Coleford Investment Management Ltd. et al. - ss. 74(1), 83, 121(1)(a)(ii)

Headnote

Relief from reporting issuer requirements for existing fund with only managed account holders- Relief from the prospectus and registration requirements of the Act to permit the distribution of pooled fund units to certain fully managed accounts on an exempt basis -- Relief from self-dealing prohibition of the Act to allow in specie transfers between pooled funds and managed accounts.

Applicable Legislative Provisions

Securities Act, R.S.O., c. S.5, as am., ss. 25, 53, 74(1), 83, 118(2)(b), 121(2)(a)(ii).

Subsection 1(6) of the Business Corporations Act (Ontario)

Staff Notices Cited

Commission Staff Notice 12-703.

Rules Cited

National Instrument 81-102 Mutual Funds.

National Instrument 45-106 Prospectus and Registration Exemptions.

August 25, 2006

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, C. S.5, AS AMENDED

(THE SECURITIES ACT)

AND

IN THE MATTER OF

THE BUSINESS CORPORATIONS ACT,

R.S.O. 1990, C. B.16, AS AMENDED

(THE OBCA)

AND

IN THE MATTER OF

COLEFORD INVESTMENT MANAGEMENT LTD.

(COLEFORD),

COLEFORD PRIVATE FUNDS CORPORATION

(THE CORPORATION) AND

COLEFORD PRIVATE BALANCED FUND

(THE EXISTING FUND)

RULING AND ORDER

(Subsection 74(1), Section 83 and Clause 121(2)(a)(ii) of

the Securities Act and Subsection 1(6) of the OBCA)

Background

The Ontario Securities Commission (the Commission) has received an application (the Application) from Coleford and the Corporation for:

(a) an order, pursuant to section 83 of the Securities Act, that the Existing Fund be deemed to have ceased to be a reporting issuer;

(b) an order, pursuant to subsection 1(6) of the OBCA, that the Corporation be deemed to have ceased to be offering its securities to the public;

(c) a ruling, pursuant to subsection 74(1) of the Securities Act, that:

(i) trades in shares of the Existing Fund and any pooled fund established and managed by Coleford in the future (each a Future Fund, and collectively with the Existing Fund, the Funds) to Secondary Managed Accounts (as defined below) will not be subject to the dealer registration and prospectus requirements under sections 25 and 53 of the Securities Act (the Dealer Registration and Prospectus Requirements); and

(ii) trades in share of the Existing Fund to the Unique RESP Account (as defined below) will not be subject to the Dealer Registration and Prospectus Requirements; and

(d) an order, pursuant to clause 121(2)(a)(ii) of the Securities Act, that In Specie Transfers (as defined below) between the Funds and the Managed Accounts (as defined below) will be exempt from the prohibition in paragraph 118(2)(b) of the Securities Act which prevents a portfolio manager from knowingly causing any investment portfolio managed by it to purchase or sell the securities of any issuer from or to the account of a responsible person, any associate of a responsible person or the portfolio manager (the Self-Dealing Prohibition).

Together, the relief requested in paragraphs (a) and (b) above is referred to as the Reporting Issuer Relief, and the relief requested in paragraphs (c) and (d) above is referred to as the Managed Account Relief.

Representations

This Ruling and Order is based on the following facts represented by Coleford:

1. Coleford is incorporated under the laws of Ontario. It is registered with the Commission as an Investment Counsel and Portfolio Manager.

2. For the past 17 years, Coleford has been managing money for high net worth individuals and institutional clients on a fully discretionary basis. As of May 31, 2006, Coleford had assets under management of approximately $251,000,000.

3. The Corporation is a mutual fund corporation incorporated under the laws of Ontario. The authorized capital of the Corporation consists of an unlimited number of shares of a class designated as common shares (the Common Shares), and an unlimited number of shares of 1,000 classes designated as special shares (the Mutual Fund Shares), with each class of Mutual Fund Shares issuable in an unlimited number of series.

