IPC Securities Corporation
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- NI 81-105 Mutual Fund Sales Practices, s.9.1 -- exemption from subsection 7.1(3) of NI 81-105 to participating dealers to pay a commission rebate for clients to switch to related funds and exemption from subsection 8.2(3) of NI 81-105 to permit participating dealers to provide evergreen disclosure of equity interests to clients -- the relief will not be prejudicial to clients.
Applicable Legislative Provisions
National Instrument 81-105 Mutual Funds Sales Practices, ss. 7.1(1)(b), 7.1(3), 8.2(3), 9.1.
October 20, 2009
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
IPC SECURITIES CORPORATION
(IPC Securities),
IPC INVESTMENT CORPORATION
(IPC Investment) (collectively, the Filers) and
COUNSEL GROUP OF FUNDS INC.
(Counsel)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers and Counsel for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption under section 9.1 of National Instrument 81-105 Mutual Fund Sales Practices (NI 81-105) exempting the Filers and any other future dealer subsidiaries of Investment Planning Counsel Inc. (IPCI) (collectively, the IPC Dealers) and their representatives from:
(a) the prohibitions contained in paragraphs 7.1(1)(b) and subsection 7.1(3) of NI 81-105 prohibiting the IPC Dealers and their representatives from paying to a securityholder all or any part of a fee or commission payable by the securityholder on the redemption of securities of a mutual fund that occurs in connection with the purchase by the securityholder of securities of another mutual fund that is not in the same mutual fund family (a commission rebate) where the IPC Dealer is a member of the organization of the mutual fund the securities of which are being acquired (the Commission Rebate Relief); and
(b) the requirement to provide disclosure to clients of the IPC Dealers about equity interests held by certain representatives of the IPC Dealers required by subsection 8.2 (3) of NI 81-105 (the Equity Disclosure Relief).
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 Filers and Counsel have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut.
Interpretation
Defined terms contained in NI 81-105 and in 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 Filers and Counsel:
1. IPC Investments is registered in all provinces and territories of Canada as a dealer in the category of mutual fund dealer (or equivalent). IPC Investments is also registered with the principal regulator as a limited market dealer. IPC Investments is a member of the Mutual Fund Dealers Association of Canada.
2. IPC Securities is registered in all provinces, but not in any of the territories, of Canada as a dealer in the category of investment dealer (or the equivalent). IPC Securities is a member of the Investment Industry Regulatory Organization of Canada.
Corporate Structure and Relationships
3. The Filers are members of the organization of:
(a) the mutual funds managed by Counsel (the Counsel Funds);
(b) the mutual funds managed by Mackenzie Financial Corporation (MFC, and mutual funds shall be referred to as the Mackenzie Funds); and
(c) the mutual funds managed by I.G. Investment Management, Ltd. (IGIM, and the mutual funds shall be referred to as the IG Funds).
The Filers may in the future become members of the organization of other mutual funds, since an affiliate of the IPC Dealers may acquire interests in corporations that are managers of mutual funds (Future Affiliated Funds).
4. The Filers and Counsel previously received the same forms of relief as are addressed in this decision under a MRRS decision dated August 31, 2006 (the Previous Decision). Due to the changes in corporate structure described below, the Filers and Counsel cannot continue to rely upon the Previous Decision.
5. The Filers are not in default of securities legislation in any jurisdiction of Canada.
6. IGM Financial Inc. (IGM), a public company listed on The Toronto Stock Exchange, has or will increase its ownership of IPCI such that IPCI becomes for some period of time a wholly-owned subsidiary of IGM Financial. Counsel and the Filers are indirect subsidiaries of IPCI. IGM also owns IGIM, the manager of the IG Funds and MFC, the manager of the Mackenzie Funds. In the future, senior management of IPCI may be permitted to acquire shares of IPCI, but senior management will never be permitted to own, directly or indirectly, in the aggregate more than 15% of shares of IPCI and no individual member of senior management will be able to own, directly or indirectly, more than 10% of the shares of IPCI.
7. A newly incorporated company (IPC Portfolio Services Inc.), an indirect subsidiary of IPCI (and ultimately of IGM), will become the direct parent company of Counsel. Representatives of the IPC Dealers will be permitted to acquire, directly or indirectly (which may be through the ownership of shares of IPCI), in the aggregate up to 27.75% shares in IPC Portfolio Services Inc. The ability to acquire shares of IPC Portfolio Services Inc. will not be conditional upon the past or future sales of Counsel Funds, Mackenzie Funds or Future Affiliated Funds by the representatives.
