National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from the requirement in s.3.2.01, NI 81-101 to deliver a fund facts document to investors for subsequent purchases of mutual fund securities made pursuant to model portfolios, subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-101 Mutual Fund Prospectus Disclosure, ss. 3.2.01, 6.1.
December 11, 2018
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF QUADRUS INVESTMENT SERVICES LTD. (the Filer)
The principal regulator (Principal Regulator) in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (Legislation) for an exemption from the requirement (Fund Facts Delivery Requirement) in section 5.2 of National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) to send or deliver the most recently filed fund facts document (Fund Facts) in the manner required under the Legislation in respect of purchases of securities of the Funds (as defined below) that are made in connection with Rebalancing Trades (as defined below) and Weighting Change Trades (as defined below) executed with respect to a Model Portfolio (as defined below) (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 by the Filer in all the provinces and territories of Canada (together with Ontario, the Jurisdictions) in respect of the Exemption 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 with its head office located in London, Ontario.
2. The Filer is registered as a mutual fund dealer in each of the jurisdictions of Canada and is a member of the Mutual Fund Dealers Association of Canada.
3. Mackenzie Financial Corporation (Mackenzie) is a corporation amalgamated under the laws of Ontario with its head office located in Toronto, Ontario.
4. Mackenzie is registered as an investment fund manager in each of Ontario, Quebec and Newfoundland & Labrador, as a portfolio manager and exempt market dealer in each of the Jurisdictions, and as a commodity trading manager in Ontario.
5. Mackenzie is the investment fund manager of certain mutual funds (New Funds) which will form part of the London Life Managed Program model portfolio service described below (the Service) and may, in the future, be the manager of other mutual funds used in the Service (collectively with the New Funds, the Funds).
6. The Filer acts as the principal distributor of securities of the Funds offered under the Service.
7. Each Fund will be an open-ended mutual fund established under the laws of Ontario or another Jurisdiction.
8. Each Fund is or will be a reporting issuer in one or more of the Jurisdictions and is or will be subject to the provisions of National Instrument 81-102 Investment Funds (NI 81-102).
9. Mackenzie, the Filer and the New Funds are not in default of securities legislation in any Jurisdiction.
10. Mackenzie proposes to offer the Service to investors in the Funds who typically have a minimum of $25,000 to invest (either alone or part of a household). The Service will allow investors to match their risk profile and investment objectives to a model portfolio of Funds (each, a Model Portfolio) and then allocate their investment into I Series securities of such Funds and rebalance such investments on a pre-determined periodic basis.
11. Each Model Portfolio will be comprised entirely of Funds for which Mackenzie acts as investment fund manager. Only I Series securities of the Funds will be used in the Service. The Funds do not pay any fees to Mackenzie in respect of I Series securities; instead, I Series investors pay a management and administration fee directly to Mackenzie.
12. Under the Service, Mackenzie proposes to offer a number of Model Portfolios, each of which will correspond to a different investment objective, investment horizon and risk profile.
13. Each Model Portfolio will be comprised of a selection of Funds and will have its own unique allocation of mutual funds that are exposed to different asset classes (the Asset Classes).
14. Mackenzie will construct Model Portfolios which provide exposure to the different Asset Classes. In the case of certain Asset Classes, Mackenzie will identify a short list of Funds that are all suitable for the particular Model Portfolio. Each Fund within each Asset Class will have a specified minimum and maximum percentage permitted range (the Permitted Range) that is identified by Mackenzie.
15. The Filer will collect all of the relevant know-your-client and suitability information (including the client's financial circumstances, investment knowledge, investment objectives, investment time horizon and risk tolerance) for each client in the Service.
16. If a potential client is interested in the Service, the potential client will meet with a dealing representative of the Filer and, through the use of a digital tool (Tool), complete a series of questions in order to establish their risk profile, investment objectives, time horizon, liquidity needs and income requirements. Based on the potential client's responses in the Tool, a Model Portfolio will be recommended by the Filer as most suitable for the potential client. Where there is a choice of Funds within a particular Asset Class for the Model Portfolio, the dealing representative of the Filer will provide a recommendation for the specific Fund to be used for the particular Asset Class.
17. The client will discuss the recommended Model Portfolio and the recommended specific Funds with their dealing representative in face-to-face meetings and/or via the telephone or email or other written correspondence. However, the client ultimately choses the Model Portfolio and, where there is a choice available, also selects which Funds are to be used in the desired Model Portfolio.
