Relief from the dealer registration and prospectus requirements of the Act to permit the distribution of pooled fund units to fully managed accounts on an exempt basis -- Relief from the mutual fund conflict of interest investment prohibitions of the Act to allow pooled funds to make and hold investments in related issuers -- Relief from management company reporting requirements of the Act in respect of investments made by pooled fund in related issuers -- Relief from self-dealing prohibition of the Act to allow in-species transfers between pooled funds and managed accounts.
Securities Act, R.S.O. 1990, c. S.5, as am., sections 25, 53, 74(1), 111(2)(c), 111(3), 113, 117(1)(a), 117(1)(d), 117(2), 118(2)(b), 121(2)(a)(ii).
OSC Rule 45-501 -- Exempt Distributions.
IN THE MATTER OF THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED (the "Act")
IN THE MATTER OF
STRATEGIC ADVISORS CORP.
STRATEGIC CAPITAL PARTNERS INC.
IN THE MATTER OF
STRATEGIC VALUE TRUST
RULING AND ORDER
(Subsection 74(1), section 113, subsection 117(2)
and clause 121(2)(a)(ii) of the Act)
UPON the application of Strategic Advisors Corp. ("SAC") and Strategic Capital Partners Inc. ("SCPI", and together with SAC, the "Applicants"), on their behalf and on behalf of the Strategic Value Trust (the "Existing Fund") and any other pooled fund established and managed by one or both of the Applicants after the date hereof (a "Future Fund", together with the Existing Fund, the "Funds"), to the Ontario Securities Commission (the "Commission") for
(i) a ruling, pursuant to subsection 74(1) of the Act, that the sale to a Managed Account (as hereinafter defined) of units of the Funds will not be subject to the dealer registration requirement and the prospectus requirement in sections 25 and 53, respectively, of the Act;
(ii) an order, pursuant to section 113 of the Act relieving the Funds from the prohibitions in paragraph 111(2)(c) and subsection 111(3) of the Act which prohibit mutual funds in Ontario from knowingly making and holding an investment in an issuer in which
a. any officer or director of the mutual fund, its management company or distribution company or an associate of any of them, or
b. any person or company who is a substantial security holder of the mutual fund, its management company or its distribution company,
has a significant interest (the "Mutual Fund Conflict of Interest Investment Prohibitions");
(iii) an order, pursuant to subsection 117(2) of the Act relieving the Applicants from the requirement in paragraphs 117(1)(a) and 117(1)(d) to file a report of every transaction of purchase or sale of securities between the Funds and any related person or company and any transaction in which, by arrangement other than an arrangement relating to insider trading in portfolio securities, the Funds are joint participants with one or more of their related persons or companies (the "Management Company Reporting Requirements"); and
(iv) an order, pursuant to clause 121(2)(a)(ii) of the Act relieving the Applicants from the prohibition in paragraph 118(2)(b) of the Act which prohibits a portfolio manager from knowingly causing an investment portfolio managed by it to purchase or sell the securities of any issuer from or to the account of a responsible person, any associate of a responsible person or the portfolio manager (the "Self-Dealing Prohibition").
AND UPON considering the application and the recommendation of staff of the Commission;
AND UPON the Applicants having represented to the Commission as follows:
1. SAC and SCPI are affiliated entities, each of which is incorporated under the laws of the province of Ontario. Their respective head offices are in Toronto, Ontario.
2. SAC is registered under the legislation in Ontario in the categories of "investment counsel and portfolio manager, and limited market dealer". SAC is also registered under the legislation of Alberta, British Columbia, Manitoba, Saskatchewan, and Nova Scotia (collectively, the "Other Jurisdictions") in the categories of "investment counsel" and "portfolio manager" (or the equivalent).
3. SCPI is registered under the legislation of Ontario as a dealer in the category of "investment dealer (equities, options and managed accounts)", and is authorized to act as an adviser, pursuant to an exemption from the "adviser registration requirement" (as defined in National Instrument 14-101 -- Definitions) that is made available to dealers who are members of the Investment Dealers Association of Canada.
4. The Applicants offer 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 ("Managed Account"). Pursuant to a written agreement ("Managed Account Agreement") made between the respective Applicant and the Client, the Applicant makes investment decisions for the Managed Account and has full discretionary authority to trade in securities for the Managed Account without obtaining the specific consent of the Client to the trade.
