Fidelity Retirement Services Company of Canada Limited - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications -- Relief granted to participating dealer and potential principal distributor from the requirements of section 11.1(1)(b) and section 11.2(1)(b) of NI 81-102 to permit commingling of cash received for the purchase or redemption of mutual fund securities with cash received for the purchase and sale of other securities or instruments the participating dealer is licensed to sell, subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 11.1(1)(b), 11.2(1)(b), 19.1.
August 11, 2006
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, NEW BRUNSWICK,
NOVA SCOTIA, PRINCE EDWARD ISLAND,
NEWFOUNDLAND AND LABRADOR,
THE NORTHWEST TERRITORIES, NUNAVUT
AND YUKON (the "Jurisdictions")
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
FIDELITY RETIREMENT SERVICES COMPANY
OF CANADA LIMITED
(the "Filer")
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filer for a decision (the "Requested Relief") under section 19.1 of National Instrument 81-102 Mutual Funds (the "Legislation") for an exemption from the provisions of section 11.1(1)(b) and section 11.2(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") that prohibit a principal distributor and other service providers, or a participating dealer and other service providers, from commingling cash received for the purchase or redemption of mutual fund securities ("Mutual Fund Trust Monies") with cash received for the purchase or sale of guaranteed investment certificates ("GICs") and other securities or instruments the participant is permitted to sell, with respect to transactions for participants in Fidelity Group Plans and the Fidelity NextStep Program (each as defined below) ("Non Mutual Fund Client Trust Monies") (the "Commingling Prohibitions").
Under the Mutual Reliance Review System for Exemptive Relief Applications:
(a) The Ontario Securities Commission is the principal regulator for this application; and
(b) This MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained 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 Filer:
1. The Filer's principal business is acting as record keeper for employer sponsored group retirement and savings plans ("Fidelity Group Plans") and in the course of so acting the Filer trades in mutual funds, employer stock and guaranteed investment certificates ("GICs") with participants in Fidelity Group Plans (the "participants"). The Filer also administers the Fidelity NextStep Program and trades in mutual funds and GICs with the participants in the Fidelity NextStep Program (as described in paragraph 4). Fidelity Group Plans and the Fidelity NextStep Program include both tax-assisted and non tax-assisted capital accumulation plans.
2. The Filer acts as a participating dealer with respect to mutual funds related to the Fidelity Group Plans and the Fidelity NextStep Program, and may in future, assume the role of principal distributor with respect to such funds.
3. A sponsor of the Fidelity Group Plans (generally an employer) establishes a Fidelity Group Plan for the participants and chooses a slate of investment options from which those participants will make their own investment selections. These investment options may include (depending on the sponsor), securities of the employer ("employer stock"), a mutual fund that invests all of its assets in securities of the employer ("employer stock funds"), GICs and mutual funds managed by the Filer's affiliate, Fidelity Investments Canada Limited ("FICL") or third party mutual fund managers. A participant in a Fidelity Group Plan chooses which investments he or she wishes to make with his or her payroll and/or lump sum contributions on the basis of the material provided to the participant by the Filer which includes, in the case of publicly offered mutual funds, the simplified prospectus for those funds. In many cases, the employer makes matching contributions to the participant's investment of choice. Participants are not induced to purchase mutual fund securities or employer stock by expectation of employment or continued employment. These investment decisions are transmitted to the Filer by the participant and the Filer then acts as an order-taker (akin to the services provided by discount brokers) to carry out the trade. In trading in mutual funds, employer stock and GICs, neither the Filer nor any of its salespersons provides investment advice or recommendations to participants in the Fidelity Group Plans or in the Fidelity NextStep Program. Only general investment education is provided.
4. The Fidelity NextStep Program is designed for retired or terminated Fidelity Group Plan participants. When a Fidelity Group Plan participant retires or is terminated, he or she has the option of transferring his or her investments to an account (which may be tax or non-tax assisted) administered in Fidelity's NextStep Program. Once his or her investments are transferred to an account in the Fidelity NextStep Program, the participant will have the option of changing those investments and may choose amongst a slate of investment options, made available by the Filer, which would include mutual funds or GICs. The participant may make additional lump sum contributions. The Filer's role in the Fidelity NextStep Program is similar to its role in connection with the Fidelity Group Plans. The Filer provides no advice or recommendations in respect of the choices made by participants in the Fidelity NextStep Program. The Filer acts as an order taker to carry out the trades instructed by the NextStep Program participants.
