Canfin Private Wealth Inc.
Pursuant to National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from the dealer registration requirement, the know-your-client, trusted contact person and suitability requirements, and the requirements to deliver account statements and investment performance reports granted to a portfolio manager in respect of investors in a model portfolio program offered through an affiliated mutual fund dealer.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7(1).
Securities Act, R.S.O. 1990, c. S.5, ss. 25, 74(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.2, 13.2.01, 13.3, 14.14, 14.14.1, 14.18 and 15.1(2).
December 21, 2023
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 CANFIN PRIVATE WEALTH INC. (the Filer)
The principal regulator in the Jurisdiction (Principal Regulator) has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (Legislation) exempting the Filer from the following requirements with respect to clients in the Model Portfolio Program (as defined below):
(a) the requirement (the Dealer Registration Requirement) in the Legislation that the Filer be registered as a dealer in order to effect Rebalancing Trades (as defined below), executed with respect to a Model Portfolio (as defined below) (the Dealer Registration Exemption);
(b) the requirement (the Know Your Client Requirement) in the Legislation that the Filer take reasonable steps to:
(i) establish the identity of a client and, if the Filer has cause for concern, make reasonable inquiries as to the reputation of the client;
(ii) establish whether the client is an insider of a reporting issuer or any other issuer whose securities are publicly traded;
(iii) ensure that the Filer has sufficient information regarding the client's investment needs, objectives, financial circumstances, and risk profile, among other information, to enable the Filer to meet its obligations under the Legislation to make a determination with respect to the Suitability Requirement (as defined below); and
(iv) keep the information described above current;
(collectively, the Know Your Client Exemption);
(c) the requirement (the Trusted Contact Person Requirement) in the Legislation that the Filer take reasonable steps to:
(i) obtain from the client the name and contact information of a trusted contact person, and the written consent of the client for the Filer to contact the trusted contact person to confirm or make inquiries about any of the following:
a. the Filer's concerns about possible financial exploitation of the client;
b. the Filer's concerns about the client's mental capacity as it relates to the ability of the client to make decisions involving financial matters;
c. the name and contact information of a legal representative of the client, if any;
d. the client's contact information; and
(ii) keep the information described above current
(collectively, the Trusted Contact Person Exemption);
(d) the requirement (the Suitability Requirement) in the Legislation that the Filer take reasonable steps to ensure that, before it makes a recommendation to or accepts an instruction from a client to buy or sell a security or makes a purchase or sale of a security for a client's account, or upon the occurrence of any other required suitability assessment event, such action is suitable for the client (the Suitability Exemption); and
(e) the requirement (the Statement Delivery Requirement) in the Legislation that the Filer deliver account statements and investment performance reports to clients who have invested in the Model Portfolios (the Statement Delivery Exemption).
The Dealer Registration Exemption, Know Your Client Exemption, Trusted Contact Person Exemption, Suitability Exemption, and the Statement Delivery Exemption are collectively referred to as 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 section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon by the Filer in Alberta and each jurisdiction where the Filer seeks registration in the future (together with Ontario, the Canadian Jurisdictions) (see representation 9 below).
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
The Filer and its Affiliate
1. The Filer is a business corporation incorporated under the laws of Canada, registered as a portfolio manager in Ontario and Alberta. The Filer offers discretionary investment management services to its clients, with its head office located in Toronto, Ontario.
2. Canfin Magellan Investments Inc. (the Dealer) is a business corporation incorporated under the laws of Canada. The Dealer is registered as a mutual fund dealer in each of Ontario, Alberta, British Columbia and Saskatchewan and as an exempt market dealer (EMD) in Ontario. The Dealer is a member of the Canadian Investment Regulatory Organization (CIRO).
3. The Filer and the Dealer are both wholly owned subsidiaries of Canfin Holdings Inc.
4. The Dealer, as a mutual fund dealer, offers investment solutions involving mutual funds as defined in the Legislation. However, the Dealer's dealing representatives cannot take on discretionary trading authority to manage portfolios in order to gain portfolio management efficiencies and provide enhanced client experience.
5. The Filer, in conjunction with the Dealer, will offer a model portfolio program comprising Model Portfolios constructed and managed by the Filer (the Model Portfolio Program).
6. The Filer is not in default of securities legislation in the Jurisdiction.
The Model Portfolio Program
7. The Dealer provides wealth management services to its clients, including financial planning and mutual fund dealer services in accordance with applicable securities legislation, including CIRO rules (applicable to a mutual fund dealer).
8. Where suitable, the Dealer's dealing representatives may offer their clients the Managed Portfolio Program, comprising of Model Portfolios provided by the Filer.
9. The Model Portfolios will be provided through the Dealer only in the jurisdictions where both the Filer and the Dealer are registered (as of the date of this decision, Ontario and Alberta only). In the future, if the Filer seeks registration in additional jurisdictions, the Filer will file a passport notice pursuant to section 4.7(1) of MI 11-102 to rely on this decision in these jurisdictions.
