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BMO Asset Management Inc. et al. – s. 80 of the CFA
Headnote
Section 80 of the Commodity Futures Act (Ontario) -- Relief from the adviser registration requirement of paragraph 22(1)(b) of the CFA granted to sub-advisers headquartered in a foreign jurisdiction in respect of advice regarding trades in commodity futures contracts and commodity futures options, subject to certain terms and conditions -- Relief mirrors exemption available in section 8.26.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations made under the Securities Act (Ontario).
Applicable Legislative Provisions
Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 1(1), 22(1)(b), 80.
Securities Act, R.S.O. 1990, c. S.5, as am., s. 25(3).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 8.26.1.
Ontario Securities Commission Rule 35-502 Non-Resident Advisers, s. 7.11.
IN THE MATTER OF THE COMMODITY FUTURES ACT, R.S.O. 1990, CHAPTER C.20, AS AMENDED (the CFA) AND IN THE MATTER OF BMO ASSET MANAGEMENT INC., F&C MANAGEMENT LIMITED, LGM INVESTMENTS LIMITED, AND PYRFORD INTERNATIONAL LIMITED
ORDER (Section 80 of the CFA)
UPON the application (the Application) of F&C Management Limited (F&C), LGM Investments Limited (LGM Investments), Pyrford International Limited (Pyrford and, together with F&C and LGM Investments, the Sub-Advisers and, each, a Sub-Adviser) and BMO Asset Management Inc. (the Principal Adviser) to the Ontario Securities Commission (the Commission) for an order, pursuant to section 80 of the CFA, that each Sub-Adviser (and individuals engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of a Sub-Adviser in respect of the Sub-Advisory Services (as defined below) (the Representatives)) be exempt, for a specified period of time, from the adviser registration requirements of paragraph 22(1)(b) of the CFA when acting as a sub-adviser to the Principal Adviser for the benefit of the Clients (as defined below) regarding commodity futures contracts and commodity futures options traded on commodity futures exchanges (collectively, the Contracts) and cleared through clearing corporations;
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON the Principal Adviser and the Sub-Advisers having represented to the Commission that:
1. The Principal Adviser is a corporation organized under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
2. The Principal Adviser is an indirect wholly-owned subsidiary of Bank of Montreal (BMO), a global financial services company providing a full-spectrum of banking and related services including asset management and wealth management services. As such, the Principal Adviser leverages the global expertise of investment professionals at its affiliates worldwide.
3. The Principal Adviser is currently registered (i) as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer in each of the provinces and territories of Canada, (ii) as an investment fund manager in Ontario, Newfoundland and Labrador and Québec, and (iii) as an adviser in the category of commodity trading manager in Ontario.
4. The Principal Adviser is not in default of securities legislation, commodity futures legislation or derivatives legislation in any jurisdiction of Canada.
5. F&C is a corporation organized under the laws of England and Wales. The head office of F&C is located in London, United Kingdom. F&C is an indirect wholly-owned subsidiary of BMO.
6. F&C is authorized and regulated by the United Kingdom Financial Conduct Authority (FCA) (No. 119230) as a financial services firm to advise on investments, including commodity futures, commodity options and options on commodity futures. F&C engages in the business of an adviser in respect of Contracts in the United Kingdom.
7. F&C currently relies on the international dealer, international adviser and international investment fund manager exemptions under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers in respect of dealer, advisory and management services for securities provided to residents of Canada.
8. LGM Investments is a corporation organized under the laws of England and Wales. The head office of LGM Investments is located in London, United Kingdom. LGM Investments is a wholly-owned subsidiary of LGM (Bermuda) Ltd., which is an indirect wholly-owned subsidiary of BMO.
9. LGM Investments is authorized and regulated by the FCA (No. 176763) as a financial services firm to advise on investments, including commodity futures, commodity options and options on commodity futures. LGM Investments engages in the business of an adviser in respect of Contracts in the United Kingdom.
10. Pyrford is a corporation organized under the laws of England and Wales. The head office of Pyrford is located in London, United Kingdom. Pyrford is an indirect wholly-owned subsidiary of BMO.