4. As of the date of the Application, the Existing Fund is the only issued class of Mutual Fund Shares, with only Series F shares outstanding. Previously, there were also Series A shares outstanding, as discussed below.

5. The Existing Fund is a "mutual fund" as defined in the Securities Act. The primary investment objective of the Existing Fund is to generate a real rate of return while preserving capital. The Existing Fund invests in common and preferred shares of large North American companies, plus bonds, debentures and treasury bills. As of May 31, 2006, the Existing Fund had net assets under management of $2,452,323.

6. Coleford currently acts as the portfolio adviser of the Existing Fund. All-Canadian Management Inc. (All-Canadian) acts as the manager, principal distributor, registrar and transfer agent of the Existing Fund. All-Canadian is incorporated under the laws of Ontario and is registered with the Commission as an Investment Counsel and Portfolio Manager.

7. Coleford receives a fee from All-Canadian for acting as portfolio advisor of the Existing Fund. All-Canadian collects a fee of 1.8% of net asset value from the Existing Fund for its services as manager of the Existing Fund.

8. As of the date of the Application, there are 100 Common Shares outstanding. Previously, half of them were owned by Coleford, with the other half owned by All-Canadian. On May 23, 2006, Coleford purchased All-Canadian's shares. In connection with the purchase, the parties agreed that Coleford would become the manager of the Existing Fund, subject to the Reporting Issuer Relief being granted. If the Reporting Issuer Relief is granted, Coleford will act as manager, portfolio adviser, principal distributor, registrar and transfer agent of the Existing Fund after the change of manager. Coleford will act in such capacity for each Future Fund.

9. A simplified prospectus was prepared and filed for the Existing Fund on February 17, 2003, and renewed on April 6, 2004, so that Series A and F shares could be sold to Ontario investors who were not either an "accredited investor" under Ontario securities law or making an initial purchase of $150,000 or more. This strategy was not otherwise implemented and was subsequently abandoned, and the simplified prospectus was permitted to lapse on April 6, 2005.

10. There are 66 accounts holding series F shares of the Existing Fund. The accounts are owned by 51 investors (the Accountholders). As of the date of this ruling and order, all but one of the Accountholders are accredited investors in Primary Managed Accounts (as defined below) or investors in Secondary Managed Accounts (as defined below).

11. When they first purchased shares of the Existing Fund, each Accountholder was employed by Coleford or All-Canadian and/or was either an existing client of Coleford or related to an existing client of Coleford and/or the trade in securities held by that Accountholder would have been exempt from the Dealer Registration and Prospectus Requirements if NI 45-106 had been in force at the time.

12. Excluding the reinvestment of distributions, there have been 20 trades in Series F shares of the Existing Fund since the simplified prospectus lapsed. All of them were to existing Accountholders or individuals closely related to or connected with existing Accountholders.

13. Since July 5, 2005, shares of the Existing Fund have been issued only under exemptions from the Dealer Registration and Prospectus Requirements.

14. None of the Accountholders have acquired shares of the Existing Fund through the traditional broker-dealer distribution network, other than through a registered dealer affiliate of All-Canadian and a registered dealer used by Coleford for trades involving its clients.

Reporting Issuer Relief

15. If the Existing Fund had less than 15 shareholders, the Corporation could have applied for relief via Commission Staff Notice 12-703:

(a) No securities of the Existing Fund are traded on a marketplace as defined in National Instrument 21-101 Marketplace Operation;

(b) The Existing Fund is not in default of any of its obligations under the Securities Act as a reporting issuer. On May 1, 2006, the Existing Fund filed with the Commission its management report of fund performance and audited financial statements for the year ended December 31, 2005, and an annual information form prepared under Part 9 of National Instrument 81-106 Investment Fund Continuous Disclosure; and

(c) The Existing Fund will not be a reporting issuer or the equivalent in any jurisdiction in Canada immediately after the Reporting Issuer Relief is granted. The same will be true of the Corporation under the OBCA.

