HSBC Investment Funds (Canada) Inc.

Headnote

MI 11-102 Passport System -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- A mutual fund dealer selling model portfolios of mutual funds is exempt from registration as an adviser with respect to discretionary Strategic and Tactical Rebalancing activities carried out by the affiliated adviser to the model portfolios of mutual funds, subject to certain conditions.

Applicable Legislative Provisions

Multilateral Instrument 11-102 Passport System.

Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., ss. 25(3)(a), 74(1).

December 23, 2011

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

HSBC INVESTMENT FUNDS (CANADA) INC.

(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption relieving the Filer from the adviser registration requirement (the Relief Sought) in connection with the Strategic and Tactical Rebalancing Activities (as defined below) carried out by HSBC Global Asset Management (Canada) Limited (AMCA) in connection with the Product (as defined and described below).

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

(a) the Ontario Securities Commission is the principal regulator for this application,

(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 Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, and Newfoundland and Labrador.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision, unless otherwise defined.

Representations

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

(1) the Filer is registered in each of the provinces of Canada, except Prince Edward Island, as a dealer in the category of mutual fund dealer and is a member of the Mutual Fund Dealers Association of Canada (the "MFDA");

(2) the Filer is not in default of securities legislation in any jurisdiction;

(3) AMCA is a corporation continued under the laws of Canada, with its head office in Vancouver, British Columbia; AMCA is currently registered under applicable securities legislation in British Columbia as an investment fund manager and is registered in each of the provinces of Canada, except Prince Edward Island, as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer;

(4) AMCA and the Filer are affiliated entities;

(5) the Filer's registered dealing representatives propose to offer investments in the "HSBC World Selection Portfolio" service (the "Product") to their clients;

(6) the Product consists of a number of model portfolios, which together occupy successive portions of the investing spectrum from conservative, income-maintenance investing to aggressive growth investing. Each model portfolio is comprised of mutual funds. The model portfolios will be principally comprised of units of the HSBC Pooled Funds and HSBC Mutual Funds, each being a family of mutual funds managed by AMCA;

(7) any of the HSBC Pooled Funds or HSBC Mutual Funds that is used in connection with the Product will be qualified under a simplified prospectus that has been filed in one or more of the Jurisdictions; similarly, any other mutual fund that is used in connection with the Product (collectively with the HSBC Pooled Funds and HSBC Mutual Funds, the "Funds") will be qualified under a simplified prospectus that has been filed in one or more of the Jurisdictions;

(8) if a client is interested in the Product, the client completes a risk rated profile form questionnaire (the "Form") that produces a score and recommends a suitable model portfolio; the Form is used by the Filer as a "know your client" form, to obtain information that enables the Filer to consider the client's financial circumstances, investment knowledge, investment objectives, time horizon and risk tolerance, and thereby assist in determining an appropriate model portfolio for the client; based on the score of the Form and information provided in the Form, the Filer recommends one of the model portfolios as suitable for the client; the client can either select the recommended or an alternative model portfolio;

(9) the client receives a description of the model portfolio selected by the client (the "Selected Model Portfolio") in the Form; the description provides information on the Selected Model Portfolio's Asset Classes (as defined below), Permitted Ranges (as defined below) and Benchmark Percentages (as defined below); the client also receives the simplified prospectus for the Funds which provides information about all of the Funds that may be used to comprise the Selected Model Portfolio; the client then completes an account application and enters into an account agreement ("Account Agreement") with the Filer; the account application must be approved by the applicable Branch Manager of the Filer before the account is opened;

(10) the client agrees to pay the Filer a quarterly fee outlined in the Account Agreement; fees could be changed from time to time, provided clients are given at least 60 days' advance written notice; fees will be calculated based on the net asset value of assets held in each client's account, subject to a minimum amount;

(11) the Filer pays AMCA a management fee pursuant to an advisory agreement between the Filer and AMCA (the "Advisory Agreement"), no management fees will be charged by AMCA directly to the Funds or to the clients in relation to the series or class of units of the Funds that are available under the Product; no sales charges or commissions will be payable by the client in respect of any Auto Rebalancing Activities (as defined below) or Strategic and Tactical Rebalancing Activities (as defined below), and each Fund will pay its own operating expenses; as a result, there will be no duplication of any fees between the Filer and AMCA; investors in the Funds who acquire units of the Funds outside of the Product will not bear expenses attributable to the Product; the Filer will at all times be ultimately responsible to the client for the Auto Rebalancing Activities (defined below) and the Strategic and Tactical Rebalancing Activities (defined below) undertaken by AMCA;

(12) the Account Agreement authorizes the Filer to retain AMCA, pursuant to the Advisory Agreement, to invest client monies in accordance with the terms of the Selected Model Portfolio; clients will receive express disclosure that AMCA will be providing discretionary investment management services in connection with the Auto Rebalancing Activities (as defined below) and Strategic and Tactical Rebalancing Activities (as defined below);

(13) pursuant to the Advisory Agreement, AMCA undertakes to develop and manage the model portfolios; each model portfolio is comprised of different asset classes (the "Asset Classes") which are determined by AMCA in its sole discretion; AMCA allocates each Asset Class a permitted range ("Permitted Range"), being a minimum and maximum percentage of the model portfolio that can be allocated to investments of a particular Asset Class; AMCA can change the Permitted Range or the Asset Classes of a model portfolio, including adding a new Asset Class, or both, if the client is provided at least 60 days' advance written notice of the change; AMCA's actions will be carried out with a view to ensuring that the model portfolio continues to abide by the stated objectives;

