Fiduciary Trust Company of Canada
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, trusted contact person 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 affiliated and unaffiliated mutual fund 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, 13.2.01, 13.3, 14.14, 14.14.1, 14.18 and 15.1(2).
December 13, 2022
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 FIDUCIARY TRUST COMPANY OF CANADA (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 the following requirements with respect to clients invested in Model Portfolios (as defined below):
(a) the requirement (Dealer Registration Requirement) in the Legislation that the Filer be registered as a dealer in order to effect Rebalancing Trades, Fee Redemption Trades and Weighting Change Trades (all as defined below), executed with respect to a Model Portfolio (Dealer Registration Exemption);
(b) the requirement (the Know Your Client Requirement) in the Legislation that the Filer 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 profile, among other information, to enable the Filer to meet its obligations under the Legislation to make a determination with respect to the Suitability Requirement (as defined below);
(collectively, the Know Your Client Exemption);
(c) the requirement (the Trusted Contact Person Requirement) in the Legislation that the Filer take reasonable steps to:
(i) obtain from the client the name and contact information of a trusted contact person, and the written consent of the client for the Filer to contact the trusted contact person to confirm or make inquiries about any of the following:
a. the Filer's concerns about possible financial exploitation of the client;
b. the Filer's concerns about the client's mental capacity as it relates to the ability of the client to make decisions involving financial matters;
c. the name and contact information of a legal representative of the client, if any;
d. the client's contact information; and
(ii) keep the information described above current
(collectively, the Trusted Contact Person Exemption);
(d) the requirement in the Legislation (Suitability Requirement) 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, or upon the occurrence of any other required suitability assessment event, such action is suitable for the client (the Suitability Exemption); and
(e) 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).
The Dealer Registration Exemption, Know Your Client Exemption, Trusted Contact Person Exemption, Suitability Exemption, and the Statement Delivery Exemption are collectively referred to as 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 each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, and Yukon Territory (the Other Jurisdictions, and together with the Jurisdiction, 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.
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 federally-regulated trust company, with its head office located in Toronto, Ontario.
2. The Filer is registered as a portfolio manager in each of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador and Yukon Territory, and as a commodity trading manager in Ontario. The Filer provides portfolio management services primarily to high net worth individuals and families through separately managed accounts, pooled funds, and mutual funds.
3. The Filer is a member of the Franklin Templeton group of companies and is a subsidiary of Franklin Templeton Investments Corp. (FTIC). FTIC is registered as a portfolio manager, exempt market dealer and mutual fund dealer in each of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador and Yukon Territory. FTIC is also registered as an investment fund manager in each of Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia, Ontario, and Québec and as a commodity trading manager in Ontario.
4. The Filer and FTIC are both indirect wholly-owned subsidiaries of Franklin Resources, Inc.
5. As described in more detail below, the Filer, in its role as portfolio manager, will create and manage model portfolios (the Services), comprising investment funds managed by the Filer, FTIC, another affiliate of the Filer or third-party unaffiliated investment fund managers (collectively, the Funds).
6. Each Fund is or will be an open-ended mutual fund, including an exchange-traded fund, established under the laws of Ontario or another Jurisdiction.
7. Each Fund is or will be a reporting issuer in one or more of the Canadian Jurisdictions and is or will be subject to the provisions of National Instrument 81-102 Investment Funds.
8. The Filer is not in default of securities legislation in any of the Canadian Jurisdictions.
The Services
9. The Filer will provide the Services, which will be available to clients of investment dealers and mutual fund dealers that are both affiliated and unaffiliated with the Filer (the Dealers). The Dealers are members of the Investment and Industry Regulatory Organization of Canada or any successor thereto (IIROC), as well as members of the Mutual Fund Dealers Association of Canada or any successor thereto (MFDA).
10. The Services will allow investors to match their risk profile and investment objectives to a model portfolio of Funds (each, a Model Portfolio) and have the Filer rebalance such investments on a pre-determined basis.
11. The Filer will design the asset mix and select securities, as well as direct trades in the Model Portfolios. Each Model Portfolio will comprise a selection of Funds and will have its own unique allocation of investment funds that are exposed to different asset classes (the Asset Classes).
12. Exposure to the different Asset Classes in a Model Portfolio will be achieved using the Funds. Each Fund will have a percentage target weight within an Asset Class (the Target Weight), which may, due to changes in the market value of the Fund, increase or decrease within an upper and lower range (the Permitted Range). From time to time, the Filer may decide to change the Target Weight or Permitted Range of the Funds in the Model Portfolio or may replace a Fund with one or more alternative Funds (the Model Re-allocation).
