National Bank Financial Inc. and National Bank Direct Brokerage Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Revocation of prior relief -- relief granted primarily to extend sunset clause set out in the original decision -- relief granted on terms that are substantially similar to prior relief -- Exemptive relief granted to dealers from the prospectus delivery requirement -- Relief granted from requirement to deliver prospectus subject to dealers sending or delivering a prescribed summary disclosure document to purchasers with trade confirmation when acting as agent of the purchaser -- Relief conditional on implementing alternative prospectus delivery requirement -- Relief consistent with the implementation of the Canadian Securities Administrators Point of Sale Disclosure Project, which contemplates rule-making to codify new alternative prospectus delivery requirement -- Securities Act (Ontario).
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 71(1), 147.
August 24, 2015
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 NATIONAL BANK FINANCIAL INC. AND NATIONAL BANK DIRECT BROKERAGE INC. (individually, a Filer and collectively, the Filers)
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filers for a decision under the securities legislation of the Jurisdictions (the Legislation):
• for exemptive relief from the Prospectus Delivery Requirement (as defined below) in connection with distributions of an ETF Security (as defined below) (the Exemption Sought); and
• revoking a decision the Filers obtained from the Decision Makers dated July 19, 2013 granting the Exemption Sought until September 1, 2015 (the Original Decision).
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 Filers have provided notice that subsection 4.7(1) of Regulation 11-102 respecting Passport System (c. V-1.1, r. 1) (Regulation 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon Territory and Nunavut; 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 (c. V-1.1, r.3), and Regulation 11-102 have the same meaning if used in this decision, unless otherwise defined.
Affiliate Dealer means a registered dealer that is an affiliate of an Authorized Dealer or Designated Broker and that participates in the re-sale of Creation Units (as defined below) from time to time.
Authorized Dealer means a registered dealer that has entered, or intends to enter, into an agreement with an ETF Manager (as defined below) authorizing the dealer to subscribe for, purchase and redeem Creation Units from one or more ETFs on a continuous basis from time to time.
Creation Units means newly issued ETF Securities.
Designated Broker means a registered dealer that has entered, or intends to enter, into an agreement with an ETF Manager to perform certain duties in relation to the ETF, including posting a liquid two-way market for the trading of the ETF's listed securities on an exchange or another marketplace.
ETF means an open end mutual fund of which a class of securities is listed on an exchange in a jurisdiction of Canada.
ETF Facts means a prescribed document in accordance with the regulations, in respect of one or more classes or series of ETF Securities being distributed under a prospectus.
ETF Manager means the duly registered investment fund manager of an ETF.
ETF Security or ETF Securities means a listed security or listed securities of an ETF in a jurisdiction of Canada.
Prospectus Delivery Requirement means the requirement under the Legislation that obligates a dealer to send or deliver to the subscriber or the purchaser or their representative, within a specified time period and in a specified manner, the prospectus, and any amendment to the prospectus, in respect of an application to subscribe for or purchase securities offered in a distribution. In Québec, this requirement is set forth in section 29 of the Securities Act, R.S.Q. c. V-1.1. Collectively, these requirements are referred to as the Prospectus Delivery Requirements.
Prospectus Right of Rescission means the right of action, given to a person under the Legislation, for rescission of, or the revision of the price of, the subscription or purchase of an ETF Security or for damages against a dealer for the failure of the dealer to send or deliver a prospectus to the subscriber or the purchaser or its agent to whom a prospectus, and any amendment, was required to be sent or delivered pursuant to the Prospectus Delivery Requirement. In Québec, as set forth in section 214 of the Securities Act, R.S.Q. c. V-1.1, such a subscriber or a purchaser may apply to have the transaction rescinded or the price revised, at the subscriber's or the purchaser's option, without prejudice to the subscriber's or the purchaser's claim for damages. Collectively, these rights are referred to as the Prospectus Rights of Rescission.
