June 19, 2019
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 ROYAL MUTUAL FUNDS INC. (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) for an exemption from the requirement in section 3.2.01(1) of National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) to deliver or send the most recently filed fund facts document (the Fund Facts) in the manner required under the Legislation (the Fund Facts Delivery Requirement) in respect of purchases of securities of the funds (the Funds) that are, or will be, part of the target asset allocation program offered by the Filer (the Program) that are made pursuant to the Automatic Rebalancing Trades (as defined below) and Additional Investments (as 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 section 4.7(1) of Multilateral Instrument 11‑102 Passport System (MI 11-102) is intended to be relied upon by the Filer in all of the other provinces and territories of Canada (together with Ontario, the Canadian 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
The Filer is a corporation incorporated under the laws of Canada with its head office located in Toronto, Ontario.
The Filer is registered as a mutual fund dealer in each of the Canadian Jurisdictions and is a member of the Mutual Fund Dealers Association of Canada (the MFDA).
The Filer is a wholly owned subsidiary of Royal Bank of Canada.
The Filer is not in default of the securities legislation of the Canadian Jurisdictions.
The Funds
Each Fund is, or will be, an open-end mutual fund trust 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 in some or all of the Canadian Jurisdictions, and subject to National Instrument 81-102 Investment Funds.
Securities of the Funds are, or will be, qualified for distribution pursuant to a simplified prospectus, annual information form and Fund Facts that have been, or will be, prepared and filed in accordance with NI 81-101.
The Funds are not in default of the securities legislation of the Canadian Jurisdictions.
Securities of the Funds are, or will be, distributed through the Filer.
The Funds that will be initially included in the Program are managed by RBC Global Asset Management Inc. (RBC GAM), but Funds that are subsequently added to the Program may be managed by RBC GAM or other investment fund managers.
The Program
The Program involves the Filer rebalancing an investor’s investments in certain selected Funds back to specific target allocations at prescribed time intervals and subject to prescribed variances, as further described below.
The Filer intends to launch the Program in September 2019.
A registered dealing representative of the Filer (an Advisor) collects “know your client” information (the KYC Information) from each client for each investment account, such as the client’s financial circumstances, investment knowledge, investment objectives, time horizon and risk tolerance.
This data is then run through a proprietary technology tool (the Tool), which recommends a list of Funds and target allocations for the client, and gives the client the option to customize their own portfolio and target allocations using the list of Funds.
A client chooses a portfolio of Funds (the Selected Funds) with the Advisor using the Tool and determines the target percentage weightings of these Selected Funds (the Target Fund Allocations). The portfolios recommended by the Filer, through use of the Tool, are designed to occupy successive portions of the risk-return spectrum from conservative, income-maintenance investing to aggressive growth investing.
The Tool then generates the client’s target percentage asset weightings (the Target Asset Allocations) based on the relative weightings of specified asset classes (the Asset Classes) within the Selected Funds. The client sets a permitted range for each Asset Class (the Permitted Range) in the form of a specific percentage deviation from the Target Asset Allocation.
The Tool periodically calculates the actual percentage weightings of each Asset Class within each client’s account. If, when comparing the actual percentage weightings of each Asset Class to the Target Asset Allocation (based on Target Fund Allocations), the percentage weighting of any Asset Class deviates from the Permitted Range, the Tool will calculate the necessary purchase and redemption trades of the Selected Funds (the Automatic Rebalancing Trades) required to bring the client’s account portfolio back to the original Target Fund Allocations.
The Automatic Rebalancing Trades will be executed by the Filer.
This monitoring, calculation and consequent auto-rebalancing, if necessary, occurs at pre-determined time intervals (for example, quarterly, semi-annually or annually), as determined by the client.
Before participating in the Program, the client will complete an enrollment form relating to the Program (the Enrollment Form) and sign a client account agreement with the Filer (the Client Account Agreement). After completing the Enrollment Form and reviewing the Client Account Agreement with an Advisor, the client authorizes the Filer to effect the Automatic Rebalancing Trades upon instructions from the Tool.
Details of the Program will be disclosed in the Enrollment Form and Client Account Agreement.
When enrolling in the Program, the client is made aware, prior to investing, that they are selecting a solution that automatically rebalances the Selected Funds by making purchases and/or redemptions of securities of the Selected Funds from time to time, pursuant to the Target Fund Allocations that they have selected.
There are no fees or expenses charged in respect of the Program. The Filer and its dealing representatives will not receive any advisor fees from a client for participating in the Program.
No sales charges, redemption fees, switch fees or short-term trading fees will be charged in connection with any trades effected under the Program.
Clients may, from time to time, contribute additional funds to their accounts with the Filer for investment in Selected Funds through the Program. Such additional funds will be applied towards the purchase of additional securities of the Selected Funds in accordance with the Target Fund Allocations (the Additional Investments).
