Securities Law & Instruments

Headnote

Section 80 of the Commodity Futures Act (Ontario) -- Relief from the adviser registration requirements of subsection 22(1)(b) of the CFA granted to sub-advisers not ordinarily resident in Ontario in respect of advice regarding trades in commodity futures contracts and commodity futures options traded on commodity futures exchanges outside of Canada and cleared through clearing corporations outside of Canada, subject to certain terms and conditions. Relief mirrors exemption available in section 7.3 of OSC Rule 35-502 -- Non-Resident Advisers (Rule 35-502) made under the Securities Act (Ontario).

Statutes Cited

Commodity Futures Act, R.S.O. 1990, c. C.20, as am., paragraph 22(1)(b) and s. 80.

Securities Act, R.S.O. 1990, c. S.5, as am. -- Rule 35-502 -- Non Resident Advisers.

IN THE MATTER OF

THE COMMODITY FUTURES ACT

R.S.O. 1990, CHAPTER C. 20, AS AMENDED

(the CFA)

AND

IN THE MATTER OF

PRINCIPAL GLOBAL INVESTORS, LLC

 

ORDER

(Section 80 of the CFA)

UPON the application (the Application) of Principal Global Investors, LLC (the Sub-Adviser) to the Ontario Securities Commission (the Commission) for an order, pursuant to section 80 of the CFA, that the Sub-Adviser (including its directors, officers and employees) be exempt, for a period of five years, from the requirements of paragraph 22(1)(b) of the CFA in respect of acting as an adviser for Integra Capital Limited (the Principal Adviser) for the benefit of Investment Accounts (as defined below) regarding commodity futures contracts and commodity futures options (Futures) traded on commodity futures exchanges outside of Canada and cleared through clearing corporations outside of Canada;

AND UPON considering the Application and the recommendation of staff of the Commission;

AND UPON the Sub-Adviser having represented to the Commission that:

1. The Sub-Adviser is a limited liability company formed under the laws of the State of Delaware, United States of America. The Sub-Adviser is not a resident of any province or territory of Canada.

2. The Sub-Adviser is currently registered as an international adviser under the Securities Act (Ontario) (the OSA) and is not registered in any capacity under the securities legislation of any other jurisdiction in Canada. The Sub-Adviser is currently registered as an investment adviser under the Investment Advisers Act of 1940 (U.S.), as amended, and is exempted from registration as a commodity trading adviser or commodity pool operator with the U.S. Commodities Futures Trading Commission.

3. The Principal Adviser is a corporation incorporated under the laws of the Province of Ontario, and is registered as a limited market dealer and as an investment counsel and portfolio manager under the OSA, and as a commodity trading manager under the CFA.

4. The Sub-Adviser has entered into arrangements with the Principal Adviser to provide sub-advisory services (the Proposed Sub-Advisory Services) to the Principal Adviser in respect of investment accounts of clients located in Ontario that have retained the Principal Adviser to provide investment management and advisory services (Investment Accounts) pursuant to investment management agreements (Investment Management Agreements). An Investment Management Agreement may provide for the provision of investment management or advisory services both with respect to securities and with respect to Futures.

5. The Ontario clients referred to in the preceding paragraph may include investment funds established by the Principal Adviser of which the Principal Adviser would be administrative manager, and that will be offered on a private placement basis to accredited investors, as defined in National Instrument 45-106 Prospectus and Registration Exemptions, or investors purchasing pursuant to the registration and prospectus exemptions contained in certain blanket orders and discretionary exemptive relief in respect of capital accumulation plans. The Principal Adviser may, pursuant to a written agreement with each such fund act as an adviser in respect of trading securities or Futures, and may retain the Applicant as a sub-adviser to provide Sub-Advisory Services in respect of securities or Futures transactions.

6. The Sub-Adviser and the Principal Adviser shall enter into a written agreement (a Sub-Advisory Agreement) with respect to the Investment Accounts, pursuant to which the Principal Adviser will either delegate to the Sub-Adviser investment management authority in respect of the Investment Account or retain the Sub-Adviser to provide advisory services to the Principal Adviser in respect of the Investment Account. A Sub-Advisory Agreement may be entered into with respect to a specific Investment Account, or may pertain to multiple Investment Accounts.

