BMO Asset Allocation Fund - MRRS Decision
Headnote
MRRS -- revocation and replacement of decision granted under NI 81-102 -- Original decision granted relief from matching requirements under paragraph 15.3(4)(c) of NI 81-102 to allow use of Morningstar Star Ratings in sales communications -- Original decision replaced with decision containing revised condition reflecting new facts -- Securities Act (Ontario).
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5 as amended, s. 144.
Rules Cited
National Instrument 81-102 Mutual Funds, s. 15.3(4)(c).
January 8, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUEBEC, PRINCE EDWARD
ISLAND, NEW BRUNSWICK, NOVA SCOTIA,
NEWFOUNDLAND AND LABRADOR, NORTHWEST
TERRITORIES, YUKON AND NUNAVUT
(the "Jurisdictions")
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
BMO ASSET ALLOCATION FUND (the "Fund")
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from BMO Investments Inc. (the "Filer") on behalf of the Fund and other Canadian mutual funds that are governed by National Instrument 81-102 Mutual Funds ("Other Funds") and that wish to publish Morningstar Star Ratings (as defined below) in sales communications for a decision under the securities legislation of the Jurisdictions (the "Legislation") revoking the Original Decision (defined below) and replacing it with this decision (the "Requested Relief").
Under the Mutual Reliance Review System for Exemptive Relief Applications
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is the manager of the Fund. The head office of the Filer is located in Ontario.
2. The Fund is an open-ended mutual fund trust established under the laws of Ontario. Units of the Fund are offered on a continuous basis in each of the Jurisdictions pursuant to a simplified prospectus dated May 10, 2006.
3. The Filer wishes to include in sales communications of the Fund certain ratings of its performance prepared and provided by Morningstar Canada Inc. (the "Morningstar Star Ratings"), which sales communications will not strictly comply with the requirement in paragraph 15.3(4)(c) of National Instrument 81-102 Mutual Funds ("NI 81-102") that the ratings published be provided for, or "match" each period for which standard performance data is required to be given (the "Matching Requirement"). Other Funds similarly wish to publish Morningstar Star Ratings in sales communications.
4. Morningstar Canada Inc. ("Morningstar") is a rating agency that is not a member of the organization of the Fund or of Other Funds. The Fund and Other Funds may make reference to the Morningstar Star Ratings in sales communication subject to the terms of a license agreement with Morningstar.
5. In accordance with the requirements of section 15.8 of NI 81-102, standard performance data in sales communications for mutual funds is required for the following periods (as applicable): one year, three years, five years, 10 years, and the period since inception of the mutual fund if the mutual fund has been offering securities by way of simplified prospectus for more than one and less than 10 years.
6. The basis of generating Morningstar Star Ratings is consistent from mutual fund to mutual fund and captures a quantitative assessment of a mutual fund's past risk-adjusted return, presented relative to its category. Each month, Morningstar computes, for each Canadian mutual fund that has at least three years of performance history, its risk-adjusted rate of return and then compares each mutual fund's figures with all other rated funds in its category. The Morningstar Star Ratings are then ranked with the resulting range of scores divided into five tiers. The top 10% of mutual funds in each category earn five stars; the next 22.5% form the second tier, earning four stars; the following 35% earn three stars; the next 22.5% earn two stars, and the bottom 10% earn one star. Accordingly, one star indicates that the mutual fund has not performed as well as other mutual funds in its category, while five stars indicates that a mutual fund has generally performed better than the other mutual funds in its category. The Morningstar Star Ratings methodology is available for public review on Morningstar's website.
7. The categories against which the Fund and Other Funds are ranked by Morningstar are the categories established by Morningstar and published by it on its website (www.morningstar.ca), but will include the categories established and published by the Canadian Investment Funds Standards Committee (the "CIFSC") or a successor to the CIFSC in circumstances in which Morningstar publishes that it adopts the categories established by CIFSC. In either case, the categories change over time.
8. All categories established or adopted by Morningstar provide a reasonable and appropriate basis of evaluating mutual fund performance. Morningstar establishes its categories on the basis of objective mutual fund industry data from a number of sources, including participants in the Canadian mutual fund industry. The categories are determined by Morningstar on the basis of this data without regard to the impact or potential impact of such determination upon any particular participant in the Canadian mutual fund industry or upon any mutual fund. Before a new category established by Morningstar is used in conjunction with the Morningstar Star Ratings, it is published on Morningstar's website for a period of public review and commentary.
9. The Morningstar Star Ratings provide ratings for the following periods (as applicable): three years, five years, 10 years, and the overall rating (the "Overall Rating"), which is a weighted reflection of the previous three periods. For mutual funds more than 10 years old, the 10-year statistics account for 50% of the Overall Rating, the five-year statistics account for 30%, and the three-year statistics for 20%. If only five years of history are available, the five-year statistics account for 60% of the Overall Rating and the three-year statistics for 40%. If only three years of data are available, the three-year statistics alone are used. Mutual funds less than three years old are not rated and accordingly are not included in the applicable category.
