Securities Law & Instruments

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 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), 144(1).

Rules Cited

National Instrument 45-106 Prospectus and Registration Exemptions.

National Instrument 31-103 Registration Requirements and Exemptions.

July 9, 2010

IN THE MATTER OF

THE SECURITIES ACT,

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

(the "Act")

AND

IN THE MATTER OF

HEATHBRIDGE CAPITAL MANAGEMENT LTD.

(the "Filer")

RULING

(Subsections 74(1) and 144(1) of the Act)

Background

The Ontario Securities Commission (the "Commission") has received an application from the Filer, on behalf of itself, the Heathbridge U.S. Pooled Fund and the Heathbridge Checkmark[Check] Equity Pooled Fund (the "Existing Funds") and any open-ended investment fund that is not a reporting issuer established and managed by the Filer after the date hereof (a "Future Fund" and, together with the Existing Funds, the "Funds"), for a ruling (the "Requested Relief"), (i) pursuant to subsection 74(1) of the Act, that distributions of units of the Funds to Secondary Clients (as defined below) and to Permitted Clients (as defined below) to whom the Filer provides Managed Services (as defined below) through Managed Accounts (as defined below) will not be subject to the prospectus requirement (the "Prospectus Requirement") under section 53 of the Act, and (ii) pursuant to subsection 144(1) of the Act to revoke and replace the Prior Ruling (as defined below).

Interpretation

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.

Representations

This ruling is based on the following facts represented by the Filer:

1. The Filer was incorporated under the laws of Ontario and its head office is in Ontario.

2. The Filer is registered under the Act as an adviser, in the category of portfolio manager, and as a dealer, in the category of exempt market dealer. The Filer is also registered as an adviser, in the category of portfolio manager, in Alberta, British Columbia, Saskatchewan, Manitoba, Quebec, Nova Scotia and New Brunswick (the "Other Jurisdictions").

3. The Filer is the trustee, manager, primary portfolio advisor and principal distributor of the Existing Funds and will act in a similar capacity for each Future Fund. The Filer has not currently retained, but may retain, a sub-advisor in respect of a Fund.

4. Each Existing Fund is, and each Future Fund will be, an open-end investment fund that is not a reporting issuer.

5. The Filer provides discretionary investment management services ("Managed Services") to individuals (including tax deferred plans for which such individuals or their spouses or children are the beneficiaries), corporations, charitable foundations and other entities (each, a "Client") through a managed account (a "Managed Account").

6. The Managed Services are provided pursuant to an investment management agreement (the "IMA") between the Filer and the Client.

7. The Filer generally provides Managed Services to Clients ("Primary 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 ("Secondary Clients") who are not accredited investors but who are accepted by the Filer because they have a relationship to a Primary Client and are within a category contemplated by a ruling of the Commission dated May 5, 2006 (the "Prior Ruling"). The Filer also has other Clients ("Permitted Clients") who are not accredited investors and who are not Secondary Clients. Permitted Clients may be (i) Clients who were Primary Clients or Secondary Clients at the time they became Clients but who are no longer an "accredited investor" or who no longer satisfy the criteria to be a Secondary Client; (ii) Clients who have a relationship with a Primary Client or a Secondary Client but the relationship does not satisfy the criteria to be a Secondary Client; or (iii) Clients who have at least $250,000 in one or more Managed Accounts.

8. Primary Clients constitute the main source of business for the Filer and a majority of Clients are accredited investors. The Filer's minimum aggregate account size, which it may waive in appropriate circumstances, is $500,000. The average account size of Clients is in excess of $ 1 million. The business of Secondary Clients and Permitted Clients is incidental to the business of Primary Clients. The business of a Secondary Client or a Permitted Client is generally accepted by the Filer as a courtesy to a Primary Client. Less than 10% of The Filer's assets under management are currently managed for Secondary Clients or Permitted Clients.

9. Investments in individual securities may not be appropriate for Primary Clients in certain circumstances or for Secondary Clients or Permitted Clients. In the case of Secondary Clients or Permitted Clients the amount they have available for investment may not be sufficient for appropriate asset diversification and, due to the size of an investment, they may incur disproportionately higher brokerage commissions than Primary Clients.

10. The Filer has created the Existing Funds to provide Clients with access to certain types of investments, portfolio management efficiencies or appropriate diversification through a pooled investment vehicle.

11. The Filer has determined that to fulfill its fiduciary duty to its Client, all or a portion of the assets of some Clients should be invested in a Fund.

12. The Existing Funds are currently sold by the Filer only to Managed Accounts of Primary Clients or Secondary Clients or to Managed Accounts of other investors if they invest at least $150,000.

13. The Filer wishes to be able to offer the Existing Funds and each Future Fund to Managed Accounts that it manages on behalf of Permitted Clients, as well as to Managed Accounts of Primary Clients and Secondary Clients, without being required to invest $150,000 in each Fund on behalf of a Permitted Client.

