Securities Law & Instruments


Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief from the dealer registration requirement, 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 service offered through unaffiliated mutual fund dealers and investment dealers.

Applicable Legislative Provisions

Multilateral Instrument 11-102 Passport System, s. 4.7(1).
Securities Act, Ontario, ss. 25, 74(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.2, 13.3, 14.14, 14.14.1, 14.18 and 15.1(2).


September 11, 2019


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
SEI Investments Canada Company
(the Filer)

DECISION



Background
The principal regulator (the Principal Regulator) in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filer from the following requirements with respect to Investors (as defined below) in the SEI Portfolios (as defined below):

  1. the requirement (the Dealer Registration Requirement) in the Legislation that the Filer be registered as a dealer in a category of registration that permits the Filer to effect Service Trades (as defined below) executed with respect to an SEI Portfolio (the Dealer Registration Exemption);
  2. the requirement (the Know-Your-Client Requirement) in the Legislation that the Filer take reasonable steps to
    1. establish the identity of a client and, if the Filer has cause for concern, make reasonable inquiries as to the reputation of the client;
    2. establish whether the client is an insider of a reporting issuer or any other issuer whose securities are publicly traded;
    3. ensure that the Filer has sufficient information regarding the client’s investment needs, objectives, financial circumstances and risk tolerance to enable the Filer to meet its obligations under the Legislation; and
    4. keep the information described above current (collectively the Know-Your-Client Exemption);
  3. the requirement (the Suitability Requirement) in the Legislation that the Filer 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 Exemption); and
  4. the requirement (the Statement Delivery Requirement) in the Legislation that the Filer deliver account statements and investment performance reports (the Statement Delivery Exemption and together with the Dealer Registration Exemption, the Know-Your-Client Exemption, the Suitability Exemption and the Statement Delivery Exemption, the Exemptions Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

  1. the Ontario Securities Commission is the principal regulator for this application; and

  2. 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 Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Québec, Saskatchewan and Yukon (the Other Jurisdictions, and together with Ontario, the Canadian Jurisdictions) in respect of the Exemption Sought.

Interpretation

Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning 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 Dealers

  1. The Filer is an unlimited liability company organized under the laws of the Province of Nova Scotia. The registered office of the Filer is located in Toronto, Ontario.
  2. The Filer is registered as a portfolio manager and an exempt market dealer in all of the Canadian Jurisdictions, and is registered under the Securities Act (Ontario), and in Newfoundland and Labrador and in Québec, as an investment fund manager. The Filer is also registered under the Commodity Futures Act (Ontario) as an adviser in the category of commodity trading manager.
  3. The Filer is the investment fund manager of certain mutual funds (the Existing Funds) that form part of the SEI Portfolios model portfolio service described below (the Service). The Filer may, in the future, also become the manager of additional mutual funds (the Future Funds and, together with the Existing Funds, the Funds) that will also form part of the Service.
  4. Each of the Funds is, or will be, a reporting issuer in one or more of the Canadian Jurisdictions, and subject to the requirements of National Instrument 81-102 Investment Funds (NI 81-102). Securities of the Funds are, or will be, qualified for sale pursuant to a simplified prospectus, annual information form and Fund Facts that have been, or will be, prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
  5. Securities of the Funds are sold to investors through appropriately registered dealers that are unaffiliated with the Filer (each a Dealer). Each Dealer is, or will be, registered as:
    1. a dealer in the category of mutual fund dealer in the applicable Canadian Jurisdictions and, other than mutual fund dealers registered in Québec, is, or will be a member of the Mutual Fund Dealers Association of Canada (the MFDA); or
    2. a dealer in the category of investment dealer in the applicable Canadian Jurisdictions and a member of the Investment Industry Regulatory Organization of Canada (IIROC).
  6. Subject to the Exemptions Sought, the Filer is not in default of the securities legislation of any Canadian Jurisdiction.

