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 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(1)(c), 74(1).
May 29, 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
BMO INVESTMENTS INC.
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) to revoke and replace the Original Decision (as defined herein) with this Decision exempting the Filer from the adviser registration requirement (the Exemption Sought) with respect to the Strategic Rebalancing Activities (as defined below) carried out by Jones Heward Investment Counsel Inc. (JHIC) in connection with the Product (as defined and described below).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(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 the 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, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut, and Yukon.
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
This decision is based on the following facts represented by the Filer:
1. The Filer is a business corporation incorporated under the laws of Canada. The head office of the Filer is located in Toronto, Ontario, and Ontario is the domicile of the mutual funds it manages.
2. The Filer is registered under the Legislation as a dealer in the category of mutual fund dealer and holds the equivalent registration in each of the other provinces and territories in Canada (the Other Jurisdictions).
3. JHIC is registered under the Legislation as an adviser in the categories of investment counsel and portfolio manager and holds the equivalent registration in each of the Other Jurisdictions.
4. The Filer and JHIC are affiliated entities.
5. The Filer's salespersons distribute the BMO MatchMaker and BMO Intuition Portfolios (the Product) to their clients (clients).
6. The Product consists of a number of portfolios (the Portfolios), which together occupy successive portions of the investing spectrum from conservative, income-maintenance investing to aggressive growth investing. Each Portfolio, other than the registered and non-registered savings portfolios (the Savings Portfolios), is made up exclusively of securities of BMO Mutual Funds. Each of the Savings Portfolios currently consist of guaranteed investment certificates (GICs) and securities of BMO Mutual Funds designed to ensure preservation of capital.
7. Any of the BMO Mutual Funds that currently exist or that may be created in the future (the Funds) and that are used in the Product are or will be qualified under a simplified prospectus that has been receipted by the applicable securities regulators under applicable securities legislation.
8. If a client is interested in the Product, the client completes an investor profile form (the Form). The Form is used by the Filer as a "know your client" form to enable the Filer to consider the client's financial circumstances, investment knowledge, investment objectives and risk tolerance and thereby assist in determining an appropriate Portfolio for the client. From and based on the information provided in the Form, the Filer recommends one of the Portfolios as suitable for the client.
9. The client receives a description of the Funds in a Portfolio and, in the case of the Savings Portfolios, both the Funds and the GICs in a Portfolio, at the time it is selected by the client (the Selected Portfolio), completes the account application and enters into an agreement (the Account Agreement) with the Filer. Clients will receive express disclosure that JHIC will be providing discretionary investment management services in connection with the Strategic Rebalancing Activities (defined below) and that the client shall be treated as having retained JHIC to provide such activities just as though JHIC were a direct signatory to the Account Agreement.
10. Except for the Savings Portfolios, each Fund within a Selected Portfolio is given a target weighting and a target range for determining when the Selected Portfolio will be rebalanced through a series of purchase and redemption trades effected by the Filer on behalf of all clients invested in the Funds in the Selected Portfolio. The Selected Portfolio will only be automatically rebalanced if the percentage weighting of at least one of the Funds in the Selected Portfolio varies by more than its set target range. Such trades are referred to herein as the Auto Rebalancing Activities. The Savings Portfolios are not subject to the Auto Rebalancing Activities.
11. In addition to the mechanical non-discretionary Auto Rebalancing Activities described above that are effected by the Filer, JHIC will review all of the Portfolios on a periodic basis, currently expected to be every two or three years, to consider changing the relative weightings of the Funds in the Portfolios, and to make any changes in the Funds included in the Portfolios, which will be done on a full discretionary basis. In the case of the Savings Portfolios, JHIC will also consider whether any changes in the GICs in the Portfolios are warranted, again, on a fully discretionary basis. JHIC will give trade instructions to the Filer to effect these changes in the Selected Portfolios and each client account. Such activities are referred to herein as the Strategic Rebalancing Activities.
12. The Filer will retain JHIC under an advisory agreement (the Advisory Agreement) to provide the Strategic Rebalancing Activities with respect to the Product and will be responsible for the remuneration paid to JHIC, if any, with respect to the provision of such services. The Filer will at all times be ultimately responsible to the client for the Strategic Rebalancing Activities undertaken by JHIC.
13. Each Portfolio is comprised of different asset classes (Asset Classes). Each Asset Class is allocated a permitted range (Permitted Range), being a minimum and maximum percentage of the Portfolio that can be allocated to Funds of a particular Asset Class. The Asset Classes and Permitted Ranges will be disclosed to the client in the Selected Portfolio and cannot be changed without the prior consent of the client.
