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 Filers have policies in place to handle potential conflicts of interest. The Filers are exempted from the prohibition for current and future representatives.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 3.11, 3.12, 4.1 and 15.1.
May 22, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF CALDWELL INVESTMENT MANAGEMENT LTD. (CIM) AND CALDWELL SECURITIES LTD. (CSL)
The principal regulator in the Jurisdiction has received an application from CIM and CSL (each a Filer and, together, the Filers) for a decision under the securities legislation of the jurisdiction of the principal regulator (the Legislation) for relief, pursuant to section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), from the requirement in paragraph 4.1(1)(b) of NI 31-103 to permit certain current and future individuals (collectively, the Representatives) to each be registered as both a dealing representative of CSL and an advising representative or associate advising representative of CIM (the Dual Registration) in order to provide investment management advice to certain clients of CIM (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102Passport System (MI 11-102) is intended to be relied upon by the Filers in Alberta, British Columbia, Manitoba and Saskatchewan (the Non-principal Jurisdictions and, together with Ontario, the Filing Jurisdictions).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filers:
1. Each of the Filers is a wholly-owned subsidiary of Caldwell Financial Ltd.
2. CIM is registered in each of the Filing Jurisdictions as an adviser in the category of portfolio manager and as an investment fund manager.
3. CSL is registered in the Filing Jurisdictions, New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island as a dealer in the category of investment dealer and as is a member of the Investment Industry Regulatory Organization of Canada (IIROC).
4. The head office of each of the Filers is located in Ontario.
5. The Filers are not in default of any requirements of securities legislation in any of the Filing Jurisdictions.
6. CIM's main line of business is providing investment fund management and portfolio management services to the following investment funds: Caldwell Balanced Fund, Caldwell Income Fund, Caldwell Growth Opportunities Trust, Caldwell Institutional Equity Pool, Caldwell ICM Market Strategy Pool, Caldwell Canadian Value Momentum Fund and Urbana Corporation (collectively, the Caldwell Investment Funds). CIM also provides portfolio management services to other clients that are predominantly high net worth clients (i.e. accredited investors as defined in National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) or permitted clients as defined in NI 31-103).
7. CSL's main line of business is providing investment advice to clients that maintain either brokerage or managed accounts with CSL. Although most clients of CSL are high net worth individuals, there are also some institutional clients. Other than limited participation in the selling group of new issues, CSL does not participate in corporate finance or underwriting activities. CSL is a self-clearing dealer and provides custodial services to many of its clients. CSL does not provide margin loans to its clients.
8. CSL is permitted to provide managed account services to client accounts exempt from the adviser registration requirement under the Legislation on the basis that CSL and its Representatives meet all of the requirements of IIROC, including IIROC Dealer Member Rule 1300, specifically sections 1300.3 through 1300.21, pertaining to discretionary and managed accounts (the IIROC Supervision Rules).
9. The Representatives meet the proficiency requirements in (i) section 3.11 of NI 31-103 or section 3.12 of NI 31-103 for advising representatives or associate advising representatives, respectively; and (ii) IIROC Dealer Member Rule 2900 Part I, section A.6 pertaining to the proficiency requirements for individuals that are approved by IIROC as registered representatives (as defined by IIROC) and who provide discretionary portfolio management in respect of managed accounts (the IIROC Proficiency Rules, and together with the IIROC Supervision Rules, the IIROC Rules).
10. CIM and CSL provide portfolio management services to clients as follows:
(a) One business line within CIM's operations provides portfolio management services to the Caldwell Investment Funds (the Fund Management Division).
(b) The other business line within each of CIM and CSL provides portfolio management services to high net worth clients (the HNW Client Division), as outlined above, predominantly accredited investors as defined in NI 45-106 or permitted clients as defined in NI 31-103.
(c) CIM's Fund Management Division employs an investment committee that meets regularly to discuss investment ideas for implementation across the Caldwell Investment Funds and some of its other managed accounts. At present, only individuals that are registered with CIM are licensed to contribute to these investment decisions.
(d) CSL's HNW Client Division operates with individual portfolio managers (as defined in the IIROC Rules and who meet the requirements in the IIROC Proficiency Rules) providing discretionary investment management services to CSL clients subject to CSL's supervision in accordance with the IIROC Rules.
11. In the past, several dealing representatives of CSL have met the requirements of the IIROC Proficiency Rules and have also become dually registered as advising representatives or associate advising representatives of CIM. Six individuals were registered with both CSL and CIM prior to amendments to NI 31-103 that became effective on July 11, 2011. One individual was granted dual registration in a decision of the Jurisdiction dated July 16, 2012.
12. The Filers propose to continue to register Representatives with both CIM and CSL as needed to provide discretionary portfolio management services to the clients of CIM, as outlined in paragraphs 10 and 13.
13. There are valid business reasons for the Representatives to be registered with both Filers, namely:
(a) to give clients of CIM, predominantly the Caldwell Investment Funds, the benefit of investment management advice from Representatives who are registered with CSL and qualified, in accordance with the IIROC Rules, to provide discretionary portfolio management services; and
(b) to continue the seamless servicing of clients of each of CIM and CSL through two business lines that have historically coexisted, and that have relied on the dual registration of Representatives in order to provide discretionary portfolio management services to these clients.
14. The Filers' management will ensure that the Representatives will have sufficient time and resources to adequately serve both firms and will limit the number of client relationships of such Representatives, as required.
15. The Filers will disclose the Dual Registration of the Representatives to applicable clients. This disclosure will be made in writing prior to the respective Representative providing portfolio management services to the applicable client.
16. The Filers have policies and procedures addressing any conflicts of interest that may arise as a result of the Dual Registration and the Filers believe that they will be able to appropriately deal with these conflicts, should they arise.
17. There is adequate supervision of the identified conflicts of interest to ensure that Representatives, and each of the Filers, can deal appropriately with any conflict of interest that may arise. The Representatives are currently and will continue to be under the supervision of both Filers and are subject to all policies and procedures addressing conflicts of interest that may arise as a result of the Dual Registration.
18. The Representatives shall act in the best interests of both their Fund Management Division clients and their HNW Client Division clients and will deal fairly, honestly and in good faith with these clients.
19. The Filers are affiliates and their interests are aligned.
20. In the absence of the Exemption Sought, the Filers would be prohibited from permitting a Representative to act as an advising representative or an associate advising representative of CIM while the individual is a dealing representative of CSL, even though CIM is an affiliate of CSL. This restriction would impede the delivery of portfolio management services between the two affiliates.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
i. the circumstances described above in paragraphs 14, 15, 16, 17 and 18 remain in place;
ii. the Representatives are registered as advising representatives or associate advising representatives under the Legislation;
iii. the Representatives are registered as dealing representatives under the Legislation and are approved by IIROC as registered representatives (as defined by IIROC) that provide discretionary portfolio management in respect of managed accounts; and
iv. the Filers only register Representatives with both CIM and CSL as needed to provide investment management advice to the clients of CIM, as outlined in paragraphs 10 and 13.