Pro-Financial Asset Management Inc. (Re), 2010 CanLII 90357

Headnote National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions – relief granted certain disclosure and consent requirements of section 8.2 of National Instrument 81-105 Mutual Fund Sales Practices – some units issued by Filer purchased by sales representatives of participating dealers pursuant to private placement – NI 81-105 triggers certain disclosure and consent requirements relating to ‘equity interests’ held by sales representatives, including requirement to continuously update disclosure and consent – compliance with updating requirements can be administratively burdensome with limited additional benefit to investors – disclosure and consent requirements in NI 81-105 modified to allow evergreen disclosure of aggregate holdings up to a stated maximum percentage to reduce the need for continuous updates but still provide key disclosure to investors – participating dealers wishing to rely on exemption must agree to abide by terms and conditions of decision document, including requirement for written policies and procedures for compliance with modified disclosure requirements – fund manager must keep records of participating dealers relying on the exemption and provide the principal regulator with an updated list on a quarterly basis of those participating dealers relying on this decision. Applicable Legislative Provisions National Instrument 81-105 Mutual Fund Sales Practices, sections 8.2 and 9.1.

April 5, 2010

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 Pro-Financial Asset Management Inc. (the Filer)

and

in the Matter of the Pro Financial Mutual Funds (the Funds)

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 of the principal regulator (the Legislation) for an exemption pursuant to section 9.3 of National Instrument 81-105 – Mutual Fund Sales Practices (NI 81-105) for the following:

a) an exemption from the prospectus disclosure requirements found in subsections 8.2(1) and (2) of NI 81-105 on its own behalf, as the manager of the Funds; and

b) an exemption from the point of sale and consent requirements found in subsections 8.2(3) and (4) of NI 81-105, on behalf of entities that are registered as mutual fund dealers or investment dealers and are not affiliated with the Filer, and their dealing or sales representatives who may from time to time own or acquire securities issued by the Filer, in any of the Jurisdictions

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 in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador.

Interpretation

Terms defined in NI 81-105, National Instrument 81-02 – Mutual Funds (NI 81-102), National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined in this decision.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is a corporation formed under the laws of the Province of Ontario having its head office in Oakville, Ontario. The Filer is registered with the Ontario Securities Commission in the categories of Portfolio Manager and Exempt Market Dealer and has submitted an application for registration as an Investment Fund Manager.

2. The Filer is the manager of the mutual funds, seven at present, which make up the Pro Financial Fund Family. The Filer may from time to time establish and become the manager for additional mutual funds (such existing funds and any future funds managed by the Filer are herein referred to collectively as the Funds). Accordingly, the Filer is a “member of the organization” of the Funds within the meaning of 81-105. Neither the Filer nor any of the existing Funds is in default of the securities legislation of any Jurisdiction (as defined below).

3. The Funds are qualified for sale in each of the provinces of Canada (the Jurisdictions) pursuant to a simplified prospectus and annual information form dated November 8, 2009. The Funds are distributed through dealers in the Jurisdictions, and such dealers are “participating dealers” of the Funds within the meaning of National Policy 81-102 – Mutual Funds and NI 81-105.

4. The Filer intends to effect one or more private placements (the Private Placements) of its Class B Non-Voting Common Shares. At the time of completion of the first Private Placement, the Filer will have authorized share capital consisting of two classes of shares, namely Class A Voting Common Shares (the Class A Shares) and Class B Non-Voting Common Shares (the Class B Shares). The Class B Shares are economically equivalent to the Class A Shares, except that the holders thereof are not ordinarily entitled to notice of or to vote at meetings of shareholders. The Class B Shares automatically convert to Class A Shares on a one-to-one basis upon the occurrence of certain events, including the sale of majority control of the Filer to a third party or the Filer becoming a public entity. Accordingly, the Class A Shares and the Class B Shares together make up the “equity interest” in the Filer within the meaning of NI 81-105.

5. At the time of completion of the first Private Placement, the Filer will have issued and outstanding 1,000,000 Class A Voting Common Shares, all of which will be owned by the management of the Filer. Certain members of management will hold options to acquire an additional 70,000 Class A Voting Common Shares.

6. The aggregate number of Class B Shares to be issued under the Private Placements will represent no more than 20% of the Filer’s issued and outstanding equity securities.

7. The Filer intends to offer the Class B Shares to qualified purchasers, including certain individual dealing and sales representatives of various participating dealers who distribute the Funds. In this application, individual dealing and sales representatives who become holders of the Class B Shares are referred to as Participating Advisors and a Participating Advisor’s sponsoring firm is referred to as a Participating Dealer.

8. Purchases by any one Participating Advisor will be limited by the Filer so that at no time will any Participating Advisor own more than 1% of the Filer’s issued and outstanding equity securities.

9. The Filer anticipates that following the completion of the Private Placements, notwithstanding that Participating Advisors may have purchased Class B Shares:

a. each such Participating Dealer and each Participating Advisor will be free to choose which mutual funds to recommend to their clients and will consider recommending the Funds to their clients in the same manner as they consider recommending mutual funds that are not managed by the Filer; and

b. each such Participating Dealer and each Participating Advisor will comply with its respective obligations at law to recommend to their clients the mutual funds that such Participating Dealer and Participating Advisor believe would be suitable for such clients and in accordance with the investment of objectives of such clients.

