Pursuant to National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief from the know-your-client and suitability requirements, and the requirements to deliver account statements and investment performance reports granted to a portfolio manager in respect of investors in a model portfolio program offered by an affiliated mutual fund dealer.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.2, 13.3, 14.14, 14.14.1, 14.18, 15.1.
October 22, 2018
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
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 relief from:
(a) with respect to investors in the Model Portfolios (as defined below), the requirement in the Legislation that the Filer must take reasonable steps to:
(i) establish the identity of a client and, if the Filer has cause for concern, make reasonable inquiries as to the reputation of the investor;
(ii) establish whether the investor is an insider of a reporting issuer or any other issuer whose securities are publicly traded;
(iii) ensure that the Filer has sufficient information regarding the investor’s investment needs, objectives, financial circumstances and risk tolerance to enable the Filer to meet its obligations under the Legislation; and
(iv) keep the information described above current;
(the “Know Your Client Requirement”);
(b) with respect to Clients (as defined below) invested in the Model Portfolios, the requirement in the Legislation that the Filer must take reasonable steps to ensure that, before it makes a recommendation to or accepts an instruction from a Client to buy or sell a security, or makes a purchase or sale of a security for a Client’s account, the purchase or sale is suitable for the Client (the “Suitability Requirement”);
(c) the requirement in the Legislation that the Filer deliver account statements and investment performance reports to Clients who have invested in the Model Portfolios (the “Statement Delivery Requirement”);
(the Know Your Client Requirement, Suitability Requirement, and Statement Delivery Requirement are collectively, the “Relief 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 by the Filer in all the provinces and territories of Canada in respect of the Relief Sought.
Terms defined in MI 11-102 and National Instrument 14-101 Definitions 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 a corporation incorporated under the laws of Canada. The Filer is registered under the Securities Act (Ontario) (the “Act”) as a portfolio manager and is also registered as a portfolio manager in the Other Jurisdictions.
2. The head office of the Filer is located in Toronto, Ontario.
3. The Filer is not in default of the securities legislation of any of the Jurisdictions.
4. The Filer will build discretionary model investment portfolios (the “Model Portfolios”) for its clients exclusively from:
(a) investment funds that meet the definition of “mutual fund” under the Act, including exchange traded funds (the “Funds”), each of which:
(i) is not a commodity pool, as defined by National Instrument 81-104 Commodity Pools;
(ii) does not employ leverage or short selling strategies in excess of the limits prescribed in National Instrument 81-102 Mutual Funds;
(iii) is not managed by the Filer; and
(b) cash and cash equivalents.
5. Each Model Portfolio has a fixed allocation between equity and fixed income investments (the “Asset Classes”) which are suitable for investors with short, medium or long-term investment horizons and with different tolerances for risk.
6. Exposure to the different Asset Classes in the Model Portfolio will be achieved using the equity or fixed income Funds. Each Fund will have a percentage target weight within an Asset Class (the “Target Weight”) which may, due to changes in the market value of the Fund, increase or decrease within an upper and lower range (the “Permitted Range”). From time to time, the Filer may decide to change the Target Weight of the Funds in the Model Portfolio or may replace a Fund with one or more alternative Funds (the “Model Re-allocation”).
7. When, due to changes in the relative market value of each Fund, one or more Funds in an investor’s Model Portfolio exceed the Permitted Range, the Filer will execute appropriate trades so that each Fund is returned to a relative weight that is within the Permitted Range (the “Account Rebalance”).
8. Wealthsimple Advisor Services Inc. (the “Dealer”) has been granted registration as a mutual fund dealer in each of the Jurisdictions and has membership with the Mutual Fund Dealer Association of Canada (the MFDA) as of October 4, 2018.
9. Prospective clients of the Dealer will complete an online questionnaire (the “Questionnaire”) and meet with a registered dealing representative of the Dealer (an Advisor) in order to determine which Model Portfolio is suitable for the prospective client.
10. The Dealer and the Filer jointly created the Questionnaire, and each agree that the Questionnaire is an effective tool for determining whether each client is suitable for a Model Portfolio.
11. The Dealer will use the information obtained from the prospective client, including their responses to the Questionnaire and discussions held with the prospective client and the Advisor’s knowledge of the prospective client’s affairs, to complete a know your client and suitability assessment on the prospective client’s affairs as required under sections 13.2 and 13.3 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”).
12. Having determined which Model Portfolio they believe is suitable for a prospective client, the Dealer will recommend that Model Portfolio, and the prospective client will decide if they wish to accept the recommendation and invest in that Model Portfolio.
13. The Dealer will make trades in the Funds to invest the Client in their chosen Model Portfolio. Any decision by the Filer to effect a Rebalancing Trade will be made through the Dealer, their affiliate Canadian ShareOwner Investments Inc. or another dealer registered in a category that permits the trade.
14. Prospective clients and Clients will have no direct contact with the Filer in connection with the Filer’s management of the model portfolio, and prospective clients and Clients will interact solely with the Dealer and approved persons of the Dealer in connection with the Filer’s management of the Model Portfolios and the Dealer’s administration of the Dealer’s account.