18. The Tool will generate:
(a) an investment policy statement which reflects the composition of the Model Portfolio and the Funds in the Model Portfolio, the percentage allocation among the Asset Classes and the Permitted Range to be invested in for each Fund; and
(b) a client acknowledgement letter which describes the fees and provides for the payment of the fees to the Filer and Mackenzie and the terms of the Service, as well as the rules governing the investment and management of the Model Portfolio (the I Series Account Agreement).
19. Clients will have no direct contact with Mackenzie in connection with Mackenzie's management of the Model Portfolios and will interact solely with the Filer and approved persons of the Filer in connection with Mackenzie's management of the Model Portfolios and the Filer's administration of its accounts.
20. The fees and expenses charged in respect of the Service will be disclosed in the simplified prospectus and Fund Facts of the Funds and in the I Series Account Agreement.
21. There will be no duplication of any fees or charges as a result of a client's decision to use the Service:
(a) Mackenzie will receive management and administration fees directly from each investor in respect of the investor's holding of I Series securities of the Funds. These management and administration fees are charged on a tiered basis depending upon the amount of assets held by each investor and their household across all mutual funds, segregated funds and annuities offered by London Life and the Filer and includes the cost to Mackenzie of offering and managing the Service.
(b) The Filer and its dealing representatives will not receive any trailing commissions from the Funds and, instead, will receive advisor service fees from each client in the Service, which reflects the costs associated with performing its dealer responsibilities for the Service.
(c) No sales charges, redemption fees, switch fees or early trading fees will be charged in connection with any trades effected under the Service.
22. The I Series Account Agreement with the Filer and Mackenzie sets out, amongst other matters, the following:
(a) Model Portfolio -- The client will authorize Mackenzie to manage the client's investments on a discretionary basis with a view to ensuring that the client's account(s) are managed in accordance with the agreed upon Model Portfolio, according to the Permitted Range indicated in the I Series Account Agreement, but will provide that Mackenzie is not responsible for taking into consideration the client's financial circumstances or risk profile in the management of the account(s);
(b) No Changes to another Model Portfolio -- In the event that changes in the client's financial circumstances or risk profile are communicated by the client to the Filer, which results in a different Model Portfolio being more suitable for the client, the client will be required to enter into a new I Series Account Agreement before the client's investments are changed to reflect the new Model Portfolio;
(c) Funds in Model Portfolio -- Except as described below, none of the Filer, Mackenzie or the client can make any changes to the Funds that make up the chosen Model Portfolio, or to the weighting established for each Fund within an Asset Class in the Model Portfolio. If the client desires to change the Funds or invest in a different Model Portfolio, the investor must terminate the I Series Account Agreement and enter into a new I Series Account Agreement that specifies the new Funds to be used in the Model Portfolio and/or new Model Portfolio. To the extent Mackenzie determines it will no longer offer a Fund within a Model Portfolio (e.g. upon termination of the Fund), it will identify a new Fund to be included in the Model Portfolio and 60 days' advance written notice will be sent to the affected clients, delivering a copy of the Fund Facts for the new Fund and specifying that if the client does not provide his or her objection to the proposed change within a specified date, then Mackenzie will take this non objection as consent to make the Fund substitution in the client's Model Portfolio on the effective date;
(d) KYC and Suitability -- The client will acknowledge that the KYC Requirement and Suitability Requirement is not the responsibility of Mackenzie and instead, the Filer will be responsible for gathering and periodically updating the KYC information concerning the client and confirming the suitability of the client's Model Portfolio;
(e) Initial Allocation -- To commence the Service, the client will invest his/her assets in I Series units of a money market fund managed by Mackenzie and then will instruct the Filer to switch all investments made by the client in the money market fund into I Series securities of the Funds that make up the chosen Model Portfolio across all accounts for which the client is the beneficial owner according to the target allocation indicated in the I Series Account Agreement;
(f) Asset Classes -- The client will authorize Mackenzie to use its discretion to change and update the percentage allocations of the Asset Classes within the Model Portfolio by purchasing and redeeming I Series securities of the Funds in the Model Portfolio (a Weighting Change Trade), provided the client is given at least 60 days' advance written notice of the change, but will not authorize the Filer or Mackenzie to add a new Fund into an Asset Class;
(g) Rebalancing Trades -- The client will authorize Mackenzie to rebalance holdings in the Funds from time to time within the Permitted Ranges in a manner that seeks to reduce the tax impact of holding such Funds across all account types for which the client is the beneficial owner (the Rebalancing Trades); and
(h) No Discretionary Authority for the Filer -- The client will acknowledge that the Filer will not have discretionary authority to participate in the management of the Model Portfolio or to effect Weighting Change Trades or Rebalancing Trades.