5. The Managed Services are provided by employees of the Applicants who meet the proficiency requirements of an advising officer or advising representative (or associate advising officer or associate advising representative) in the case of SAC, or as a Portfolio Manager (or Associate Portfolio Manager) in the case of SCPI, under the legislation of Ontario. Certain individuals are officers of both SAC and SCPI and are dually registered by the Commission to provide Managed Services at both SAC and SCPI.
6. The Managed Services provided by the Applicant consist of the following:
(a) each Client who accepts Managed Services executes a Managed Account Agreement whereby the Client authorizes the respective Applicant to supervise, manage and direct purchases and sales, at the Applicant's full discretion on a continuing basis;
(b) the respective Applicant'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;
(c) each Managed Account holds securities as selected by the respective Applicants; and
(d) each Applicant retains overall responsibility for the Managed Services provided to its respective Clients and has designated a senior officer to oversee and supervise the Managed Services.
7. Each Applicant's minimum account size is $500,000, which may be waived at the Applicant's discretion. From time to time, the Applicants accept certain Clients for Managed Accounts with less than $500,000 under management. Managed Accounts may not be ideal for such Clients since they may not receive the same asset diversification benefits and may incur disproportionately higher brokerage commissions relative to other Clients, due to minimum commission charges.
8. In order to improve the diversification and cost benefits to Managed Accounts with less than $500,000 under management, the Applicants wish to distribute units of the Funds to those Managed Accounts. The Client would thereby be able to partake of the Applicants' investment management expertise, regarding both asset allocation and individual stock selection, as well as receive the benefits of lower costs and broader asset diversification associated with pooled investments relative to direct holdings of individual securities.
9. The Applicants may also distribute units of the Funds by subscription agreements to persons who do not have Managed Accounts.
10. The Existing Fund is an open-end mutual fund trust managed by SAC that was established under the laws of the province of Ontario on January 1, 2005. The Future Funds will consist of open-end mutual fund trusts or limited partnerships of which SAC or SCPI will be appointed portfolio manager, with full discretionary authority, and in most cases will be appointed administrative manager as well.
11. Certain of the Funds will fit within the definition of either "mutual fund" or "non-redeemable investment fund" under the Act. The Funds are not, or will not be, reporting issuers under the Act. The Funds are, or will be, sold in Ontario under applicable statutory exemptions from the prospectus and dealer registration requirements.
12. In the absence of the ruling requested, the Applicants would be prohibited from selling units of the Funds to a Managed Account in Ontario for the reason that Ontario Securities Commission Rule 45-501 -- Exempt Distributions ("OSC Rule 45-501") stipulates that a managed account is an "accredited investor" only if it is acquiring a security that is not a security of a mutual fund or non-redeemable investment fund. Currently, under OSC Rule 45-501, a Managed Account is allowed to invest in the Funds on an exempt basis only where either (i) the Client holding the Managed Account personally qualifies as an accredited investor, or (ii) the Managed Account makes a purchase of not less than $150,000 in securities of the Fund.
13. The majority of Clients holding Managed Accounts with less than $500,000 under management would not qualify as accredited investors under OSC Rule 45-501, since they do not meet the financial assets test ($1,000,000) or the net income test ($200,000, or $300,000 together with their spouse) under OSC Rule 45-501.
14. There is no restriction on the ability of Managed Accounts to purchase securities, including investment fund securities, on an exempt basis under the exempt distribution rule applicable in the Other Jurisdictions. Under Multilateral Instrument 45-103 - Capital Raising Exemptions ("MI 45-103"), the Funds would be permitted to be sold to Managed Accounts in the Other Jurisdictions pursuant to exemptions from the prospectus and dealer registration requirements.
15. Since units of the Funds will not be sold pursuant to a prospectus, and since it is intended that sales of units of the Funds to Managed Accounts managed by SAC will be sold through SAC (a limited market dealer) and not through SCPI (a registered investment dealer), units of the Funds will only be sold pursuant to an exemption from both the dealer registration and prospectus requirements of sections 25 and 53 of the Act.
