October 28, 2015
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 Fidelity Investments Canada ULC (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 (the Legislation) exempting the Filer from the requirement in the Legislation for a dealer to deliver or send the most recently filed fund facts document (Fund Facts) at the same time and in the same manner as otherwise required for the prospectus (the Fund Facts Delivery Requirement) in respect of purchases of mutual fund securities of the Tiered Series (defined below) that are made pursuant to Automatic Switches (defined below) (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 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (collectively, the Passport Jurisdictions).
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:
The Filer is a corporation duly amalgamated and validly existing under the laws of the Province of Alberta. The head office of the Filer is in Toronto, Ontario. The Filer is the investment fund manager of existing mutual funds (the Existing Funds) and may establish and manage other mutual funds in the future (together with the Existing Funds, the Funds).
The Filer is registered in Ontario, Québec and Newfoundland and Labrador in the category of investment fund manager. The Filer is also registered as a portfolio manager and mutual fund dealer in each of the provinces and territories of Canada and is registered under the Commodity Futures Act (Ontario) in the category of commodity trading manager.
Each Fund is, or will be, an open-end mutual fund trust created under the laws of the Province of Ontario or an open-end mutual fund that is a class of shares of a mutual fund corporation.
Each Fund is, or will be, a reporting issuer under the laws of some or all of the provinces and territories of Canada and subject to National Instrument 81-102 Investment Funds. The securities of the Funds are, or will be, qualified for distribution pursuant to a simplified prospectus, Fund Facts and annual information form that have been, or will be, prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
The units and shares of the Funds are referred to herein collectively as Securities. Securities of the Funds are currently offered under simplified prospectuses, Fund Facts and annual information forms dated October 29, 2014, March 27, 2015, April 20, 2015 and September 29, 2015.
The Funds currently offer up to 15 series of Securities, as applicable – series A, B, F, I, O, T5, I5, S5, T8, I8, S8, F5, F8, C and D Securities.
Series F, F5 and F8 Securities of the Funds have lower fees than series A, B, I, T5, T8, I5, I8, S5, S8, C and D Securities and are usually purchased by investors who have fee-based accounts with dealers who sign an eligibility agreement with the Filer. Instead of paying sales charges, investors pay their dealer a fee for investment advice and other services they provide. In addition, the Filer does not pay any commissions or trailing commissions to dealers who sell Series F Securities. Series F is defined herein to include series F, F5 and F8, as applicable.
Series B, S5 and S8 Securities of the Funds are purchased by investors on an initial sales charge basis. Series B, S5 and S8 Securities of certain of the Funds may also be acquired upon the automatic switch of Series A, T5 or T8 Securities after the expiration of the deferred sales charge period on those Securities. Trailing commissions are paid to dealers who sell ISC Series Securities. ISC Series is defined herein to include series B, S5 and S8, as applicable.
Dealers are responsible for deciding whether investors are eligible to purchase and continue to hold Series F Securities. If an investor is no longer eligible to hold these Securities, the investor’s dealer is responsible for telling the Filer to switch the investor’s Securities into Securities of the appropriate ISC Series of the same Fund or redeem them.
The Filer proposes to create a new set of series on certain of the Funds that will offer tiered management and administration fees (the P Tiered Series) for Series F holders. The P Tiered Series will offer lower combined management and administration fees than the existing Series F based on the size of the holdings of the Funds in the investor’s account or, in certain instances, the group of related accounts of which the investor is a member. The Filer will automatically switch these Series F holders into and out of the P Tiered Series based on the size of the holdings of the Funds in the investor’s account or collectively in the related accounts without the dealer or investor having to initiate the trade.
The Filer is expecting to offer a similar set of series on certain of the Funds that offer tiered management and administration fees (the ISC Tiered Series) for ISC Series holders. The ISC Tiered Series will offer lower combined management and administration fees than the existing ISC Series based on the size of the holdings of the Funds in the investor’s account or, in certain instances, the group of related accounts of which the investor is a member. The Filer will automatically switch these ISC Series holders into and out of the ISC Tiered Series based on the size of the holdings of the Funds in the investor’s account or collectively in the related accounts without the dealer or investor having to initiate the trade.
These proposed programs are collectively referred to herein as the Automatic Switching Programs and individually as an Automatic Switching Program.
Once an account has qualified for one of the P Tiered Series or ISC Tiered Series, as the case may be, the account will continue to enjoy the benefit of lower management and administration fees associated with that tier even if fund performance reduces the account value below that tier’s threshold.