10. The Filer will construct and manage the managed portfolio solutions (Model Portfolios) exclusively from:
(a) investment funds that meet the definition of a mutual fund under the Legislation, including exchange-traded funds (ETF) and alternative mutual funds (collectively, Funds and, individually, a Fund), each of which: (i) does not employ leverage or short selling strategies in excess of the limits prescribed in National Instrument 81-102 Investment Funds (NI 81-102); and (ii) is managed by a third-party investment fund manager that is unaffiliated with the Filer; and
(b) cash and cash equivalents.
11. Each of the Funds is or will be a reporting issuer in one or more of the Canadian Jurisdictions, and subject to the requirements of NI 81-102.
12. The securities of each of the Funds are, or will be, qualified for distribution in one or more of the Canadian Jurisdictions pursuant to a: (a) simplified prospectus, annual information form and Fund Facts, prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure, or (b) long form prospectus and ETF Facts, prepared and filed in accordance with National Instrument 41-101 General Prospectus Requirements.
13. The securities of each Fund that is an ETF are, or will be, listed and traded on a recognized exchange.
14. Each Model Portfolio will have a set allocation to equity, fixed income and cash (the Asset Classes) which are suitable for clients with short, medium or long-term investment horizons and with different risk profiles.
15. Exposure to the different Asset Classes in a Model Portfolio will be achieved using the Funds. Each Fund will have a percentage target weight within an Asset Class (the Target Weight) which may, due to changes in the market value of the Fund, increase or decrease within an upper and lower range (the Permitted Range). From time to time, the Filer may decide to change the Target Weight or Permitted Range of the Funds in the Model Portfolio or may replace a Fund with one or more alternative Funds (the Model Re-allocation).
16. When, due to changes in the relative market value of each Fund, one or more Funds in a client's Model Portfolio exceed the Permitted Range, the Filer will execute appropriate trades so that each Fund is returned to a relative weight that is within the Permitted Range (the Account Rebalance). The Account Rebalance may include rebalancing of additional funds invested in the client's account.
17. Prospective clients of the Dealer will complete a goal-based questionnaire (the Questionnaire) and have a meaningful discussion with a dealing representative of the Dealer, subject to any applicable exemption or relief order, in order to determine which Model Portfolio is suitable for the prospective client for a specific goal or an account.
18. The Dealer and the Filer will jointly create the Questionnaire, and each agree that the Questionnaire is an effective tool for determining whether each client's goal or account is suitable for a Model Portfolio.
19. The Dealer will use the information obtained from the prospective client, including their responses to the Questionnaire and any discussions held with the prospective client and the dealing representative's knowledge of the prospective client's affairs, to complete a know your client (KYC) and suitability assessment on the prospective client, as required under sections 13.2 and 13.3 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).
20. Having determined which Model Portfolio or a set of Model Portfolios are suitable for a prospective client's goal or account, the Dealer will recommend those Model Portfolios, and the prospective client will decide if they wish to accept the recommendation and invest in one of the suitable Model Portfolios.
21. The Dealer will make trades in the Funds to invest the client's account in their chosen Model Portfolio. Any decision by the Filer to effect a Rebalancing Trade (as defined below) will be made through the Dealer, its carrying dealer, or another dealer, including an affiliate, registered in a category that permits the trade.
22. Prospective clients and existing clients will have no direct contact with the Filer in connection with the Filer's management of the Model Portfolio, and prospective clients and existing clients will interact solely with the Dealer and dealing representatives of the Dealer in connection with the Filer's management of the Model Portfolios and the Dealer's administration of the client accounts.
23. Where a Dealer's dealing representative determines that a Model Portfolio is no longer appropriate for the client or that a different Model Portfolio would be more appropriate for the client, the Dealer's dealing representative will communicate with the client, and take appropriate action. A change to a different Model Portfolio will not be made without the client entering into a new Agreement (as defined below) or providing instructions to the Dealer in respect of the new Model Portfolio.
