Court sides with firm in dispute over advisor-managed funds

An Ontario court has declined to order that an advisor has the right to bring pooled funds that she managed for clients from her old firm to her new one.

The Ontario Superior Court of Justice sided with Mandeville Private Client Inc., an investment firm that opposed a motion brought by one of its former reps, Jennifer Black, seeking court orders that would enable her to transfer funds that were set up to allow reps with discretionary authority to manage clients’ money in a pooled vehicle with her to her new business.

Black and her mother (who worked together) sold their business to Mandeville in 2016, and became agents of the firm under principal-agent agreements, according to the court ruling released Tuesday. Black and Douglas Beck, another rep at the firm, resigned effective Nov. 30, 2022 to set up a new firm (her mother had left the firm in 2021).

A dispute arose around a series of advisor-managed pooled funds that were established in 2020 to enable reps with discretionary authority to manage clients’ money through the funds.

The funds were set up with Majestic Asset Management LLC as the fund manager and Mandeville as the sub-advisor. Mandeville appointed reps (including Black) to handle portfolio management for the funds.

After leaving Mandeville, the partners in the new firm sought to bring the pooled funds business with them.

However, Mandeville opposed that move.

“Mandeville disagreed with the transfer of the Majestic funds,” the court noted, and it told the fund manager that “Majestic could not replace Mandeville as the sub-advisor” on its funds.

In response, Black sought an injunction prohibiting Mandeville from preventing the transfer of the Majestic funds to her new business.

Black argued the principal-agent agreement with her former firm gives her the right “to continue to provide investment management and advisory services to the Majestic funds by transferring the Majestic funds from Mandeville to her new business.”

But Justice Leonard Ricchetti agreed with Mandeville’s argument that none of its agreements gave Black the right to bring the funds with her to her new business, so he granted Mandeville’s cross-motion for an injunction to enforce a non-solicitation provision of the agreement that was signed when Black sold her business to Mandeville.

In deciding in favour of Mandeville, Justice Ricchetti ruled that Black, in reality, is seeking a court order “with respect to the rights between Mandeville and Majestic — that is whether Majestic can terminate Mandeville as a sub-advisor” to be replaced by Black.

However, the court ruled it “has no jurisdiction in this proceeding to determine the rights as between Mandeville and Majestic,” given that the fund manager isn’t party to the litigation.

It also found that there’s nothing in the principal-agent agreement between Black and Mandeville that gives her the “right” to transfer the Majestic funds to her new business.

In granting an interlocutory injunction preventing Black from soliciting her former clients to join her new firm, the court ruled that non-solicitation clauses are “much more readily enforced” against a party that sold their client accounts than non-solicitation provisions in an employment contract.

“This was a sale of a business, an unambiguous non-solicitation term making this a very strong case,” it said.