Davis-Rea Ltd. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from sections 15.3(2), 15.3(4)(c), 15.6(a)(i), 15.6(d), 15.8(2)(a) and 15.8(3)(a) of National Instrument 81-102 Mutual Funds to permit mutual funds, including mutual funds that have not distributed securities under a simplified prospectus in a jurisdiction for 12 consecutive months, to include in their sales communications performance data for the period when the funds were not reporting issuers -- relief also granted from section 2.1 of National Instrument 81-101 Mutual Fund Prospectus Disclosure for the purposes of the relief requested from Item 4 of Part 1 of Form 81-101F3 Contents of Fund Facts Document, to permit the Funds to include in their respective fund facts for certain classes, the past performance data for the period when the funds were not reporting issuers.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 15.3(2), 15.3(4)(c), 15.6(a)(i), 15.6(d), 15.8(2)(a), 15.8(3)(a), 19.1.
National Instrument 81-101 Mutual Fund Prospectus Disclosure, s. 2.1.
Item 4 of Part I of Form 81-101F3 Contents of Fund Facts Document.
February 14, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO
AND
IN THE MATTER OF DAVIS-REA LTD. (the Filer)
AND
IN THE MATTER OF DAVIS-REA BALANCED FUND (the Balanced Fund), DAVIS-REA EQUITY FUND (the Equity Fund)
AND DAVIS-REA FIXED INCOME FUND (the Income Fund) (each a Fund, and collectively, the Funds)
DECISION
IN THE MATTER OF DAVIS-REA LTD. (the Filer)
AND
IN THE MATTER OF DAVIS-REA BALANCED FUND (the Balanced Fund), DAVIS-REA EQUITY FUND (the Equity Fund)
AND DAVIS-REA FIXED INCOME FUND (the Income Fund) (each a Fund, and collectively, the Funds)
DECISION
IN THE MATTER OF DAVIS-REA BALANCED FUND (the Balanced Fund), DAVIS-REA EQUITY FUND (the Equity Fund)
AND DAVIS-REA FIXED INCOME FUND (the Income Fund) (each a Fund, and collectively, the Funds)
DECISION
DECISION
Background
The Ontario Securities Commission (the OSC) has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of Ontario (the Legislation) exempting the class O units of the Funds and the class A units of the Balanced Fund from:
(a) sections 15.3(2), 15.3(4)(c), 15.6(a)(i), 15.6(d), 15.8(2)(a) and 15.8(3)(a) of National Instrument 81-102 Mutual Funds (NI 81-102) to permit the Funds to include past performance data in sales communications of the Funds notwithstanding that:
(i) the Funds have not distributed their securities under a simplified prospectus for 12 consecutive months; and
(ii) the performance data will relate to a period prior to the Funds offering the securities under a simplified prospectus; and
(b) section 2.1 of National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) for the purposes of the relief requested from Form 81-101F3 Contents of Fund Facts Document (Form 81-101F3);
(c) items 5(2), 5(3) and 5(4), and Instructions (1) and (5), of Part 1 of Form 81-101F3 in respect of the requirement to comply with sections 15.3(2), 15.3(4)(c), 15.6(a)(i), 15.6(d), 15.8(2)(a) and 15.8(3)(a) of NI-81-102 to permit the Funds to include past performance data in the fund facts of the Funds (the Fund Facts) notwithstanding that:
(i) the Funds have not distributed their securities under a simplified prospectus for 12 consecutive months; and
(ii) the performance data will relate to a period prior to the Funds offering the securities under a simplified prospectus.
(collectively, the Requested Relief).
Interpretation
Defined terms contained in NI 81-102, National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and National Instrument 14-101 Definitions have the same meaning in this decision, unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation governed by the laws of Ontario and is registered as a portfolio manager in Ontario, Alberta, British Columbia, Manitoba, Nova Scotia and Québec. The Filer is also registered as an exempt market dealer in Ontario and Alberta, and as investment fund manager in Ontario. The Filer's head office is located in Toronto, Ontario.
2. The Filer is the investment fund manager, portfolio manager and promoter of the Funds.
The Funds
3. The Balanced Fund (formerly called the Davis-Rea Balanced Pooled Fund) was established on February 7, 2003 and is governed by an amended and restated mutual fund trust agreement dated as of the 12th day of September 2013 (the Master Trust Agreement).
4. The Equity Fund (formerly called the Davis-Rea Equity Pooled Fund) and the Income Fund (formerly called the Davis-Rea Fixed Income Pooled Fund) were each established on May 31, 2011 and are also governed by the Master Trust Agreement.
5. Since the inception date of each Fund, until the simplified prospectus and the annual information form for the Funds dated March 18, 2013 (collectively, the Prospectus), which were filed pursuant to NI 81-101, were receipted by the OSC on March 20, 2013, class O units of the Funds and class A units of the Balanced Fund (collectively, the Units) were previously distributed to investors across Canada on a prospectus-exempt basis in accordance with the requirements of National Instrument 45-106 Prospectus and Registration Exemptions.
6. The Filer and the Funds are not in default of securities legislation in Ontario or any other province or territory of Canada.
