Securities Law & Instruments


Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions. Under paragraph 4.1(1)(b) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations a registered firm must not permit an individual to act as a dealing, advising or associate advising representative of the registered firm if the individual is registered as a dealing, advising or associate advising representative of another registered firm. The Filers are affiliated entities and have valid business reasons for the individuals to be registered with both firms. The individuals will have sufficient time to adequately serve both firms. The Filers have policies in place to handle potential conflicts of interest. The Filers are exempted from the prohibition.

Applicable Legislative Provisions

Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 4.1, 15.1.
Derivatives Act (Quebec), s. 86.
Derivatives Regulation (Quebec), s. 11.1.

December 22, 2017

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
(the Jurisdictions)

AND

IN THE MATTER OF
THE DERIVATIVES LEGISLATION OF
QUÉBEC

AND

IN THE MATTER OF
PALOS MANAGEMENT INC.
(PMI)

AND

PALOS WEALTH MANAGEMENT INC.
(PWM, and together with PMI, the Filers)

DECISION

1.             Background

The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filers for a decision under the securities legislation of the Jurisdictions (Legislation) for relief from the restriction in paragraph 4.1(1)(b) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), pursuant to section 15.1 of NI 31-103, to permit Mr. Charles Marleau and Mr. Bechara Haddad to act as advising representatives of PWM and also act as advising representatives and dealing representatives of PMI (the Exemption Sought).

The securities regulatory authority in Québec has received an application from the Filers for a decision under the derivatives legislation of Québec for relief from section 11.1 of the Derivatives Regulation (Québec) pursuant to section 86 of the Derivatives Act (Québec) to allow Mr. Charles Marleau to act as a derivatives advising representative for each Filer (the Derivatives Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a hybrid application):

(a)           the Autorité des marchés financiers (AMF) is the principal regulator for this application;

(b)           in respect of the Exemption Sought, the Filers have provided notice that sub-section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Saskatchewan and Yukon Territory;

(c)           the decision with respect to the Exemption Sought is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario; and

(d)           the decision with respect to the Derivatives Exemption Sought is the decision of the principal regulator.

2.             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.

3.             Representations

This decision is based on the following facts represented by the Filers:

PWM

3.1          PWM is a corporation incorporated under the Business Corporations Act (Québec). Its head office is located at 1670-1 Place Ville-Marie, Montréal, Québec, H3B 2B6, and its principal securities regulator is the AMF. PWM is controlled by Palos Capital Corporation.

3.2          PWM is registered in the category of portfolio manager in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec, Saskatchewan and Yukon Territory.

3.3          On February 28, 2017, PWM was registered as derivatives portfolio manager, limited to options, in Québec. On March 7, 2017, PWM filed applications to become registered as an adviser under the commodity futures legislation of Ontario (Commodity Trading Manager category) and of Manitoba.

3.4          PWM was created to complete the spin-off of PMI’s wealth management business for business reasons. As part of the spin-off, all the segregated accounts related to the wealth management business of PMI (the Wealth Management Accounts) will be transferred to PWM and will be managed by PWM (the Spin-off). Following the Spin-off, PMI will no longer conduct wealth management business. It is intended that the Spin-off be completed at the end of the calendar year 2017.

PMI

3.5          PMI is a corporation incorporated under the Business Corporations Act (Québec). Its head office is located at 1670-1 Place Ville-Marie, Montréal, Québec, H3B 2B6, and its principal securities regulator is the AMF. PMI is controlled by Palos Capital Corporation.

3.6          Founded in 2001, PMI is a boutique financial management firm headquartered in Montréal that offers a variety of investment products and solutions. As mentioned above, all the Wealth Management Accounts will be transferred to PWM and PMI will no longer have any segregated accounts.

3.7          PMI is registered in the categories of exempt market dealer, portfolio manager and investment fund manager in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec, Saskatchewan and Yukon Territory. PMI is also registered in the category of derivatives portfolio manager in Québec.

Mr. Charles Marleau

3.8          Mr. Marleau is the president of PMI and the secretary and treasurer of PWM. He is also a board member of both companies.

