Mackenzie Financial Corporation
Headnote
Pursuant to 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 by an affiliated mutual fund dealer.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7(1).
Securities Act, R.S.O. 1990, c. S.5, 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, 15.1(2).
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 MACKENZIE FINANCIAL CORPORATION (the Filer)
DECISION
Background
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) exempting the Filer from:
(a) the requirement (Dealer Registration Requirement) in the Legislation that the Filer be registered as a dealer in order to effect Rebalancing Trades (as defined below) and Weighting Change Trades (as defined below) executed with respect to a Model Portfolio (as defined below) (Dealer Registration Exemption);
(b) with respect to clients in the Model Portfolios (as defined below), the requirement (the Know Your Client 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 client;
(ii) establish whether the client 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 client'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 (collectively, the Know Your Client Exemption);
(c) with respect to clients invested in the Model Portfolios, the requirement (Suitability 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, the purchase or sale is suitable for the client (the Suitability Exemption); and
(d) the requirement (the Statement Delivery 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 Exemption and together with the Dealer Registration Exemption, Know Your Client Exemption and Suitability Exemption, the 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.
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.
NI 31-103 means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation amalgamated under the laws of Ontario with its head office located in Toronto, Ontario.
2. The Filer 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.
3. The Filer 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).
4. Quadrus Investment Services Ltd. (Quadrus) is a corporation incorporated under the laws of Canada with its head office located in London, Ontario.
5. Quadrus 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 (MFDA).
6. Quadrus 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. The Filer, Quadrus and the New Funds are not in default of securities legislation in any Jurisdiction.
The Service
10. The Filer 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 the Filer 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 the Filer in respect of I Series securities; instead, I Series investors pay a management and administration fee directly to the Filer.
12. Under the Service, the Filer 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. The Filer will construct Model Portfolios which provide exposure to the different Asset Classes. In the case of certain Asset Classes, the Filer 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 the Filer.
15. Quadrus 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 Quadrus dealing representative 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 Quadrus dealing representative as most suitable for the potential client. Where there is a choice of Funds within a particular Asset Class for the Model Portfolio, the Quadrus dealing representative will provide a recommendation for the specific Fund to be used in the particular Asset Class.
17. The client will discuss the recommended Model Portfolio and the recommended specific Funds with their Quadrus 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 Quadrus and the Filer 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 the Filer in connection with the Filer's management of the Model Portfolios and will interact solely with Quadrus and approved persons of Quadrus in connection with the Filer's management of the Model Portfolios and Quadrus' 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) The Filer will receive management and administration fees directly from each client in respect of the client'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 Quadrus and includes the cost to the Filer of offering and managing the Service.
(b) Quadrus 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 Quadrus and the Filer sets out, amongst other matters, the following:
(a) Model Portfolio -- The client will authorize the Filer 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 the Filer 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 Quadrus, 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) No Changes to Funds in Model Portfolio -- None of Quadrus, the Filer 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 client 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 the Filer 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 the Filer 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 the Filer and instead, Quadrus 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 the Filer and then will instruct Quadrus 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 the Filer 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 Quadrus or the Filer to add a new Fund into an Asset Class;
(g) Rebalancing Trades -- The client will authorize the Filer 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 Quadrus -- The client will acknowledge that Quadrus 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 Quadrus 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 client, and Quadrus 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 Quadrus 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 Quadrus dealing representative 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 the Filer'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 the Filer 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 the Filer will take this non objection as consent to make the appropriate changes to the client's Model Portfolio of Funds on the effective date.
Account Reporting
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 Quadrus.
28. The Weighting Change Trades and Rebalancing Trades will be reflected in each client's account(s) with Quadrus on the business day following such trades and the records of the Filer and Quadrus are reconciled daily.
29. Clients will be able to access their accounts via the internet on a daily basis.
30. Trade confirmations for the initial allocation trades will be provided by Quadrus and trade confirmations for each Weighting Change Trade and Rebalancing Trade will be provided by the Filer.
31. Quadrus will send statements of account to each client in the Service on a quarterly basis.
32. An investment performance report will be sent to each client in the Service by Quadrus on an annual basis.
33. The Filer will provide each client in the Service with an annual tax reporting package.
Exemption Sought
34. In the absence of the Exemption Sought, the Filer would be required:
(a) to register as a mutual fund dealer under the Legislation and become a member of the MFDA in order to effect the Weighting Change Trades and Rebalancing Trades;
(b) to gather and update the information contemplated by the Know Your Client Requirement in subsection 13.2 of NI 31-103 for each client in the Service in order to fulfil its obligations as a registered adviser;
(c) by the Suitability Requirement in subsection 13.3 of NI 31-103, to ensure that each Weighting Change Trade and Rebalancing Trade is suitable for each client in the Service, rather than invested in accordance with the terms of the client's I Series Account Agreement, in order to fulfil its obligations as a registered adviser; and
(d) 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 in the Service.
35. Quadrus does not require an exemption from the adviser registration requirement under the Legislation as a result of its involvement with the Model Portfolio as it will not be engaged in providing discretionary management advice to clients in connection with the management of the Model Portfolios and nor will it be participating in the Weighting Change Trades or Rebalancing Trades.
36. Quadrus does not require an exemption from the trade confirmation requirement under the Legislation as it will send trade confirmations after the initial allocation trades and thereafter, it will not act on behalf of a client in the Service to effect any Weighting Change Trades or Rebalancing Trades.
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 provided that:
(a) the Filer is, at the time of each Weighting Change Trade and Rebalancing Trade, registered under the Legislation as an adviser in the category of portfolio manager;
(b) each Weighting Change Trade and Rebalancing Trade is made in accordance with the terms of the selected Model Portfolio; and
(c) the Filer
(i) takes reasonable steps to assure itself that Quadrus has complied with the Know Your Client Requirement and the Suitability Requirement with respect to each client in the Service;
(ii) maintains its own records of each client's investment positions and trades;
(iii) informs each client in writing that it will not provide account statements and annual performance reports in addition to those delivered by Quadrus;
(iv) has a written agreement with Quadrus concerning their respective responsibilities regarding the delivery of account statements and investment performance reports to clients in the Service; and
(v) takes reasonable steps, including documented sample testing and reconciliations, to verify that account statements and investment performance reports are delivered by Quadrus to clients and are complete, accurate and delivered on a timely basis in a format that is compliant with applicable rules of the MFDA.
In respect of the Dealer Registration Exemption
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"Robert P. Hutchison"
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"Peter Currie"
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Commissioner
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Commissioner
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Ontario Securities Commission
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Ontario Securities Commission
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In respect of the Know Your Client Exemption, Suitability Exemption and Statement Delivery Exemption