Stone Asset Management Limited
Headnote
Pursuant to National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from 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 service offered through an unaffiliated mutual fund dealer.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7(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).
September 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 STONE ASSET MANAGEMENT LIMITED (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 (the "Legislation") exempting the Filer from the following requirements with respect to clients invested in the Model Portfolios (as defined below):
(a) 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 tolerance, 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);
(collectively, the "Know Your Client Exemption"); and
(b) 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;
(collectively, the "Trusted Contact Person Exemption"); and
(a) 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
(b) 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 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, British Columbia, Manitoba, Newfoundland & Labrador, Nova Scotia, Québec and Saskatchewan, (each, a 'Jurisdiction' and, together with Ontario, the 'Canadian Jurisdictions'). in respect of the Exemption Sought.
Interpretation
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
NI 31-103 means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
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 under the Legislation as a portfolio manager and restricted dealer and is also registered as a portfolio manager under the securities legislation in each of the Other Jurisdictions. The Filer is also registered as an investment fund manager in Ontario, Quebec and Newfoundland & Labrador.
3. The Filer is not in default of securities legislation in any of the Canadian Jurisdictions.
The Model Portfolio Service
4. The Filer proposes to use its valuation and selection methodologies to construct and maintain model investment portfolios for various stated investment objectives (each a "Model Portfolio" and collectively the "Model Portfolios").
5. Each Model Portfolio will have investment guidelines governing the acceptable minimum and maximum allocation to various asset classes within the Model Portfolio (the "Permitted Ranges", and each, a "Permitted Range").
6. Each Model Portfolio will be comprised exclusively of open-ended mutual funds, including exchange-traded mutual funds (ETFs), (collectively the "Funds" and individually a "Fund") established under the laws of a Canadian Jurisdiction and cash and cash equivalents.
7. 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 National Instrument 81-102 Investment Funds.
8. 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.
9. The securities of each Fund that is an ETF are, or will be, listed and traded on a recognized exchange.
10. Each of the Funds is, or will be, managed by a third-party investment fund manager that is unaffiliated with the Filer. In the future, one or more of the Funds may be managed by the Filer or an affiliate of the Filer.
11. The Model Portfolios will be offered as a service (the "Service") to investors through Monarch Wealth Corporation Inc. (the "Dealer"). The Dealer is registered under the Securities Act (Ontario) (the "Act") as an exempt market dealer and mutual fund dealer and is also registered as a mutual fund dealer in each of Alberta, British Columbia (also registered as an exempt market dealer), Manitoba, Newfoundland & Labrador, Nova Scotia, Québec, and Saskatchewan.
12. The Dealer will collect all of the required know your client ("KYC"), trusted contact person ("TCP"), and suitability information for each client considering the Service. Based on an assessment of the client's KYC and suitability information, the Dealer's dealing representative will recommend a Model Portfolio for the client.
13. The client will discuss the recommended Model Portfolio and the Funds within the Model Portfolio with their Dealer's dealing representative, and the client ultimately chooses the Model Portfolio. Model Portfolios are not changed or tailored for individual clients.
14. If the client decides to invest in a Model Portfolio, a tripartite agreement (the "Agreement") is entered into between the client, the Dealer and the Filer in respect of the Service as described below.
15. Securities of the Funds that comprise each Model Portfolio will be distributed through the Dealer to clients and will be held either directly by each client in his/her own account(s) established with the Dealer, or in the case of nominee accounts, in the Dealer's name, in trust for the client.
16. Clients will have no direct contact with the Filer in connection with the Filer's management of the Model Portfolios and will interact solely with their Dealer and approved persons of their Dealer in connection with the Filer's management of the Model Portfolios and the Dealer's administration of its accounts.
17. The Dealer has the option of imposing a minimum investment amount for clients to participate in the Service.
18. The Dealer will be responsible for gathering and periodically updating KYC and TCP information concerning the client and confirming, on at least an annual basis, the suitability of the Model Portfolio for the client.
19. Where the Dealer 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, this will be communicated to the Filer and the client by the Dealer, and the Dealer will take appropriate action. A change to a different Model Portfolio will not be made without the client entering into a new Agreement in respect of the new Model Portfolio.
20. A client may terminate the Service at any time by instructing the Dealer to redeem or switch the client's investment out of the Funds. The Dealer and the Filer can terminate the Service under the conditions set out in the Agreement.
Monitoring, Service Trades and Additional Investment Trades
21. The Filer will oversee and monitor each Model Portfolio to ensure it remains in compliance with its stated investment objective and investment guidelines at all times and to determine whether any changes to the composition of the Model Portfolio or Permitted Ranges would be appropriate.
