Securities Law & Instruments

Headnote

Section 80 of the Commodity Futures Act (Ontario) -- Renewal of previous order (granted April 2, 2004) providing an exemption from the adviser registration requirements of subsection 22(1)(b) of the CFA that neither Flaherty & Crumrine, nor any of its directors, officers or employees acting on its behalf as an adviser, shall be subject to paragraph 22(1)(b) of the CFA in respect of advice provided for the benefit of an Ontario Fund, the principal investment adviser of which is an Ontario registrant, in respect of trades in commodity futures contracts and commodity futures options traded on commodity futures exchanges outside Canada and cleared through clearing houses outside Canada.

Fees waived as application only required because amendments to or a rule under the CFA that would have a similar effect as section 7.3 of Rule 35-502 -- Non Resident Advisers have not yet been adopted.

Statutes Cited

Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 22(1)(b), 80.

Securities Act, R.S.O. 1990, c. S.5, as am. -- Rule 35-502 -- Non Resident Advisers.

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

 

ORDER

(Section 80 of the CFA)

UPON the application of Flaherty & Crumrine Incorporated (Flaherty & Crumrine) to the Ontario Securities Commission (the Commission) for an order pursuant to Section 80 of the CFA,that neither Flaherty & Crumrine, nor any of its directors, officers or employees acting on its behalf as an adviser, shall be subject to paragraph 22(1)(b) of the CFA in respect of advice provided for the benefit of the Fund (as defined below), the principal investment adviser of which is an Ontario registrant, in respect of trades in commodity futures contracts and commodity futures options traded on commodity futures exchanges outside Canada and cleared through clearing houses outside Canada (the Contracts);

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

AND UPON Flaherty & Crumrine having represented to the Commission that:

1. The Flaherty & Crumrine Investment Grade Preferred Fund (the Fund) is an investment trust established under the laws of Ontario pursuant to a declaration of trust. The Fund was established for the purpose of holding an actively managed portfolio consisting primarily of preferred shares, hybrid preferred securities and various debt instruments (the Preferred Portfolio). At the time of purchase, all of the securities held in the Preferred Portfolio will be rated "investment grade".

2. The Fund will not purchase or sell commodities or commodity 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 Preferred Portfolio will be hedged to the Canadian dollar at all times.

3. Brompton Capital Advisors Inc. (BCA) is the principal investment adviser to the Fund and is registered as an adviser under the Securities Act (Ontario) (the OSA) in the categories of investment counsel and portfolio manager and as a limited market dealer. In respect of commodity futures related advice, BCA and its directors, officers and employees rely on section 31(d) of the CFA, which provides registration relief for OSA registrants whose services as "advisers" for purposes of the CFA are solely incidental to their principal business.

4. Flaherty & Crumrine provides investment advisory and portfolio management services for the benefit of the Fund with respect to both the Preferred 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 registered as an investment adviser under the Investment Advisers Act 1940, as amended, with the U.S. Commodities Futures Trading Commission as a commodity trading adviser and is a member of the U.S. National Futures Association.

6. In respect of its securities related investment advisory and portfolio management services for the benefit of the Fund, Flaherty & Crumrine and its directors, officers and employees rely on the exemption from registration under the OSA set out under section 7.3 of Ontario Securities Commission Rule 35-502 -- Non-Resident Advisers, which provides that a non-resident adviser is exempt from the OSA registration requirement where the principal adviser is a registrant that pursuant to a written agreement, irrevocably accepts responsibility for the services provided by the exempted non-resident. Flaherty & Crumrine is not registered in any capacity under the CFA and does not intend to seek registration under the CFA.

7. Pursuant to a written agreement among Flaherty & Crumrine, BCA, the Fund and the manager of the Fund, BCA will monitor the investment advice (both as relates to securities and as relates to commodity futures) provided for the benefit of the Fund by Flaherty & Crumrine and its directors, officers and employees and will be responsible to the Fund for any loss that arises as a result of Flaherty & Crumrine or its directors, officers and employees failing to:

(a) exercise their powers and discharge their duties of their office honestly, in good faith and in the best interests of BCA and the Fund for whose benefit the advice is or portfolio management services are to be provided, or

(b) exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.

8. The offering documents of the Fund disclose that BCA will be responsible for Flaherty & Crumrine's investment advice and that to the extent applicable, there may be difficulty in enforcing any legal rights against Flaherty & Crumrine as it is not resident in Canada and as all or a substantial portion of its assets are situated outside of Canada.

AND UPON being satisfied that it would not be prejudicial to the public interest for the Commission to grant the exemptions requested on the basis of the terms and conditions proposed,

IT IS ORDERED pursuant to Section 80 that Flaherty & Crumrine and its directors, officers and employees are not subject to the requirements of paragraph 22(1)(b) of the CFA in respect of their investment advice and portfolio management services for the benefit of the Fund, provided that:

(a) the obligation and duties of Flaherty & Crumrine as an adviser are set out in a written agreement with BCA;

(b) BCA contractually agrees with the Fund on whose behalf investment advice and portfolio management services are to be provided by Flaherty & Crumrine, its directors, officers and employees to be responsible for any loss that arises out of the failure of Flaherty & Crumrine, its directors, officers or employees so acting as advisers

(i) to exercise the powers and discharge the duties of their office honestly, in good faith and in the best interests of BCA and the Fund for whose benefit the advice is or portfolio management services are to be provided, or

(ii) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances;

(c) BCA cannot be relieved by the Fund from its responsibility for loss under paragraph (b);

(d) Flaherty & Crumrine is registered as an investment adviser under the Investment Advisers Act 1940, as amended, with the U.S. Commodities Futures Trading Commission as a commodity trading adviser and is a member of the U.S. National Futures Association;

(e) BCA is registered as an investment counsel and portfolio manager under the OSA;

(f) unless BCA is registered under the CFA as a commodity trading manager, at the time of purchase of a Contract by the Fund, after giving effect to such purchase, the original cost of all Contracts of the Fund would not be more than five percent of the total assets of the Fund; and

(g) this Order shall terminate on the day that is five years after the date of the Order.

May 4, 2007

"Robert L. Shirriff"
Commissioner
Ontario Securities Commission
 
"James Turner"
Commissioner
Ontario Securities Commission