8. The Filers act as participating dealers in respect of the Counsel Funds and the Mackenzie Funds, as well as for mutual funds managed by unrelated fund managers. The Filers do not distribute securities of the IG Funds.
9. The Filers act independently from Counsel and have no connection with MFC, other than through IGM, being their common ultimate parent company. The Filers and the representatives of the Filers are free to choose which mutual funds to recommend to their clients and consider recommending the Counsel Funds and the Mackenzie Funds to their clients in the same way as they consider recommending other third party mutual funds. The Filers and their representatives comply with their obligations at law and only recommend mutual funds that they believe would be suitable for their clients and in accordance with the clients' investment objectives. Counsel and MFC provide the Filers with the compensation and sales incentives described in the prospectus of the respective funds for distributing the Counsel Funds and the Mackenzie Funds in the same manner as Counsel and MFC do for any participating dealer selling securities of the Counsel Funds and the Mackenzie Funds to their clients. All compensation and sales incentives paid to the Filers by Counsel, MFC and the manager of any Future Affiliated Funds will comply with NI 81-105.
10. The name of Counsel will be changing to Counsel Portfolio Services Inc. effective on or about October 22, 2009.
The Commission Rebate Prohibition
11. Following implementation of NI 81-105 in May 1998, the Filers and Counsel considered the prohibition contained in subsection 7.1(3) of NI 81-105 and its implications for switches by clients from third-party funds into the Counsel Funds. In a decision dated February 16, 2000 (the Original Decision) Counsel received relief from the Canadian securities administrators in all provinces and territories on behalf of all IPC Dealers (which included the Filers) from the prohibitions contained in subsection 7.1(3) to allow representatives of those dealers to pay the fees and commissions payable by clients upon redemption of third-party mutual funds (or "commission rebates") when the clients wish to switch from those third-party funds to the Counsel Funds, to a maximum amount of the commission earned on the purchase of the Counsel Funds. The Original Decision was replaced by the Previous Decision which also permitted the Filers to pay, directly or indirectly, a portion of the commission rebate in these circumstances to "top-up" any payment to a client by a representative so that clients switching into the Mackenzie Funds, Counsel Funds or Future Affiliated Funds from a third-party fund could receive a full commission rebate. This ability to provide clients with a full commission rebate eliminated a "reverse" incentive for clients to move from one third-party fund into another third-party fund, rather than into a Counsel Fund or a Mackenzie Fund that would otherwise exist under section 7.1 of NI 81-105. The Previous Decision addressed the then current corporate structure of Counsel and the Filers.
12. The Previous Decision no longer reflects Counsel's or the Filers' corporate structure and, therefore, Counsel and the Filers cannot continue to rely upon the Previous Decision.
13. Neither the Filers, nor any representative of the Filers, are or will be subject to quotas (whether express or implied) in respect of selling securities of the Counsel Funds or the Mackenzie Funds. None of the Filers, Counsel or MFC or any other member of the respective mutual fund organizations, provide any incentive (whether express or implied) to any representative of the Filers, or to the Filers to encourage those representatives or the Filers to recommend to clients the Counsel Funds or the Mackenzie Funds over third-party managed mutual funds.
14. Counsel and MFC comply with NI 81-105 in respect of sales incentives provided to the Filers in connection with sales of the applicable mutual funds. The Filers also comply with NI 81-105; and, in particular, section 4.1 of NI 81-105 in their compensation practices with their representatives.
15. The Filers believe that the same principles that resulted in the granting of the Previous Decision continue to apply despite the changes in the corporate structure. By imposing conditions that prohibit the members of the mutual fund organization (other than the IPC Dealers), which would include the managers of the mutual funds, from reimbursing the IPC Dealers or their representatives for the commission rebates paid to the IPC Dealers' clients and requiring the IPC Dealers and their representatives to offer commission rebates on identical terms to the IPC Dealers' clients without having such commission rebates conditional upon a switch to a related fund and regardless of whether the client switches to a third-party fund or a related fund, any potential for undue influence on the client is sufficiently mitigated. The conditions will not allow an IPC Dealer or its representatives to give commission rebates only when a client is switching to a related fund, or an IPC Dealer or its representatives to pay more of a commission rebate provided that the client switches to a related fund.
