Securities Law & Instruments


Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Existing and future mutual funds managed by the Filer granted relief from paragraphs 15.3(4)(c) and (f) of NI 81-102 Investment Funds to permit references to FundGrade A+ Awards, FundGrade Ratings, Lipper Awards and Lipper Leader Ratings in sales communications – Relief subject to conditions requiring specified disclosure and the requirement that the FundGrade A+ Awards and Lipper Awards being referenced not have been awarded more than 365 days before the date of the sales communication.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss.15.3(4)(c) and (f), 19.1.

[Translation]

October 23, 2018

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
(the Jurisdictions)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
PROFESSIONALS’ FINANCIAL – MUTUAL FUNDS INC.
(the Filer)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer on behalf of existing mutual funds and future mutual funds of which the Filer is, or in the future will be, the investment fund manager (or which an affiliate of the Filer becomes the investment fund manager) and to which Regulation 81-102 respecting Investment Funds (CQLR, c. V-1.1, r.39) (Regulation 81-102) applies (each, a Fund and collectively, the Funds) for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption from the requirements set out in paragraphs 15.3(4)(c) (in respect of the FundGrade A+ Awards, FundGrade Ratings, Lipper Awards and Lipper Leader Ratings) and 15.3(4)(f) (in respect of the FundGrade A+ Awards and Lipper Awards only) of Regulation 81-102, which provide that a sales communication must not refer to a performance rating or ranking of a mutual fund or asset allocation service unless:

1.             the rating or ranking is provided for each period for which standard performance data is required to be given, except the period since the inception of the mutual fund; and

2.             the rating or ranking is to the same calendar month end that is:

a)            not more than 45 days before the date of the appearance or use of the advertisement in which it is included, and

b)            not more than three months before the date of first publication of any other sales communication in which it is included;

(together, the Exemption Sought), to permit the FundGrade A+ Awards, FundGrade Ratings, Lipper Awards and Lipper Leader Ratings to be referenced in sales communications relating to the Funds.

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 Regulation 11-102 respecting Passport System (CQLR, c. V-1.1, r.1) (Regulation 11-102) is intended to be relied upon in New Brunswick (together with Québec and Ontario, the Filing Jurisdictions), and

c)             the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in Regulation 14-101 respecting Definitions (CQLR, c. V-1.1, r.3), Regulation 11-102 and Regulation 81-102 have the same meanings if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer:

The Filer and the Funds

1.             The Filer is registered as an investment fund manager in Québec and Ontario, and as a mutual fund dealer, a portfolio manager and a derivatives portfolio manager in Québec. The head office of the Filer is in Montreal, Québec.

2.             The Filer manages the Funds, which are retail mutual funds, the securities of which are, or will be, qualified for distribution to investors in each of the Filing Jurisdictions pursuant to one or more simplified prospectuses, as the same may be amended or renewed from time to time.

3.             Each of the Funds is, or will be, a reporting issuer in each of the Filing Jurisdictions and each of the Funds is or will be subject to Regulation 81-102.

4.             Neither the Filer nor any of the Funds are in default of securities legislation in any of the Filing Jurisdictions.

FundGrade Ratings and FundGrade A+ Awards

5.             The Filer wishes to include in sales communications of the Funds references to the FundGrade Ratings and references to the FundGrade A+ Awards where such Funds have been awarded a FundGrade A+ Award.

6.             FundGrade A+ Awards and FundGrade Ratings are awarded by Fundata Canada Inc. (Fundata) a “mutual fund rating entity” as that term is defined in Regulation 81-102. Fundata is a supplier of mutual fund information, analytical tools and commentary.

7.             One of Fundata’s programs is the FundGrade A+ Awards program. This program highlights funds that have excelled in delivering consistently strong risk-adjusted performance relative to their peers. The FundGrade A+ Awards designate award-winning funds in most individual fund classifications for the previous calendar year, and the awards are announced in January of each year. The categories for fund classification used by Fundata are those maintained by the Canadian Investment Funds Standards Committee (CIFSC) (or a successor to CIFSC), a Canadian organization that is independent of Fundata.

8.             The FundGrade A+ Awards are based on a proprietary rating methodology developed by Fundata, the FundGrade Rating system. The FundGrade Rating system evaluates funds based on their risk adjusted performance measured by three ratios: the Sharpe Ratio, the Information Ratio and the Sortino Ratio. These ratios are calculated for the two through ten year time periods for each fund. When there is more than one eligible series of a fund, an average ratio is taken for each period. The ratios are ranked across all time periods and an overall score is calculated by equally weighting the yearly ranking.

9.             The FundGrade Ratings are letter grades that are determined each month and released on the seventh business day of the following month. Because the overall score of a fund is calculated by equally weighting the periodic rankings, to receive an A grade, a fund must show consistently high scores for all ratios across all time periods.

