Securities Law & Instruments

Headnote

Relief from the dealer registration and prospectus requirements of the Act to permit the distribution on an exempt basis of pooled fund securities to managed accounts held by non-accredited investors - Non-accredited investors are specified family members and close business associates of core managed account clients that are accredited investors - ss. 25, 53 and 74(1) of Securities Act (Ontario).

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss.s 25, 53, 74(1).

Rules Cited

National Instrument 45-106 Prospectus and Registration Exemptions.

May 1, 2007

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED (the "Legislation")

AND

IN THE MATTER OF

GUARDIAN CAPITAL LP ("Guardian Capital"),

GUARDIAN CAPITAL ADVISORS LP

("Guardian Advisors") (together referred to as "Guardian")

AND THE POOLED FUNDS LISTED IN APPENDIX A

(the "Existing Funds") (collectively, the "Filers")

 

RULING

(Subsection 74(1))

Background

The Ontario Securities Commission (the "Decision Maker") has received an application (the "Application") from the Filers for a ruling that trades in units of the Existing Funds and any pooled fund established and managed by Guardian in the future (each a "Future Fund", and together with the Existing Funds, the "Funds") to Secondary Managed Accounts (as defined below) will not be subject to the dealer registration and prospectus requirements under the Legislation (the "Requested Relief").

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

The decision is based on the following facts represented by the Filers:

1. Guardian Capital and Guardian Advisors are both limited partnerships formed under the laws of Ontario with their head offices in Toronto, Ontario. Each is registered with the Decision Maker as an Investment Counsel and Portfolio Manager. Guardian has equivalent registrations in several other Canadian jurisdictions and in the United States.

2. Guardian has been managing money for high net worth individuals and institutional clients on a fully discretionary basis for approximately 40 years. As of October 31, 2006, Guardian had assets under management of approximately $16.18 billion, of which approximately $368.9 million is managed in the Existing Funds.

3. Guardian is the manager and portfolio advisor of the Existing Funds and will act in such capacity for each Future Fund. The trustee of each Existing Fund is CIBC Mellon Trust Company.

4. Each of the Existing Funds is a "mutual fund" as defined in the Legislation.

5. The Future Funds will consist of open-end mutual fund trusts, limited partnerships or classes or series of a corporation of which Guardian will be appointed portfolio manager, with full discretionary authority, and in most cases will be appointed administrative manager as well.

6. Guardian primarily 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 Guardian and the Client, Guardian 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.

7. The Managed Services are provided by employees of Guardian who meet the proficiency requirements of an advising officer or advising representative (or associate advising officer or associate advising representative) under Ontario securities law.

8. The Managed Services consist of the following:

(a) each Client who accepts Managed Services executes a Master Client Agreement whereby the Client authorizes Guardian to supervise, manage and direct purchases and sales, at Guardian's full discretion on a continuing basis;

(b) Guardian'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 Guardian; and

(d) Guardian retains overall responsibility for the Managed Services provided to its Clients and has designated a senior officer to oversee and supervise the Managed Services.

9. Guardian's minimum aggregate balance for all the Managed Accounts of a client is $400,000. From time to time, Guardian will accept a client who does not meet this minimum threshold if there are exceptional factors that have persuaded Guardian for business reasons to accept such persons as Clients and waive the minimum aggregate balance, provided those Clients agree to pay Guardian's minimum management fee. Managed Accounts of a client which on aggregate satisfy this minimum balance and/or minimum fee requirement are hereinafter referred to as "Primary Managed Accounts". This minimum balance/minimum fee requirement may be waived at Guardian's discretion.

10. In addition, from time to time Guardian may accept certain Clients for managed accounts with less than $400,000 under management or who will not pay Guardian's minimum management fees. 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 Guardian for business reasons to accept such persons as Clients and waive its minimum balance and fee requirements. Assets managed by Guardian 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". Together, the Primary Managed Accounts and the Secondary Managed Accounts are hereinafter referred to herein as the "Managed Accounts".

11. While the holders of the Primary Managed Accounts each qualify as accredited investors under Ontario securities law (subject to the one technical exception referred to paragraph 14 below), the holders of the Secondary Managed Accounts do not always themselves qualify as accredited investors under Ontario securities law, nor do their investments meet the minimum investment threshold set out in National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106"). Guardian 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 future.

12. 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.

13. Guardian Capital and Guardian Advisors are both in the process of applying as limited market dealers under the Legislation. Once these registrations are granted they will be able to take over the distribution of units of the Funds from the registrant, a former affiliate of Guardian's, that is currently responsible for such distribution.

