Conflicts of Interest
Under applicable Canadian securities laws, we are required to address and manage existing, as well as reasonably foreseeable, material conflicts in the best interests of our clients. A conflict of interest can include any circumstance where:
a) the interests of different parties, such as the interests of the firm and those of a client, are inconsistent or divergent;
b) the firm or one of its registered representatives may be influenced to put their interests ahead of a client’s interests; or
c) monetary or non-monetary benefits available to the firm or a registered representative, or potential detriments to which they may be subject, may compromise the trust that a reasonable client has in the firm or the individual.
Whether a conflict is “material” or not depends on the circumstances. In determining whether a conflict is material, we will typically consider whether the conflict may be reasonably expected to affect the decisions of the client in the circumstances, and/or the recommendations or decisions of the firm or its registered representatives in the circumstances.
In general, we deal with and manage relevant conflicts as follows:
a) Avoidance: This includes avoiding conflicts that are prohibited by law as well as conflicts that cannot effectively be addressed.
b) Control: We manage acceptable conflicts through means such as separating different business functions and limiting the internal exchange of information.
c) Disclose: By providing you with information about conflicts, you can assess independently their significance when evaluating our recommendations and any actions we take.
GAVIN employees and directors are trained to recognize conflicts of interest between themselves, individually, and any client of GAVIN and between GAVIN, as a firm, and any client. They are also required to report any existing or potential conflicts of interest to GAVIN’s Chief Compliance Officer. When such a report is made, a formal conflict of interest assessment of the situation is performed by GAVIN’s Chief Compliance Officer who determines how the matter will be resolved in the best interest of clients.
On an annual basis, or more frequently as appropriate, GAVIN reviews existing, potential or reasonably foreseeable conflicts of interest between GAVIN, including each individual acting on its behalf, and its clients. Following are the conflicts of interest that GAVIN has identified and a description of how they are addressed.
1. Proprietary Products
For the purposes of this summary, (i) the word “connected” is intended to involve a state of indebtedness to, or other relationship with, the registrant or those “related” to the registrant that, in connection with a distribution of securities, would be material to a purchaser of the securities; and (ii) the word “related” is intended to involve positions permitting, through ownership or otherwise, a controlling influence, and would include all companies under a common controlling influence.
GMG’s business model includes managing certain proprietary funds including the GAVIN Special Opportunities Fund (the “GMG Funds”). The GMG Funds are connected/related to GMG because the Firm established the GMG Funds and acts as their portfolio manager and investment fund manager.
Regulators have noted that where a registered firm distributes securities of connected/related issuers, a material conflict of interest exists because GMG may have an incentive to recommend the GMG Funds to its clients over other third party funds that do not provide similar incentives. GMG may also be incented to fail to disclose or provide inadequate disclosure to investors about the GMG Funds in cases where there is negative information (for example, where a company owned by one of the GMG Funds is experiencing financial difficulty), resulting in investors taking on more risk than they could, or wish to, bear.
GMG takes the following steps to mitigate the actual and potential conflicts of interest described above:
– On an annual basis, GMG conducts an analysis of similar funds available to a similar client base. GMG is comfortable that the GMG Funds compare favorably to these similar funds.
– GMG has policies and procedures in place to ensure that its representatives conduct a suitability analysis for each client accepted into the GMG Funds. This suitability analysis ensures that the GMG Funds are appropriate for that client. Certain types of clients may be able to waive this suitability.
– In conducting its suitability analysis for a client, each representative of GMG will have a thorough understanding of: (i) the structure and features of the GMG funds; and (ii) amongst other client information, the personal and financial circumstances of that relevant client.
– GMG has retained independent legal and regulatory counsel to provide ongoing training regarding a representative’s suitability obligations when accepting a client into the GMG Funds.
– GMG representatives are not directly incentivized for accepting a client into the GMG Funds. Specifically, no GMG representative is subject to sales or revenue targets or earns commission based on GMG Funds recommended or sold.
2. Multi-Service/Internal Compensation Arrangements
GAVIN employees may be incentivized to recommend certain products or services over others. Specifically, GAVIN offers several family office type services and its employees could be perceived as being motivated by the Firm to encourage a client to expand its services with GAVIN. Some of these activities may be called “tied selling”.
GAVIN addresses this conflict through its structure as its employees are not directly incentivized to recommend any specific service either through GMG or any of its affiliates.
3. Sub-Advisory Relationships
GAVIN may retain sub-advisory services providers that have an existing relationship with the firm. Specifically, GAVIN’s parent company, Connectus Wealth Advisers, owns other registrant firms that have particular knowledge and access of specified investment strategies. From time to time, GAVIN may seek to access those investment strategies by entering into a sub-advisory relationship with an affiliated firm. In selecting this service provider, GAVIN will always take steps to ensure that this sub-advisory relationship is in the best interest of the client. Specifically, GAVIN will only enter into these relationships where the investment strategy contemplated is only available through an affiliated firm. Furthermore, GAVIN will conduct a comparative analysis of other similar strategies to satisfy itself that the affiliated investment strategy is appropriate for its clients.
