Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- 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, ss. 2.1, 3.2.01(1), 6.1.

April 6, 2020

IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF HSBC GLOBAL ASSET MANAGEMENT (CANADA) LIMITED (HSBC GAM) AND IN THE MATTER OF HSBC INVESTMENT FUNDS (CANADA) INC. (the Representative Dealer, and together with HSBC GAM, the Filers)

DECISION

Background

¶ 1 The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from HSBC GAM on behalf of the Funds (as defined below) and the Representative Dealer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption for:

(a) each dealer (a Dealer) who trades in securities of the Funds 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 required under the Legislation (the Fund Facts Delivery Requirement) in respect of the purchases of High Net Worth Series Securities (as defined below) or Retail Series Securities (as defined below) of the Funds that are made pursuant to the Switches (as defined below) (the Fund Facts Delivery Relief); and

(b) 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 dual application):

(a) the British Columbia Securities Commission is the principal regulator for this application;

(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 Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut; 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

¶ 2 Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. In addition, terms defined in NI 81-101 have the same meaning if used in this decision, unless otherwise defined.

Representations

¶ 3 This decision is based on the following facts represented by the Filers:

HSBC GAM

1. HSBC GAM is a corporation organized under the laws of Canada with its head office located in Vancouver, British Columbia;

2. HSBC GAM is registered as (a) an investment fund manager in British Columbia, Ontario, Quebec, and Newfoundland and Labrador; (b) a portfolio manager in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, and Newfoundland and Labrador; and (c) an exempt market dealer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, and the Northwest Territories;

3. HSBC GAM is not in default of the securities legislation in any of the provinces and territories of Canada;

The Dealers

4. the Representative Dealer is a member of the Mutual Fund Dealers Association of Canada (the MFDA) and is registered in the category of mutual fund dealer in each of the provinces of Canada except Prince Edward Island;

5. securities of the Funds (the Securities) are, or will be, distributed through Dealers that may or may not be affiliated with HSBC GAM, including the Representative Dealer;

6. each Dealer is, or will be, registered as a dealer in one or more provinces and territories of Canada; and each Dealer is, or will be, a member of either the Investment Industry Regulatory Organization of Canada or the MFDA;

7. the Representative Dealer is not in default of the securities legislation in any of the provinces and territories of Canada;

The Funds

8. HSBC GAM 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); and HSBC GAM 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;

9. each Fund is, or will be, a reporting issuer under the laws of all of the provinces and territories of Canada; and the Securities of the Funds are, or will be, qualified for distribution pursuant to a simplified prospectus, annual information form and Fund Facts that have been, or will be, prepared and filed in accordance with NI 81-101;

10. each Fund is, or will be, an open-end mutual fund trust created under the laws of British Columbia or an open-end mutual fund that is a class of shares of a mutual fund corporation incorporated under the laws of British Columbia or Canada;

11. the Existing Funds are not in default of the securities legislation in any of the provinces and territories of Canada;

12. the Existing Funds currently offer up to 6 series of Securities -- Investor Series, Investor T Series, Premium Series, Premium T Series, Manager Series and Institutional Series -- under a simplified prospectus, annual information form and Fund Facts dated December 18, 2019, as amended; and HSBC GAM may also offer additional series of the Funds in the future;

13. each Fund offers, or will offer, one or more series (each a Retail Series) of Securities (the Retail Series Securities) that are generally available to all investors;

14. each Fund offers, or may offer, one or more series (each a High Net Worth Series) of Securities (the High Net Worth Series Securities) that are, or will be, available to investors that purchase and hold a minimum balance of High Net Worth Series Securities in a single Fund in a single account having a market value of at least $100,000 if the High Net Worth Series Securities are valued in Canadian dollars or US$100,000 if the High Net Worth Series Securities are valued in U.S. dollars (the Eligibility Criteria);

15. each pair of series of Securities of a Fund is made up of a Retail Series and a High Net Worth Series (each a Pair); currently, each Pair is the Investor Series and the Premium Series of a Fund and the Investor T Series and the Premium T Series of a Fund; each High Net Worth Series in a Pair is identical to its corresponding Retail Series in that Pair but for the Eligibility Criteria and the fact that it has a lower percentage management fee than the Retail Series;

Switches

16. subject to receiving the Exemption Sought, HSBC GAM intends to implement a program (the Switching Program) effective on a future date specified by HSBC GAM (the Implementation Date) for each existing Pair; Pairs created in the future may be added to the Switching Program at future dates (which future date for a future Pair will be its Implementation Date); under the Switching Program, where an investor holds Retail Series Securities of a Pair and meets the Eligibility Criteria, the investor will be switched automatically into the High Net Worth Series Securities of its Pair (a Lower Fee Switch) without the Dealer or investor having to initiate the trade; if an investor holding High Net Worth Series Securities ceases to meet the Eligibility Criteria because the investor has redeemed High Net Worth Series Securities, HSBC GAM may switch the applicable High Net Worth Series Securities into the applicable Retail Series Securities without the Dealer or investor initiating the trade (a Higher Fee Switch and, together with the Lower Fee Switches, the Switches);

17. Lower Fee Switches will take place after the investor purchases additional Retail Series Securities of a Fund and/or when positive market movement increases the market value of the Retail Series Securities held by the investor, resulting in the investor meeting the Eligibility Criteria;

18. Higher Fee Switches may take place after the investor redeems High Net Worth Series Securities that decrease the market value of the High Net Worth Securities held by the investor below the Eligibility Criteria; however, a market value decline, by itself, will not trigger a Higher Fee Switch;

