Relief from the dealer registration and prospectus requirements of the Act to permit the distribution of pooled fund units to certain fully managed accounts on an exempt basis -- Relief from self-dealing prohibition of the Act to allow in specie transfers between pooled funds and managed accounts.
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 53, 74(1), 118(2)(b), 121(2)(a)(ii).
OSC Rule 45-501 -- Exempt Distributions.
National Instrument 45-106 -- Prospectus and Registration Exemptions.
August 5, 2005
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
GLUSKIN SHEFF + ASSOCIATES INC.
THE GS+A EQUITY HEDGE FUND
THE GS+A FIXED INCOME FUND
THE GS+A GLOBAL FUND
THE GS+A GROWTH FUND
THE GS+A INCOME TRUST HEDGE FUND
THE GS+A PREMIUM INCOME FUND
THE GS+A RRSP FUND
THE GS+A SMALL-CAP FUND
THE GS+A VALUE FUND
(the "Existing Funds")
RULING AND ORDER
(Subsection 74(1) and Clause 121(2)(a)(ii) of the Act)
WHEREAS GS+A has applied to the Ontario Securities Commission (the "Commission") on behalf of itself, the Existing Funds and any pooled fund established and managed by GS+A after the date hereof (a "Future Fund", and together with the Existing Funds, the "Funds"), for:
(a) a ruling, pursuant to subsection 74(1) of the Act, that distributions of units of the Funds to Secondary Managed Accounts (as defined below) 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"); and
(b) an order, pursuant to clause 121(2)(a)(ii) of the Act, that In Specie Transfers (as defined below) between the Funds and the Managed Accounts (as defined below) are exempted from the prohibition in paragraph 118(2)(b) of the Act which prevents a portfolio manager from knowingly causing any 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 WHEREAS GS+A has represented to the Commission that:
1. GS+A is incorporated under the laws of the province of Ontario. Its head office is in Toronto.
2. GS+A is registered with the Commission as an Investment Counsel, Portfolio Manager, Limited Market Dealer and Mutual Fund Dealer. GS+A has equivalent registration in British Columbia, Alberta, Manitoba, Nova Scotia and New Brunswick (the "Other Jurisdictions").
3. GS+A is the manager, portfolio advisor and principal distributor of the Existing Funds and will act in such capacity for each Future Fund. GS+A is the trustee of The GS+A RRSP Fund and The GS+A Fixed Income Fund. GS+A may act in such capacity for each Future Fund that is formed as a trust. The securities of The GS+A RRSP Fund are currently distributed by means of a simplified prospectus for which a receipt has been issued by the Director under the Act.
4. The Existing Funds are open-end mutual fund trusts and limited partnerships managed by GS+A and established under the laws of Ontario. The Future Funds will consist of open-end mutual fund trusts or limited partnerships of which GS+A will be appointed portfolio manager, with full discretionary authority, and in most cases will be appointed administrative manager as well.
5. GS+A 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. Pursuant to a written agreement ("Master Client Agreement") between GS+A and the Client, GS+A 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.
6. The Managed Services are provided by employees of GS+A who meet the proficiency requirements of an advising officer or advising representative (or associate advising officer or associate advising representative) under Ontario securities law.
7. The Managed Services consist of the following:
(a) each Client who accepts Managed Services executes a Master Client Agreement whereby the Client authorizes GS+A to supervise, manage and direct purchases and sales, at GS+A's full discretion on a continuing basis;
(b) GS+A'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 GS+A; and
(d) GS+A retains overall responsibility for the Managed Services provided to its Clients and has designated a senior officer to oversee and supervise the Managed Services.
8. GS+A's minimum aggregate balance for all the managed accounts of a client is $1,000,000. Managed accounts of a client which on aggregate satisfy this minimum balance shall hereinafter be referred to as "Primary Managed Accounts". This minimum balance requirement may be waived at GS+A's discretion. From time to time, GS+A may accept certain Clients for managed accounts with less than $1,000,000 under management. Such Clients consist primarily of family members of Primary Managed Account Clients, but may also include persons who have another relationship with the holder of a Primary Managed Account where there are exceptional factors that have persuaded GS+A for business reasons to accept such persons as Clients and waive the minimum aggregate balance. Assets managed by GS+A for the family members and other persons described above are incidental to the assets it manages for holders of Primary Managed Accounts. Managed accounts where the minimum aggregate balance has been waived for the reasons given above are hereinafter referred to as "Secondary Managed Accounts". The Primary Managed Accounts and the Secondary Managed Accounts shall together be referred to as the "Managed Accounts".
