Cumberland Private Wealth Management Inc. et al.
Headnote
Relief from the prospectus requirements of the Act to permit the distribution on an exempt basis of pooled fund securities to managed accounts held by non-accredited investors - Non-accredited investors are specified family members or indirectly connected to core managed account clients that are accredited investors - ss. 53 and 74(1) of Securities Act (Ontario).
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.
May 18, 2007
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990. c. s.5, AS AMENDED (the Act)
AND
IN THE MATTER OF
CUMBERLAND PRIVATE WEALTH MANAGEMENT INC.
(CPWM),
CUMBERLAND INVESTMENT MANAGEMENT INC.
(CIMI) (CPWM and CIMI, collectively, the Filers)
AND
CUMBERLAND OPPORTUNITIES FUND
(the Opportunities Fund)
RULING
Background
The Ontario Securities Commission (the Commission) has received an application (the Application) from the Filers on behalf of themselves and the Opportunities Fund and any pooled fund established and managed by CIMI after the date hereof (a Future Cumberland Pooled Fund, and together with the Opportunities Fund, the Cumberland Pooled Funds), for a ruling pursuant to subsection 74(1) of the Act, that distributions of units of the Cumberland Pooled Funds to Secondary Managed Accounts (as defined below) will not be subject to the prospectus requirements under section 53 of the Act (the Prospectus Requirements).
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filers:
1. CPWM is a corporation organized under the Business Corporations Act (Ontario). CPWM is registered as an investment dealer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia, Prince Edward Island and Newfoundland and Labrador. CPWM is a member of the Investment Dealers Association of Canada.
2. CIMI is a corporation organized under the Business Corporations Act (Ontario). It is not a registrant in any jurisdiction.
3. The Filers are "affiliates" as defined in National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106").
4. Each of the Cumberland Pooled Funds is or will be an open-end mutual fund trust established under the laws of the Province of Ontario. The Opportunities Fund is, and the Future Cumberland Pooled Funds will each be, a "mutual fund" under the Act. The Opportunities Fund is not, and the Future Cumberland Pooled Funds will each not be, a reporting issuer under the Act.
5. CIMI is or will be the manager and trustee of the Cumberland Pooled Funds. CPWM is or will be the portfolio advisor and principal distributor of the Cumberland Pooled Funds. From time to time CIMI may engage CPWM to enter into a sub-advisory agreement for one or more of the Cumberland Pooled Funds.
6. All of the investors in the Cumberland Pooled Funds (the Accountholders) will be clients of CPWM who have entered into a discretionary investment management agreement (Managed Account Agreements) with CPWM. The Cumberland Pooled Funds may redeem units held by persons who have ceased to be clients of CPWM.
7. CPWM provides discretionary investment management services (Managed Services) to clients pursuant to the Managed Account Agreements between the clients and CPWM. Pursuant to the Managed Account Agreement the client authorizes CPWM to supervise, manage and direct purchases and sales, at CPWM's full discretion on a continuing basis. Based on the size of the assets of the clients and depending on the allocation of a client's assets to a particular asset class, CPWM either manages the client's assets on a segregated account basis or invests the client's assets in a fund managed by CIMI.
8. Pursuant to the Managed Account Agreements with its clients, CPWM has full authority to provide its investment management services, including investing clients in mutual funds for which CPWM is the portfolio advisor and changing those funds as CPWM determines in accordance with the mandate of the clients.
9. The Managed Services are provided by employees of CPWM who are registered under the Securities Legislation of the applicable Jurisdiction to trade in securities. CPWM acts as an advisor without registration under applicable securities legislation in Ontario in accordance with the requirements of Section 3.8 of NI 45-106.
10. The Managed Services consist of the following:
(a) each client who accepts Managed Services executes a Managed Account Agreement whereby the client authorizes CPWM to supervise, manage and direct purchases and sales, at the CPWM's full discretion on a continuing basis;
(b) CPWM'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 CPWM, including units of the Cumberland Pooled Funds; and
(d) CPWM retains overall responsibility for the Managed Services provided to its clients and has designated a senior officer to oversee and supervise the Managed Services.
