Relief from the 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.
Applicable Legislative Provisions
Securities Act, R.S.O., c. S.5, as am., ss. 25, 53, 74(1).
National Instrument 81-102 Mutual Funds.
National Instrument 45-106 Prospectus and Registration Exemptions.
October 2, 2007
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
NEWPORT INVESTMENT COUNSEL INC.
THE NEWPORT FIXED INCOME FUND,
THE NEWPORT CANADIAN EQUITY FUND,
THE NEWPORT GLOBAL EQUITY FUND
AND THE NEWPORT YIELD FUND
(together, the "Existing Funds")
(Subsection 74(1) of the Act)
The Ontario Securities Commission (the "Commission") has received an application from the Filer, on behalf of itself, the Existing Funds, and any other funds established in the future from time to time (the "Future Funds", and collectively with the Existing Funds the "Funds") for 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").
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
2. The Filer is registered as an adviser in the categories of investment counsel and portfolio manager or their equivalent in Ontario, British Columbia, Alberta, Saskatchewan, New Brunswick, Nova Scotia, Newfoundland and Labrador and Prince Edward Island and is also registered in Ontario as a dealer in the category of limited market dealer. The Filer has applied to the Manitoba Securities Commission to become registered in the categories of Adviser and Portfolio Manager in Manitoba.
3. The Filer engages in a number of advisory activities, including as an investment counsel and/or portfolio manager for its clients and as manager of the Existing Funds.
4. The Filer is, or will be, the manager, trustee and principal distributor for each of the Funds.
5. Each of the Funds is or will be an open-ended mutual fund trust established under the laws of the Province of Ontario. Each of the Funds is or will be a "mutual fund" under the Act.
6. The Existing Funds are currently "reporting issuers" in the Jurisdictions and therefore subject to the provisions of National Instrument 81-102 -- Mutual Funds. Units of the Funds are qualified for distribution under a simplified prospectus and annual information form dated June 21, 2007, filed in each of the Jurisdictions. The Existing Funds have sought to be deemed to cease to be reporting issuers as of September 30, 2007 pursuant to an MRRS application filed in certain provinces and the Future Funds will not be reporting issuers in any Province or Territory in Canada. The Funds are or will be sold under applicable exemptions from the Dealer Registration and Prospectus Requirements.
7. The Filer offers personal and corporate wealth management services ("Managed Services") to individuals and families under the terms of discretionary managed account agreements ("Managed Account Agreements") which provide the Filer with full discretionary authority over such clients' accounts. The Filer also advises certain clients on a non-discretionary basis.
8. The Managed Services are provided by employees of the Filer who meet the proficiency requirements of a portfolio manager under Ontario securities law.
9. The Managed Services consist of the following:
(a) each client who accepts Managed Services executes a Managed Account Agreement whereby the client authorizes the Filer to supervise, manage and direct purchases and sales, at the Filer's full discretion, on a continuing basis;
(b) the Filer'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 Filer; and
(d) the Filer retains overall responsibility for the Managed Services provided to its clients and has designated a senior officer to oversee and supervise the Managed Services.
10. From September 30, 2007 onward, unitholders in the Funds may be comprised of persons from the following categories:
(a) Investors who qualify as "accredited investors", as defined in National Instrument 45-106 - Prospectus and Registration Exemptions ("NI 45-106");
(b) Investors who have entered into a Managed Account Agreement with the Filer, making the Filer the accredited investor pursuant to paragraph (q) of the "accredited investor" definition in NI 45-106;
(c) Investors who qualify under the "minimum amount investment" exemption under section 2.10 of NI 45-106; and
(d) Employees of the Filer.
(Clients referred to in subparagraphs 10(a) are hereinafter referred to as "Primary Managed Accounts".)
11. In addition, from September 30, 2007 onward, the Filer would like to have certain clients who do not or will not qualify as accredited investors under NI 45-106 or whose investments do not meet the minimum investment amount threshold set out in NI 45-106 or who are not employees of the Filer invest in the Funds. Such clients would consist of family members of Primary Managed Accounts and other persons who have a relationship with a Primary Managed Account, where there are exceptional factors that have persuaded the Filer for business reasons to accept such persons as clients.
(Clients referred to in this paragraph that have entered into a Managed Account Agreement with the Filer are referred to as "Secondary Managed Accounts" and, together with the Primary Managed Accounts, are referred to as the "Managed Accounts".)
12. The Filer's minimum aggregate balance for all the accounts of a client is $1,000,000. This minimum may be waived at the Filer's discretion, and the Filer may accept at any time clients for Managed Accounts with less than $1,000,000 under management.
13. The Filer would service the Secondary Managed Account clients as a courtesy to its Primary Managed Account clients. Primary Managed Accounts constitute the main source of business for the Filer and the Secondary Managed Accounts are incidental to the Primary Managed Accounts.
14. Investments in individual securities may not be appropriate in certain circumstances for the Filer's clients. The Filer is proposing to continue the Existing Funds and create Future 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).
15. To improve the diversification and cost benefits to its clients in Managed Accounts, the Filer wishes to distribute units of the Funds without a minimum investment. These Managed Account clients would thereby be able to receive the benefit of the Filer'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. The Filer does not, and will not, and the Funds do not, and will not, charge a management fee to Managed Accounts in respect of investments on behalf of Managed Accounts in Funds, as the Filer is paid a management fee from the Funds. Accordingly, there will be no duplication of fees between a Managed Account and the Funds.
17. There will be no commission payable by a client on the purchase or redemption of units of the Funds to a Managed Account, nor will referral fees be paid by the Filer to a person or company in connection with the referral to the Filer of Secondary Managed Account clients that invest in units of a Fund.
18. NI 45-106 excludes 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.
The Commission being satisfied that the relevant test contained in subsection 74(1) of the Act has been met, the Commission rules pursuant to subsection 74(1) of the Act that relief from the Dealer Registration and Prospectus Requirements is granted in connection with the distributions of units of the Funds to Secondary Managed Accounts provided that,
(a) this decision will terminate upon the coming into force of any legislation or rule exempting a trade in a security of a mutual fund to a fully managed account from the Dealer Registration and Prospectus Requirements in the Act;
(b) this decision shall only apply with respect to a Secondary Managed Account referred to in paragraph 11 where the holder of the Secondary Managed Account is:
(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, provided that:
(1) there are factors that have persuaded the Filer for business reasons to accept such close business associate, employee or professional adviser as a Secondary Managed Account Client, and a record is kept and maintained of the 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 the Filer's total Managed Account assets under management;
(c) the Filer does not receive any compensation in respect of a sale or redemption of units of the Funds (other than redemption fees disclosed in the offering documents of the Funds) and the Filer does not pay a referral fee to any person or company who refers Secondary Managed Account clients who invest in units of the Funds.
"Harold H. Hands"
"Paul K. Bates"