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QS Investors, LLC
Headnote
U.S. investment advisor registered as portfolio manager in Ontario and relying on international adviser exemption in Quebec -- Relief from providing comparative financial filings subsequent to expected amalgamation due to "as if" consolidated requirement for comparative year under U.S. GAAP -- Exemption granted from requirement to provide financial statements on a comparative basis for the Filer's financial year ending March 31, 2017 -- Exemption granted from requirement to file calculation of excess working capital on a comparative basis for the Filer's financial year ending March 31, 2017 -- Relief conditional upon Filer providing prompt written notice of any prior period adjustments for the Filer's financial year ending March 31, 2016
Applicable Legislative Provisions
National Instrument 14-101 Definitions.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 12.10, 12.13.
National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards.
January 19, 2016
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF QS INVESTORS, LLC (the Filer)
DECISION
Background
The Ontario Securities Commission (the Commission) has received an application from the Filer (the Application) for a decision under the securities legislation of Ontario (the Legislation) exempting the Filer from the following requirements for its financial year ending March 31, 2017:
(a) the requirements of subsection 12.10(1) of NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that the Filer prepare a statement of comprehensive income, a statement of changes in equity, a statement of cash flows and a statement of financial position, each prepared for the most recently completed financial year and the financial year immediately preceding the most recently completed financial year; and
(b) the requirements of paragraph 12.13(b) of NI 31-103 that the Filer deliver a completed Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1) showing the calculation of its excess working capital as at the end of the financial year and as at the end of the immediately preceding financial year (together with (a) above, the Exemption Sought).
Interpretation
Terms defined in National Instrument 14-101 Definitions and National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (NI 52-107) have the same meaning if used in this decision, unless otherwise defined.
Representations
The decision is based on the following facts represented by the Filer:
1. The Filer is a Delaware limited liability company which has its principal place of business in New York, New York. The Filer is registered as a portfolio manager in the Jurisdiction and relies on the international adviser exemption under section 8.26 of NI 31-103 in Quebec. The Filer's principal regulator in Canada is the Commission. The Filer is also registered as an investment adviser with the SEC and as a commodity trading adviser with the Commodity Futures Trading Commission (CFTC) of the United States of America (U.S.).
2. The Filer is in compliance with all registration and other requirements of U.S. federal securities law and all other applicable securities laws of the U.S.
3. The Filer is not in default of securities legislation in any jurisdiction of Canada.
4. The Filer is wholly-owned by QS Investors Holdings, LLC (QSH), a Delaware limited liability company, which in turn is wholly-owned by Legg Mason, Inc. (Legg Mason).
5. Legg Mason is a global asset management firm based in Baltimore, Maryland and is a company that provides services to individual and institutional investors through a diversified group of affiliated global asset management firms which operate with investment autonomy. The common shares of Legg Mason are traded on the New York Stock Exchange (symbol: LM).
6. Among other affiliates of the Legg Mason group of companies, QSH and the Filer are affiliated with QS Legg Mason Global Asset Allocation, LLC (QS-GAA) and QS Batterymarch Financial Management, Inc. (QS-BFM). QS-GAA and QS-BFM were also formed and have their registered offices and principal places of business in the U.S.
7. As provided for in the governance agreement, dated March 4, 2014, among the Filer, QSH, QS-GAA and QS-BFM, the management of the Filer provides the day-to-day management and governance for the Filer, QS-GAA and QS-BFM. However, each entity maintains its own set of financial records and prepares separate financial statements.
8. The Filer currently delivers annual financial statements to the Commission pursuant to sections 12.10 and 12.13 of NI 31-103. These financial statements currently present a statement of comprehensive income, a statement of changes in equity, a statement of cash flows and a statement of financial position, each prepared for the most recently completed financial year and the financial year immediately preceding the most recently completed financial year. These financial statements are prepared in accordance with U.S. GAAP and are audited in accordance with auditing standards generally accepted in the U.S. (specifically, U.S. AICPA GAAS) as provided under sections 3.15 and 3.16 of NI 52-107.
9. The Filer is not required to file its financial statements with the SEC or the CFTC.
10. The financial year-end of each of the Filer, QS-GAA, and QS-BFM is March 31. It is expected that on April 1, 2016, which is the first day of the financial year ending March 31, 2017, QS-GAA, and QS-BFM will be merged and consolidated into the Filer as part of an internal reorganization. The operations of the Filer will not change as a result of the business combination, nor will the Filer's categories of registration with the Commission. In order for the Filer to report comparative financial information for the financial year ending March 31, 2017, U.S. GAAP requires that the comparative year end of the Filer (March 31, 2016) includes the financial results of QS-GAA and QS-BFM "as if" their consolidation with the Filer had been effective on April 1, 2015. Since the Filer prepares the Form 31-103F1 and financial statements it delivers to the Commission in accordance with U.S. GAAP, the "as if" comparative reporting requirement would result in the Filer providing results for the comparative year end (March 31, 2016) which would differ from those provided prior to consolidation for the financial year ending March 31, 2016 under sections 12.10 and 12.13 of NI 31-103.
11. The Filer is requesting the Exemption Sought for the financial year ending March 31, 2017 and will resume submitting comparative financial information in Form 31-103F1 and in its financial statements pursuant to sections 12.10 and 12.13 of NI 31-103 for the financial years ending March 31, 2018 and beyond.
12. The Filer submits that granting the Exemption Sought is not prejudicial to the public interest or otherwise objectionable for the following reasons:
a. The Filer will require relief from filing comparative information for only the financial year ending March 31, 2017.
b. In the absence of the Exemption Sought, the Filer would be required for the financial year ending March 31, 2017 to provide audited financial information for the financial year ending March 31, 2016 on an "as if" consolidated basis, which would be burdensome and costly in consideration of the Filer's prior requirement to provide non-consolidated financial information for the financial year ending March 31, 2016 pursuant to sections 12.10 and 12.13 of NI 31-103.
Decision
The Director is satisfied that the decision meets the test set out in the Legislation for the Commission to make the decision.
The decision of the Director under the Legislation is that the Exemption Sought is granted provided that:
(a) the head office or principal place of business of the Filer is in the U.S.;
(b) the Filer continues to be registered as an investment adviser with the SEC and as a commodity trading adviser with the CFTC;
(c) the Filer continues to comply with all registration and other requirements of U.S. federal securities law and all other applicable securities laws of the U.S.;
(d) the Filer delivers a completed Form 31-103F1 and financial statements for the financial year ending March 31, 2016 in accordance with sections 12.10 and 12.13 of NI 31-103;
(e) the Filer delivers a completed Form 31-103F1 and financial statements for the financial year ending March 31, 2017 in accordance with sections 12.10 and 12.13 of NI 31-103 except for that the Form 31-103F1 and the financial statements will not include comparative figures for the financial year ending March 31, 2016;
(f) the Filer resumes submitting comparative financial information in Form 31-103F1 and in its financial statements in accordance with sections 12.10 and 12.13 of NI 31-103 for the financial years ending March 31, 2018 and beyond; and
(g) the Filer provides the Commission with prompt written notice of any prior period adjustments for the financial year ending March 31, 2016.
"Marrianne Bridge"
Deputy Director
Compliance and Registrant Regulation
Ontario Securities Commission