Securities Law & Instruments

Headnote

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

Rules Cited

National Instrument 45-106 Prospectus and Registration Exemptions.

August 28, 2007

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

(the "Act")

AND

IN THE MATTER OF

NEXUS INVESTMENT MANAGEMENT INC.

("Nexus")

AND

NEXUS NORTH AMERICAN BALANCED FUND

NEXUS NORTH AMERICAN EQUITY FUND

NEXUS NORTH AMERICAN INCOME FUND

(the "Nexus Funds")

 

RULING

(Subsection 74(1) of the Act)

Background

The Ontario Securities Commission (the "Commission") has received an application from Nexus on behalf of itself, the Nexus Funds and any pooled fund established and managed by Nexus after the date hereof (a "Future Fund", and together with the Nexus Funds, the "Funds", or individually a "Fund"), for a ruling, pursuant to subsection 74(1) of the Act, that Nexus will not be subject to the requirement to be registered as a mutual fund dealer under s. 25 of the Act (the "Dealer Registration Requirement") and the requirement to file and obtain a receipt for a prospectus under s. 53 of the Act (the "Prospectus Requirement") in connection with the distribution of units of the Funds to Managed Accounts (as defined below) of Secondary Clients (as defined below).

Representations

This Ruling and Order is based on the following facts represented by Nexus:

1. Nexus is a corporation incorporated on July 5, 1988 under the laws of the Province of Ontario with its principal place of business in Toronto.

2. Nexus is registered as an adviser in the categories of investment counsel and portfolio manager and as a limited market dealer with the Commission. Nexus is also registered as an adviser in British Columbia, Alberta and Quebec.

3. Nexus has established the Nexus Funds as open-end mutual fund trusts offered pursuant to exemptions from the prospectus and, where available, registration requirements. Nexus will be the manager and portfolio manager of the Nexus Funds. RBC Dexia Investor Services Trust is the trustee of the Nexus Funds. The Future Funds will consist of open-end mutual fund trusts for which Nexus will be the manager and portfolio manager.

4. Nexus offers investment management and financial counselling services, primarily to high net worth individuals (each, a "Client").

5. Each Client who wishes to receive the investment management services of Nexus executes a written agreement (the "Investment Counsel Agreement") whereby the Client appoints Nexus to act as portfolio manager in connection with an investment portfolio of the Client with full discretion (a "Managed Account").

6. Nexus's normal minimum aggregate balance for all the accounts of a client is $250,000. This minimum may be waived at the Nexus's discretion. From time to time, Nexus may accept certain Clients for Managed Accounts with less than $250,000 under management.

7. Nexus generally acts as portfolio manager 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, Nexus 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 Nexus 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.

8. Primary Clients constitute the main source of business for Nexus and the business of Secondary Clients is incidental to the business of Primary Clients. The business of a Secondary Client is generally accepted by Nexus as a courtesy to the Primary Client.

9. Investments in individual securities may not be appropriate in certain circumstances for Nexus's Clients, especially Secondary Clients, since they may not receive the same asset diversification benefits and may incur disproportionately higher brokerage commissions relative to large Managed Accounts.

10. To improve the diversification and cost benefits to its Clients in Managed Accounts, Nexus wishes to distribute units of the Funds without a minimum investment. These Clients would thereby be able to receive the benefit of Nexus'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.

11. Nexus wishes to be able to offer a Fund to a Secondary Client without requiring the Secondary Client to invest $150,000 in that Fund.

12. Accredited investors will own a significant majority of the Funds. Managed Accounts of Secondary Clients will represent less than 10% of Nexus' total Managed Account assets under management.

13. Under the Investment Counsel Agreements between each Client and Nexus, Clients agree to pay Nexus 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 Counsel Agreement. None of the Nexus Funds will charge a commission or a management fee directly to investors.

14. Unless the requested relief is granted, Nexus will be prohibited from selling units of the Funds to Managed Accounts where the Client resides in Ontario and is not an accredited investor and does not invest a minimum of $150,000 in each Fund.

Ruling

The Commission being satisfied that the relevant test contained in subsection 74(1) of the Act have been met, the Commission rules, pursuant to subsection 74(1) of the Act, that relief from the Dealer Registration Requirement and the Prospectus Requirement is granted in connection with the distribution of securities of the Funds to Managed Accounts of Secondary Clients 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 (v) 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 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 Nexus for business reasons to accept such close associate, employee or professional adviser as a Secondary Client and waive Nexus' 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 Nexus' total Managed Account assets under management;

(c) Nexus does not receive any compensation in respect of a sale or redemption of securities of the Funds, and Nexus 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 Nexus;

(d) Nexus remains registered under the Legislation as an adviser in the categories of "investment counsel" and "portfolio manager" (or the equivalent) and as a dealer in the category of "limited market dealer" (or the equivalent) and will comply with the duties and obligations of such registration in connection with any trade made to Managed Accounts of Secondary Clients.

"James E. A. Turner"
Vice-Chair
 
"Wendell S. Wigle"
Commissioner