7. Upon the issuance of the receipt for the Funds' Prospectus on March 20, 2013, the Funds have been permitted to commence distributing their Units to the public and the Funds have become reporting issuers under the securities laws of Ontario. The Funds became subject to the requirements of NI 81-102 and all aspects of NI 81-106 at that time. Previously, the Funds had distributed their annual audited and semi-annual unaudited financial statements to all holders of its securities in accordance with the requirements of NI 81-106.
8. Since the inception date of each Fund, each Fund has, except as noted in the next sentence, complied with the investment restrictions and practices contained in NI 81-102. From August 30, 2012 until September 21, 2012, the Equity Fund held one security that represented 10.44% of the net asset value of the Equity Fund on the purchase date, and from March 22, 2012 until June 6, 2012, the Equity Fund held one security that represented 12.61% of the net asset value of the Equity Fund on the purchase date.
9. As reporting issuers in Ontario, the Funds are being managed in the same way as they were managed before they became reporting issuers in Ontario. As a result of becoming reporting issuers in Ontario:
(a) the Funds' investment objectives have not changed, other than to provide additional detail as required by NI 81-101;
(b) the management fees charged to the holders of the Class O units of the Funds, and the Class A units of the Balanced Fund, which were the only units of the Funds that were offered before the Funds became reporting issuers in Ontario, have not changed;
(c) the day-to-day administration of the Funds has not changed, other than to comply with the additional regulatory requirements associated with being a reporting issuer in Ontario (none of which will impact the portfolio management of any Fund) and to provide additional features that are available to investors who decide to buy Units of the Funds as described in the Prospectus; and
(d) the management expense ratio (the MER) of the Funds has not increased by more than 0.10%, which the Filer considers to be an immaterial amount.
10. The Filer proposes in Ontario to present the performance data of the class O units of the Funds and the class A units of the Balanced Fund for the time period since the inception of that Fund in sales communications and Fund Facts pertaining to that Fund based on the financial statements (annual and interim) of that Fund. The past performance data of the Manager's composites, which included Units of the Funds, complied with the Global Investment Performance Standards (GIPS), and have been verified by an independent auditor.
11. Without the Requested Relief, sales communications and Fund Facts pertaining to the Funds in Ontario would not be permitted to include performance data until the Funds have distributed Units under the Prospectus for 12 consecutive months, and sales communications and Fund Facts pertaining to the Funds would only be permitted to include performance data for the period commencing after the date on which the Funds commenced distributing Units under the Prospectus.
12. As a reporting issuer in Ontario, each Fund is required under NI 81-101 to prepare and file Fund Facts. The Filer proposes to include in the Fund Facts for the class O units of the Funds and the class A units of the Balanced Fund, past performance data in the chart required by items 5(2), 5(3) and 5(4) under the sub-headings "Year-by-year returns", "Best and worst 3-month returns" and "Average return", respectively, related to periods prior to the Funds becoming reporting issuers in Ontario. Without the Requested Relief, the Fund Facts cannot include performance data of the Funds that relate to a period prior to the Funds becoming reporting issuers in Ontario.
13. As a reporting issuer in Ontario, each Fund is required by NI 81-106 to prepare and send annual and interim management reports of fund performance (each, a MRFP) in accordance with NI 81-106. The most recent financial statements prepared by the Funds under NI 81-106 were the unaudited semi-annual financial statements for the period ended June 30, 2013, which did not reflect the Exemption Sought or the NI 81-106 Relief (defined below). The Filer has filed a separate application for exemptive relief from certain provisions of NI 81-106 (the NI 81-106 Relief) to enable the Funds to include in their MRFPs the performance data of the class O units of the Funds and the class A units of the Balanced Fund that relate to a period prior to the Funds becoming reporting issuers in Ontario.
14. The performance and other financial data of the Funds for the time periods before they became reporting issuers in Ontario is significant and meaningful information for existing and prospective investors of class O units of the Funds and class A units of the Balanced Fund.
Decision
The OSC is satisfied that the decision meets the test set out in the Legislation for the OSC to make this decision.
The decision of the OSC under the Legislation is that the Requested Relief is granted provided that:
(a) any sales communication and any Fund Facts that contains performance data of class O units of the Funds or class A units of the Balanced Fund relating to a period prior to when that Fund was a reporting issuer in Ontario discloses:
(i) that the Fund was not a reporting issuer in Ontario during such period; and
(ii) that the expenses of that Fund would have been higher during such period had that Fund been subject to the additional regulatory requirements applicable to a reporting issuer in Ontario;
(b) the information contained under the heading "Fund Expenses Indirectly Borne by Investors" in Part B of the simplified prospectus of the Funds based on the MER for the class O units of the Funds and the class A units of the Balanced Fund for the financial year ended December 31, 2013 be accompanied by disclosure that:
(i) the information is based on the MER of each Fund for its last completed financial year when its class O units and, in the case of the Balanced Fund, its class A units, were offered privately during a period of time in such financial year; and
(ii) the MER of each Fund may increase as a result of each Fund offering its class O units and, in the case of the Balanced Fund, its class A units, under a simplified prospectus; and
(c) the Funds prepare their MRFPs in accordance with the NI 81-106 Relief.