14. The distribution of units of the Funds to Managed Accounts of Primary Clients can be conducted by the Filer without compliance with the Prospectus Requirement pursuant to subsection 2.3(1) of NI 45-106 and pursuant to its registration as an exempt market dealer or without compliance with the dealer registration requirement of the Act (the "Registration Requirement") pursuant to subsection 8.6(1) of National Instrument 31-103 -- Registration Requirements and Exemptions ("NI 31-103"). The distribution of units of the Funds to Managed Accounts of Secondary Clients can be conducted by the Filer without compliance with the Prospectus Requirement pursuant to the Prior Ruling and without compliance with the Registration Requirement pursuant to the Prior Ruling or pursuant to subsection 8.6(1) of NI 31-103. The distribution of units of the Funds to Managed Accounts of Permitted Clients can be conducted without compliance with the Registration Requirement pursuant to subsection 8.6(1) of NI 31-103.

15. Upon obtaining the Exemption Sought, the Filer will not rely on the Prior Ruling.

16. The Filer may, but does not currently intend to, distribute units of the Funds to investors who do not have a Managed Account with the Filer in reliance on available exemptions from the Prospectus Requirement in NI 45-106 or in other provisions of applicable securities laws and in reliance on its exempt market dealer registration or available exemptions from the Registration Requirement.

17. At the initial meeting between a new Client and one or more portfolio managers who will service the Client, The Filer establishes the Client's general investment goals and objectives, including target asset mix and the risk parameters for the Managed Account. This is documented in the IMA. The Filer complies with the "know your client" obligations set out in NI 31-103. After the initial meeting, the Client is advised of the name of one or more portfolio managers (each of whom meets the proficiency requirements under NI 31-103 to be an advising officer or an advising representative or an associate advising officer or associate advising representative) who will meet at least once per year with the Client (or more frequently if required) to review the performance of the Managed Accounts and the investment goals.

18. Under the IMA the Filer acquires full discretionary authority to manage the assets in a Client's Managed Account, in accordance with the investment guidelines established for the account, without obtaining the consent of the Client to any specific trade. The IMA provides that, if authorized under the IMA, the Filer may invest the assets in a Client's Managed Account in one or more of the Funds. The Filer currently does not invest assets of Permitted Clients in units of the Funds unless the investment in a Fund is at least $150,000.

19. The IMA provides that the Client will pay to the Filer a base management fee and a performance incentive bonus (the "Compensation") and the Client acknowledges that there may be a management fee payable by a Fund and that such fee will be in addition to the Compensation. Further, the Client acknowledges that the assets invested in a Fund will be included in calculating the Compensation.

20. While the Compensation is in addition to the management fee payable by a Fund, the Filer negotiates the Compensation and acquires units of a Fund on a basis such that there is no duplication of fees paid.

21. There will be no commission paid by a Client in respect of the purchase of units of a Fund.

22. If a Client's Managed Account may be invested in units of a Fund, the Client receives an offering memorandum relating to the Fund which describes the investment objectives and strategies of the Fund and other material information relating to the Fund including a description of the fees and expenses that are payable by the Fund.

23. A Client receives from the custodian of the Managed Account a monthly or quarterly account statement (depending on the level of account activities) showing current holdings in his/her Managed Account. Upon request, Clients can have online viewing access of their Managed Account. All Clients who hold units of the Funds in their Managed Accounts receive a quarterly letter which details their rates of return. The portfolio manager is available to review and discuss with Clients all account statements.

24. Although the distribution of units of the Funds to Managed Accounts of Clients, including Secondary Clients and Permitted Clients, not resident in Ontario is not subject to the Prospectus Requirement due to the exemption for such distributions in NI 45-106, the distribution of units of the Funds to Managed Accounts of Secondary Clients and Permitted Clients resident in Ontario is subject to such requirement. This is because a Managed Account is not an accredited investor in Ontario for the purposes of the purchase of securities of an investment fund but it is an accredited investor in the Other Jurisdictions for such purposes.

Ruling

The Commission being satisfied that the relevant tests contained in subsections 74(1) and 144(1) of the Act have been met, the Commission rules pursuant to subsection 74(1) and 144(1) of the Act that the Requested Relief is granted, provided that, in connection with the distribution of units of the Funds to Secondary Clients and Permitted Clients in Ontario:

(a) units of the Funds distributed pursuant to the relief from the Prospectus Requirement contained in this ruling shall only be distributed to Managed Accounts of The Filer;

(b) for each Secondary Client who becomes a Client of the Filer after the date hereof and any Permitted Client that will invest in units of one or more Funds through a Managed Account pursuant to this ruling, the Filer shall deliver to such Secondary Client or Permitted Client prior to effecting a trade in units 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 the Client's 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.

"Carol S. Perry"
Commissioner
Ontario Securities Commission
 
"Paulette L. Kennedy"
Commissioner
Ontario Securities Commission