LEGAL CONSI DERATI ONS FOR STARTI NG A POOLED FUND Pierre-Yves - - PDF document

LEGAL CONSI DERATI ONS FOR STARTI NG A POOLED FUND Pierre-Yves Châtillon, Fasken Martineau DuMoulin

1. The Pooled Fund Structure a) Benefits: Is a conduit that can maintain same characterization of income and capital gains for client ( if non-residentbeneficiary: distribution will be deemed income from property) while allowing manager to manage efficiently various accounts with similar investment profiles through one common portfolio. b) Structure

• Trust Agreement (requires trustee and settlor. Settlor is usually manager as

promoter

• Trust Declaration (if manager is trustee)
• Master Trust document with Fund document for each fund or Trust

document for one or more funds (Trust document need not be amended to add new fund). Interesting approach for manager because manager can create internally as many new funds as it wishes without needing outside counsel assistance because of standard forms – must do appropriate cross- references to name new funds in other documents.

• Offering memorandum, or term sheet, or nothing – Remember, registrant

always responsible for suitability of investments products to clients – (OMs and Term-sheets may serve to qualify the fund as a quasi-mutual fund trust. One condition of quasi-mutual fund trust is that there be a public distribution of its securities. The OM or term sheet needs to be distributed to at least one person.)

• Portfolio management agreement – must include specific reference to use
• f related funds in client account and get client’s signed consent

(NI 31-103, Sect. 13.5 (2) (a))

• Custodian Agreement – We have models, but you may want to use TD

Waterhouse’s.

• Subscription agreement if only sale of units w/o managing portfolio.

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• Insert clause in trust agreement and portfolio management agreement or

subscription agreement if management fees to be paid by fund or by client directly. c) Reporting: Annual reports of sales on exempt market NI 45-106 w/in 30 days of Fund’s financial year end plus private placement fees (varies with province of client). Table of current rates attached. d) Registration: PM, IFM, EMD. See attached requirement summaries. 2. Exemptions available: a) Statutory

• Accredited investors (NI 45-106) – prospectus exemption only

− Organizations − individuals

• $150,000 minimum amount (NI 45-106) – prospectus exemption only
• Accredited investors (NI 31-103) – dealer exemption only

−

• Sect. 8.6 re: managed accounts

−

• Sect. 8.5 if acting through registered dealer

b) Discretionary

• Designation as trustee:

− must have registration in Ontario (even if resident elsewhere) and clients resident in Ontario − fees required since 2010-1,500$ − PIFs needed (executive officer-directors) − Custodian must be approved

• Secondary Managed Account via Primary Managed Account:

− In Ontario only because Ontario carved out designation of PM as accredited investorfor its managed accounts in NI 45-106 − Managed account. Discretionary management agreement;

• pening of account form

− AUM and experience − Primary and Secondary Accounts − Fees required

• Small investor (small estates, small long-standing clients):

− Managed account – Discretionary Management Agreement – opening of account form − AUM and experience – very important − Reconsidering exemptions for smaller PMs. 3. Foreign investors:

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• must not be established or maintained primarily for the benefit of non-

residents:

• not more than 49% of unitholders to to have non-resident status
• however if the pooled fund holds less than 10% of taxable

Canadian property, there can be a higher number of non-residents.

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Jurisdiction Filing Fees Notes British Columbia $100.00* *The Greater of $100 or 0.03% of proceeds in BC Alberta $120.00** **The Greater of $120 or 0.025% of proceeds in AB Saskatchewan $100.00 Or greater of $50 per SK purchaser if under 2.10(2) Manitoba $25.00 Or $650 if Offering Memorandum exemption Ontario $500.00 Only payable if not a reporting issuer or mutual fund Quebec $253.00 ***The Greater of $253 or 0.025% of proceeds in PQ. New Brunswick $100.00 Nova Scotia $26.26 Prince Edward Island $0.00 Newfoundland $50.00 Northwest Territories $25.00 Yukon $25.00 Nunavut $25.00 Total $3,500.00 * BC Calculator Proceeds $0.00 0.03% 0.03% Payable (if greater than $100) $0.00 ** AB Calculator Proceeds $0.00 0.025% 0.025% Payable (if greater than $120) $0.00 *** PQ Calculator Proceeds $0.00 0.025% 0.025% Payable (if greater than $253) $0.00

