National Bank Investments Inc.
Headnote
Policy Statement 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Except in British Columbia, a mutual fund dealer selling model portfolios of mutual funds is exempt from registration as an adviser with respect to the Rebalancing and Strategic and Tactical Rebalancing activities carried out by the affiliated advisers to the model portfolios of mutual funds, subject to certain conditions. Incidentally, after launching the new programs, the mutual fund dealer is exempt from obtaining a written confirmation pursuant to section 14.4 NI 31-103 form orphan accounts client.
Applicable Legislative Provisions
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions.
Multilateral Instrument 11-102 Passport System, ss 4.7(1).
Securities Act (Québec), ss. 148 and 149.
[TRANSLATION]
October 30, 2015
IN THE MATTER OF THE SECURITIES LEGISLATION OF QUEBEC 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 INVESTMENTS INC. (the "Filer")
DECISION
Background
The securities regulatory authority or regulator in the Jurisdictions (the Decision Makers) have received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption from:
1. the adviser registration requirement in connection with the Rebalancing Activities (as defined below) and the Strategic and Tactical Rebalancing Activities (as defined below) carried out by NBT and NTC (as each is defined below) in connection with the Programs (as defined and described below) (the Adviser Registration Requirement); and
2. with respect to Orphaned Accounts (as defined below), the requirement that the Filer must receive written confirmation (the Written Confirmation) from a client that the client has read and understood the written notice that has been sent to the client by the Filer upon opening the client's account (the Written Notice) notifying the client that the Filer is a separate legal entity from National Bank of Canada before the Filer purchases or sells a security for the client (the Written Confirmation Requirement).
The exemption from the Adviser Registration Requirement and from the Written Confirmation Requirement are collectively, the Exemptions Sought.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Autorité des marchés financiers (the AMF) is the principal regulator for this application;
(b) with respect to the Adviser Registration Requirement, 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 in Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Nunavut, Northwest Territories and Yukon;
(c) with respect to the Written Confirmation Requirement, the Filer has provided notice that section 4.7(1) of MI 11-102 is intended to be relied upon in British-Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Nunavut, Northwest Territories and Yukon;
(d) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation with its head office in Montreal, Quebec.
2. The Filer is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador and as a dealer in each of the jurisdictions of Canada in the category of mutual fund dealer and is a member of the Mutual Fund Dealers Association of Canada (the MFDA).
3. The Filer is not in default of securities legislation in any of the jurisdictions of Canada.
4. National Bank Trust Inc. (NBT) is a trust company organized under the laws of Quebec and has its head office in Montreal, Quebec. NBT is registered or authorized to act as an adviser, in the category of portfolio manager, under applicable securities legislation in each of the jurisdictions of Canada, other than the Northwest Territories, Yukon and Nunavut.
5. Natcan Trust Company (NTC) is a trust company organized under the laws of Canada and has its head office in Montreal, Quebec. NTC is registered or authorized to act as an adviser, in the category of portfolio manager, under applicable securities legislation in British Columbia, Alberta, Manitoba, Nova Scotia, Ontario and Newfoundland and Labrador.
6. The Filer, NBT and NTC are each direct or indirect wholly-owned subsidiaries of National Bank of Canada (National Bank) and as such, are affiliated entities.
PIM Program
7. NBT and NTC have been offering fully discretionary managed accounts to clients, including those managed using some or all of the mutual funds managed by the Filer currently known as the NBT Pooled Funds (the NBT Pooled Funds). The service is known as the Private Investment Management Program (the PIM Program).
8. The PIM Program builds each client's personalized investment portfolio based on a number of model portfolios, which together occupy successive portions of the investing spectrum with respect to the objective of the client, from low variability to equity. Each model portfolio is comprised of NBT Pooled Funds, a family of mutual funds managed by the Filer, suitable to the objective of that portfolio.
9. Each of the NBT Pooled Funds is an open-ended mutual fund established under the laws of Quebec.
10. The Filer is the investment fund manager of the NBT Pooled Funds, NBT is the trustee of the NBT Pooled Funds and NBT or NTC is the custodian of each of the NBT Pooled Funds.
11. Currently, each client in the PIM Program has a contractual relationship with NBT or NTC. However, NBT and NTC are working with the Filer to transition existing accounts within the PIM Program from NBT and NTC to the facilities of the Filer as of the fall 2015. The new service, offered through the Filer, will be known as the NBI Private Wealth Management Program (the PWM Program). Under the PWM Program, each client will have a contractual relationship with the Filer, rather than with NBT or NTC (as further described in paragraphs 16 and 17 below). NBT and NTC will continue to develop and rebalance model portfolios for the PWM Program in a manner that aligns substantively with the approach NBT and NTC have taken previously for clients within the PIM Program.