Investors may only access a P Tiered Series of a Fund by initially investing in Series F Securities of that Fund. Investors may only access an ISC Tiered Series of a Fund by initially investing in ISC Series Securities of that Fund or by acquiring certain ISC Series Securities of that Fund upon the automatic switch of securities after the expiration of the deferred sales charge period. For Series F and ISC Series accounts that have qualified for the P Tiered Series or ISC Tiered Series, as the case may be, the Filer will automatically switch:
(a) Series F or ISC Series accounts into the appropriate tier of the P Tiered Series or ISC Tiered Series of the same Fund;
(b) once in the P Tiered Series or ISC Tiered Series, among the appropriate tiers of the P Tiered Series or ISC Tiered Series of the same Fund based on increases in the size of the holdings of the Funds in the investor’s account or the related accounts, as the case may be, as a result of additional purchases and/or positive fund performance; and
(c) the account(s) to the applicable higher cost P Tiered Series or ISC Tiered Series, or from the P Tiered Series or ISC Tiered Series back into Series F or ISC Series of the same Fund, where the account(s) no longer meets the account size threshold as a result of redemptions.
(the Automatic Switches, individually an Automatic Switch).
Further to each Automatic Switch, an investor’s account(s) would continue to hold Securities in the same Fund(s) with the only material difference to the investor being that the combined management and administration fees of (a) each P Tiered Series will be lower than those charged on Series F Securities or (b) each ISC Tiered Series will be lower than those charged on ISC Series, as the case may be. In no event will (a) an account that qualifies for the P Tiered Series ever pay more than the Series F management and administration fees for which it initially subscribed or (b) an account that qualifies for the ISC Tiered Series ever pay more than the ISC Series management and administration fees for which it initially subscribed or acquired upon the automatic switch of certain Securities after the expiration of the deferred sales charge period.
There will be no embedded commissions or trailing commissions in the P Tiered Series. In addition, there will be no sales charges associated with the P Tiered Series. Sales charges and trailing commissions may apply to the ISC Tiered Series.
The rates of sales charges and trailing commissions attached to each ISC Tiered Series will not exceed the rates of sales charges and trailing commissions attached to the ISC Series.
Implementation of the Automatic Switches will have no adverse tax consequences on investors under current Canadian tax legislation.
Each Automatic Switch will entail a redemption of Series F Securities or of P Tiered Series Securities, or a redemption of ISC Series Securities or of ISC Tiered Series Securities, as the case may be, immediately followed by a purchase of the applicable P Tiered Series or Series F Securities, or the applicable ISC Tiered Series or ISC Series Securities, as the case may be. Each purchase of Securities done as part of the Automatic Switch will be a “distribution” under the Legislation that triggers the Fund Facts Delivery Requirement.
While the Filer will initiate each trade done as part of the Automatic Switches, the Filer does not propose to deliver the Fund Facts to investors in connection with the purchase of Securities made pursuant to Automatic Switches. Since at no time will (a) an account that qualifies for the P Tiered Series pay more than the combined management and administration fees of the Series F Securities for which it initially subscribed or (b) an account in the ISC Tiered Series pay more than the combined management and administration fees of the ISC Series for which it initially subscribed or acquired upon the automatic switch of certain Securities after the expiration of the deferred sales charge period. In all cases, since Series F and ISC Series holders would have received a prospectus or Fund Facts document disclosing the higher level of fees which applied to the series for which they initially subscribed, the investor would derive little benefit from a further Fund Facts document for each Automatic Switch.
The Filer will deliver or will arrange for the delivery of trade confirmations to investors in connection with each trade done further to Automatic Switches. Furthermore, details of the changes in series of securities held will be reflected in the account statements sent to investors for the month in which the change occurred.
Prior to launching the applicable Automatic Switching Program, the Filer will (a) disclose the eligibility requirements and the management and administration fees applicable to the Series F and each P Tiered Series and/or to the ISC Series and each ISC Tiered Series in the simplified prospectuses of the Funds, and (b) disclose a summary of the eligibility requirements, the management and administration fees or the management expense ratios, as applicable, and the fee discounts applicable to the Series F and each P Tiered Series and/or to the ISC Series and each ISC Tiered Series in the Fund Facts of the Funds.
The Filer will communicate extensively with dealers about the Automatic Switches so that dealers will be equipped to appropriately notify existing Series F investors and ISC Series investors of the changes applying to their Series F or ISC Series investments, as the case may be, and appropriately advise new Series F and ISC Series investors on the applicable Automatic Switching Program.