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NI 31-103 – Registration Requirements and Exemptions

Requirements Portfolio Manager (PM) FITNESS OF REGISTRATION Working Capital [12.1] $25,000 Transition period: [16.11] One year for registered ICPMs Insurance [12.3, 12.4 & 12.5] $50,000 per clause if do not hold or have access to client assets OR If hold or has access to client assets, the highest of following per clause:

• 1% of AUM or $25Million, whichever is less
• 1% of PM’s total assets or $25Million, whichever is less
• $200,000
• amount determined by the Board of Directors

Transition period: 6 months for registered ICPMs [16.13] Ultimate Designated Person (UDP) [11.2] UDP must be one of the following:

• chief executive officer
• sole proprietor
• An officer in charge of a

division, if the registerable activities occurs only within that division

• an individual acting in a

capacity similar to that above No proficiency requirements Transition period [16.8]: 3 months to apply to register UDP for registered ICPMs Chief Compliance Officer (CCO) [11.3] A CCO must be designated CCO must be one of the following:

• an officer or partner
• sole proprietor

Proficiency Requirements [3.13]:

• 1. CFA, CA, CGA, CMA, lawyer, or Québec notary + CSC & PDO + 3 years

relevant securities experience with an ID, PM or an IFM or 3 years professional services in the securities industry & 1 year with a registered firm or an IFM

• OR –
• 2. CSC & PDO + 5 years with an ID or a PM, 5 years of which in a compliance

capacity

• OR -
• 3. PDO and meet requirements of an advising representative of a PM

Transition period: 3 months to apply to register CCO for registered ICPMs converted to PMs [16.9(1)] Existing CCO of registered ICPMs is grandfathered [16.9(2)(d)] New CCO applying to register within the 3 month deadline has 1 year to meet

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Requirements Portfolio Manager (PM) the proficiency requirements [16.9(3)(d)] Representatives Proficiency Requirements for an Advising Representative (AR) [3.11]:

• 1. CFA + 12 months relevant investment management experience in the last 3

year period

• OR –
• 2. CIM + 4 years relevant investment management experience, 1 year of which

in the last 3 year period Proficiency Requirements for an Associate Advising Representative (AAR) [3.12]:

• 1. Level 1 of CFA + 2 years relevant investment management experience
• OR –
• 2. CIM + 2 years relevant management experience

Transition period: Existing advisers of registered ICPMs converted to ARs/AARs are grandfathered [16.10(1)] New ARs and AARs must meet requirements at time of application Financial Reporting

• 1. Audited financial statements and Form 31-103F1 within 90 days after fiscal

year end [12.13] Transition period: No transition period OPERATIONAL REQUIREMENTS Compliance System System of controls and supervision and compliance with securities legislation [11.1] Written policies and procedures manual in place Record keeping [11.5 & 11.6] Know your client and suitability [13.2 & 13.3] Conflicts of interest [13.4] Transition period: No transition period Disclosure to clients Relationship disclosure information [14.2] Disclosure of fairness policy (re fair allocation of investment opportunities) [14.3] Disclosure of relationship with a financial institution, if applicable [14.4] Transition period: Current registrants have 1 year to comply with 14.2 relationship disclosure [16.14] Client account activity reporting Delivery of client statements at least once every 3 months [14.14(3)]

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Requirements Portfolio Manager (PM) Transition period: No transition period Referral Arrangements Referral arrangement disclosure to clients [13.10] Transition period: 6 months to comply for current registrants [16.15] Complaint Handling Complaint handling procedures, dispute resolution or mediation services and disclosure to clients [13.15 & 13.16] Transition period: 2 years to comply with dispute resolution service for current registrants, except Québec [16.16] Course Abbreviations: CSC – Canadian Securities Course Exam PDO – Officers’, Partners’ and Directors’ Exam CIF – Canadian Investment Funds Exam IFICC – Investment Funds in Canada Course Exam EMP – Exempt Market Products Exam MFDC – Mutual Fund Dealers Compliance Exam SRP – Sales Representative Proficiency Exam BMP – Branch Manager Proficiency Exam

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Registration Requirements for an Exempt Market Dealer (EMD) under NI 31-103

