Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Participating dealers exempted from compliance with the point of sale equity interest consent requirements of subsection 8.2(4) of NI 81-105 in respect of trades made by certain existing clients in securities of public mutual funds.
Applicable Legislative Provisions
National Instrument 81-105 Mutual Fund Sales Practices, subsection 8.2(4) and 9.1.
December 7, 2011
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
manulife securities INCorporated (MSI)
and
manulife securities investment services inc. (MSISI)
(collectively, the Filers)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Filers from the requirement that the Filers obtain written consent from those clients who opened an account with a Filer between September 1, 2007 and October 31, 2008 (Affected Clients), prior to the completion of a trade in related mutual funds (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,
(b) the Filer has provided notice that Subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon (the Passport Jurisdictions).
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions and National Instrument 81-105 Mutual Fund Sales Practices (NI 81-105) have the same meanings if used in this decision unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
MSI is registered as an investment dealer in all provinces and territories of Canada. MSI is a member of the Investment Industry Regulatory Organization of Canada.
MSISI is registered as a mutual fund dealer in all provinces and territories of Canada, except Nunavut and is registered as an exempt market dealer in all provinces and territories of Canada, except Nunavut and Northwest Territories. MSISI is a member of the Mutual Fund Dealers Association of Canada.
Manulife Financial Corporation (Manulife) is a public company listed on The Toronto Stock Exchange and owns 100% of The Manufacturers Life Insurance Company. Manulife is a reporting issuer in all provinces and territories of Canada.
Manulife Asset Management Limited (MAML), is the manager of certain mutual funds, including the Manulife Mutual Funds and a group of mutual funds formerly known as the “AIC Mutual Funds” (and now rebranded as part of the Manulife Mutual Funds (collectively, the Funds)). The Filers and MAML are wholly owned subsidiaries of Manulife.
As a result of the above relationships, the Filers are “members of the organization” (within the meaning of NI 81-105) of the Funds managed by MAML.
On September 25, 2009, Manulife purchased AIC Limited’s Canadian retail investment fund business, which resulted in AIC Limited, the former manager of the AIC Mutual Funds, transferring its investment fund management business to MAML (the Transaction).
Unitholders of the former AIC Mutual Funds, including clients of the Filers, were informed about the change of manager of these Funds and were presented with multiple disclosure documents describing the Transaction, including the following:
(a) A press release was issued and a material change report was filed on August 12, 2009, in respect of the former AIC Mutual Funds, providing information relating to the proposed Transaction.
(b) Amendments dated August 13, 2009, were made to the former AIC Mutual Funds’ simplified prospectus and annual information form, in order to reflect the proposed Transaction.
(c) A notice of meeting, a form of proxy and a management information circular dated August 14, 2009, were sent to all unitholders of record of the former AIC Mutual Funds on the relevant mailing date, providing them with information about the Transaction and requesting approval of the change of manager to MAML.
(d) Following the special meeting and once unitholder approval of the Transaction was obtained, a press release was issued and a material change report was filed on September 24, 2009, in respect of the former AIC Mutual Funds, announcing the receipt of unitholder approval for the change of manager to MAML. Similarly, a press release was issued and a material change report was filed on September 25, 2009, in respect of the former AIC Mutual Funds, stating that the Transaction had been completed.
(e) Amendments dated September 28, 2009, were made to the former AIC Mutual Funds’ simplified prospectus and annual information form, disclosing unitholder approval of the Transaction.
The current simplified prospectus of the Funds informs investors about the ownership of the Filers and MAML by Manulife and the relationship between the Filers and the Funds.
In addition, all clients of the Filers were sent a copy of a disclosure document which sets out the ownership of the Filers and MAML by Manulife and the relationship between the Filers and the Funds. In this way, all clients of the Filers have access to complete information about the relationships between the relevant parties.
The Filers act as participating dealers (within the meaning of NI 81-105) in respect of the Funds, as well as for mutual funds managed by unrelated fund managers.
The Filers act independently from MAML and have no connection with MAML, other than through their common ultimate parent company.
The Filers are free to choose which mutual funds to recommend to their clients and consider recommending the Funds to their clients in the same way as they consider recommending other third party mutual funds. The Filers comply with their obligations at law and only recommend mutual funds that they believe would be suitable for their clients and in accordance with their clients’ investment objectives.
MAML provides the Filers with the compensation described in the prospectus of the Funds in the same manner as MAML does for any participating dealer selling securities of the Funds to their clients.
Subsections 8.2(3), (4) and (5) of NI 81-105 requires the following in respect of trades in securities of the Funds:
(a) pursuant to subsection 8.2(3), the Filers are required to disclose to the purchasers of securities of a Fund, the amount of equity interest that Manulife, and any other member of the organization of the Funds, has in the Filers;
(b) pursuant to subsection 8.2(4), a purchaser of securities of a Fund from the Filers must consent to the trade after he or she receives the disclosure document described under (a) before the trade can be completed; and
(c) pursuant to subsection 8.2(5), the Filers are not required to deliver the disclosure document to obtain the consent of a purchaser of securities of the Funds if that purchaser has previously acquired such securities and received a disclosure document, if the information contained in that disclosure document has not changed.
For accounts opened prior to September 1, 2007, the Filers complied with the requirements of subsection 8.2 of NI 81-105 by obtaining written consent of such clients (either at the time of account opening or through a separate disclosure document) or by relying upon exemptive relief granted to the Filers by the securities regulators for a specified group of clients. From November 1, 2008 onward, the Filers implemented a policy of obtaining written consent to the purchase of the Funds from all clients during the account opening process.
During the period September 1, 2007 until October 31, 2008 (the Period), the Filers’ policy was to obtain the written consent of an investor to the purchase of securities of a Fund only at the time a client invested in such securities. As a result, the Filer typically would not have written consent from clients who opened an account during the Period and who have not purchased securities of a Fund.
The Filers are seeking an exemption from the requirement in subsection 8.2(4) to obtain written consent for trades in securities of the Funds for those investors who opened an account with a Filer during the Period and who have not already provided written consent to the purchase of securities of the Funds (Affected Clients).
As at February 7, 2011 the Filers have a combined total of approximately 8,004 Affected Clients. A significant number of these Affected Clients trade in mutual funds.
The Filers have developed a procedure for Affected Clients to obtain written consent prior to completion of trades in securities of the Funds on an “as needed” basis. However, the Filers are concerned that the procedure creates a disincentive for many of their clients and sales representatives from trading in securities of the Funds and potentially creates trade delays.
The Filers believe that its clients are aware of the relationships between the Filers and the Funds given the shared use of the name “Manulife” and that many of the Affected Clients would view the requirement to provide written consent evidencing such knowledge as administratively burdensome so as to cause them to invest in unrelated mutual funds.
The Filers have considered alternatives to the “as needed” approach, such as re-documenting all Affected Client’s accounts. This would involve a mail-out to all Affected Clients, tracking whether or not a client has executed a consent form and following up with any client who failed to return the form prior to any such client trading in securities of the Funds. The costs of compliance with this approach are considerable with little or no benefit to clients, given that they are already aware of the relationship between the Filers and the Funds.
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.
“Wes M. Scott” “James D. Carnwath”
Name: Wes M. Scott Name: James D. Carnwath
Title: Commissioner Title: Commissioner
Ontario Securities Commission Ontario Securities Commission