16. Coleford has notified all of the Accountholders that the Application has been made, and has explained the implications of the Reporting Issuer Relief being granted in the context of their account, whether managed or not.

17. The assets of the Existing Fund are, and will continue to be, invested in accordance with Part 2 of National Instrument 81-102 Mutual Funds (NI 81-102) and held by a qualified custodian in accordance with Part 6 of NI 81-102. The assets of the Existing Fund are currently held under the custody of Canadian Imperial Bank of Commerce.

18. If the Reporting Issuer Relief is granted, the financial statements of the Existing Fund will be prepared and delivered to shareholders in accordance with the requirements of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) that apply to mutual funds that are not reporting issuers. The Existing Fund will rely on the filing exemption contained in section 2.11 of NI 81-106.

19. As of the date of this decision, Coleford will act as manager of the Existing Fund.

Managed Account Relief

20. Coleford primarily offers discretionary portfolio management services to individuals, corporations and other entities (each, a Client) seeking wealth management or related services (Managed Services) through a managed account. Pursuant to a written agreement (Master Client Agreement) between Coleford and the Client, Coleford makes investment decisions for the managed account and has full discretionary authority to trade in securities for the managed account without obtaining the specific consent of the Client to the trade.

21. The Managed Services are provided by employees of Coleford who meet the proficiency requirements of an advising officer or advising representative (or associate advising officer or associate advising representative) under Ontario securities law.

22. The Managed Services consist of the following:

(a) each Client who accepts Managed Services executes a Master Client Agreement whereby the Client authorizes Coleford to supervise, manage and direct purchases and sales, at Coleford's full discretion on a continuing basis;

(b) Coleford'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 Coleford; and

(d) Coleford retains overall responsibility for the Managed Services provided to its Clients and has designated a senior officer to oversee and supervise the Managed Services.

23. Coleford's minimum aggregate balance for all the managed accounts of a client is $1,000,000. This amount is published in Coleford's marketing materials, including its Web site. From time to time, Coleford will accept a client who does not meet this minimum threshold if there are exceptional factors that have persuaded Coleford for business reasons to accept such persons as Clients and waive the minimum aggregate balance, provided those Clients agree to pay Coleford's minimum management fee. Managed accounts of a client which on aggregate satisfy this minimum balance and/or minimum fee requirement are hereinafter referred to as Primary Managed Accounts. This minimum balance/minimum fee requirement may be waived at Coleford's discretion.

24. In addition, from time to time Coleford may accept certain Clients for managed accounts with less than $1,000,000 under management or who will not pay Coleford's minimum management fees. Such Clients consist primarily of family members of Primary Managed Account Clients, but may also include persons who have another relationship with the holder of a Primary Managed Account where there are exceptional factors that have persuaded Coleford for business reasons to accept such persons as Clients and waive its minimum balance and fee requirements. Assets managed by Coleford for the family members and other persons described above 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.

25. All but one of the holders of the Primary Managed Accounts investing in the Existing Fund qualify as accredited investors under Ontario securities law. The remaining holder set up a Primary Managed Account with Coleford as part of the registered education savings plan of the holder's grandchildren (the Unique RESP Account). The Unique RESP Account acquired shares of the Existing Fund while the simplified prospectus was in place. The holder of the Unique RESP Account is a longstanding Coleford client and is well known to Coleford. Coleford would like for the Unique RESP Account to be able to continue to acquire shares of the Existing Fund, so that the Unique RESP Account will not have to incur the costs of individually buying and selling each security held by the Existing Fund from time to time. As noted above in paragraph 17, the assets of the Existing Fund will continue to be invested in accordance with Part 2 of NI 81-102, and will continue to be held by a qualified custodian in accordance with Part 6 of NI 81-102.

26. The holders of 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. Coleford typically services these Secondary Managed Account Clients as a courtesy to its Primary Managed Account Clients, or with the expectation that a Secondary Managed Account will satisfy the minimum balance requirement in the future.