FITNESS OF REGISTRATION Excess Working Capital [12.1] Transition period: Always greater than zero as calculated using Form 31-103F1

• Minimum capital - $50,000

1 year for registered LMDs in Ont and Nfld [16.13]; otherwise must register within 1 year [16.7] Insurance [12.3] Transition period: Specified clauses, double aggregate limit / full reinstatement coverage Highest of the following per clause:

• $50,000 per employee/agent/dealing representative or $200,000, whichever is less
• 1% of total client assets that the EMD holds or has access to or $25 million, whichever is

less

• 1% of EMD’s total assets or $25 million, whichever is less
• amount determined by the Board of Directors

6 months for registered LMDs in Ont and Nfld [16.13]; otherwise must register within 1 year [16.7] Ultimate Designated Person (UDP) [11.2] Transition period: No proficiency requirements for an UDP UDP must be one of the following: chief executive officer, sole proprietor, an officer in charge of a division, if the registerable activities occurs only within that division or an individual acting in a capacity similar to the above 3 months to apply to register UDP for registered LMDs in Ont & Nfld[16.8]; otherwise must register within 1 year [16.7] Chief Compliance Officer (CCO) [11.3] Transition period: Proficiency Requirements of a CCO [3.10]:

• 1. Partners, Directors and Senior Officers Course Exam + Canadian Securities Course Exam
• r Exempt Market Products Exam; or
• 2. Meet proficiency requirements of a CCO of a Portfolio Manager

3 months to apply to register CCO for registered LMDs in Ont & Nfld [16.9(1)]; otherwise must register within 1 year [16.7] Existing CCO of registered LMDs in Ont & Nfld have 1 year to meet the proficiency requirements [16.9(4)] New CCO applying to register within the 3 month deadline will have 1 year to meet the proficiency requirements [16.9(3)] Dealing Representative (DR) Transition period: Proficiency Requirements of a DR [3.9]:

• 1. Canadian Securities Course Exam or Exempt Market Products Exam; or
• 2. Meet proficiency requirements of an Advising Representative of a Portfolio Manager

Existing trading officers and salespersons of registered LMDs converted to DRs must meet the proficiency requirements within 1 year [16.10(3)] New DRs must meet the proficiency requirements within 1 year [16.7(4)]

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Registration Requirements for an EMD under NI 31-103 – Page 2

Financial Reporting Transition period: Audited financial statements and Form 31-103F1 within 90 days after fiscal year end [12.12(1)] 1 year for registered LMDs in Ont and Nfld [Omnibus Order]; otherwise must register within 1 year [16.7] OPERATIONAL REQUIREMENTS Compliance System Transition period:

• Policies and Procedures that establish a system of controls and supervision to ensure

compliance with securities legislation [11.1]

• Record keeping – prescribed requirements + 7 year retention [11.5 & 11.6]
• KYC & suitability [13.2 & 13.3]. Generally, does not apply if a permitted client waives

their KYC & suitability requirements in writing; no managed accounts [13.2(6) & 13.3(4)] No transition period Disclosure to Clients Transition period: Relationship disclosure information to clients [14.2]. Does not apply if a permitted client waives their right to such information in writing; no managed accounts [14.2(6)] 1 year to comply with 14.2 relationship disclosure for LMDs in Ont & Nfld [16.14];

• therwise must register within 1 year [16.7]

Client account activity reporting Transition period: Deliver written trade confirmation, including prescribed information, promptly to clients or semi-annual confirmations for certain automatic plans [14.12 & 14.13] Quarterly statements or monthly statements as requested by clients [14.14(1) & 14.14(2)] 2 years to comply with section 14.14 (re delivery of client statements) for registered LMDs in Ont & Nfld [Omnibus Order]; otherwise must register within 1 year [16.7] Referral Arrangements Transition period: Referral Agreement + appropriate client disclosure (prescribed) to clients [13.8 to 13.10], including existing referral arrangements where referral fees are paid after Sept 28/09 [13.11] 6 months to comply for registered LMDs in Ont and Nfld [16.15]; otherwise must register within 1 year [16.7] Complaint Handling Transition period: Complaint handling procedures (fair & reasonable), and alternative dispute resolution or mediation services at EMD’s expense must be made available to clients [13.15 & 13.16] 2 years to comply with dispute resolution service for registered LMDs in Ont and Nfld [16.16]; otherwise must register within 1 year [16.7]

