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 of 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. DM_MTL/010159-00002/2545262.1
- 2 - • 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; opening 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: DM_MTL/010159-00002/2545262.1
- 3 - • 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. DM_MTL/010159-00002/2545262.1
- 4 - Jurisdiction Filing Fees Notes British Columbia $100.00* *The Greater of $100 or 0.03% of proceeds in BC **The Greater of $120 or 0.025% of proceeds in Alberta $120.00** 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 Only payable if not a reporting issuer or mutual Ontario $500.00 fund ***The Greater of $253 or 0.025% of proceeds in Quebec $253.00 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 DM_MTL/010159-00002/2545262.1
- 5 - 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 No proficiency requirements ( 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 Transition period [16.8]: 3 months to apply to register UDP for registered ICPMs Chief Compliance Officer ( CCO ) Proficiency Requirements [3.13]: [11.3] 1. CFA, CA, CGA, CMA, lawyer, or Québec notary + CSC & PDO + 3 years A CCO must be designated 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 CCO must be one of the - OR – following: 2. CSC & PDO + 5 years with an ID or a PM, 5 years of which in a compliance - an officer or partner capacity - sole proprietor - 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 DM_MTL/010159-00002/2545262.1
- 6 - 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)] DM_MTL/010159-00002/2545262.1
- 7 - 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 DM_MTL/010159-00002/2545262.1
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