19. HSBC GAM will 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, HSBC GAM may effect a Higher Fee Switch;

20. once an investor has qualified for High Net Worth Series Securities of a Fund, the investor will continue to receive the benefit of the lower management fee associated with the High Net Worth Series, even if the performance of the Fund reduces the market value of the High Net Worth Series Securities below the Eligibility Criteria as long as the investor has not redeemed any High Net Worth Series Securities that bring the value of the High Net Worth Series Securities held by the investor below the Eligibility Criteria;

21. 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;

22. 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;

23. further to each Lower Fee Switch, an investor would continue to hold Securities in the same Fund as before the Lower Fee Switch, with the only material difference to the investor being that the percentage management fee charged for the High Net Worth Series Securities would be lower than that charged for Retail Series Securities of that Pair;

24. further to each Higher Fee Switch, an investor would continue to hold Securities in the same Fund as before the Higher Fee Switch, with the only material difference to the investor being that the percentage management fee charged for the Retail Series Securities would be higher than that charged for High Net Worth Series Securities of that Pair;

25. the trailing commission, if any, for High Net Worth Series Securities is lower than the trailing commission, if any, for Retail Series Securities of that Pair;

26. there are no sales charges, switch fees or other fees payable by the investor upon a Switch;

27. the Switches will have no adverse tax consequences on investors under current Canadian tax legislation;

Consolidated Fund Facts Relief

28. HSBC GAM will prepare, for each Pair of each Fund, a consolidated Fund Facts (a Consolidated Fund Facts Document);

29. 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 30;

30. specifically, for each Consolidated Fund Facts Document of a Pair in the Switching Program, HSBC GAM 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 applicable 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 of the applicable Pair 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 Securities;

(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 a lower management fee 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 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 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 a higher management fee 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 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 a higher management fee 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 Fund is new, to:

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

(ii) disclose the rate of the management 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 subheading "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 management fee decrease of the applicable High Net Worth Series from the management fee of the applicable Retail Series, shown in percentage terms; and

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

(s) Item 1.3(7) of Part II, to permit a Consolidated Fund Facts Document to disclose the range of the rates of the trailing commission for each sales charge option for both the series in the applicable Pair

(collectively, the Switching Disclosure);

31. In order to 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, the Filers will provide a 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;

32. in the absence of the Consolidated Fund Facts Relief, HSBC GAM would be required to prepare separate Fund Facts for each of the series within each Pair;

Fund Facts Delivery Relief

33. each Switch will entail either (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; and each purchase of Securities done as part of a Switch will be a re-designation under the amended and restated declaration of trust for the Funds and a "distribution" under the Legislation, which triggers the Fund Facts Delivery Requirement;

34. 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 that series of the fund;

35. while HSBC GAM will initiate each trade done as part of a Switch, HSBC GAM and each Dealer 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 Securities 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;

36. 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, HSBC GAM will liaise with the Dealers to devise and implement a notification plan for such investors to notify them about the Switches, as further described below in condition 2(a) below;

37. HSBC GAM will communicate with the Dealers about the Switches so that the Dealers can explain the changes in the Retail Series and High Net Worth Series applying to existing investors investments in the Funds, and appropriately advise new investors about the Switches;

38. HSBC GAM will deliver, or will arrange for the delivery by the Dealers of, trade confirmations to investors in connection with each trade done further to a Switch; furthermore, transaction details of the changes in series of Securities held by investors will be reflected in the account statements sent to investors for the quarter in which the change occurred;

39. the most recently filed Consolidated Fund Facts Document for each series will be available to investors on HSBC GAM's website; and

40. in the absence of the Fund Facts Delivery Relief, the Dealers would be required to deliver the applicable Fund Facts to investors in connection with the purchase of Securities made pursuant to each Switch.

Decision

¶ 4 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:

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

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

(a) for investors invested in the Retail Series or the High Net Worth Series of a Pair prior to its Implementation Date, HSBC GAM will liaise with the relevant Dealers 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 a lower management fee upon meeting the Eligibility Criteria;

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

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

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

(A) 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;

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

(C) the most recently filed Consolidated Fund Facts Document may be found either on the SEDAR website or on HSBC GAM's website; and

(D) 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) prior to the Implementation Date for a Pair, HSBC GAM incorporates disclosure in the simplified prospectus for each Fund participating in the Switches that describes the Switches, including:

(i) the Eligibility Criteria;

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

(iii) that if investors cease to meet the Eligibility Criteria, their investment may be switched to the corresponding Retail Series Securities, which has a higher management fee;

(c) after each Implementation Date of a Pair, HSBC GAM sends to each investor that holds Securities of that Pair an annual reminder notice advising that they will not receive a Fund Facts when they purchase Retail Series Securities 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 HSBC GAM's website; and

(iv) they will not have a Withdrawal Right in respect of a purchase of 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;

(d) HSBC GAM provides to the principal regulator, on an annual basis, beginning 60 days after the date upon which the Fund Facts Delivery Relief is first relied upon by a Dealer, either:

(i) a current list of all Dealers that are relying on the Fund Facts Delivery Relief; or

(ii) an update to the list of such Dealers previously provided by HSBC GAM to the principal regulator, or confirmation that there has been no change to such list; and

(e) prior to a Dealer relying on the Fund Facts Delivery Relief, HSBC GAM provides to the Dealer a disclosure statement informing the Dealer of the implications of this decision.

"John Hinze"
Director, Corporate Finance
British Columbia Securities Commission