Relief from the prospectus requirement of the Act to permit the distribution of pooled fund securities to managed accounts held by non-accredited investors on an exempt basis -- NI 45-106 contains a carve-out for managed accounts in Ontario which prohibits portfolio manager from making exempt distributions of securities of its proprietary pooled funds to its managed account clients in Ontario unless managed account client qualifies as accredited investor or invests $150,000 -- portfolio manager provides bona fide portfolio management services to high net worth clients -- not all managed account clients are accredited investors -- portfolio manager permitted to make exempt distributions of proprietary pooled funds to its managed accounts provided written notice is sent to clients advising them of the relief granted -- portfolio manager is restricted from distributing proprietary pooled fund securities to parties other than its managed account clients.
Applicable Legislative Provisions
Ontario Securities Act, ss. 53, 74(1).
National Instrument 45-106 Prospectus and Registration Exemptions.
October 19, 2010
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
AND IN THE MATTER OF
G.I. Capital Corp. (the Filer) AND ANY OPEN-END
MUTUAL FUNDS THAT ARE NOT REPORTING
ISSUERS ESTABLISHED BY THE FILER AND
FOR WHICH THE FILER ACTS OR WILL ACT AS
MANAGER, TRUSTEE (IF ESTABLISHED AS A
TRUST) AND PORTFOLIO MANAGER
(the G.I. Funds)
(Subsection 74(1) of the Act)
The Ontario Securities Commission (the Commission) has received an application from the Filer, on behalf of itself and the G.I. Funds, for a ruling pursuant to subsection 74(1) of the Act, that distributions of securities of the G.I. Funds to Managed Accounts of Clients (as defined below) for which the Filer provides discretionary investment management services will not be subject to the prospectus requirement under Section 53 of the Act (the Prospectus Requirement) (the Requested Relief).
Defined terms contained in the Act and in National Instrument 14-101 Definitions have the same meaning in this ruling unless they are defined in this ruling.
This ruling is based on the following facts represented by the Filer:
1. The Filer is incorporated under the laws of Ontario. Its head office is in Toronto, Ontario. The Filer is not in default of securities legislation in any jurisdiction.
2. The Filer is registered with the Commission as an adviser in the category of portfolio manager and as an exempt market dealer.
3. The Filer has applied to the Commission to become registered in the category of investment fund manager.
4. In addition to being their manager and portfolio manager, the Filer is or will be the trustee of G.I. Funds established as trusts. The G.I. Funds are and/or will be distributed pursuant to exemptions from the Prospectus Requirement.
5. The Filer offers investment management and financial counselling services primarily to high net worth individuals (each, a Client) each through a managed account (Managed Account).
6. The Filer's normal minimum aggregate balance for all the Managed Accounts of a Client is $250,000. This minimum may be waived at the Filer's discretion. From time to time, the Filer may accept certain Clients with less than $250,000 under management generally in order to solidify a client relationship with a view to growing the account over time.
7. The Filer generally acts as portfolio manager to Clients who are predominantly "accredited investors" within the meaning of National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106). However, from time to time, in limited circumstances (generally where despite a client not being an accredited investor, the client is still able to meet the minimum account balance of $250,000) the Filer may agree to provide services to Clients who are not "accredited investors".
8. All of the Managed Accounts are serviced by individual portfolio managers of the Filer who meet the proficiency requirements of an advising officer or advising representative (or associate advising officer or associate advising representative) under Ontario securities law.
9. Each Client who wishes to receive the investment management services of the Filer executes a written agreement (the Investment Counsel Agreement) whereby the Client appoints the Filer to act as portfolio manager in connection with an investment portfolio of the Client with full discretionary authority to trade in securities for the Managed Account without obtaining the specific consent of the Client to the trade. The Investment Counsel Agreement further sets out how the Managed Account operates and informs the Client of the Filer's various rules, procedures and policies.
10. At the initial meeting between a new Client and a portfolio manager, the portfolio manager establishes the Client's general investment goals and objectives, which are then generally documented in an investment objectives letter (IPS) that describes the strategies that the Filer will employ to meet these objectives and includes specific information on matters such as asset allocation, risk tolerance and liquidity requirements. To the extent that a Client's goals or circumstances have changed, a new IPS is created to reflect those changes.