11. CPWM's minimum aggregate balance for all the managed accounts of a client is $500,000. From time to time, CPWM will accept a client who does not meet this minimum threshold if there are exceptional factors that have persuaded CPWM for business reasons to accept such persons as clients and waive the minimum aggregate balance. Managed accounts of a client which on aggregate satisfy the minimum balance requirement are hereinafter referred to as Primary Managed Accounts.
12. Most of the holders of the Primary Managed Accounts investing in the Opportunities Fund and any Future Cumberland Pooled Fund qualify as accredited investors under NI 45-106.
13. From time to time, CPWM may provide Managed Services to clients with less than $500,000 under management. Such clients consist of family members of Primary Managed Account Clients. Assets managed by CPWM for the family members 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 hereinafter referred to as the Managed Accounts.
14. The holders of Secondary Managed Accounts do not always themselves qualify as accredited investors under NI 45-106. CPWM typically services these Secondary Managed Account clients as a courtesy to its Primary Managed Account clients.
15. 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.
16. Unless relief from the Prospectus Requirements is granted, the Cumberland Pooled Funds will be available only to clients that are accredited investors or are able to invest a minimum of $150,000 ("Private Placement Minimum") in a Cumberland Pooled 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 Cumberland Pooled Funds, or may create a potential conflict for a CPWM portfolio manager in considering whether to invest more of a Secondary Managed Account client's portfolio in a Cumberland Pooled Fund than the portfolio manager might otherwise consider.
17. To improve the diversification and cost benefits to Secondary Managed Account clients whose assets under management are not enough to replicate CPWM's model portfolios on a discretionary basis with appropriate diversification, CPWM wishes to distribute units of the Cumberland Pooled Funds to Secondary Managed Accounts, without requiring that the client either be an accredited investor or invest the Private Placement Minimum. The Secondary Managed Account client would thereby be able to receive the benefit of CPWM'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.
18. Managed Services provided by CPWM under a Managed Account Agreement are 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 record-keeping. The terms of the Base Management Fee are detailed in the Managed Account Agreement. In some cases in addition to the Base Management Fee CPWM charges clients, a Cumberland Pooled Fund may charge a performance fee. Clients are asked, in accordance with current securities law requirements, to specifically acknowledge and agree that a performance fee is payable by a Cumberland Pooled Fund prior to Cumberland causing the client's assets to be invested in units of a Cumberland Pooled Fund where a performance fee might be payable. In such cases a subscription agreement is used to approve the transaction and acknowledge the performance fee.
19. The Cumberland Pooled Funds will be sold in Ontario under applicable exemptions from the Prospectus Requirements with CPWM acting as the dealer on the trades in units of the Cumberland Pooled Funds.
20. There will be no commission payable by a client on the sale of units of the Cumberland Pooled Funds to a Managed Account.
21. In Ontario only, CPWM is not considered to be an accredited investor in respect of a Cumberland Pooled Fund for the purposes of the accredited investor exemption available under NI 45-106. In subsection 1.1(q) of NI 45-106 the term "accredited investor" is defined to include "a person acting on behalf of a fully managed account managed by the person, if that person
(i) is registered or authorized to carry on business as an adviser or the equivalent under the securities legislation of a jurisdiction of Canada or a foreign jurisdiction, and
(ii) in Ontario, is purchasing a security that is not a security of an investment fund".
As a result of paragraph (ii) of this definition, a distribution of securities of a Cumberland Pooled Fund to a Managed Account in Ontario is not exempt from the Prospectus Requirements of the Act.
22. Unless relief is granted from the Prospectus Requirements, CPWM will be prohibited from selling units of a Cumberland Pooled Fund to a Secondary Managed Account where the client is not an accredited investor or where the client is investing not less than the Private Placement Minimum in the Cumberland Pooled Fund.
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 relief from the Prospectus Requirements is granted in connection with the distribution of units of the Cumberland Pooled 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) his Ruling shall only apply where the holder of the Secondary Managed Account is, and in the case of clauses (iii) to (v) 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, grandchild 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; or
(v) a private foundation controlled by an individual referred to in clause (i) or (ii) above; and
(c) CPWM does not receive any compensation in respect of a sale or redemption of units of the Cumberland Pooled Funds (other than redemption fees disclosed in the offering documents of the Cumberland Pooled Funds) and CPWM does not pay a referral fee to any person or company who refers Secondary Managed Account clients who invest in units of the Cumberland Pooled Funds.