National Bank Investments Inc.
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Existing and future mutual funds managed by the Filer or an affiliate of the Filer granted relief from paragraphs 15.3(4)(c) and (f) of NI 81-102 Investment Funds to permit references to FundGrade A+ Awards and FundGrade Ratings in sales communications -- Relief subject to conditions requiring specified disclosure and the requirement that the FundGrade A+ Awards being referenced not have been awarded more than 365 days before the date of the sales communication.
Applicable Legislative Provisions
NI 81-102 Investment Funds, ss. 15.3(4)(c) and (f), 19.1.
March 18, 2020
IN THE MATTER OF THE SECURITIES LEGISLATION OF QUÉBEC AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF NATIONAL BANK INVESTMENTS INC. (the Filer)
The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer on behalf of the Funds (as defined below) for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption pursuant to section 19.1 of Regulation 81-102 respecting Investment Funds, CQLR, c. V-1.1, r. 39 (Regulation 81-102) from the requirements set out in paragraphs 15.3(4)(c) (in respect of both the FundGrade A+ Awards and the FundGrade Ratings) and 15.3(4)(f) (in respect of the FundGrade A+ Awards only) of Regulation 81-102, which provide that a sales communication must not refer to a performance rating or ranking of a mutual fund or asset allocation service unless:
a) the rating or ranking is provided for each period for which standard performance data is required to be given, except the period since the inception of the mutual fund; and
b) the rating or ranking is to the same calendar month end that is:
(i) not more than 45 days before the date of the appearance or use of the advertisement in which it is included; and
(ii) not more than three months before the date of first publication of any other sales communication in which it is included;
(together, the Exemption Sought) in order to permit the FundGrade A+ Awards and the FundGrade Ratings to be referenced in sales communications relating to the Funds (as defined below).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
a) the Autorité des marchés financiers is the principal regulator for this application;
b) the Filer has provided notice that section 4.7(1) of Regulation 11-102 respecting Passport System, CQLR c. V-1.1, r. 1 (Regulation 11-102) is intended to be relied upon in each of the jurisdictions of Canada other than the Jurisdictions; and
c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in Regulation 14-101 respecting Definitions, CQLR c. V-1.1, r. 3, Regulation 11-102 and Regulation 81-102 have the same meaning if used in this decision, unless otherwise defined.
Fund or Funds means, individually or collectively, the existing and future mutual funds governed by the provisions of Regulation 81-102 for which the Filer, or a duly registered affiliate of the Filer is, or in the future will be, the investment fund manager.
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
1. The Filer's head office is in Québec.
2. The Filer is registered as an investment fund manager in Québec, Ontario and Newfoundland and Labrador and as a mutual fund dealer in each of the jurisdictions of Canada.
3. Each of the Funds is, or will be, a mutual fund established under the laws of Canada or a jurisdiction of Canada.
4. Each of the Funds is, or will be, a reporting issuer in one or more of the jurisdictions of Canada.
5. The securities of each of the Funds are, or will be, qualified for distribution pursuant to a prospectus that has been, or will be, prepared and filed in accordance with the securities legislation of each applicable jurisdiction of Canada.
6. Each of the Funds is, or will be, subject to Regulation 81-102, including Part 15 of Regulation 81-102, which governs sales communications.
7. Neither the Filer nor any of the existing Funds is in default of the securities legislation in any jurisdiction of Canada.
FundGrade A+ Awards Program and FundGrade Ratings
8. The Filer wishes to include in sales communications of the Funds references to the FundGrade Ratings and references to the FundGrade A+ Awards where such Funds have been awarded a FundGrade A+ Award.
9. FundGrade A+ Awards and FundGrade Ratings are awarded by Fundata Canada Inc. (Fundata), a company that is not a member of the Funds' organization. Fundata is a "mutual fund rating company", as that term is defined in Regulation 81-102. Fundata is a supplier of mutual fund information, analytical tools and commentary to advisors, media and investors worldwide.
10. The FundGrade A+ Awards are awarded to funds in most individual fund classifications for the previous calendar year, and the award are announced in January of each year. The categories for fund classification used by Fundata are those maintained by the Canadian Investment Funds Standards Committee (the CIFSC) (or a successor to CIFSC), a Canadian organization that is independent of Fundata.
11. The FundGrade A+ Awards are based on a rating methodology developed by Fundata, the FundGrade Rating system which evaluates funds on their risk-adjusted performance. The metrics for evaluating fund performance are calculated for the two through ten year time periods for each fund. The FundGrade Ratings are letter grades determined each month and are released on the seventh business day of the following month. Because the overall score of a fund is calculated by equally weighting the periodic rakings, to receive an A Grade, a fund must show consistently high scores all ratios across all time periods.