4. Fee Based Accounts
GAVIN could be conflicted where it holds commissioned based securities in fee-based accounts. Specifically, it could be perceived that GAVIN is obtaining dual compensation in that it is earning any fees associated with the management of the account while also recommending securities that drive additional compensation to GAVIN. This is sometimes referred as “double charging” the client. However, as GAVIN is a fee-only firm, we do not invest our clients’ assets in investment products that directly compensate our firm through hidden commissions, trailer fees or 12b-1 fees. Accordingly, GAVIN will never “double charge” a client
5. Referral Arrangements
From time to time, GAVIN may enter into referral arrangements where another party refers clients to us or where we refer clients to a third party for a fee.
When referring a client to a third party, or accepting a referred client, GAVIN must ensure that such a relationship is in the best interest of the client. GAVIN should not enter into a referral arrangement solely because of the referral fee that they will receive from that party. Furthermore, if a client pays more for the same, or substantially similar, products or services as a result of a referral arrangement, GAVIN would not be seen as appropriately discharging its obligations to its clients.
In order to mitigate any actual or potential conflicts, GAVIN will bring the referral relationship and the terms of that referral relationship to the attention of the referred client. In addition to client disclosure, GAVIN has adopted several procedures to ensure it determines that accepting a referral is in a referred client’s best interest. These procedures include: (i) requiring Chief Compliance Officer approval of any referral arrangement; (ii) conducting due diligence on potential third-party referrers; (iii) ensuring that the referred client does not pay additional fees or compensation for the same service or product provided to other GAVIN clients as a result of the referral arrangement; and (iv) keeping a record of all payments related to GAVIN’s referral arrangements.
6. Outside Activities
GAVIN registered individuals may become involved in other activities outside of their employment with the Firm (e.g., sitting on boards of directors or providing volunteer services for a charity). These outside activities could: (i) impact the amount of time a GAVIN registered individual spends on GAVIN employment or registration obligation; and (ii) create a conflicting interest as to how a GAVIN registered individual discharges its obligations to GAVIN or its clients.
GAVIN has policies and procedures to ensure that all outside activities are reported to and considered by its Chief Compliance Officer. The Chief Compliance Officer will only approve such outside activities that do not conflict with GAVIN operations or obligations
7. Best Execution
GAVIN may hire a brokerage firm to execute trades on behalf of its managed accounts based on a pre-existing relationship, rather than objective qualitative or quantitative considerations. This is considered a best execution conflict of interest.
GAVIN has policies and procedures to ensure that when GAVIN directs brokerage transactions to brokers, the service is comparable on either a qualitative and/or quantitative basis. GAVIN monitors the level of service provided by any broker retained on behalf of the GAVIN Funds with respect to the cost and execution of trades.
8. Fair Allocation of Investment Opportunities
GAVIN owes its clients a duty to treat each client fairly. This duty must be considered when allocating investment opportunities.
Trade allocation will be determined on basis that is fair, reasonable and equitable to all clients, and that meets the clients’ investment objectives. GAVIN requires its advising representatives, in ordering a trade, to specify a pre-determined quantity of the security for each account prior to placing the trade with a broker.
GMG allocates trading costs and commissions are on a pro-rata basis for trades that are bunched or blocked. The basis for the allocation will be the percentage of the total trade that is executed on behalf of each client. Clients will pay a percentage of the total transaction cost equal to the percentage of the securities allocated to their account. GMG charges the average price of the securities for trades that are blocked or bunched on behalf of multiple clients.
GMG allocates partially filled orders to buy or sell securities on behalf of multiple clients on a pro-rata basis. Each client will receive the quantity of securities equal to the percentage of the total order that is filled for GMG clients.
Where it is not possible to apply this policy in any particular trade, every effort will be made to allocate the next investment opportunities so that clients over time, irrespective of account size, receive equitable treatment in the filling of orders.
Proprietary accounts of GAVIN and those of any of its employees will not be allocated a pro-rata share of any partially filled block trades or initial public offering of securities.
9. Third Party Compensation
GMG may recommend third party products that in turn provide compensation to GMG. Specifically, GMG may receive: i) referral or distribution fees from third party managers; or ii) structuring fees for assisting with creating a third-party fund share class that would appeal to GMG clients. Absent appropriate controls, clients may perceive a GMG recommendation as being driven by third party compensation as opposed to what is appropriate for the client. GMG does not accept third party fees for recommending third party products.
10. Gifts and Entertainment
While it is recognized that conducting business may involve some modest exchange of gifts and business-related entertainment, the value of such gifts and entertainment must not create a real or perceived conflict of interest and must not impair the independence or objectivity of the recipient.
GAVIN has policies and procedures in place with respect to the receipt or giving of gifts and/or entertainment. These policies and procedures require employees to contact the Chief Compliance Officer with any concerns about the receipt or giving of a gift or entertainment and whether that may create a conflict of interest. Further, employees are required to notify the Chief Compliance Officer upon receipt of a gift or entertainment in excess of $500 (on an individual basis).