3.9          Mr. Marleau holds 50% of the voting securities of the entity which controls Palos Capital Corporation and is a director of Palos Capital Corporation, PMI and PWM.

3.10        Mr. Marleau is registered as a dealing representative, an advising representative and the ultimate designated person of PMI in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec, Saskatchewan and Yukon Territory. Since February 10, 2017, he has also been registered as a derivatives advising representative of PMI in Québec.

3.11        On February 28, 2017, Mr. Marleau was registered as officer in charge of derivatives limited to options for PWM in Québec.

3.12        In addition to his current registration with PMI, the Filers wish to register Mr. Marleau as an advising representative of PWM in all jurisdictions where PWM is currently registered under securities legislation and also wish to register Mr. Marleau as derivatives advising representative, limited to options, in Québec, as advising representative (commodity trading manager), limited to options, in Ontario and as adviser, limited to options, in Manitoba.

3.13        In respect of the Exemption Sought and the Derivatives Exemption Sought, it is anticipated that Mr. Marleau will spend 75% of his time working for PMI and 25% of his time working for PWM and he will have sufficient time to adequately serve both Filers.

Mr. Bechara Haddad

3.14        Mr. Haddad is registered as a dealing representative and as an advising representative of PMI in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec, Saskatchewan and Yukon Territory.

3.15        In addition to his current registration with PMI, the Filers wish to register Mr. Haddad with PWM as an advising representative in all jurisdictions where PWM is currently registered under securities legislation.

3.16        In respect of the Exemption Sought, it is anticipated that Mr. Haddad will spend 50% of his time working for PMI and 50% of his time working for PWM and he will have sufficient time to adequately serve both Filers.

Additional Representations

3.17        On November 25, 2016 (before the Spin-off), an employee of PMI (the Employee), who acted as advising representative and as derivatives advising representative for the PMI funds and for the Wealth Management Account clients, ceased his employment with PMI.

3.18        On February 10, 2017, Mr. Marleau (who was already registered as an advising representative) was registered in the additional category of derivatives advising representative for PMI to replace the Employee in his functions. Conse-quently, Mr. Marleau currently (before the Spin-off) services the Wealth Management Account clients.

3.19        Given that the Wealth Management Accounts for which Mr. Marleau currently acts as advising representative and as derivatives advising representative will be transferred to PWM as part of the Spin-off, the Filers wish to have Mr. Marleau be registered as advising representative and as derivatives advising representative for PWM in order for the Wealth Management Account clients to continue to receive Mr. Marleau’s services.

3.20        The Exemption Sought and the Derivatives Exemption Sought would allow Mr. Marleau to pursue the same activities that he had prior to the Spin-off. The Derivatives Exemption Sought will allow Mr. Marleau to advise both the PMI funds and the Wealth Management Account clients on derivatives.

3.21        Mr. Haddad is registered as dealing repre-sentative and as advising representative of PMI. He currently acts as an advising representative for both the PMI funds and the Wealth Management Account clients.

3.22        Following the Spin-off, the Wealth Management Accounts will be transferred to PWM and PMI will no longer have any segregated accounts. The Exemption Sought will allow Mr. Haddad to continue to act as an advising representative for the Wealth Management Account clients as well as for the PMI funds. This means that the Exemption Sought would allow Mr. Haddad to pursue the same activities that he had prior to the Spin-off, and would allow the Wealth Management Account clients to continue to receive Mr. Haddad’s services.

3.23        PMI and PWM each have adequate policies and procedures in place to address any conflicts of interests that may arise, including any conflicts of interest that may arise as a result of the dual registration of Mr. Marleau and Mr. Haddad, and will deal appropriately with any such conflicts. Mr. Marleau and Mr. Haddad are both aware of those policies and procedures.

3.24        The PMI funds and the Wealth Management Accounts have different investment strategies and are not expected to compete for the same investments, which further mitigates the risks of conflicts of interest arising from the dual registration.

3.25        Mr. Marleau and Mr. Haddad will also have to comply with the code of conduct that has been adopted by each Filer, which will require both registrants to act fairly, honestly and in good faith and in the best interests of the funds and clients, as applicable, of each Filer.