27. 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.

Relief from the Dealer Registration and Prospectus Requirements

28. If the Reporting Issuer Relief is granted, all of the Funds will be able to give Managed Account Clients the benefit of asset diversification, access to investment products with very high minimum investment thresholds and economies of scale on minimum brokerage commission charges in contrast to individual trades in each Managed Account. Unless relief from the Dealer Registration and Prospectus Requirements is granted, the Funds will be available only to Clients that are accredited investors or are able to invest a minimum of $150,000 in a Fund. These requirements either act as a barrier to Secondary Managed Account Clients investing in the Funds, or may cause Coleford'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.

29. To improve the diversification and cost benefits to Secondary Managed Account Clients, Coleford wishes to distribute securities of the Funds to Secondary Managed Accounts without a minimum investment. The Secondary Managed Account Client would thereby be able to receive the benefit of Coleford'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.

30. Managed Services provided by Coleford under a Managed Account 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 Master Client Agreement.

31. Where Coleford invests on behalf of a Managed Account in Funds which would otherwise pay a management fee to Coleford as manager, the Managed Account will purchase shares of a series without such fees. Accordingly, there will be no duplication of fees between a Managed Account and the Funds.

32. There will be no commission payable by a Client on the sale of shares of the Funds to a Managed Account.

33. The Existing Fund is, and the Future Funds will each be, a "mutual fund" under the Securities Act. If the Reporting Issuer Relief is granted, the Existing Fund will not be a reporting issuer under the Securities Act. Any Future Funds will also not be reporting issuers under the Securities Act. The Funds will be sold in Ontario under applicable exemptions from the Dealer Registration and Prospectus Requirements.

34. Unless relief is granted from the Dealer Registration and Prospectus Requirements, Coleford will be prohibited from selling shares of a Fund to a Secondary Managed Account where the Client is not an accredited investor or does not invest a minimum of $150,000 in the Fund. NI 45-106 excludes from the definition of "accredited investor" a managed account if it is acquiring a security of a mutual fund in Ontario. Under NI 45-106, a Managed Account may only invest in the Funds on an exempt basis if either (a) the Client holding the Managed Account itself qualifies as an accredited investor, or (b) the Managed Account purchases at least $150,000 of securities of the Fund.

Relief from the Self-Dealing Prohibition

35. Coleford wishes to permit payment, in whole or in part, for Fund shares purchased by a Managed Account to be made by making good delivery of securities held by such Managed Account to a Fund, provided those securities meet the investment criteria of the Fund. Implementing in specie transfers of securities between a Managed Account and a Fund reduces market impact costs, which can be detrimental to Clients. In specie transfers will also allow Coleford to efficiently retain within its control institutional-size blocks of securities that otherwise would need to be broken apart and re-assembled. Such securities often are those that trade in lower volumes, with less frequency, and have larger bid-ask spreads.

36. Similarly, after a redemption of shares of a Fund by a Managed Account, Coleford wishes to permit payment, in whole or in part, of redemption proceeds to be satisfied by making good delivery of securities held in the investment portfolio of a Fund to such Managed Account, if those securities meet the investment criteria of the Managed Account (the transactions described in this paragraph and the previous paragraph are collectively referred to as In Specie Transfers). Coleford anticipates In Specie Transfers after a redemption of shares of a Fund where a Managed Account invested in such Fund has experienced a change in circumstances, which results in the Managed Account being an ideal candidate for direct holdings of individual securities rather than Fund shares. In Specie Transfers will be executed through a registered dealer.

37. As Coleford is the portfolio manager of the Managed Accounts, it would be considered a "responsible person" under subsection 118(1) of the Securities Act with respect to the Managed Accounts. Furthermore, the Corporation will be an affiliate of Coleford under the Securities Act because Coleford owns voting securities carrying more than 50% of the votes for the election of the directors of the Corporation.

