Sun Life Financial Investment Services (Canada) Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from National Instrument 81-105 Mutual Fund Sales Practices to permit dealer to pay commission rebates in connection with switches to purchase units of related mutual funds as well as 3rd party funds -- s. 7.1 of NI 81-105 prohibits payment of rebates where investor is switching to related mutual funds -- relief subject to conditions that mitigate conflict of interest.
Applicable Legislative Provisions
National Instrument 81-105 Mutual Fund Sales Practices, ss. 7.1(1) and (3), s. 9.1
August 12, 2014
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 SUN LIFE FINANCIAL INVESTMENT SERVICES (CANADA) INC. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction (the Principal Regulator) has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) for an exemption under Section 9.1 of National Instrument 81-105 Mutual Fund Sales Practices (NI 81-105) exempting the Filer and any other future dealer subsidiaries of Sun Life Financial Inc. (collectively, the Sun Life Dealers) and their representatives from the prohibitions contained in paragraph 7.1(1)(b) and subsection 7.1(3) of NI 81-105 prohibiting the Sun Life Dealers and their representatives from paying all or any part of a fee or commission payable by a 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 Sun Life Dealer is a member of the organization of the mutual fund the securities of which are being acquired (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 in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Nunavut, Northwest Territories and Yukon Territories.
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-105 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is registered in each of the provinces and territories of Canada as a dealer in the category of mutual fund dealer. The Filer is a member of the Mutual Fund Dealers Association of Canada. The Filer's head office is located in Waterloo, Ontario.
2. The Filer is a "member of the organization" (within the meaning of NI 81-105) of the mutual funds managed by Sun Life Global Investments (Canada) Inc. (SLGI), known as the "SLGI Funds". The Filer may become in the future, a "member of the organization" of other mutual funds, since the Parent (as defined below) or an affiliate of the Filer may establish or acquire interests in corporations that are managers of mutual funds (Future Affiliated Funds).
3. The Filer is an indirect wholly-owned subsidiary of Sun Life Financial Inc. (the Parent), which is publicly traded on the Toronto, New York and Philippine Stock Exchanges. SLGI is also an indirect wholly-owned subsidiary of the Parent.
4. The Filer is not in default of securities legislation in any jurisdiction of Canada.
5. The Filer acts as a participating dealer (within the meaning of National Instrument 81-102 Mutual Funds) in respect of the SLGI Funds and also acts as a participating dealer for third party managed mutual funds.
6. The Filer has been selling third party managed mutual funds for a certain number of years and currently distributes third party managed mutual funds from more than 45 unaffiliated fund manufacturers. The Filer has been selling the SLGI Funds since 2010.
7. The Filer acts independently from SLGI. The Filer and its representatives are free to choose which mutual funds to recommend to their clients and consider recommending the SLGI Funds to their clients in the same way as they consider recommending other third party mutual funds. The Filer and its representatives comply with their obligation at law and only recommend mutual funds that they believe would be suitable for their clients and in accordance with the clients' investment objectives and financial circumstances. SLGI provides the Filer with the compensation described in the prospectus of the SLGI Funds in the same manner as SLGI does for any participating dealer selling securities of the SLGI Funds to their clients. All compensation and sales incentives paid to the Filer by any member of the organization of the SLGI Funds or of any Future Affiliated Funds complies and will continue to comply with NI 81-105.
8. Neither the Filer, nor any of its representatives, is or will be subject to quotas (whether express or implied) in respect of selling the SLGI Funds. Except as permitted by NI 81-105, neither the Filer, SLGI nor any other member of their organization, provides any incentive (whether express or implied) to the Filer's representatives or to the Filer to encourage itsrepresentatives or the Filer to recommend the SLGI Funds over third party managed mutual funds.
9. The Filer complies with NI 81-105, including the rules dealing with internal dealer incentive practices prescribed under Part 4 of NI 81-105 in its compensation practices with the Filer's representatives. The Filer and its representatives also comply with the rules concerning Commission Rebates provided for in section 7.1 of NI 81-105.
10. No representative of the Filer has an equity interest in the Filer (within the meaning of NI 81-105) or in any other member of the organization of the SLGI Funds.
11. The prohibition in subsection 7.1(3) of NI 81-105 means that neither the Filer nor its representatives can reimburse their client for any fees or commissions incurred by those clients when they decide to switch into a SLGI Fund or a Future Affiliated Fund from another mutual fund. Subsection 7.1(1) of NI 81-105 allows the Filer and its representatives to pay Commission Rebates only when the client decides to switch from one third party fund to another third party fund, and provided the disclosure and consent procedure established in section 7.1 is followed. Payment of Commission Rebates by the Filer and its representatives benefit the client so that the client does not incur costs in switching from one fund to another.
12. In the absence of the Exemption Sought, a client of the Filer who effects a redemption of mutual fund securities that are subject to a redemption charge and who uses the proceeds thereof to purchase securities of a SLGI Fund or Future Affiliated Fund would not have the benefit of a Commission Rebate from the Filer or one of its representatives, while a client who uses the proceeds of such redemption to purchase securities of a mutual fund unaffiliated to the Filer could have the benefit of a Commission Rebate from the Filer or one of its representatives. In circumstances where a representative of the Filer believes that a SLGI Fund or Future Affiliated Fund is the most suitable fund for the client, the Filer believes that the prohibition in paragraph 7.1(3) of NI 81-105 may discourage the client from trading in the recommended SLGI Fund or Future Affiliated Fund. This may not be in the client's best interests.
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:
(a) For each switch made by a Sun Life Dealer client to a SLGI Fund or a Future Affiliated Fund from another mutual fund where the Sun Life Dealer and/or its representative(s) agrees to pay a Commission Rebate, the Sun Life Dealer and the representative(s) will:
(i) comply with the provisions of paragraph 7.1(1)(a) of NI 81-105;
(ii) comply with the disclosure and consent provisions of Part 8 of NI 81-105;
(iii) advise the client in writing and in advance of finalizing a switch to a SLGI Fund or Future Affiliated Fund, that any commission rebate proposed to be made available in connection with the purchase of securities of SLGI Funds or Future Affiliated Funds:
(A) will be available to the client regardless of whether the redemption proceeds are invested in a SLGI Fund, a Future Affiliated Fund or a third party fund;
(B) will not be conditional upon the purchase of securities of a SLGI 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 Filer on the client's purchase of a SLGI Fund or a Future Affiliated Fund.
(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 (a)(iii)(C) above.
(c) A Sun Life Dealer and/or its representatives that provide Commission Rebates will not be reimbursed directly or indirectly in respect of the Commission Rebate in connection with a switch to a SLGI Fund or a Future Affiliated Fund by any member of the organization of that fund, other than the Sun Life Dealer which may make the reimbursement under this Decision.
(d) No Sun Life Dealer or any of its representatives is, or will be, subject to quotas whether express or implied in respect of selling securities of a SLGI Fund or a Future Affiliated Fund.
(e) Except as permitted by NI 81-105, no Sun Life Dealer and no member of the respective organization of the SLGI Funds or of any Future Affiliated Funds provides or will provide any incentive whether express or implied to the Sun Life Dealer or any of its representatives to encourage the Sun Life Dealer representatives to recommend to clients the SLGI Funds or Future Affiliated Funds over third party funds.
(f) Each Sun Life 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 of the Sun Life Dealer cannot be conditional on the client acquiring a SLGI Fund or a Future Affiliated Fund and will be made available to the client if the client wishes to switch to an unaffiliated third party fund.
(g) This decision shall cease to be operative following the entry into force of a rule of the Principal Regulator which replaces or amends section 7.1 of NI 81-105.