9. While the holders of the Primary Managed Accounts each qualify as accredited investors under Ontario securities law, the holders of the Secondary Managed Accounts do not always themselves qualify as accredited investors under Ontario securities law. GS+A typically services these Secondary Managed Account Clients as a courtesy to its Primary Managed Account Clients, or with the expectation that a Secondary Managed Account will satisfy the minimum balance requirement in the near future.
10. Investments in individual securities may not be ideal for the Secondary Managed Account Clients since they may not receive the same asset diversification benefits and may incur disproportionately higher brokerage commissions relative to the Primary Managed Account Clients due to minimum commission charges.
11. To give its Managed Account Clients the benefit of asset diversification, access to investment products with very high minimum investment thresholds and economies of scale on minimum brokerage commission charges in contrast to individual trades in each Managed Account, GS+A has created the Existing Funds. Currently the Existing Funds are only available to Clients that are accredited investors and Clients who are able to invest a minimum of $150,000 in each such Fund. These requirements either act as a barrier to Secondary Managed Account Clients investing in certain Existing Funds, or may cause GS+A's portfolio manager to invest more of a Secondary Managed Account Client's portfolio in such a Fund than it might otherwise prefer to allocate.
12. To improve the diversification and cost benefits to Secondary Managed Account Clients, GS+A wishes to distribute units of the Funds to Secondary Managed Accounts without a minimum investment. The Secondary Managed Account Client would thereby be able to receive the benefit of GS+A's 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.
13. GS+A may also, but does not currently intend to, distribute units of the Funds by subscription agreements to accredited investors who do not have a Managed Account.
14. Managed Services provided by GS+A under a Managed Account are covered by a base management fee calculated as a fixed percentage of the assets under management in the Managed Account (the "Base Management Fee"). The Base Management Fee includes investment research, portfolio selection and management with respect to all securities or other assets in the Managed Account. 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 standard administrative services provided in connection with the operation of the Managed Account, such as account transfers, withdrawals, safekeeping charges, service charges, wire transfer requests and record-keeping. In addition, the Client typically pays an annual performance-based fee (the "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 the Performance Fee are detailed in the Master Client Agreement.
15. Where GS+A invests on behalf of a Managed Account in Funds which would otherwise pay a management fee and/or performance-based fee to GS+A as an advisor, the Managed Account will purchase units of a series without such fees. Accordingly, there will be no duplication of fees between a Managed Account and the Funds.
16. There will be no commission payable by a Client on the sale of units of the Funds to a Managed Account.
Relief from the Dealer Registration and Prospectus Requirements
17. Certain of the Funds fit, or will fit, within the definition of either "mutual fund" or "non-redeemable investment fund" under the Act. Other than The GS+A RRSP Fund, the Funds are not, and likely will not be, reporting issuers under the Act, and are, or will be, sold in Ontario under applicable statutory exemptions from the Dealer Registration and Prospectus Requirements.
18. Unless the relief is granted from the Dealer Registration and Prospectus Requirements, GS+A will be prohibited from selling units of the Funds to the Secondary Managed Accounts where the Client resides in Ontario and is not an accredited investor or does not invest a minimum of $150,000 in each Fund. Both Ontario Securities Commission Rule 45-501 Exempt Distributions ("OSC Rule 45-501") and National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106") exclude from the definition of "accredited investor" a managed account if it is acquiring a security of a mutual fund or a non-redeemable investment fund in Ontario. Under OSC Rule 45-501 and NI 45-106, a Managed Account may only invest in the Funds on an exempt basis if either (a) the Client holding the Managed Account itself qualifies as an accredited investor, or (b) the Managed Account purchases at least $150,000 of securities of the Fund.
19. 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 Multilateral Instrument 45-103 Capital Raising Exemptions, a Managed Account can acquire securities of the Funds as an accredited investor.
