Davis-Rea Ltd. and Davis-Rea Balanced Pooled Fund

Headnote

Relief from the prospectus requirements of the Act to permit the distribution of pooled fund units to certain fully managed accounts on an exempt basis.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53, 74(1).

Rules Cited

National Instrument 81-102 Mutual Funds.

National Instrument 45-106 Prospectus and Registration Exemptions.

January 16, 2009

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, C. S.5, AS AMENDED

(the Act)

AND

IN THE MATTER OF

DAVIS-REA LTD.

(the Filer)

AND

DAVIS-REA BALANCED POOLED FUND

(the Balanced Fund)

RULING

Background

The Ontario Securities Commission (the Commission) has received an application from the Filer, on its own behalf, and on behalf of the Balanced Fund and any pooled fund established and managed by the Filer in the future (a Future Davis-Rea Fund and, together with the Balanced Fund, the Funds, individually, a Fund) for a ruling pursuant to subsection 74(1) of the Act that trades in units of the Funds to Secondary Managed Accounts (as defined below) will not be subject to the prospectus requirements under section 53 of the Act (the Prospectus Requirements).

Interpretation

Terms defined in National Instrument 14-101 Definitions have the same meaning if used 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 a corporation organized under the Business Corporations Act (Ontario) with its head office in Toronto, Ontario. The Filer is registered with the Commission as an adviser in the categories of Investment Counsel and Portfolio Manager and as a dealer in the category of Limited Market Dealer. It is registered in the appropriate categories to provide discretionary investment management in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia and Prince Edward Island.

2. Each of the Funds is, or will be, an open-end mutual fund trust established under the laws of the Province of Ontario. Each of the Funds is, or will each be, a "mutual fund" under the Act. The Balanced Fund is not, and the Future Davis-Rea Funds will each not be, a reporting issuer under the Act.

3. The Filer is or will be the manager, portfolio advisor, and principal distributor of the Funds.

4. The Funds will be sold in Ontario under applicable exemptions from the Prospectus Requirements with the Filer acting as the dealer on the trades in units of the Funds.

5. All of the investors in the Funds will be clients of the Filer who have entered into a discretionary investment management agreement (Managed Account Agreements) with the Filer.

6. The Filer provides discretionary investment management services (Managed Services) to clients pursuant to the Managed Account Agreements between the clients and the Filer. Pursuant to the Managed Account Agreement with a client, the client authorizes the Filer to supervise, manage and direct purchases and sales, at the Filer's full discretion, on a continuing basis. Based on the size of the assets of the clients and depending on the allocation of a client's assets to a particular asset class, the Filer either manages the client's assets on a segregated account basis or on a pooled basis by investing in the Balanced Fund and may in future invest in a Future Davis-Rea Fund.

7. Pursuant to the Managed Account Agreements, the Filer has full authority to provide its investment management services, including investing clients in mutual funds for which the Filer is the portfolio advisor and changing those funds as the Filer determines in accordance with the mandate of the clients.

8. The Managed Services are provided by employees of the Filer who are registered under the Ontario securities law to advise with respect to securities.

9. The Managed Services consist of the following:

(a) each client who accepts Managed Services executes a Managed Account Agreement whereby the client authorizes the Filer to supervise, manage and direct purchases and sales, at the Filer's full discretion on a continuing basis;

(b) the Filer's qualified employees perform investment research, securities selection and management functions with respect to all securities, investments, cash equivalents or other assets in the managed account;

(c) each managed account holds securities as selected by the Filer, including where appropriate units of the Balanced Fund; and

(d) the Filer retains overall responsibility for the Managed Services provided to its clients and has designated a senior officer to oversee and supervise the Managed Services.

10. The Filer's minimum aggregate balance for all the managed accounts of a client is $500,000. From time to time, the Filer will accept a client who does not meet this minimum threshold if there are exceptional factors that have persuaded the Filer for business reasons to accept such persons as clients and waive the minimum aggregate balance. Managed accounts of a client which in aggregate satisfy the minimum balance requirement are hereinafter referred to as Primary Managed Accounts.

11. Most of the holders of the Primary Managed Accounts investing in the Balanced Fund qualify, and those who will invest in a Future Davis-Rea Fund will qualify, as accredited investors under National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).

12. From time to time, the Filer may provide Managed Services to clients with less than $500,000 under management. Such clients would consist primarily of family members of Primary Managed Account clients. Assets managed by the Filer for the family members are incidental to the assets it manages for holders of Primary Managed Accounts. Managed accounts where the minimum aggregate balance has been waived for the reasons given above are referred to as Secondary Managed Accounts. Together, the Primary Managed Accounts and the Secondary Managed Accounts are referred to as the Managed Accounts.