16. Managed Services provided by an Applicant under a Managed Account are covered by a base management fee calculated as a fixed percentage of the assets under administration in the Managed Account ("Base Management Fee"). The Base Management Fee includes investment research, portfolio selection, management with respect to all securities or other assets in the Managed Account, and reporting. The Base Management Fee is not intended to cover brokerage commissions and other transaction charges in respect of each transaction which occurs in a Managed Account, nor does it cover interest charges on funds borrowed or charges for minor administrative services provided in connection with the operation of the Managed Account, such as account transfers, withdrawals, safekeeping charges, service charges, and wire transfer requests. In addition, the Client typically pays an annual performance-based fee ("Performance Fee") in the event that the performance in the Managed Account exceeds a certain minimum appreciation in the net asset value of the Managed Account. Terms of both the Base Management Fee and Performance Fee are detailed in the Managed Account Agreement.
17. The Applicants will waive any Base Management Fee and/or Performance Fee typically applicable under a Managed Account Agreement, where the Applicant invests on behalf of a Managed Account in Funds which pay an administration fee and/or performance-based fee to one of the Applicants as an advisor. Accordingly, there will be no duplication of fees between a Managed Account and the Funds.
18. There will be no commission payable by a Client on the sale of units of the Funds to a Managed Account.
19. An individual who is an officer and director of both SAC and SCPI is also Chairman of St Andrew Goldfields Ltd. ("St Andrew"), a company listed on the Toronto Stock Exchange, and holds a "significant interest", as such term is defined in subsection 110(2) of the Act, in shares of St. Andrew.
20. In addition, SAC, SCPI and their associates beneficially own or exercise control or direction (through securities held in managed accounts at SAC and SCPI) over more than 10% of the outstanding common shares of St Andrew. As a result of these holdings, St Andrew is a related and connected issuer of each of SAC and SCPI, as those terms are defined in the Act.
21. Certain Managed Accounts of the Applicants currently hold securities of St Andrew. Similarly, Managed Accounts of the Applicants may in the future hold securities of other issuers (the "Other Issuers") in which an officer or director of SAC and/or SCPI, or a substantial security holder thereof, may have a significant interest. Where possible, the Applicants wish to manage the Funds consistent with their direct investments for Managed Accounts. Accordingly, it is expected that the Funds will hold securities of St Andrew and of the Other Issuers.
22. Investments in securities of St Andrew and of Other Issuers by the Funds will represent the business judgment of the Applicants and their respective portfolio managers, uninfluenced by considerations other than the best interests of the Funds.
23. Certain of the Funds will fit within the definition of "mutual fund in Ontario" in subsection 1(1) of the Act. In the absence of the Order requested, the Funds would be prohibited by the Mutual Fund Conflict of Interest Investment Prohibitions from investing in securities of St Andrew and of Other Issuers. In addition, the Applicants would, in the absence of the Order, be required by the Management Company Reporting Requirements to file with the Commission a report of every purchase or sale of securities of St Andrew and of Other Issuers within thirty days after the end of the month in which the purchase or sale occurs.
24. Both SAC and SCPI include in their respective Statement of Policies (as required by the conflict of interest provisions of Part XIII of the Regulation made under the Act) a list of related and connected issuers and obtain from Clients the written consent to the exercise of discretionary authority with respect to such issuers.
25. In addition, both SAC and SCPI provide Clients with disclosure as to the relationships between any of their respective directors, officers and employees and any issuers whose securities may be purchased for Clients, and the Client's consent is obtained to the exercise of discretionary authority with respect to such issuers (as required by paragraph 118(2)(a) of the Act).
26. The Applicants may permit payment, in whole or in part, for Fund units purchased by a Managed Account to be made by making good delivery of securities, held by such Managed Account, to a Fund, provided those securities meet the investment criteria of the Fund. Effecting such internal cross-trades of securities between a Managed Account and a Fund reduces market impact costs, which can be detrimental to the clients. Cross-trading also allows a portfolio manager to efficiently retain within its control institutional-size blocks of securities that otherwise would need to be broken and re-assembled. Such securities often are those that trade in lower volumes, with less frequency, and have larger bid-ask spreads.