13. The applicable Dealer will collect all of the required know-your-client (KYC), trusted contact person (TCP) and suitability information (including the client's personal circumstances, financial circumstances, investment knowledge, investment needs and objectives, investment time horizon and risk profile) for each client who wishes to participate in the Services. A registered dealing representative of the Dealer (a Registered Representative) will perform a KYC analysis to determine which Model Portfolio is suitable for each client. Based on the KYC analysis, a detailed investment policy statement or similar document (the Investment Policy Statement) will be created for the client of the Dealer and a recommended Model Portfolio will be generated through the Service.
14. The client will discuss the recommended Model Portfolio and the recommended specific Funds with their Registered Representative. The Registered Representative will communicate with the client in accordance with the Dealer's usual processes and in accordance with securities legislation, which may include face-to-face meetings (in person or on-line) and/or via telephone or email or other written correspondence. However, the client ultimately chooses the Model Portfolio. The client has no ability to select funds within a Model Portfolio.
15. The Investment Policy Statement or other similar document will reflect 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.
16. Once the client confirms the final Investment Policy Statement, the client will sign an acknowledgement form or similar document that describes the fees and provides for the payment of the fees to the Dealer and the Filer and the terms of Service (the Client Acknowledgement Form), approving the final Investment Policy Statement and the Model Portfolio, and authorizing the Filer to implement and maintain the Model Portfolio.
17. When, due to changes in the relative market value of each Fund or additional investments by a client, one or more Funds or Asset Classes in an investor's Model Portfolio exceed the Permitted Range, the Filer will execute appropriate trades, within a reasonable time, so that each Fund is returned to a relative weight that is within the Permitted Range (the Account Rebalance). The client will authorize the Filer to undertake Account Rebalances in the Client Acknowledgement Form.
18. Clients will have no direct contact with the Filer in connection with the Filer's management of the Model Portfolios. Clients will interact solely with the applicable Dealer and Registered Representatives of the Dealer in connection with the Filer's management of the Model Portfolios and the Dealer's administration of the Dealer's accounts.
19. Each Dealer and their Registered Representatives do not purport to offer managed accounts to their clients -- their recommendation is limited to recommending that a client participate in the Service, through which the client will invest in a Model Portfolio. Although the Filer develops the Model Portfolios, each Dealer and each Registered Representative must determine whether or not investing in the constituent Funds pursuant to the Model Portfolio is suitable for that client. The Filer is responsible for developing the Model Portfolios and managing them, but does not refer to any specific client's circumstances in doing so.
20. A client may terminate the Services at any time by contacting their Dealer.
Client Agreement and Client Reporting
21. If the prospective client decides to proceed with investing in a Model Portfolio, an agreement by way of the Client Acknowledgment Form (the Agreement) in respect of the Service is entered into between the client, the Dealer, and the Filer, which will set out, among other matters, the following:
(a) Model Portfolio -- The client will authorize the Filer to manage the client's investment on a discretionary basis with a view to ensuring that the client's account is managed in accordance with the agreed upon Model Portfolio and within the Permitted Ranges indicated in the Agreement, which may be adjusted in the discretion of the Filer, but provides 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 the applicable Dealer, which results in a different Model Portfolio being more suitable for the client, the Registered Representative of the Dealer will need to undertake the analysis described in paragraphs 14 and 14 above and enter into a new Agreement before the client's investments are changed to reflect the new Model Portfolio;
(c) KYC, TCP and suitability -- The client will acknowledge that the Know Your Client Requirement, the Trusted Contact Person Requirement, and the Suitability Requirement is not the responsibility of the Filer, but instead will be that of the Dealer who will gather and periodically update the KYC and TCP information concerning the client and confirm, on at least an annual basis, the suitability of the selected Model Portfolio for the client;
(d) Weighting Change Trades -- The client will authorize the Filer to use its discretion, from time to time, to make decisions regarding certain changes to the Permitted Ranges of a Model Portfolio (Weighting Changes) and trades in connection with such Weighting Changes, including authorizing the Filer to use its discretion to change and update the Permitted Range within the Model Portfolio by purchasing and redeeming securities of the Funds in the Model Portfolio (the Weighting Change Trades);
(e) 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 and use its discretion to effect a Model Re-allocation or an Account Rebalance (the Rebalancing Trades);
(f) Fee Redemption Trades -- The client will authorize the Filer to redeem units of the Funds to pay fees owed by the client pursuant to the Agreement (the Fee Redemption Trades);
(g) The Filer will be responsible to the client for ensuring that the selected Model Portfolio is managed in accordance with the terms agreed upon by the client; and
(h) No discretionary authority for the Dealers -- The client will acknowledge that the Dealer will not have discretionary authority to participate in the management of the Model Portfolio or to effect Weighting Change Trades, Rebalancing Trades or Fee Redemption Trades.
