Securities Law & Instruments

Headnote

 

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-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.

 

Subsection 78(1) of the Commodity Futures Act (Ontario) – Order also revokes prior order of the Commission dated July 19, 2016, In the Matter of Franklin Templeton Investments Corp. et. al. that would otherwise have expired on July 19, 2021.

 

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 Franklin Templeton Investments Corp. et al., (2016) 39 OSCB 6794

 

IN THE MATTER OF

THE COMMODITY FUTURES ACT,

R.S.O. 1990, CHAPTER C.20, AS AMENDED (the “CFA”)

 

AND

 

IN THE MATTER OF

FRANKLIN TEMPLETON INVESTMENTS CORP.,

FIDUCIARY TRUST COMPANY OF CANADA,

FRANKLIN ADVISERS, INC.,

FRANKLIN TEMPLETON INSTITUTIONAL, LLC,

FRANKLIN MUTUAL ADVISERS, LLC,

K2/D&S MANAGEMENT CO., LLC,

TEMPLETON INVESTMENT COUNSEL, LLC,

TEMPLETON GLOBAL ADVISORS LIMITED,

FRANKLIN TEMPLETON INVESTMENT MANAGEMENT LIMITED, AND

FRANKLIN TEMPLETON INTERNATIONAL SERVICES S.à.r.l.

 

ORDER

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

 

UPON the application (the Application) of Franklin Templeton Investments Corp. (FTIC) and Fiduciary Trust Company of Canada (FTCC) (each referred to individually as a Principal Adviser and collectively as the Principal Advisers) and Franklin Advisers, Inc. (FAI), Franklin Templeton Institutional, LLC (FTI LLC), Franklin Mutual Advisers, LLC (FMA), K2/D&S Management Co., LLC (K2), Templeton Investment Counsel, LLC (TIC), Templeton Global Advisors Limited (TGAL), Franklin Templeton Investment Management Limited (FTIML) and Franklin Templeton International Services S.à.r.l. (FTIS) (each referred to individually as a Sub-Adviser and collectively as the Sub-Advisers) 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 Advisers and the Sub-Advisers, except FTIS, on July 19, 2016 (the Previous Order); and

 

(b)           pursuant to section 80 of the CFA, that each of the Sub-Advisers and any individuals engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of their respective Sub-Advisers 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 Advisers 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 (the Relief Sought);

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

 

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

 

Principal Advisers

 

1.             FTIC is a corporation amalgamated under the laws of Ontario, having its head office in Toronto, Ontario. FTIC is registered (a) under the securities legislation in each of the provinces of Canada and in Yukon Territory as a portfolio manager, an exempt market dealer and a mutual fund dealer; (b) under the securities legislation in Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia, Ontario and Québec as an investment fund manager; and (c) under the CFA in Ontario as a commodity trading manager. In addition, FTIC is registered with the Securities and Exchange Commission of the United States of America (the SEC) as an investment adviser.

 

2.             FTIC is an indirect wholly-owned subsidiary of Franklin Resources Inc. (FRI), a global investment management organization operating as Franklin Templeton Investments.

 

3.             FTCC is a trust company established under the laws of Canada, having its head office in Toronto, Ontario. FTCC is registered (a) under the securities legislation in each of the provinces of Canada and in Yukon Territory as a portfolio manager; and (b) under the CFA in Ontario as a commodity trading manager.

 

4.             FTCC and FTIC are affiliates as FTCC is a wholly-owned subsidiary of FTIC.

 

Sub-Advisers

 

5.             Each Sub-Adviser is organized under the laws of a jurisdiction other than Canada or the provinces or territories thereof. In particular, the Sub-Advisers are:

 

(a)           FAI, a corporation incorporated under the laws of the State of California. FAI is resident in the United States of America, with a principal office and place of business at One Franklin Parkway, San Mateo, California, USA. FAI provides a variety of discretionary advisory services to clients, including, but not limited to: (i) certain investment companies registered under the Investment Company Act of 1940, as amended; (ii) unregistered funds and other pooled investment vehicles; and (iii) institutions, such as insurance companies, other financial institutions, pension and profit sharing plans, and governmental entities. FAI offers advice with respect to a broad range of securities, derivatives and other financial instruments. FAI is registered as an investment adviser with the SEC and as a commodity pool operator with the U.S. Commodity Futures Trading Commission (CFTC).

 

(b)           FTI LLC, a limited liability company organized and existing under the laws of the State of Delaware. FTI LLC is resident in the United States of America, with a principal office and place of business at 600 Fifth Avenue, New York, New York, USA. FTI LLC provides a variety of discretionary advisory services to clients, including, but not limited to: (i) certain investment companies registered under the Investment Company Act of 1940, as amended; (ii) unregistered funds and other pooled investment vehicles; and (iii) institutions, such as insurance companies, pension and profit sharing plans, and governmental entities. FTI LLC offers advice with respect to a broad range of securities, derivatives and other financial instruments. FTI LLC is registered as an investment adviser with the SEC and is exempted from registration as a commodity trading adviser and commodity pool operator with the CFTC.

 

(c)           FMA, a limited liability company organized and existing under the laws of the State of Delaware. FMA is resident in the United States of America, with a principal office and place of business at 51 John F. Kennedy Parkway, Short Hills, New Jersey, USA. FMA provides a variety of discretionary advisory services to clients, including, but not limited to: (i) certain investment companies registered under the Investment Company Act of 1940, as amended; (ii) unregistered funds and other pooled investment vehicles; and (iii) institutions, such as insurance companies. FMA offers advice with respect to a broad range of securities, derivatives and other financial instruments. FMA is registered as an investment adviser with the SEC and is exempted from registration as a commodity trading adviser and commodity pool operator with the CFTC.

 

(d)           K2, a limited liability company organized and existing under the laws of the State of Delaware. K2 is resident in the United States of America, with a principal office and place of business at 300 Atlantic Street, 12th Floor, Stamford, Connecticut, USA. K2 provides a variety of discretionary advisory services to clients, including, but not limited to: (i) certain investment companies registered under the Investment Company Act of 1940, as amended; (ii) unregistered funds and other pooled investment vehicles; and (iii) institutions, such as banking and thrift institutions, pension and profit sharing plans, and governmental entities. K2 offers advice with respect to a broad range of securities, derivatives and other financial instruments. K2 is registered as an investment adviser with the SEC and is registered as a commodity trading adviser and commodity pool operator with the CFTC.

 

(e)           TIC, a limited liability company organized and existing under the laws of the State of Delaware. TIC is a resident of the United States of America, with a principal office and place of business at 300 Southeast 2nd Street, Fort Lauderdale, Florida, USA. TIC provides a variety of discretionary advisory services to clients, including, but not limited to: (i) certain investment companies registered under the Investment Company Act of 1940, as amended; (ii) unregistered funds and other pooled investment vehicles; and (iii) institutions, such as insurance companies, other financial institutions, pension and profit sharing plans, and governmental entities. TIC offers advice with respect to a broad range of securities, derivatives and other financial instruments. TIC is registered as an investment adviser with the SEC and is exempted from registration as a commodity trading adviser and commodity pool operator with the CFTC.

 

(f)            TGAL, a company organized and existing under the laws of the Commonwealth of the Bahamas. TGAL is resident in the Bahamas, with a principal office and place of business at Lyford Cay, Nassau, Bahamas. TGAL provides a variety of discretionary advisory services to clients, including, but not limited to: (i) certain investment companies registered under the Investment Company Act of 1940, as amended; (ii) unregistered funds and other pooled investment vehicles; and (iii) institutions, such as insurance companies and charitable organizations. TGAL offers advice with respect to a broad range of securities, derivatives and other financial instruments. TGAL is registered as an investment fund administrator with the Securities Commission of the Bahamas and as an investment adviser with the SEC. It is exempted from registration as a commodity trading adviser and commodity pool operator with the CFTC.

 

(g)           FTIML, a company organized and existing under the laws of England. FTIML is resident in England, with a principal office and place of business at Cannon Place, 78 Cannon Street, London, England. FTIML provides a variety of discretionary advisory services to clients, including, but not limited to: (i) certain investment companies registered under the Investment Company Act of 1940, as amended; (ii) unregistered funds and other pooled investment vehicles; and (iii) institutions, such as insurance companies, other financial institutions, and governmental entities. FTIML offers advice with respect to a broad range of securities, derivatives and other financial instruments. FTIML is registered with the Financial Conduct Authority in the United Kingdom as an adviser. It is also registered as an investment adviser with the SEC and exempted from registration as a commodity trading adviser and commodity pool operator with the CFTC.

 

(h)           FTIS, an investment management company organized and existing under the laws of Luxembourg. FTIS is resident in Luxembourg, with a registered office at 8A, rue Albert Borschette, L-1246 Luxembourg, Grand-Duchy of Luxembourg. FTIS creates, promotes, administers and manages undertakings for collective investment in transferable securities (UCITS) and alternative investment funds. It also provides services such as discretionary portfolio management, investment advice, and reception and transmission of orders in relation to financial instruments. FTIS is registered with the Luxembourg Trade and Companies Register and is authorized by the Commission de Surveillance du Secteur Financier (Luxembourg) as an UCITS management company and an alternative investment fund manager. FTIS is also exempted from registration as an investment adviser with the SEC, but reports limited information to the SEC as an Exempt Reporting Adviser, pursuant to such exemption. Additionally, it is exempted from registration as a commodity trading adviser and commodity pool operator with the CFTC.

 

6.             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 its jurisdiction of residence 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 outside of Canada in which its head office or principal place of business is located.

 

7.             None of the Sub-Advisers is registered in any capacity under the CFA or the Securities Act (Ontario) (the OSA), nor are any of the Sub-Advisers registered in any capacity under the securities law, commodity futures law or derivatives law of any other jurisdiction of Canada.

 

8.             Each of the Sub-Advisers acts in reliance on the exemption from the requirement to register as an adviser under the OSA pursuant to section 8.26.1 “International sub-adviser” of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).

 

9.             The following Sub-Advisers are also relying on the exemption from the requirement to register as an adviser under the OSA pursuant to section 8.26 “International adviser” of NI 31-103 (the OSA International Adviser Exemption): FAI, FTI LLC and FTIML. FTIS is relying on the exemption from the requirement to register as an investment fund manager under the OSA pursuant to Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers. All other Sub-Advisers are not currently relying on any exemptions from the requirement to register under securities law, commodity futures law or derivatives law of any jurisdiction of Canada (except as identified in paragraph 8 above).

 

10.          Each Sub-Adviser engages in the business of an adviser in respect of Contracts in its principal jurisdiction.

 

11.          None of the Sub-Advisers is a resident of any province or territory of Canada.

 

12.          The Sub-Advisers and the Principal Advisers are affiliates, as defined in the OSA. Each of the Sub-Advisers and Principal Advisers are directly or indirectly wholly-owned by their parent company, FRI.

 

13.          None of the Principal Advisers or the Sub-Advisers is in default of securities legislation, commodity futures legislation or derivatives legislation in any jurisdiction of Canada.

 

14.          Each Sub-Adviser is in compliance in all material respects with the securities laws, commodity futures laws and derivatives laws in each jurisdiction outside of Canada in which its head office or principal place of business is located.

 

15.          The Principal Advisers provide, or may provide, discretionary and/or non-discretionary portfolio management services in Ontario to the following clients (each referred to individually as a Client and collectively as the Clients):

 

(a)           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);

 

(b)           pooled funds, the securities of which are sold on a private placement basis in Ontario and certain other provinces and territories of Canada pursuant to prospectus exemptions contained in National Instrument 45-106 Prospectus Exemptions (the Pooled Funds);

 

(c)           clients who have entered into investment management agreements with a Principal Adviser to establish managed accounts (the Managed Account Clients); and

 

(d)           other Investment Funds, Pooled Funds and Managed Account Clients that may be established or retained in the future in respect of which a Principal Adviser will engage a Sub-Adviser to provide portfolio advisory services (the Future Clients).

 

16.          Certain of the Clients may, as part of their investment program, invest in Contracts. The Principal Advisers each act as a commodity trading manager in respect of such Clients.

 

17.          In connection with the Principal Advisers acting as advisers to Clients in respect of the purchase or sale of Contracts, each Principal Adviser, pursuant to a written agreement 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 investment 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 must be cleared through an "acceptable clearing corporation" [as defined in National Instrument 81-102 Investment Funds (NI 81-102), or any successor thereto] 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 such registered adviser.

 

19.          By providing the Sub-Advisory Services, each Sub-Adviser and its 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 Relief Sought, would be required to register as an adviser or a representative of an adviser, as the case may be, 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 provided under section 8.26.1 of NI 31-103.

 

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

 

22.          A Sub-Adviser will only provide the Sub-Advisory Services to a Principal Adviser as long as that 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 are, or will be, set out in a written agreement with the relevant Principal Adviser or Principal Advisers; and

 

(b)           the relevant Principal Adviser or Principal Advisers have 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 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 agreement between a 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.

 

25.          The Principal Advisers 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 (in either case, the Offering Document) of each Client that is an Investment Fund or a Pooled Fund and for which a Principal Adviser engages one or more Sub-Advisers 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 any Sub-Adviser to meet the Assumed Obligations; and

 

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

 

27.          Prior to purchasing any securities of one or more of the Clients that are Investment Funds or Pooled Funds directly from a Principal Adviser, all investors in the Investment 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).

 

28.          Each Client that is a Managed Account Client for which a Principal Adviser engages one or more Sub-Advisers 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.

 

29.          The Principal Advisers and the Sub-Advisers obtained substantially similar relief in the Previous Order, pursuant to which the Sub-Advisers, with the exception of FTIS, currently provide Sub-Advisory Services to the Principal Advisers for the benefit of the Clients. The Relief Sought will add FTIS as a Sub-Adviser.

 

30.          Each Principal Adviser and Sub-Adviser that is subject to the Previous Order (i.e., all Filers other than FTIS), have complied with, and are currently in compliance with, all of the terms and conditions of the Previous 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 Previous Order is revoked;

 

AND IT IS ORDERED, pursuant to section 80 of the CFA, that each Sub-Adviser and its Representatives is exempt from the adviser registration requirements of paragraph 22(1)(b) of the CFA when acting as a sub-adviser to a 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 the failure of the Sub-Adviser to meet the Assumed Obligations;

 

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

 

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

 

(i)            each Client that is a Managed Account Client for which the Principal Adviser engages the 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 Advisers in respect of the Sub-Advisory Services; and

 

(c)           five years after the date of this Order.

 

DATED at Toronto, Ontario, this 1st day of August, 2018.

 

“Lawrence Haber”

Commissioner

Ontario Securities Commission

“Peter Currie”

Commissioner

Ontario Securities Commission