3.26        The dual registration of Mr. Marleau and Mr. Haddad will not give rise to the conflicts of interest that may be present in a similar arrangement involving unrelated, arm’s length firms. Since the Filers are under common control, each such entity is an affiliate of the other. The interests of the Filers are aligned in connection with the appropriate management and administration of each of the PMI funds and Wealth Management Account clients.

3.27        Each Filer has appropriate compliance and supervisory policies and procedures in place to monitor the conduct of its registered individuals. In particular, Mr. Marleau and Mr. Haddad will be subject to the supervisory requirements and the applicable compliance requirements of each of the Filers in the same way as any other employee of each of the Filers. Mr. Marleau, on behalf of PWM, will not conduct assessment, supervision or oversight of investment management activities for the PMI funds where Mr. Marleau has a personal role in providing those investment management services. The chief compliance officer will take appropriate measures to address any issue that may arise involving Mr. Marleau (a very senior member of management and significant indirect shareholder of Palos Capital Corporation), including notifying the board of directors, the audit committee, or the independent review committee of Palos Capital Corporation, PMI, PWM, or the PMI funds as required and applicable. PMI will not hire PWM, either directly or as a sub-advisor, to provide investment management services for the PMI funds.

3.28        Each Filer’s chief compliance officer and ultimate designated person will ensure that Mr. Marleau and Mr. Haddad each have sufficient time and resources to adequately serve each Filer and its respective clients and funds. The chief compliance officer of each Filer, who has been acting as chief compliance officer of PMI for at least two years, will supervise Mr. Marleau. As chief compliance officer of both Filers, the chief compliance officer has direct access to the board of directors of each Filer and submits an annual report to the board of directors of each Filer as required by section 11.4 of NI 31-103 and paragraph 5.2(d) of NI 31-103, respectively. The board of directors of each Filer is made of up three directors (and Mr. Marleau is one of those directors in respect of both Filers).

3.29        PMI has provided notice pursuant to section 11.9 of NI 31-103 of the transfer of all the Wealth Management Accounts to PWM.

The AMF reviewed such notice, and issued a non-objection letter in respect of the acquisition of the Wealth Management Accounts by PWM.

3.30        Furthermore, in order to minimize client confusion, the dual registration of each of Mr. Marleau and Mr. Haddad and the relationship between PMI and PWM will be fully disclosed in writing to each client of the Filers that deal with Mr. Marleau and Mr. Haddad.

3.31        Neither of the Filers is in default of securities legislation, derivatives legislation or commodity futures legislation in any jurisdiction of Canada.

4.             Decision

Each of the Decision Makers is satisfied that the decision in respect of the Exemption Sought meets the test set out in the Legislation for the Decision Maker to make the decision. The principal regulator is satisfied that the decision in respect of the Derivatives Exemption Sought meets the test set out in the Derivatives Act (Québec) for the principal regulator to make the decision.

The decision of the Decision Makers under the Legislation and the decision of the principal regulator under the Derivatives Act (Québec) is that the Exemption Sought and the Derivatives Exemption Sought, respectively, are granted provided that:

I.              Mr. Marleau and Mr. Haddad are each subject to supervision by, and the applicable compliance requirements of, both Filers;

II.             The chief compliance officer and ultimate designated person of each Filer ensures that Mr. Marleau and Mr. Haddad each have sufficient time and resources to adequately serve each Filer and its respective clients and funds;

III.            The Filers each have adequate policies and procedures in place to address any conflicts of interests that may arise as a result of the dual registration of Mr. Marleau (who holds senior positions, and is a significant shareholder, in the Palos group of companies) and Mr. Haddad, and deal appropriately with any such conflicts; and

IV.           The relationship between the Filers and the fact that Mr. Marleau and Mr. Haddad are dually registered with both Filers is fully disclosed in writing to each client of the Filers that deal with Mr. Marleau or Mr. Haddad.

“Eric Stevenson”
Superintendent, Client services
and Distribution Oversight