National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) requires securities dealers to disclose information that a reasonable investor would expect to know about the client’s relationship with the dealer, including any material conflicts the dealer or its representatives may have with a client. These regulations require dealers to provide this disclosure to clients prior to making any trades.
Virtus Capital Management Inc. (VCMI or the Firm) is registered in the provinces of British Columbia, Alberta, Manitoba, Ontario, New Brunswick, Prince Edward Island, and Nova Scotia in the category of exempt market dealer. Due to the relationship between VCMI and its registered individuals and certain issuers, terms and conditions are imposed on the registration of VCMI requiring that these relationships be disclosed to clients. The Ontario Securities Commission (OSC) is the principal regulator for VCMI.
VCMI is an exempt market dealer that distributes the securities of related and unrelated issuers. VCMI provides investors access to a limited range of investment opportunities within the Private Capital Market. VCMI can only sell investments to investors that qualify to purchase prospectus exempt securities pursuant to National Instrument 45-106 – Prospectus Exemptions.
As an exempt market dealer, VCMI has a transactional relationship with its clients and does not hold or have access to client assets. We do sell some products that are eligible for RRSP and TFSA accounts but an outside custodian, such as, a trust company, must be used by the client. These companies charge fees for these services.
VCMI also offers financial planning and through some of its representatives, a diverse range of insurance and investment products (non-securities), and other financial services to meet the needs and goals of its clients. Representatives provide clients with disclosure of any additional services that they offer.
Proprietary products and conflicts of interest
Under s. 13.4 of NI 31-103 VCMI must take reasonable steps to identify, disclose and address existing and foreseeable material conflicts of interest. Conflicts of interest must be addressed in the best interests of the client and relationship must be disclosed. VCMI has policies and procedures in place to ensure the Firm and its dealing representatives comply with the requirements under NI 31-103, including identifying, disclosing and addressing conflicts of interest in the best interest of clients.
Under securities legislation, a proprietary product is defined as a security of a connected or related issuer of a registered firm. VCMI is part of the Virtus Group of Companies. The Virtus Group of Companies has a number of companies and entities which are issuers. These issuers are related or connected issuers to VCMI. These investments are proprietary products and the relationship between VCMI and these issuers creates a material conflict of interest.
In some cases, the CEO of VCMI, through other entities to which he is related, has business dealings with an issuer connected or related to VCMI. These business dealings could include the sale of properties to the issuer. Due to this conflict, the issuer could pay more for the property than it is worth. The conflict is addressed by the property being appraised prior to the sale of the property to the issuer. In these cases, there is disclosure information contained in the offering documents of the issuer describing the conflict of interest between the entities involved. Clients should refer to the relevant proprietary product offering memorandum to understand the fees and costs where the Virtus Group of Companies may benefit from the sale of proprietary products.
Due to this conflict of interest, VCMI and its dealing representatives may be biased in favour of their proprietary product or recommend unsuitable investments in the product. To address this conflict of interest VCMI and its dealing representatives take steps to ensure they deal with clients fairly, honestly and good faith, as required by Securities Legislation.
This includes conducting a suitability determination on any securities recommended to clients. Ensuring suitability of investments involves conducting due diligence on clients through a meaningful interaction and collecting know your client information. VCMI also conducts deep due diligence on its issuers, including the VCMI Funds, to understand the risks, fees and costs, features and benefits of the securities they offer. VCMI takes steps to have similar third-party alternative offerings. The dealing representatives, apply their professional judgement and experience to ensure that any security recommended is suitable for the client and puts the clients interest first. VCMI compliance staff monitor the use of proprietary products in client accounts. Finally, all trades are approved by compliance staff.
Where a proprietary product is sold by VCMI, clients are provided with a disclosure form describing the conflict of interest, its potential impact prior to making a trade and how it is addressed in the client’s best interest.
As an exempt market dealer, VCMI can trade and underwrite exempt market securities. There are risks associated with exempt market securities. Exempt market securities may not be listed on any stock exchange which could restrict your ability to resell them. There could be a lockup period that applies to the security which restricts you from trading, selling or transferring the security.
Issuers of exempt market securities generally do not have to file a prospectus. A prospectus describes the investment in detail and gives you some legal protections. There is a risk that the issuer will be unable to meet interest and principal payments on its obligations on a timely basis. Furthermore, the securities could be from a non-reporting issuer. This type of issuer does not have to publish financial information or notify the public of changes in its business. Suitability of investments
These types of investments may not be suitable for all clients. VCMI is obligated under section 13.3 of NI 31-103 to make a suitability determination to ensure the proposed investment is suitable for you and puts your interests first.
To assess the suitability of proposed investments, VCMI will obtain information relating to your investment objectives, risk profile, investment knowledge, financial position, personal circumstances and other relevant information. Section 13.2 of NI 31-103 also requires VCMI to obtain information related to your identity. All this information is collected through the Investor Information Form provided.
VCMI conducts deep due diligence on the products it sells. VCMI collects information from the management of the issuers and other sources. We rely on our professional judgement, knowledge and expertise to assess the quality of these investment vehicles against industry best practices and returns for products with a similar risk profile.
A suitability determination does not guarantee a particular client outcome.
Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.
Dealing Representatives and conflicts of interest
VCMI dealing representatives may be licenced in other regulated industries such as, real estate agents and brokers (regulated by the Real Estate Council of Ontario), insurance agents and brokers (regulated by the Financial Services Regulatory Authority of Ontario), or mortgage administrators and brokers (also regulated by FSRA). This outside employment creates a foreseeable material conflict of interest. Dealing representatives may recommend to clients unsuitable investments in VCMI product offerings with the use of proceeds from the other industry. To address this conflict of interest VCMI and its dealing representatives take steps to ensure they deal with clients fairly, honestly and good faith, as required by Securities Legislation, such as, monitoring what VCMI dealing representatives are selling and conducting three levels of suitability reviews.
Referral arrangements and conflicts of interest
VCMI and its dealing representatives have referral arrangements to refer VCMI clients to other registered entities such as Portfolio Managers and receive compensation for any successful client referral. These arrangements could lead a client to make an investment with a referral party that may treat these clients differently given the lower compensation they earn. To address this conflict of interest, and in accordance with Securities Legislation, VCMI takes reasonable steps to satisfy itself that the referral party has the appropriate qualifications to provide the services, and if applicable, is registered to provide those services. VCMI and its dealing representatives have referral arrangements to accept clients interested in exempt market investment opportunities and pay compensation to referral parties. These arrangements could lead to a potential material conflict of interest as VCMI and its dealing representatives may treat these clients differently given the lower compensation received. To address this conflict of interest VCMI and its dealing representatives take steps to ensure they deal with clients fairly, honestly and good faith, as required by Securities Legislation. Where VCMI has paid a referral fee, disclosure is provided to clients describing the arrangement. In addition, VCMI and its dealing representatives following all requirements and guidance in NI 31-103 which includes monitoring referral fees paid and monitoring what products are being sold.
As an exempt market dealer, VCMI does not charge a fee or commission to clients to securities. VCMI does receive a commission from issuers based on the proceeds of the offering raised through VCMI. The details of the commissions are described in the relevant offering memorandum. Clients may be required to pay fees to a custodian (e.g. a trust company) for safekeeping of their securities.
Where VCMI is raising capital for issuers in similar businesses, a conflict of interest can occur if each issuer pays a different level of commission to the dealing representative. As a control to mitigate this potential conflict of interest, VCMI tries to ensure where the issuers it carries have similar businesses, they also have similar commission schedules.
VCMI uses a “grid” to calculate compensation due to its dealing representatives. As a dealing representative reaches a certain level on the grid over the year, the dealing representative receives a higher level of compensation for transactions beyond that the level. This is a bonus system used by VCMI to recognize and reward the performance of a dealing representative but could lead to a potential conflict of interest. VCMI monitors all the sales of dealing representatives to ensure that unprofessional and aggressive sales techniques are not used to meet grid targets. Furthermore, VCMI bases its grid on total capital raised by the dealing representative across all issuers carried by VCMI. Finally, the grid is measured on the basis of capital raised for issuers and not sales commissions earned by dealing representatives.
In addition to the measures to mitigate and address conflicts of interest in the best interests of the client as described above, VCMI must conduct a suitability determination of any investment recommended to a client which must put the client’s interest first. This would include the level of commission earned by the dealing representative.