38. Unless the requested relief is granted, the Self-Dealing Prohibition will prohibit Coleford from causing a Managed Account to make an In Specie Transfer of securities of any issuer to or from any of the Funds of which Coleford is the trustee, as the Funds would each be a "responsible person".

Ruling and Order

The Commission being satisfied that the relevant tests contained in subsection 74(1), section 83 and clause 121(2)(a)(ii) of the Securities Act, and subsection 1(6) of the OBCA, have been met, the Commission:

1. orders, pursuant to section 83 of the Securities Act, that the Existing Fund be deemed to have ceased to be a reporting issuer;

2. orders, pursuant to subsection 1(6) of the OBCA, that the Corporation be deemed to have ceased to be offering its securities to the public;

3. rules, pursuant to subsection 74(1) of the Securities Act, that trades in shares of the Funds to Secondary Managed Accounts will not be subject to the Dealer Registration and Prospectus Requirements, 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 Dealer Registration and Prospectus Requirements;

(b) this ruling will only apply 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);

(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) a close business associate, employee or professional adviser to a holder of a Primary Managed Account that is an accredited investor, provided that:

(1) in each instance, there are exceptional factors that have persuaded Coleford for business reasons to accept such person as a Secondary Managed Account Client and waive Coleford's minimum aggregate balance, and a record is kept and maintained of the exceptional factors considered; and

(2) the Secondary Managed Account clients acquired through such relationships to a holder of a Primary Managed Account may not at any time represent more than five percent of Coleford's total Managed Account assets under management; and

(c) Coleford and the Corporation do not pay any fees or commissions to any person in connection with the distribution of shares of a Fund, and neither Coleford nor the Corporation pays referral fees to any person in connection with the referral of Secondary Managed Accounts that invest in shares of any of the Funds;

4. rules, pursuant to subsection 74(1) of the Securities Act, that trades in shares of the Existing Fund to the Unique RESP Account will not be subject to the Dealer Registration and Prospectus Requirements, provided that 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 Dealer Registration and Prospectus Requirements; and

5. orders, pursuant to clause 121(2)(a)(ii) of the Securities Act, that the Self-Dealing Prohibition shall not apply to Coleford in connection with the payment of the purchase or redemption price of shares of a Fund by In Specie Transfers between the Managed Accounts and the Funds, provided that:

(a) in connection with the purchase of shares of any of the Funds by a Managed Account:

(i) Coleford obtains the prior written consent of the relevant Managed Account Client before it engages in any In Specie Transfers in connection with the purchase of shares;

(ii) the Fund would at the time of payment be permitted to purchase those securities;

(iii) the securities are acceptable to the portfolio advisor of the Fund and consistent with the Fund's investment objective;

(iv) the value of the securities is at least equal to the issue price of the securities of the Fund for which they are payment, valued as if the securities were portfolio assets of that fund;

(v) the account statement next prepared for the Managed Account includes a note describing the securities delivered to the Fund and the value assigned to such securities; and

(b) in connection with the redemption of shares of a Fund by a Managed Account:

(i) Coleford obtains the prior written consent of the relevant Managed Account Client to the payment of redemption proceeds in the form of an In Specie Transfer;

(ii) the securities are acceptable to the portfolio advisor of the Managed Account and consistent with the Managed Account's investment objective;

(iii) the value of the securities is equal to the amount at which those securities were valued in calculating the net asset value per security used to establish the redemption price;

(iv) the holder of the Managed Account has not provided notice to terminate its Master Client Agreement with Coleford;

(v) the account statement next prepared for the Managed Account includes a note describing the securities delivered to the Managed Account and the value assigned to such securities; and

(c) Coleford does not receive any compensation in respect of any sale or redemption of shares of a Fund (other than redemption fees disclosed in the offering documents of the Funds), and, in respect of any delivery of securities further to an In Specie Transfer, the only charge paid by the Managed Account is the commission charged by the dealer executing the trade.

"Robert L. Shirriff"

"Paul K. Bates"