Relief from the 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 or mutual funds and managed accounts.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53, 74(1), 118(2)(b), 121(2)(a)(ii).
National Instrument 81-102 Mutual Funds.
National Instrument 45-106 Prospectus and Registration Exemptions.
May 4, 2007
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
NORTHWOOD STEPHENS PRIVATE COUNSEL INC.
NSFC FIXED INCOME FUND
NSPC DIVIDEND INCOME FUND
NSPC CANADIAN EQUITY FUND
NSPC US EQUITY FUND
NSPC INTERNATIONAL EQUITY FUND
(the "NSPC Funds")
RULING AND ORDER
(Subsection 74(1) and Clause 121(2)(a)(ii) of the Act)
The Ontario Securities Commission (the "Commission") has received an application from Northwood Stephens on behalf of itself, the NSPC Funds and any pooled fund established and managed by Northwood Stephens after the date hereof (a "Future Fund", and together with the NSPC Funds, the "Funds", or individually a "Fund"), for:
(a) a ruling, pursuant to subsection 74(1) of the Act, that distributions of units of the Funds managed by Northwood Stephens to 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) will be exempt 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").
This Ruling and Order is based on the following facts represented by Northwood Stephens:
1. Northwood Stephens is incorporated under the laws of Ontario with its head office in Toronto.
2. Northwood Stephens is registered as an adviser in the categories of investment counsel and portfolio manager and as a limited market dealer with the Commission. Northwood Stephens is not registered in any jurisdictions outside of Ontario.
3. Northwood Stephens proposes to establish the NSPC Funds as open-end mutual fund trusts. Northwood Stephens will be the portfolio manager, administrative manager, and trustee of the NSPC Funds. The Future Funds will consist of open-end mutual fund trusts or limited partnerships for which Northwood Stephens will be appointed as portfolio manager, administrative manager, and trustee for each Future Fund that is formed as a trust.
4. The Funds fit, or will fit, within the definition of an "investment fund" under the Act. The Funds are not, and likely will not be, reporting issuers under the Act, and are, or will be, sold in Ontario under applicable exemptions from the prospectus and dealer registration requirements.
5. Northwood Stephens offers portfolio management and related financial advice and services, including investment consulting and discretionary investment management, to individual investors including wealthy families and foundations (each, a "Client") seeking wealth management or related services ("Managed Services") through a managed account ("Managed Account"). Pursuant to a written agreement ("Investment Management Agreement") between Northwood Stephens and the Client, Northwood Stephens 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 Northwood Stephens 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 an Investment Management Agreement whereby the Client authorizes Northwood Stephens to supervise, manage and direct purchases and sales, at Northwood Stephens' full discretion on a continuing basis;
(b) Northwood Stephens determines whether it is appropriate to delegate some or all of the portfolio management of a Client's Managed Account to a sub-advisor;
(c) if Northwood Stephens performs the portfolio management services for the Client, then Northwood Stephens' 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;
(d) each Managed Account holds securities as selected by Northwood Stephens or sub-advisor(s), as appropriate; and
(e) Northwood Stephens retains overall responsibility for the Managed Services provided to its Clients (including any portfolio management services provided by a sub-advisor) and has designated a senior officer to oversee and supervise the Managed Services.
8. Northwood Stephens' minimum aggregate balance for all the accounts of a client is $2,000,000. This minimum may be waived at Northwood Stephens' discretion. From time to time, Northwood Stephens may accept certain Clients for Managed Accounts with less than $2,000,000 under management.
9. Northwood Stephens 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, Northwood Stephens may agree to provide services to Clients who are not accredited investors ("Secondary Clients"). For purposes of this application, the Secondary Clients are Clients who are accepted by Northwood Stephens because of a relationship between the Secondary Client and a Primary Client, typically family members, including a spouse, parent, grandparent, child, or sibling of a Primary Client.
10. Primary Clients constitute the main source of business for Northwood Stephens and the business of Secondary Clients is incidental to the business of Primary Clients. The business of a Secondary Client is generally accepted by Northwood Stephens as a courtesy to the Primary Client.
Relief from the Dealer Registration and Prospectus Requirements
11. Investments in individual securities may not be appropriate in certain circumstances for Northwood Stephens' Clients. Northwood Stephens is proposing to create the NSPC Funds to give its Clients the benefit of asset diversification, access to investment products with very high minimum investment levels, and economies of scale regarding minimum commission charges on portfolio trades (in contrast to individual trades in each Managed Account).
12. To improve the diversification and cost benefits to its Clients in Managed Accounts, Northwood Stephens wishes to distribute units of the Funds without a minimum investment. These Clients would thereby be able to receive the benefit of Northwood Stephens' 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. Northwood Stephens wishes to be able to offer a Fund to a Secondary Client without being required to invest $150,000 in that Fund.
