Relief from the prospectus requirement of the Securities Act (Ontario) to permit the distribution of pooled fund securities to certain managed accounts held by non-accredited investors on an exempt basis - NI 45-106 containing carve-out for managed accounts in Ontario prohibiting portfolio manager from making exempt distributions of securities of its proprietary funds to its managed account clients in Ontario unless managed account client qualifies as accredited investor or invests $150,000 - portfolio manager providing bona fide portfolio management services to high net worth clients - not all managed account clients are accredited investors.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53, 74(1), 144(1).
National Instrument 45-106 Prospectus and Registration Exemptions.
National Instrument 81-102 Mutual Funds.
May 27, 2011
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, C. S.5, AS AMENDED
IN THE MATTER OF
DAVIS-REA BALANCED POOLED FUND
(the Existing Fund)
(Subsections 74(1) and 144(1) of the Act)
The Ontario Securities Commission (the Commission) has received an application from the Filer, on its own behalf, and on behalf of the Existing Fund and any other pooled fund that the Filer may establish and manage in the future as part of the Davis-Rea Pooled Funds (the Future Funds and together with the Existing Fund, the Funds) for a ruling pursuant to Subsections 74(1) and 144(1) of the Act:
(a) to revoke the Previous Ruling (defined below); and
(b) for a ruling that distributions of units of the Funds to Secondary Managed Accounts (defined below) of clients for which the Filer provides discretionary investment management services will not be subject to the prospectus requirements (the Prospectus Requirements) in section 53 of the Act.
Terms defined in National Instrument 14-101 Definitions have the same meaning if used in this ruling, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of Ontario and has its head office in Toronto, Ontario. The Filer is registered as a portfolio manager, as an exempt market dealer and as an investment fund manager in Ontario. The Filer is also registered as a portfolio manager in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, Nova Scotia and Prince Edward Island.
2. Each Fund is, or will be, an open-end mutual fund trust established under the laws of the Province of Ontario, and is, or will be, a "mutual fund" under the Act. The Existing Fund is not, and no Future Fund will be, a reporting issuer under the Act.
3. The Filer is or will be the manager, portfolio advisor and principal distributor of each Fund.
4. The Funds will be sold on an exempt basis to investors in Ontario pursuant to applicable exemptions from the Prospectus Requirements (e.g., the accredited investor exemption or the $150,000 exemption in National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106)).
5. The Filer provides discretionary investment management services (Managed Services) to clients pursuant to managed account agreements between such clients and the Filer (each a Managed Account Agreement). Pursuant to a Managed Account Agreement, each client, in accordance with its investment objectives, authorizes the Filer to manage that client's investment portfolio on a fully-discretionary basis, which depending on its size, may be managed by the Filer on a segregated account basis or invested in one or more of the Funds.
6. The Managed Services are provided by employees of the Filer who are registered under Ontario securities law to provide advice on securities to clients.
7. 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 that client's Managed Account (defined below);
(c) each Managed Account holds securities as selected by the Filer, including where appropriate units of one or more of the Funds; and
(d) the Filer retains overall responsibility for the Managed Services provided to each client and has designated a senior officer to oversee and supervise such Managed Services.
8. The Filer's minimum aggregate balance for all the managed accounts of a client is usually $250,000 (each a Primary Managed Account). From time to time, the Filer will accept a person as a client who does not meet this minimum threshold if there are exceptional factors that have persuaded the Filer for business reasons to accept such person as a client and to waive its usual minimum aggregate balance.
9. Most of the holders of the Primary Managed Accounts investing in units of one or more of the Funds will qualify as an accredited investor (as such term is defined in NI 45-106) or will rely on another exemption such as the $150,000 exemption in NI 45-106.
10. From time to time, the Filer may provide Managed Services to clients with less than $250,000 under management, which will usually consist of family members of Primary Managed Account clients (the Secondary Managed Accounts, and together with the Primary Managed Accounts, the Managed Accounts). The assets managed by the Filer for such family members are incidental to the assets the Filer manages for the holder of the applicable Primary Managed Account.
11. The holders of Secondary Managed Accounts do not always qualify as an accredited investor. The Filer typically services the Secondary Managed Account clients as a courtesy to its Primary Managed Account clients.
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. NI 45-106 currently does not recognize a portfolio manager acting on behalf of a managed account in Ontario as being an accredited investor if that account is acquiring a security of an investment fund. In the absence of relief from the Prospectus Requirements, the Funds will be available only to clients that are accredited investors in their own right or are able to invest a minimum of $150,000 in a Fund in accordance with the requirements of NI 45-106. These requirements either act as a barrier to Secondary Managed Account clients investing in a Fund, or may cause the Filer to invest more of a Secondary Managed Account client's portfolio in such a Fund than it might otherwise prefer to allocate.
14. To improve the diversification and cost benefits to Secondary Managed Account clients, the Filer wishes to distribute units 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 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.
15. Managed Services provided by the Filer under a Managed Account Agreement are usually 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 recordkeeping. The terms of the Base Management Fee are detailed in the Managed Account Agreement.
16. When the Filer invests on behalf of a Managed Account in units of one or more of the Funds, which would otherwise pay a management fee to the Filer as manager, the Managed Account will purchase units of a class of the applicable Fund(s) 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(s) are paid directly to the Filer, pursuant to the Managed Account Agreements.
17. There will be no commission payable by a client on the sale of units of a Fund(s) to a Secondary 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(s).
18. Pursuant to a decision of the Commission dated January 16, 2009 (the Previous Ruling), the Commission granted relief to the Filer and the Funds from the Prospectus Requirements in connection with a distribution of units of the Funds to Secondary Managed Accounts, subject to certain conditions.
The Commission being satisfied that the relevant tests contained in Subsections 74(1) and 144(1) of the Act have been met, the Commission:
1. revokes the Previous Ruling; and
2. rules that relief from the Prospectus Requirements is granted in connection with the distribution of units of the Funds to Secondary 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 in a security of a mutual fund to a fully managed account from the Prospectus Requirements;
(b) this Ruling will only apply with respect to a Secondary Managed Account, 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) 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 holder of a Primary Managed Account provided that:
(A) there are exceptional 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 exceptional factors considered; and
(B) the Secondary Managed Account clients acquired through such relationships to holders of Primary Managed Accounts shall not at any time represent more than five percent of the Filer's total Managed Account assets under management; and
(c) the Filer does not receive any compensation in respect of the sale or redemption of units of the Funds, including any redemption fees, 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.