5. The Filer is required to be registered as a dealer in the category of mutual fund dealer (or the equivalent) in all the Jurisdictions in order to carry out the trades in mutual fund securities to participants in the Fidelity Group Plans and in the Fidelity NextStep Program. The Filer is a member of the Mutual Fund Dealers Association of Canada ("MFDA") in all Jurisdictions except Quebec.
6. As a member of the MFDA, the Filer is subject to the rules of the MFDA ("MFDA Rules") on an ongoing basis, particularly those with respect to the handling and segregation of client cash. As a member of the MFDA, the Filer is expected to comply with all MFDA Rules and requirements.
7. Over the years, FICL and the Filer obtained exemptive relief from the Decision Makers to allow them to trade in employer stock to participants in Fidelity Group Plans. Since the Filer is registered as a mutual fund dealer in each Jurisdiction and a member of the MFDA in all Jurisdictions except Quebec, it does not need any securities regulatory exemptions to trade in securities of mutual funds, including the employer stock funds, with participants in the Fidelity Group Plans or the Fidelity NextStep Program.
8. The Filer maintains trust accounts ("Client Trust Accounts") with a major Canadian chartered bank into which all monies invested by or on behalf of plan participants and participants in the Fidelity NextStep Program are paid and from which redemption proceeds or assets to be distributed are paid. These trust accounts are interest bearing and all of the interest earned on the cash in the trust accounts is paid out to the applicable mutual funds on a pro rata basis in compliance with subsection 11.2(4) of NI 81-102 (and that would be required by subsection 11.1(4) were the Filer currently acting as a principal distributor). The Filer also ensures compliance with section 11.3 in the way in which the Client Trust Accounts are maintained.
9. The Client Trust Accounts are each designated as 'trust accounts' by the financial institution at which they are held.
10. Plan sponsors forward to the Filer the vast majority of the monies that are deposited into the Client Trust Accounts. These amounts include payroll and/or lump sum participant contributions and employer matching contributions. These monies are typically deposited into the Client Trust Accounts electronically via wire.
11. The plan sponsors have no means of knowing a participant's investment selections. FRSCo collects and stores this information and processes contributions against these selections. They have retained the Filer to deal with all of the administrative details of the plans and, in any event, there would be privacy issues in the Filer sharing this information with plan sponsors. As a result, the plan sponsors are not in a position to separate the monies they are sending to be invested in mutual funds from monies to be invested in other investments such as GICs. In addition, plan sponsors do not have the systems that would be necessary to provide separate contribution feeds even if they were in possession of this information on the participants' investment decisions. A key service that the Filer provides is to ensure that the amount of money it receives from a plan sponsor is correct and to then allocate it to appropriate investments for participants and maintain the books and records that reflect these investments in the participants' accounts.
12. The Filer does not believe that the interests of its clients will be prejudiced in any way by the commingling of Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies.
13. The Commingling Prohibitions prevent the Filer from commingling Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies. Prior to June 23, 2006, section 3.3.2(e) of the MFDA Rules ("MFDA Commingling Prohibition") also prohibited the commingling of Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies. On June 23, 2006, the MFDA granted relief from the MFDA Commingling Prohibition to the Filer subject to the Filer obtaining similar relief from the Commingling Prohibitions from the Jurisdictions. Should the Requested Relief be granted by the Jurisdictions, the Filer will provide the MFDA with notice that the Requested Relief has been granted.
14. In providing its services the Filer utilizes sophisticated systems and is able to account for all of the monies it receives into and all of the monies that are to be paid out of its Client Trust Accounts in order to meet the policy objectives of sections 11.1 and 11.2 of NI 81-102.
15. The Filer will maintain proper records with respect to client cash in a commingled account, and will ensure that all Client Trust Accounts are reconciled, and that Mutual Fund Trust Monies and Non-Mutual Fund Trust Monies are properly accounted for daily.
16. Except for the Commingling Prohibitions, the Filer will comply with all other requirements prescribed in Part 11 of NI 81-102 with respect to the handling and segregation of client cash.
17. Effective July 1, 2005, the MFDA Investor Protection Corporation ("MFDA IPC") commenced offering coverage, within defined limits, to customers of MFDA members against losses suffered due to the insolvency of MFDA members. The Filer does not believe that the Requested Relief will affect coverage provided by the MFDA IPC.
18. In the absence of the Requested Relief, the commingling of Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies would contravene the Commingling Prohibitions.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that this Decision, as it relates to the jurisdiction of a Decision Maker, will terminate upon the coming into force of any change in the MFDA IPC rules which would reduce the coverage provided by the MFDA IPC relating to Mutual Fund Client Trust Monies and Non-Mutual Fund Client Trust Monies held in the Client Trust Accounts.