7. The Proposed Sub-Advisory Services to be provided by the Sub-Adviser may be in respect of both securities and in Futures. The Sub-Adviser will provide the Proposed Sub-Advisory Services in respect of securities transactions in reliance on section 7.3 of OSC Rule 35-502 -- Non Resident Advisers (Rule 35-502) or in reliance on its international adviser registration.

8. Paragraph 22(1)(b) of the CFA prohibits a person or company from acting as an adviser unless the person or company is registered as an adviser under the CFA, or is registered as a partner or an officer of a registered adviser and is acting on behalf of a registered adviser. Under the CFA, "adviser" means a person or company engaging in or holding himself, herself or itself out of engaging in the business of advising others as to trading in "contracts", and "contracts" means commodity futures contracts and commodity futures options.

9. By providing the Proposed Sub-Advisory Services in relation to Futures, the Sub-Adviser will be acting as an adviser with respect to Futures and, in the absence of being granted the request relief, would be required to registered as an adviser under the CFA.

10. There is presently no rule under the CFA that provides an exemption from the adviser registration requirement in paragraph 22(1)(b) of the CFA for a person or company acting as an adviser in respect of Futures that is similar to the exemption from the adviser registration requirement in section 25(1)(c) of the OSA for acting as an adviser (as defined in the OSA) in respect of securities that is provided under section 7.3 of Rule 35-502.

11. As would be required under section 7.3 of Rule 35-502:

(a) the obligations and duties of the Sub-Adviser in connection with the Proposed Sub-Advisory Services will be set out in a written agreement with the Principal Adviser;

(b) the Principal Adviser will contractually agree with the Investment Account to be responsible for any loss that arises out of the failure of the Sub-Adviser:

(i) to exercise the powers and discharge the duties of its office honesty, in good faith and in the best interests of the Principal Adviser and the Investment Account; or

(ii) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances (together with (i), the Assumed Obligations); and

(c) the Principal Adviser cannot be relieved by the Investment Account from its responsibility for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations.

12. The Sub-Adviser is not resident of any province or territory of Canada.

13. The Sub-Adviser is appropriately registered or exempt from registration to provide advice to the Principal Adviser and Investment Account pursuant to the applicable legislation of its principal jurisdiction.

14. Prior to purchasing any securities in one or more of the Investment Accounts, all investors in the Investment Account who are Ontario residents will receive written disclosure that includes:

(a) a statement that the Principal Adviser is responsible for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations; and

(b) a statement that there may be difficulty in enforcing any legal rights against the Sub-Adviser (or the individual representatives of the Sub-Adviser) advising the Investment Account because it is resident outside of Canada and all or substantially all of its assets are situated outside of Canada.

AND UPON being satisfied that it would not be prejudicial to the public interest for the Commission to grant the exemption requested on the basis of the terms and conditions proposed;

IT IS ORDERED, pursuant to section 80 of the CFA, that the Sub-Adviser (including its directors, officers and employees) is exempted from the requirements of paragraph 22(1)(b) of the CFA in respect of the Proposed Sub-Advisory Services provided to the Principal Adviser and an Investment Account, for a period of five years, provided that at the relevant time that such activities are engaged in:

(a) the Principal Adviser is registered under the CFA as an adviser in the category of commodity trading manager;

(b) the Sub-Adviser is appropriately registered or exempt from registration to provide advice to the Principal Adviser and Investment Account pursuant to the applicable legislation of its principal jurisdiction;

(c) the obligations and duties of the Sub-Adviser are set out in a written agreement with the Principal Adviser;

(d) the Principal Adviser has contractually agreed with the Investment Account to be responsible for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations;

(e) the Principal Adviser cannot be relieved by the Investment Account from its responsibility for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations; and

(f) prior to purchasing any securities in an Investment Account, all investors who are Ontario residents received written disclosure that includes:

(i) a statement that the Principal Adviser is responsible for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations; and

(ii) a statement that there may be difficulty in enforcing any legal rights against the Sub-Adviser (or the individual representatives of the Sub-Adviser) advising the Investment Account because it is resident outside of Canada and all or substantially all of its assets are situated outside of Canada.

April 28, 2009

"Suresh Thakrar"
Commissioner
Ontario Securities Commission
 
"Paul K. Bates"
Commissioner
Ontario Securities Commission