The Service

  1. Through the Service and as a registered portfolio manager in the Canadian Jurisdictions, the Filer constructs and makes available to investors, through Dealers, asset allocation portfolios which are invested exclusively in various combinations of the Funds (the SEI Portfolios, and each, an SEI Portfolio).
  2. The Service offers a number of SEI Portfolios, each of which is comprised of a selection of Funds and corresponds to a different investment objective, investment horizon and risk profile. The SEI Portfolios are designed to meet a wide range of investor goals, from capital preservation to maximum growth, and span a broad risk-return spectrum.
  3. Each SEI Portfolio is, and will be, comprised entirely of Funds for which the Filer acts as investment fund manager.
  4. Each SEI Portfolio has a specified target fund allocation that defines the percentage of the portfolio (Target Weighting) to be invested in each Fund.
  5. Because of fluctuations in the value of the Funds in each SEI Portfolio, their actual weighting will vary from time to time in relation to the initial allocation. As such, as a part of the Service, the Filer may need to rebalance an investor’s holdings in the Funds from time to time back to the Target Weighting for each Fund within the selected SEI Portfolio through purchases and redemptions of securities of the Funds (the Rebalancing Trades).
  6. In addition, as part of the Service, the Filer may also need to reallocate securities of the Funds held in an investor’s account through purchases and redemptions of securities of the Funds in order to change the composition of the selected SEI Portfolio, including to:
    1. add one or more new Funds to an SEI Portfolio (each, a New Fund), when the Filer considers another Fund to be more appropriate than an existing Fund in an SEI Portfolio (the New Fund Addition Trades);
    2. remove one or more Funds from an SEI Portfolio (the Fund Removal Trades); and
    3. change the Target Weighting of one or more Funds within an SEI Portfolio (the Weighting Change Trades, and together with the Rebalancing Trades, the New Fund Addition Trades, and the Fund Removal Trades, the Service Trades).
  7. In order to invest in an SEI Portfolio, an investor (the Investor) meets with a registered representative of a Dealer (the Registered Representative) who collects and assesses the Investor’s financial circumstances, investment knowledge, investment objectives, investment time horizon and risk tolerance, for each Investor.
  8. The Registered Representative will use the information obtained from the Investor, including discussions held with the Investor and the Dealer’s knowledge of the Investor, to assist the Investor to complete a Know-Your-Client and suitability assessment on the Investor, as required under sections 13.2 and 13.3 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and similar provisions under IIROC and MFDA rules, as applicable.
  9. The Filer provides an investment policy statement or equivalent document, setting out the rules governing the investment in each SEI Portfolio (the SEI Investment Policy Statement) to the Dealer. The SEI Investment Policy Statement is intended to establish a clear understanding between the Investor and the Dealer as to their respective duties and responsibilities, the investment policies and objectives of the selected SEI Portfolio and the rules governing the investment in the selected SEI Portfolio. The Filer may also provide a form of questionnaire or another similar process (the Questionnaire) to the Dealer to help the Registered Representative and the Investor determine the SEI Portfolio that best suits the Investor’s needs and financial goals.
  10. The SEI Portfolio will be selected by the Investor in consultation with the Dealer, based on, if applicable, the information contained in the Questionnaire completed by the Investor with the assistance of the Registered Representative (or any other similar process employed by the Dealer), the unique circumstances of the Investor and the investment mandate of each SEI Portfolio, as described in the SEI Investment Policy Statement.
  11. If the Investor decides to invest in an SEI Portfolio, the Filer (through an agreement prepared by the Filer), the Investor and the Registered Representative will complete and sign a form of investor application and agreement and related documents, including, as the case may be, the relevant SEI Investment Policy Statement or equivalent document (the Agreement).
  12. The Investor must invest a specified minimum amount to be eligible to invest in an SEI Portfolio. All distributions made by the Funds within an SEI Portfolio are set to reinvest automatically in additional securities of the Funds for all accounts.
  13. An Investor may, from time to time, contribute additional funds to the Investor’s accounts with a Dealer for investment in the selected SEI Portfolio through the Service. Such additional funds will be applied towards the purchase of additional securities of the Funds in accordance with the Target Weighting of each Fund.