22. As part of the Service, provided that the Model Portfolio remains consistent with its stated investment objective at all times, the Filer may, from time to time, use its discretion to make decisions regarding certain changes to the holdings of a Model Portfolio within the Permitted Ranges (the Optimization Changes).
23. As part of the Service, provided that the client is given at least 60 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).
24. The Written Notice will describe the proposed Weighting Change and specify that if the client does not provide his or her objection to the proposed Weighting Change by a specified date, this non-objection will be deemed to be consent for the change on the effective date.
25. The Optimization Changes and Weighting Changes to Model Portfolios that are determined from time to time by the Filer will be communicated by the Filer to the Dealer in writing and will be effected in a client's account by the Dealer through the following types of trades:
a. purchase of securities to increase holdings of an existing Fund in a Model Portfolio (the "Increase Trades");
b. sale of securities to decrease holdings of an existing Fund in a Model Portfolio (the "Decrease Trades");
c. purchase of securities to add a new Fund to a Model Portfolio (the "New Fund Trades"); and
d. sale of securities to remove an existing Fund from a Model Portfolio (the "Fund Removal Trades", and together with the Increase Trades, Decrease Trades and New Fund Trades, the "Service Trades").
26. In each case, the Dealer will confirm receipt of the Filer's instructions and will provide written confirmation to the Filer that the Service Trades have been effected in accordance with the Filer's instructions in the applicable client accounts.
27. A client may, from time to time, contribute additional funds to the client's account with the Dealer for investment in the selected Model Portfolio through the Service. Such additional funds will be applied towards the purchase of additional securities of the Funds in accordance with the Permitted Ranges (the "Additional Investment Trades"). All Additional Investment Trades will be effected by the relevant Dealer.
28. The Dealer will not have discretionary authority to participate in the management of the Model Portfolios or to recommend Optimization Changes or Weighting Changes.
Fees and Expenses
29. Each client pays the Dealer a negotiated fee for the Service that is calculated as a percentage of the market value of the client's investment in the Service. Independent of the Service, each client also negotiates a separate fee for the services of their Dealer's dealing representative.
30. The Filer's fee for managing the Model Portfolios is calculated based on the aggregate amount of assets held in Model Portfolios by all the Dealer's clients. This fee is paid by the Dealer and included in the service fee that the client pays to the Dealer.
31. The Model Portfolios will be comprised of institutional series units of Funds that are not ETFs, and regular units of Funds that are ETFs. The management fees for institutional series units of Funds that are not ETFs will be charged outside the Funds and are negotiable with the applicable Fund manager. The Dealer is responsible for negotiating the management fees for these Funds and these management fees will be included in the negotiated service fee that each client pays the Dealer. Certain institutional series of Funds that are not ETFs have operating expenses that will be charged within the Funds. The management fees and operating expenses for ETFs will be charged within the ETFs.
32. There will be no duplication of any fees or charges as a result of a client's decision to use the Service.
33. For Model Portfolios comprised of Funds that are not ETFs, there will be no separate fees, such as sales charges, redemption fees, switch fees or early trading fees, charged in connection with the Service Trades.
34. For Model Portfolios comprised of Funds that are ETFs, there will be no separate fees, such as sales charges, redemption fees, switch fees or early trading fees, charged in connection with the Service Trades except for brokerage fees (also known as trading or transaction fees) charged by the Dealer for each Service Trade, if any, which will be charged to each client on a proportional basis.
Agreement among the Filer, the Dealer and the Client and Client Reporting
35. The Agreement entered into among the Filer, the Dealer and each client in respect of the Service will set out, among other matters, the following:
a. the name, investment objective and Permitted Ranges of the selected Model Portfolio, and the names of the underlying Funds that form part of the selected Model Portfolio at the time the Agreement is entered into;
b. the role, duties and responsibilities of the Filer, including:
i. that the client authorizes the Filer to manage the client's investments on a discretionary basis in accordance with the terms of the Model Portfolio selected by the client and without reference to the client's circumstances;
ii. that the Filer has the discretion to make Optimization Changes, provided the Model Portfolio remains consistent with its stated investment objective and the Permitted Ranges;
iii. that the Filer has the discretion to recommend Weighting Changes, provided the Client is given at least 60 days' advance written notice and does not object and the Model Portfolio remains consistent with its stated investment objective;
c. the role, duties and responsibilities of the Dealer, including:
i. that the Dealer will be solely responsible for gathering and periodically updating KYC and TCP information concerning the client, and confirming, on at least an annual basis, the suitability of the selected Model Portfolio for the client;
ii. that the Dealer will not have discretionary authority to participate in the management of the Model Portfolio or to recommend Optimization Changes or Weighting Changes;
iii. that the Dealer is responsible for effecting all trades for the client associated with the Service, including the Service Trades;
iv. that the Dealer is responsible for providing the client with all required reporting under the Legislation in connection with the Service, including trade confirmations, account statements and investment performance reports;
d. a description of all fees and expenses payable by a client in respect of an investment in a Model Portfolio, including those charged directly to a client in respect of the Service and those charged in respect of an investment in the Funds through the Service, as well as confirmation that there will be no duplication of any fees or charges as a result of the client's decision to use the Service, as described in paragraphs 29 to 34 above;
e. a statement that the Filer's fee, which is paid by the Dealer and included in the service fee that the client pays to the Dealer, is calculated based on the aggregate amount of assets held in Model Portfolios by all of the Dealer 's clients;
f. how the Service may be terminated.