14. Unless the Requested Relief is granted, the Funds will be available only to Clients that are accredited investors or are able to invest a minimum of $150,000 in a Fund. NI 45-106 excludes from the definition of "accredited investor" a managed account if it is acquiring a security of a mutual fund in Ontario. Under 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. These requirements either act as a barrier to Secondary Managed Account Clients investing in the Funds, or may cause Guardian'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.

15. To improve the diversification and cost benefits to Secondary Managed Account Clients, Guardian wishes to distribute securities 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 Guardian'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.

16. Managed Services provided by Guardian 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. The terms of the Base Management Fee are detailed in the Master Client Agreement.

17. Where Guardian invests on behalf of a Managed Account in Funds which would otherwise pay a management fee to Guardian as manager, 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. The only management fees that are paid by a Managed Account that holds units of a Fund are paid directly to Guardian Capital or Guardian Advisors, as the case may be, pursuant to the discretionary investment management agreement that is entered into between Guardian Capital or Guardian Advisors, as the case may be, and every Managed Account.

18. Neither Guardian nor the Funds pay fees or commissions to any person in connection with the distribution of units of the Funds. Guardian may, from time to time, pay referral fees to persons who refer Managed Accounts, including Secondary Managed Accounts, to Guardian. However, neither Guardian nor the Funds pay any referral fees in connection with the referral of Secondary Managed Accounts that invest in units of the Funds.

19. Units of the Funds are "related issuers" and "connected issuers" of Guardian within the meaning of Ontario securities law. Therefore, in addition to entering into a written discretionary portfolio management agreement, clients who establish a Managed Account with Guardian Capital or Guardian Advisors are also provided with the applicable entity's Statement of Policies and provide Guardian Capital or Guardian Advisors with their informed written consent to the exercise of that entity's discretionary authority to include units of the Funds in their Managed Account.

20. The Funds are not hedge funds. Guardian Capital and Guardian Advisors each manage Funds in such a way that the Funds substantially comply with National Instrument 81-102 Mutual Funds. The Funds comply with those provisions of National Instrument 81-106 Investment Fund Continuous Disclosure that apply to mutual funds that are not reporting issuers in a particular province or territory of Canada.

21. The Existing Funds are, and the Future Funds will each be, a "mutual fund" under the Legislation. The Existing Funds and any Future Funds will not be reporting issuers under the Legislation. The Funds will only be sold in Ontario under applicable dealer registration and prospectus exemptions in the Legislation.

Decision

The Decision Maker being satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Maker under the Legislation is that the Requested Relief is granted provided that:

(a) this ruling will terminate upon the coming into force of any legislation or rule of the Decision Maker exempting a trade in a security of a mutual fund to a fully managed account from the Dealer Registration and Prospectus Requirements;

(b) this ruling will 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 sex 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 that is an accredited investor provided that:

(1) in each instance, there are exceptional factors that have persuaded Guardian for business reasons to accept such person as a Secondary Managed Account Client and waive Guardian'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 may not at any time represent more than five percent of Guardian's total Managed Account assets under management; and

(c) Guardian does not pay any fees or commissions to any person in connection with the distribution of units of a Fund, and Guardian does not pay referral fees to any person in connection with the referral of Secondary Managed Accounts that invest in units of any of the Funds.

"James Turner"
Vice-Chair
Ontario Securities Commission
 
"Paul K. Bates"
Commissioner
Ontario Securities Commission

 

APPENDIX A

VECTOR BALANCED FUND
VECTOR CANADIAN BOND FUND
VECTOR CANADIAN EQUITY FUND
VECTOR CANADIAN EQUITY VALUE
VECTOR CANADIAN SMALL/MID CAP
VECTOR HIGH YIELD BOND FUND
VECTOR INCOME TRUST FUND
VECTOR INDEX-ENHANCED BOND FUND
VECTOR INTERNATIONAL EQUITY FUND
VECTOR PREMIUM GROWTH FUND
VECTOR U.S EQUITY FUND
VECTOR U.S. LARGE CAP GROWTH FUND
VECTOR U.S. LARGE CAP VALUE FUND
VEGA AMERICAN EQUITY FUND
VEGA CANADIAN BOND FUND
VEGA CANADIAN GROWTH EQUITY FUND
VEGA ENTERPRISE EQUITY FUND
VEGA GLOBAL EQUITY FUND
VEGA INTERNATIONAL EQUITY FUND