  14. The Agreement outlines the rules governing the investment in the selected SEI Portfolio, including with respect to the following matters:
    1. Model Portfolio – The Investor engages the Filer to act as manager of the cash, securities and property (the Portfolio Assets) held in respect of the Investor’s account with the Filer (the Account) in accordance with the selected SEI Portfolio. The Agreement contains disclosure relating to the Service Trades, including that, under the SEI Portfolio program, the Filer is the manager of the SEI Portfolios and will be providing discretionary investment management services with respect to each SEI Portfolio, including rebalancing the percentage allocations of the Funds in the selected SEI Portfolio back to the applicable Target Weighting, adding and removing Funds from the selected SEI Portfolio and changing the applicable Target Weighting of the Funds in the selected SEI Portfolio.
    2. Role of the Third Party Dealer - The Investor invests in the selected SEI Portfolio through an appropriately registered Dealer which serves as its agent and attorney-in-fact, including for the purposes of assisting the Investor in the selection of the SEI Portfolio, and instructing the Filer to (i) invest the Investor’s assets in accordance with the selected SEI Portfolio, (ii) invest additional money into the selected SEI Portfolio, (iii) withdraw money from the selected SEI Portfolio, and (iv) make required Service Trades. The Dealer in turn instructs the Filer in connection with the selected SEI Portfolio. The Filer is entitled to accept absolutely and without any inquiry the Investor’s choice of the selected SEI Portfolio, and invest in the Funds in accordance with such SEI Portfolio. The Investor specifically authorizes the Filer to, among other things, (i) follow the instructions from the Dealer, as agent of the Investor, to invest additional money into, and withdraw money from, the selected SEI Portfolio; and (ii) maintain appropriate records of the Portfolio Assets, including all purchases and redemptions and provide regular transaction reporting to the Dealer, as agent of the Investor.
    3. KYC and Suitability - The Investor acknowledges that the Filer: (i) is not responsible for making any asset allocation recommendations or evaluating the suitability of a particular SEI Portfolio for the Investor’s needs and financial goals, for supervising or monitoring trading by the Dealer in the Investor’s account with the Dealer, or for providing for the rebalancing of the SEI Portfolios on an individual basis; and (ii) will receive discretionary authority and instructions with respect to the investment of the Investor’s assets with the selected SEI Portfolio solely from the Dealer as the Investor’s agent and attorney-in-fact.
  15. The Filer actively monitors the SEI Portfolios to ensure that the investment objectives are being met within the expected risk parameters.
  16. SEI Portfolios comprised of Class E, F or O units may be selected. The fees and expenses charged in respect of an investment in an SEI Portfolio are currently as follows:
    1. For SEI Portfolios comprised of Class E units, the Filer will receive management fees from each Fund in respect of the Investor’s holdings. A portion of the management fee (as described in the Fund Facts and simplified prospectus) is currently paid to the Dealer in the form of a trailing commission.
    2. For SEI Portfolios comprised of Class F units, the Filer will receive management fees from each Fund in respect of the Investor's holdings. Since Class F units are intended for use within Dealer-sponsored fee-based accounts, an advisory fee will also be charged by the Dealer to the Investor.
    3. For SEI Portfolios comprised of Class O units, the Filer will receive management fees as detailed in the Agreement. These management fees are charged on a tiered basis depending upon the market value of the assets held in the SEI Portfolio. SEI Portfolios comprised of Class O units will generally also be subject to an advisory fee (Investor’s Agent Fee) of up to 1.50% that is determined and mutually agreed to by the Registered Representative and the Investor. The Investor’s Agent Fee is communicated to the Filer under the Agreement. The combined Investor’s Agent Fee and management fees for the applicable SEI Portfolio will be paid by redemption of Class O units from a Fund in the Investor’s account selected at the Filer’s discretion.
  17. There is no duplication of any fees received by the Filer and the Dealer, and no separate fees, such as sale charges, redemption fees, switch fees or early trading fees, charged in connection with an investment in an SEI Portfolio or the Service Trades.
  18. The fees and expenses charged in respect of an investment in an SEI Portfolio, such as the management fee and the operating expenses applicable to the Funds, are described in the Agreement, as well as in the simplified prospectus, and will be described in the Fund Facts of the Funds.