36. The Dealer will provide a copy of the Agreement to the client and be responsible for ensuring that the client understands the Service and the topics covered in the Agreement.
37. The Dealer will reflect the Service Trades and Additional Investment Trades in each client's account(s) on the next business day following such trades, subject to technological limitations.
38. Clients will be able to access their accounts via Dealer online access on a daily basis.
39. Fund Facts and ETF Facts will be delivered to each client by the Dealer as required by the Legislation, subject to any applicable exemption.
40. Trade confirmations for every transaction in a client's account, including Service Trades, will be provided to the client by the Dealer in accordance with the requirements under the Legislation.
41. The Dealer will send account statements and investment performance reports to each client in the Service in accordance with the requirements under the Legislation.
42. The Dealer will provide each client in the Service with an annual tax reporting package.
Exemption Sought
43. In the absence of the Exemption Sought, the Filer would be required:
a. to gather and update the information contemplated by the Know Your Client Requirement in section 13.2 of NI 31-103 for each client in the Service;
b. 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 in the Service;
c. to ensure that each Service Trade is suitable for each client in the Service in accordance with the Suitability Requirement in section 13.3 of NI 31-103, rather than invested in accordance with the terms of the client's Model Portfolio; and
d. to deliver account statements and investment performance reports to clients who have invested in the Model Portfolios in accordance with the Statement Delivery Requirement in sections 14.14, 14.14.1, and 14.18 of NI 31-103.
44. The Dealer does not require an exemption from the adviser registration requirement under the Legislation as a result of its involvement with the Service as it will not be engaged in providing discretionary management advice to clients in connection with the management of the Model Portfolios and will be effecting the Service Trades in accordance with the Filer's instructions, without exercising any discretion.
Decision
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 Service Trade, registered under the Legislation as an adviser in the category of portfolio manager;
(b) each Service Trade is made in accordance with the terms of the selected Model Portfolio;
(c) each client in the Service 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 TCP information concerning the client and confirming, 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 Dealer, and will not receive account statements and performance reports from the Filer;
(d) the Filer will adopt, maintain and apply policies and procedures designed to provide reasonable assurance that the Dealer complies with its KYC, TCP and suitability obligations with respect to each client in the Service, including requiring that:
(i) the Dealer not market and sell the Model Portfolios through an order-execution-only, suitability-exempt channel;
(ii) the Dealer notify the Filer of each instance where a Model Portfolio is sold 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 IIROC or MFDA rules;
(iii) the Dealer shall be responsible for gathering and periodically updating KYC and TCP information concerning the client and confirming, on at least an annual basis, the suitability of the selected Model Portfolio for each client, and
(iv) 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, TCP and suitability obligations with respect to each client in the Service.
(e) the Filer will adopt, maintain and apply policies and procedures designed to provide reasonable assurance that the Dealer complies with the client reporting obligations under the rules of the MFDA in respect of clients in the Service, 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:
(i) the Dealer has complied with its client reporting obligations under the rules of the MFDA and
(ii) the Dealer has performed and documented sample testing and reconciliations 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 the MFDA.
(f) the Filer will adopt, maintain and apply policies and procedures designed to provide reasonable assurance that the Dealer complies with its obligations in respect of all trading for clients in connection with the Service, 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:
(i) the Dealer has effected all trades for clients in connection with the Service, including all Additional Investment Trades, in accordance with the selected Model Portfolios, and
(ii) the Dealer has effected all Service Trades in accordance with the Filer's written instructions in the applicable client accounts.
(iii) the Filer has a written agreement in place with the Dealer concerning their respective roles, duties and responsibilities to clients in respect of the Service.
"Debra Foubert"
Director, Compliance & Registrant Regulation
Ontario Securities Commission
Application File #: 2022/0253