes to deviate from the following requirements in Form 81-101F3:

(a)           General Instructions (10) and (16), to permit the Consolidated Fund Facts Document to be the Fund Facts for, and disclose information relating to, both of the series in the applicable Pair, except as further described below;

(b)           Item 1(c.1) of Part I, to permit the Consolidated Fund Facts Document to name both of the series in the applicable Pair in the heading;

(c)           Item 1(e) of Part I, to permit the Consolidated Fund Facts Document to name both of the series in the applicable Pair in the introduction to the Fund Facts;

(d)           Instruction (0.1) of Part I, to permit the Consolidated Fund Facts Document to identify the fund codes of both of the series in the applicable Pair;

(e)           Instruction (1) of Item 2 of Part I, to permit the Consolidated Fund Facts Document to list the date that both of the series in the applicable Pair first became available to the public;

(f)            Instruction (3) of Item 2 of Part I, to permit the Consolidated Fund Facts Document to disclose the management expense ratio (the MER) of only the applicable Retail Series within the applicable Pair;

(g)           Instruction (6) of Item 2 of Part I, to permit the Consolidated Fund Facts Document to specify the minimum investment amount and additional investment amount of only the Retail Series within the applicable Pair;

(h)           General Instruction (8), to permit the Consolidated Fund Facts Document to include a footnote under the “Quick Facts” table that:

(i)            states that the Fund Facts pertains to both of the series in the applicable Pair;

(ii)           cross-references the “How much does it cost?” section of the Fund Facts for further details about the Switches;

(iii)           cross-references the fee decrease table under the subheading “Fund Expenses” of the Fund Facts for further details about the minimum investment amount for both series in the applicable Pair; and

(iv)          cross-references the “Fund Expenses” subsection of the Fund Facts for further details about the MER for both of the series in the applicable Pair;

(i)            Item 5(1) of Part I, to permit the Consolidated Fund Facts Document to:

(i)            reference only the applicable Retail Series in the introduction under the heading “How has the fund performed?”; and

(ii)           include, as a part of the introduction, disclosure explaining that the performance of the High Net Worth Series of the applicable Pair would be similar to the performance of the corresponding Retail Series, but would vary as a result of the difference in fees compared to the corresponding Retail Series, as set out in the fee decrease table under the subheading “Fund expenses”;

(j)            Instruction (4) of Item 5 of Part I, to permit a Consolidated Fund Facts Document to show the required performance data under the subheadings “Year-by-year returns”, “Best and worst 3-month returns”, and “Average return” relating only to the applicable Retail Series;

(k)           Item 1(1.1) of Part II, to permit a Consolidated Fund Facts Document to:

(i)            refer to both series in the applicable Pair in the introductory statement under the heading “How much does it cost?”; and

(ii)           include, as part of the introductory statement, a summary of the Switches, consisting of:

a.             a statement explaining that the High Net Worth Series charges lower combined management and administration fees than the corresponding Retail Series;

b.             a statement explaining the scenarios in which the Switches will be made, including Switches that may be made due to the investor no longer meeting the Eligibility Criteria for the applicable High Net Worth Series;

c.             a cross-reference to the fee decrease table under the subheading “Fund expenses”;

d.             a cross-reference to specific sections of the simplified prospectus of the Funds for more details about the Switches; and

e.             a statement disclosing that investors should speak to their representative for more details about the Switches;

(l)            Item 1(1.2)(1) of Part II, to permit a Consolidated Fund Facts Document to refer to both of the series in the applicable Pair in the introduction under the subheading “Sales charges”, if applicable;

(m)          Instruction (1) of Item 1 of Part II, to permit a Consolidated Fund Facts Document to disclose all sales charge options for both of the series in the applicable Pair.