The Dealer and Know-Your-Client and Suitability

  1. As a registered portfolio manager and the manager of the Service, the Filer is responsible for ensuring that the Investor’s assets are invested in accordance with the terms of the selected SEI Portfolio and for monitoring the suitability of trading decisions, including the Service Trades, it makes at the level of the SEI Portfolio such that the trading decisions are suitable for the particular risk-return profile of the SEI Portfolio selected by the Investor.
  2. The Dealer is not affiliated with the Filer, and the Filer does not approve, recommend or endorse the Dealer.
  3. The Dealer is responsible for arranging for the execution of the Agreement and related materials by the Investor as a condition of the Dealer investing assets of the Investor in the selected SEI Portfolio.
  4. As the Filer does not have any direct interaction with the Investor, other than through the Dealer that is acting as the Investor’s agent and attorney-in-fact, the Service contemplates (the Program Intention) that the Dealer is solely responsible for compliance with the Know-Your-Client Requirement and the Suitability Requirement at the level of the Investor. In particular, it is the Program Intention that the Dealer is solely responsible for gathering and periodically updating Know-Your-Client information concerning the Investor and confirming the suitability of the selected SEI Portfolio for the Investor given the Investor’s financial goals, risk tolerance and unique circumstances.
  5. In order to give effect to the Program Intention, the Filer is in the process of adopting and will maintain and apply policies and procedures designed to provide reasonable assurance that the Dealers through which the SEI Portfolios are marketed and sold comply with the Know-Your-Client Requirement and the Suitability Requirement with respect to each Investor. These policies and procedures (the KYC and Suitability Oversight Policies and Procedures) include, without limitation,
    1. a written explanation in the Agreement of the different roles and responsibilities of the Filer and the Dealer, and specifically the Filer’s expectation that the Dealer will be solely responsible for gathering and periodically updating Know-Your-Client information concerning the Investor and confirming the suitability of the selected SEI Portfolio for the Investor given the Investor’s financial goals, risk tolerance and unique circumstances;
    2. a requirement that the Dealer not market and sell the SEI Portfolios through an order-execution-only, suitability-exempt channel;
    3. a requirement that the Dealer notify the Filer of each instance whereby an SEI Portfolio is sold to an Investor on the basis of a “client-directed trade” as contemplated by subsection 13.3(2) of NI 31-103 and similar provisions under IIROC or MFDA rules;
    4. a requirement that, for the duration that the Filer holds an Account for the Investor, the Dealer responsible for gathering and periodically updating Know-Your-Client information concerning the Investor and confirming the suitability of the selected SEI Portfolio for the Investor will, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that the Dealer has complied with its Know-Your-Client and suitability obligations to the Investor.
  6. In the absence of the Exemption Sought, the Filer would be required to:
    1. gather and update the information contemplated by the Know-Your-Client Requirement for each Investor with respect to its investment in an SEI Portfolio, although such information may be duplicative of the detailed Know-Your-Client information required to be collected by the Dealer from the Investor prior to its selection of a suitable SEI Portfolio;
    2. ensure that each Service Trade in a given Investor’s SEI Portfolio is suitable for such Investor in accordance with the Suitability Requirement rather than invested on terms that are suitable to the particular SEI Portfolio itself; and
    3. to deliver account statements and investment performance reports to clients who have invested in the SEI Portfolios, although such information may be duplicative of the client documents required to be delivered by the Dealer.

Account Reporting

  1. Under the Service, the Filer is responsible for maintaining appropriate records of Portfolio Assets, including all purchases and redemptions, and will provide regular transaction reporting to the Dealer, as agent of the Investor.
  2. The Filer is in the process of adopting and will maintain and apply policies and procedures designed to provide reasonable assurance that the Dealers through which the SEI Portfolios are marketed and sold comply with the client-reporting obligations under the applicable rules of the MFDA or IIROC, as applicable (the Client Reporting Oversight Policies and Procedures). These policies and procedures will include, without limitation,
    1. a requirement that the Filer maintain its own records of each Investor’s investment positions and trades;
    2. a requirement that the Filer inform each Investor in writing, in the Agreement or otherwise, that it will not provide account statements and investment performance reports in addition to those delivered by the Dealer;
    3. a requirement that, for the duration that an Investor holds an Account with the Filer, the Dealer responsible for providing client reporting for the Investor will, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that the Dealer has:
      1. complied with its client reporting obligations under the applicable rules of the MFDA or IIROC, as applicable; and
      2. performed documented sample testing and reconciliations to provide reasonable assurance that the account statements and investment performance reports delivered by the Dealers to the Investor are complete, accurate and delivered on a timely basis in a format that is compliant with applicable rules of the MFDA or IIROC, as applicable.

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 on the following conditions:

    1. the Filer is, at the time of any Service Trade, registered under the Legislation as an adviser in the category of portfolio manager;
    2. each Service Trade is made in accordance with the terms of the selected SEI Portfolio;
    3. the Filer has adopted and maintains and applies the KYC and Suitability Oversight Policies and Procedures; and
    4. the Filer has adopted and maintains and applies the Client Reporting Oversight Policies and Procedures.

September 11, 2019

In respect of the Dealer Registration Exemption

“M. Cecilia Williams”                                                           “Mary Anne De Monte-Whelan”       
Commissioner                                                                     Commissioner
Ontario Securities Commission                                        Ontario Securities Commission

September 11, 2019

In respect of the Know Your Client Exemption, Suitability Exemption and Statement Delivery Exemption

“Elizabeth King”
Deputy Director, Compliance and Registrant Regulation Branch
Ontario Securities Commission