Franklin Templeton Investments Corp. and FTC Investor Services Inc., 2018 CanLII 126964

(the Jurisdiction)

AND

(the Filer)

AND

(the Representative Dealer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer and the Representative Dealer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) (a) for an exemption from the requirement to deliver or send the most recently filed fund facts document (a Fund Facts) in the manner as required under the Legislation (the Fund Facts Delivery Requirement) in respect of purchases of High Net Worth Series (as defined below) securities of the Funds (as defined below) that are made pursuant to the Lower Fee Switches (as defined below) (the Fund Facts Delivery Exemption) and (b) the revocation of the decision (the Previous Decision) granted by the principal regulator on December 9, 2016 (the Revocation and collectively with the Fund Facts Delivery Exemption, 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 each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 – Definitions and MI 11-102 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:

The Filer and the Representative Dealer

The Filer is a corporation amalgamated under the laws of the Province of Ontario having its head office in Toronto, Ontario.
The Filer is registered under securities legislation in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland & Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec, Saskatchewan and Yukon as an adviser in the category of portfolio manager and as a dealer in the categories of mutual fund dealer and exempt market dealer. The Filer is registered under securities legislation in Alberta, British Columbia, Manitoba, Newfoundland & Labrador, Nova Scotia, Ontario and Québec as an investment fund manager. The Filer is also registered under the Commodity Futures Act (Ontario) as a commodity trading manager.
The Filer is the investment fund manager, promoter and portfolio manager of various mutual funds (Existing Funds), each of which is subject to the requirements of National Instrument 81-102 – Investment Funds (NI 81-102) and may, in the future, become the investment fund manager of additional mutual funds that are subject to NI 81-102 (Future Funds and together with the Existing Funds, the Funds and individually, a Fund).
The head office of the Representative Dealer is located in Toronto, Ontario.
The Representative Dealer is an affiliate of the Filer.
The Representative Dealer is registered under securities legislation in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland & Labrador, Nova Scotia, Ontario, Prince Edward Island, Saskatchewan and Yukon as a dealer in the category of mutual fund dealer. The Representative Dealer is also a member of the Mutual Fund Dealers Association of Canada.
Securities of the Funds are, or will be, distributed through dealers (Dealers or individually, a Dealer) who may or may not be affiliated with the Filer, including the Representative Dealer.
Each Dealer is, or will be, registered as a dealer in one or more of the provinces and territories of Canada. Other than Dealers who are registered as exempt market dealers, the Dealers are, or will be, members of either the Investment Industry Regulatory Organization of Canada or the Mutual Fund Dealers Association of Canada.
Neither the Filer nor the Representative Dealer is in default of the securities legislation of any of the Jurisdictions.

The Funds

Each Fund is, or will be, an open-end mutual fund created under the laws of Canada or a Jurisdiction.
Each Fund is, or will be, a reporting issuer in one or more of the Jurisdictions.
The securities of each of the Funds are, or will be, qualified for distribution pursuant to a simplified prospectus, Fund Facts and annual information form that has been, or will be, prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
The securities of the Existing Funds are currently offered under a simplified prospectus dated May 29, 2018, as amended.
Each of the Existing Funds currently offers up to 13 series: Series A, A (Hedged), F, FT, I, O, OT, PF, PF (Hedged), PFT, T, T-USD and V. In addition to Series PF and Series PFT (the Current High Net Worth Series) the Filer intends to also offer Series PA, PA (Hedged), PT and PT-USD series of the Funds (the New High Net Worth Series). The Filer may also offer additional series of the funds in the future.
The Existing Funds are not in default of securities legislation in any of the Jurisdictions.

Series PA, PA (Hedged), PT, PT-USD, PF and PFT securities

The Current High Net Worth Series, the New High Net Worth Series, and any future applicable high net worth series securities (collectively, the High Net Worth Series) of the Funds, have, or will have, lower management fees than the corresponding Series A, A (Hedged), T, T-USD, F and FT respectively, and any future applicable retail series securities (the Retail Series) of the same Fund and are, or will be, only available to investors who meet the minimum investment threshold of $200,000 ($100,000 in respect of Series PF and PFT) in securities of all Funds held in an account(s) whether by an investor alone or by an investor's household having met the minimum investment criteria for the respective series (the Eligibility Criteria).
The High Net Worth Series have the same attributes as the Retail Series except for a combined management and administration fee that is lower than that of the Retail Series of the same Fund.

