Relief from the prospectus requirement of the Act to permit the distribution of pooled fund securities to managed accounts held by non-accredited investors on an exempt basis -- NI 45-106 containing carve-out for managed accounts in Ontario prohibiting portfolio manager from making exempt distributions of securities of its proprietary pooled funds to its managed account clients in Ontario unless managed account client qualifies as accredited investor or invests $150,000 -- portfolio manager providing bona fide portfolio management services to high net worth clients -- Not all managed account clients are accredited investors -- portfolio manager permitted to make exempt distributions of proprietary pooled funds to its managed accounts provided written notice is delivered to clients advising them of the relief granted -- portfolio manager is restricted from distributing proprietary pooled fund securities to parties other than its managed account clients.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53, 74(1).
National Instrument 45-106 Prospectus and Registration Exemptions.
National Instrument 31-103 Registration Requirements and Exemptions.
April 13, 2010
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
JC CLARK LTD.
JC CLARK INC.
(Each a "Filer" and collectively the "Co-Filers")
IN THE MATTER OF
THE JC CLARK PRESERVATION TRUST
THE JC CLARK FOCUSED OPPORTUNITIES FUND
THE JC CLARK COMMONWEALTH PATRIOT TRUST
(Subsection 74(1) of the Act)
The Ontario Securities Commission (the "Commission") has received an application (the "Application") from the Co-Filers and any pooled fund established and managed by either of the Co-Filers 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 prospectus requirements under section 53 of the Act (the "Prospectus Requirements") (the "Requested Relief").
This Ruling is based on the following facts represented by the Co-Filers:
1. JC Clark Ltd. is a corporation established under the Business Corporations Act (Ontario) with its head office in Toronto, Ontario. It is registered as a broker and investment dealer (or equivalent category) under the applicable securities laws in all provinces. JC Clark Ltd. has been managing money for high net worth individuals and institutional clients on a fully discretionary basis since 2001 and currently acts as a co-manager of and portfolio adviser for each Fund, along with JC Clark Inc.
2. JC Clark Inc. is a corporation established under the Business Corporations Act (Ontario) and is currently registered in Ontario as an adviser in the category of Portfolio Manager. JC Clark Inc. is able to rely on the exemption from investment dealer registration requirements contained in section 8.6 of National Instrument 31-103 Registration Requirements and Exemptions ("NI 31-103").
3. Each of the Funds is an open-ended unincorporated mutual fund trust organized under the laws of Ontario. The Funds are not reporting issuers and are only sold under applicable prospectus exemptions under the applicable securities laws of each Province.
4. The Co-Filers primarily offer 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 ("Managed Account"). Pursuant to a written agreement ("Managed Account Agreement") between a Filer and the Client, the applicable 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.
5. The Managed Services are provided by employees of the Co-Filers who meet the proficiency requirements of an advising officer or advising representative (or associate advising officer or associate advising representative) under National Instrument 31-103 Registration Requirements and Exemptions.
6. Managed Accounts are typically held with JC Clark Ltd., but may in some cases be held with JC Clark Inc.. In either case, the scope of Managed Services provided to a Client are and will continue to be consistent between the Co-Filers.
7. The Managed Services consist of the following:
i. each Client who accepts Managed Services executes a New Client Account Form which details the client's investment objectives, risk tolerance and other pertinent information. The Client also executes a Managed Account Agreement whereby the Client authorizes the applicable Filer to supervise, manage and direct purchases and sales at the Filer's full discretion on a continuing basis;
ii. the Co-Filers' qualified employees perform investment research, securities selection and management functions with respect to all securities, investments, cash equivalents or other assets included in the Funds;
iii. each Managed Account will invest in units of one or more of the Funds or in some cases individual securities as selected by the applicable Filer according to a Client's stated investment objectives and risk tolerance. The Managed Accounts invest primarily in the Funds, but may, from time to time, as appropriate invest a portion of the Managed Account assets in funds managed by third parties which are offered under prospectus;
iv. Managed Account holders are provided quarterly performance information and the applicable Filer meets with its Clients at least annually to review investment performance and to assess a Client's investment goals; and
v. the appropriate 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.
8. The publicly stated minimum assets a Client is required to have in one or more Managed Accounts is $2,000,000. From time to time, the Co-Filers will accept a Client who does not meet this minimum threshold of $2,000,000, but qualifies as an accredited investor under National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106"), if there are other factors that have persuaded the Co-Filers for business reasons to accept such persons as Clients. A "Primary Managed Account" is defined as a Client that meets the $2,000,000 minimum threshold or qualifies as a accredited investor under NI 45-106.
9. The Co-Filers seek to accept certain Clients who may not ordinarily qualify as a Primary Managed Account Client. Such Clients consist primarily of family members of Primary Managed Account Clients; Clients who, due to a change in circumstances are no longer accredited investors; or persons who have a relationship with:
i. the holder of a Primary Managed Account;
ii. an existing client of the Co-Filers but who is not a holder of a Primary Managed Account; or
iii. the Co-Filers;
and for which there are exceptional factors which have persuaded the Co-Filers for business reasons to accept such persons as Clients. Each such Client would be served through a Managed Account, the above hereinafter referred to as "Secondary Managed Accounts". Secondary Managed Accounts are expected to be incidental to the Co-Filers' business and assets under management.
10. While the holders of the Primary Managed Accounts each qualify as accredited investors under NI 45-106, the holders of the Secondary Managed Accounts do not always themselves qualify as accredited investors, nor will the $150,000 minimum investment exemption in NI 45-106 be available in all cases.
11. While a Managed Account qualifies as an "accredited investor" in each province and territory outside Ontario, NI 45-106 contains a carve out for Managed Accounts in Ontario when the securities being purchased by the Managed Account are those of an investment fund. Accordingly, 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.
12. The Co-Filers wish to distribute securities of the Funds to Secondary Managed Accounts. The Secondary Managed Account Client would thereby be able to receive the benefit of the Co-Filer's investment management expertise.
13. Managed Services provided by a Filer are not subject to a management fee. Rather, a Filer invests in the Funds which pay a management fee and may pay a performance fee to the Co-Filers in their capacity as co-managers of and portfolio advisers to the Funds. Accordingly, there is no duplication of fees between a Managed Account and the Funds.
14. In some instances, the Co-Filers may pay referral fees in respect of Clients referred to it. The Co-Filers' referral fees and referral arrangement practices are in compliance with the referral arrangements requirements of NI 31-103.
The Commission being satisfied that the relevant test contained in subsection 74(1) of the Act has been met, the Commission rules that the Requested Relief is granted provided that:
(a) securities of the Funds distributed pursuant to the relief from the Prospectus Requirements contained in this ruling shall only be distributed to Managed Accounts;
(b) for each Client that becomes a Client of a Filer after the date of this ruling that will invest in securities of one or more Funds through a Managed Account pursuant to this ruling, such Filer shall deliver to such Client prior to effecting a trade in securities of a Fund in reliance on this ruling, written disclosure advising of:
(i) the nature of the relief granted under this ruling, and
(ii) the fact that the ruling permits the Client to invest in an investment fund product which the Client otherwise would not be allowed to invest in on an exempt basis through their Managed Account; and
(c) this ruling will terminate upon the coming into force of any legislation or rule of the Commission exempting a trade by a fully managed account in Ontario in securities of investment funds from the Prospectus Requirement.