Right of Withdrawal means the right, given to a subscriber or a purchaser under the Legislation, to withdraw from a subscription for or a purchase of securities offered in a distribution if the dealer from which the subscriber or the purchaser subscribed or purchased the securities receives written notice evidencing the intention of the subscriber or the purchaser not to be bound by the subscription or the purchase within two business days of receipt of the latest prospectus or any amendment to the prospectus. In Québec, this right is set forth in section 30 of the Securities Act, R.S.Q. c. V-1.1. Collectively, these rights are referred to as the Rights of Withdrawal.
Trade Confirmation Right of Rescission means the right, given to a subscriber or purchaser of an ETF Security under the securities legislation of some Canadian jurisdictions in certain circumstances, to rescind the subscription or the purchase within 48 hours after receiving confirmation of the subscription or the purchase.
Representations
This decision is based on the following facts represented by the Filers:
1. The Filers are duly registered as investment dealers in one or more Canadian jurisdictions.
2. The head office of National Bank Financial Inc. is located at 1115, Metcalfe Street, 5th floor, Sun Life Building, Montreal, Quebec H3B 4S9, and the head office of National Bank Direct Brokerage Inc. is located at 1100, University Street, 7th floor, Montreal, Quebec H3B 2G7.
3. ETF Securities are, or will be, distributed on a continuous basis in one or more Canadian jurisdictions pursuant to a prospectus. ETF Securities are generally only subscribed for or purchased directly from an ETF by Authorized Dealers or Designated Brokers. Investors are generally expected to purchase ETF Securities through dealers executing trades using the facilities of an exchange or another marketplace. ETF Securities may also be issued directly to ETF investors upon the reinvestment of distributions of income or capital gains.
4. Each of the Filers is either: (1) an Authorized Dealer and/or Designated Broker that from time to time subscribes for and purchases Creation Units directly from one or more ETFs; or (2) an Affiliate Dealer. The Filers are also generally engaged in purchasing and selling ETF Securities of the same class as the Creation Units in the secondary market. Creation Units are generally commingled with ETF Securities purchased in the secondary market. As such, it is not practicable for the Filers to determine whether a particular re-sale of ETF Securities involves Creation Units or ETF Securities purchased in the secondary market.
5. The Filers may also be engaged in purchasing and selling, in the secondary market, ETF Securities of ETFs for which they are not an Authorized Dealer or Designated Broker.
Prospectus Delivery Requirement
6. Each Decision Maker has advised the Filers that it takes the view that the first re-sale of a Creation Unit on an exchange or another marketplace in Canada will generally constitute a distribution of Creation Units under the Legislation and that the Filers are subject to the Prospectus Delivery Requirement in connection with such re-sales. Re-sales of ETF Securities purchased by the Filers in the secondary market, that are not Creation Units, would not ordinarily constitute a distribution of ETF Securities.
7. Compliance with the Prospectus Delivery Requirement is not practicable in the circumstances of re-sales of Creation Units on an exchange or another marketplace by a Filer as the Filer will often not know the identity of a subscriber or a purchaser and will generally not know whether a sale involves Creation Units.
8. The Prospectus Delivery Requirement affects purchasers of ETF Securities differently depending upon whether their purchase order is filled through the re-sale of Creation Units or through a secondary market trade. The Prospectus Delivery Requirement also affects purchasers of ETF Securities differently from subscribers of conventional mutual funds securities because only sales of ETF Securities that are Creation Units are distributions under the Legislation.
9. The Filers, when acting for a purchaser of an ETF Security, are required under the Legislation to deliver a trade confirmation to the purchaser in connection with each trade of an ETF Security, unless a Filer is exempt from the requirement in respect of a particular trade. Purchasers of ETF Securities will be better served if the Filers send or deliver a prescribed summary disclosure document to all purchasers of ETF Securities who are customers of a Filer at the same time as they deliver the trade confirmation, regardless of whether the purchaser's order is filled through the re-sale of a Creation Unit, or through the re-sale of an ETF Security purchased in the secondary market.
