Relief from the registration and prospectus requirements of the Act to permit the distribution of pooled fund units to certain fully managed accounts on an exempt basis.
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 53, 74(1).
National Instrument 81-102 Mutual Funds.
National Instrument 45-106 Prospectus and Registration Exemptions.
December 19, 2008
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, C. S.5, AS AMENDED
IN THE MATTER OF
ROBERT EVANS INVESTMENT COUNSEL LIMITED
(Subsection 74(1) of the Act)
The Ontario Securities Commission (the "Commission") has received an application (the "Application") from the Filer and any pooled fund established and managed by the Filer in the future (each a "Fund", and together the "Funds") 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 dealer registration and prospectus requirements under sections 25 and 53 of the Act (the "Dealer Registration and Prospectus Requirements").
Defined terms contained in National Instrument 45-106 Definitions have the same meaning in this decision unless they are defined in this decision.
This Ruling is based on the following facts represented by the Filer:
1. The Filer is a corporation established under the Ontario Business Corporations Act with its head office in Toronto, Ontario.
2. The Filer is registered with the Commission as an Investment Counsel and Portfolio Manager. It has equivalent registrations in British Columbia, Alberta and Prince Edward Island.
3. The Filer has been managing money for high net worth individuals and institutional clients on a fully discretionary basis for approximately twenty years. As of September 30, 2008, the Filer had assets under management of approximately 691 million.
4. The Filer will act as the manager and portfolio advisor for each Fund. The Filer may in the future, subject to receipt of the necessary regulatory approval, act for each Fund that is formed as a trust.
5. The Funds will consist of open-end mutual fund trusts, limited partnerships or classes of series of a corporation that are open-end mutual funds of which the Filer will be appointed manager and may be appointed portfolio manager, with full discretionary authority. The Funds will each be, a "mutual fund" under the Act. The Funds will not be reporting issuers under the Act. The Funds will only be sold in Ontario under applicable dealer registration and prospectus exemptions in the Act.
6. The Filer primarily offers discretionary portfolio management services to individuals, corporations and other entities (each, a "Client") seeking wealth management or related services ("Managed Services") through a Managed Account. Pursuant to a written agreement ("Master Client Agreement") between the Filer and the Client, the Filer makes investment decisions for the Managed Account and has full discretionary authority to trade in securities for the Managed Account without obtaining the specific consent of the Client to the trade.
7. The Managed Services are provided by employees of the Filer who meet the proficiency requirements of an advising officer or advising representative (or associate advising officer or associate advising representative) under Ontario securities law.
8. The Managed Services consist of the following:
(a) each Client who accepts Managed Services executes a Master Client 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; 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.
9. The usual minimum assets a Client is required to have in one or more Managed Accounts with the Filer is $1,000,000. 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, provided those Clients agree to pay the Filer's minimum management fee. Managed Accounts of a Client which in the aggregate satisfy this minimum balance and/or minimum fee requirement are hereinafter referred to as "Primary Managed Accounts". This minimum balance/minimum fee requirement may be waived at the Filer's discretion.
10. In addition, from time to time the Filer may accept certain Clients for managed accounts with less than $1,000,000 under management or who will not pay the Filer's minimum management fees. Such Clients consist primarily of family members of Primary Managed Account Clients, but may also include persons who have another relationship with the holder of a Primary Managed Account where there are exceptional factors that have persuaded the Filer for business reasons to accept such persons as Clients and waive its minimum balance and fee requirements. Assets managed by the Filer for the family members and other persons described above 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 hereinafter referred to as "Secondary Managed Accounts". Together, the Primary Managed Accounts and the Secondary Managed Accounts are referred to in this Application as the "Managed Accounts".
11. While the holders of the Primary Managed Accounts each qualify as accredited investors under Ontario securities law, the holders of the Secondary Managed Accounts do not always themselves qualify as accredited investors under Ontario securities law, nor do their investments meet the minimum investment threshold for exemption from prospectus and dealer registration requirements set out in National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106"). The Filer typically services these Secondary Managed Account Clients as a courtesy to its Primary Managed Account Client or with the expectation that a Secondary Managed Account will satisfy the minimum balance requirement in the future.
12. Investment 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.
Relief from the Dealer Registration and Prospectus Requirements
13. 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 Dealer Registration and 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 the Funds, or may cause the Filer's portfolio manager to invest more of a Secondary Managed Account Client's portfolio in such a Fund than it might otherwise prefer to allocate.
14. To improve the diversification and cost benefits to Secondary Managed Account Clients, the Filer wishes to distribute securities 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.
15. Managed Services provided by the Filer under a Managed Account 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 record-keeping. The terms of the Base Management Fee are detailed in the Master Client Agreement.
16. 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 discretionary investment management agreement that is entered into between the Filer and every Managed Account.
17. Neither the Filer nor the Funds pay fees or commissions to any person in connection with the distribution of units of the Funds. The Filer may, from time to time, pay referral fees to persons or companies that refer Managed Accounts, including Secondary Managed Accounts, to the Filer. However, neither the Filer nor the Funds will pay any referral fees in connection with the referral of solely Secondary Managed Accounts that invest in units of the Funds. At present, the percentage of assets managed by the Filer that have resulted from a referral in respect of which referral fees are paid is not significant and it is not anticipated that this percentage will increase materially as a result of the granting of relief sought.
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 Dealer Registration and Prospectus Requirements is granted in connection with the distributions 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 Dealer Registration and Prospectus Requirements in the Act;
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:
(1) there are exceptional factors that have persuaded the Filer for business reasons to accept such close business associate, person or professional adviser as a Secondary Managed Account client, and a record is kept and maintained of the exceptional factors considered; and
(2) the Secondary Managed Account clients acquired through such relationships to a 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;
C. the Filer does not pay any fees or commissions to any person in connection with the distribution of units of a Fund;
D. the Filer does not pay referral fees to any person or company in connection with the referral of a Secondary Managed Account that invests in units of the Funds unless the payment of such referral fees is proportionate to, or less than, and incidental to, the payment of referral fees on the Primary Managed Account related to such Secondary Managed Account; and
E. before a client is referred to the Filer, the terms of the referral arrangement are set out in a written agreement between the Filer and the person or company receiving the referral, the Filer records all referral fees on its records, and the Filer ensures that before the earlier of opening the client's account or any services are provided to the client under the referral arrangement, the client receives written disclosure of the referral arrangement that includes:
(i) the name of each party to the referral arrangement;
(ii) the purpose and material terms of the referral arrangement, including the nature of the services to be provided by each party;
(iii) any conflicts of interest resulting from the relationship between the parties to the referral arrangement and from any other element of the referral arrangement;
(iv) the method of calculating the referral fee and, to the extent possible, the amount of the fee;
(v) the category of registration of each registrant that is a party to the agreement with a description of the activities that the registrant is authorized to engage in under that category and, giving consideration to the nature of the referral, the activities that the registrant is not permitted to engage in; and
(vi) a statement that all activity requiring registration resulting from the referral arrangement will be provided by the Filer, and
if there is a material change to the information set out in clauses (i) to (vi), the Filer must ensure that written disclosure of that change is provided to each client affected by the change as soon as practicable and no later than the 30th day before the date on which a referral fee is next paid or received.