(14) AMCA manages the model portfolios on a discretionary basis; in addition to determining the Asset Classes for each model portfolio, AMCA also determines the benchmark percentage ("Benchmark Percentage") for each Asset Class, representing the target percentage within the Permitted Range, and adjusts that percentage at its discretion; AMCA also uses its discretion in choosing which Fund or Funds will be used for each Asset Class, provided the investment objective and strategies of any Funds are consistent with the Asset Class; AMCA's actions will be carried out with a view to ensuring that the Selected Model Portfolio continues to abide by the stated objectives;

(15) the client's account will be periodically rebalanced through a series of purchase and redemption trades effected by AMCA; if the percentage weighting of at least one of the Asset Classes in the Selected Model Portfolio exceeds or falls below the Permitted Range, AMCA will effect trades on behalf of all clients invested in the Selected Model Portfolio to bring the Asset Classes of the Selected Model Portfolio within its target range; additionally, a client account may be rebalanced if the percentage weighting of at least one Fund in a client account exceeds or falls below the Permitted Range; AMCA will effect trades on behalf of that client account to bring the Funds in the client account back to their target range (and within the Permitted Range for the Asset Class); these trades are referred to herein as the "Auto Rebalancing Activities";

(16) in addition to the Auto Rebalancing Activities described above that are effected by AMCA, AMCA will review all of the model portfolios on a periodic basis, currently at least annually, to ensure the model portfolios are consistent with their stated objectives and to make any changes to the Benchmark Percentage, the Funds and their weight in the model portfolios; AMCA will also review all of the model portfolios on a monthly basis and may change the weightings of the Funds within the model portfolios to take advantage of market conditions and trends; all changes effected by AMCA as described above will be done on a fully discretionary basis and in a manner consistent with the stated objectives of the model portfolios; in connection with its responsibilities under the Product, AMCA will carry out the trades in the Funds that are necessary and incidental in connection with modifying the model portfolios; these activities are referred to herein as the "Strategic and Tactical Rebalancing Activities";

(17) the trades carried out by AMCA as described above will be reflected in the Filer's records and subject to oversight by the MFDA;

(18) MFDA Investor Protection Corporation coverage will apply to the investments in the Funds held in the clients' accounts with the Filer on the same terms as other mutual fund investments;

(19) the client is provided with a simplified prospectus or other offering document required by securities legislation for the Funds prior to investing in any of the model portfolios; after investing in the Selected Model Portfolio, the client is provided with details of the Funds held in their account on a quarterly basis in the account statements; the account statement will also include information about how a client can obtain a copy of the current simplified prospectus or other offering document required by securities legislation for the Funds if the client requires further details;

(20) the Filer will carry out trades in units of the Funds for a client in connection with the investment of monies (an Investment) by the client in the Funds comprising the Selected Model Portfolio at the time of Investment; AMCA will carry out trades in units of the Funds for a client of the Filer that are necessary and incidental to its Auto Rebalancing Activities and Strategic and Tactical Rebalancing Activities, other than trades relating to an Investment; all trades will be reflected in the client's account on the day following the trade, and will also be reflected in the trade blotter to be shared by the Filer and AMCA in connection with the Product;

(21) AMCA is responsible for ensuring that the client monies are invested in accordance with the terms of the Selected Model Portfolio; notwithstanding that there is no direct relationship between the client and AMCA, the client will be entitled to treat AMCA as if AMCA were a party to the Account Agreement with respect to the responsibilities in this regard.

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 Relief Sought is granted, provided that:

(a) the Asset Classes and Permitted Ranges cannot be changed without providing at least 60 days' advance written notice to the client; and

(b) the Filer ensures that the Account Agreement or other materials delivered to the client with respect to the Selected Model Portfolio fully describe the Product and applicable model portfolio including (but not limited to):

(i) that AMCA manages the investment portfolios of the model portfolios pursuant to the Advisory Agreement;

(ii) that the Filer and AMCA are affiliated entities;

(iii) that while AMCA manages the model portfolio, it is not responsible for determining or confirming the suitability of a model portfolio for the client, and AMCA has no direct relationship with the client and will not provide the client with direct access to investment management services;

(iv) that the Asset Classes comprising a model portfolio will be listed along with the Permitted Range for each Asset Class;

(v) that the Asset Classes and Permitted Ranges cannot be changed without providing the client at least 60 days' advance written notice;

(vi) that AMCA will in its discretion adjust the Benchmark Percentage of an Asset Class within the Permitted Range;

(vii) that AMCA will in its discretion choose the Funds in which each Asset Class will invest and their weightings, and each Asset Class of a model portfolio will be invested in units of Funds that have investment objectives and strategies that are consistent with the Asset Class;

(viii) that AMCA will carry out the trades in units of the Funds for clients that are necessary and incidental to its Auto Rebalancing Activities and Strategic and Tactical Rebalancing Activities, other than trades related to an Investment. All trades will be reflected in the client's account on the day following the trade, and will also be reflected in the trade blotter to be shared by the Filer and AMCA in connection with the Product;

(ix) full disclosure of the compensation paid to AMCA and the Filer, including:

(A) the Filer pays AMCA a management fee pursuant to the Advisory Agreement, no management fees will be charged by AMCA directly to the Funds in relation to the series or class of units of the Funds that are available under the Product or to the clients, no sales charges or commissions will be payable by the client in connection with any Auto Rebalancing or Strategic or Tactical Rebalancing Activities, and each Fund pays its own operating expenses;

(B) the client will pay the Filer a quarterly fee in accordance with the fees outlined in the Account Agreement, which fees will be based on the net asset value of the client's account and which fees could only be changed from time to time provided the client is given at least 60 days' advance written notice.