10. In order that the Funds' and Other Funds' sales communications comply with the Matching Requirement, Morningstar has agreed to calculate and provide a one-year rating for mutual funds that have at least three years of performance history.
11. The standard performance data that is required to be given by mutual funds in accordance with section 15.8 of NI 81-102 covers a period which is not matched by the Morningstar Star Ratings as Morningstar does not provide a 'since inception' period rating. It does not do so as it believes that any period that runs from the inception of the mutual fund in question will, by definition, create different periods for mutual funds within the same category and that this would undermine the comparability of the resulting information, as well as undermine the transparency of its methodology to investors.
12. Given that the Morningstar Star Ratings do not include a 'since inception' rating, the Fund and Other Funds wish to be exempted from the requirement to publish such rating in accordance with the Matching Requirement. In addition, the Fund and Other Funds wish to publish the Overall Rating.
13. The absence of the since inception rating in sales communications, as well as the addition therein of the Overall Rating, would not cause a sales communication to be misleading to investors contrary to clause 15.2(l)(a) of NI 81-102. The Fund and Other Funds will otherwise comply with the Matching Requirement when making reference to Morningstar Star Ratings in sales communications.
14. Under a MRRS decision document dated November 22, 2000 (the "Original Decision"), the Fund and Other Funds were, subject to certain conditions, granted the following limited relief from the Matching Requirement:
(i) relief from the requirement to publish a Morningstar Star Rating that corresponds to the 'since inception' period of standard performance data; and
(ii) relief to use Morningstar's Overall Rating in sales communications alongside Morningstar Star Ratings that correspond to the one, three, five and 10-year periods, as applicable, for which standard performance data is required to be given.
15. A condition to the relief granted under the Original Decision provides that the Morningstar Star Ratings provided in a sales communication of the Fund or Other Fund are to be calculated based on comparisons of performance of investment funds within a specified category established by the CIFSC that provides a reasonable and appropriate basis of evaluating mutual fund performance.
16. In September 2006, Morningstar ceased using the CIFSC fund categories in the determination of the Morningstar Star Ratings and instead began using its newly established fund categories which are discussed in paragraph 7 above. Morningstar's fund categories were not established at the time the Original Decision was made. The CIFSC was, at the time of the Original Decision, the only Canadian organization that categorized Canadian mutual funds. Morningstar's fund categories equally provide a reasonable and appropriate basis of evaluating mutual fund performance.
17. In the absence of the Requested Relief, the Fund and Other Funds would be prohibited from publishing the Morningstar Star Ratings in sales communications given that they are now unable to comply with the condition in the Original Decision referenced in paragraph 15 above. Accordingly, the publication by a Fund or Other Fund of a Morningstar Star Rating in a sales communication would fall short of strict compliance with the Original Decision.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Makers with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted.
Under this decision, the Fund and Other Funds are exempted from the Matching Requirement such that
(i) they are not required to publish a Morningstar Star Rating that corresponds to the 'since inception' period of standard performance data; and
(ii) they may publish Morningstar's Overall Rating in sales communications alongside Morningstar Star Ratings that correspond to the one, three, five and 10-year periods, as applicable, for which standard performance data is required to be given,
provided that:
1. The sales communication of the Fund or Other Fund that contains the Morningstar Star Ratings complies with Part 15 of NI 81-102 and contains the following disclosure in at least 10 point type:
(a) the name of the category within which the Fund or the Other Fund is rated;
(b) the number of mutual funds in the applicable category for each required standard performance period;
(c) the name of the ranking entity, i.e. Morningstar;
(d) the length of period and the ending date, or, the first day of the period and the ending date on which the Morningstar Star Rating is based;
(e) a statement that the Morningstar Star Ratings are subject to change every month;
(f) a brief overview of Morningstar's rating methodology, including what return/risk measures it takes into account;
(g) disclosure of the meaning of the "star" symbol (e.g. five stars indicates fund is in top 10% of its category);
(h) reference to Morningstar's website (www.morningstar.ca) for greater detail on the calculation of the Morningstar Star Ratings;
2. If the sales communication of the Fund or Other Fund also includes the Overall Rating, the Overall Rating is to the most recent calendar month end that is not more than 45 days before the date of the appearance or use of the advertisement in which it is included, and not more than three months before the date of first publication of any other sales communication in which it is included; and
3. The Morningstar Star Ratings provided in a sales communication of the Fund or Other Fund are calculated based on comparisons of performance of investment funds within a specified category established by Morningstar or established by CIFSC and adopted by Morningstar, as the case may be, provided that:
(a) all such categories are published by Morningstar on its website;
(b) each category represents a reasonable and appropriate basis of evaluating mutual fund performance; and
(c) in the case of categories established by Morningstar, each new category will be published on its website for a period of public review and commentary prior to use of that category in conjunction with the Morningstar Star Ratings.