The Equity Interest Disclosure Requirement
16. It is proposed that representatives of the IPC Dealers (or their associates) may acquire equity interests in IPC Portfolio Services Inc. It is also proposed that senior members of management of IPCI (or their associates) may also acquire equity interests in IPCI. The maximum in the aggregate of equity interests held by such persons, directly or indirectly, will not exceed 15% of the outstanding equity interests in IPCI or 27.75% of IPC Portfolio Services Inc. IPC Portfolio Services Inc. was not addressed in the Previous Decision and given the change in ownership of IPCI and the possible purchase of equity interests in IPCI by senior management of IPCI in the future, the Filers and Counsel do not believe they could continue to rely upon the relief with respect to equity interest disclosure granted in the Previous Decision.
17. Without this Decision, subsections 8.2 (3), (4) and (5) of NI 81-105 would require the following:
(a) if a security of one of Counsel Funds, the Mackenzie Funds or a Future Affiliated Fund is traded by any representative of a Filer, the Filer must deliver to the purchaser of that security, a document that discloses:
(i) the amount of shares of IPC Portfolio Services Inc. and/or IPCI owned, directly or indirectly, by
(1) the representatives of that Filer and their associates, in aggregate;
(2) any representative together with his or her associates holding, directly or indirectly, a more than 5% equity interest in IPC Portfolio Services Inc. and/or IPCI; and
(3) the sales representative of that Filer and his or her associates, in aggregate, who is acting on the trade; and
(ii) the approximate percentage that IGM holds, directly or indirectly, of the securities of IPCI, which is the parent company of the Filers and of IPC Portfolio Services Inc., the parent company of Counsel;
(b) pursuant to subsection 8.2(4), a purchaser of a Counsel Fund, a Mackenzie Fund or a Future Affiliated Fund from a Filer must consent to the trade after he or she receives the disclosure document before the trade can be completed; and
(c) pursuant to subsection 8.2(5), a Filer is not required to deliver the disclosure document or obtain the consent of a purchaser of securities of one of the Counsel Funds, the Mackenzie Funds or a Future Affiliated Fund if that purchaser has previously acquired such securities and received a disclosure document, if the information contained in that disclosure document has not changed.
This will also be true with respect to any trades in securities of Counsel Funds, Mackenzie Funds and Future Affiliate Funds by any dealer that may in the future become an IPC Dealer.
18. With respect to trades in the Mackenzie Funds or a Future Affiliated Fund that is not managed by a subsidiary of IPCI (a Non-IPCI Fund), due to the only tangential connection between the Filers and MFC and the manager of the Non-IPCI Fund, as applicable, and, hence, the technical application only of the relevant sections of NI 81-105, the Filers seek a complete exemption from subsection 8.2(3), (4) and (5). Representatives may come to hold equity interests in IPC Portfolio Services Inc., which will be a subsidiary of IGM and an affiliate of MFC. Representatives who are also members of senior management of IPCI may come to hold equity interests in IPCI. The performance of the representatives' equity interest in IPC Portfolio Services Inc. and/or IPCI will not be related to or dependent upon the performance of MFC or any manager of a Non-IPCI Fund.
19. The Filers submit that it is appropriate that the Commission Rebate Relief and Equity Disclosure Relief extend to future IPC Dealers on the basis once such dealers become subsidiaries of IPCI the representations made in pargraphs 3, 5 and 6 through 9 and 13 through 18 will apply equally to such other dealers.
20. The Mackenzie Funds, the Counsel Funds and the Future Affiliated Funds will comply with the disclosure obligations that apply to them as required by subsection 8.2(1) and (2) of NI 81-105. In this way, clients of the IPC Dealers making investments in these funds will have access to complete information about the relationships between the relevant parties.
Decision
The principal regulator is satisfied that the decision meets the test set out in NI 81-105 and the Legislation that provides the principal regulator with the jurisdiction to make the decision.
