Gluskin Sheff + Associates Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) -- relief from the requirement in section 11.2 of NI 31-103 to designate an individual to be the ultimate designated person (UDP), and instead be permitted to designate two individuals as UDPs in respect of two distinct operational divisions of the Filer.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 11.2 and 15.1.
November 22, 2022
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF GLUSKIN SHEFF + ASSOCIATES INC. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for relief, pursuant to section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), from the requirement contained in section 11.2 of NI 31-103 to designate an individual to be the ultimate designated person (UDP) and instead permit the Filer to designate and register two individuals as UDP in respect of two distinct lines of securities business of the Filer (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 Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in all of the jurisdictions in Canada outside of Ontario (together with the Jurisdiction, the Filing Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under the laws of Ontario with its head office located in Toronto, Ontario.
2. The Filer is registered in each of the provinces and territories as a portfolio manager (other than Prince Edward Island and Nunavut) and as an exempt market dealer (other than Prince Edward Island, Nunavut and the Yukon) and is registered in Ontario, Quebec and Newfoundland and Labrador as an investment fund manager. The Filer is also registered in Ontario as a commodity trading manager. Additionally, the Filer is regulated as an investment advisor by the U.S. Securities and Exchange Commission.
3. The Filer is wholly owned by Onex Corporation. Onex Corporation was founded in 1984 by Gerry Schwartz to make private equity investments in companies located primarily in North America and today operates from offices located in Toronto (established in 1984), New York (established in 1986), New Jersey (established in 2007) and London (established in 2012). Onex Corporation shares trade on the Toronto Stock Exchange under the stock symbol ONEX.
4. The Filer is not in default of any requirements of securities legislation in any jurisdiction of Canada.
Operational Structure
5. The Filer operates two distinct lines of securities business based on the nature of the services provided:
(a) one business line referred to as the Private Client Division through which the Filer: (i) offers fully discretionary accounts that currently invest in equity, fixed income, alternative credit and alternative equity investment products managed by the Filer or its affiliates (the Proprietary Funds) and may in the future invest in investment products managed by other fund managers or directly in equity, fixed income and other securities; and (ii) distributes interests in the Proprietary Funds to discretionary accounts managed by the Filer (where determined to be appropriate for the account(s)) and directly to non-discretionary investors as an exempt market dealer. The Private Client Division serves as a wealth manager for primarily high net worth and ultra high net worth clients through constructing and optimizing client portfolios, offering investment advice and execution of investments, and also provides financial and wealth planning services including estate and trust planning, tax planning, retirement analysis and philanthropy planning; and
(b) the other business line referred to as the Investment Management Division (and along with the Private Client Division, the Divisions, and each, a Division), through which the Filer identifies investment opportunities, creates and manages the Proprietary Funds and is responsible for risk management and oversight of the Proprietary Funds, which includes: (i) establishing the product mandate; (ii) monitoring adherence to the mandate; and (iii) conducting the investment activities of the product.
6. The Filer began dividing its activities among the two Divisions in the first quarter of 2022. Each Division has or will have separate and distinct senior management and operating structures. As of June 30, 2022, the Filer had 162 employees with 57 employees dedicated to the Private Client Division on a full-time basis (including 19 registrants) and 20 employees dedicated to the Investment Management Division on a full-time basis (including 10 registrants), and the remaining employees providing administrative, back office and middle office services to both Divisions. As of June 30, 2022, the Filer had approximately CAD$7.1 billion in assets under management.
7. Given that each Division is functionally a stand-alone operation within the Filer's business, and the historical annual growth of the Filer's business, as described above, the Filer seeks to ensure that its operational structure remains aligned with its business model while effectively meeting the policy objectives of NI 31-103.
The UDPs
8. Currently, the Divisions share the same UDP and Chief Compliance Officer (the CCO). The Filer does not have a CEO; instead, the head of the Private Client Division of the Filer is currently the UDP of the Filer, and the head of the Investment Management Division of the Filer is the Chief Investment Officer of the Filer.
9. If the Exemption Sought is granted, the Filer intends to have two UDPs. The head or most senior officer of each Division will be the UDP of their respective Division (together, the Division Heads).
10. The Division Heads will each have the role that is the equivalent of a chief executive officer in respect of the Division for which they are responsible and will be the most senior and final decision maker for their Division. Each Division Head fulfills the following roles for their respective Division:
(a) provides clear leadership and sets the tone at the top for the business lines;
(b) is the person that management within the business line reports to;
(c) implements the objectives, strategy and plans for the business lines;
(d) promotes compliance with industry rules and applicable securities laws;
(e) supervises the activities of the Filer directed toward ensuring compliance with industry rules and applicable securities law requirements;
(f) is responsible for the overall conduct of and the supervision of its employees;
(g) ensures that supervisory policies and procedures are developed and implemented and adequately reflect the regulatory requirements; and
(h) has accountability for reporting to the Filer's Board of Directors with respect to the Division.
11. There will be no line of reporting between the Division Heads. Each Division Head will have direct access and will report independently to the Board of Directors of the Filer in respect of the Division for which they are responsible. David Kelly, who is expected to serve solely as the UDP of the Private Client Division, will step down from the Board of Directors of the Filer prior to his appointment as the UDP of the Private Client Division. While it is anticipated that David Kelly will be the UDP of the Private Client Division and Peter Zaltz will be the UDP of the Investment Management Division, the Exemption Sought is for any person who may act in the capacity of a Division Head.
12. The Filer's compliance team (the Compliance Team) has been, and will continue to be, led by a single CCO. The Compliance Team serves both Divisions and is supported and reinforced by the reporting structure that Onex Corporation has adopted across all of its business lines (each, an Onex Business Line). The legal and compliance functions of each Onex Business Line (including the Filer) report to the General Counsel of Onex Corporation (the Onex GC) in her capacity as the most senior legal and compliance executive of Onex Corporation and to the board of directors of the relevant Onex Business Line. While the Office of the Onex GC will be available to the UDPs and CCO of the Filer, the Onex GC is not expected to be involved in the day-to-day regulatory compliance of the Filer, and such responsibility currently resides, and will continue to reside, with the CCO of the Filer. The CCO of the Filer will have direct access to each UDP and the Board of Directors of the Filer.
13. No other executive officer of the Filer will have authority to overrule a decision of the applicable Division Head or control either of the Division Heads' access to the Board of Directors of the Filer.
Reasons for the Exemption Sought
14. Under section 11.2 of NI 31-103, a registered firm is required to designate an individual to be the UDP and the UDP must be: (i) the chief executive officer (the CEO) or, if the firm does not have a CEO, an individual acting in a capacity similar to a CEO; (ii) the sole proprietor of the registered firm; or (iii) the officer in charge of a division of the registered firm, if the activity that requires the firm to register occurs only in the division and the firm has significant other business activities (the UDP Requirement).
15. Granting the Exemption Sought would be consistent with the policy objectives that the UDP Requirement is intended to achieve because:
(a) The Divisions are independent operations that are distinct from each other and conducted on a significant scale; and
(b) The Division Heads shall be, effectively, the most senior executive members of their respective Divisions.
Decision
16. The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
17. The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
(a) Each Division shall have its own UDP, who shall be the equivalent of the chief executive officer in respect of the Division for which they are the UDP;
(b) Only one individual shall be the UDP of each Division;
(c) Each UDP has direct access to the Board of Directors of the Filer; and
(d) Each UDP shall fulfill the responsibilities set out in section 5.1 of NI 31-103, and any successor provision thereto, in respect of the Division for which they are designated UDP.