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 disclosure 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).
National Instrument 45-106 Prospectus and Registration Exemptions.
National Instrument 31-103 Registration Requirements and Exemptions.
July 13, 2010
IN THE MATTER OF
THE SECURITIES ACT
R.S.O. 1990, c.S.5, AS AMENDED
IN THE MATTER OF
CUMBERLAND PRIVATE WEALTH
MANAGEMENT INC. (CPWM)
MANAGEMENT INC. (CIMI)
(CPWM and CIMI, collectively, the Filers)
(Subsections 74(1) and 144(1) of the Act)
The Ontario Securities Commission (the Commission) has received an application from the Filers, on behalf of themselves and any open-ended investment fund that is not a reporting issuer for which CIMI or CPWM acts or will act as manager and CPWM acts or will act as portfolio manager (the Funds) for a ruling pursuant to:
1. subsection 74(1) of the Act, that distributions of securities of the Funds to Managed Accounts (as defined below) of Clients (as defined below) will not be subject to the prospectus requirement under section 53 of the Act (the Prospectus Requirement); and
2. subsection 144(1) of the Act, to revoke and replace the Current Relief (as defined below)
(collectively, the Requested Relief).
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 Filers:
1. CPWM is a corporation organized under the Business Corporations Act (Ontario) (the OBCA). Its head office is in Toronto, Ontario. CPWM is registered as an investment dealer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador (the Jurisdictions). CPWM is a member of the Investment Industry Regulatory Organization of Canada (IIROC). CPWM provides portfolio investment management services in accordance with the rules of IIROC.
2. CIMI is a corporation organized under the OBCA. It is not registered as a dealer or an adviser in any of the Jurisdictions. CIMI is proposing to apply for registration as an investment fund manager with the Ontario Securities Commission (OSC) in accordance with the requirements of National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103), unless CPWM is appointed investment fund manager of the Funds. In that case, CPWM would apply for registration as an investment fund manager.
3. The Filers are "affiliates" as defined in National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).
4. The Funds are open-end mutual fund trusts established under the laws of Ontario. Each Fund is or will be offered pursuant to exemptions from the prospectus requirements.
5. CIMI is or will be the trustee of the Funds. CPWM is or will be the portfolio advisor and distributor of the Funds. CIMI is the current investment fund manager of the Funds and either CIMI or CPWM will be the investment fund manager of the Funds.
6. CPWM provides discretionary investment management services (Managed Services) primarily to high net worth individuals, institutions and foundations (each a Client or collectively, Clients) through a managed account (Managed Account).
7. Each Client enters into a discretionary investment management agreement (Managed Account Agreement) with CPWM, whereby the Client appoints CPWM to provide the Managed Services. Based on the assets of the Client and depending on the allocation of a Client's assets to a particular asset class, CPWM either manages the Client's assets on a segregated account basis or invests the Client's assets in one or more Funds. The Managed Account Agreement further sets out how the Managed Account operates and informs the Client of CPWM's various rules, procedures and policies.
8. The Managed Services consist of the following:
(a) CPWM supervises, manages and directs purchases and sales for the Managed Account, at CPWM's full discretion, on a continuing basis;
(b) CPWM'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; and
(c) CPWM selects securities for the Managed Account including investing clients in mutual funds for which CPWM is the portfolio advisor and changing those funds as CPWM determines in accordance with the mandate of the Clients.
9. The Managed Services are provided by employees of CPWM who are registered under the legislation of the applicable Jurisdictions to trade in securities (the Legislation); CPWM acts as an advisor without registration under the Legislation pursuant to the exemption in Section 8.24 of NI 31-103 by virtue of its membership in IIROC and provision of its advisory activities in accordance with the rules of IIROC.
10. At the initial meeting between a new Client and a Client Portfolio Manager (CPM) who is an employee of CPWM, the CPM establishes the Client's general investment goals and objectives. Typically, the CPM then makes investment recommendations to the client that describe the strategies that CPWM shall employ to meet these objectives.
11. After the initial meeting, the CPM 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.
12. PWM sends each Client a quarterly portfolio valuation showing current holdings in his/her Managed Account. In addition, clients are provided with monthly or quarterly account statements (depending on account activity) as well as trade confirmations for each purchase or redemption of units of the Funds. The CPM is available to review and discuss with Clients all account statements and portfolio valuations.