10.          Fundata calculates a grade using only the retail series of each fund. Institutional series or fee-based series of any fund are not included in the calculation. A fund must have at least two years of history to be included in the calculation. Once a letter grade is calculated for a fund, it is then applied to all related series of that fund.

11.          At the end of each calendar year, Fundata calculates a Fund “grade point average” or “GPA” for each fund based on the full year’s performance. The Fund GPA is calculated by converting each month’s FundGrade Rating letter grade into a numerical score. Any fund earning a GPA of 3.5 or greater earns a FundGrade A+ Award.

Lipper Leader Ratings and Lipper Awards

12.          The Filer also wishes to include in sales communications of the Funds references to Lipper Leader Ratings and Lipper Awards where such Funds have been awarded a Lipper Award.

13.          Lipper, Inc. (Lipper) is a “mutual fund rating entity” as that term is defined in Regulation 81-102. Lipper is part of the Thomson Reuters group of companies and is a supplier of mutual fund information, analytical tools and commentary.

14.          One of Lipper’s programs is the Thomson Reuters Lipper Fund Awards program (the Lipper Awards). This program recognizes funds that have excelled in delivering consistently strong risk-adjusted performance relative to peers and also recognizes fund families with high average scores for all funds within a particular asset class or overall.

15.          The Lipper Awards are based on a proprietary rating methodology prepared by Lipper, the Lipper Leader Rating System. The Lipper Leader Rating System includes Lipper Ratings for Consistent Return, Lipper Ratings for Total Return, Lipper Ratings for Preservation and Lipper Ratings for Expense. Lipper Ratings provide an instant measure of a fund’s success against a specific set of key metrics and can be used by investors to identify funds that meet particular characteristics. In each case, the categories for fund classification used by Lipper for the Lipper Leader Ratings are those maintained by CIFSC (or a successor to CIFSC), a Canadian organization that is independent of Lipper. Lipper Leader Ratings are measured monthly over 36, 60 and 120 month periods, and an overall rating is also measured, which is an unweighted average of the previous three periods. The highest 20% of funds in each category are named Lipper Leaders for that particular rating.

16.          The Lipper Awards, awarded annually, are based on the Lipper Ratings for Consistent Return measure, which is a risk-adjusted mutual fund return performance measure used by Lipper that takes into account both short- and long-term risk-adjusted performance relative to fund classification, together with a measure of a fund’s consistency. In respect of the Lipper Awards, the Lipper Ratings for Consistent Return are measured over the 36, 60 and 120 month periods ending at the end of July of each year. The highest Lipper Leader for Consistent Return in each applicable fund classification over these periods wins a Lipper Award.

Relief from paragraph 15.3(4)(c) of Regulation 81-102

17.          The FundGrade Ratings and Lipper Leader Ratings fall within the definition of “performance data” under Regulation 81-102 as they constitute “a rating, ranking, quotation, discussion or analysis regarding an aspect of the investment performance of an investment fund”. The FundGrade A+ Awards and Lipper Awards may be considered to be “overall ratings or rankings”, given that the awards are based on the FundGrade Ratings and Lipper Leader Ratings, respectively as described above. Therefore, references to FundGrade Ratings, FundGrade A+ Awards, Lipper Leader Ratings and Lipper Awards in sales communications relating to the Funds need to meet the applicable requirements in Part 15 of Regulation 81-102.

18.          Paragraph 15.3(4)(c) of Regulation 81-102 imposes a “matching” requirement for performance ratings or rankings that are included in sales communications for mutual funds. If a performance rating or ranking is referred to in a sales communication, it must be provided for, or “match”, each period for which standard performance data is required to be given for the fund, except for the period since the inception of the fund (i.e. for one, three, five and ten year periods, as applicable).

19.          While FundGrade Ratings are based on calculations for a minimum of two years through to a maximum of ten years and the FundGrade A+ Awards are based on a yearly average of monthly FundGrade Ratings, specific ratings for the three, five and ten year periods within the two to ten year measurement period are not given. This means that a sales communication referencing FundGrade Ratings cannot comply with the “matching” requirement contained in paragraph 15.3(4)(c) of Regulation 81-102. Relief from paragraph 15.3(4)(c) of Regulation 81-102 is, therefore, required in order for a Fund to use FundGrade Ratings in sales communications.

20.          Lipper Leader Ratings are calculated only for 36, 60 and 120 month periods and are not calculated for a one year period. This means that a sales communication referencing a Lipper Leader Rating cannot comply with the “matching” requirement contained in paragraph 15.3(4)(c) of Regulation 81-102 because a rating is not available for the one year period. Relief from paragraph 15.3(4)(c) of Regulation 81-102 is, therefore, required in order for Funds to reference Lipper Leader Ratings in sales communications.