24. A client may terminate their participation in the Model Portfolio Program at any time by notifying the Dealer.
Client Agreement and Client Reporting
25. If the prospective client decides to invest in a Model Portfolio, a tripartite agreement (the Agreement) is entered into between the client, the Dealer and the Filer that:
(a) will authorize the Filer to manage the client's investment on a discretionary basis with a view to ensuring that the client's account is managed in accordance with the agreed upon Model Portfolio and within the Permitted Ranges, which may be adjusted at the discretion of the Filer;
(b) will authorize the Filer to use its discretion to effect a Model Re-allocation or an Account Rebalance (Rebalancing Trades). To facilitate the Rebalancing Trades, the client will consent to providing the Filer with access to view the client's account with the Dealer that holds the Funds included in the Model Portfolio, and use the account holding information;
(c) provides that the Dealer may in the future recommend changing to a different Model Portfolio than the one currently accepted by the client if there are:
i. material changes in the client's financial circumstances or risk profile; or
ii. Filer-initiated changes to the Asset Classes in the Model Portfolio currently accepted by the client;
but the Dealer will not implement any such recommendation without the client's prior approval obtained in writing or through any other electronic means, including via a secure online portal;
(d) provides that the Filer will be responsible to the client for ensuring that the selected Model Portfolio is managed in accordance with the terms agreed upon by the client;
(e) provides that satisfying the Know Your Client Requirement, the Trusted Contact Person Requirement and the Suitability Requirement will not be the responsibility of the Filer but instead will be that of the Dealer who will gather and periodically update the KYC information concerning the client and confirm, on at least an annual basis, the suitability of the Model Portfolio;
(f) provides that the Dealer will not have discretionary authority to participate in the management of the Model Portfolio or to effect Rebalancing Trades; and
(g) provides that the Filer:
i. may appoint one or more sub-advisers (each a Sub-Adviser) to design Model Portfolios for the Filer; and
ii. shall pay the Sub-Adviser from the Filer's Model Portfolio management fee, which will differ from Sub-Adviser to Sub-Adviser and may be higher than the fee on Model Portfolios managed solely by the Filer.
26. In addition to the Agreement, the client is also provided, including via a secure online portal:
(a) with an investment plan (the Investment Plan) prior to or concurrently with the execution of the Agreement which sets out the composition of the Model Portfolio, the percentage allocation of the Asset Classes, the method by which the Permitted Range is determined, the fees payable to the Dealer and the Filer (if any) as well as the rules governing the investment and management of the Model Portfolio;
(b) prior to the Agreement being entered into, or within two days of trades being implemented for the Model Portfolio, with the Fund Facts or other document required by Legislation, in respect of the Funds included in the Model Portfolio. In the event that a new replacement Fund is incorporated into the Model Portfolio as part of the Rebalancing Trades, the client will similarly be provided with the Fund Facts for the replacement Fund, subject to any applicable exemption or relief order; and
(c) trade confirmations for every transaction in the client's account, including Rebalancing Trades, within the timelines required by Legislation, subject to any applicable exemption or relief order.
27. Sales communications and account opening documents will explain the different responsibilities of the Dealer and the Filer with respect to the client and the client's Model Portfolio. This will include disclosure that the Filer is responsible for managing the Model Portfolio without reference to the client's circumstances and only in accordance with the Model Portfolio agreed upon by the client, and the Dealer alone will have the responsibility to determine that the selected Model Portfolio is and remains suitable for the client.
28. The Funds that comprise each Model Portfolio are directly held by each client in their own account with the Dealer (including via any carrying dealer), and if the client has not already opened an account with the Dealer, the client will complete an account application. All Rebalancing Trades are reflected in the client's account within two business days.
29. The Dealer will maintain records as required under section 11.5 of NI 31-103 and applicable CIRO rules and reconcile all trades executed in the account with the Rebalancing Trades provided by the Filer.
30. An account statement will be provided to the client by the Dealer on a monthly basis.
31. An investment performance report will be provided to the client by the Dealer at least annually.
32. The Dealer will also provide the client with an annual tax reporting package.
33. There will be no duplication of any fees or charges as a result of a client's decision to use the Model Portfolio Program.
34. The fees and expenses charged by the Dealer, Sub-Advisor (if any) and the Filer will be disclosed in the Agreement. The Filer will not receive any management, administration and other fees from the Funds and no sales charges, redemption fees, switch fees or early trading fees will be charged in connection with Rebalancing Trades.
Oversight and Monitoring
35. The Filer will carry out the following monitoring and oversight procedures in connection with the client's account designated to hold the Funds included in the Model Portfolio:
(a) Ongoing monitoring of the composition of the client account and providing adjustment instructions to the Dealer to ensure the account is managed in accordance with the agreed upon Model Portfolio and within the Permitted Ranges;
(b) Ongoing oversight responsibilities on the composition of the Model Portfolios and make recommendations for changes where considered appropriate;
(c) Ongoing oversight responsibilities on the portfolio guidelines and make recommendations for changes when considered appropriate;
(d) No less frequently than annually, the Filer will review any Model Portfolio managed by a Sub-Adviser to ensure that it complies with its applicable mandate.
36. The Filer will maintain policies and procedures to comply with NI 31-103 and other applicable securities regulations that pertain to the category of portfolio manager, which will contain a section that covers the processes and controls related to client accounts invested in the Model Portfolio Program.