11. Pyrford is authorized and regulated by the FCA (No. 122137) as a financial services firm to advise on investments, including commodity futures, commodity options and options on commodity futures. Pyrford engages in the business of an adviser in respect of Contracts in the United Kingdom.
12. None of the Sub-Advisers is registered in any capacity under the CFA or the Securities Act (Ontario) (the OSA) other than Pyrford, which is registered as a portfolio manager under the OSA, and each Sub-Advisor, other than Pyrford, acts in reliance on the exemption from the requirement to register as an adviser under the OSA available to it pursuant to section 8.26.1 of NI 31-103.
13. Each Sub-Adviser is registered in a category of registration, or operates under an exemption from registration, under the commodities futures or other applicable legislation of its principal jurisdiction that permits it to carry on the activities in that jurisdiction that registration as an adviser under the CFA would permit it to carry on in Ontario. As such, each Sub-Adviser is authorized and permitted to carry on the Sub-Advisory Services (as defined below).
14. The Sub-Advisers are not in default of securities legislation, commodity futures legislation or derivatives legislation in any jurisdiction of Canada.
15. The Principal Adviser provides investment advice and/or discretionary portfolio management services in Ontario to (i) investment funds, the securities of which are qualified by prospectus for distribution to the public in Ontario and the other provinces and territories of Canada (the Investment Funds); (ii) pooled funds, the securities of which are sold on a private placement basis in Ontario and the other provinces and territories of Canada pursuant to available prospectus exemptions (the Pooled Funds); (iii) clients who have entered into investment management agreements with the Principal Adviser to establish managed accounts (the Managed Account Clients); and (iv) other Investment Funds, Pooled Funds and Managed Account Clients that may be established or retained in the future and in respect of which the Principal Adviser engages a Sub-Adviser to provide portfolio advisory services (the Future Clients) (each of the Investment Funds, Pooled Funds, Managed Account Clients and Future Clients being referred to individually as a Client and collectively as the Clients).
16. Certain of the Clients may, as part of their investment program, invest in Contracts. The Principal Adviser acts, or will act, as a commodity trading manager in respect of such Clients.
17. In connection with the Principal Adviser acting as an adviser to Clients in respect of the purchase or sale of Contracts, the Principal Adviser, pursuant to written agreements made between the Principal Adviser and each respective Sub-Adviser, has retained or will retain the respective Sub-Adviser to act as a sub-adviser to the Principal Adviser in respect of Contracts in which that Sub-Adviser has experience and expertise by exercising discretionary authority on behalf of the Principal Adviser, in respect of all or a portion of the assets of the investment portfolio of the respective Client, which may include discretionary authority to buy or sell Contracts for the Client (the Sub-Advisory Services), provided that:
(a) in each case, the Contracts must be cleared through an "acceptable clearing corporation" (as defined in National Instrument 81-102 Investment Funds, or any successor thereto (NI 81-102)) or a clearing corporation that clears and settles transactions made on a futures exchange listed in Appendix A of NI 81-102, or any successor thereto; and
(b) such investments are consistent with the investment objectives and strategies of the applicable Client.
18. 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 or 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 as engaging in the business of advising others as to trading in "contracts", and "contracts" means commodity futures contracts and commodity futures options.
19. By providing the Sub-Advisory Services, the Sub-Advisers will be engaging in, or holding themselves out as engaging in, the business of advising others with respect to Contracts and, in the absence of being granted the requested relief, would be required to register as advisers under the CFA.
20. There is presently no rule or regulation under the CFA that provides an exemption from the adviser registration requirement in paragraph 22(1)(b) of the CFA that is similar to the exemption from the adviser registration requirement in subsection 25(3) of the OSA which is provided under section 8.26.1 of NI 31-103.
21. The relationship among the Principal Adviser, the Sub-Advisers and any Client is consistent with the requirements of section 8.26.1 of NI 31-103.
