Securities Law & Instruments

Headnote

Application for an order pursuant to section 80 of the Commodity Futures Act (Ontario) (the CFA) that the applicant and its representatives be exempt from the adviser registration requirement in paragraph 22(1)(b) of the CFA in connection with advising employee plans established for the benefit of employees of the Canadian affiliate of the applicant, subject to terms and conditions and sunset clause.

Statutes Cited

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

July 5, 2016

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

ORDER (Section 80 of the CFA)

UPON the application (the Application) of IBM Corporation (the Applicant) to the Ontario Securities Commission (the Commission) for an order pursuant to section 80 of the CFA that the Applicant and any individuals engaging in, or holding themselves out as engaging in, the business of advising others as to trading in Contracts (as defined below) on the Applicant's behalf (the Representatives) be exempt, for a specified period of time, from the adviser registration requirement in paragraph 22(1)(b) of the CFA, subject to certain terms and conditions;

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

AND WHEREAS for the purposes of this Order:

"CEA" means the United States Commodity Exchange Act, as amended from time to time;

"CFA Adviser Registration Requirement" means the requirement in the CFA that prohibits a person or company from acting as an adviser with respect to trading in Contracts unless the person or company is registered in the appropriate category of registration under the CFA;

"CFTC" means the United States Commodity Futures Trading Commission;

"Contract" has the meaning ascribed to that term in subsection 1(1) of the CFA;

"Foreign Contract" means a Contract that is primarily traded on one or more organized exchanges that are located outside of Canada and primarily cleared through one or more clearing corporations that are located outside of Canada;

"Futures Advisory Services" means investment advisory services provided by the IBM In-House Team to the IBM Employee Plans of the Applicant and its affiliates in respect of Foreign Contracts;

"IBM Canada" means IBM Canada Ltd.;

"IBM Canada Investment Management Agreement" means the investment management agreement between IBM Operations Corporation and IBM Canada, in its capacity as Administrator of certain IBM Canada Plans dated September 9, 1997 and amended as of February 24, 2003;

"IBM Canada Plans" means the IBM Employee Plans established for the benefit of employees of IBM Canada, including the IBM Canada Limited Retirement Trust Fund, and such other Canadian affiliates of the Applicant as may exist from time to time;

"IBM Employee Plans" mean the pension plans, retirement plans and similar plans established for the benefit of the employees of the Applicant and its affiliates globally;

"IBM In-House Team" means a group of investment management professionals employed by the Applicant who provide investment advisory services to IBM Employee Plans;

"In-House Services" means the investment advisory services provided by the IBM In-House Team to the IBM Employee Plans of the Applicant and its affiliates;

"OSA" means the Securities Act, R.S.O. 1990, c. S.5, as amended;

"OSA Adviser Registration Requirement" means the requirement in the OSA that prohibits a person or company from acting as an adviser with respect to investing in, buying or selling securities unless the person or company is registered in the appropriate category of registration under the OSA;

"OSC Rule 35-502" means OSC Rule 35-502 Non-Resident Advisers;

"SEC" means the United States Securities and Exchange Commission;

"Trust Agreement" means the Pension Trust Agreement between IBM Canada and State Street Trust Company Canada, as trustee, dated September 3, 2002; and

"1940 Act" means the Investment Advisers Act of 1940 of the United States, as amended.

AND UPON the Applicant having represented to the Commission that:

1. The Applicant is a New York corporation formed in 1911, with its principal place of business in New York, United States.

2. The Applicant is global leader in the information technology industry. The Applicant's common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange.

3. IBM Canada is governed by the Canada Business Corporations Act and carries on the business of the Applicant in Canada. IBM Canada is a wholly-owned subsidiary of the Applicant which employed approximately 15,300 people as of December 31, 2014.

4. IBM Canada established the IBM Canada Limited Retirement Plan Trust Fund for the benefit of its employees in Canada pursuant to the Trust Agreement. IBM Canada is the administrator and sponsor of the IBM Canada Limited Retirement Plan Trust Fund.