22. In addition to the Agreement, the client will also be provided:
(a) with the final Investment Policy Statement prior to or concurrently with the execution of the Agreement which sets out the composition of the Model Portfolio, the Target Weight of the Funds, the method by which the Permitted Range is determined, the fees payable to the Dealer and the Filer as well as the rules governing the investment and management of the Model Portfolio;
(b) within two days of trades being implemented for the Model Portfolio, with the Fund Facts or other document, as may be required by applicable securities laws, in respect of the Funds included in the Model Portfolio. In the event that, as part of the Rebalancing Trades, a new replacement Fund is incorporated as part of the Model Portfolio, the client will similarly be provided with the Fund Facts for the replacement Fund, subject to any applicable exemption available to the Dealer; and
(c) with trade confirmations by the Dealer for the initial allocation trades when the client first invests in a Model Portfolio.
23. Where the Dealer determines that a Model Portfolio is no longer appropriate for the client or that a different Model Portfolio would be more appropriate for the client, this will be communicated to the Filer and the client by the Dealer, and the Dealer will take appropriate action. A change to a different Model Portfolio will not be made without the client entering into a new Agreement in respect of the new Model Portfolio.
24. The Dealer is responsible for arranging for the execution of the Agreement and related materials by the client. Trade confirmations for the initial allocation trades will be provided by the Dealer. The Dealer will not act on behalf of the client when the Filer effects a Weighting Change Trade, Rebalancing Trade or Fee Redemption Trade for the client. Accordingly, the Dealer will not be required by the Legislation to deliver trade confirmations to the client for Weighting Change Trades, Rebalancing Trades or Fee Redemption Trades. The documentation executed by the client in connection with establishing the Services will disclose that the client will not receive trade confirmations for Weighting Change Trades, Rebalancing Trades or Fee Redemption Trades.
25. The Dealer will reflect all Weighting Change Trades, Rebalancing Trades or Fee Redemption Trades in the client's account in accordance with the Legislation.
26. Each Dealer will be responsible for providing clients with account statements, trade confirmations, performance reports and any other reports or statements required by the Legislation.
27. Account opening documents relating to the Services will explain the different responsibilities of the Dealer 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 the Dealer alone will have the responsibility to determine that the selected Model Portfolio is and remains suitable for the client.
28. The Funds that will comprise each Model Portfolio will be held directly by each client in their own account with the Dealer and if the client has not already opened an account with the Dealer, the client will complete an account application.
29. Each Dealer will send clients statements of account in accordance with applicable securities legislation, including the requirements of IIROC and MFDA, as applicable. Such statements of account will be sent monthly if any transactions have occurred in the Service during the month, otherwise the statement of account will be sent quarterly or more frequently if the client has requested to receive monthly statements. Such statements of account will identify the assets being managed on behalf of the client through the Services and will include for each Rebalancing Trade, Fee Redemption Trade or Weighting Change Trade, the information that the Dealer would otherwise have been required to include in a trade confirmation in accordance with the Legislation. Such statements of account also will reconfirm that the client will not receive trade confirmations for these trades.
30. Clients will be able to access their accounts in the manner each Dealer makes its accounts available for its clients.
31. An investment performance report will be sent to each client in the Service by the applicable Dealer on an annual basis.
32. The Dealer will also provide the client with an annual tax reporting package.
33. The fees and expenses charged by the Dealer and the Filer will be disclosed in the Agreement and/or applicable Fund prospectus and Fund Facts.
34. There will be no duplication of any fees or charges for the same services as a result of a client's decision to use the Services. No sales charges, redemption fees, switch fees or early trading fees will be charged in connection with any of the trades effected under the Service.
Oversight and Monitoring
35. The following monitoring and oversight procedures will be carried out in connection with each client's account in the Services:
(a) An annual portfolio review will be conducted by the relevant Registered 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.
36. As part of the Service, provided that the client's Registered Representative of the Dealer is given at least 60 days' advance written notice (the Written Notice) and the Model Portfolio remains consistent with its stated investment objective at all times, the Filer may also, from time to time, use its discretion to make Weighting Changes.