10. Various ETF Managers have obtained relief from the requirements to include an underwriter's certificate in Canadian jurisdictions where the applicable securities legislation contains such an obligation and to include a statement respecting subscribers' or purchasers' statutory rights of withdrawal and rescission in an ETF's prospectus (the ETF Relief). Conditions of the ETF Relief include that an ETF must file a prescribed summary disclosure document with the applicable Canadian jurisdictions on SEDAR (the Summary Document).
Civil Liability for Prospectus Misrepresentations
11. The liability under the prospectus civil liability provisions of the Legislation, of an ETF or its investment fund manager for a misrepresentation in a prospectus, will not be affected by the grant of an exemption from the Prospectus Delivery Requirement. Under such provisions, purchasers of Creation Units offered by a prospectus during the period of distribution have a right of action for damages against the ETF and its investment fund manager without regard to whether the purchaser relied on the misrepresentation and whether or not the purchaser in fact received a copy of the prospectus. Under the secondary market disclosure civil liability provisions of the Legislation, purchasers of ETF Securities that are not Creation Units and, therefore, are not offered by prospectus during the period of distribution, have a similar right of action for damages for misrepresentation in a prospectus against the ETF and its investment fund manager without regard to whether the purchaser relied on the misrepresentation and whether or not the purchaser in fact received a copy of the prospectus.
12. The Filers take the view, in the circumstances, that they are not underwriters within the meaning of the Legislation. The Filers do not provide the same services in connection with a distribution of Creation Units as would typically be provided by an underwriter in a conventional underwriting. They are not involved in the preparation of an ETF's prospectus, do not incur any marketing costs or receive any underwriting fees or commissions from the ETFs or the ETF Managers in connection with the distribution of Creation Units. ETF Managers generally conduct their own marketing, advertising and promotion of the ETFs. The Filers generally seek to profit from their ability to subscribe for and redeem ETF Securities by engaging in arbitrage trading to capture spreads between the trading prices of ETF Securities and their underlying securities and by making markets for their clients to facilitate client trading in ETF Securities. In the circumstances, the Filers take the view that a purchaser of ETF Securities will not be entitled to exercise a statutory right of action for rescission or damages against an Authorized Dealer or Designated Broker in the event that the prospectus contains a misrepresentation.
Right of Withdrawal
13. Under the Legislation, if the Prospectus Delivery Requirement applies in respect of a sale of Creation Units, the purchaser of the Creation Units has a Right of Withdrawal.
14. It is not practicable for the Filers to provide purchasers of Creation Units on an exchange or another marketplace with a prospectus in accordance with the Prospectus Delivery Requirement as the Filers will often not know the identity of a purchaser and will generally not know whether the sale involves Creation Units.
15. Where the Exemption Sought is being relied upon by a Filer in respect of a re-sale of Creation Units, the Right of Withdrawal will not be available to the purchaser of Creation Units since the Filer will be exempt from the Prospectus Delivery Requirement. Under the ETF Relief, an ETF will state in its prospectus or amendment to its prospectus that the Right of Withdrawal will not be available in such circumstances. Under the ETF Relief, an ETF will state in its Summary Document that under the securities legislation of some Canadian jurisdictions an investor has the Trade Confirmation Right of Rescission and other rights and remedies if the Summary Document or prospectus contains a misrepresentation.
Prospectus Right of Rescission
16. Under the Legislation, if a dealer is subject to the Prospectus Delivery Requirement in respect of a sale of Creation Units, the purchaser of the Creation Units has the Prospectus Right of Rescission.
17. Where the Exemption Sought is being relied upon by a Filer in respect of a re-sale of Creation Units, the Prospectus Right of Rescission will not be available to the purchaser of Creation Units because the Prospectus Delivery Requirement will not apply. Under the ETF Relief, an ETF will state in its prospectus or amendment to its prospectus that the Prospectus Right of Rescission will not be available in such circumstances.
