Celernus Investment Partners Inc. -- s. 74(1)
Headnote
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 containing carve-out for managed accounts in Ontario prohibiting 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 -- distributions to Secondary Managed Account holders limited to family members and 0.5% of AUM for non-family members.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53, 74(1).
Rules Cited
National Instrument 45-106 Prospectus and Registration Exemptions.
National Instrument 31-103 Registration Requirements and Exemptions.
July 24, 2012
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED
(the "Act")
AND
IN THE MATTER OF
CELERNUS INVESTMENT PARTNERS INC.
(the "Filer")
AND
ANY OPEN-ENDED MUTUAL FUNDS THAT ARE NOT REPORTING ISSUERS
ESTABLISHED BY THE FILER AND FOR WHICH THE FILER ACTS OR WILL ACT
AS INVESTMENT FUND MANAGER, TRUSTEE
(IF ESTABLISHED AS A TRUST) AND PORTFOLIO MANAGER
(the "Celernus Funds", and individually, a "Fund")
RULING
(Subsection 74(1) of the Act)
Background
The Filer has applied to the Ontario Securities Commission (the "Commission") on behalf of itself and the Celernus Funds, for a ruling pursuant to subsection 74(1) of the Act, that distributions of securities of the Celernus Funds to Secondary Managed Accounts (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").
Interpretation
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 decision.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is incorporated under the laws of the province of Ontario. Its head office is in Toronto, Ontario.
2. The Filer is registered with the Commission in the categories of Portfolio Manager and Investment Fund Manager.
3. The Filer is currently the investment fund manager and portfolio manager of one open-ended mutual fund which is not a reporting issuer, and in the future, proposes to act as the investment fund manager, portfolio manager and/or trustee of additional open-ended mutual funds which are not reporting issuers. The Celernus Funds are, and will be, distributed pursuant to exemptions from the Prospectus Requirement.
4. The Filer and the Celernus Fund are not in default under the securities legislation in any province or territory of Canada.
5. The Filer offers investment management and financial counseling services primarily to high net worth individuals qualifying as "accredited investors", as such term is defined in National Instrument 45-106 -- Prospectus and Registration Exemptions ("NI 45-106") (each such account hereinafter referred to as a "Primary Managed Account", and each such client herein referred to as a "Primary Managed Account Client"), or in reliance on another exemption from the Prospectus Requirement, such as the $150,000 exemption in NI 45-106.
6. The Filer's normal minimum aggregate balance for all of the Primary Managed Accounts of a Primary Managed Account Client is $250,000. This minimum will not be waived unless the Primary Managed Account Client is an "accredited" investor.
7. From time to time, the Filer may accept certain clients with less than $250,000 under management generally in order to solidify a Primary Managed Account Client relationship ("Secondary Managed Account Clients"). Such Secondary Managed Account Clients consist of family members or personal or business associates of Primary Managed Account Clients. Assets managed by the Filer for Secondary Managed Account Clients are incidental to the assets it manages for holders of Primary Managed Accounts. Managed accounts where the minimum aggregate balance has been waived for the reasons given above are hereinafter referred to as "Secondary Managed Accounts". Together, the Primary Managed Accounts and the Secondary Managed Accounts are referred to in this Application as the "Managed Accounts".
8. While the holders of the Primary Managed Accounts each qualify as accredited investors under Ontario securities law, the holders of the Secondary Managed Accounts do not always themselves qualify as accredited investors under Ontario securities law, nor do their investments meet the minimum investment threshold set out in NI 45-106. The Filer will typically service these Secondary Managed Account Clients as a courtesy to its Primary Managed Account Clients.
9. 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.
10. NI 45-106 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. Accordingly, in the absence of relief from the Prospectus Requirement, the Celernus 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 the Funds, or may cause the Filer's portfolio manager to invest more of a Secondary Managed Account Client's portfolio in such a Fund than it might otherwise prefer to allocate.
11. To improve the diversification and cost benefits to Secondary Managed Account Clients, the Filer wishes to distribute securities of the Celernus Funds to Secondary Managed Accounts without a minimum investment. The Secondary Managed Account Client would 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.
12. All of the Managed Accounts are, and will be, 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.
13. Each Primary Managed Account Client and Secondary Managed Account Client (together herein referred to as a "Client") 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.
14. 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 is then documented in an investment objectives letter ("IPS") that describes the strategies that the Filer will employ to meet these objectives and include 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 will be created to reflect those changes.
15. After the initial meeting, the Filer's portfolio manager meets 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.
16. 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 provides commentary on the investments contained in their Managed Account portfolio. The portfolio manager is available to review and discuss with Clients all account statements.
17. 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 Celernus Funds.
18. One Fund has been established and additional 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 has not and will not be paid any compensation with respect to the distribution of the Celernus Funds' securities to the Managed Accounts.
19. The operation and management of the Celernus 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.
20. The Filer will receive from each Fund an advisory fee, equal to 0.85% of the net asset value of the Fund, calculated and paid monthly. In addition, the Filer may earn and charge to each Fund a performance fee equal to 20% of the change in net assets between a new high water mark and the previous high water mark for which a performance fee was earned by the Manager and charged to the Fund. A performance fee will only be earned at such time as the compound annual return of the Fund is is greater or equal to 6%. The Filer will not charge a Client a duplicate fee in these circumstances as the investments in the Funds will be excluded from fee calculations for the Managed Account.
21. Each Fund 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 Fund and the Filer invests, on behalf of a Managed Account, in securities of such Fund, the necessary steps will be taken to ensure that there will be no duplication of fees between a Managed Account and the Celernus Funds.
22. 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 Celernus Funds are prohibited in Ontario from distributing, and the Filer is effectively prohibited from investing in, securities of the Celernus 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 Fund.
23. 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 Celernus Funds as an "accredited investor".
Ruling
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 Celernus Funds to Clients 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 an investment 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) either a personal or 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 personal or business associate, employee or professional adviser as a Secondary Managed Account Client, and a record is kept and maintained of the exceptional factors considered;
(B) the Primary Managed Account Client is an "accredited investor"; and
(C) the personal or business associates, employees and professional advisers to holders of Primary Managed Accounts shall not, at any time, represent more than one half of one percent (0.5%) 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 securities of the Celernus 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 securities of the Celernus Funds in reliance on this Ruling.