14. Northwood Stephens may also distribute units of the Funds pursuant to a subscription agreement to investors who do not have Managed Accounts pursuant to available exemptions from the dealer registration and prospectus requirements.
15. Accredited investors will own a significant majority of the Funds. Northwood Stephens anticipates that Secondary Clients would represent less than 10% of the investors in the Funds initially and that this number will decline over time as additional Primary Clients invest in the Funds.
16. Under the Investment Management Agreements between each Client and Northwood Stephens, Clients agree to pay Northwood Stephens a management fee based upon a percentage of assets under management in the Managed Account. Terms of the fees are detailed in each Client's Investment Management Agreement. None of the NSPC Funds will charge a management fee directly to investors.
17. Northwood Stephens may create Future Funds that charge a management fee directly to investors. Where Northwood Stephens invests on behalf of a Managed Account in Funds that would otherwise pay a management fee to Northwood Stephens 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.
18. There will be no commission payable by a Client on the sale of units of the Funds to a Managed Account and nor will referral fees be paid to a person or company in connection with the referral to Northwood Stephens of Clients that invest in units of a Fund through Managed Accounts.
19. Unless the requested relief is granted, Northwood Stephens will be prohibited from selling units of the Funds to 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.
Relief from the Self-Dealing Prohibition
20. Northwood Stephens 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 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, Northwood Stephens 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").
22. Northwood Stephens anticipates In Specie Transfers to occur 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.
23. The only costs which will be incurred by a Fund or Managed Account for an In specie Transfer are nominal administrative charges levied by the custodian of the Managed Account or Fund to record the trade and/or any commission charged by a dealer executing the trade.
24. None of the securities which are the subject of In Specie Transfers are or will be securities of related issuers of Northwood Stephens.
25. As Northwood Stephens 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 Northwood Stephens under the Act because Northwood Stephens serves, or will serve, as trustee of the Funds.
26. Unless the requested relief is granted, the Self-Dealing Prohibition will prohibit Northwood Stephens 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 Northwood Stephens is the trustee, as such Funds would each be an associate of Northwood Stephens.
Ruling and Order
The Commission being satisfied that the relevant tests contained in subsection 74(1) and clause 121(2)(a)(ii) of the Act have been met, the Commission:
1. rules, pursuant to subsection 74(1) of the Act, that relief from the Dealer Registration and Prospectus Requirements is granted in connection with the distribution of securities of the Funds to Managed Accounts provided that,
(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 investment funds from the Dealer Registration and Prospectus Requirements in the Act;
(b) this ruling shall only apply where the Secondary Client is, and in the case of clauses (iii) to (vi) below remains,
(i) an individual (of the opposite or same sex) who is or has been married to a Primary Client, or is living or has lived with a Primary Client in a conjugal relationship outside of marriage;
(ii) a parent, grandparent, child or sibling of either a Primary Client or the individual referred to in clause (i) above;
(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 Primary Client provided that
(A) in each instance, there are exceptional factors that have persuaded Northwood Stephens for business reasons to accept such close associate, employee or professional adviser as a Secondary Client and waive Northwood Stephens' minimum aggregate balance, and a record is kept and maintained of the exceptional factors considered; and
(B) the Secondary Clients acquired through such relationships to a Primary Client shall not at any time represent more than five percent of Northwood Stephens' total Managed Account assets under management; and
(c) Northwood Stephens does not receive any compensation in respect of a sale or redemption of securities of the Funds (other than redemption fees disclosed in the offering documents of the Funds), and Northwood Stephens does not pay a referral fee to any person or company who refers Secondary Clients who invest in securities of the Funds through Managed Accounts managed by Northwood Stephens.
2. orders, pursuant to clause 121(2)(a)(ii) of the Act, that the Self-Dealing Prohibition shall not apply to Northwood Stephens in connection with the payment of the purchase or redemption price of shares of a Fund by In Specie Transfers between the Managed Accounts and the Funds, provided that:
(a) in connection with the purchase of securities of any of the Funds by a Managed Account:
(i) Northwood Stephens obtains the prior written consent of the relevant Managed Account Client before it engages in any In Specie Transfers in connection with the purchase of securities;
(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 that Fund; and
(v) the account statement next prepared for the Managed Account includes a note describing the securities delivered to the Fund and the value assigned to such securities; and
(b) in connection with the redemption of securities of a Fund by a Managed Account:
(i) Northwood Stephens obtains 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 Investment Management Agreement with Northwood Stephens; and
(v) the account statement next prepared for the Managed Account includes a note describing the securities delivered to the Managed Account and the value assigned to such securities; and
(c) Northwood Stephens does not receive any compensation in respect of any sale or redemption of securities 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 charges paid by the Managed Account is the commission charged by the dealer executing the trade and/or any administrative charges levied by the custodian.