Fasken Martineau DuMoulin LLP

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Registration Requirements for an Investment Fund Manager (IFM) under NI 31-103

FITNESS OF REGISTRATION Transition Period

• 1 year for an active Canadian IFM to apply for registration as an IFM in the

jurisdiction of its head office [16.4(1) & (2)]

• 2 years for a Canadian IFM to apply for registration as an IFM in other jurisdictions

[16.5(1) & (2)]

• 1 year for a registered dealer or a registered adviser acting as an IFM to comply with

the insurance requirement of an IFM [16.4(3)]

• 2 years for a non-Canadian IFM to apply for registration as an IFM [16.6(1) & (2)]

Excess Working Capital [12.1(3)(c)] Always greater than zero as calculated using Form 31-103F1

• Minimum capital - $100,000
• exemption from minimum capital - pooled fund exemption [12.1(4)]

Insurance [12.5] Specified clauses, double aggregate limit / full reinstatement coverage Highest of the following per clause:

• 1% of assets under management or $25 million, whichever is less
• 1% of IFM’s total assets or $25 million, whichever is less
• $200,000
• amount determined by the Board of Directors

Ultimate Designated Person (UDP) [11.2] No proficiency requirements for an UDP UDP must be one of the following: chief executive officer, sole proprietor, an officer in charge of a division, if the registerable activities occurs only within that division or an individual acting in a capacity similar to the above Chief Compliance Officer (CCO) [11.3] Proficiency Requirements of a CCO [3.14]:

• 1. CFA Charter, Lawyer, Chartered Accountant, Certified General Accountant, Certified

Management Accountant in Canada, or Québec Notary PLUS Canadian Securities Course Exam (“CSC Exam”) + Partners, Directors and Senior Officers Course Exam (“PDO Exam”) PLUS 3 years relevant securities experience with a registered firm or an IFM, or 3 years professional services in the securities industry and 1 year with an IFM

• OR -
• 2. Canadian Investment Funds Exam, the CSC Exam or the Investment Funds in Canada

Course Exam PLUS PDO Exam PLUS 5 years of relevant securities experience with a registered firm or an IFM, including 3 years in a compliance capacity

• OR -
• 3. Individual meets the proficiency requirements of a CCO of a Portfolio Manager (PM)

(cannot rely on grandfathering as meeting the proficiency requirements of a CCO of a PM)

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Registration Requirements for an IFM under NI 31-103 – Page 2

Permitted Individuals All Permitted Individuals of an IFM must complete a Form 33-109F4 [2.5 of NI 33-109] “Permitted Individual” means a director, a 10% or more shareholder (directly or indirectly), chief executive officer, chief financial officer, or chief operating officer (or an individual performing the functional equivalent of a CEO, CFO or COO) Financial Reporting

• 1. Audited financial statements, Form 31-103F1 and a description of any net asset value

adjustment during the year - within 90 days after fiscal year end [12.14(1)]

• 2. Quarterly unaudited financial statements, Form 31-103F1 and a description of any net

asset value adjustment during the quarter - within 30 days after each quarter end 12.14(2)] OPERATIONAL REQUIREMENTS Compliance System

• Policies and Procedures that establish a system of controls and supervision to ensure

compliance with securities legislation [11.1]

• Record keeping – prescribed requirements + 7 year retention [11.5 & 11.6]

KYC / Suitability Not applicable [13.1] Complaints Not applicable [13.14] Disclosure to Clients Relationship disclosure documents, allocating investment opportunities fairly, relationship with a financial institution, notice by non-resident registrants, holding client assets (except in trust), safekeeping agreements - not applicable [14.1] Client account activity reporting Not applicable [14.1] Conflicts of Interest Identifying and responding to conflicts of interest and disclosure when recommending related

• r connected securities [13.4 & 13.6]

Does not apply to an IFM in respect to an investment fund that is subject to NI 81-107 Independent Review Committee for Investment Funds [13.4(4)] Referral Arrangements Referral Agreement + appropriate client disclosure (prescribed) to clients [13.8 to 13.10], including existing referral arrangements where referral fees are paid after Sept 28/09 [13.11]

Fasken Martineau DuMoulin LLP