15. If the prospective client decides to proceed with investing in a Model Portfolio, an agreement (the “Agreement”) is entered into between the investor (the “Client”), the Dealer and the Filer that:
(a) will authorize the Filer to manage the Client’s investment on a discretionary basis with a view to ensuring that the Client’s account is managed in accordance with the agreed upon Model Portfolio and within the Permitted Ranges which may be adjusted in the discretion of the Filer;
(b) will authorize the Filer to use its discretion to effect a Model Re-allocation or an Account Rebalance (“Rebalancing Trades”);
(c) provides that the Dealer may in the future recommend changing to a different Model Portfolio than the one currently accepted by the Client if there are:
(i) material changes in the Client’s financial circumstances or risk profile; or
(ii) Filer-initated changes to the Asset Classes in the Model Portfolio currently accepted by the Client;
but the Dealer will not implement any such recommendation without the Client’s prior written approval;
(d) provides that the Filer will be responsible to the Client for ensuring that the selected Model Portfolio is managed in accordance with the terms agreed upon by the Client;
(e) provides that satisfying the Know Your Client Requirement and the SuitabilityRequirement will not be the responsibility of the Filer but instead will be that of the Dealer who will gather and periodically update the know your client information concerning the Client and confirm the suitability of the selected Model Portfolio;
(f) provides that the Dealer will not have discretionary authority from the Client to participate in the management of the Model Portfolio or to effect Rebalancing Trades; and
(g) provides that the Filer:
(i) may appoint one or more sub-advisers (each a “Sub-Adviser”) to design Model Portfolios for the Filer; and
(ii) shall pay the Sub-Adviser from the Filer’s Model Portfolio management fee, which will differ from Sub-Adviser to Sub-Adviser and will be higher than Model Portfolios managed soley by the Filer;
16. In addition to the Agreement, the Client is also provided:
(a) with an investor policy statement prior to or concurrently with the execution of the Agreement which sets out the composition of the Model Portfolio, the percentage allocation of the Asset Classes, the method by which the Permitted Range is determined, the fees payable to the Dealer and the Filer as well as the rules governing the investment and management of the Model Portfolio;
(b) prior to the Agreement being entered into, or within two days of trades being implemented for the Model Portfolio, with the Fund Facts or other document required by Legislation, in respect of the Funds included in the Model Portfolio. In the event that as part of the Rebalancing Trades a new replacement Fund is incorporated as part of the Model Portfolio, the Client will similarly be provided with the Fund Facts for the replacement Fund, subject to any applicable exemption or relief order; and
(c) trade confirmations for every transaction in the Client’s account, including Rebalaning Trades, within the timelines required by Legislation.
17. Sales communications and account opening documents will explain the different responsibilities of the Dealer and the Filer with respect to the Client and the Client’s Model Portfolio. This will include disclosure that the Filer is responsible for managing the Model Portfolio without reference to the Client’s circumstances and only in accordance with the Model Portfolio selected by the investor, and the Dealer alone will have the responsibility to determine that the selected Model Portfolio is and remains suitable for the Client.
18. The Funds that comprise each Model Portfolio are directly held by each Client in their own account with the Dealer and if the Client has not already opened an account with the Dealer, the Client will complete an account application. All Rebalancing Trades are reflected in the Client’s account by the end of the next business day and the records of the Filer and the Dealer are reconciled daily.
19. An account statement will be sent to the Client by the Dealer on a monthly basis and an investment performance report will be sent to Client by the Dealer annually. The Dealer will also provide the Client with an annual tax reporting package.
20. The fees and expenses charged by the Dealer, Advisor and Filer will be disclosed in the Agreement. The Filer will not receive management, administration and other fees from the Funds and no sales charges, redemption fees, switch fees or early trading fees will be charged in connection with Rebalancing Trades.
21. The Filer carries out the following monitoring and oversight procedures in connection with the Client’s account:
(a) Ongoing oversight responsibilities on the composition of the Model Portfolios and make recommendations for changes where considered appropriate; and
(b) No less frequently than annually, the Filer will review any Model Portfolio managed by a Sub-Adviser to ensure that it complies with the applicable investor policy statements.
22. In the absence of the Relief Sought the Filer will be required:
(a) to gather and update the information contemplated by the Know Your Client Requirement in subsection 13.2 of NI 31-103 for each Client;
(b) by the Suitability Requirement in subsection 13.3 of NI 31-103, to ensure that each Rebalancing Trade is suitable for the Client, rather than invested in accordance with the terms of the investor policy statement; and
(c) by the Statement Delivery Requirement in subsections 14.14 or 14.14.1 and 14.18 of NI 31-103, to deliver a quarterly account statement and annual investment performance report to each Client.
23. The Dealer does not require an exemption from the adviser registration requirement under the Legislation as a result of their involvement with the Model Portfolios as they will not be engaged in providing discretionary management advice to Clients in connection with the management of the Model Portfolios.
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 on the following conditions:
(a) the Filer is, at the time of any Rebalancing Trade, registered under the Legislation as an adviser in the category of portfolio manager;
(b) any Sub-Adviser will be registered as an adviser in the category of portfolio manager in a Jurisdiction, or be exempt from the requirement to be registered as an adviser pursuant to NI 31-103;
(c) all Rebalancing Trades will be made in accordance with the terms of the selected Model Portfolio;
(d) the Filer :
(i) takes reasonable steps to assure itself that the Dealer has complied with the Know Your Client Requirement and the Suitability Requirement with respect to each Client;
(ii) maintains its own records of each Client’s investment positions and trades;
(iii) informs each Client in writing that it will not provide quarterly statements and annual performance reports in addition to those delivered by the Dealer;
(iv) has a written agreement with the Dealer concerning their respective responsibilities regarding the delivery of account statements and investment performance reports to Clients; and
(v) takes reasonable steps, including documented sample testing and reconciliations, to verify that account statements and investment performance reports are delivered by the Dealer to Clients and are complete, accurate and delivered on a timely basis in a format that is compliant with applicable rules of the MFDA.
“Felicia Tedesco” “October 22, 2018”
Compliance and Registrant Regulation