23. The I Series Account Agreement will explain the different responsibilities of the Filer and Mackenzie with respect to the client and the client's Model Portfolio. This will include disclosure that Mackenzie 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 client, and the Filer alone will have the responsibility to determine that the selected Model Portfolio is and remains suitable for the client.
24. A client may terminate the Service at any time by instructing the Filer to redeem or switch the client's investment out of I Series securities of the Funds.
On-going Monitoring and Oversight
25. The following monitoring and oversight procedures will be carried out in connection with each client's account in the Service:
(a) An annual portfolio review will be conducted by the relevant dealing representative of the Filer to determine whether there have been any changes to the client's circumstances that would warrant the selection of another Model Portfolio; and
(b) Ongoing oversight of each Model Portfolio by Mackenzie's advising representatives, including the selection of recommended Funds within each Asset Class, to determine whether the composition of the Model Portfolio remains suitable for the risk profile of the model or whether any changes to the Asset Classes or selection of Funds within the model would be appropriate.
26. If Mackenzie determines it is appropriate to make a Weighting Change Trade to the Asset Classes in each a Model Portfolio, each affected client will receive a notice describing the proposed change and specifying that if the client does not provide his or her objection to the proposed change within a specified date, then Mackenzie will take this non objection as consent to make the appropriate changes to the client's Model Portfolio of Funds on the effective date.
27. The I Series securities of the Funds that comprise each Model Portfolio are directly held by each client in his/her own account(s) established with the Filer.
28. The Weighting Change Trades and Rebalancing Trades will be reflected in each client's account(s) with the Filer on the business day following such trades and the records of Mackenzie and the Filer are reconciled daily.
29. Clients will be able to access their accounts via the internet on a daily basis.
30. The Filer will send statements of account to each client in the Service on a quarterly basis.
31. An investment performance report will be sent to each client in the Service by the Filer on an annual basis.
32. Mackenzie will provide each client in the Service with an annual tax reporting package.
33. Weighting Change Trades and Rebalancing Trades will result in redemptions and purchases of securities of one or more Funds in the Model Portfolio. Such purchases would trigger the Fund Facts Delivery Requirement for the Fund(s) in the Model Portfolio, unless the Filer has previously delivered the most recent Fund Facts.
34. The Fund Facts Delivery Requirement requires the Filer, unless it has previously done so, to deliver or send to the investor the most recently filed Fund Facts before the Filer accepts an instruction from the investor to purchase a security of a Fund.
35. Prior to the initial set-up of a new Model Portfolio for an investor or prior to an investor adding new money to their chosen Model Portfolio, the Filer will send or deliver the Fund Facts document in respect of the money market fund and each Fund in the chosen Model Portfolio to the investor, in accordance with the Fund Facts Delivery Requirement.
36. In the absence of the Exemption Sought, unless the Filer has previously done so, the Filer is required to deliver the most recently filed Fund Facts for each affected Fund in an investor's chosen Model Portfolio prior to each Weighting Change Trade and Rebalancing Trade.
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) each investor in a Model Portfolio is sent or delivered a notice that states:
(i) that except as contemplated in representations 22 and 26 above, the investor will not receive the Fund Facts for the Funds in the Model Portfolio from time to time, unless the investor specifically requests them,
(ii) the investor is entitled to receive upon request, at no cost to the investor, the most recently filed Fund Facts for the Funds in the Model Portfolio by calling a specified toll-free number, or by sending a request by mail or e-mail to a specified address or e-mail address,
(iii) how to access the Fund Facts for the Funds in the Model Portfolio electronically,
(iv) the investor will not have a right of withdrawal under the Legislation for Weighting Change Trades and Rebalancing Trades for the Funds in the Model Portfolio, but will continue to have a right of action if there is a misrepresentation in the prospectus or any document incorporated by reference into the prospectus, and
(v) the investor may terminate the I Series Account Agreement at any time;
(b) at least annually, the investor will be advised in writing of how he/she can request the most recently filed Fund Facts; and
(c) the most recently filed Fund Facts is sent or delivered to the investor if the investor requests it.