Automatic Switches

The Filer currently offers an automatic switching program where investors holding Series F and FT are switched into Series PF and PFT, respectively and as applicable, if they meet the Eligibility Criteria (the Current Lower Fee Switches). If an investor holding Series PF or Series PFT ceases to be eligible to hold that series, the Filer may switch the applicable High Net Worth Series into the applicable Retail Series securities.
The Filer intends to extend the automatic switching program to all Retail Series and High Net Worth Series on or before January 25, 2019 (the Implementation Date) so that at the end of each Business Day (as defined below), without the dealer/investor having to initiate the trade, the Filer will automatically switch Retail Series investors who meet the Eligibility Criteria to the corresponding High Net Worth Series securities of the same Fund (the Lower Fee Switches) without the dealer or investor having to initiate the trade. If an investor holding High Net Worth Series securities ceases to meet the Eligibility Criteria, the Filer may switch the High Net Worth Series securities into the applicable Retail Series securities without the dealer or investor having to initiate the trade (the Higher Fee Switches, and together with the Lower Fee Switches, the Automatic Switches).
The Lower Fee Switches will generally take place when the investor purchases additional securities of the Funds or when positive market movement moves the investor into High Net Worth Series eligibility.
The Higher Fee Switches may occur because of redemptions that decrease the amount of total investments with the Filer for purposes of calculating the investor's eligibility for High Net Worth Series securities. However, in no circumstances will market value declines lead to Higher Fee Switches.
Once an investor has qualified for the High Net Worth Series, the investor will continue to enjoy the benefit of lower management and administration fees associated with the applicable High Net Worth Series, even if the Fund performance reduces the account value below the Eligibility Criteria.
Investors may access High Net Worth Series securities of a Fund by (a) initially investing in High Net Worth Series securities if they meet the Eligibility Criteria or (b) initially investing in Retail Series securities and then, upon meeting the Eligibility Criteria, having those Retail Series securities switched into High Net Worth Series securities by way of a Lower Fee Switch.
Investors may access Retail Series securities of a Fund by (a) initially investing in Retail Series securities, or (b) initially investing in High Net Worth Series securities and then, upon no longer meeting the Eligibility Criteria for the High Net Worth Series securities, having those High Net Worth Series securities switched into Retail Series securities by way of a Higher Fee Switch.
Further to each Lower Fee Switch, an investor's account would continue to hold securities in the same Fund(s) as before the Automatic Switch, with the only material difference to the investor being that the combined management and administration fees charged for the High Net Worth Series securities will be lower than those charged for Retail Series securities.
The Filer will monitor whether an investor meets, or continues to meet, the Eligibility Criteria each day the Filer's head office in Toronto is open for business (a Business Day) and will monitor whether an investor, who has met the Eligibility Criteria, has made any new investments in the Retail Series securities each Business Day. Based upon this monitoring, the Filer will carry out the Lower Fee Switches each Business Day.
Further to each Higher Fee Switch, an investor's account would continue to hold securities in the same Fund(s) as before the Automatic Switch, with the only material differences to the investor being that the management fees charged for the Retail Series securities would be higher than those charged for High Net Worth Series securities.
There are no sales charges, switch fees or other fees payable by the investor upon an Automatic Switch.
The trailing commissions for the High Net Worth Series and the Retail Series securities for each Fund are or will be identical, other than in respect of Series PF, PFT, F and FT where no trailing commissions are paid.
Implementation of the Automatic Switches will have no adverse tax consequences on investors under current Canadian tax legislation.

Fund Facts Delivery Requirement

Each Automatic Switch will entail (a) a redemption of the Retail Series security, immediately followed by a purchase of the corresponding High Net Worth Series security, or (b) a redemption of the High Net Worth Series security immediately followed by a purchase of the corresponding Retail Series security. Each purchase of securities done as part of an Automatic Switch will be a "distribution" under the Legislation, which triggers the Fund Facts Delivery Requirement.
Pursuant to the Fund Facts Delivery Requirement, a dealer is required to deliver the most recently filed Fund Facts of a series of a Fund to an investor before the dealer accepts an instruction from the investor for the purchase of securities of that series of the Fund.
In the absence of the Exemption Sought, the Filer may not carry out the Lower Fee Switches without compliance with the Fund Facts Delivery Requirement.

Rationale for Exemption Sought

While the Filer will initiate each trade done as part of an Automatic Switch, the Fund Facts will not be delivered to investors in connection with the purchase of High Net Worth Series securities made pursuant to a Lower Fee Switch for the following reasons:

(a) at no time will an investor who qualifies for High Net Worth Series securities pay combined management and administration fees at a rate higher than the rate of the combined management and administration fees of the Retail Series securities for which the investor initially subscribed; and

(b) since Retail Series securityholders would have received a Fund Facts disclosing the higher level of fees which applied to the Retail Series for which they initially subscribed, the investor would derive little benefit from receiving a further Fund Facts relating to the High Net Worth Series upon each Lower Fee Switch.