13. CPWM may determine that to best fulfill its fiduciary duty to its Clients, all or a portion of the asset mix in a Client's portfolios should be invested in one or more of the Funds.
14. The Funds are, or will be, established by the Filers with a view to achieving efficiencies in the delivery of portfolio management services to the Clients of CPWM. CPWM will not be paid any compensation with respect to the distribution of the Funds' securities to the Managed Accounts.
15. CPWM's minimum aggregate balance for all the Managed Accounts of a Client is $500,000. From time to time, CPWM will accept Clients who do not meet this minimum threshold if there are exceptional factors that have persuaded CPWM for business reasons to accept such persons as Clients and waive the minimum aggregate balance.
16. Most of CPWM's Clients, who meet the minimum threshold, qualify as accredited investors as defined in Section 1.1 of NI 45-106. The vast majority of Clients who would not qualify as accredited investors are holders of "Secondary Managed Accounts" as that term is defined under exemptive relief granted to the Filers by the Commission on May 18, 2007 (the Current Relief). The Current Relief granted the Filers relief from the Prospectus Requirement to distribute units of the Funds to such Secondary Managed Accounts in amounts that are less than $150,000. A condition of the Current Relief is that the Secondary Managed Accounts meet that definition at all times.
17. From time to time, CPWM may also have a small number of Managed Accounts that are held by Clients who are not accredited investors or Secondary Managed Accounts (Non-Exempt Clients). These Non-Exempt Clients are typically Clients who, due to a change in circumstances are no longer accredited investors or Secondary Managed Accounts, or who may otherwise have a relationship with a current Client but the relationship does not meet the definition of a Secondary Managed Account under the Current Relief.
18. CPWM's usual practice is to not provide its services to Non-Exempt Clients. However, in certain limited cases, CPWM has determined that it may wish to provide its services to Non-Exempt Clients, often due to the strength of the pre-existing relationship between the Non-Exempt Client and CPWM or another Client.
19. Investments in individual securities may not be ideal for Non-Exempt Clients, since they may not receive the same asset diversification benefits and may incur disproportionately higher brokerage commissions relative to the Clients with larger Managed Accounts due to minimum commission charges. Accordingly, reliance on the minimum investment exemption amount in section 2.10 of NI 45-106 may not be appropriate for Clients with smaller Managed Accounts as this might require a disproportionately high percentage of the account to be invested in a single Fund.
20. 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 relief being requested, the Funds are prohibited in Ontario from distributing units, and CPWM cannot rely on the accredited investor exemption in NI 45-106 or on the Current Relief to provide its services to Managed Accounts held by Non-Exempt Clients.
21. 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, CPWM proposes to cause certain of its Clients, including Non-Exempt Clients, to invest in units of the Funds, without the Client needing to invest a minimum of $150,000 in a Fund, subject to each Client's risk tolerance and account objectives.
22. Each Fund pays or will pay all administration fees and expenses relating to its operation, including any management fees payable to the investment fund manager of the Fund and investment management fees or performance fees payable by the Fund to CPWM. The investment fund manager of each Fund gets paid a nominal fixed management fee (currently $2,500). None of the Funds charges or will charge a commission to investors. Typically, CPWM receives investment management fees directly from investors in each of the Funds based upon a percentage of the value of the Clients Managed Account and no investment management fees are payable by the Fund to CPWM. The terms of these fees, as well as any investment management or performance fees payable by a Fund to CPWM, are detailed in each Client's Managed Account Agreement or in another agreement with the client.
23. Where CPWM invests on behalf of a Managed Account in a Fund to which CPWM will charge an investment management fee or performance fee, the necessary steps will be taken to ensure that there will be no duplication of fees between a Managed Account and the Funds.
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 that the Requested Relief is granted provided that:
(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;
(b) for each Client that becomes a Client of CPWM after the date of this ruling that will invest in units of one or more Funds through a Managed Account pursuant to this ruling, CPWM shall deliver to such Client, prior to effecting a trade in the 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 this 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.