Securities Law & Instruments


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 a 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.

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.

November 21, 2018

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

AND

IN THE MATTER OF
EVOLVE FUNDS GROUP INC. AND
ALLIANZ GLOBAL INVESTORS U.S. LLC

ORDER
(Section 80 of the CFA)

UPON the application (the Application) of Evolve Funds Group Inc. (the Principal Adviser) and Allianz Global Investors U.S. 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 individuals 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) (the Sub-Adviser Individuals)) 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 the Clients (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.             The Principal Adviser is a corporation established under the laws of Ontario with its head office located in Toronto, Ontario.

2.             The Principal Adviser is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, as an adviser in the category of portfolio manager and as a commodity trading manager in Ontario.

3.             The Sub-Adviser is a Delaware limited liability company, with its principal office in New York, New York. The Sub-Adviser is a direct, wholly-owned subsidiary of Allianz Global Investors U.S. Holdings LLC, which in turn is owned indirectly by Allianz SE, a diversified global financial institution.

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

5.             The Sub-Adviser is currently registered as an investment advisor in the United States with the U.S. Securities and Exchange Commission.

6.             The Sub-Adviser is not an affiliate of the Principal Adviser.

7.             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 United States, 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, the Sub-Adviser is authorized and permitted to carry on the Sub-Advisory Services (as defined below) in the United States.

8.             The Sub-Adviser engages in the business of an adviser in respect of Contracts in the United States.

9.             The Sub-Adviser is not registered in any capacity under the CFA.

10.          The Sub-Adviser is registered in the capacity of an exempt market dealer under applicable securities law in each of Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan.

11.          The Sub-Adviser is also currently relying on the international adviser exemption in each of British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario and Québec and the international investment fund manager exemption in Ontario and Québec. However, with respect to the Principal Adviser, the Sub-Adviser intends to avail itself of the international sub-adviser registration exemption in section 8.26.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”).

12.          The Principal Adviser and the Sub-Adviser are not in default of securities legislation, commodity futures legislation or derivatives legislation in any jurisdiction of Canada. The Sub-Adviser is in compliance in all material respects with the securities laws, commodity futures laws and derivatives laws in the United States.

13.          The Principal Adviser is or will be the investment fund manager of and provides or will provide 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 all the other provinces and territories of Canada (the Investment Funds) and (ii) other Investment Funds that may be established in the future and in respect of which the Principal Adviser engages the Sub-Adviser to provide portfolio advisory services (the Future Clients) (each of the Investment Funds and Future Clients being referred to individually as a Client and collectively as the Clients).

14.          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.

15.          The discretionary portfolio management services provided or to be provided by the Principal Adviser to the Clients include acting as an adviser with respect to both securities and Contracts where such investments are part of the investment program of such Clients.

16.          In connection with the Principal Adviser acting as an adviser to the Clients in respect of the purchase or sale of securities and Contracts, the Principal Adviser, pursuant to a written agreement made between the Principal Adviser and the Sub-Adviser, will retain the Sub-Adviser to act as a sub-adviser to the Principal Adviser in respect of securities and Contracts in which the 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 Clients, including discretionary authority to buy or sell Contracts for the Clients (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 applicable Client.

17.          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.

18.          By providing the Sub-Advisory Services, the Sub-Adviser and the Sub-Adviser Individuals will be engaging in, or holding himself, herself, itself or 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.

19.          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 Securities Act (Ontario) (OSA) that is provided under section 8.26.1 of NI 31-103.

20.          The relationship among the Principal Adviser, the Sub-Adviser and any Clients will be consistent with the requirements of section 8.26.1 of NI 31-103.

21.          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.

22.          As would be required under section 8.26.1 of NI 31-103:

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

(b)           the Principal Adviser has entered or will enter into a written agreement with each Client, agreeing 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 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).

23.          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 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.

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

25.          The prospectus or other offering document (in either case, the Offering Document), if any, for each Client that is an Investment Fund for which the Principal Adviser engages the Sub-Adviser 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 the Sub-Adviser to meet the Assumed Obligations (as defined above); and

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

26.          Prior to purchasing any securities of a Client directly from the Principal Adviser, all investors in the Client who are Ontario residents will receive, or have received, the Required Disclosure in writing (which may be in the form of an Offering Document).

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 section 80 of the CFA, that the Sub-Adviser and its Sub-Adviser Individuals 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 each Client agreeing to be responsible for any loss that arises out of any failure of the Sub-Adviser to meet the Assumed Obligations;

(g)           the Offering Document of each Client that is an Investment Fund for which the Principal Adviser engages the Sub-Adviser to provide the Sub-Advisory Services will include the Required Disclosure; and

(h)           prior to purchasing any securities of a Client that is an Investment Fund directly from the Principal Adviser, each investor in any of these Investment Funds who is an Ontario resident received, or will receive, the Required Disclosure in writing; 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 the 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 16th day of November, 2018.

“Mark J. Sandler”
Commissioner
Ontario Securities Commission

“Deborah Leckman”
Commissioner
Ontario Securities Commission