37. The Written Notice will describe the proposed Weighting Change and will provide sufficient detail for the Registered Representative to determine whether the Model Portfolios, after the implementation of the proposed change, would continue to be appropriate for their clients. The Written Notice will specify that if the Registered Representative does not provide an objection on behalf of their client to the proposed Weighting Change by a specified date, such non-objection will be deemed to be consent for the changes on the effective date.
Exemption Sought
38. 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 Rebalancing Trades, Fee Redemption Trades or Weighting Change Trades;
(b) to gather and update the information contemplated by the Know Your Client Requirement in section 13.2 of NI 31-103 for each client in the Service in order to fulfil its obligations as a registered adviser;
(c) to gather and update the information contemplated by the Trusted Contact Person Requirement in section 13.2.01 of NI 31-103 for each client in the Service in order to fulfil its obligations as a registered adviser;
(d) by the Suitability Requirement in section 13.3 of NI 31-103, to ensure that each Rebalancing Trade, Fee Redemption Trade or Weighting Change Trade is suitable for each client in the Service, rather than invested in accordance with the terms of the client's Agreement; and
(e) by the Statement Delivery Requirement in subsections 14.14 or 14.14.1 and 14.18 of NI 31-103, to deliver account statements and investment performance reports to each client in the Service.
39. The Dealers do not require an exemption from the adviser registration requirement under the Legislation as a result of their involvement with the Service, as they will not be engaged in providing discretionary management advice to clients in connection with the management of the Model Portfolios and will not be effecting the Rebalancing Trades, Fee Redemption Trades or Weighting Change Trades.
40. The Dealers do not require an exemption from the trade confirmation requirement under the Legislation as they will send trade confirmations after the initial allocation trades and thereafter, they will not act on behalf of a client in the Services to effect any Rebalancing Trades, Fee Redemption Trades or Weighting Change 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 on the following conditions:
(a) the Filer is, at the time of any Rebalancing Trade, Fee Redemption Trade or Weighting Change Trade, registered under the Legislation as an adviser in the category of portfolio manager;
(b) each Rebalancing Trade, Fee Redemption Trade and Weighting Change Trade is made in accordance with the terms of the selected Model Portfolio;
(c) Each client in the Service is informed in writing in the Agreement or otherwise:
(i) of the roles, duties and responsibilities of the Filer and each Dealer, including that:
a. the Filer will manage the Model Portfolios without reference to the client's circumstances and only in accordance with the terms of the Model Portfolio selected by the client;
b. each Dealer will be solely responsible for gathering and periodically updating KYC and TCP information concerning the client and reviewing, on at least an annual basis, the suitability of the selected Model Portfolio for the client;
(ii) that the client will receive account statements and performance reports from each Dealer, and will not receive account statements and performance reports from the Filer;
(d) the Filer will adopt, maintain, and apply oversight policies and procedures designed to provide reasonable assurance that each Dealer complies with its KYC, TCP, and suitability obligations with respect to each client in the Service, including requiring that:
(i) each Dealer not market and sell the Model Portfolios through an order-execution-only, suitability-exempt channel;
(ii) each Dealer notify the Filer of each instance where a Model Portfolio is sold to a client on the basis of a client-directed trade as contemplated in section 13.3 of NI 31-103 and similar provisions under IIROC or MFDA rules;
(iii) each Dealer be responsible for gathering and periodically updating KYC and TCP information concerning the client and confirming, on at least an annual basis, the suitability of the selected Model Portfolio for each client; and
(iv) each Dealer, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that each Dealer has complied with its KYC, TCP, and suitability obligations with respect to each client in the Service;
(e) the Filer will adopt, maintain, and apply oversight policies and procedures designed to provide reasonable assurance that each Dealer complies with the client reporting obligations under the rules of NI 31-103, the MFDA or IIROC, as applicable, in respect of clients in the Service, including requiring that the Dealer, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that:
(i) the Dealer has complied with its client reporting obligations under the rules of NI 31-103, the MFDA or IIROC, as applicable, and
(ii) the Dealer has undertaken steps in accordance with its policies and procedures to provide reasonable assurance that account statements and investment performance reports delivered to clients are complete, accurate and delivered on a timely basis in a format that is compliant with the rules of NI 31-103, the MFDA or IIROC, as applicable;
(f) the Filer will adopt and maintain oversight policies and procedures designed to provide reasonable assurance that each Dealer complies with its obligations in respect of all trading for clients in connection with the Service, including requiring that each Dealer, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that each Dealer has effected all trades for clients in connection with the Service, but not including Rebalancing Trades, Fee Redemption Trades and Weighting Change Trades, in accordance with the selected Model Portfolios.