In accordance with the Fund Facts Delivery Requirement, if not previously delivered, the client will receive the most recent version of the Fund Facts of the Selected Funds at the time that the client signs up for the Program and determines the Target Fund Allocations.
A client may substitute any of the Selected Funds in their account with another Fund at any time by instructing their Advisor. If and when a Fund for which the client has not yet received the most recent version of the Fund Facts is chosen as a Selected Fund, the Filer will provide such client with the most recent version of the Fund Facts of that Selected Fund prior to including such Selected Fund in the client’s account, in accordance with the Fund Facts Delivery Requirement.
A client may also choose to change the Target Fund Allocations (which consequently changes the Target Asset Allocations) at any time by instructing their Advisor. At no time will the Filer substitute any of the Selected Funds in a client’s account or change the Target Fund Allocations without a client’s consent.
Clients may terminate their participation in the Program at any time by instructing the Filer to discontinue participation in the Program.
Ongoing Monitoring and Oversight
- The following monitoring and oversight procedures will be carried out in connection with the Program:
a. the Filer will send annual notifications to clients when the KYC Information related to their accounts in the Program have not been updated for greater than twelve months, and the notification will prompt such clients to engage an Advisor to:
i. inform the Advisor of any changes to the clients’ circumstances; and
ii. review the Selected Funds within their accounts to ensure that the Selected Funds remain suitable; and
b. the Filer will conduct ongoing oversight of the portfolios and Funds that it recommends to clients through use of the Tool to determine whether the composition of the portfolios and Funds recommended through the Tool remain suitable for each risk profile or whether any changes to the selection of Funds would be appropriate.
Account Reporting
Upon the initial investment by the client in the Selected Funds under the Program and upon purchases of the Selected Funds made pursuant to Additional Investments, the client will receive trade confirmations as required under the applicable MFDA rule.
No trade confirmations are required to be sent to the client in respect of the Automatic Rebalancing Trades.
Clients will receive an email notification each time that an Automatic Rebalancing Trade occurs in their account. This notification will inform the client that their portfolio has drifted beyond the Permitted Range and that the Filer has completed Automatic Rebalancing Trades in order to bring the balance of the Selected Funds back to the Target Fund Allocations. The notification will also invite the client to log in to their online account to review the details of the Automatic Rebalancing Trades and inform them that the details of such Automatic Rebalancing Trades will be reflected on their next quarterly account statement.
The Automatic Rebalancing Trades and any trades made pursuant to Additional Investments will also be reflected on the client’s quarterly account statements.
The Exemption Sought
The Automatic Rebalancing Trades will result in redemptions and purchases of securities of one or more Selected Funds in a client’s account. The Additional Investments will result in purchases of securities of one or more Selected Funds in a client’s account. Each such purchase is a “distribution” under the Legislation, which triggers the Fund Facts Delivery Requirement.
The Fund Facts Delivery Requirement requires that a dealer, unless it has previously done so, deliver or send to a purchaser of a security of a fund the most recently filed Fund Facts for the fund before the dealer accepts an instruction from the purchaser for the purchase of the security.
Prior to the initial set-up of an account for an investor in the Program or prior to the purchase of a new Selected Fund, the Filer will send or deliver the Fund Facts document in respect of each applicable Selected Fund to the investor in accordance with the Fund Facts Delivery Requirement.
In the absence of the Exemption Sought, the Filer would be required to deliver the most recently filed Fund Facts in advance of purchases of securities of a Selected Fund that are made pursuant to each (a) Automatic Rebalancing Trade and (b) Additional Investment.
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:
- each investor in the Program is sent or delivered a notice that states:
a. except as contemplated in paragraphs 26 and 27 above, that the investor will not receive the Fund Facts when they subsequently purchase securities of a Selected Fund under the Program unless they specifically request them;
b. that the investor is entitled to receive, upon request, at no cost to the investor, the most recently filed Fund Facts for the Selected Funds in the Program by calling a specified toll-free number, or by sending a request by mail or e-mail to a specified address or e-mail address;
c. how to access the Fund Facts for the Selected Funds in the Program electronically;
d. that the investor does not have a right of withdrawal under the Legislation for the Automatic Rebalancing Trades and Additional Investments under the Program, but will continue to have a right of action for misrepresentation in the prospectus or any document incorporated by reference into the prospectus; and
e. that the investor may terminate their participation in the Program;
at least annually, each investor will be advised in writing of how they can request the most recently filed Fund Facts; and
the most recently filed Fund Facts will be sent or delivered to an investor if the investor requests it.
“Neeti Varma”
Neeti Varma, Manager Investment Funds and Structured Products Branch Ontario Securities Commission
App No. 2019/0225