Flaherty & Crumrine Incorporated and Brompton Funds Limited – ss. 78(1) and 80 of the CFA

Section 80 of the Commodity Futures Act (Ontario) (the CFA) – Relief from the adviser registration requirement of paragraph 22(1)(b) of the CFA granted to sub-adviser 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) – Relief is subject to a sunset clause.

Subsection 78(1) of the Commodity Futures Act (Ontario) – Order also revokes prior order of the Commission dated November 16, 2012, In the Matter of Flaherty & Crumrine Incorporated, that expires on November 20, 2017.

Applicable Legislative Provisions

Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 1(1), 22(1)(b), 78(1), 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.

Applicable Orders

In the Matter of Flaherty & Crumrine Incorporated, dated November 16, 2012, (2012) 35 OSCB 10680.
In the Matter of Flaherty & Crumrine Incorporated, dated November 20, 2007, (2007) 30 OSCB 9696.
In the Matter of Flaherty & Crumrine Incorporated, dated November 23, 2004, (2005) 28 OSCB 674.

IN THE MATTER OF
THE COMMODITY FUTURES ACT,
R.S.O. 1990, CHAPTER C.20, AS AMENDED
(the CFA)

AND

IN THE MATTER OF
FLAHERTY & CRUMRINE INCORPORATED AND
BROMPTON FUNDS LIMITED

ORDER
(Subsection 78(1) and Section 80 of the CFA)

                UPON the application (the Application) of Flaherty & Crumrine Incorporated (Flaherty & Crumrine or the Sub-Adviser) and Brompton Funds Limited (the Principal Adviser) to the Ontario Securities Commission (the Commission) for an order:

(a)           pursuant to subsection 78(1) of the CFA, revoking the exemption order granted by the Commission to Flaherty & Crumrine on November 16, 2012 (the Prior Order); and

(b)           pursuant to section 80 of the CFA, that Flaherty & Crumrine and any individuals engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of Flaherty & Crumrine 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 in respect of advice provided for the benefit of the Fund (as defined below) regarding commodity futures contracts and commodity futures options (collectively, the Contracts) traded on commodity futures exchanges and cleared through clearing corporations;

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

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

1.             Flaherty & Crumrine Investment Grade Fixed Income Fund (the Fund) is an investment trust established under the laws of Alberta pursuant to a declaration of trust. The Fund was established for the purpose of holding an actively managed portfolio consisting primarily of various corporate debt securities and hybrid preferred securities of North American issuers (the Fixed Income Portfolio). At the time of purchase, all of the securities held in the Fixed Income Portfolio are required to be rated investment grade. The Fund is a reporting issuer under securities legislation.

2.             The Fund will not purchase or sell commodities or Contracts except that the Fund may purchase and sell financial futures contracts and related options as part of its hedging strategies. Substantially all of the Fixed Income Portfolio will be hedged to the Canadian dollar at all times.

3.             The Principal Adviser is the principal investment adviser to the Fund (including acting as a commodity trading manager in respect of the Fund) and its head office is located in Toronto, Ontario. The Principal Adviser is registered in Ontario under the CFA as an adviser in the category of commodity trading manager, and under the Securities Act (Ontario) (the OSA) as an investment fund manager, an adviser in the category of portfolio manager and a dealer in the category of exempt market dealer. The Principal Adviser is also registered as an investment fund manager in Quebec and Newfoundland and Labrador.

4.             Flaherty & Crumrine provides investment advisory and portfolio management services for the benefit of the Fund with respect to both the Fixed Income Portfolio and certain of the hedging strategies of the Fund.

5.             Flaherty & Crumrine is a corporation headquartered in Pasadena, California and specializes in the active management of preferred shares, hybrid preferred securities and debt instruments for institutional investors and publicly traded closed-end funds. Flaherty & Crumrine is not resident in any province or territory of Canada.

6.             Flaherty & Crumrine is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended, and with the U.S. Commodity Futures Trading Commission as a commodity trading adviser. Flaherty & Crumrine is a member of the U.S. National Futures Association.

7.             Accordingly, Flaherty & Crumrine is registered in a category of registration, or operates under an exemption from registration, under the commodity futures or other applicable securities or derivatives legislation of the jurisdiction outside of Canada 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. As such, Flaherty & Crumrine is authorized and permitted to carry on the Sub-Advisory Services (as defined below) in the jurisdiction in which its head office or principal place of business is located.

8.             Flaherty & Crumrine engages in the business of an adviser in respect of Contracts in the jurisdiction outside of Canada in which its head office or principal place of business is located.

9.             In respect of its securities related investment advisory and portfolio management services for the benefit of the Fund, Flaherty & Crumrine and its Representatives rely on the exemption from the requirement to register as an adviser under the OSA set out in section 8.26.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), which provides (among other things) that an international sub-adviser is exempt from the OSA adviser registration requirement on terms specified in that section. Flaherty & Crumrine is not registered in any capacity under the CFA, the OSA, or the securities, commodity futures or derivatives legislation of any other jurisdiction of Canada, and Flaherty & Crumrine does not intend to seek such registration.