21.          The exemption in subsection 15.3(4.1) of Regulation 81-102 for references to overall ratings or rankings of funds cannot be relied upon to reference the FundGrade A+ Awards and Lipper Awards in sales communications for the Funds because it is available only if a sales communication “otherwise complies” with the requirements of subsection 15.3(4) of Regulation 81-102. As noted above, sales communications referencing the FundGrade A+ Awards and Lipper Awards cannot comply with the “matching” requirement in paragraph 15.3(4)(c) of Regulation 81-102 given that the awards are based on the FundGrade Ratings and Lipper Leader Ratings, respectively, rendering the exemption in subsection 15.3(4.1) of Regulation 81-102 unavailable. Relief from paragraph 15.3(4)(c) of Regulation 81-102 is, therefore, also required in order for the Funds to reference the FundGrade A+ Awards and Lipper Awards in sales communications.

Relief from paragraph 15.3(4)(f) of Regulation 81-102

22.          Paragraph 15.3(4)(f) of Regulation 81-102 provides that in order for a rating or ranking such as a FundGrade A+ Awards and Lipper Awards to be used in an advertisement, the advertisement must be published within 45 days of the calendar month end to which the rating or ranking applies. Further, in order for the rating or ranking to be used in any other sales communications, the rating or ranking must be published within three months of the calendar month end to which the rating or ranking applies.

23.          Because the evaluation of funds for the FundGrade A+ Awards will be based on data aggregated until the end of December in any given year and the results will be published in January of the following year, by the time a fund receives a FundGrade A+ Award in January, paragraph 15.3(4)(f) of Regulation 81-102 will only allow the FundGrade A+ Award to be used in an advertisement until the middle of February and in other sales communications until the end of March.

24.          Because the evaluation of funds for the Lipper Awards will be based on data aggregated until the end of July in any given year and the results will be published in November of that year, by the time a fund receives an award in November, paragraph 15.3(4)(f) of Regulation 81-102 will prohibit it from publishing news of the award altogether.

Reasons for the Exemption Sought

25.          The Filer submits that the FundGrade A+ Awards, FundGrade Ratings, Lipper Awards and Lipper Leader Ratings provide investors with context when evaluating investment choices. They also provide an objective, transparent and quantitative measure of performance in fund analysis that alleviates any concern that references to them may be misleading and therefore, contrary to paragraph 15.2(1)(a) of Regulation 81-102.

26.          The Filer further submits that the Exemption Sought is not detrimental to the protection of investors.

Decision

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 to permit the FundGrade A+ Awards, FundGrade Ratings, Lipper Awards and Lipper Leader Ratings to be referenced in sales communications relating to a Fund, provided that:

1.             the sales communication complies with Part 15 of Regulation 81-102, other than as set out herein, and contains the following disclosure in at least 10 point type:

a)            the name of the category for which the Fund has received the award or rating;

b)            the number of mutual funds in the category for the applicable period;

c)             the name of the ranking entity, i.e. Fundata or Lipper;

d)            the length of period and the ending date, or, the first day of the period and the ending date on which the FundGrade A+ Award, FundGrade Rating, Lipper Award or Lipper Leader Rating is based;

e)            a statement that FundGrade Ratings or Lipper Leader Ratings are subject to change every month;

f)             in the case of a FundGrade A+ Award or Lipper Award, a brief overview of the FundGrade A+ Award or Lipper Award, as applicable;

g)            in the case of a FundGrade Rating (other than FundGrade Ratings referenced in connection with a FundGrade A+ Award) or a Lipper Leader Rating (other than Lipper Leader Ratings referenced in connection with a Lipper Award), a brief overview of the FundGrade Rating or Lipper Leader Rating, as applicable;

h)            where Lipper Awards are referenced, the corresponding Lipper Leader Rating that the Lipper Award is derived from is presented for each period for which standard performance data is required other than the one year and since inception periods;

i)              where a Lipper Leader Rating is referenced, the Lipper Leader Ratings are presented for each period for which standard performance data is required other than the one year and since inception periods;

j)              disclosure of the meaning of the FundGrade Ratings from A to E (e.g., rating of A indicates a fund is in the top 10% of its category) or Lipper Leader Ratings from 1 to 5 (e.g., rating of 5 indicates a fund is in the top 20% of its category), as applicable;

k)             reference to Fundata’s website (www.fundata.com) for greater detail on the FundGrade A+ Awards and the FundGrade Ratings or reference to Lipper’s website (www.lipperweb.com) for greater detail on the Lipper Awards and Lipper Leader Ratings, which includes the rating methodology prepared by Fundata or Lipper, as applicable;

2.             the FundGrade A+ Awards and Lipper Awards being referenced must not have been awarded more than 365 days before the date of the sales communication; and

3.             the FundGrade A+ Awards, FundGrade Ratings, Lipper Awards and Lipper Leader Ratings being referenced are calculated based on comparisons of performance of mutual funds within a specified category established by CIFSC (or a successor to CIFSC).

“Lucie J. Roy”
Senior Director, Corporate Finance