The decision of the Principal Regulator under NI 81-105 and under the Legislation is that:
1. The Commission Rebate Relief is granted provided that
(a) For each switch made by a client of an IPC Dealer from an unrelated third-party fund to a Counsel Fund, a Mackenzie Fund or a Future Affiliated Fund or from a Counsel Fund to a Mackenzie Fund or a Future Affiliated Fund and vice versa where the IPC Dealer or one of its representatives agrees to pay a commission rebate to that client, the IPC Dealer and the representative will:
(i) Comply with the informed written consent provisions of paragraph 7.1 (1)(a) and the disclosure and consent provisions of Part 8 of NI 81-105 (modified by the Equity Disclosure Relief);
(ii) Advise the client, in writing and in advance of finalizing the switch, that any commission rebate proposed to be made available in connection with the purchase of a Counsel Fund, a Mackenzie Fund or a Future Affiliated Fund will
(A) be available to the client regardless of which mutual fund the redemption proceeds are to be invested in
(B) not be conditional on a purchase of a Counsel Fund, a Mackenzie Fund or a Future Affiliated Fund and
(C) in all cases, be not more than the amount of the gross sales commission earned by the IPC Dealer on the client's purchase of a Counsel Fund, Mackenzie Fund or Future Affiliated Fund; and
(b) The actual amount of the commission rebate paid in respect of the switch will be not more than the amount referred to in paragraph (ii) (C) above.
(c) An IPC Dealer or its representatives that provide commission rebates will not be reimbursed directly or indirectly in respect of that commission rebate in connection with a switch to a Counsel Fund, a Mackenzie Fund or a Future Affiliated Fund by any member of the organization of that fund, other than the IPC Dealer.
(d) Each IPC Dealer's compliance policies and procedures that relate to this decision will emphasize that any commission rebate agreed to be paid to a client by a representative cannot be conditional on the client acquiring a Counsel Fund, a Mackenzie Fund or a Future Affiliated Fund and will be made available to the client if the client wishes to switch to a unrelated third-party fund.
2. The Equity Disclosure Relief is granted provided that with respect to trades in the Counsel Funds or in a Future Affiliated Fund that is managed by a subsidiary of IPCI (an IPCI Fund):
(a) If a representative, together with his or her associates, owns, directly or indirectly, less than 5% of the securities of IPCI and less than 5% of the securities of IPC Portfolio Services Inc. and/or, if the representative is not a branch manager, the branch manager of that representative, together with his or her associates, owns, directly or indirectly, less than 5% of the securities in IPCI and less than 5% of the securities of IPC Portfolio Services Inc., and that representative trades in a security of a Counsel Fund or an IPCI Fund, then that representative will provide a disclosure document to the client that discloses that:
(i) the representatives of the IPC Dealer and their associates, in aggregate, own, directly or indirectly, no more than 15% of the securities of IPCI or more than 27.75% of IPC Portfolio Services Inc.;
(ii) either or both, as applicable,
(A) the representative of the IPC Dealer, who is acting on the trade, and his or her associates, in aggregate, own, directly or indirectly, no more than 5% of the securities of IPCI and no more than 5% of the securities of IPC Portfolio Services Inc.;
(B) the branch manager of the representative of the IPC Dealer, who is acting on the trade, and his or her associates, in aggregate, own, directly or indirectly, no more than 5% of the securities of IPCI and no more than 5% of the securities of IPC Portfolio Services Inc.; and
(iii) the client may call a specified toll-free number and obtain the actual amount of the equity interests held in IPCI and/or IPC Portfolio Services Inc. by above-noted individuals or groups of individuals.
(b) If a representative, together with his or her associates, owns, directly or indirectly, more than 5% of the securities of either IPCI or IPC Portfolio Services Inc. and/or if the representative is not a branch manager, the branch manager of the representative, together with his or her associates, owns, directly or indirectly, more than 5% of the securities of either IPCI and/or IPC Portfolio Securities Inc. and that representative trades in a security of a Counsel Fund or an IPCI Fund, then that representative will provide a disclosure document to the client that discloses that:
(i) the representatives of the IPC Dealer and their associates, in aggregate, own, directly or indirectly, no more than 15% of IPCI or more than 27.75% of IPC Portfolio Services Inc.;
(ii) either or both, as applicable:
(A) the representative and his or her associates, in aggregate, own, directly or indirectly, no more than 10% of the securities of IPCI and no more than 10% of the securities of IPC Portfolio Services Inc.;
(B) the branch manager of the representative of the IPC Dealer, who is acting on the trade, and his or her associates, in aggregate, own, directly or indirectly, no more than 10% of the securities of IPCI and no more than 10% of the securities of IPC Portfolio Services Inc.; and
(iii) the client may call a specified toll-free number and obtain the actual amount of the equity interests held in IPCI and/or IPC Portfolio Services Inc. by above-noted individuals or groups of individuals.
(c) The IPC Dealers will comply with subsection 8.2(4) of NI 81-105 as modified by subsection 8.2(5) of NI 81-105, when they are required to give disclosure to clients in the circumstances set out above.