Each Dealer will be required to deliver Fund Facts for the Retail Series to investors in connection with the purchase of Retail Series securities made pursuant to a Higher Fee Switch, as required by the Fund Facts Delivery Requirement.
The Filer will disclose (a) the Eligibility Criteria and the management and administration fees applicable to the Retail Series and the High Net Worth Series in the simplified prospectus of the Funds and (b) a summary of the Eligibility Criteria and the fee discounts applicable to the High Net Worth Series in the Fund Facts of the Retail Series of the Funds.
The Filer will communicate with dealers about the Lower Fee Switches so that Dealers will be equipped to appropriately notify existing Retail Series investors of the changes applying to their Retail Series investments and appropriately advise new Retail Series investors about the Lower Fee Switches.
The Filer and the Representative Dealer previously received exemptive relief from the Fund Facts Delivery Requirement for the Current Lower Fee Switches pursuant to the Previous Decision.
The Filer's intention to extend the automatic switching program to all Retail Series and all High Net Worth Series, including the New High Net Worth Series, has triggered the need for the Revocation and the Exemption Sought.

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 Revocation is granted; and
the Fund Facts Delivery Exemption is granted provided that:

(a) for investors invested in Retail Series prior to the Implementation Date, the Filer will liaise with the relevant Dealers to devise and implement a notification plan for such investors regarding the Automatic Switches to communicate the following:

(i) that their investment may be switched to a High Net Worth Series with lower fees upon meeting the applicable Eligibility Criteria;

(ii) that, other than a difference in fees, there will be no other material difference between the Retail Series and the High Net Worth Series;

(iii) that if they cease to meet the Eligibility Criteria for High Net Worth Series, their investment will be switched into a series with higher management and administration fees which will not exceed the management and administration fees associated with the Retail Series; and

(iv) that they will not receive the Fund Facts when they purchase High Net Worth Series securities further to a Lower Fee Switch, but that:

(A) 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;

(B) the most recently filed Fund Facts will be sent or delivered to them at no cost;

(D) 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 a Lower Fee 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;

(b) the Filer will incorporate disclosure in the simplified prospectus for the Retail Series and the High Net Worth Series that sets out the following:

(i) the Eligibility Criteria for both the Retail Series and the High Net Worth Series;

(ii) the management and administration fees applicable to investments in both the Retail Series and the High Net Worth Series; and

(iii) in the event investors cease to meet the Eligibility Criteria of a specified High Net Worth Series, their investment may be switched into a series with higher management and administration fees which will not exceed the applicable Retail Series fees;

(i) Under the heading "How much does it cost?", a summary of the Automatic Switch program, consisting of:

(A) a statement explaining that the Automatic Switch program offers a management and administration fee decrease;

(B) in the case of the Retail Series only, a statement explaining the scenarios in which the Lower Fee Switches will be made;

(D) a cross-reference to the disclosure described below under paragraph 2 (c) (ii);

(E) a cross-reference to the more detailed disclosure in the simplified prospectus for more information about the program; and

(F) a statement disclosing that investors should speak to their representative for more details about the program; and

(ii) at the end of the disclosure under the sub-heading "Fund Expenses", a statement that discloses the management and administration fee decrease of the applicable High Net Worth Series from the management and administration fee of the applicable Retail Series, shown in percentage terms;

(d) for Retail Series investors, the Filer sends these investors an annual reminder notice advising that they will not receive the Fund Facts when they purchase High Net Worth Series securities further to a Lower Fee Switch, but that:

(i) they may request the most recently filed Fund Facts for the relevant class by calling a specified toll-free number or by sending a request via email to a specified 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 securities made pursuant to a Lower Fee Switch, but they will have a 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.

(e) the Filer will provide to the principal regulator, on an annual basis, beginning 60 days after the date upon which the Exemption Sought is first relied upon by a Dealer, either:

(i) a current list of all such Dealers that are relying on the Exemption Sought; or

(ii) an update to the list of such Dealers or confirmation that there has been no change to such list; and

(f) prior to a Dealer relying on the Exemption Sought, the Filer provides to the Dealer a disclosure statement informing the Dealer of the implications of this decision.

"Stephen Paglia"

Stephen Paglia, Manager

Investment Funds and Structured Products Branch Ontario Securities Commission

Application No. 2018/0571