Morneau Shepell Ltd. and Morneau Shepell Asset & Risk Management Ltd.
Headnote
National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions -- Plan Sponsors, CAP Members, and named service providers exempted from the dealer registration and prospectus requirements in the Legislation in respect of trades in securities of mutual funds to non-tax assisted savings plans which act as 'overflow' savings plans connected to tax-assisted capital accumulation plans serviced by the same service provider, subject to certain terms and conditions -- contributions to the non-tax assisted savings plans limited by reference to specified limits in the Income Tax Act (Canada) -- contributions to the non-tax assisted plans are not expected to be significant -- service providers may only service non-tax assisted savings plans borne out of tax-assisted capital accumulation plans also serviced by the same service provider -- members of the non-tax assisted savings plan must be members of the tax assisted capital accumulation plan serviced by the same service provider.
Statutes Cited
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1)(a), 53, 74(1).
Rules Cited
National Instrument 81-101 Mutual Fund Prospectus Disclosure.
National Instrument 81-102 Mutual Funds.
National Instrument 45-106 Prospectus and Registration Exemptions.
Published Documents Cited
Amendments to NI 45-106 -- Registration and Prospectus Exemption for Certain Capital Accumulation Plans, October 21, 2005 (2005), 25 OSCB 8681.
August 20, 2013
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
MORNEAU SHEPELL LTD. (MS)
AND
MORNEAU SHEPELL ASSET & RISK MANAGEMENT LTD. (MS ARM)
(MS and MS ARM are collectively the Filers)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers for a decision, on behalf of the Filers (including their respective directors, officers, representatives and employees acting on their behalf), any Plan Sponsor (as defined herein) and any Fund (as defined herein), under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for a ruling that:
(a) the dealer registration requirements contained in the Legislation shall not apply to the Filers (including their respective directors, officers, representatives and employees acting on its behalf) or any Plan Sponsor of a CAP (as defined herein) or a Non-Tax Assisted CAP (as defined herein) that uses the services of a Filer in respect of its CAP or Non-Tax Assisted CAP (a Plan Sponsor, or collectively, the Plan Sponsors) in respect of trades in the securities of the Funds to a CAP or Non-Tax Assisted CAP sponsored by a Plan Sponsor, subject to certain terms and conditions (the Dealer Registration Relief) ; and
(b) the prospectus requirements contained in the Legislation shall not apply in respect of the distribution of securities of the Funds to CAPs or Non-Tax Assisted CAPs sponsored by a Plan Sponsor for which the Filers provide services (the Prospectus Relief);
(the Dealer Registration Relief and the Prospectus Relief are collectively 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 Filers have provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in the jurisdictions of (i) Québec, Newfoundland and Labrador, the Yukon Territory and Nunavut in respect of CAPs and (ii) Alberta, British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Nunavut, the Yukon Territory and the Northwest Territories in respect of Non-Tax Assisted CAPs.
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
For the purposes of this decision, the following words have the following meanings:
(a) CAP has the meaning given to the term "Capital Accumulation Plan" as defined in section 1.1 of the CAP Guidelines (as defined herein), namely, a tax assisted investment or savings plan, including a defined contribution registered pension plan (a DCPP), a group registered retirement savings plan (a RRSP), a group registered education savings plan (a RESP), or a deferred profit sharing plan (a DPSP), established by a Plan Sponsor that permits a member to make investment decisions among two or more investment options offered within the plan and in Québec and Manitoba, includes a simplified pension plan;
(b) CAP Guidelines means the Guidelines for Capital Accumulation Plans published in May 2004 by the Joint Forum of Financial Market Regulators;
(c) Fund means a mutual fund as defined in section 1 of the Legislation, whether offered by prospectus or pursuant to prospectus exemptions in the Legislation, and which in both cases, comply with Part 2 of National Instrument 81-102 -- Mutual Funds (NI 81-102);
(d) Member means a current or former employees, or a person who belongs, or did belong, to a trade union or association, or
(i) his or her spouse;
(ii) a trustee, custodian or administrator who is acting on his or her behalf, or for his or her benefit, or on behalf of, or for the benefit of, his or her spouse; or
(iii) his or her holding entity, or a holding entity of his or her spouse;
that have assets in a CAP or Non-Tax Assisted CAP, and also includes any person who is eligible to participate in a CAP or Non-Tax Assisted CAP.
(e) Non-Tax Assisted CAP means a savings or investment plan that meets the definition of CAP in the CAP Guidelines (as defined herein) and that is administered in accordance with the CAP Guidelines, but for the fact that such plan is non-tax assisted; and
(f) Plan Sponsor means any employer, trustee, trade union or association or a combination of them that establish a CAP or a Non-Tax Assisted CAP, and includes a Service Provider to the extent that the Plan Sponsor has delegated its responsibilities to the Service Provider.
(g) Service Provider means a person or company that provides services to a Plan Sponsor to design, establish, or operate a CAP.
Representations
This decision is based on the following facts represented by the Filer:
MS
1. MS is a corporation created under the laws of Ontario. Its head office is located in Toronto, Ontario. MS is not registered as a dealer or adviser under the securities legislation of any jurisdiction.
2. The business of MS includes providing consulting services to Plan Sponsors. In addition, MS provides to Plan Sponsors administrative services in respect of their CAPs, which generally involve recordkeeping of member data, transactions processing in respect of Member accounts, provision of member statements as required under pension standards legislation and/or the applicable recordkeeping agreement and processing changes to member accounts such as termination, death, retirement or a change in marital status.
3. MS, the Plan Sponsors and the Funds trade or will trade within CAPs or to Members of CAPs in accordance with the conditions set out in proposed amendments to National Instrument 45-106Prospectus and Registration Exemptions related to CAPs, which were published by the Canadian securities administrators on October 21, 2005 (the Proposed CAP Exemption) and adopted in the form of a blanket exemption in all jurisdictions, other than in Ontario, Québec, Newfoundland and Labrador, the Yukon Territory and Nunavut (the CAP Blanket Exemption). The Proposed CAP Exemption and the CAP Blanket Exemption contemplate both dealer registration and prospectus exemptions, where required.
4. Though no equivalent to the CAP Blanket Exemption has been adopted in the jurisdictions of Ontario, Québec, Newfoundland and Labrador, the Yukon Territory or Nunavut, Morneau Sobeco Limited Partnership obtained a ruling dated July 31, 2007 (the Ruling) providing prospectus and dealer registration relief consistent with the CAP Blanket Exemption to allow it to trade within CAPs and to Members of CAPs and to allow the Funds to be offered to CAPs without a prospectus on conditions consistent with the CAP Blanket Exemption and the Proposed CAP Exemption.
5. MS is the successor to Morneau Sobeco Limited Partnership, which was the operating company in an income trust structure. Due to tax law changes, the income trust structure converted into a corporate structure through a plan of arrangement effective on January 1, 2011. To clarify that MS as successor to Morneau Sobeco Limited Partnership has the same exemption benefit as the Ruling, MS seeks a new passport decision granting the Exemption Sought to replace the Ruling. MS also seeks a new passport decision which contemplates the services it wishes to provide to Non-Tax Assisted CAPs which originate out of CAPs it also services, since the Ruling did not contemplate such Non-Tax Assisted CAPs. Accordingly, upon obtaining the Exemption Sought, the MS will no longer rely, or be in a position to rely, on the Ruling.
6. MS desires to provide similar services to Plan Sponsors in respect of Non-Tax Assisted CAPs, to those it provides to Plan Sponsors in respect of CAPs, including trading in the Funds as part of its administrative services.
7. The investment choices offered by the Plan Sponsors in respect of the CAPs and Non-Tax Assisted CAPs may include Funds. Plan Sponsors may also select identical Funds as investment choices for their CAPs and Non-Tax Assisted CAPs.
MS ARM
8. MS ARM is a corporation created under the laws of Ontario on November 16, 2011. Its head office is located in Toronto, Ontario. It is a wholly owned subsidiary of MS.
9. MS ARM is registered as an investment fund manager, portfolio manager and exempt market dealer in the provinces of Ontario, Quebec, Alberta, British Columbia and Nova Scotia.
10. MS ARM's principal business is to provide investment management services through pooled funds to defined benefit pension plans and other institutional investors. MS ARM retains arms' length sub-advisors for each of its pooled funds. MS ARM receives inquiries from its clients with defined benefit pension plans from time to time as to whether the client's CAP can also participate in the pooled funds managed by MS ARM and whether MS ARM can provide certain administrative services to the CAP in that regard. These services would be of the same type that MS would provide to a Plan Sponsor as described above.
11. MS ARM also provides non-discretionary advice to Plan Sponsors, including doing research and providing recommendations regarding what funds Plan Sponsors might select as investment options within the CAP, with the Plan Sponsor ultimately making the investment decision.
12. Many of MS ARM's pooled funds are 'mutual funds' within the definition of section 1 of the Legislation and comply with Part 2 of NI 81-102. Accordingly, such pooled funds are Funds. Plan Sponsors may wish to offer the Funds as investment options within their CAPs pursuant to the CAP Blanket Exemption and to retain MS ARM to provide the necessary administrative services to the CAPs. However, it is not practicable for MS ARM to provide such services unless MS ARM receives the Exemption Sought from the dealer and prospectus requirements to allow it to provide the Funds to Members who are located in the provinces of Ontario, Québec, Newfoundland and Labrador, the Yukon Territory or Nunavut. It is possible that a Plan Sponsor with whom MS ARM deals may also establish or have established a Non-Tax Assisted CAP. Accordingly, MS ARM wishes to also provide administrative services to the Non-Tax Assisted CAP should the Plan Sponsor desire it to do so.
13. The Filers will not be involved in the design of the CAP, except as consultants. The Filers are not engaged in discretionary decision-making with respect to CAPs or Member accounts, and will not select investments for the CAPs or Member accounts or provide investment advice to Members. Similarly, the Filers will not provide discretionary decision-making in respect of Non-Tax Assisted CAPs and their Members.
14. Members, and in some cases, the Plan Sponsor, will make initial investment decisions and subsequent changes to those investment decisions with or without the assistance of an advisor selected by the Member (which will not be either of the Filers). The investment instructions of Members are or will be transmitted to the relevant Filer and the Filer will then transmit these instructions to the Funds directly. The interest in the securities of the Funds wil be registered in the name of the applicable Filer (or other nominee) for the account of the relevant CAP. The Filers establish and maintain or will establish and maintain the records reflecting the interest of each Member or Plan Sponsor, as the case may be, in each Fund.
Non-Tax Assisted CAPs
15. Non-Tax Assisted CAPs may be established by Plan Sponsors in conjunction with CAPs to provide individuals with savings flexibility because Canadian tax legislation imposes a limit on the amounts that may be contributed to CAP. The benefit formula under a Plan Sponsor's benefit program sometimes results in contributions that exceed that tax limit. A Plan Sponsor may establish a Non-Tax Assisted CAP to allow for those excess contributions to be invested in the same manner as the tax assisted contributions. These excess contributions to Non-Tax Assisted CAPs are not expected to be significant and will be limited by the calculation set out in Condition 1(j) of this decision and subject to the remaining conditions set out in this decision.
16. Non-Tax Assisted CAPs will operate in the same manner as CAPs in terms of the relationship between Members and Plan Sponsors, and the duties, rights and responsibilities of Members and Plan Sponsors and the services that the Filers provide or will provide. The only significant difference between the two types of plans is the tax assisted nature of one and not the other.
17. Each Member of a Non-Tax Assisted CAP of a Plan Sponsor that is administered by a Filer will also be a member of the Plan Sponsor's CAP.
18. The Filers will administer the Non-Tax Assisted CAPs in accordance with the CAP Guidelines and, in the case of the Non-Tax Assisted CAPs, in a similar fashion to the related CAPs for the applicable Members.
19. Each Filer will only administer Non-Tax Assisted CAPs which originate out of CAPs of a Plan Sponsor that is also serviced by the same Filer.
20. The Filers are not in default of securities legislation in any jurisdiction of Canada.
21. There is no difference between CAPs and Non-Tax Assisted CAPs offered by Plan Sponsors but for the lack of tax assistance. The Plan Sponsor has, and will have, all of the same responsibilities for the Non-Tax Assisted CAP as the CAP and its relationship with its Members in both a CAP or Non-Tax Assisted CAP will be the same.
