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 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, 74(1).
National Instrument 45-106 Prospectus and Registration Exemptions.
National Instrument 31-103 Registration Requirements and Exemptions.
December 1, 2009
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
BURGUNDY ASSET MANAGEMENT LTD.
(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 is established and managed by the Filer for a ruling, pursuant to subsection 74(1) of the Act, that distributions of securities of the Burgundy Funds (as defined below) to managed accounts of Clients (as defined below) to which the Filer provides discretionary investment management services will not be subject to the prospectus requirement under section 53 of the Act (the "Prospectus Requirement").
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 Ontario. Its head office is in Toronto, Ontario.
1. The Filer is registered as a portfolio manager and as an exempt market dealer with the Commission. The Filer is also registered as a portfolio manager in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.
2. The Filer is currently the manager, trustee and portfolio manager of various open-end mutual fund trusts. Certain of these funds are offered pursuant to a prospectus. Other of these funds are offered pursuant to exemptions from the prospectus and, where available, registration requirements (the "Burgundy Pooled Funds"). The Filer may, in the future, be the manager of other open-end investment funds offered pursuant to exemptions from the prospectus requirement (with the Burgundy Pooled Funds, the "Burgundy Funds").
3. The Filer offers investment management and financial counselling services, primarily to high net worth individuals, institutions and foundations (each, a "Client") through a managed account ("Managed Account"). The Filer has two types of Client accounts: "Beaujolais" Clients and "Burgundy" Clients.
4. The Filer's normal minimum aggregate balance for the Managed Accounts of a Burgundy Client is $3 million. The Filer's normal minimum aggregate balance for the Managed Accounts of a Beaujolais Client is $500,000. These minimums may be waived at the Filer's discretion. From time to time, the Filer may accept certain Clients with less than $500,000 under management.
5. The Filer generally acts as portfolio manager to Clients who are "accredited investors" within the meaning of National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106"). However, from time to time, the Filer may agree to provide services to Clients who are not "accredited investors".
6. The Managed Accounts are serviced by individual portfolio managers of the Filer who meet the proficiency requirements of an advising representative (or associate advising representative) under National Instrument 31-103 Registration Requirements and Exemptions.
7. Each Client who wishes to receive the investment management services of the Filer executes a written agreement (the "Investment Counsel Agreement") whereby the Client appoints the Filer to act as portfolio manager in connection with an investment portfolio of the Client with full discretionary authority to trade in securities for the Managed Account without obtaining the specific consent of the Client to the trade. The Investment Counsel Agreement further sets out how the Managed Account operates and informs the Client of the Filer's various rules, procedures and policies.
8. At the initial meeting between a new Client and a portfolio manager, the portfolio manager establishes the Client's general investment goals and objectives, which are then documented in an investment policy statement ("IPS") that describes the strategies that the Filer shall employ to meet these objectives and includes specific information on matters such as asset allocation, risk tolerance and liquidity requirements. To the extent that a Client's goals or circumstances have changed, a new IPS is created to reflect those changes.
9. After the initial meeting, the Filer's portfolio manager offers to meet at least once per year with his/her Clients (or more frequently as required) to review the performance of their account and their investment goals.
10. The Filer sends the Client a quarterly statement showing current holdings and a summary of all transactions carried out in their Managed Account during the quarter. The portfolio manager is available to review and discuss with Clients all account statements.
11. The Filer has determined that to best fulfill its fiduciary duty to its Clients, all or a portion of the asset mix in many Clients' portfolios should be invested in the Burgundy Funds.
12. The Burgundy 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 Burgundy Funds' securities to the Managed Accounts.
13. Investments in individual securities may not be appropriate for the 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 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 certain of its Clients, including those that do not qualify as "accredited investors", to invest in securities of the Burgundy Funds, without the Client needing to invest a minimum of $150,000 in each Burgundy Fund, subject to each Client's risk tolerance.
15. Currently, none of the Burgundy Pooled Funds charge a commission or a management fee directly to investors. Instead, under the Investment Counsel Agreement between each Client and the Filer, the Client agrees to pay the Filer a management fee based upon a percentage of assets under management in the Managed Account (excluding assets invested in two Burgundy money market mutual funds that are reporting issuers). Burgundy Money Market Fund and Burgundy U.S. Money Market Fund charge a management fee directly to investors. Terms of the fees are detailed in each Client's Investment Counsel Agreement.
16. Each Burgundy Fund will pay all administration fees and expenses relating to its operation. If the Filer charges management fees or performance fees to a Burgundy Fund and the Filer invests, on behalf of a Managed Account, in securities of such Burgundy Fund, the necessary steps will be taken to ensure that there will be no duplication of fees between a Managed Account and the Burgundy Funds.
17. 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. Absent the requested relief, the Burgundy Funds are prohibited in Ontario from distributing, and the Filer is effectively prohibited from investing in, securities of the Burgundy Funds for the Managed Accounts, 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 a single Burgundy Fund.
18. Under the exempt distribution rule applicable in each province and territory outside Ontario, 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 each province and territory outside Ontario can acquire securities of the Burgundy 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 Prospectus Requirement is granted in connection with the distribution of securities of the Burgundy Funds to Clients provided that:
(a) securities of the Burgundy Pooled Funds distributed pursuant to relief from the Prospectus Requirement contained in this ruling shall only be distributed to Managed Accounts;
(b) before making trades in securities of the Burgundy 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) 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.