13. The holders of Secondary Managed Accounts do not always themselves qualify as accredited investors under NI 45-106. The Filer typically services the Secondary Managed Account clients as a courtesy to its Primary Managed Account clients.

14. Investments in individual securities may not be ideal for the Secondary Managed Account clients since they may not receive the same asset diversification benefits and may incur disproportionately higher brokerage commissions relative to the Primary Managed Account clients due to minimum commission charges.

15. NI 45-106 currently does not recognize a portfolio manager acting on behalf of a managed account in Ontario as being an accredited investor if that account is acquiring a security of an investment fund. In the absence of relief from the Prospectus Requirements, the Funds will be available only to clients that are accredited investors in their own right or are able to invest a minimum of $150,000 in a Fund in accordance with the requirements of NI 45-106. These requirements either act as a barrier to Secondary Managed Account clients investing in a Fund, or may cause the Filer to invest more of a Secondary Managed Account client's portfolio in such a Fund than it might otherwise prefer to allocate.

16. To improve the diversification and cost benefits to Secondary Managed Account clients, the Filer wishes to distribute units of the Funds to Secondary Managed Accounts without a minimum investment. The Secondary Managed Account client would thereby be able to receive the benefit of the Filer's investment management expertise, regarding both asset allocation and individual stock selection, as well as receive the benefits of lower costs and broader asset diversification associated with pooled investments relative to direct holdings of individual securities.

17. Managed Services provided by the Filer under a Managed Account Agreement are covered by a base management fee calculated as a fixed percentage of the assets under management in the Managed Account (the Base Management Fee). The Base Management Fee includes investment research, portfolio selection and management with respect to all securities or other assets in the Managed Account. The Base Management Fee is not intended to cover brokerage commissions and other transaction charges in respect of each transaction which occurs in a Managed Account, nor does it cover interest charges on funds borrowed or charges for standard administrative services provided in connection with the operation of the Managed Account, such as account transfers, withdrawals, safekeeping charges, service charges, wire transfer requests and recordkeeping. The terms of the Base Management Fee are detailed in the Managed Account Agreement.

18. Where the Filer invests on behalf of a Managed Account in Funds which would otherwise pay a management fee to the Filer as manager, the Managed Account will purchase units of a series without such fees. Accordingly, there will be no duplication of fees between a Managed Account and the Funds. The only management fees that are paid by a Managed Account that holds units of a Fund are paid directly to the Filer, pursuant to the Managed Account Agreements.

19. There will be no commission payable by a client on the sale of units of the Funds to a Secondary Managed Account, nor will referral fees be paid by the Filer to a person or company in connection with the referral to the Filer of Secondary Managed Account clients that invest in units of a Fund.

Ruling

The Commission being satisfied that the relevant test contained in subsection 74(1) of the Act has been met, the Commission rules pursuant to subsection 74(1) of the Act that relief from the Prospectus Requirements is granted in connection with the distribution of units of the Funds to Secondary Managed Accounts, provided that:

(a) this Ruling will terminate upon the coming into force of any legislation or rule of the Commission exempting a trade in a security of a mutual fund to a fully managed account from the Prospectus Requirements;

(b) this Ruling will only apply with respect to a Secondary Managed Account, where the holder of the Secondary Managed Account is, and in the case of clauses (iii) to (vi) remains,

(i) an individual (of the opposite sex or same sex) who is or has been married to the holder of a Primary Managed Account, or is living or has lived with the holder of a Primary Managed Account in a conjugal relationship outside of marriage;

(ii) a parent, grandparent, child, or sibling of either the holder of a Primary Managed Account or the individual referred to in clause (i) above;

(iii) a personal holding company controlled by an individual referred to in clause (i) or (ii) above;

(iv) a trust, other than a commercial trust, of which an individual referred to in clause (i) or (ii) above is a beneficiary;

(v) a private foundation controlled by an individual referred to in clause (i) or (ii) above; or

(vi) a close business associate, employee or professional adviser to a holder of a Primary Managed Account provided that:

(A) there are exceptional factors that have persuaded the Filer for business reasons to accept such close business associate, employee or professional adviser as a Secondary Managed Account client, and a record is kept and maintained of the exceptional factors considered; and

(B) the Secondary Managed Account clients acquired through such relationships to holder of a Primary Managed Account shall not at any time represent more than five percent of the Filer's total Managed Account assets under management; and

(c) the Filer does not receive any compensation in respect of the sale or redemption of units of the Funds (other than redemption fees disclosed in an offering memorandum of a Fund) and the Filer does not pay a referral fee to any person or company who refers Secondary Managed Account clients who invest in units of the Funds.