12. At the end of each calendar year, Fundata calculates a "fund grade point average or GPA" for each fund based on the full year's performance. The fund GPA is calculated by converting each month's FundGrade Rating letter grade into a numerical score. Any fund earning a GPA of 3.5 or greater earns a FundGrade A+ Award.
Relief from paragraph 15.3(4)(c) of Regulation 81-102
13. The FundGrade Ratings fall within the definition of "performance data" under Regulation 81-102 as they constitute "a rating, ranking, quotation, discussion or analysis regarding an aspect of the investment performance of an investment fund". The FundGrade A+ Awards may be considered to be "overall ratings or rankings", given that the awards are based on the FundGrade Ratings as described above. Therefore, references to FundGrade Ratings and FundGrade A+ Awards in sales communications relating to the Funds need to meet the applicable requirements of Part 15 of Regulation 81-102.
14. Paragraph 15.3(4)(c) of Regulation 81-102 imposes a "matching" requirement for performance ratings or rankings that are included in sales communications for mutual funds. If a performance rating or ranking is referred to in a sales communication, it must be provided for, or "match", each period for which standard performance data is required to be given for a fund, except for the period since the inception of the fund (i.e., for one, three, five and ten year periods, as applicable).
15. While FundGrade Ratings are based on calculations for a minimum of two years through to a maximum of ten years and the FundGrade A+ Awards are based on a yearly average of monthly FundGrade Ratings, specific rating for the three, five and ten year periods within the two to ten year measurement period are not given. This means that a sales communication referencing FundGrade Ratings and FundGrade A+ Awards cannot comply with the "matching" requirement contained in paragraph 15.3(4)(c) of Regulation 81-102. Relief from paragraph 15.3(4)(c) of Regulation 81-102 is, therefore, required in order for the Funds to use FundGrade Ratings and FundGrade A+ Awards in sales communications.
Relief from paragraph 15.3(4)(f) of Regulation 81-102
16. Paragraph 15.3(4)(f) of Regulation 81-102 provides that in order for a rating of ranking such as a FundGrade A+ Award or the FundGrade Ratings to be used in an advertisement, the advertisement must be published within 45 days of the calendar month end to which the rating or ranking applies. Further, in order for the rating or ranking to be used in any other sales communications, the rating or ranking must be published within three months of the calendar month end to which the rating or ranking applies.
17. Because the evaluation of fund for the FundGrade A+ Awards will be based on data aggregated until the end of December in any given year and the results will be published in January of the following year, by the time a fund receives a FundGrade A+ Award in January, paragraph 15.3(4)(f) of Regulation 81-102 will only allow the FundGrade A+ Award to be used in an advertisement until the middle of February and in other sales communications until the end of March.
Reasons for the Exemption Sought
18. The Filer submits that the FundGrade A+ Awards and FundGrade Ratings provide important tools for investors, as they provide investors with context when evaluating investment choices. These awards and ratings provide an objective, transparent and quantitative measure of performance that is based on the expertise of FundGrade in fund analysis that alleviates any concern that references to them may be misleading and, contrary to paragraph 15.2(1)(a) of Regulation 81-102.
19. The Filer submits that the Exemption Sought is not detrimental to the protection of investors.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted to permit the FundGrade A+ Awards and the FundGrade Ratings to be referenced in sales communications relating to a Fund, provided that:
1. the sales communication that refers to the FundGrade A+ Awards and the FundGrade Ratings complies with Part 15 of Regulation 81-102 other than as set out herein and contains the following disclosure in at least 10 point type:
a) the name of the category for which the Fund has received the award or rating;
b) the number of mutual funds in the category for the applicable period;
c) the name of the ranking entity, i.e., Fundata;
d) the length of period and the ending date, or, the first day of the period and the ending date on which the FundGrade A+ Awards or the FundGrade Rating is based;
e) a statement that FundGrade Ratings are subject to change every month;
f) in the case of a FundGrade A+ Award, a brief overview of the FundGrade A+ Awards;
g) in the case of a FundGrade Rating (other than FundGrade Ratings referenced in connection with a FundGrade A+ Award), a brief overview of the FundGrade Rating;
h) disclosure of the meaning of the FundGrade Ratings from A to E (e.g., rating of A indicates a fund is in the top 10% of its category); and
i) references to Fundata's website (www.fundata.com) for greater detail on the FundGrade A+ Awards and the FundGrade Ratings;
2. the FundGrade A+ Awards being referenced must not have been awarded more than 365 days before the date of the sales communication; and
3. the FundGrade A+ Awards and the FundGrade Ratings being referenced are calculated based on comparisons of performance of mutual funds within a specified category established by the CIFSC (or a successor to CIFSC).