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:
1. for the Dealer Registration Relief;
(a) the Plan Sponsor selects the mutual funds that Members will be able to invest in under the CAP or Non-Tax Assisted CAP;
(b) the Plan Sponsor establishes a policy, and provides Members with a copy of the policy and any amendments to it, describing what happens if a Member does not make an investment decision;
(c) in addition to any other information that the Plan Sponsor believes is reasonably necessary for a Member to make an investment decision within the CAP and Non-Tax Assisted CAP, and unless that information has previously been provided, the Plan Sponsor provides the Member with the following information about each mutual fund the Member may invest in:
(i) the name of the mutual fund;
(ii) the name of the manager of the mutual fund and its portfolio adviser;
(iii) the fundamental investment objective of the mutual fund;
(iv) the investment strategies of the mutual fund or the types of investments the mutual fund may hold;
(v) a description of the risks associated with investing in the mutual fund;
(vi) where a Member can obtain more information about each mutual fund's portfolio holdings; and
(vii) where a Member can obtain more information generally about each mutual fund, including any continuous disclosure;
(d) the Plan Sponsor provides Members with a description and amount of any fees, expenses and penalties relating to CAP and the Non-Tax Assisted CAP, as the case may be, that are borne by Members, including:
(i) any costs that must be paid when the mutual fund is bought or sold;
(ii) costs associated with accessing or using any of the investment information, decision-making tools or investment advice provided by the Plan Sponsor;
(iii) mutual fund management fees;
(iv) mutual fund operating expenses;
(v) record keeping fees;
(vi) any costs for transferring among investment options, including penalties, book and market value adjustments and tax consequences;
(vii) account fees; and
(viii) fees for services provided by Service Providers;
provided that the Plan Sponsor may disclose the fees, penalties and expenses on an aggregate basis, if the Plan Sponsor discloses the nature of the fees, expenses and penalties, and the aggregated fees do not include fees that arise because of a choice that is specific to a particular Member;
(e) the Plan Sponsor has, within the past year, provided the Members with performance information about each mutual fund the Members may invest in, including:
(i) the name of the mutual fund for which the performance is being reported;
(ii) the performance of the mutual fund, including historical performance for one, three, five and ten years if available;
(iii) a performance calculation that is net of investment management fees and mutual fund expenses;
(iv) the method used to calculate the mutual fund's performance return calculation, and information about where a Member could obtain a more detailed explanation of that method;
(v) the name and description of a broad-based securities market index, selected in accordance with National Instrument 81-106 Investment Fund Continuous Disclosure, for the mutual fund, and corresponding performance information for that index; and
(vi) a statement that past performance of the mutual fund is not necessarily an indication of future performance;
(f) the Plan Sponsor has, within the past year, informed Members if there were any changes in the choice of mutual funds that Members could invest in and where there was a change, provided information about what Members needed to do to change their investment decision, or make a new investment;
(g) the Plan Sponsor provides Members with investment decision-making tools that the Plan Sponsor reasonably believes are sufficient to assist them in making an investment decision within the CAP or Non-Tax Assisted CAP;
(h) the Plan Sponsor must provide the information required by paragraphs (b), (c), (d) and (g) prior to the Member making an investment decision under the CAP or Non-Tax Assisted CAP;
(i) if the Plan Sponsor makes investment advice from a registrant available to Members, the Plan Sponsor must provide Members with information about how they can contact the registrant; and
(j) the maximum amount that may be contributed in respect of a Member to the Non -Tax Assisted CAP in a given year is limited to any positive difference between:
(i) the maximum amount that the Member and the Plan Sponsor would have been able to contribute for that year to the applicable CAP under the terms of the applicable CAP if contributions to the applicable CAP were not restricted to the maximum dollar limit provided in theIncome Tax Act (Canada) (the ITA); and
(ii) the maximum dollar limit provided in the ITA for the applicable CAP,
provided that this maximum amount that may be contributed in respect of a Member to the Non-Tax Assisted CAP in a given year shall not exceed an amount equal to the "money purchase limit", as defined in the ITA, for the year.
In this paragraph (j), the amount determined under (i) shall be no more than 18 % of the Member's "earned income" as defined in the ITA and the "maximum dollar limit" means the "RRSP dollar limit" as defined in the ITA (in the case where the applicable CAP is an RRSP), the "money purchase limit" as defined in the ITA (in the case where the applicable CAP is a DCPP), one-half of the "money purchase limit" (in the case where the applicable CAP is a DPSP), or, the applicable maximum fixed dollar contribution prescribed under the ITA (in the case of any other type of CAP).
2. for the Prospectus Relief;
(a) the conditions set forth in paragraph 1 above are met; and
(b) the Funds comply with Part 2 of NI 81-102; and
(c) where a Member chooses to invest in a publicly available mutual fund selected by the Plan Sponsor as an investment option for the Non-Tax Assisted Plan, the current prospectus of the mutual fund and/or fund facts, as permitted by the Legislation, will be made available upon demand, to the Member.
3. this Decision, as it relates to the jurisdiction of a Decision Maker with respect to the Dealer Registration Relief will terminate upon the coming into force in securities rules of a registration exemption for trades in a security of a mutual fund to a CAP or 90 days after the Decision Maker publishes in its Bulletin a notice or a statement to the effect that it does not propose to make such a rule;
4. this Decision, as it relates to the jurisdiction of a Decision Maker with respect to the Prospectus Relief will terminate upon the coming into force in securities rules of a prospectus exemption for the distribution of a security of a mutual fund to a CAP or 90 days after the Decision Maker publishes in its Bulletin a notice or a statement to the effect that it does not propose to make such a rule.