22. The Sub-Advisers 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.
23. As would be required under section 8.26.1 of NI 31-103:
(a) the obligations and duties of each Sub-Adviser will be set out in a written agreement with the Principal Adviser;
(b) the Principal Adviser will enter into a written contract with each Client agreeing to be responsible for any loss that arises out of the failure of any 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 each Client; 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).
24. The written agreements between the Principal Adviser and each Sub-Adviser will set out the obligations and duties of each party in connection with the Sub-Advisory Services and will permit 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.
25. The Principal Adviser will deliver to the Clients all required reports and statements under applicable securities, commodity futures and derivatives legislation.
26. The prospectus or other offering document, if any (the Offering Document), for each Client that is an Investment Fund or a Pooled Fund and for which the Principal Adviser engages one or more Sub-Advisers to provide the Sub-Advisory Services will include the following disclosure (the Required Disclosure):
(a) a statement that the Principal Adviser is responsible for any loss that arises out of the failure of any Sub-Adviser to meet the Assumed Obligations; and
(b) a statement that there may be difficulty in enforcing any legal rights against a Sub-Adviser (or any of their Representatives) because the Sub-Adviser is resident outside of Canada and all or substantially all of their assets are situated outside of Canada.
27. If a Client is an Investment Fund or Pooled Fund, then any investor in such Client that resides in Ontario and purchases securities of such Client directly from the Principal Adviser will receive the Required Disclosure in writing (which may be in the form of an Offering Document).
28. Each Client that is a Managed Account Client for which the Principal Adviser engages a Sub-Adviser to provide the Sub-Advisory Services will receive the Required Disclosure in writing prior to the purchasing of any Contracts for such Client.
AND UPON being satisfied that it would not be prejudicial to the public interest for the Commission to grant the exemption requested;
IT IS ORDERED, pursuant to section 80 of the CFA, that each Sub-Adviser and its Representatives are exempt from the adviser registration requirement in paragraph 22(1)(b) of the CFA when acting as sub-adviser to the Principal Adviser in respect of the Sub-Advisory Services 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's head office or principal place of business is in a foreign jurisdiction;
(c) the Sub-Adviser is registered in a category of registration, or operates under an exemption from registration, under the commodity futures or other applicable legislation of the foreign jurisdiction in which its head office or principal place of business is located, that permits it to carry on the activities in that jurisdiction that registration as an adviser under the CFA would permit it to carry on in Ontario;
(d) the Sub-Adviser engages in the business of an adviser in respect of Contracts in the foreign jurisdiction in which its head office or principal place of business is located;
(e) the obligations and duties of the Sub-Adviser are set out in a written agreement with the Principal Adviser;
(f) the Principal Adviser has entered into a written agreement with the Clients, agreeing to be responsible for any loss that arises out of any failure of the applicable Sub-Adviser to meet the Assumed Obligations;
(g) the Offering Document of each Client that is an Investment Fund or Pooled Fund and for which the Principal Adviser engages a Sub-Adviser to provide the Sub-Advisory Services will include the Required Disclosure;
(h) prior to purchasing any securities of one or more of the Clients that are Investment Funds or Pooled Funds directly from the Principal Adviser, all investors in these Clients who are Ontario residents will receive, or have received, the Required Disclosure in writing; and
(i) each Client that is a Managed Account Client for which the Principal Adviser engages a Sub-Adviser to provide the Sub-Advisory Services will receive, or has received, the Required Disclosure in writing prior to the purchasing of any Contracts for such Client.
IT IS FURTHER ORDERED that this Order will terminate on the earliest of
(a) such transition period as provided by operation of law, after the effective date of the repeal of the CFA;
(b) six months, or such other transition period as provided by operation of law, after the coming into force of any amendment to Ontario commodity futures law (as defined in the CFA) or Ontario securities law (as defined in the OSA) that affects the ability of a Sub-Adviser to act as a sub-adviser to the Principal Adviser in respect of the Sub-Advisory Services; and
(c) five years after the date of this Order.
DATED at Toronto, Ontario, this 31st day of May, 2016.
"T. Moseley"
Commissioner
Ontario Securities Commission
"W. Furlong"
Commissioner
Ontario Securities Commission