Rae & Lipskie Investment Counsel Inc. and RaeLipskie Partners' Equity Fund -- s. 74(1)

Headnote

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 contains a carve-out for managed accounts in Ontario which prohibits 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 provides 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 sent 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 and 74(1).

Rules Cited

National Instrument 45-106 Prospectus and Registration Exemptions

August 24, 2011

IN THE MATTER OF

THE SECURITIES ACT,

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

(the "Act")

AND

IN THE MATTER OF

RAE & LIPSKIE INVESTMENT COUNSEL INC.

(the "Filer")

AND

IN THE MATTER OF

RAELIPSKIE PARTNERS' EQUITY FUND

(the "Existing Fund")

RULING

(Subsection 74(1) of the Act)

Background

The Ontario Securities Commission (the "Commission") has received an application (the "Application") from the Filer, the Existing Fund and any future pooled fund established and managed by the Filer in the future (the "Future Funds" together with the Existing Fund, the "Funds") for a ruling, pursuant to subsection 74(1) of the Act, that trades in securities 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 Requirement") (the "Requested Relief").

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 Ruling is based on the following facts represented by the Filer:

1. The Filer is a corporation organized under the Business Corporations Act (Ontario) and its head office is located in Waterloo, Ontario. The Filer is registered in Ontario and British Columbia as an adviser in the category of portfolio manager. The Filer is also registered in Ontario as an investment fund manager.

2. 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 approvals, act as trustee for each Fund that is formed as a trust.

3. Neither the Filer nor the Funds are in default of securities legislation in any jurisdiction.

4. The Filer does not propose to apply for registration as exempt market dealer for the sale of securities of the Funds, as it intends to limit its dealing activities in respect of Fund securities which are securities of non prospectus qualified investment funds to Managed Accounts (as defined below).

5. The Filer is able to rely on the exemption from the dealer registration requirement contained in section 8.6 of National Instrument 31-103 Registration Requirements and Exemptions ("NI 31-103").

6. The Funds are or will consist of open-end mutual fund trusts of which the Filer is or will be appointed manager and is or will be appointed portfolio manager, with full discretionary authority. The Funds are or 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 under the Act.

7. 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.

8. The Managed Services are provided by employees of the Filer who are registered under Ontario securities law to provide advice on securities to clients.

9. 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, including where appropriate units of one or more of the Funds; 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 usual minimum assets a Client is required to have in one or more Managed Accounts with the Filer is $500,000. Managed Accounts of a Client which on aggregate satisfy this minimum balance are hereinafter referred to as "Primary Managed Accounts". This minimum balance may be waived by the Filer in rare or limited circumstances.

11. In addition, from time to time the Filer may accept certain Clients for managed accounts with less than $500,000 under management or who will not pay the Filer's minimum management fees. Such Clients consist of family members of Primary Managed Account Clients. Assets managed by the Filer for 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".

12. 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 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 Clients, or with the expectation that a Secondary Managed Account will satisfy the minimum balance requirement in the future.

13. 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.

14. 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. Accordingly, in the absence of relief from the Prospectus Requirement, 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.

15. 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 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.

16. Managed Services provided by the Filer in 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.

17. The Filer charges the Base Management Fee directly to each Managed Account and no management fee is charged to a Fund. 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 securities of a Fund are the Base Management Fees paid directly by the Client under the Master Client Agreement.

18. Neither the Filer nor the Funds pay fees or commissions to any person in connection with the distribution of securities of the Funds. The Filer may, from time to time, pay referral fees to persons who refer Managed Accounts, including Secondary Managed Accounts, to the Filer. However, neither the Filer nor the Funds pay any referral fees in connection with the referral of Secondary Managed Accounts for investing in securities of the Funds.

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 Requested Relief 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 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 (v) 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; or

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

(c) the Filer does not receive any compensation in respect of the sale or redemption of units of the Funds, including any redemption fees, 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.