(n)           Item 1(1.3)(2) of Part II, to permit a Consolidated Fund Facts Document, where the applicable Quadrus Fund is not new, to:

(i)            disclose the MER, trading expense ratio and fund expenses of both series in the particular Pair, and where certain information is not available for a particular series, to state “not available” in the corresponding part of the table; and

(ii)           add a row in the table:

a.             in which the first column states “For every $1,000 invested, this equals”; and

b.             which discloses the respective equivalent dollar amounts of the fund expenses of each series included in the table for each $1,000 investment;

(o)           Item 1(1.3)(3) of Part II, to permit a Consolidated Fund Facts Document, where the applicable Quadrus Fund and both of the series in the applicable Pair are not new, to include, instead of the mandated statement above the fund expenses table:

(i)            a statement explaining that the applicable Retail Series has higher combined management and administration fees than the applicable High Net Worth Series; and

(ii)           a statement stating “As of [the date of the most recently filed management report of fund performance], the fund expenses were as follows:”;

(p)           Item 1(1.3)(3) of Part II, to permit a Consolidated Fund Facts Document, where the applicable Quadrus Fund is not new but where one of the series in the applicable Pair is new, to include, instead of the mandated statement above the fund expenses table:

(i)            a statement explaining that the applicable Retail Series has higher combined management and administration fees than the applicable High Net Worth Series;

(ii)           a statement disclosing that the fund expenses information below is not available for one of the series because it is new, as indicated below; and

(iii)           a statement stating “As of [the date of the most recently filed management report of fund performance], the fund expenses were as follows:”;

(q)           Item 1(1.3)(4) of Part II, to permit a Consolidated Fund Facts Document, where the applicable Quadrus Fund is new, to:

(i)            include a statement explaining that the applicable Retail Series has higher combined management and administration fees than the applicable High Net Worth Series;

(ii)           disclose the rates of the management fee and administration fee of only the applicable Retail Series; and

(iii)           for only the applicable Retail Series, disclose that the operating expenses and trading costs are not available because it is new;

(r)            General Instruction (8), 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 qualifying investment amounts associated with each of the series in the applicable Pair; and

b.             the combined management and administration fee decrease of the applicable High Net Worth Series from the combined management and administration fee of the applicable Retail Series, shown in percentage terms; and

(ii)           an introduction to the table stating that the table sets out the combined management and administration fee decrease of the applicable High Net Worth Series from the combined management and administration fee of the applicable Retail Series.

(collectively, the Switching Disclosure).

29.          Mackenzie submits that, given that each of the Retail Series and High Net Worth Series are a part of the Switches, and an investor in either series would make one investment decision at the outset by purchasing securities of a Retail Series of a Quadrus Fund or, if eligible, of a High Net Worth Series of a Quadrus Fund, a Consolidated Fund Facts Document containing the Switching Disclosure will provide investors with more comprehensive disclosure about the Switches and each of the series in the applicable Pair as compared to disclosure in separate Fund Facts for each of the series in the applicable Pair.

30.          Since, if the Fund Facts Delivery Relief described below is granted, the Fund Facts for the series that is being switched into pursuant to a Switch would not be delivered in connection with the Switch, Mackenzie submits that there is little benefit to preparing separate Fund Facts for each of the series in the applicable Pair. Mackenzie submits that the Consolidated Fund Facts Document containing the Switching Disclosure, which would be delivered to investors before the initial investment in Retail Series securities or, if eligible, High Net Worth Series securities, provides investors with better disclosure than if investors received the Fund Facts pertaining only to the applicable Retail Series or High Net Worth Series.

31.          In the absence of the Consolidated Fund Facts Relief, Mackenzie would be required to prepare separate Fund Facts for each of the series within each Pair.

Fund Facts Delivery Relief

32.          Each Switch entails (a) a redemption of the Retail Series security, immediately followed by a purchase of the corresponding High Net Worth Series security, or (b) a redemption of the High Net Worth Series security, immediately followed by a purchase of the corresponding Retail Series security. Each purchase of securities done as part of a Switch is a “distribution” under the Legislation, which triggers the Fund Facts Delivery Requirement.

33.          Pursuant to the 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.

34.          The Filers previously obtained relief from the Fund Facts Delivery Requirement in respect of purchases of High Net Worth Series securities that are made pursuant to the Lower Fee Switches in the Prior Decision (the Prior Relief).

35.          The Filers request that, starting on or about November 1, 2019 (the Implementation Date), the Prior Relief be extended to purchases of Retail Series securities that are made pursuant to the Higher Fee Switches through the granting of the Revocation and the Fund Facts Delivery Relief.