12. The NBT Pooled Funds and several additional funds that are to be used in connection with the PWM Program have been, or will be, qualified under a simplified prospectus filed in the applicable jurisdictions of Canada. These funds are now, or will be, known as the NBI Private Portfolios.
13. If a client is interested in the PWM Program, the client will complete the Filer's application form, which includes all of the relevant know-your-client and suitability information (including the client's investment needs and objectives, financial circumstances and risk tolerance). The client will discuss the PWM Program's model portfolios with the Filer's dealing representative and, based on the client's responses, the dealing representative will recommend which model portfolio will be suitable for the client; however, the client will ultimately select the model portfolio. If the dealing representative considers the selected model portfolio unsuitable for the client, prior to the investment in that model portfolio, the dealing representative will inform the client of the dealing representative's opinion and will not finalize the investment in that model portfolio unless the client instructs the dealing representative to proceed nonetheless.
14. Each client will receive a description of the model portfolio selected by the client (the Selected PWM Model Portfolio), which provides information on the Asset Classes (as defined below) and Permitted Ranges (as defined below) of such Selected PWM Model Portfolio.
15. Each client will be provided with the fund facts for the NBI Private Portfolios that comprise the Selected PWM Model Portfolio chosen by the client in accordance with the prospectus delivery obligation in securities legislation.
16. The client will enter into an agreement with the Filer (the NBI Account Agreement) in respect of the PWM Program. The NBI Account Agreement must be approved by the Branch Manager of the Filer.
17. The NBI Account Agreement will include express disclosure that an affiliate of the Filer will be providing discretionary investment management services to the Filer in connection with the rebalancing activities for the Selected PWM Model Portfolio in the PWM Program. The NBI Account Agreement will state that the client appoints the Filer to develop and rebalance the Selected PWM Model Portfolio and select, add or remove NBI Private Portfolios within the Selected PWM Model Portfolio on the terms set out in the NBI Account Agreement. The Filer will enter into a separate agreement with an affiliate of the Filer to provide the rebalancing services for the PWM Program's model portfolios.
18. Under the NBI Account Agreement, the client agrees to pay the Filer the fees set forth in the fee schedule for the Selected PWM Model Portfolio, which amount is used to pay for the services of the Filer and the rebalancing services of an affiliate of the Filer. Fees may be changed from time to time on 60 days' prior written notice to the client.
19. The minimum investment in the PWM Program will be $250,000.
20. Each of the NBI Private Portfolios may pay the Filer, as manager of the NBI Private Portfolios, an annual management fee. The Filer pays the operating expenses of the NBI Private Portfolios, other than the fixed-fee fund expenses, in exchange for a fixed rate administration fee. The fixed-fee fund expenses are paid for by the NBI Private Portfolios.
21. No sales charges or commissions will be payable by a client in respect of any rebalancing activities described below.
22. As a result, there will be no duplication of any fees between any affiliate of the Filer and the Filer.
23. To the extent that there are investors in the NBI Private Portfolios who acquire securities of the NBI Private Portfolios outside the PWM Program, such investors will bear the cost of the relevant management fee and administration fee charged to the NBI Private Portfolios but will not bear costs attributable to the PWM Program itself.
24. After investing in the Selected PWM Model Portfolio, the client is provided with details of the NBI Private Portfolios held in their account with the Filer in the quarterly, or more frequent, account statements, as required by the AMF or the MFDA, as the case may be.
Managed Portfolios
25. The Filer has been offering a service to clients known as the National Bank Managed Portfolios (the Managed Portfolio Program and together with the PWM Program, the Programs), composed of mutual funds managed by the Filer (the National Bank Mutual Funds and together with the NBI Private Portfolios, collectively, the Funds).
26. NBT is the portfolio manager for any portfolio management activities carried out in respect of the Managed Portfolio Program in the provinces of Quebec, Prince Edward Island, Saskatchewan and New Brunswick. NTC is the portfolio manager for any portfolio management activities carried out in respect of the Managed Portfolio Program in all other provinces of Canada.
27. The Managed Portfolio Program consists of a number of model portfolios, which together occupy successive portions of the investing spectrum with respect to the objective of the client, from stable income to equity. Each model portfolio offered under the Managed Portfolio Program is comprised of National Bank Mutual Funds suitable to the objective of that portfolio.