10. Following the completion of the Private Placements:

a. the Filer will provide to the Participating Dealers the compensation described in the prospectus of the Funds in the same manner as the Filer provides compensation for any other participating dealer selling securities of the Funds whose sales representative has not purchased Class B Shares; and

b. neither the Filer nor any other member of the organization of the Funds will provide any incentive (whether express or implied) to any Participating Advisor or to a Participating Dealer to encourage those Participating Advisors or the Participating Dealer to recommend to their clients the Funds rather than competing mutual funds managed by persons other than the Filer, except as permitted by NI 81-105.

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 exemptions from the application of subsections 8.2 (1) and (2) and subsections 8.2 (3) and (4) of NI 81-105 (the Exemptions Sought) are granted provided that:

1. In substitution of the disclosure requirements of subsections 8.2(1) and (2) of NI 81-105 that apply to the simplified prospectuses of the Funds, the Funds will include the following disclosure in their simplified prospectuses that describes, as of a date that is within 30 days of the date of the simplified prospectus:

a) that up to a maximum of 20 percent of the outstanding equity interests of the Filer may be held by Participating Dealers and Participating Advisors;

b) the names of any Participating Dealer who has Participating Advisors holding equity interests in the Filer, the aggregate amount held by those Participating Advisors and the fact that up-to-date information can be obtained from the Filer’s website, which will be updated on a monthly basis, as Class B shares of the Filer are issued;

c) that no Participating Advisor, together with his or her associates, will hold more than 1 percent of the outstanding equity interests of the Filer;

d) that as a shareholder of the Filer, a Participating Advisor may stand to benefit from the inflow of client money to the Funds;

e) that if an investor’s sales representative is a Participating Advisor, then that investor will receive a disclosure statement describing the equity interest held by that Participating Advisor before he or she invests in the Funds and that he or she must consent to the trade of units of the Funds; and

f) that if the branch manager or other supervisor of the investor’s sales representative is a Participating Advisor, the investor will also receive a disclosure statement describing the equity interest that the branch manager or supervisor holds before he or she invests in the Funds and that he or she must consent to the trade of units of the Funds.

2. The Filer updates its website to provide the aggregate percentage of equity interests held by Participating Advisors and the names of the applicable Participating Dealers will be updated if new Participating Advisors or additional Participating Dealers acquire an equity interest in the Filer, or if there is a change in the aggregate percentages previously disclosed.

3. In substitution of the point of sale disclosure and consent requirements of subsections 8.2(3), 8.2(4) and (5) of NI 81-105 that would otherwise apply to Participating Dealers and Participating Advisors, any participating dealer who has a Participating Advisor will:

a) deliver to a client of a Participating Advisor, prior to completing a trade in a security of a Fund, a disclosure document which states

i) that all Participating Advisors of the Participating Dealer and their associates hold, in the aggregate, no more than a maximum of stated percentage of the equity interests of the Filer;

ii) that the Participating Advisor acting on the trade and the associates of such Participating Advisor hold, in the aggregate, a maximum of one percent of the equity interests of the Filer; and

iii) that the client may go to the Filer’s website or call a specified toll-free number, which will be disclosed in such disclosure document, to obtain additional information about the holdings of the Participating Dealer and its Participating Advisors in the Filer;

b) the stated percentage that must be disclosed pursuant to (a)(i) above, will be that number determined by the Participating Dealer that reasonably and accurately represents the maximum amount that it expects its Participating Advisors will from time to time hold in the Filer;

c) the Participating Dealer will, following the delivery of the disclosure document described above, comply with the requirements of section 8.2(4) of NI 81-105 unless section 8.2(5) of NI 81-105 applies in respect of that trade; and

d) in the event a Participating Advisor assumes a position of authority or supervision over other sales representatives of the Participating Dealer, before completing a trade in a unit of a Portfolio that is acted on by one of those other sales representatives, the Participating Dealer and the other sales representatives will comply with the requirements of 2(a), (b) and (c) above, to disclose the amount held by the specific Participating Advisor in that position of authority.

4. The Participating Dealer will not be required to comply with the requirements described in condition 3 if the Participating Dealer has already delivered the disclosure document and obtained the purchaser’s consent on a previous trade and the Participating Dealer is satisfied that the equity interests held by its Participating Advisors at the time of the trade have not increased above the amounts disclosed in the previously delivered disclosure document.

5. Prior to a Participating Dealer relying on this Decision, the Filer will provide such Participating Dealer with a copy of this Decision together with an explanation to the Participating Dealer of the operation of the Decision and the actions required on the part of the Participating Dealer.

6. Any Participating Dealer wishing to rely on this Decision will:

a) send a written consent to the Filer agreeing to comply with the conditions of this decision as they relate to the Participating Dealer and any Participating Advisor (the Written Consent);

b) have in place written policies and procedures to ensure that there is compliance with the conditions of this Decision.

5. The Filer will:

a) keep records of the Participating Dealers from which it has received a Written Consent;

b) forward an updated list of all Participating Dealers from which it has received a Written Consent to the principal regulator on a quarterly basis within 10 business days of the end of each calendar quarter; and

c) include in either the simplified prospectus or the annual information form of the Funds a list of the Participating Dealers from which it has received a Written Consent as of a date that is within 30 days of the date of the simplified prospectus or annual information form.

6. This Decision will expire on the date on which the requirements in section 8.2 of NI 81-105 are amended, revoked or replaced.

“Paulette Kennedy”

“Margot Howard”

Name: Paulette Kennedy

Title: Commissioner

Name: Margot Howard

Title: Commissioner

ONTARIO SECURITIES COMMISSION