14. The Account Agreement will authorize the Filer to permit JHIC to exercise discretion over the client's account so that it may engage in the Strategic Rebalancing Activities in accordance with the terms of the Selected Portfolio and the Product. The Account Agreements of clients in the Product before the relief requested hereby is effective will be amended to address the client's granting of authority to JHIC to engage in the Strategic Rebalancing Activities.
15. There is no separate charge to a client for the Product. The Filer, as manager of the Funds, receives the management fees and fixed administration fee from the Funds used in the Product in the usual manner and each Fund may pay certain operating expenses not covered by the fixed administration fee. No sales charges would be payable in respect of any sales, redemptions or fund switches. As a result, there will be no duplication of any fees.
16. All trades for clients in the Product will be reflected in each client's account on the day following the trade, and will also be reflected in the Filer's trade blotter in connection with the Product. The Filer will be responsible for providing clients with confirmations and account statements that reflect this trading activity in their accounts in accordance with the Legislation.
17. Notwithstanding that there is no direct relationship between the client and JHIC, the client will be entitled to treat JHIC as if JHIC were a party to the Account Agreement with respect to its responsibilities described above.
18. If and when a Fund for which a client has not yet received a prospectus (each a New Fund) is intended to be included in a Portfolio, the Filer will provide such client with the Part A section and any and all pages from the Part B section of the simplified prospectus that pertain to the New Fund(s) (the Tailored Simplified Prospectus), prior to including such New Fund(s) in the Portfolio. The Tailored Simplified Prospectus will not derogate from the rights of investors and will include all of the disclosure of an investor's legal rights contained in the full simplified prospectus.
19. On March 3, 2009, the Filer was granted an exemption from the adviser registration requirement with respect to the Strategic Rebalancing Activities carried out by JHIC in connection with the Product subject to certain conditions, including condition (b), which provided that "if and when a Fund for which a client has not yet received a prospectus is intended to be included in a Portfolio, the Filer will provide such client with a new or amended simplified prospectus that includes that Fund prior to investing the Portfolio in such Fund" (the Original Decision). The Filer now seeks to revoke and replace the Original Decision with this Decision, in which condition (b) will now require that the Filer provide clients with the Tailored Simplified Prospectus rather than a new or amended simplified prospectus.
20. In the absence of the Exemption Sought, the Filer would have to be registered under the Legislation as an adviser in the categories of investment counsel/portfolio manager (or its equivalent in each of the Other Jurisdictions) in order to assume ultimate responsibility for, and to facilitate JHIC's involvement in, the Strategic Rebalancing Activities described in this 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:
(a) the Filer ensures that the Account Agreement and other material with respect to the Portfolios fully describe the Product and the applicable Selected Portfolio including (but not limited to) that:
(i) in addition to the Auto Rebalancing Activities effected by the Filer, JHIC is authorized to exercise discretion in performing the Strategic Rebalancing Activities in connection with the Selected Portfolio pursuant to the Advisory Agreement;
(ii) while JHIC provides limited discretionary investment services in performing the Strategic Rebalancing Activities, it is not responsible for determining or confirming the suitability of a Portfolio for the client, and JHIC has no direct relationship with the client and will not provide the client with direct access to investment management services;
(iii) the Filer assumes ultimate responsibility to the client for the Strategic Rebalancing Activities;
(iv) JHIC and the Filer are affiliated entities;
(v) in performing its Strategic Rebalancing Activities JHIC will, in its discretion, choose the Funds in which each Portfolio will invest and their weightings so that they are consistent with the general risk profile determined by the Filer and suggested by the characterization of each Portfolio, and the Asset Classes and Permitted Ranges cannot be changed without the prior consent of the client;
(vi) all trades will be effected by the Filer and reflected in the client's account on the day following the trade and will also be reflected in the trade blotter of the Filer in connection with the Product and the client will receive confirmations and account statements reflecting such trading activity in accordance with the Legislation; and
(vii) the client will not be responsible for the remuneration paid to JHIC, if any, with respect to the provision of the Strategic Rebalancing Activities, and there is no separate charge or duplication of any fees to a client in connection with the Product; and
(b) if and when a New Fund for which a client has not yet received a prospectus is intended to be included in a Portfolio, the Filer will provide such client with a Tailored Simplified Prospectus that includes that New Fund prior to adding the New Fund to the Portfolio.