Relief from the dealer registration and prospectus requirements 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 BMO Harris 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 - BMO Harris providing portfolio management services to high net worth clients - Not all managed account clients are accredited investors - BMO Harris permitted to make exempt distributions of proprietary pooled funds to its managed accounts, including those held by non-accredited investors, provided written notice is sent to clients advising them of the relief granted - Securities Act (Ontario).
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 53, 74(1).
National Instrument 45-106 Prospectus and Registration Exemptions.
March 24, 2009
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
BMO HARRIS INVESTMENT MANAGEMENT INC.
(Subsection 74(1) of the Act)
The Ontario Securities Commission (the "Commission") has received an application from the Filer, on behalf of itself and any open-ended investment fund that is not a reporting issuer and that is currently, or will be after the date of this ruling, established and managed by the Filer (together, the "Funds", individually, a "Fund") for a ruling, pursuant to subsection 74(1) of the Act, that distributions of securities of the Funds to managed accounts of Clients (as hereinafter defined) to which the Filer provides discretionary investment management services 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 the Act and in National Instrument 14-101 Definitions have the same meaning in this ruling unless they are defined in this ruling.
This ruling is based on the following facts represented by the Filer:
1. The Filer is incorporated under the laws of Canada. Its head office is in Toronto.
2. The Filer is registered with the Commission as an Investment Counsel, Portfolio Manager, Commodity Futures Trading Manager, and Limited Market Dealer. The Filer has the equivalent of the Investment Counsel/Portfolio Manager registration in each of the other jurisdictions of Canada (the "Other Jurisdictions").
3. The Filer 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. Except in certain limited circumstances, the Filer will provide Managed Services only to high net worth Canadians, generally with greater than $500,000 of investable assets. A small percentage of its "legacy accounts" (opened before 2000) are smaller than $500,000. A significant majority of the Filer's Managed Services Clients meet the "accredited investor" requirements of NI 45-106 Prospectus and Registration Exemptions ("NI 45-106"). Certain of the Managed Services Clients that hold the smaller accounts may not however qualify as accredited investors under NI 45-106.
4. The Managed Services are provided by investment counsellors of the Filer ("Investment Counsellors") who meet the proficiency requirements of an advising officer or advising representative (or associate advising officer or associate advising representative) under Ontario securities law.
5. Managed Services Clients are referred to the Filer from within the Bank of Montreal ("BMO") group of companies. The Filer employs personal wealth consultants who work with others within the BMO group of companies to assess clients for whom the services of the Filer would be appropriate and therefore obtain referrals from the retail and commercial banking unit of BMO. Referral fees are paid only to contacts within the BMO group of companies for the referral of a Client based on the value of the assets that the Client transfers to the Filer. The Filer does not currently pursue external referrals to any extent.
6. The Filer's Investment Counsellors ensure that an account application and a detailed managed account agreement ("Managed Account Agreement") are duly completed by a new Managed Services Client. The Managed Account Agreement authorizes the Filer to make investment decisions for the managed account and gives the Filer full discretionary authority to trade in securities for the managed account without obtaining the specific consent of the Client to the trade. The Managed Account Agreement further sets out how the managed account operates and informs the Client of the Filer's various rules, procedures and policies.
7. At the initial meeting between a new Managed Services Client and an Investment Counsellor, an Investment Policy Statement ("IPS") is established for the Client. The IPS provides the general investment goals and objectives of a Client and describes the strategies that the Filer shall employ to meet these objectives. This includes specific information on matters such as asset allocation, risk tolerance and liquidity requirements.
8. After the initial meeting, the Filer's Investment Counsellors offer to meet at least twice per year with their Managed Services Clients to review the performance of their account and their investment goals. In most cases, the larger the managed account, the more frequent the meetings.
9. Managed Services Clients are provided with a quarterly portfolio statement showing all transactions carried out in their account during the quarter. The Investment Counsellor is available to review and discuss with a new or existing Managed Services Client the first quarterly portfolio statement as well as any subsequent portfolio statement, as applicable, that is prepared for that Client.
10. The Filer has determined that to best fulfill its fiduciary duty to its Clients nation-wide, a portion of the asset mix in each Client's portfolio should be invested in what are commonly referred to as alternative investments, including non-prospectus qualified investment funds such as the Funds. The Filer's Clients have also expressed ever-increasing interest in having a portion of their accounts invested in such investment funds.
11. The Funds in which the Filer might invest on behalf of its Clients are, or will be, established and managed by the Filer. The Filer is, or will be, the adviser to the Funds with primary oversight over the management of their portfolios. The Filer may retain an arms-length sub-adviser for the Funds. The Funds may make direct investments in individual securities and/or in another investment fund(s) managed either by the Filer (or its affiliates) or arms length fund managers.
12. The Funds are, or will be, established by the Filer with a view to achieving efficiencies in the delivery of portfolio management services to its Clients' managed accounts. The Filer will not be paid any compensation with respect to the distribution of the Funds' securities to the managed accounts.
13. Investments in individual securities may not be appropriate for the Managed Services Clients with smaller managed accounts since they may not receive the same asset diversification benefits and may, as a result of the minimum commission charges, incur disproportionately higher brokerage commissions relative to the Clients with larger managed accounts.
14. To give all of its Managed Services Clients the benefit of asset diversification, access to investment products with a very high minimum investment threshold and economies of scale on brokerage commission charges, the Filer proposes to cause all of its Managed Services Clients, including those that do not qualify as accredited investors, to invest in securities of the Funds, subject to each Managed Services Client's risk tolerance.
15. Each Fund will pay all administration fees and expenses relating to its operation, including any management or performance fees paid to the Filer. Where the Filer invests on behalf of a managed account in Funds that would otherwise pay a management fee and/or performance-based fee to the Filer, the necessary steps will be taken to ensure that there will be no duplication of fees between a managed account and the Funds. Any sub-advisor to a Fund retained by the Filer will earn a fee charged to the Fund or paid by the Filer directly. Terms of the fee arrangements with a Client are currently, and in the future will be, detailed in the Managed Account Agreement.
16. While a managed account qualifies as an "accredited investor" in the Other Jurisdictions, 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. Absent the relief being requested, the Funds are prohibited in Ontario from distributing, and the Filer is effectively prohibited from investing in, securities of the Funds for managed accounts it manages, in reliance upon the accredited investor exemption in NI 45-106 in circumstances where the individual Client who is the beneficial owner of the managed account is not otherwise qualified as an "accredited investor". Reliance upon the $150,000 minimum investment exemption available under NI 45-106 may not be appropriate for smaller managed accounts as this might require a disproportionately high percentage of the account to be invested in an investment fund.
17. Under the exempt distribution rule applicable in the Other Jurisdictions, there is no restriction on the ability of managed accounts to purchase investment fund securities on an exempt basis. Under NI 45-106, a managed account in the Other Jurisdictions can acquire securities of the Funds as an accredited investor.
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 distribution of securities of the Funds to Managed Services Clients provided that,
(a) 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 both the Dealer Registration and Prospectus Requirements;
(b) before making trades in securities of the Funds on behalf of a Client, the Filer provides the Client with 60 days prior written notice advising the Client of:
(i) the filing of the Filer's application with the Commission,
(ii) the nature of the relief granted under this ruling,
(iii) 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) 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, in any event, no later than the 30th day before the date on which a referral fee is next paid or received.