37. As part of the Model Portfolio Program, provided that the client's dealing representative of the Dealer is given at least 45 days' advance written notice (the Written Notice) and the Model Portfolio remains consistent with its stated investment objective at all times, the Filer may also, from time to time, use its discretion to make decisions regarding certain changes to the Permitted Ranges (the Weighting Changes).
38. The Written Notice will describe the proposed Weighting Change and will provide sufficient detail for the Dealer's dealing representatives to determine whether the Model Portfolios, after the implementation of the proposed change, would continue to be appropriate for their clients. The Written Notice will specify that if the Dealer's dealing representative does not provide an objection on behalf of his / her client to the proposed Weighting Change by a specified date, such non-objection will be deemed to be consent for the changes on the effective date.
39. In the absence of the Exemption Sought, the Filer would be required:
(a) to register as a mutual fund dealer under the Legislation and become a member of CIRO (mutual fund dealer division) in order to effect the Rebalancing Trades;
(b) to gather and update the information contemplated by the Know Your Client Requirement in section 13.2 of NI 31-103 for each client;
(c) to gather and update the information contemplated by the Trusted Contact Person Requirement in section 13.2.01 of NI 31-103 for each client;
(d) by the Suitability Requirement in section 13.3 of NI 31-103, to ensure that each Rebalancing Trade is suitable for the client, rather than invested in accordance with the terms of the Investment Plan; and
(e) by the Statement Delivery Requirement in sections 14.14 or 14.14.1 and 14.18 of NI 31-103, to deliver a quarterly account statement and annual investment performance report to each client.
40. The Dealer does not require an exemption from the adviser registration requirement under the Legislation as a result of the Dealer's involvement with the Model Portfolios, as the Dealer will not be engaged in providing discretionary trading services to clients in connection with the management of the Model Portfolios or the client accounts.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
(a) The Filer is, at the time of each Rebalancing Trade, registered under the Legislation as an adviser in the category of portfolio manager;
(b) any Sub-Adviser will be registered as an adviser in the category of portfolio under the Legislation, or be exempt from the requirement to be registered as an adviser pursuant to NI 31-103;
(c) each Rebalancing Trade will be made in accordance with the terms of the Model Portfolio and the Investment Plan;
(d) the Dealer will maintain records pertaining to the client accounts;
(e) each client is informed in writing in the Agreement or otherwise:
(i) of the roles, duties and responsibilities of the Filer and the Dealer, including that:
a. The Filer will manage the Model Portfolios without reference to the client's circumstances and only in accordance with the terms of the Model Portfolio selected by the client;
b. the Dealer will be solely responsible for gathering and periodically updating KYC and trusted contacted person information concerning the client and reviewing, on at least an annual basis, the suitability of the selected Model Portfolio for the client;
(ii) that the client will receive account statements and performance reports from the Dealer, and will not receive account statements and performance reports from the Filer;
(f) the Filer:
(i) will adopt, maintain and apply oversight policies and procedures designed to provide reasonable assurance that the Dealer complies with its KYC, trusted contact person and suitability obligations with respect to each client, including requiring that:
a. the Dealer not market and sell the Model Portfolios through an order-execution-only, suitability-exempt channel;
b. the Dealer notify the Filer of each instance where a Model Portfolio is provided to a client on the basis of a client-directed trade as contemplated in section 13.3 of NI 31-103 and similar provisions under CIRO rules (applicable to mutual fund dealers);
c. the Dealer be responsible for gathering and periodically updating KYC and trusted contacted person information concerning the client and confirming, on at least an annual basis, the suitability of the selected Model Portfolio for each client; and
d. the Dealer, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that the Dealer has complied with its KYC, trusted contacted person, and suitability obligations with respect to each client;
(ii) will maintain its own records of each client's investment positions and trades;
(iii) will have a written agreement with the Dealer concerning their respective responsibilities regarding the delivery of account statements and investment performance reports to clients; and
(iv) will adopt, maintain, and apply oversight policies and procedures designed to provide reasonable assurance that the Dealer complies with the client reporting obligations under the rules of NI 31-103 and CIRO (applicable to mutual fund dealers), as applicable, in respect of clients, including requiring that the Dealer, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that:
a. the Dealer has complied with its client reporting obligations under the rules of NI 31-103 and CIRO (applicable to mutual fund dealers), as applicable, and
b. the Dealer has undertaken steps in accordance with its policies and procedures to provide reasonable assurance that account statements and investment performance reports delivered to clients are complete, accurate and delivered on a timely basis in a format that is compliant with the rules of NI 31-103 and CIRO (applicable to mutual fund dealers); and
(v) will adopt, maintain and apply oversight policies and procedures designed to provide reasonable assurance that the Dealer complies with its obligations to provide Fund Facts and trade confirmations to a client with respect to the client's initial investment in a Model Portfolio, including requiring that each Dealer, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that the Dealer has provided Fund Facts and trade confirmations to clients in connection with such trades.
OSC File #: 2023/0221