36.          While Mackenzie will initiate each trade done as part of a Switch, Mackenzie and the Principal Distributor do not propose to deliver a Fund Facts to investors in connection with the purchase of securities made pursuant to a Switch since, after the Implementation Date, investors will receive a Consolidated Fund Facts Document containing the Switching Disclosure before their first purchase of Retail Series or High Net Worth Series securities in accordance with the Fund Facts Delivery Requirement. The Consolidated Fund Facts Document will provide investors with disclosure about the Switches and both of the series in the applicable Pair, and investors would derive little benefit from receiving a further Consolidated Fund Facts Document in conjunction with each Switch.

37.          To ensure that existing investors in both the Retail Series and High Net Worth Series prior to the Implementation Date receive sufficient disclosure of the changes that will be implemented on the Implementation Date, Mackenzie will liaise with the Principal Distributor to devise and implement a notification plan for such investors to notify them about the Switches, as further described below in condition 3(a) below.

38.          Mackenzie will communicate extensively with the Principal Distributor and London Life Insurance Company about the Switches so that Mackenzie will be equipped to appropriately notify existing investors in the Retail Series and High Net Worth Series of the changes applying to their Quadrus Funds investments, and appropriately advise new investors about the Switches.

39.          Mackenzie or the Principal Distributor will deliver, or will arrange for the delivery of, trade confirmations to investors in connection with each trade done further to a 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.

40.          The most recently filed Consolidated Fund Facts Document for each series will be available to investors on the Principal Distributor’s website.

41.          In the absence of the Fund Facts Delivery Relief, the Principal Distributor would be required to deliver the applicable Fund Facts to investors in connection with the purchase of securities made pursuant to each Switch.

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:

1.             the Revocation is granted;

2.             the Consolidated Fund Facts Relief is granted provided that each Consolidated Fund Facts Document contains the Switching Disclosure; and

3.             the Fund Facts Delivery Relief is granted provided that:

(a)           for investors invested in the Retail Series or High Net Worth Series prior to the Implementation Date, Mackenzie will liaise with the Principal Distributor to devise and implement a notification plan for such investors regarding the Switches to communicate the following:

(i)            that their investment may be switched to the High Net Worth Series with lower management and administration fees upon meeting the Eligibility Criteria;

(ii)           that, other than a difference in management and administration fees, there will be no other material difference between the Retail Series and the High Net Worth Series;

(iii)           that if they cease to meet the Eligibility Criteria, their investment may be switched into the Retail Series, which has higher management and administration fees; and

(iv)          that they will not receive the Consolidated Fund Facts Document when they purchase securities in connection with a Switch, but that:

1.             they may request the most recently filed Consolidated Fund Facts Document for the relevant series by calling a specified toll-free number or by sending a request via email to a specified address;

2.             the most recently filed Consolidated Fund Facts Document will be sent or delivered to them at no cost, if requested;

3.             the most recently filed Consolidated Fund Facts Document may be found either on the SEDAR website or on the Principal Distributor’s website; and

4.             they will not have the right to withdraw from an agreement of purchase and sale (a Withdrawal Right) in respect of a purchase of securities made pursuant to a 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;

(b)           Mackenzie incorporates disclosure in the simplified prospectus for each Quadrus Fund participating in the Switches that describes the Switches, including setting out:

(i)            the Eligibility Criteria;

(ii)           the fees applicable to investments in the applicable Retail Series and High Net Worth Series; and

(iii)           that if investors cease to meet the Eligibility Criteria, their investment may be switched back to the corresponding Retail Series, which has higher management and administration fees; and

(c)           for Retail Series and High Net Worth Series investors, Mackenzie sends these investors an annual reminder notice advising that they will not receive a Fund Facts when they purchase Retail Series or High Net Worth Series securities pursuant to a Switch, but that:

(i)            they may request the most recently filed Consolidated Fund Facts Document 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 Consolidated Fund Facts Document will be sent or delivered to them at no cost, if requested;

(iii)           the most recently filed Consolidated Fund Facts Document may be found either on the SEDAR website or on the Principal Distributor’s website; and

(iv)          they will not have a Withdrawal Right in respect of a purchase of series securities made pursuant to a 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.

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