Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – National Instrument 81-105 Mutual Fund Sales Practices – relief from subsection 7.1(1)(b) and 7.1(3) of NI 81-105 granted to participating dealer and its representatives to pay a commission rebate to clients when clients switch into related mutual funds – relief subject to conditions that mitigate conflicts.
Applicable Legislative Provisions
National Instrument 81-105 Mutual Funds Sales Practices, sections 7.1(1)(b), 7.1(3) and 9.1.
December 15, 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
FundEX Investments Inc. (FundEX or the Filer)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer 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 Filer and its present and future representatives (the Representatives) from the prohibitions contained in paragraph 7.1(1)(b) and subsection 7.1(3) of NI 81-105 prohibiting the Filer and its 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 Filer 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, Northwest Territories, Yukon Territories and Nunavut.
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.
Representations
This decision is based on the following facts represented by the Filer:
FundEX is registered in each of the provinces and territories of Canada as a dealer in the category of mutual fund dealer. FundEX is also registered as an exempt market dealer in Ontario and Newfoundland and Labrador. FundEX is a member of the Mutual Fund Dealers Association of Canada. The head office of FundEX is located in Ontario.
The Filer is a “member of the organization” (within the meaning of NI 81-105) of the mutual funds managed by IA Clarington Investments Inc. (IA Clarington), known as the “IA Clarington Funds”. The Filer may become in the future, a “member of the organization” of other mutual funds, since the parent company or an affiliate of the Filer may establish or acquire interests in corporations that are managers of mutual funds (Future Affiliated Funds).
The Filer is a direct wholly-owned subsidiary of Industrial Alliance Insurance and Financial Services Inc. (Industrial Alliance). IA Clarington is also a direct wholly-owned subsidiary of Industrial Alliance.
The Filer is not in default of securities legislation in any jurisdiction of Canada.
The Filer acts as a participating dealer (within the meaning of NI 81-105) in respect of the IA Clarington Funds as well as for third party managed mutual funds.
The Filer acts independently from IA Clarington and has no connection with IA Clarington, other than through its common parent company. The Filer and its Representatives are free to choose which mutual funds to recommend to their clients and consider recommending the IA Clarington 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 their clients’ investment objectives. IA Clarington provides the Filer with the compensation described in the prospectus of the IA Clarington Funds in the same manner as IA Clarington does for any participating dealer selling securities of the IA Clarington Funds to their clients. All compensation and sales incentives paid to the Filer by any member of the organization of the IA Clarington Funds or of any Future Affiliated Funds will comply with NI 81-105.
Neither the Filer, nor any of its Representatives, is or will be subject to quotas (whether express or implied) in respect of selling the IA Clarington Funds. Neither the Filer nor IA Clarington or any other member of their organization, provide any incentive (whether express or implied) to the Filer’s Representatives or to the Filer to encourage those Representatives or the Filer to recommend the IA Clarington Funds over third-party managed mutual funds.
The Filer complies with NI 81-105, in particular, Part 4 of NI 81-105 in its compensation practices with the Representatives.
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 IA Clarington Funds.
The prohibitions in section 7.1 of NI 81-105 mean 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 an IA Clarington Fund from another mutual fund. Section 7.1 allows the Filer and its Representatives to pay commission rebates when the client decides to switch from one third party fund to another third party fund, 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.
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) The Representatives and the Filer will comply with the provisions of paragraph 7.1(1)(a) of NI 81-105.
(b) The Representatives and the Filer will comply with the disclosure and consent provisions of Part 8 of NI 81-105.
(c) The clients of the Filer will be advised by the Filer and its Representatives, in writing and in advance of finalizing the switch, that any commission rebate proposed to be made available in connection with the purchase of securities of IA Clarington Funds or Future Affiliated Funds:
(i) will be available to the client regardless of whether the redemption proceeds are invested in an IA Clarington Fund, a Future Affiliated Fund or a third party fund (to the maximum of the commission earned by the Representative on the purchase);
(ii) will not be conditional upon the purchase of securities of an IA Clarington Fund or a Future Affiliated Fund; and
(iii) in all cases, be not more than the amount of the gross sales commission earned by the Filer on the client’s purchase of an IA Clarington Fund or a Future Affiliated Fund.
(d) The actual amount of the commission rebate paid in respect of the switch will be not more than the amount referred to in paragraph (c) (iii) above.
(e) The Filer 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 an IA Clarington Fund or a Future Affiliated Fund by any member of the organization of that fund.
(f) The Filer’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 an IA Clarington Fund or a Future Affiliated Fund and will be made available to the client if the client wishes to switch to an unrelated 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.
“David L. Knight” “James Turner”
David L. Knight James Turner (Name)
Commissioner Vice-Chair (Title)
Ontario Securities Commission Ontario Securities Commission
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – National Instrument 81-105 Mutual Fund Sales Practices – relief from subsection 7.1(1)(b) and 7.1(3) of NI 81-105 granted to participating dealer and its representatives to pay a commission rebate to clients when clients switch into related mutual funds – relief subject to conditions that mitigate conflicts.
Applicable Legislative Provisions
National Instrument 81-105 Mutual Funds Sales Practices, sections 7.1(1)(b), 7.1(3) and 9.1.