11. After the initial meeting, the Filer's portfolio manager offers to meet at least once per year with his/her Clients (or more frequently as required) to review the performance of their account and their investment goals.
12. The custodian of each Client sends the Client a monthly statement showing all transactions carried out in their Managed Account during the month. On a monthly basis, the Filer sends its Clients a statement showing all holdings in their Managed Account and providing commentary on the investments contained in their Managed Account portfolio. The portfolio manager is available to review and discuss with Clients all account statements.
13. The Filer has determined that to best fulfill its fiduciary duty to its Clients, a portion of the asset mix in each Client's portfolio should be invested in the G.I. Funds.
14. One G.I. Fund has been established and additional G.I. Funds may be established by the Filer, in each case, with a view to achieving efficiencies in the delivery of portfolio management services to its Clients' Managed Accounts. The Filer is not and will not be paid any compensation with respect to the distribution of the G.I. Funds' securities to the Managed Accounts.
15. The operation and management of the G.I. Funds by the Filer is and will be incidental to the principal business activity of the Filer of providing personalized investment management services to Managed Account Clients.
16. Investments in individual securities may not be appropriate for the Clients with smaller Managed Accounts, since they may not receive the same asset diversification benefits and may, as a result of the minimum commission charges, incur disproportionately higher brokerage commissions relative to the Clients with larger Managed Accounts. In addition, the initial G.I. Fund invests in private mortgages which do not lend themselves to investments by individual investors, making the fund structure more appropriate for this asset class.
17. To give all of its Clients the benefit of asset diversification, access to investment products with a very high minimum investment threshold (or those not available otherwise than through a fund structure) and economies of scale on brokerage commission charges, the Filer proposes to cause its Clients, including those that do not qualify as "accredited investors", to invest in securities of the G.I. Funds, without the Client needing to invest a minimum of $150,000 in each G.I. Fund, subject to each Client's risk tolerance.
18. None of the G.I. Funds charges or will charge a commission or a management fee directly to investors. Instead, under the Investment Counsel Agreements between each Client and the Filer, the Client agrees to pay the Filer 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.
19. Each G.I. Fund pays or will pay all administration fees and expenses relating to its operation. If, in the future, the Filer charges management fees or performance fees to a G.I. Fund and the Filer invests, on behalf of a Managed Account, in securities of such G.I. Fund, the necessary steps will be taken to ensure that there will be no duplication of fees between a Managed Account and the G.I. Funds.
20. While a Managed Account qualifies as an "accredited investor" in each province and territory outside Ontario, NI 45-106 contains a carve out for Managed Accounts in Ontario when the securities being purchased by the Managed Account are those of an investment fund. Absent the Requested Relief, the G.I. Funds are prohibited in Ontario from distributing, and the Filer is effectively prohibited from investing in, securities of the G.I. Funds for the Managed Accounts, in reliance upon the "accredited investor" exemption in NI 45-106 in circumstances where the individual Client who is the beneficial owner of the Managed Account is not otherwise qualified as an "accredited investor". Reliance upon the $150,000 minimum investment exemption available under NI 45-106 may not be appropriate for smaller Managed Accounts as this might require a disproportionately high percentage of the account to be invested in a G.I. Fund.
21. Under the exempt distribution rule applicable in each province and territory outside Ontario, there is no restriction on the ability of Managed Accounts to purchase investment fund securities on an exempt basis. Under NI 45-106, a Managed Account in each province and territory outside Ontario can acquire securities of the G.I. Funds as an "accredited investor".
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 the Requested Relief from the Prospectus Requirement is granted in connection with the distribution of securities of the G.I. Funds to Clients provided that:
(a) securities of the G.I. Funds distributed pursuant to the relief from the Prospectus Requirement contained in this ruling shall only be distributed to Managed Accounts;
(b) for each Client that becomes a Client of the Filer after the date of this ruling that will invest in securities of one or more G.I. Funds through a Managed Account pursuant to this ruling, the Filer shall deliver to such Client, prior to effecting a trade in securities of a G.I. Fund in reliance on this ruling, written disclosure advising of:
(i) the nature of the relief granted under this ruling, and
(ii) the fact that the ruling permits the Client to invest in an investment fund product which the Client otherwise would not be allowed to invest in on an exempt basis through their Managed Account; and
(c) 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 Ontario in securities of investment funds from the Prospectus Requirement.