In accordance with s. 14.12 of NI 31-103, VCMI provides trade confirmation notices for purchases of securities. The confirmation provides information about your transaction including: date, quantity, price, and name of the VCMI representative. VCMI will send trade confirmations electronically and by regular mail for clients unable to receive electronic documents.
The contractual agreement regarding the investment is between you and the issuer. The issuer or its agent provides clients with a subscription agreement or other documentation to demonstrate ownership of an investment. VCMI deals with clients on a transactional and often infrequent basis and does not hold or have access to client assets. As a result, clients do not make payments to VCMI but to the issuer or its agent. VCMI does not hold or control any cash or securities of a client.
VCMI delivers quarterly statement to clients who have made a transaction during a quarter. The statement will provide all information related to the transactions during a quarter as required by NI 31-103. VCMI will send trade confirmations electronically and by regular mail for clients unable to receive electronic documents.
Investment benchmarks generally provide a broad measure of return generated by specific asset classes over a given period. An investment benchmark can be used as a standard against which performance of a security or investment portfolio can be measured. The most common form of investment benchmark is an index such as a stock or bond index, for example the S&P/TSX Composite Index.
VCMI does not provide benchmarks for performance reporting. The securities distributed by VCMI are not listed on any stock exchange. As a result, VCMI does not believe there are meaningful benchmarks for the securities it sells.
VCMI offers independent dispute resolution or mediation service through Ombudsman for Banking Services and Investments (OBSI), at its own expense, to clients to resolve client complaints. The Firm may be required to make the independent service available when a complaint:
- relates to a trading activity of VCMI or its representatives, and
- is raised within six years of the date when the client knew or ought to have known of the activity (or omission) that caused or contributed to the complaint.
The client may escalate an eligible complaint to the independent service made available by VCMI in two circumstances:
- The Firm failed to give the client notice of its decision within 90 days of receiving the complaint. The client is entitled to escalate the complaint to the independent service immediately or at any later date until the Firm has notified the client of its decision. Informing the client that VCMI plans to take more than 90 days to make its decision does not change this deadline.
- The Firm has given the client notice of its decision about the complaint and the client is not satisfied with the decision. The client then has 180 days in which escalate the complaint to the independent service.
In either instance, the client may escalate the complaint by directly contacting the independent dispute resolution or mediation service.
In accordance with section 13.16 of NI 31-103, the Firm will inform a client how to contact OBSI and use the dispute resolution service or mediation service, when a complaint has been made by the client about any trading activity of VCMI or its representatives.
Confidentiality of client information
Virtus Capital Management Inc. (VCMI) earns your trust by adhering to privacy principles in protecting your personal information. The term “personal information” refers to information that specifically identifies you as an individual and is provided to or collected by us. It includes, for example, your name and address, age and gender, personal information records, identification numbers such as your social insurance number, and your employment information.
Collection and use of personal information
VCMI is required under securities legislation and anti-money laundering legislation to collect information to verify the identity and reputation of clients. VCMI is also required under securities legislation to make a determination to ensure a proposed investment is suitable for you. To assess the suitability of proposed investments, VCMI will obtain information relating to your investment objectives, risk tolerance, investment knowledge, financial situation and circumstances. In providing services to clients, VCMI may be required to use and share personal information with its employees, third party service providers and other financial institutions. When you open an account with us, you authorize us to collect this information during the course of our relationship. Personal information collected by VCMI will be held at the head office of the Firm located at 100 Arbors Lane, Unit B, Woodbridge, Ontario, L4L 7G4.
Sharing personal information
VCMI will not use or disclose personal information for purposes other than those for which it was collected except with the consent of the client or as required by law. Personal information will be retained only as long as necessary for these purposes or required by law.
Safeguarding personal information
VCMI will ensure that third party service providers requiring the use of personal information have appropriate security procedures and controls to protect the personal information of VCMI’s clients.
Updating and accessing your personal information
Upon request, we will provide you with access to your personal information as permitted or required under applicable law. In limited circumstances set out in applicable privacy law, we may be unable to provide access to certain pieces of information.
For further information contact:
Chief Compliance Officer
Virtus Capital Management Inc.
100 Arbors Lane, Unit B
Woodbridge, ON L4L 7G4
Telephone: (416) 972-0420 ext. 105