28. Each National Bank Mutual Fund is or will be an open-ended mutual fund established under the laws of Ontario or another province or territory of Canada or under the laws of Canada.
29. The Filer is the investment fund manager of the National Bank Mutual Funds and NTC is the trustee and custodian for the National Bank Mutual Funds.
30. Any of the National Bank Mutual Funds that are used in connection with the Managed Portfolio Program are, or will be, qualified under a simplified prospectus filed in the applicable jurisdictions of Canada.
31. If a client is interested in the Managed Portfolio Program, the client completes an application form, which includes all of the relevant know-your-client and suitability information (including the client's investment needs and objectives, financial circumstances and risk tolerance). The client discusses the Managed Portfolio Program's model portfolios with the Filer's dealing representative and, based on the client's responses, the dealing representative recommends which model portfolio will be suitable for the client; however, the client ultimately selects the model portfolio. If the dealing representative considers the selected model portfolio unsuitable for the client, prior to the investment in that model portfolio, the dealing representative will inform the client of the dealing representative's opinion and will not finalize the investment in that model portfolio unless the client instructs the dealing representative to proceed nonetheless.
32. Each client receives a description of the model portfolio selected by the client (the Selected Model Managed Portfolio and together with the Selected PWM Model Portfolio, the Selected Model Portfolio), which provides information on the Asset Classes (as defined below) and Permitted Ranges (as defined below) of the Selected Model Managed Portfolio.
33. Each client is provided with the fund facts for the National Bank Mutual Funds that comprise the Selected Model Managed Portfolio chosen by the client in accordance with the prospectus delivery obligation in securities legislation.
34. Currently, the client also enters into a discretionary management agreement with NBT (for investors residing in Quebec, Prince Edward Island, Saskatchewan or New Brunswick) or NTC (for investors residing in all other provinces of Canada) (the Managed Portfolio Account Agreement), which gives NBT or NTC, as applicable, the authority to develop and rebalance the Selected Model Managed Portfolio and select, add or remove National Bank Mutual Funds within the Selected Model Managed Portfolio.
35. In order to harmonize the approach of the Managed Portfolio Program with that of the PWM Program, the Filer wishes to be able to collect the "know your client" and suitability information for each client and to enter into an NBI Account Agreement with the client in respect of the Managed Portfolio Program.
36. The NBI Account Agreement will include express disclosure that an affiliate of the Filer will be providing discretionary investment management services to the Filer in connection with the rebalancing activities for the Selected Model Managed Portfolio in the Managed Portfolio Program. The NBI Account Agreement will state that the client appoints the Filer to develop and rebalance the Selected Model Managed Portfolio and select, add or remove National Bank Mutual Funds within the Selected Model Managed Portfolio on the terms set out in the NBI Account Agreement. The Filer will enter into a separate agreement with an affiliate of the Filer to provide the services for the Managed Portfolio Program's model portfolios.
37. The minimum investment in the Managed Portfolio Program is $100,000. There are no fees or expenses related to investing in a Managed Portfolio Program, except for the fees and expenses related to investing in the National Bank Mutual Funds that comprise the Managed Portfolio Program.
38. Each of the National Bank Mutual Funds pays the Filer, as manager of the National Bank Mutual Funds, an annual management fee. The Filer pays the operating expenses of the National Bank Mutual Funds, other than the fixed-fee fund expenses, in exchange for a fixed rate administration fee. The fixed-fee fund expenses are paid for by the National Bank Mutual Funds.
39. No sales charges or commissions are or will be payable by the client in respect of any rebalancing activities described below.
40. As a result, there is no duplication of any fees between NBT or NTC or any affiliate of the Filer (as applicable) and the Filer.
41. Any investors in the National Bank Mutual Funds who acquire securities outside the Managed Portfolio Program will not bear any costs attributable to the Managed Portfolio Program.
42. After investing in the Selected Model Managed Portfolio, the client is provided with details of the National Bank Mutual Funds held in their account with the Filer in the quarterly, or more frequent, account statements, as required by the AMF or the MFDA, as the case may be.
The Programs
43. NBT and NTC develop and manage the model portfolios which form part of the Programs on a discretionary basis. Each model portfolio is comprised of different asset classes (the Asset Classes) which are determined by NBT or NTC (as applicable), each in its sole discretion. NBT and NTC allocate each Asset Class a permitted range (the Permitted Range), being a minimum and maximum percentage of the model portfolio that can be allocated to investments of a particular Asset Class. NBT and NTC can change the Permitted Range or the Asset Classes of a model portfolio (including adding a new Asset Class) or both. NBT and NTC's actions are carried out with a view to ensuring that each model portfolio continues to abide by its stated objectives.