Relief from the Self-Dealing Prohibition
20. GS+A wishes to 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. Implementing in specie transfers of securities between a Managed Account and a Fund reduces market impact costs, which can be detrimental to the clients. In specie transfers also allow 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.
21. Similarly, after a redemption of units of a Fund by a Managed Account, GS+A 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, if those securities meet the investment criteria of the Managed Account (the transactions described in this paragraph and the previous paragraph are collectively referred to as "In Specie Transfers"). GS+A anticipates In Specie 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.
22. As GS+A is the portfolio manager of the Managed Accounts, it would be considered a "responsible person" under subsection 118(1) of the Act with respect to the Managed Accounts. Furthermore, each of the Funds that is a trust is or will be an "associate" of GS+A under the Act because GS+A serves, or will serve, as trustee of the Funds.
23. Unless the requested relief is granted, the Self-Dealing Prohibition will prohibit GS+A from causing a Managed Account to make an In Specie Transfer of securities of any issuer to or from any of the Funds of which GS+A is the trustee, as such Funds would each be an associate of GS+A.
AND WHEREAS the Commission is satisfied that the tests contained in subsection 74(1) and clause 121(2)(a)(ii) of the Act have been met;
IT IS HEREBY RULED, pursuant to subsection 74(1) of the Act, that the distribution of units of the Funds to Secondary Managed Accounts shall not be subject to the Dealer Registration and Prospectus Requirements,
(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 securities of mutual funds or non-redeemable investment funds from the Dealer Registration and Prospectus Requirements;
(b) this Ruling shall only apply where the holder of the Secondary Managed Account is, and in the case of clauses (iii) to (vi) remains,
(i) an individual (of the opposite or same sex) who is or has been married to the holder of a Primary Managed Account, or is living or has lived with the holder of a Primary Managed Account in a conjugal relationship outside of marriage;
(ii) a parent, grandparent, child or sibling of either the holder of a Primary Managed Account or the individual referred to in clause (i);
(iii) a personal holding company controlled by an individual referred to in clause (i) or (ii) above;
(iv) a trust, other than a commercial trust, of which an individual referred to in clause (i) or (ii) above is a beneficiary;
(v) a private foundation controlled by an individual referred to in clause (i) or (ii) above; or
(vi) a close business associate, employee or professional adviser to a holder of a Primary Managed Account provided that:
(1) in each instance, there are exceptional factors that have persuaded GS+A for business reasons to accept such person as a Secondary Managed Account Client and waive GS+A's minimum aggregate balance, and a record is kept and maintained of the exceptional factors considered; and
(2) the Secondary Managed Account Clients acquired through such relationships to a holder of a Primary Managed Account shall not at any time represent more than five percent of GS+A's total Managed Account assets under management;
AND IT IS HEREBY ORDERED, pursuant to clause 121(2)(a)(ii) of the Act, that the Self-Dealing Prohibition shall not apply to GS+A in connection with the payment of the purchase or redemption price of units of a Fund by In Specie Transfers between the Managed Accounts and the Funds, provided that:
(a) in connection with the purchase of units of a Fund by a Managed Account:
(i) GS+A obtain the prior written consent of the relevant Managed Account Client before it engages in any In Specie Transfers in connection with the purchase of units;
(ii) the Fund would at the time of payment be permitted to purchase those securities;
(iii) the securities are acceptable to the portfolio advisor of the Fund and consistent with the Fund's investment objective;
(iv) 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; and
(v) 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;
(b) in connection with the redemption of units of a Fund by a Managed Account:
(i) GS+A obtain the prior written consent of the relevant Managed Account Client to the payment of redemption proceeds in the form of an In Specie Transfer;
(ii) the securities are acceptable to the portfolio advisor of the Managed Account and consistent with the Managed Account's investment objective;
(iii) 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;
(iv) the holder of the Managed Account has not provided notice to terminate its Master Client Agreement with GS+A; and
(v) 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
(c) GS+A do not receive any compensation in respect of any sale or redemption of units of a Fund (other than redemption fees disclosed in the offering documents of the Funds) and, in respect of any delivery of securities further to an In Specie Transfer, the only charge paid by the Managed Account is the commission charged by the dealer executing the trade.
"Paul M. Moore"
"Paul K. Bates"