Under paragraph 4.1(1)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations a registered firm must not permit an individual to act as a dealing, advising or associate advising representative of the registered firm if the individual acts as an officer, partner or director of another registered firm that is not an affiliate of the first-mentioned firm. The firms require relief for a limited period of time. The individual will have sufficient time to adequately serve both firms. As one firm is largely inactive, conflicts of interest are unlikely to arise. The firms have policies in place to handle potential conflicts of interest. The firms are exempted from the prohibition.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 4.1, 15.1.
October 2, 2013
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
STUART INVESTMENT MANAGEMENT LIMITED
CORNERSTONE ASSET MANAGEMENT L.P.
JAMES THOMAS KIERNAN
(KIERNAN) (STUART, CORNERSTONE and KIERNAN
are, collectively, THE FILERS)
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for relief from the requirement in paragraph 4.1(1)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), pursuant to section 15.1 of NI 31-103, to permit James Thomas Kiernan, a director, officer, ultimate designated person (UDP), chief compliance officer (CCO), dealing representative and advising representative of Cornerstone, to be registered as a director, officer, UDP, CCO and dealing representative of Stuart, for a period of six months to facilitate the purchase of Stuart by Sunnyside Investments Inc. (Sunnyside) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta and British Columbia (with Ontario, the Jurisdictions).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filers:
1. Stuart is registered as an investment dealer in Alberta, British Columbia, Ontario and Quebec; as a derivatives dealer in Quebec and as a futures commission merchant in Ontario. It is in the process of surrendering its registrations as a derivatives dealer in Quebec and as a futures commission merchant in Ontario. Stuart is also a dealer member of the Investment Industry Regulatory Organization of Canada (IIROC). Stuart's head office is in Toronto, Ontario.
2. Stuart provides advisory and discretionary investment management services to retail clients and investment banking services to issuers and other corporate clients.
3. Cornerstone is registered as a commodity trading manager, exempt market dealer and portfolio manager in Ontario and as an exempt market dealer in Alberta and British Columbia. It is in the process of surrendering its registrations as a commodity trading manager and portfolio manager in Ontario. Cornerstone's head office is in Toronto, Ontario.
4. While Cornerstone has previously conducted exempt distributions, at present its only business is providing merger and acquisition advice to private companies for a fee. Cornerstone has no clients to whom it provides portfolio management services.
5. Kiernan is registered in Alberta, British Columbia, Ontario and Quebec as a director, officer, UDP, CCO, dealing representative and advising representative of Cornerstone and he is also registered as a director, officer, UDP, CCO and dealing representative of Stuart (the Dual Registration).
6. Kiernan is the controlling shareholder of Cornerstone Capital Partners L.P., which is the controlling shareholder of both Stuart and Cornerstone; therefore Stuart and Cornerstone are affiliates.
7. Kiernan and Cornerstone Capital Partners L.P. have entered into an agreement to sell all of the shares of Stuart to Sunnyside (the Proposed Acquisition).
8. On completion of the Proposed Acquisition, Cornerstone and Stuart will no longer be affiliates. In the absence of the Exemption Sought, Kiernan would be prohibited under paragraph 4.1(1)(a) of NI 31-103 from acting as a director, officer, UDP, CCO, dealing representative and advising representative of Cornerstone, while also acting as a director, officer, UDP, CCO and dealing representative of Stuart.
9. Kiernan has agreed to remain as a director, officer, UDP, CCO and dealing representative of Stuart for a period of six months after the Proposed Acquisition closes, after which Sunnyside and Kiernan will determine whether he will continue to be employed with Stuart. He may relinquish some of those positions on agreement with Sunnyside.
10. Cornerstone has agreed to terms and conditions being placed on its registration which include that:
(i) Cornerstone and all its registered individuals shall not engage in any registerable activities under securities law on Cornerstone's behalf.
(ii) Cornerstone must not open any new accounts.
(iii) Cornerstone must inform its clients in writing of the terms and conditions placed on the firm.
These terms and conditions will be in place until such time as Kiernan's registration status has been made compliant with paragraph 4.1(1)(a) of NI 31-103, whether through a permanent exemption or a change in his positions with Stuart or Cornerstone.
11. There is a valid business reason for the Dual Registration. By the end of the six-month contractual period, Kiernan will know whether he will remain longer with Stuart or will leave Stuart, in which case he will carry on with Cornerstone's business. The temporary exemption will also give him an opportunity to seek other solutions to the prohibition in paragraph 4.1(1)(a) of NI 31-103.
12. Kiernan will have sufficient time to adequately meet his obligations to both Stuart and Cornerstone.
13. Stuart and Cornerstone have in place policies and procedures to address any conflicts of interest that may arise as a result of the Dual Registration and the fact that Cornerstone will not engage in any registerable activities will facilitate this, by largely or entirely avoiding any conflicts of interest. Specifically, Kiernan is prohibited from contacting any client of Stuart regarding any transactions being conducted through Cornerstone and, therefore, Cornerstone deals will not be sold to Stuart clients.
14. Moreover, while the proposed purchasers will not be actively engaged in Stuart's business until they have attained the requisite proficiency and become registered, as a practical matter, they will have veto power over any major transactions undertaken by Stuart.
15. All new and existing clients of Stuart will receive conflicts of interest and shared premises disclosure.
16. Cornerstone will inform its clients in writing of the terms and conditions placed on the firm.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted. The Exemption Sought shall expire six months from the date hereof.