44. NBT and NTC also use their discretion in choosing which of the Funds will be used for each Asset Class, provided the investment objective and strategies of any Fund are consistent with the Asset Class. NBT and NTC's actions are carried out with a view to ensuring that each model portfolio continues to abide by its stated objectives.
45. Each client's account within a Program will be periodically rebalanced through a series of purchase and redemption trades effected by the Filer, as instructed by NBT or NTC. If the percentage weighting of at least one of the Asset Classes in the Selected Model Portfolio exceeds or falls below the Permitted Range for that Asset Class, NBT or NTC will generally instruct the Filer to effect trades on behalf of all clients invested in the Selected Model Portfolio to bring the Asset Classes of the Selected Model Portfolio within the Permitted Range for each Asset Class. Additionally, a client account may be rebalanced if the percentage weighting of at least one Fund in a client account exceeds or falls below the rebalancing threshold for that Fund in an Asset Class. NBT or NTC will instruct the Filer to effect trades on behalf of that client account to bring the Funds in the client account back to their target range (and within the Permitted Range for the Asset Class). These trades are referred to herein as the Rebalancing Activities.
46. In addition to the Rebalancing Activities described above that are effected by the Filer upon instruction from NBT and NTC, NBT and NTC will review all of the model portfolios in each Program on a periodic basis, whenever needed and at least annually, to ensure the model portfolios are consistent with their stated objectives, include appropriate Funds, and weight each Fund desirably. NBT and NTC may also change the weightings of the Funds within the model portfolios to take advantage of market conditions and trends. All changes effected by NBT and NTC as described above will be done on a fully discretionary basis and in a manner consistent with the stated objectives of each model portfolio. In connection with its responsibilities under the Programs, each of NBT or NTC, as applicable, will instruct the Filer to carry out the trades in the Funds that are necessary and incidental in connection with modifying the model portfolios. These activities are referred to herein as the Strategic and Tactical Rebalancing Activities.
47. The Filer will at all times also be ultimately responsible to each client for the Rebalancing Activities undertaken by NBT or NTC, as applicable, in the PWM Program. NBT and NTC currently remain responsible to each client for the Rebalancing Activities undertaken by NBT or NTC, as applicable, in the Managed Portfolio Program. The Filer will become ultimately responsible to each client that enters into an NBI Account Agreement in respect of the Managed Portfolio Program for the Rebalancing Activities undertaken by NBT or NTC, as applicable, in the Managed Portfolio Program. NBT and NTC will continue to be responsible for ensuring that each Selected Model Portfolio continues to abide by its stated objectives. Notwithstanding that there will be no direct relationship between the client and NBT or NTC, as applicable, each client will be entitled to treat NBT or NTC, as applicable, as if it were a party to the NBI Account Agreement with respect to its responsibilities in connection with the Rebalancing Activities and the Strategic and Tactical Rebalancing Activities.
48. The Filer will carry out all trades in securities of the Funds for a client in connection with the investment of monies by the clients in the Funds comprising the Selected Model Portfolio at the time of initial investment and for all Rebalancing Activities and Strategic and Tactical Rebalancing Activities. All trades will be reflected in the client's account on the day following the trade.
49. The trades carried out by the Filer as described above will be reflected in the records of the Filer and subject to oversight by the AMF and the MFDA.
50. MFDA Investor Protection Corporation coverage in each of the jurisdictions of Canada (other than Quebec) will apply to the investments in the Funds held in the clients' accounts with the Filer on the same terms as other mutual fund investments.
Orphaned Accounts
51. As detailed above, NBT and NTC are working with the Filer to transition all existing accounts within the PIM Program from NBT or NTC to the facilities of the Filer beginning in the fall of 2015. The Filer, NBT and NTC will commence a six month campaign in the fall of 2015 to complete the transition of all existing accounts with NBT and NTC to the Filer (the Transition Period). After the Transition Period commences, all new accounts will be opened through the facilities of the Filer.
52. During the Transition Period, the Filer and NBT or NTC, as applicable, will provide each client with a joint written notice of the proposal to transfer each client's account to the Filer and request that each client complete the documentation to open an account with the Filer and enter into an NBI Account Agreement with the Filer.
53. Following the mailing of the initial notice, the Filer will directly contact each affected client to schedule an appointment to complete the account opening process and execute the NBI Account Agreement.
