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 a high net worth series pursuant to switches from a regular retail series upon meeting certain eligibility requirements based on the amount of the investor’s investments – High net worth series securities are identical to regular retail series securities except that the high net worth series have lower combined management and administration fees – Investment fund manager initiating switches on behalf of investors when their investments satisfy eligibility requirements of high net worth series – Switches between series of a fund triggering a distribution of securities attracting the requirement to deliver a fund facts – Relief granted from requirement to deliver a fund facts to investors for purchases of high net worth series securities made pursuant to such switches subject to compliance with certain notification and prospectus/fund facts disclosure requirements – National Instrument 81-101 Mutual Fund Prospectus Disclosure.

Applicable Legislative Provisions

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

November 3, 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
INVESCO CANADA LTD.
(the Filer and the Representative Dealer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer and the Representative Dealer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from the requirement in the Legislation for a dealer who trades in securities of the Funds (as defined below) to deliver or send the most recently filed fund facts document (Fund Facts) in the manner as required under the Legislation (the Pre-sale Fund Facts Delivery Requirement) in respect of the purchases of Private Investor Series (as defined below) securities of the Funds that are made pursuant to Lower Fee Switches (as defined below) (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 (the Principal Regulator) for this 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 each of the other provinces and territories of Canada (the Other Jurisdictions, together with the Jurisdiction, the Jurisdictions).

Interpretation

Terms defined in NI 81-102, 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 Ontario with its head office in Toronto, Ontario.

2.             The Filer is an indirect wholly-owned subsidiary of Invesco, Ltd., a global investment manager.

3.             The Filer is registered as an investment fund manager, portfolio manager, mutual fund dealer, exempt market dealer and commodity trading manager in Ontario and as an investment fund manager and mutual fund dealer in Quebec. The Filer is registered as portfolio manager and exempt market dealer in the rest of the Jurisdictions, as well as a mutual fund dealer in Alberta, British Columbia, Nova Scotia and Prince Edward Island and as an investment fund manager in Newfoundland and Labrador.

4.             The Filer is the investment fund manager of the mutual funds (the Existing Funds), each of which is subject to the requirements of National Instrument 81-102 Investment Funds (NI 81-102). The Filer may in the future become the manager of additional funds that are subject to the requirements of NI 81-102 (the Future Funds, and together with the Existing Funds, the Funds and, individually a Fund).

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

The Representative Dealer

6.             Securities of the Funds are, or will be, distributed through dealers who may or may not be affiliated with the Filer, including the Representative Dealer. Each of these dealers is, or will be, registered as a dealer in one or more of the provinces and territories of Canada.

7.             The Representative Dealer is registered as a mutual fund dealer in Alberta, British Columbia, Nova Scotia, Ontario, Prince Edward Island and Quebec.

8.             The Representative Dealer is not in default of securities legislation in any of the Jurisdictions.

The Funds

9.             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.

10.          Each Fund is, or will be, a reporting issuer under the laws of the Jurisdictions. The securities of the Funds have, 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 National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101).

11.          The units and shares of the Funds are referred to herein, collectively, as Securities. The Securities of the Existing Funds are currently offered under simplified prospectus, Fund Facts and annual information form dated July 28, 2017.

12.          The Funds currently offer up to 35 series of Securities, including Series A, P, F, PF, T4, PT4, T6, PT6, T8, PT8, F4, PF4, F6, PF6, F8, PF8, H, PH, FH and PFH. The Filer may offer additional series in the future.

13.          Series P, PF, PT4, PT6, PT8, PF4, PF6, PF8, PH, PFH and any future applicable private investor series Securities (the “Private Investor Series”) of the Funds have or will have lower combined management and advisory fees than Series A, F, T4, T6, T8, F4, F6, F8, H, FH and any future applicable retail investor series Securities (the “Retail Investor Series”) and are or will be only available to investors who have invested at least $100,000 in one series of a Fund or $100,000 across a group of eligible investments.

14.          The Existing Funds are not in default of securities legislation in any of the Jurisdictions.

Lower Fee Switches

15.          Subject to receiving the Exemption Sought, the Filer is planning to implement a program effective November 6, 2017 (the “Implementation Date”) whereby investors holding Retail Investor Series of a Fund will automatically be switched into the corresponding Private Investor Series of the same Fund, if the investor meets certain eligibility criteria, if the corresponding Private Investor Series is offered by that Fund and if the dealer through which the investor purchased the Securities (the “Dealer”) has not opted out of the program, subject to certain exceptions outlined in paragraph 19 below.

16.          To qualify for automatic switching into Private Investor Series, investors must (a) hold an account with $100,000 or more invested in the Securities of a Fund or Funds, or (b) hold multiple accounts, which together have $100,000 or more invested in Securities of a Fund or Funds, if the accounts are held with the same Dealer, or (c) hold an account or accounts that is or are part of a “financial/household group”, if accounts in the financial/household group together have $100,000 or more invested in Securities of a Fund or Funds (all together, these are the “Eligibility Criteria”).