10.          The Principal Adviser and Flaherty & Crumrine are not in default of securities legislation, commodity futures legislation or derivatives legislation in any jurisdiction of Canada. Flaherty & Crumrine is in compliance in all material respects with the securities laws, commodity futures laws and derivatives laws in the jurisdiction in which its head office or principal place of business is located.

11.          In connection with the Principal Adviser acting as adviser to the Fund in respect of the purchase or sale of Contracts, the Principal Adviser has retained Flaherty & Crumrine to act as a sub-adviser to the Principal Adviser in respect of Contracts (among other things) in which Flaherty & Crumrine has experience and expertise by exercising discretionary investment authority on behalf of the Principal Adviser, in respect of all or a portion of the assets of the investment portfolio of the Fund, including discretionary authority to buy or sell Contracts for the Fund (the Sub-Advisory Services), provided that:

(a)           in each case, the Contracts are 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; and

(b)           such investments are consistent with the investment objectives and strategies of the Fund.

12.          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 such registered adviser.

13.          By providing the Sub-Advisory Services, Flaherty & Crumrine and the Representatives will be engaging in, or holding themselves out as engaging in, the business of advising others in respect of Contracts and, in the absence of being granted the requested relief, would be required to register as an adviser under the CFA.

14.          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 that is provided under section 8.26.1 of NI 31-103.

15.          Flaherty & Crumrine 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.

16.          The relationship among the Principal Adviser, Flaherty & Crumrine and the Fund is consistent with the requirements of the exemption from the adviser registration requirement in section 8.26.1 of NI 31-103, namely that:

(a)           the obligations and duties of Flaherty & Crumrine are set out in a written agreement with the Principal Adviser; and

(b)           the Principal Adviser has entered into a written agreement with the Fund on whose behalf investment advice is or portfolio management services are being provided, agreeing to be responsible to the Fund for any loss that arises as a result of Flaherty & Crumrine or its Representatives failing to:

(i)            exercise their powers and discharge the duties of their office honestly, in good faith and in the best interests of the Principal Adviser and the Fund, or

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

17.          The written agreement between the Principal Adviser, Flaherty & Crumrine and the Fund sets 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 (both as relates to securities and as relates to Contracts).

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

19.          The continuous disclosure documents of the Fund, which are required to be filed under National Instrument 81-106 Investment Fund Continuous Disclosure or any other securities, commodity futures or derivatives legislation in Canada, (the Disclosure Documents) shall include the following disclosure in the Fund’s annual information form (the Required Disclosure):

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

(b)           a statement that there may be difficulty in enforcing any legal rights against Flaherty & Crumrine (or any of its Representatives) because Flaherty & Crumrine is resident outside of Canada and all or a substantial portion of its assets are situated outside of Canada.

20.          Ontario investors in the Fund will be able to access the Required Disclosure in the Fund’s annual information form on the System for Electronic Analysis and Retrieval (SEDAR).

21.          Flaherty & Crumrine obtained substantially similar relief in the Prior Order (as well as in similar relief previously obtained in 2004 and 2007), pursuant to which Flaherty & Crumrine provided Sub-Advisory Services to the Principal Adviser in respect of the Fund.

22.          The pending expiry of the Prior Order, pursuant to the terms of the Prior Order, has triggered the need for the requested Order.

                AND UPON the Commission being of the opinion that to do so would not be prejudicial to the public interest;

                IT IS ORDERED, pursuant to subsection 78(1) of the CFA, that the Prior Order is revoked;

                AND IT IS FURTHER ORDERED, pursuant to section 80 of the CFA that the Sub-Adviser and its Representatives are exempt from the adviser registration requirements of paragraph 22(1)(b) of the CFA when acting as a sub-adviser to the Principal Adviser in respect of the Sub-Advisory Services, provided that at the 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 jurisdiction outside of Canada;

(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 jurisdiction outside of Canada 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 jurisdiction outside of Canada 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 Fund agreeing to be responsible for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations;

(g)           the Disclosure Documents of the Fund will include the Required Disclosure; and

(h)           each Ontario investor in the Fund will be able to access the Required Disclosure in the Fund’s annual information form on SEDAR;

                AND IT IS FURTHER ORDERED that this Order will terminate on the earliest of:

(a)           the expiry of any transition period as may be provided by law, after the effective date of the repeal of the CFA;

(b)           six months, or such other transition period as may be provided by 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 any Sub-Adviser to act as a sub-adviser to the Principal Adviser in respect of the Sub-Advisory Services; and

(c)           November 20, 2022.

DATED at Toronto, Ontario, this 17th day of November, 2017