Gestion Placements Desjardins Inc. / Desjardins Investment Management 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 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.
Statutes Cited
Ontario Securities Act, ss. 53, 74(1).
Rules Cited
National Instrument 45-106 Prospectus and Registration Exemptions.
March 22, 2011
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
(the "Act")
AND
IN THE MATTER OF
GESTION PLACEMENTS DESJARDINS INC. /
DESJARDINS INVESTMENT MANAGEMENT INC.
(the "Filer")
RULING
(Subsection 74(1) of the Act)
Background
The Ontario Securities Commission (the "Commission") has received an application from the Filer, on behalf of the existing funds listed in Appendix A and any future funds to which the Filer will act as manager and portfolio manager (each a "Fund", and together the "Funds") for a ruling, pursuant to subsection 74(1) of the Act (the "Requested Relief"), that distributions of securities of the 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").
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 ruling.
Representations
This Ruling is based on the following facts represented by the Filer:
1. The Filer is a corporation established under the Quebec Companies Act with its head office in Montreal, Quebec.
2. The Filer is registered as a portfolio manager in Ontario, Quebec, New Brunswick, Alberta and British Columbia. It is also registered as an investment fund manager in Quebec. The Filer is not in default of securities legislation in any jurisdiction.
3. The Filer is the investment fund manager and portfolio manager of the 13 Funds listed in Appendix A. There are 11 Funds organized as an open-ended unincorporated mutual fund trusts and there are 2 funds organized as unit trusts. All Funds are established under the laws of Quebec. The Funds are not reporting issuers and are only sold pursuant to prospectus exemptions under the applicable securities laws of each Province.
4. The Filer primarily offers discretionary portfolio management services to individuals, corporations and other entities (each a "Client") seeking wealth management or related services through a managed account ("Managed Account"). The Filer will include investments in the Funds and in individual stocks. However, investments in individual securities may not be appropriate for clients with smaller managed accounts, since they may not receive the same asset diversification benefits. In addition, as a result of the minimum commission charges, they may incur disproportionately higher brokerage commissions relative to the clients with larger managed accounts.
5. The managed services are provided by employees of the Filer who meet the proficiency requirements of an advising representative (or associate advising representative) under National Instrument 31-103 Registration Requirements and Exemptions ("NI 31-103").
6. The Filer is able to rely on the exemption from the dealer registration requirement contained in section 8.6 of NI 31-103.
7. For smaller Clients the Filer only provides managed accounts through investments in its private funds. The Filer's normal minimum aggregate balance for the Managed Accounts of a smaller Client is $500,000. From time to time, the Filer may accept certain Clients with less than $500,000 under management due to other criteria. For example, the minimum balance may be waived when a Client has an established relationship with the Filer (or an affiliate of the Filer) through investments, insurance, banking or other financial services.
8. The Filer acts as portfolio manager to Clients who are "accredited investors" within the meaning of National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106"). A "Primary Managed Account" is defined as a Client that meets the minimum threshold and qualifies as an accredited investor under NI 45-106. However, the Filer also provides services to Clients who are not "accredited investors" ("Secondary Managed Accounts").
9. Primary Managed Account Clients each qualify as accredited investors under NI 45-106, Secondary Managed Account Clients do not qualify individually as accredited investors, and the $150,000 minimum investment exemption in NI 45-106 will not be available in all cases. Reliance upon the $150,000 minimum investment exemption available under NI 45-106 may not be appropriate for Secondary Managed Account Clients as it may lead to a high concentration in a single Fund.
10. Each Client who wishes to receive the investment management services of the Filer executes a written agreement (the "Discretionary Portfolio Management 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 Discretionary Portfolio Management Agreement further sets out how the Managed Account operates and informs the Client of the Filer's various rules, procedures and policies.
11. At the initial meeting between a new Client and an advising representative, the advising representative establishes the Client's general investment goals and objectives. These are then generally documented in a Personal Investment Policy ("PIP") 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 PIP is created to reflect those changes.
12. After the initial meeting, the advising representative offers to meet at least once per year with Clients (or more frequently as required) to review the performance of their account and their investment goals.
13. 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 Clients a statement of the portfolio securities and realized returns, and on a quarterly basis, a list of the transactions effected during the quarter. The advising representative is available to review and discuss with Clients all account statements.
14. The Filer has determined that to best fulfil its fiduciary duty to its Clients, a portion of the asset mix in each Client's portfolio should be invested in the Funds.
15. The operation and management of the 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. 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. Accordingly, in the absence of relief from the Prospectus Requirement, the Funds will be available only to Clients that are accredited investors in their own right or who are able to invest a minimum of $150,000 in a Fund.
17. The Filer wishes to distribute securities of the Funds to Secondary Managed Accounts. The Secondary Managed Account Client would thereby be able to receive the benefit of the Filer's investment management expertise.
18. None of the Funds charges or will charge a commission or a management fee directly to investors. Instead, under the Discretionary Portfolio Management Agreement 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 Discretionary Portfolio Management Agreement.
Ruling
The Commission being satisfied that the relevant test contained in subsection 74(1) of the Act has been met, the Commission rules that the Requested Relief is granted provided that:
(a) securities of the 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 a Filer after the date of this ruling that will invest in securities of one or more Funds through a Managed Account pursuant to this ruling, such Filer shall deliver to such Client prior to effecting a trade in securities of a 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.
Appendix A
Funds Managed by the Filer for use only in
discretionary managed accounts
Fixed Income Funds:
Canadian Equity Funds:
International Equity Funds:
Alternative Strategies Fund:
Balanced Funds: