Securities Law & Instruments


Headnote

Subsection 78(1) of the Commodity Futures Act (Ontario) – Order to revoke previous relief from paragraph 22(1)(b) of the CFA granted to sub-advisers headquartered in foreign jurisdictions in respect of advice regarding trades in commodity futures contracts and commodity futures options, subject to certain terms and conditions.

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 foreign jurisdictions 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), 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 Putnam Investments Inc., The Putnam Advisory Company, LLC and Putnam Investments Limited, November 9, 2012

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

AND

IN THE MATTER OF
PUTNAM INVESTMENTS CANADA ULC,
THE PUTNAM ADVISORY COMPANY, LLC
AND PUTNAM INVESTMENTS LIMITED

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

                UPON the application (the Application) of The Putnam Advisory Company, LLC (PAC) and Putnam Investments Limited (PIL and, together with PAC, the Sub-Advisers and, each, a Sub-Adviser) and Putnam Investments Canada ULC (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 the Principal Adviser (formerly, Putnam Investments Inc.) and the Sub-Advisers on November 9, 2012 (the Prior Relief); and

(b)           pursuant to section 80 of the CFA, that each Sub-Adviser and any 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 (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 Principal Adviser and the Sub-Advisers having represented to the Commission that:

1.             The Principal Adviser is an unlimited liability company continued under the Business Corporations Act (British Columbia) with its head office located in Toronto, Ontario.

2.             The Principal Adviser is registered as:

(a)           a portfolio manager, exempt market dealer and investment fund manager under the Securities Act (Ontario) (the OSA);

(b)           a commodity trading manager and commodity trading counsel under the CFA;

(c)           a portfolio manager with the securities commissions of Alberta, British Columbia, Manitoba (dba Putnam Management), New Brunswick, Newfoundland and Labrador, Nova Scotia (where it is also registered as an exempt market dealer), Prince Edward Island and Saskatchewan (where it is also registered as an exempt market dealer);

(d)           as an exempt market dealer in Quebec; and

(e)           as an adviser (dba Putnam Management) under the Commodity Futures Act (Manitoba).

3.             The Principal Adviser and the Sub-Advisers obtained similar relief in the Prior Relief which was subject to a 5 year “sunset” clause, and are seeking to extend the Prior Relief for a further period of time.

4.             PAC is a limited liability company organized under the laws of the State of Delaware, with its principal place of business located in Boston, State of Massachusetts in the United States. PAC is registered with the Securities and Exchange Commission of the United States of America (the SEC) as an investment adviser. Although PAC advises on derivative products to clients in the United States, PAC is currently exempt from registration under the United States Commodity Exchange Act as a commodity trading adviser with the United States Commodity Futures Trading Commission. PAC is not registered in any capacity under the CFA or the OSA, but is availing itself of the sub-adviser registration exemption in section 8.26.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) (such exemption, the International Sub-Adviser Exemption) in certain provinces.

5.             PIL is a company organized under the laws of England and Wales with its principal place of business located in London, United Kingdom. PIL is registered with the Financial Conduct Authority in the United Kingdom (the FCA) as an adviser. PIL’s permitted activities pursuant to its registration with the FCA include advising on Contracts. PIL is not registered in any capacity under the CFA or the OSA, but is availing itself of the International Sub-Adviser Exemption in certain provinces.

6.             Neither Sub-Adviser is a resident of any province or territory of Canada.

7.             The Sub-Advisers and the Principal Adviser are affiliates, as defined in the OSA.

8.             Each 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 in which its head office 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, each Sub-Adviser is authorized and permitted to carry on the Sub-Advisory Services (as defined below) in the jurisdiction in which its head office is located.

9.             Each Sub-Adviser engages in the business of an adviser in respect of Contracts in its principal jurisdiction. Among other activities, each Sub-Adviser engages in the business of advising others as to trading in commodity futures contracts and options on commodity futures in its principal jurisdiction.

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

11.          The Principal Adviser provides, or may provide, discretionary and/or non-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 Retail Funds); (ii) pooled funds, the securities of which are available for purchase on a private placement basis in Ontario and the other provinces and territories of Canada pursuant to prospectus exemptions contained in National Instrument 45-106 Prospectus Exemptions (the Pooled Funds); (iii) clients who have entered into investment management agreements with the Principal Adviser to establish managed accounts (the Managed Accounts); and (iv) Retail Funds, Pooled Funds and Managed Accounts that may be established or retained in the future and in respect of which the Principal Adviser will engage a Sub-Adviser to provide portfolio advisory services (the Future Clients) (each of the Retail Funds, Pooled Funds, Managed Accounts and Future Clients being referred to individually as a Client and, collectively as the Clients).

12.          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.

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

14.          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, a partner or an officer of a registered adviser and is acting on behalf of such registered adviser.

15.          By providing the Sub-Advisory Services, each Sub-Adviser is engaging in, or holding itself 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.

16.          There is currently no exemption from the adviser registration requirement in paragraph 22(1)(b) of the CFA that is equivalent to the International Sub-Adviser Exemption.

17.          A 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.

18.          The relationship among the Principal Adviser, a Sub-Adviser and a Client is, or will be, consistent with the requirements of the International Sub-Adviser Exemption, namely that:

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

(b)           the Principal Adviser has entered into, or will enter into, a written contract with each Client, agreeing to be responsible for any loss that arises out of the failure of the applicable 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); and

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

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

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

21.          The prospectus or other offering document (in either case, the Offering Document) of each Client that is a Retail Fund or a Pooled Fund and for which the Principal Adviser engages a Sub-Adviser to provide the Sub-Advisory Services includes, or 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 applicable Sub-Adviser to meet the Assumed Obligations; and

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

22.          Prior to purchasing any securities of one or more of the Clients that are Retail Funds or Pooled Funds directly from the Principal Adviser, all investors in these Retail Funds or Pooled Funds who are Ontario residents will receive, or have received, the Required Disclosure in writing (which may be in the form of an Offering Document).

23.          Each Client that is a Managed Account 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.

                AND UPON being satisfied that it would not be prejudicial to the public interest for the Commission to grant the requested relief:

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

                IT IS FURTHER ORDERED, pursuant to section 80 of the CFA, that each Sub-Adviser and its Representatives are exempt from the adviser registration requirements in 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 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, or will enter, into a written agreement with each Client, 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 a Retail 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 a Client that is a Retail Fund or a Pooled Fund directly from the Principal Adviser, each investor in any of these Retail Funds or Pooled Funds who is an Ontario resident received, or will receive, the Required Disclosure in writing (which may be in the form of an Offering Document); and

(i)            each Client that is a Managed Account for which the Principal Adviser engages a Sub-Adviser to provide the Sub-Advisory Services received, or will receive, the Required Disclosure in writing prior to the purchasing of any Contracts for such Client; 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)           five years after the date of this Order.

                DATED at Toronto, Ontario, this 31st of October, 2017

“Peter Currie”
Commissioner    
Ontario Securities Commission      
“Philip Anisman”
Commissioner    
Ontario Securities Commission