National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from the commission rebate prohibitions in paragraph 7.1(1)(b) and subsection 7.1(3) of NI 81-105 Mutual Fund Sales Practices to permit participating dealers to pay a commission rebate to clients when clients switch into related mutual funds -- Relief subject to conditions that mitigate conflicts.
Applicable Legislative Provisions
National Instrument 81-105 Mutual Fund Sales Practices, ss. 7.1(1)(b), 7.1(3), 9.1.
January 17, 2014
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUEBEC AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
DESJARDINS FINANCIAL SECURITY INVESTMENTS INC.
(DSFI or the Filer)
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption under Section 9.1 of National Instrument 81-105 Mutual Fund Sales Practices (c. V-1.1., r. 41) (NI 81-105) exempting the Filer and its present and future representatives (the Representatives) from the prohibitions contained in paragraph 7.1(1)(b) and subsection 7.1(3) of NI 81-105 prohibiting the Filer and its Representatives from paying all or any part of a fee or commission payable by a securityholder on the redemption of securities of a mutual fund that occurs in connection with the purchase by the securityholder of securities of another mutual fund that is not in the same mutual fund family (a commission rebate) where the Filer is a member of the organization of the mutual fund the securities of which are being acquired (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Autorité des marchés financiers 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 British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Nunavut, Northwest Territories and Yukon Territories, and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in National Instrument 14-101 Definitions (c. V-1.1, R. 3) 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. DSFI is registered in each of the provinces and territories of Canada as a dealer in the category of mutual fund dealer. DSFI is also registered in the category of exempt market dealer in certain provinces. DSFI is a member of the Mutual Fund Dealers Association of Canada. The head office of DSFI is located in Québec City, Québec.
2. The Filer is a "member of the organization" (within the meaning of NI 81-105) of the mutual funds managed by Desjardins Investments Inc. (DSP), known as the "Desjardins Funds". The Filer may become in the future, a "member of the organization" of other mutual funds, since the parent company or an affiliate of the Filer may establish or acquire interests in corporations that are managers of mutual funds (Future Affiliated Funds).
3. The Filer is an indirect subsidiary of La Fédération des caisses Desjardins du Québec (la Fédération). DSP is also a direct wholly-owned subsidiary of la Fédération.
4. The Filer is not in default of securities legislation in any jurisdiction of Canada.
5. The Filer acts as a participating dealer (within the meaning of National Instrument 81-102 Mutual Funds) in respect of the Desjardins Funds and acts as participating dealer for third party managed mutual funds.
6. The Filer has been selling third-party managed mutual funds for a certain number of years and currently distributes third-party managed mutual funds from more than 70 unaffiliated fund manufacturers. The Filer has been selling the Desjardins Funds since November 25, 2013 but is not allowing any commission rebates for such funds.
7. The Filer acts independently from la Fédération. The Filer and its Representatives are free to choose which mutual funds to recommend to their clients and consider recommending the Desjardins Funds to their clients in the same way as they consider recommending other third party mutual funds. The Filer and its Representatives comply with their obligation at law and only recommend mutual funds that they believe would be suitable for their clients and in accordance with their clients' investment objectives. DSP provides the Filer with the compensation described in the prospectus of the Desjardins Funds in the same manner as DSP does for any participating dealer selling securities of the Desjardins Funds to their clients. All compensation and sales incentives paid to the Filer by any member of the organization of the Desjardins Funds or of any Future Affiliated Funds will comply with NI 81-105.
8. Neither the Filer, nor any of its Representatives, is or will be subject to quotas (whether express or implied) in respect of selling the Desjardins Funds. Neither the Filer nor la Fédération or any other member of their organization, provide any incentive (whether express or implied) to the Filer's Representatives or to the Filer to encourage those Representatives or the Filer to recommend the Desjardins Funds over third-party managed mutual funds.