Trade Confirmation Right of Rescission
18. In applicable Canadian jurisdictions, purchasers of ETF Securities will continue to have the Trade Confirmation Right of Rescission as it is not affected by the grant of an exemption from the Prospectus Delivery Requirement.
Original Decision; Proposed Rules
19. The Filers are seeking to revoke the Original Decision and replace it with this decision.
20. The securities regulatory authorities are developing proposed rule amendments that will require ETF Managers to file an ETF Facts in connection with the filing of a prospectus. If the amendments are adopted, the requirement for ETF Managers to file an ETF Facts will supersede the requirement for ETF Managers to file a Summary Document. Since the introduction of the ETF Facts will likely be subject to a transition period, there may be a period of time where some ETFs have an ETF Facts while other ETFs have a Summary Document. If an ETF Manager files an ETF Facts with respect to a class or series of ETF Securities, the Filers will use such ETF Facts instead of a Summary Document to satisfy their obligations under this decision with respect to any purchase of such class or series of ETF Securities that occurs after the date of the filing of such ETF Facts.
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 (i) the Original Decision is revoked and replaced by this decision and (ii) the Exemption Sought is granted, provided that the Filer is in compliance with the following conditions:
1. Each Filer undertakes to its principal regulator that it will, unless the Filer has previously done so, send or deliver to each purchaser of an ETF Security who is a customer of the Filer, and to whom a trade confirmation is required under the Legislation to be sent or delivered by the Filer in connection with the purchase, the latest Summary Document filed in respect of the ETF Security not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after the purchase of the ETF Security.
2. Each Filer provides to each ETF Manager of an ETF for which it is an Authorized Dealer or Designated Broker, or is an Affiliate Dealer, an executed acknowledgement:
(a) acknowledging receipt of a copy of this decision;
(b) agreeing to send or deliver the Summary Document in accordance with this decision;
(c) undertaking that the Filer will attach or bind one ETF's Summary Document with another ETF's Summary Document only if the documents are being sent or delivered under this decision at the same time to an investor purchasing ETF Securities of each such ETF; and
(d) confirming that the Filer has in place written policies and procedures to ensure that there is compliance with the conditions of this decision.
3. Each Filer provides to each ETF Manager of each ETF in whose ETF Securities it is generally engaged in purchasing and selling in the secondary market on behalf of its customers, but for which it is not an Authorized Dealer or Designated Broker, or is not an Affiliate Dealer, an executed acknowledgement:
(a) acknowledging receipt of a copy of this decision;
(b) agreeing to send or deliver the Summary Document in accordance with this decision;
(c) undertaking that the Filer will attach or bind one ETF's Summary Document with another ETF's Summary Document only if the documents are being sent or delivered under this decision at the same time to an investor purchasing ETF Securities of each such ETF; and
(d) confirming that the Filer has in place written policies and procedures to ensure that there is compliance with the conditions of this decision.
4. Each Filer files with the principal regulator, to the attention of the Director, Investment Funds Branch, on or before January 31st in each calendar year, a certificate signed by an ultimate designated person certifying that, to the best of the knowledge of such person after making due inquiry, the Filer has complied with the terms and conditions of this decision, and the Original Decision, as applicable, during the previous calendar year.
5. If an ETF Manager files an ETF Facts instead of a Summary Document with respect to a class or series of ETF Securities, the latest ETF Facts filed in respect of such class or series of ETF Securities must be substituted for a Summary Document in order to satisfy the foregoing conditions with respect to any purchase of such class or series of ETF Securities that occurs after the date of the filing of such ETF Facts.
The decision, as it relates to one or more Canadian jurisdictions, will terminate on the latest of: (i) the coming into force of any legislation or rule dealing with the Exemption Sought or (ii) the end date of any applicable transition period for any legislation or rule dealing with the Exemption Sought.