National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption from section 4.2(1) of NI 81-105 to permit certain sales representatives of a principal distributor of proprietary funds to compensate their Specified Approved Persons for the distribution of proprietary funds and third party funds in an unequal manner -- the primary business of the affected sales representatives is financial planning.
Applicable Legislative Provisions
National Instrument 81-105 Mutual Fund Sales Practices, ss. 4.2(1), 9.1.
February 27, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
QUADRUS INVESTMENT SERVICES LTD.
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 under section 9.1 of National Instrument 81-105 Mutual Fund Sales Practices (NI 81-105) from the requirements in section 4.2(1) of NI 81-105 such that the Filer may compensate Specified Approved Persons (as defined below) in the manner described 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 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Nunavut and the Northwest Territories.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is registered as a mutual fund dealer or equivalent in each of the provinces and territories of Canada and is a member of the Mutual Fund Dealers Association of Canada (the MFDA).
2. The Filer is the principal distributor of mutual funds (Quadrus Group of Funds) which are managed in whole or in part by Mackenzie Financial Corporation (MFC).
3. The Filer is not in default of securities legislation in any jurisdiction of Canada.
4. The Filer has two general classes of sales persons or approved persons only as defined in Bylaw No. 1 of the MFDA: those who are authorized to sell Quadrus Group of Funds and other mutual funds for which the Filer acts as a participating dealer (Third Party Funds), and those who are authorized to sell Quadrus Group of Funds but, except for the following products, no other mutual funds (Specified Approved Persons). Both groups are authorized to offer clients an MFC registered education savings plan which is only permitted to hold certain Mackenzie mutual funds, as well as certain approved labour sponsored funds. Quadrus also has a direct sales unit of head office employees (the "Direct Sales Unit") who are authorized to sell Quadrus Group of Funds as well as Third Party Funds.
5. The Filer is the exclusive distributor of Quadrus Group of Funds and distributes them on a deferred sales charge and front end load basis.
6. Each of the Filer and MFC is a "member of the organization", within the meaning of NI 81-105, of Quadrus Group of Funds.
7. The primary business of the Specified Approved Persons is to provide financial planning services to clients and to implement those plans through the sale and distribution of Quadrus Group of Funds.
8. The Filer also permits Third Party Funds to be held in certain client accounts serviced by Specified Approved Persons. Third Party Funds are held only at the request of an investor and on an "accommodation" basis only, for clients who either already held them when their account moved to the Filer, or who wish to incorporate them into their financial plan. For purposes of this decision, "accommodation" means that the Filer does not promote, or encourage the Specified Approved Persons to promote the purchase of Third Party Funds by clients. Further, the Filer does not advertise that Third Party Funds may be purchased through Specified Approved Persons, nor are Specified Approved Persons authorized to hold themselves out as a distributor of Third Party Funds. However, as a service to clients who request to continue holding one or more Third Party Funds in their mutual fund account with the Filer or to purchase additional or new securities of a Third Party Fund, the Filer will accommodate the request and facilitate the Third Party Fund transaction. Only certain Third Party Funds may be accommodated through the Filer, specifically only those that (i) may be settled through FundSERV and (ii) are purchased on a "no load" basis or on a "front load" basis where the front load is reduced to nil. If a Third Party Fund does not have a no-load series of securities, the Filer requires that the front-load series be sold with the front load reduced to nil. Quadrus offers registered education savings plans offered by MFC, which may only hold certain Mackenzie mutual funds, through its Specified Approved Persons, for which the Specified Approved Persons receive the same percentage sales commissions for sales of Quadrus Group of Funds. The Filer also permits clients of Specified Approved Persons to hold their investments in a registered education savings plan offered by a third party other than MFC, but only on a no-load or front-load nil basis.
9. Third Party Funds sold to the clients of Specified Approved Persons on the accommodation basis described in Representation 8 represent 8.77% of the dollar value of mutual funds purchased by clients of Specified Approved Persons in 2008. The ratio of Third Party Funds held by clients of Specified Approved Persons as a percentage of Quadrus's total assets under management was 7.92% as of December 31, 2008.
10. As a result of offering the accommodation service described in 8 above, the Filer is considered a "participating dealer" as defined in NI 81-102, in respect of Third Party Funds held by clients of Specified Approved Persons.
11. Specified Approved Persons receive compensation from the Filer, on the sale of securities of Quadrus Group of Funds, whether they are sold under a deferred sales charge option or a front end sales charge option, as follows:
(i) a sales commission at the time of the initial sale of the securities; and
(ii) an annual trailing commission payable monthly based on the end of month value of the applicable securities.
The amount of the sales commission and the trailing commission is fixed at 50% of the dealer commission received from MFC. The amount of the front end sales charge option is negotiated between the Specified Approved Person and the client, up to a maximum of 5%.
12. In respect of the sale of Third Party Funds (which the Filer only permits to be offered by Specified Approved Persons under a no-load option or where the front end load is reduced to nil) on the accommodation basis set out above, the Filer compensates Specified Approved Persons with an annual trailing commission, based on 50% of the trailing commission received by the Filer payable monthly.
As a result, the percentage amount of annual trailing commissions that Specified Approved Persons receive in respect of assets invested in Quadrus Group of Funds and in Third Party Funds is the same. As noted in Representation 11, however, Specified Approved Persons receive sales commissions at the time of the initial sale of Quadrus Group of Funds which they do not receive in respect of the Third Party Funds sold to their clients on the accommodation basis set out above.
13. The Filer does not reimburse Specified Approved Persons for expenses incurred in respect of the distribution of Quadrus Group of Funds nor pay for Specified Approved Persons to attend conferences sponsored by the Filer. Further, the Filer does not award prizes and bonuses to Specified Approved Persons in respect of the distribution of Quadrus Group of Funds.
14. The compensation paid to Specified Approved Persons of the Filer in respect of Quadrus Group of Funds is paid to the Filer by MFC from management fees paid to MFC by Quadrus Group of Funds.
15. To the knowledge of the Filer, the compensation paid to Specified Approved Persons in respect of Third Party Funds is paid to the Filer by the managers of Third Party Funds from management fees paid to the managers by Third Party Funds.
16. The compensation paid to Specified Approved Persons in respect of Quadrus Group of Funds and in respect of Third Party Funds is determined as a percentage of what the Filer receives from MFC or the manager of the Third Party Funds, as the case may be.
17. Section 4.2(1) of NI 81-105 prohibits a principal distributor from providing an incentive for its sales representatives to recommend a fund of which it is a principal distributor over a fund of which it is a participating dealer.
18. Specified Approved Persons will disclose the unequal compensation schemes between Quadrus Group of Funds and Third Party Funds. Clients of Specified Approved Persons who transfer Third Party Funds to a Quadrus account will receive disclosure prior to the transfers, that the Specified Approved Person will receive trailing commissions in respect of Third Party Funds. Clients of a Specified Approved Person who wish to purchase Third Party Funds for their Quadrus account going forward, will be informed prior to the purchase, that they can only purchase Third Party Funds on a no-load basis or on a front-end basis if the front-end commission is reduced to nil and that the Specified Approved Person will receive only trailing commissions in respect of Third Party Funds going forward.
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 the sale of Third Party Funds is on an "accommodation" basis, as described above, only.