27. Similarly, following a redemption of units of a Fund by a Managed Account, the Applicants may permit payment, in whole or in part, of redemption proceeds to be satisfied by making good delivery of securities held in the investment portfolio of a Fund to such Managed Account, provided those securities meet the investment criteria of the Managed Account (the transactions described in paragraphs 26 and 27 shall hereinafter be individually referred to as an "In-Species Transfer"). The Applicants anticipate In-Species Transfers following a redemption of units of a Fund where a Managed Account invested in such Fund has experienced a change in circumstances, which results in the Managed Account being an ideal candidate for direct holdings of individual securities rather than Fund units.
28. It is anticipated that the internal cross trades involved in each In-Species Transfer will be executed by SCPI. The only cost which will be incurred by a Managed Account entering into each such internal cross trade is the minimum commission charge ("Ticket Charge") paid to SCPI for each transaction, as compensation for administrative expenses incurred by SCPI.
29. Since the Applicants are portfolio managers of their respective Managed Accounts, they would be considered a "responsible person" within the meaning of subsection 118(1) of the Act with respect to such Managed Accounts. Furthermore, each of the Funds is or will be an associate of SAC and/or SCPI within the meaning of paragraph (c) of the definition of "associate" contained in subsection 1(1) of the Act because SAC and/or SCPI serves, or will serve, in the capacity of trustee in respect of the Funds.
30. In the absence of the order, the Applicants would be prohibited by the Self-Dealing Prohibition from causing a Managed Account to make an In-Species Transfer of securities of any issuer to or from a Fund, as such Fund would be an associate of the Applicants.
AND UPON the Commission being satisfied that the tests contained in subsection 74(1), section 113, subsection 117(2) and clause 121(2)(a)(ii) of the Act have been met;
IT IS RULED, pursuant to subsection 74(1) of the Act, that the sale by the Applicants of units of the Funds to the Managed Accounts shall not be subject to sections 25 and 53 of the Act,
PROVIDED THAT 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 securities of mutual funds or non-redeemable investment funds from the dealer registration requirements and prospectus requirements in the Act.
AND IT IS ORDERED, (i) pursuant to section 113 of the Act, that the Mutual Fund Conflict of Interest Investment Prohibitions shall not apply so as to prevent the Funds from making and holding investments in securities of St Andrew and of the Other Issuers, and (ii) pursuant to subsection 117(2) of the Act, that the Management Company Reporting Requirements shall not apply so as to require the Applicants to file a report relating to each purchase or sale by the Funds of securities of St Andrew and of the Other Issuers,
PROVIDED THAT units of the Funds are purchased and held only by the Managed Accounts of the Applicants.
AND IT IS FURTHER ORDERED pursuant to clause 121(2)(a)(ii) of the Act that the Self-Dealing Prohibition shall not apply to the Applicants in connection with the payment of the purchase or redemption price of units of a Fund by In-Species Transfers between the Managed Accounts and the Funds, provided that:
i) in connection with the purchase of units of a Fund by a Managed Account:
(a) the Applicants obtain the prior written consent of the relevant Managed Account Client before it engages in any In-Species Transfers in connection with the purchase of units;
(b) the Fund would at the time of payment be permitted to purchase those securities;
(c) the securities are acceptable to the portfolio advisor of the Fund and consistent with the Fund's investment objective;
(d) the value of the securities is at least equal to the issue price of the securities of the Fund for which they are payment, valued as if the securities were portfolio assets of the Fund;
(e) the statement of portfolio transactions next prepared for the Managed Account shall include a note describing the securities delivered to the Fund and the value assigned to such securities; and
ii) in connection with the redemption of units of a Fund by a Managed Account:
(a) the Applicants obtain the prior written consent of the relevant Managed Account Client to the payment of redemption proceeds in the form of an In-Species Transfer;
(b) the securities are acceptable to the portfolio advisor of the Managed Account and consistent with the Managed Account's investment objective;
(c) the value of the securities is equal to the amount at which those securities were valued in calculating the net asset value per security used to establish the redemption price;
(d) the holder of the Managed Account has not provided notice to terminate its Managed Account Agreement with the Applicant;
(e) the statement of portfolio transactions next prepared for the Managed Account shall include a note describing the securities delivered to the Managed Account and the value assigned to such securities; and
iii) the Applicants do not receive any compensation in respect of any sale or redemption of units of a Fund and, in respect of any delivery of securities further to an In-Species Transfer, the only charges paid by the Managed Account are the Ticket Charges.
January 25, 2005.
"Paul M. Moore"