17.          Once an investor has met the Eligibility Criteria, and unless the Dealer has opted out of the Lower Fee Switches (please refer to paragraph 30 below), the Filer will automatically switch the investor’s Retail Investor Series into the corresponding Private Investor Series (if offered by the Fund), as long as the investor continues to meet the Eligibility Criteria, without the Dealer or investor having to initiate the trade (the “Lower Fee Switches”). The Lower Fee Switches will be carried out on the first day that the Toronto Stock Exchange is open for trading (a “Canadian Business Day”) of the month following when the investor first met the Eligibility Criteria, or on the first Canadian Business Day of the month following the investor’s additional purchase of Retail Investor Series after meeting the Eligibility Criteria.

18.          The Private Investor Series P, PF, PT4, PT6, PT8, PF4, PF6, PF8, PH and PFH correspond to the Retail Investor Series A, F, T4, T6, T8, F4, F6, F8, H, and FH, respectively.

19.          Series H and FH will not be automatically switched pursuant to a Lower Fee Switch unless the Filer has been informed by the Dealer that these Securities are held inside certain types of savings plans registered with the Canada Revenue Agency. For the purposes of this exclusion, the savings plans include Registered Retirement Savings Plans, Registered Retirement Income Funds, Life Income Funds, Locked-in Retirement Accounts, Prescribed Retirement Income Funds, Locked-in Retirement Savings Accounts, Registered Disability Savings Plans, Registered Education Savings Plans, Tax-Free Savings Accounts, Restricted Locked-in Registered Retirement Savings Plans, Restricted Life Income Funds and deferred profit sharing plans (each a “Registered Plan”, together “Registered Plans”). Due to the way the Funds are structured and recent tax legislation changes, any switches in and out of Series H and FH, including switches to or from another series of the same Fund, would result in a taxable disposition for the investor unless the Securities are held within a Registered Plan. Therefore, to help investors avoid potentially unintended taxable dispositions, the Filer will not switch their Series H and FH pursuant to a Lower Fee Switch unless these Securities are held within a Registered Plan.

20.          An investor will typically become eligible for investment in the Private Investor Series by purchasing additional Securities or due to an increase in the value of their investments above the Eligibility Criteria.

21.          Once an account has qualified for the Private Investor Series, the account will continue to enjoy the benefit of lower fees associated with the applicable Private Investor Series, even if fund performance reduces the account value below the Eligibility Criteria, unless the investor completes a redemption of their Securities, which reduces the higher of either the market value or the original subscription value of the remaining investments (the higher of the two being the “Eligible Account Value”) below the Eligibility Criteria.

22.          Following a Lower Fee Switch, an investor’s account will continue to hold Securities in the same Fund(s) as before the Lower Fee Switch, with the only difference to the investor being that the combined management and advisory fees charged for the Private Investor Series would be lower than those charged for Retail Investor Series.

23.          The Filer will monitor whether an investor meets, or continues to meet, the Eligibility Criteria as of the last Canadian business day of each week. In addition, the Filer will monitor whether an investor, who has met the Eligibility Criteria, has made any new investments in Retail Investor Series, as of the last Canadian Business Day of each week. The Lower Fee Switches, however, will be carried out on the first Canadian Business Day of each following month in accordance with the timelines set out in paragraphs 15 and 16 above. By monitoring for eligibility for Lower Fee Switches on a weekly basis, there is a greater likelihood that investors who meet the Eligibility Criteria during the month due to market appreciation will receive the benefit of a Lower Fee Switch than if monitoring was done only at month end in the event that the market appreciation is nullified prior to month end. For example, if an investor first meets the Eligibility Criteria during the first week of a month, the investor’s Retail Investor Series will be switched into the corresponding Private Investor Series at the beginning of the following month, and any decreases in Eligible Account Value due to market depreciation alone will not make the investor ineligible for a Lower Fee Switch.

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

25.          Each Lower Fee Switch will entail a conversion of the Retail Investor Series into the corresponding Private Investor Series of the same Fund and will be a “distribution” under securities legislation in Ontario, which triggers the Pre-Sale Fund Facts Delivery Requirement.

26.          Pursuant to the Pre-Sale Fund Facts Delivery Requirement, a Dealer is required to deliver the 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.

27.          If the Requested Relief is granted, the Fund Facts will not be delivered to investors in connection with a Lower Fee Switch.