In the absence of the Exemption Sought, the Filer may not carry out the Automatic Switches without compliance with the Fund Facts Delivery Requirement.
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 is that the Exemption Sought is granted provided that:
- For investors invested in Series F or ISC Series prior to the launch date of the Automatic Switching Program for Series F or for ISC Series, the Filer will liaise with dealer firms and their advisors to devise a notification plan regarding the Automatic Switches for existing Series F and ISC Series investors who have holdings in the Funds of $150,000 or more of the following:
a) that their investment may be automatically switched to a P Tiered Series or ISC Tiered Series with lower fees upon meeting applicable eligibility requirements;
b) that, other than a difference in fees, there will be no other material difference between the Series F and the P Tiered Series or between the ISC Series and the ISC Tiered Series;
c) that if they cease to meet the eligibility requirements of a specified P Tiered Series or ISC Tiered Series, their investment will be switched into a series with higher management and administration fees which will not exceed the Series F or ISC Series fees;
d) that they will not receive the Fund Facts when they purchase Securities further to an Automatic Switch, but that:
i. they may request the most recently filed Fund Facts for the relevant series by calling a specified toll-free number or by sending a request via email to a specified address or email address;
ii. the most recently filed Fund Facts will be sent or delivered to them at no cost;
iii. the most recently filed Fund Facts may be found either on the SEDAR website or on the Filer’s website; and
iv. they will not have the right to withdraw from an agreement of purchase and sale (a Withdrawal Right) in respect of a purchase of series Securities made pursuant to an Automatic Switch, but they will have the right of action for damages or rescission in the event any Fund Facts or document incorporated by reference into a simplified prospectus for the relevant series contains a misrepresentation, whether or not they request the Fund Facts;
- For investors who purchase Series F Securities or ISC Series Securities on and after the launch date of the applicable Automatic Switching Program:
a. the Filer incorporates disclosure in the simplified prospectus for the Series F and the P Tiered Series or ISC Series and the ISC Tiered Series, as applicable, or in respect of both, that sets out:
i. the eligibility requirements for both Series F and the P Tiered Series or for the ISC Series and the ISC Tiered Series, as applicable, or in respect of both;
ii. the fees applicable to investments in both the Series F and the P Tiered Series or in both the ISC Series and the ISC Tiered Series, as applicable, or in respect of both; and
iii. that if investors cease to meet the eligibility requirements of a specified P Tiered Series or ISC Tiered Series, their investment will be switched into a series with higher management and administration fees which will not exceed the Series F fees or the ISC Series fees, as the case may be, and
b. each Fund Facts for those series will (i) disclose a summary of the eligibility requirements, the management and administrations fees or the management expense ratio, as applicable, and the fee discounts, (ii) disclose that if investors cease to meet the eligibility requirements of a specified P Tiered Series or ISC Tiered Series, their investment will be switched into a series with higher management and administration fees which will not exceed the Series F fees or the ISC Series fees, as the case may be, and (iii) will contain a cross-reference to the more detailed disclosure in the simplified prospectus; and
c. the Series F Fund Facts or ISC Series Fund Facts, as the case may be, containing the disclosure described in paragraph 2(b) above is delivered to Series F investors or ISC Series investors at the time of the first purchase of Series F Securities or ISC Securities on or after the launch date of the applicable Automatic Switching Program in accordance with the Fund Facts Delivery Requirements.
- For Series F and ISC Series investors who have holdings in the Funds of $150,000 or more and for investors in the P Tiered Series and ISC Tiered Series, the Filer sends to these investors an annual reminder notice advising that they will not receive the Fund Facts when they purchase Securities further to an Automatic Switch, but that:
i. they may request the most recently filed Fund Facts for the relevant series by calling a specified toll-free number or by sending a request via email to a specified address or email address;
ii. the most recently filed Fund Facts will be sent or delivered to them at no cost;
iii. the most recently filed Fund Facts may be found either on the SEDAR website or on the Filer’s website; and
iv. they will not have a Withdrawal Right in respect of a purchase of series Securities made pursuant to an Automatic Switch, but they will have the right of action for damages or rescission in the event any Fund Facts or document incorporated by reference into a simplified prospectus for the relevant series contains a misrepresentation, whether or not they request the Fund Facts.
“Darren McKall”
Darren McKall
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission