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Relationship Disclosure Statement

RELATIONSHIP DISCLOSURE STATEMENT (“RDS”)

To assist our Clients and prospective Clients (hereinafter “Clients”) to determine whether they want to engage and/or continue to engage Authentic Asset Management Inc. (“the Firm” or “we”) to provide discretionary and/or non-discretionary services, we have provided the following disclosure statement in accordance with National Instrument 31-103 that sets out information that a reasonable investor would consider important about its relationship with our Firm.

This document addresses a number of topics, such as nature of relationship, applicable fees, investment risks, etc. Please review and contact us with any questions that you may have.

  1. About Authentic Asset Management Inc.

The Firm is a registered Portfolio Manager in Alberta, BC, Ontario and Québec, a registered Commodity Trading Manager in Ontario, and a registered Derivatives Portfolio Manager in Québec.

The Firm is a corporation incorporated under the laws of Canada and its principal securities regulator is the Ontario Securities Commission.

  1. Nature of Products & Services Offered by the Firm

The Firm’s primary business activity is portfolio management.

The Firm aims to provide institutional quality asset management products and services to high and ultra-high net worth private Clients and institutional Clients.

The focus is on managing individual accounts on a discretionary basis according to Clients’ investment objectives and risk tolerances. The Firm’s principal investment objective for Clients will typically be capital appreciation but this may not always be the case and, in any event, will be more specifically defined between the Firm and any one Client in the investment mandate and/or investment policy statement that is developed between the Firm and the Client.

The Firm’s primary investment model is to proactively manage portfolios with explainable investment strategies and diverse market exposures in global stock, bond, currency, commodity, and derivatives markets. Subject to any Client restrictions or as otherwise set out in a specific investment mandate or investment policy statement, the Firm may utilize options, futures and forwards on markets, currencies and commodities and employ short trades on individual securities where it believes it can add value and/or reduce overall portfolio risk.

The investment beliefs of the Firm are that investment opportunities vary as market forces change, that there is a payoff available to thoughtful investment strategies and timely market exposures, and that a flexible, proactive approach to investing can deliver portfolio performance that is satisfying to Clients.

The Firm is oriented towards a dynamic, multi-strategy approach to investing. The investment process generally involves determining positions and exposures for Client portfolios through: analysis of the global environment, development of a proprietary outlook, identification of investment opportunities, and construction of strategies that best capture the market opportunity or discrepancy for a targeted risk/reward profile.

Subject to any exceptions being made, all the Firm’s Clients will be discretionary mandates and afforded the full value and advantage of ongoing portfolio oversight and management, as mutually agreed in an Investment Management Agreement.

  1. Collection of Client Information

When you first open an account with us, we ask you to share your personal information and investment objectives with us. We want and need to get to know you. Obtaining and maintaining accurate, complete and up-to-date Client information enables us to conduct our operations with the highest standard of integrity for our mutual benefit.

To know our Clients means many things to the Firm, ranging from verifying our Client’s identity and reviewing any personal circumstances which may affect your investment objectives, such as income, occupation, creditworthiness, net worth, and age. In addition, we ask that you disclose whether you are an insider of another reporting issuer or any other issuer whose securities are publicly traded or if someone very close to you holds such a position of influence. This is done to ensure that there are no conflicts of interest which may negatively affect the performance of the Client Account(s).

The Firm must ensure that it abides by various Know Your Client obligations stemming from securities laws and guidance thereto, as well as the rules set out under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and Regulations.

To assist us in collecting the requisite information, we utilize a Know Your Client Form.

It is absolutely vital that the Firm is able to elicit from its Clients all the pertinent financial information to assess portfolio suitability (i.e. investment knowledge, time horizon, financial needs, risk tolerance, identification requirements, etc.) and/or otherwise comply with its regulatory obligations. This information gathering exercise is an ongoing one. Any changes in your personal information or financial circumstances (positive or negative) should be proactively communicated to the Firm as soon as possible. Doing so helps the Firm maintain updated information about its Clients and accordingly serve them better by offering investments that are suitable to their needs.

  1. Assessing Suitability of Investments

Upon review of the collected Client information, the Client and the Firm will then engage in a meaningful dialogue. The Firm’s advising representative will obtain a solid understanding of your investment goals (such as investment objectives, risk tolerance, and income needs) and explain how an investment model of the Firm is suitable in light of your needs and objectives.

With this understanding, and knowledge of the Firm’s products and services, the advising representative can then prepare and present a suitable Investment Policy Statement to you. It sets forth the investment guidelines and permissible investments that govern the management of your Account by the Firm.

In exercising discretionary mandates with Clients, the Firm will take all appropriate steps to determine that any proposed investments to be made in the Account(s) will be suitable for the Client. This obligation is an ongoing one but requires that the Client will proactively and promptly make the Firm aware of any changes to their financial situation or needs that may impact their specific holdings and/or ongoing portfolio objectives and guidelines. Similarly, the Client must update the Firm of any changes to matters pertaining to their identity (change of name, ownership changes in the case of a corporate account, etc.).

Where a Client is engaging the Firm on a non-discretionary basis, the Firm will endeavour to determine suitability prior to executing each transaction or when made aware of any changes to your financial and/or personal situation or needs.  If, in our opinion, we believe that a particular sale or purchase of a security is not suitable based on your personal information, we will not proceed with the transaction unless you explicitly instruct us to proceed.

  1. Utilizing Derivatives

The Client Accounts may be invested in derivatives (including such derivatives as options, futures, forwards, and swaps) to hedge and/or reduce the overall portfolio’s risk exposure or for speculative purposes. The use of derivatives can introduce additional risks through leverage and counterparty exposures, and while the Firm endeavours to monitor such risks, the Client accepts the risks associated with their usage. Any negative changes in the value of such derivatives may adversely affect the value of these portfolios. Additionally, there are risks associated with a counterparty default (mitigating with the emergence of central clearing) or trading restrictions on derivatives or delays thereon set by the clearing exchanges intentionally or otherwise that may delay or curtail a closing out of notational exposures under such contracts.

On any derivative transaction involving the Client Accounts, it is anticipated that the valuation will be in accordance with provisions in the derivatives documentation and industry practice (e.g. mark to market valuation etc.). For commodity futures contracts and commodity futures options (“Contracts”), Clients are able to request and study the terms and conditions of the Contracts traded by the Firm. Upon a Client’s request, the Firm will provide the Client with a copy of all current terms and conditions of any Contract traded.

  1. Investment Related Risks

Investments carry an inherent amount of risk because of uncertainty about whether the value of the underlying securities will rise or fall or whether broader changes to such factors as inflation, interest rates, currencies, political developments, natural disasters, could all have an adverse impact on the Clients’ Accounts.

Clients must be cognizant of such risks and evaluate them carefully before committing their money by entering into a discretionary agreement with the Firm, and/or purchasing securities in a non-discretionary account.

Investing with the Firm is not guaranteed to generate income or capital gains nor preserve capital. There is always the possibility that the investment may yield losses. The Firm utilizes investment and trading strategies that expose Client Accounts to various risks. Without limitation, some of the more pertinent investment risks are described below:

Specific Underlying Securities Risks: The Client Accounts invest in securities for which the underlying values depend largely on how well the underlying reporting issuers of those securities are performing. If these businesses experience adverse financial events or setbacks, the value of their securities may decline and, accordingly, cause a decline in the value of the Client Account.

Market Risk and Volatility: The Client Accounts invest in securities that are exposed to changing market forces and may experience either a gain or decline in their values, which affect the Client Account’s performance. Some securities in which the Client Accounts are invested may react with greater market exposure than others (i.e. volatility risks). As a result, negative market changes may disproportionately reduce the value of such securities. Securities that have a lesser exposure to the market may not increase in value when there are positive market movements. The Firm’s investment strategies expose Client Accounts to market risk and volatility that depend for success upon correctly assessing future price movements of among other things, stocks, debt securities, and currencies. The Firm cannot assure any Client that it can accurately predict these price movements and position portfolios accordingly.

Interest Rate Risk and Credit Related Risks: The Client Accounts may be invested in fixed income securities (such as bonds, notes and debentures), whose value is highly influenced by interest rates. A rise in interest rates will reduce the value of such fixed income securities and, accordingly, the value of these fixed income securities in the Client’s portfolio. A decline in interest rates would have an opposite effect. A change in interest rates would also affect the value of stocks and similar equity securities that the Client Account(s) may invest in.  Changes in interest rates may reduce the value of such securities and, in turn, reduce the value of the Client’s portfolio. Additionally, the Client Accounts may be detrimentally impacted by a credit specific event to a particular company or debt issuer.

Liquidity Risk: The Client Accounts may invest in securities that are not traded frequently or become less frequently traded. This means that such securities may not be liquidated as quickly as desired, especially if they experience a decline in their value, and not at a reasonable price. Alternatively, low liquidity of some securities may prevent the Firm from investing Client Accounts in them and taking advantage of any rapid growth that such securities experience. These risks can be potentially acute where assets, such as emerging market securities or commodities, are held in Client Accounts.

Foreign Exchange Rate and Foreign Security Risk: The Client Accounts may have exposures to foreign currencies where the exchange rates can change rapidly due to a wide range of economic, political and other conditions. Additionally, where Client Accounts are invested in foreign securities, there is a heightened risk, particularly outside of the more developed markets, of adverse government actions, general political instability and/or exposures related to deficiencies in security-specific disclosures that come to light after the fact. Thus, Client Accounts invested in securities that are traded on foreign exchanges and are quoted in foreign currency, may be exposed to the risk of exchange rate losses in addition to the inherent risk of loss from trading the underlying security. Furthermore, if Client Accounts are trading on margin, the impact of currency fluctuation on account gains or losses may be even greater. There is also risk associated with the foreign exchange counterparty and it is not clear whether all foreign currency exchange transactions are regulated.

Derivatives Risk: A derivative is a type of investment, such as a future or an option, whose value is derived from the performance of other investments or from the movement of interest rates, exchange rates or market indices. The Firm will only use derivatives as permitted by securities regulations. The firm may use derivatives to help offset losses that other investments held by a portfolio might suffer because of changes in stock prices, commodity prices or interest or exchange rates. This is called hedging. Some common risks of hedging and investing in derivatives are:

  • there is no guarantee that the Firm will be able to buy or sell a derivative at the right time to make a profit or limit a loss, nor that the other party to the contract will meet its obligations. Additionally, if the other party goes bankrupt, the investor could lose any deposits made or assets pledged in favour of the other party under the contract;
  • there is no guarantee that a hedging strategy will always work, as the elements that determine the value of a derivative may change in a manner that is contrary to the intent of the hedge;
  • hedging will not always offset a drop in the value of a security and hedging can prevent the portfolio from making a gain it otherwise may have made; and
  • the portfolio may not be able to create an effective hedge against an expected change in a market if most other people expect the same change.

Securities Lending Risks: The broker-dealer/custodian of the Client Account may lend securities in any margin account. While there are measures in place at the custodian to contain these risks, such as posted collateral comparable to the value of securities loaned that gets reviewed each day, there can be no guarantee that all these risks can be eliminated. In addition, if a Fund is utilized by the Firm in investing all or some of portfolio assets, the Client acknowledges that the Fund itself may utilize a securities lending arrangement. Of note, it is recognized that the Firm may not in all circumstances be able to vote shares held in the discretionary Accounts of Clients, if the Client has permitted the custodian to undertake securities lending or other means of hypothecation of the securities in the Account. Under such circumstances, the recall of securities out on loan to allow for voting may not be warranted or feasible.

Short Sales Risks: The mechanics of short sales involve additional risks, including theoretically unlimited potential for loss not limited to the initial capital committed to the position. Shares must first be borrowed through a third-party prime broker. The broker may not be able to locate shares to lend, and even if shares are available, the interest rate on the loan may be prohibitively high, sometimes in excess of one hundred percent (100%) per year. Interest costs and dividends reduce the return from a short sale. Interest rates on borrowed shares are not known until settlement of the transaction, days after a short sale is initiated, and rates may fluctuate in the meantime. Stock loans can be recalled by the lender at any time, requiring a short seller to close the position if a new lender cannot be found. These required repurchases may occur at disadvantageous times, such as when a share price has risen quickly, resulting in a so-called squeeze that forces short sellers to repurchase shares at higher prices.

Concentration Risk: The Client Accounts may only be partially diversified. Relatively large position sizes within the Account increase the potential contribution of any one investment to overall returns. In the event a relatively large position declines in value, it would have a relatively large impact on investment performance. Furthermore, under certain market conditions, portfolio investments may behave as if they are concentrated in a limited number of issuers, economies, sectors, or securities. Adverse movements in a particular area could affect the performance of other areas to a considerably greater extent than anticipated.

Counterparty and Settlement Risks: Transactions conducted in the Client Account held with the broker-dealer/custodian depend upon the counterparties to the transactions and the means of transaction, such as an exchange, settling the transactions as contracted. The Client Account could be adversely affected were there to be a counterparty failing to meet its financial obligations with respect to any transaction.

Systemic Risk: The Firm relies on the stability of the overall financial system to implement its investment strategies for Clients. The security of Client assets depends on the solvency of a third-party broker-dealer/custodian, which the Firm also relies upon for prime brokerage and trading services. In the event of a disruption to the broker-dealer/custodian’s business, or the overall functioning of securities markets, the Firm may be unable to implement its investment strategies for Client Accounts.

Tax and Regulatory Risks:  There is a risk that an introduction of new taxation measures (domestically or abroad) and/or new regulatory requirements (domestically or abroad) may impose additional restrictions and/or costs that may adversely impact the Client’s investments.

Inflation Risk: Changes in inflation may affect the value of securities that Client Accounts will be invested in. Any negative changes to the value of the securities may offset any gains in the Client’s portfolio.

Omission of Risks: This is not a comprehensive list of every conceivable source of risk. The Firm cannot predict every possible outcome of an investment, and it cannot disclose every potential risk factor for every investment to Clients. Clients may suffer losses for any reason or no discernible reason. In addition, the Firm recognizes that its Clients are also presented with, and agree to accept, the various risks disclosed in the customer agreement they enter into with the third-party broker-dealer/custodian.

  1. Risks Using Margin Account Leverage and Borrowed Funds

As the Firm anticipates utilizing leverage to enhance the return potential of Client Accounts, there are heightened risks associated with the larger exposures that are able to be generated with the Client assets through the use of borrowed funds, levering up the aggregate amount of investments that the Client would otherwise be able to make. The increased exposure magnifies the effect of price changes, both positive and negative, which may result in greater volatility of returns and increase the risk of loss in Client Accounts.

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.

  1. Conflicts of Interest

The Firm has a regulatory obligation to deal fairly, honestly and in good faith with its Clients.  The Firm must take reasonable steps to identify existing material conflicts of interest, and material conflicts of interest that in its reasonable opinion would expect to arise, between the Firm, including each individual acting on the Firm’s behalf, and a Client. The Firm maintains robust policies to identify, avoid or mitigate any conflict of interest. In the event that a conflict of interest is discovered and not able to be avoided, the Firm endeavours to mitigate such conflicts and where appropriate, to disclose these to Clients.

  1. Summary of the Firm’s Policy in Regards to the Fair Allocation of Investment Opportunities

Under applicable Canadian securities laws, the Firm has an obligation to ensure that all Clients are treated in an equitable manner as it pertains to the fair allocation of investment opportunities. To this effect, the Firm has adopted a Fair Allocation of Investment Opportunities Policy which can be summarized as follows:

  • whenever the Firm proposes to make an investment, the investment opportunity will be allocated on an equitable basis, generally pro rata based on the pre-determined target amounts, between a Client’s Account and any other Client Account for which the proposed investment would be within such Client Account’s investment objectives;
  • as simultaneously placing a number of separate, competing orders may adversely affect the price of a security, where appropriate, Client orders may be aggregated, such that in placing orders for the purchase or sale of securities, the Firm may pool one Client’s order with that of another Client or Clients;
  • in aggregating orders, the Firm may use several criteria to determine the relative amounts in which participating Client Accounts will receive an allocation thereof. Criteria for allocating bunched orders will take into consideration the investment mandate and whether it is part of a model portfolio composite, and may include for example, the current concentration of holdings of the industry in question in an account, and with respect to fixed income allocations for example, the mix of corporate and/or government securities in an account and the duration of such securities;
  • when bunching orders and allocating block purchases and block sales, it is the Firm’s policy to treat all Clients fairly and to achieve an equitable distribution of bunched orders. All new issues of securities and block trades of securities will be purchased for, or allocated amongst, all applicable accounts of the Firm’s Clients in a manner the Firm considers to be fair and equitable;

in the course of managing a number of discretionary accounts, there may arise occasions when the quantity of a security available at the same price is insufficient to satisfy the requirements of every Client, or the quantity of a security to be sold is too large to be completed at the same price. Similarly, new issues of a security may be insufficient to satisfy the total requirements of all Clients. Under such conditions, as a general policy, and to the extent that no Client will receive preferential treatment, the Firm will ensure:

  • where orders are entered simultaneously for execution at the same price, or where a block trade is entered and partially filled, fills are allocated proportionately and equally based on the pre-determined target amount for each Client’s Account;
  • where a block trade is filled at varying prices for a group of Clients, fills are allocated on an average price basis;
  • in the case of hot issues and IPOs, participation is split equally between Clients based proportionately on the pre-determined target amount for each account;
  • in the case of a new securities issue, where the allotment received is insufficient to meet the full requirements of all accounts on whose behalf orders have been placed, allocation is made on a pro rata However, if such prorating should result in an inappropriately small position for a Client, the allotment would be reallocated to another account. Depending on the number of new issues, over a period of time, every effort will be made to ensure that these prorating and reallocation policies result in fair and equal treatment of all Clients;
  • trading commissions for block trades are allocated on a pro rata basis, in accordance with the foregoing trade allocation policies;
  • where it is impossible to achieve uniform treatment, every effort shall be made by the Firm and its staff to compensate at the next opportunity in order that every Client, large or small, over time, receives equitable treatment in the filling of orders; and
  • transactions for Clients shall have priority over transactions for the Firm’s corporate account so that transactions for the Firm’s account do not act adversely to a Client’s interest.
  1. Transaction Charges

While the Firm will seek to obtain best execution for its Clients, Client Accounts will be subject to trading commissions and other related fees on the trades made in the portfolio. The Firm itself does not impose any transaction charges for securities purchased or sold.

The Client’s broker-dealer/custodian levies brokerage and other investment expenses in addition to the Firm’s fees. Clients incur costs from trades made for their Account, such as exchange fees, clearing fees, regulatory and transaction fees, and brokerage commissions. In addition to such trading costs, Clients may incur custody fees, broker interest, minimum activity fees, order cancellation fees, and other costs and charges related to operating and maintaining a Client Account. These commissions, costs, and fees are charged or passed through by the broker-dealer/custodian, and not by the Firm.

If the Firm invests Client Accounts in Funds (such as mutual funds, pooled funds, ETFs and ETPs) of third parties, then the Client acknowledges and agrees to pay the additional administration costs and/or management fees associated with these Funds.

In the event that additional expenses (such as out-of-pocket expenses or unique possible expenses) are incurred by the Firm in providing its Services, the Firm shall notify the Client and, upon receiving an express consent from the Client, the Client will be required to reimburse the Firm for all such expenses. The Client consent will be in writing, with the reimbursement payable within 10 days.

  1. Custodian

Appendix C to the Investment Management Agreement provides more details about the separate agreements to be entered into between the Client and the Custodian of its Account.

Subject to the Client agreeing to enter into the required separate agreements with Interactive Brokers Canada Inc., the Firm typically directs or arranges for Interactive Brokers Canada Inc. to serve as Custodian of a Client’s Account.

In such instances, Interactive Brokers Canada Inc. will hold the assets in the Client’s Account as custodian in the manner and at the location that is further detailed in the separate agreement to be entered into between the Client and Interactive Brokers Canada Inc. Interactive Brokers Canada Inc. will also be acting as the sole broker-dealer, as clearing broker, and in a prime brokerage capacity on the Client’s Account, as well as providing margin and leverage, as the case may be. The Firm is responsible for providing Interactive Brokers Canada Inc. with all instructions related to securities transactions to be executed for the Client’s Account, for determining such transactions are suitable for the Client and for complying with all applicable “Know Your Client”, “Know Your Product” and anti-money laundering obligations.

This arrangement with Interactive Brokers Canada Inc. is intended to enhance the protection of Client assets since Interactive Brokers Canada Inc. is a qualified custodian, as defined in National Instrument 31-103, that is functionally independent from the Firm. However, although the Firm will monitor the services performed by Interactive Brokers Canada Inc. and believes that they are an appropriate custodian, in the event of the bankruptcy or insolvency of Interactive Brokers Canada Inc., there is no certainty that the Client will not incur losses due to its assets being unavailable for a period of time, the ultimate receipt of less than full recovery of its assets, or both.

  1. Compensation Paid to the Firm / Referral Arrangements

The Firm is not paid any compensation by any other party in relation to the products and services that a Client may purchase through the Firm.

Furthermore, the Firm does not currently have any referral arrangements with a third party, compensating such party for directing business to the Firm.

In the event that the Firm enters into such a referral arrangement with a third party, the Firm will endeavour that these not impact the fees paid by Clients. Additionally, the Firm will ensure that appropriate disclosure is made to its impacted Clients including without limitation: (a) the name of the referring party, (b) the purpose and material terms of the referral arrangement, (c) any conflicts of interest resulting therefrom, (d) the method of calculating the referral fee and to the extent possible, the amount of the fee (e) the category of registration (if any) of the other party, (f) a clear statement on what services are being provided by each party subject to the referral arrangement and (g) any other information that a reasonable Client would consider in evaluating the referral arrangement.

Similarly, if there is any other scenario in which the Firm is compensated by any third party associated with the management of the Clients, this will be disclosed in accordance with any applicable regulatory requirements.

  1. Account Reporting

The Firm will provide the Client with quarterly reports in respect of each Client Account detailing transactions and positions, unless the Client has requested in writing to receive monthly reports in respect of each Client Account. Additionally, the Firm will provide the Client with a report on charges and other compensation and an investment performance report on an annual basis. All such reports shall contain the content required under applicable Canadian securities laws.

  1. Using Benchmarks to Assess Performance

Clients may wish to consider using investment performance benchmarks to assess the performance of the Client’s investments in its Client Account. In order to provide for a meaningful comparison, in the event a Client compares the investments in its Client Account to a benchmark, the Client should be mindful of any significant differences between the composition of the benchmark and the investment strategies used by the Firm within the Client’s Account. In the event the Firm provides the Client with benchmark information, the Firm discloses the complete and official name of the benchmark(s) used, will endeavour to use appropriate and commonly used benchmarks and will provide disclosure as to the composition of the benchmark and how it may differ from the composition of the investments in the Client’s Account.

  1. Addressing Client Complaints

As noted earlier, the Firm takes seriously its obligation to deal fairly, honestly and in good faith with its Clients. In the event that Client expectations are not met, Clients can initiate a complaint with the Firm. In such circumstances, the Firm will respond with a written letter acknowledging your complaint within a week and begin working on it as soon as possible and completed prior to 180 days from the day of the complaint. This Firm’s subsequent response will inform the Client of their rights to consider the independent dispute resolution services of the Ombudsman for Banking Services and Investments (OBSI), in the event that the Client is unsatisfied with the way the Firm resolved the complaint. The costs of pursuing a resolution with the OBSI will be covered by the Firm. In the event a Client is resident in Québec, in lieu of OBSI, the Firm will inform the Client of their rights to consider the independent dispute resolution services provided by the Autorité des marchés financiers (Québec). Again, the costs of pursuing a resolution with the Autorité des marchés financiers (Québec) will be covered by the Firm.

  1. Acknowledgement and Signature

I acknowledge that I have read and understood all information provided in this Relationship Disclosure Statement, that I intend Authentic Asset Management Inc. to rely upon it, and that I intend to be bound thereby.

I also understand and agree that my electronic signature is the equivalent of a manual written signature. Typing my name below in the Signature line is equivalent to my handwritten signature.

 

 
The client:
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