28.          While the Filer will initiate each trade done as part of a Lower Fee Switch, the Filer does not propose to deliver the Fund Facts to investors in connection with each Lower Fee Switch for the following reasons:

(a)           at no time will an account that qualifies for Private Investor Series pay combined management and advisory fees at a rate higher than the rate of the combined management and advisory fees of the Retail Investor Series for which it initially subscribed; and

(b)           since Retail Investor Series securityholders would have received a simplified prospectus or Fund Facts disclosing the higher level of fees which applied to the Retail Investor Series for which they initially subscribed, the investor would derive little benefit from receiving a further Fund Facts document for each Lower Fee Switch.

29.          The Filer will deliver or arrange for the delivery of trade confirmations to investors in connection with each Lower Fee Switch. Details of the change in the series of Securities held will be reflected in the account statements sent to investors for the quarter in which the change occurred.

30.          During consultation with Dealers about the implementation of the Lower Fee Switches, the Filer has received requests from some Dealers for an option to opt-out of the Lower Fee Switches. To accommodate these Dealers, the Filer will allow them to opt-out of the Lower Fee Switches by signing an opt-out agreement.

31.          The Filer will disclose (a) the eligibility requirements and the management and advisory fees applicable to the Retail Investor Series and the Private Investor Series in the simplified prospectus of the Funds, and (b) a summary of the eligibility requirements, the management and advisory fees or the management expense ratios, as applicable, and the fee discounts applicable to the Private Investor Series in the Retail Investor Series Fund Facts of the Funds.

32.          The Filer will communicate extensively with Dealers about the Lower Fee Switches so that Dealers will be well prepared to appropriately notify existing Retail Investor Series investors of the changes applying to their Retail Investor Series investments and appropriately advise new Retail Investor Series investors about the Lower Fee Switches.

33.          In the absence of the Exemption Sought, the Filer cannot carry out the Lower Fee Switches without compliance with the Pre-Sale 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 Exemption Sought is granted provided that:

1.             For investors invested in Retail Investor Series prior to the Implementation Date of the Lower Fee Switches, the Filer will liaise with the relevant Dealers to devise a notification plan for such investors regarding the Lower Fee Switches that addresses the following:

(a)           that their investment may be switched to a Private Investor Series with lower fees upon meeting the applicable Eligibility Criteria;

(b)           that other than a difference in fees, there is no difference between the Retail Investor Series and the Private Investor Series;

(c)           that if they cease to meet the Eligibility Criteria for Private Investor Series, their investment may be switched into a series with higher management and advisory fees which will not exceed the Retail Investor Series fees; and

(d)           that they will not receive the Fund Facts in connection with a Lower Fee Switch, but that

(i)            they may request the Fund Facts for the relevant series by calling a specified toll-free number or by sending a request via email to a specified address;

(ii)           the Fund Facts will be sent or delivered to them at no cost;

(iii)          the Fund Facts may be found either on the SEDAR website or on the Filer’s website; and

(iv)          they will not have the right to withdraw from an agreement of purchase and sale (a Withdrawal Right) in connection with a Lower Fee 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.

2.             The Filer expects to file an amendment to the simplified prospectus of the Existing Funds to announce the implementation of the program. The amendment will disclose, for the purposes of the Lower Fee Switches, that:

(a)           the Eligibility Criteria for both the Retail Investor Series and the Private Investor Series,

(b)           the management and advisory fees applicable to investments in both the Retail Investor Series and the Private Investor Series,

(c)           that in the event an investor ceases to meet the Eligibility Criteria, their investment may be switched into the corresponding Retail Investor Series with a higher management and advisory fee, which will not exceed the applicable Retail Investor Series fees.

3.             The Filer proposes to amend the Fund Facts for the Retail Investor Series to

(a)           disclose a summary of the Eligibility Criteria and the discount in the combined management and advisory fee applicable to the corresponding Private Investor Series,

(b)           disclose that after a Lower Fee Switch, the investor’s investment in the Private Investor Series may be switched into the corresponding Retail Investor Series of the same Fund, with a higher management and advisory fee, which will not exceed the applicable Retail Investor Series fees, and

(c)           contain a cross-reference to the more detailed disclosure in the simplified prospectus.

4.             For Retail Investor Series investors, the Filer will send these investors an annual reminder notice advising that they will not receive the Fund Facts for the Private Investor Series in connection with a Lower Fee Switch, but that

(a)           they may request the Fund Facts for the relevant series by calling a specified toll-free number or by sending a request via email to a specified address;

(b)           the Fund Facts will be sent or delivered to them at no cost;

(c)           the Fund Facts may be found either on the SEDAR website or on the Filer’s website; and

(d)           they will not have a Withdrawal Right in respect of the Securities they receive in connection with a Lower Fee 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.

5.             The Filer provides to the Principal Regulator, on an annual basis, beginning 60 days after the date upon which the Exemption Sought is first relied upon by a Dealer, either:

(a)           a current list of all such Dealers that are relying on the Exemption Sought; or

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

(c)           prior to a Dealer relying on this Decision, 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