Securities Law & Instruments

Headnote

Section 80 of the Commodity Futures Act (Ontario) -- Relief from the adviser registration requirement in paragraph 22(1)(b) of the CFA granted to sub-adviser not ordinarily resident in Ontario in respect of advice regarding trades in commodity futures contracts and commodity futures options, subject to certain terms and conditions -- Renewal of previous relief -- Relief mirrors exemption available in section 7.3 of OSC Rule 35-502 Non-Resident Advisers made under the Securities Act (Ontario).

Applicable Legislative Provisions

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

Securities Act, R.S.O. 1990, c. S.5, as am, s. 25(3).

Ontario Securities Commission Rule 35-502 Non-Resident Advisers, s. 7.3.

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 and INTEGRA CAPITAL LIMITED

ORDER (Section 80 of the CFA)

UPON the application (the Application) of Integra Capital Limited (the Principal Adviser) and 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 (and any directors, officers and employees engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of the Sub-Adviser in respect of the Sub-Advisory Services (as defined below)) be exempt, for a specified period of time, from the adviser registration requirement of subsection 22(1)(b) of the CFA when acting as an adviser for the Principal Adviser in respect of the Funds (as defined below) regarding commodity futures contracts and commodity futures options traded on commodity futures exchanges (Contracts) and cleared through clearing corporations;

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

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

The Principal Adviser

1. The Principal Adviser is a corporation incorporated under the laws of Ontario and its principal business office is located in Oakville, Ontario.

2. The Principal Adviser is registered: (a) in every Province as a portfolio manager and exempt market dealer; (b) as an investment fund manager in the Provinces of Quebec, Ontario and Newfoundland and Labrador; (c) a portfolio manager under the Securities Act (Ontario) (the OSA); and (d) an adviser in the category of commodity trading manager under the CFA in Ontario.

3. The Principal Adviser is not in default of Ontario securities, commodity futures or derivatives legislation.

The Sub-Adviser

4. 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 a diversified global asset management firm that focuses on designing and delivering investment solutions for clients.

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

6. The Sub-Adviser, in respect of advisory services for securities, currently relies on the international adviser exemption under National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations and is not registered in any capacity under the securities legislation of any other jurisdiction in Canada. The Sub-Adviser is registered as an investment adviser under the Investment Advisers Act of 1940 (U.S.), as amended, and is registered as a commodity trading adviser under the Commodity Exchange Act, although exempted from certain requirements available for advisers who advise "qualified eligible persons". The Sub-Adviser is also a member of the National Futures Association.

7. The Sub-Adviser is not registered in any capacity under the CFA or the OSA.

The Funds

8. The Principal Adviser is the investment adviser to (a) pooled funds, the securities of which are sold on a private placement basis in all provinces of Canada to accredited investors pursuant to prospectus and registration exemptions contained in National Instrument 45-106 -- Prospectus and Registration Exemptions (the Pooled Funds), and (b) managed accounts of institutional clients who have entered into investment management agreements with the Principal Adviser (the Managed Accounts) and (c) other Pooled Funds and Managed Accounts that may be established in the future in respect of which the Principal Adviser engages the Sub-Adviser to provide portfolio advisory services (the Future Funds) (each of the Pooled Funds, Managed Accounts and Future Funds are referred to individually as a Fund and collectively as the Funds).

9. The Funds may, as part of their investment program, invest in Contracts, as defined in the CFA.

10. The Principal Adviser offers the portfolio management services of the Sub-Adviser to the respective Funds that choose to have exposure to capital markets and Contracts in which the Sub-Adviser has experience and expertise.

The Sub-Advisory Services

11. The Principal Adviser, pursuant to a written agreement between the Principal Adviser and a Fund: (a) act as an adviser (as defined in the OSA) to the Fund in respect of securities, and (b) act as an adviser (as defined in the CFA) to the Fund, in respect of trading Contracts, by exercising discretionary authority to purchase and sell securities (as defined in the OSA) and Contracts on behalf of the Fund in respect of the investment portfolios of the Fund.

12. In connection with the Principal Adviser acting as an adviser to the Funds in respect of the purchase or sale of Contracts, the Principal Adviser will, pursuant to a written agreement made between the Principal Adviser and the Sub-Adviser (a Sub-Advisory Agreement), retain the Sub-Adviser to act as an adviser to the Principal Adviser in respect of the Funds (the Sub-Advisory Services), by exercising discretionary authority on behalf of the Principal Adviser, in respect of the investment portfolios of the Funds, including discretionary authority to buy or sell Contracts for the Funds, provided that: (a) in each case, the Contracts must be cleared through an acceptable clearing corporation; and (b) such investments are consistent with the investment objectives and strategies of the Funds. A Sub-Advisory Agreement may be entered into with respect to a specific Fund, or may pertain to multiple Funds.