9. The Filer complies with NI 81-105, including the rules dealing with internal dealer incentive practices prescribed under Part 4 of NI 81-105 in its compensation practices with the Representatives.
10. No Representative of the Filer has an equity interest in the Filer (within the meaning of NI 81-105) or in any other member of the organization of the Desjardins Funds.
11. The prohibition in subsection 7.1(3) of NI 81-105 means that neither the Filer nor its Representatives can reimburse their client for any fees or commissions incurred by those clients when they decide to switch into a Desjardins Fund or a Future Affiliated Fund from another mutual fund. Subsection 7.1(1) of NI 81-105 allows the Filer and its Representatives to pay commission rebates only when the client decides to switch from one third party fund to another third party fund, and provided the disclosure and consent procedure established in section 7.1 is followed. Payment of commission rebates by the Filer and its Representatives benefit the client so that the client does not incur costs in switching from one fund to another.
12. In the absence of the Exemption Sought, a client of the Filer who effects a redemption of mutual fund securities that are subject to a redemption charge and who uses the proceeds thereof to purchase securities of a Desjardins Fund or Future Affiliated Fund would not have the benefit of a commission rebate from the Filer or a Representative, while a client who uses the proceeds of such redemption to purchase securities of a mutual fund unaffiliated to the Filer could have the benefit of a commission rebate from the Filer or a Representative. In circumstances where a Representative believes that a Desjardins Fund or Future Affiliated Fund is the most suitable fund for the client, the Filer believes that the prohibition in paragraph 7.1(3) of NI 81-105 may discourage the client from trading in the recommended Desjardins Fund or Future Affiliated Fund. This may not be in the client's best interests.
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 the Exemption Sought is granted provided that:
(a) The Representatives and the Filer will comply with the provisions of paragraph 7.1(1)(a) of NI 81-105.
(b) The Representatives and the Filer will comply with the disclosure and consent provisions of Part 8 of NI 81-105.
(c) The clients of the Filer will be advised by the Filer and its Representatives, in writing and in advance of finalizing the switch, that any commission rebate proposed to be made available in connection with the purchase of securities of Desjardins Funds or Future Affiliated Funds:
(i) will be available to the client regardless of whether the redemption proceeds are invested in a Desjardins Fund, a Future Affiliated Fund or a third party fund (to the maximum of the commission earned by the Representative on the purchase);
(ii) will not be conditional upon the purchase of securities of a Desjardins Fund or a Future Affiliated Fund; and
(iii) in all cases, be not more than the amount of the gross sales commission earned by the Filer on the client's purchase of a Desjardins Fund or a Future Affiliated Fund.
(d) The actual amount of the commission rebate paid in respect of the switch will be not more than the amount referred to in paragraph (c)(iii) above.
(e) The Filer or its Representatives that provide commission rebates will not be reimbursed directly or indirectly in respect of the commission rebate in connection with a switch to a Desjardins Fund or a Future Affiliated Fund by any member of the organization of that fund, other than the Filer which may make the reimbursement under this Decision.
(f) Neither the Filer nor any of its Representatives is, or will be, subject to quotas whether express or implied in respect of selling securities of a Desjardins Fund or a Future Affiliated Fund.
(g) Except as permitted by NI 81-105, neither the Filer nor any member of the respective organization of the Desjardins Funds or of any Future Affiliated Funds provides or will provide any incentive whether express or implied to any Representative or to the Filer to encourage the Representatives to recommend to clients the Desjardins Funds or Future Affiliated Funds over third-party funds.
(h) The Filer's compliance policies and procedures that relate to this decision will emphasize that any commission rebate agreed to be paid to a client by a Representative cannot be conditional on the client acquiring a Desjardins Fund or a Future Affiliated Fund and will be made available to the client if the client wishes to switch to an unaffiliated third-party fund.
(i) This decision shall cease to be operative with respect to a Decision Maker following the entry into force of a rule of that Decision Maker which replaces or amends section 7.1 of NI 81-105.