54. Upon meeting with each client, the Filer will obtain all necessary know your client (KYC) and suitability information and provide each client with the Written Notice and obtain the Written Confirmation.
55. To the extent that a client does not respond to the initial notice, such client will receive a subsequent written notice of the proposal to transfer the client's account to the Filer and will be informed of the client's right to close their account with NBT or NTC, as applicable, in lieu of transferring their account to the Filer.
56. At the end of the Transition Period, NBT and NTC will cease to be in the business of offering the PIM Program and cease to hold client assets for the purposes of the PWM Program.
57. The Filer anticipates that a certain number of clients will not respond to the requests to transfer their account to the Filer. This lack of response will result in a number of accounts being orphaned with NBT and NTC at the end of the Transition Period (referred to herein as Orphaned Accounts).
58. The Filer proposes that these Orphaned Accounts be transitioned to the Filer following the end of the Transition Period by the Filer using the information most recently provided by the holder of such Orphaned Account to NBT or NTC, as applicable, under the PIM Program.
59. The Filer will use diligent efforts to obtain the Written Confirmation from each client in the PIM Program; however, the Filer may fail to obtain the Written Confirmation from Orphaned Account clients.
60. The Filer believes it would be in the best interest of clients in the Orphaned Accounts for the Filer and NBT or NTC, as applicable, to have the ability to continue to perform the Rebalancing Activities and Strategic and Tactical Rebalancing Activities in respect of the Selected PWM Model Portfolio in the Orphaned Accounts, so as to maintain the investment profile of the model portfolio that was selected by the client under the PIM Program.
61. In no event will the Filer change the investment profile of the model portfolio that was selected by the client under the PIM Program, nor will the Filer accept additional investments into the Selected PWM Model Portfolio until the client provides updated KYC and suitability information and the Written Confirmation, or instructs the Filer (i) to redeem the NBI Private Portfolios or (ii) to close or transfer the Orphaned Account.
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 the Exemptions Sought are granted, provided that in respect of the Adviser Registration Requirement:
(a) the Asset Classes and Permitted Ranges cannot be changed without providing at least 60 days' advance written notice to the client; and
(b) the Filer ensures that the NBI Account Agreement or other materials delivered to the client with respect to the Selected Model Portfolio fully describes the Program and applicable model portfolio including (but not limited to):
(i) that an affiliate of the Filer manages the investment portfolios of the model portfolios pursuant to the NBI Account Agreement;
(ii) that the Filer and the portfolio manager are affiliated entities;
(iii) that while the portfolio manager manages the model portfolio, it is not responsible for determining or confirming the suitability of a model portfolio for the client (the Filer has the responsibility for determining and confirming the suitability of a model portfolio for the client), and all other terms and restrictions respecting the client's relationship with the portfolio manager are set out in the NBI Account Agreement;
(iv) that the Asset Classes comprising a model portfolio will be listed along with the Permitted Range for each Asset Class;
(v) that the Asset Classes and Permitted Ranges cannot be changed without providing at least 60 days' advance written notice to the client;
(vi) that the portfolio manager will in its discretion choose the Funds in which each Asset Class will invest and their weightings, and each Asset Class of a model portfolio will be invested in securities of the Funds that have investment objectives and strategies that are consistent with the Asset Class;
(vii) that the Filer, upon instruction from the portfolio manager, will carry out the trades in securities of the Funds for clients that are necessary and incidental to the investment of monies by the clients in the Funds comprising the Selected Model Portfolio at the time of initial investment and to all Rebalancing Activities and Strategic and Tactical Rebalancing Activities. All trades will be reflected in the client's account on the day following the trade, and will also be reflected in the records of the Filer and subject to the oversight by the AMF and the MFDA; and
(viii) full disclosure of the compensation paid to the portfolio manager and the Filer, including:
(A) each of the Funds may pay the Filer, as manager of the Funds, an annual management fee; the Filer pays the operating expenses of the Funds, other than the fixed-fee fund expenses, in exchange for a fixed rate administration fee, and the fixed-fee fund expenses are paid for by the Funds; and no sales charges or commissions will be payable by the client in connection with any Rebalancing Activities or Strategic or Tactical Rebalancing Activities; and
(B) with respect to the PWM Program, the client will pay the Filer the fees set forth in the fee schedule, which amount is used to pay for the services of the Filer and the Rebalancing Activities and Strategic and Tactical Rebalancing Activities of the portfolio manager; which fees will be based on the net asset value of the client's account, subject to a minimum amount; and which fees can only be changed from time to time provided the client is given at least 60 days' advance written notice.