13. The written agreement between the Principal Adviser and the Sub-Adviser will set out the obligations and duties of each party in connection with the Sub-Advisory Services and permits the Principal Adviser to exercise the degree of supervision and control it is required to exercise over the Sub-Adviser in respect of the Sub-Advisory Services.

14. If there is any direct contact between a Fund and the Sub-Adviser in connection with the Sub-Advisory Services, a representative of the Principal Adviser, duly registered in accordance with the CFA, will be present at all times either in person or by telephone.

15. 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 representative, partner or an officer of a registered adviser and is acting on behalf of a registered adviser.

16. By providing the Sub-Advisory Services, the Sub-Adviser and any individuals acting on behalf of the Sub-Adviser in respect of the Sub-Advisory Services will be, engaging in, or holding themselves as engaging in, the business of advising others in respect of the Contracts and, in the absence of being granted the required relief, would be required to register as an adviser, under the CFA.

17. 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 Contracts that is similar to the exemption from the adviser registration requirement in section 25(3) 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 OSC Rule 35-502 Non-Resident Advisers (OSC Rule 35-502).

18. The relationship among the Principal Adviser, the Sub-Adviser and the Funds satisfies the requirements of section 7.3 of OSC Rule 35-502.

19. The Principal Adviser will deliver to the Funds all applicable reports and statements required under applicable securities, commodity futures and derivatives legislation.

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

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

(b) the Principal Adviser has or will contractually agree with the Funds 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 honestly, in good faith and in the best interests of the Principal Adviser and the Funds; 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 Funds from its responsibility for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations.

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

22. The Sub-Adviser will only provide the Sub-Advisory Services as long as the Principal Adviser is, and remains, registered under the CFA as an adviser in the category of commodity trading manager.

Disclosure

23. The prospectus or similar offering document, if any, for each Fund and for which the Principal Adviser engages the Sub-Adviser to provide the Sub-Advisory Services will include the following disclosure:

(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 any individual engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of the Sub-Adviser in respect of the Sub-Advisory Services) because the Sub-Adviser is resident outside of Canada and all or substantially all of its assets are situated outside of Canada.

24. Prior to purchasing any securities in one or more of the Pooled Funds or Future Funds, directly from the Principal Adviser or entering into an investment management agreement with the Principal Adviser for a Managed Account, all investors 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 any individual engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of the Sub-Adviser in respect of the Sub-Advisory Services) because the Sub-Adviser is resident outside of Canada and all or substantially all of its assets are situated outside of Canada.

Previous Order

25. On April 28, 2009, the Commission granted the Sub-Adviser an exemption from the requirement in paragraph 22(1)(b) of the CFA for advisory services provided in respect of investment funds established by the Principal Adviser and for which the Principal Adviser engaged the Sub-Adviser to provide advisory services regarding Futures (the Previous Order). The Previous Order is scheduled to terminate on April 28, 2014.

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 (and any directors, officers and employees engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of the Sub-Adviser in respect of the Sub-Advisory Services) is exempt from the adviser registration requirement in paragraph 22(1)(b) of the CFA in respect of the Sub-Advisory Services to be provided to the Principal Adviser in respect of the Funds, 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 (and any directors, officers and employees engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of the Sub-Adviser in respect of the Sub-Advisory Services) is appropriately registered or licensed, or is entitled to rely on appropriate exemptions from such registrations or licenses, to provide advice for the Funds 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 Funds 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 a Fund or its securityholders from its responsibility for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations;

(f) the prospectus or similar offering document, if any, for each Fund, and for which the Principal Adviser engages the Sub-Adviser to provide the Sub-Advisory Services will include the following disclosure:

(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 any individual engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of the Sub-Adviser in respect of the Sub-Advisory Services) because the Sub-Adviser is resident outside of Canada and all or substantially all of its assets are situated outside of Canada; and

(g) prior to purchasing any securities in one or more of the Pooled Funds or Future Funds, directly from the Principal Adviser or entering into an investment management agreement with the Principal Adviser for a Managed Account, all investors who are Ontario residents will receive 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 any individual engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of the Sub-Adviser in respect of the Sub-Advisory Services) because the Sub-Adviser is resident outside of Canada and all or substantially all of its assets are situated outside of Canada.

IT IS FURTHER ORDERED that this Order is effective as at April 28, 2014 (the Effective Date) and will terminate on the earlier of (i) the coming into force of any amendments to section 7.3 of OSC Rule 35-502, (ii) the effective date of the repeal of section 7.3 of OSC Rule 35-502, and (iii) five years from the Effective Date.

DATED at Toronto, Ontario this 24th day of April 2014.

"Anne Marie Ryan"
Commissioner
Ontario Securities Commission
 
"Mary Condon"
Commissioner
Ontario Securities Commission