5. IBM Canada is authorized under the Trust Agreement, the Amended and Restated Plan Text of the IBM Canada Limited Retirement Plan Trust Fund dated January 1, 2014 and the Pension Benefits Act (Ontario), to appoint one or more investment managers to direct the investment of the IBM Canada Limited Retirement Plan Trust Fund.

6. The Applicant employs the IBM In-House Team to provide In-House Services to the IBM Employee Plans, including the IBM Canada Limited Retirement Trust Fund.

7. The Applicant does not charge fees for the provision of In-House Services to its affiliates. It is not intended that the Applicant profit from the provision of In-House Services. The Applicant does not provide investment advisory services to any person or company other than the IBM Employee Plans of the Applicant and its affiliates.

8. The IBM In-House Team provides In-House Services primarily from the Applicant's head office in New York. In-House Services primarily pertain to advising in respect of investments in securities; however, In-House Services may also include Futures Advisory Services.

9. No In-House Services are provided by IBM Canada or from Canada. No members of the IBM In-House Team are ordinarily resident or maintain an office in Canada.

10. The Applicant is not required to register, and is not registered, as an adviser under the 1940 Act nor under the CEA in order for the IBM In-House Team to provide In-House Services, including Futures Advisory Services, to the Applicant. Similarly, no members of the IBM In-House Team are registered, or required to register, in any capacity under the 1940 Act or the CEA in order for the IBM In-House Team to provide In-House Services, including Futures Advisory Services, to the Applicant. The requirement to be registered, or exempt from registration, as an investment adviser under the 1940 Act and as a commodity trading adviser (CTA) under the CEA is triggered by advising others for compensation. The SEC and the National Futures Association have both published current guidance which indicates that provision of the In-House Services by the IBM In-House Team is not considered to be "advising others" for the purposes of the 1940 Act and CEA, respectively. On this basis, the Applicant has concluded that the IBM In-House Team is not required to register.

11. Pursuant to the IBM Canada Investment Management Agreement, the Applicant has provided In-House Services to IBM Canada Plans since 1997. The Applicant had provided the In-House Services to the IBM Canada Plans without registering as an adviser under the OSA or the CFA on the basis of a good faith determination that it was not providing advice to others with respect to buying and selling securities, commodity futures contracts and commodity futures options, because it was providing such advice solely to its affiliate, IBM Canada.

12. The Applicant is authorized to provide In-House Services in respect of securities to the IBM Canada Plans pursuant to Section 7.6 of OSC Rule 35-502, which prescribes an exemption from the requirement to register as an adviser under the OSA for a person or company, not ordinarily resident in Ontario, in connection with that person or company acting as an adviser for a pension fund sponsored by an affiliate, for the benefit of the employees of the affiliate.

13. 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 partner or an officer of a registered adviser and is acting on behalf of a registered adviser. Under the CFA, "adviser" means a person or company engaging in or holding himself, herself or itself out as engaging in the business of advising others as to trading in Contracts. The Futures Advisory Services provided by the IBM In-House Team includes advising in respect of "contracts" as defined in the CFA.

14. There is presently no exemption from the adviser requirement under the CFA for a person or company, not ordinarily resident in Ontario, in connection with that person or company acting as an adviser in Contracts for a pension fund sponsored by an affiliate for the benefit of the employees of the affiliate, similar to Section 7.6 of OSC Rule 35-502 in respect of advising in securities. Consequently, the IBM In-House Team is not currently authorized to offer the Futures Advisory Services to the IBM Canada Plans.

15. After the Applicant confirmed that it may need to be registered, or exempt from registration, as an adviser under the CFA in order to provide the Futures Advisory Services to IBM Canada Plans, the IBM In-House Team ceased to provide Futures Advisory Services to IBM Canada Plans as of September 2015.

16. Except as indicated in the previous paragraphs, the Applicant is not in default of any requirements of securities legislation or commodity futures legislation in Ontario.

17. The Applicant seeks to provide comprehensive in-house investment management services the IBM Employee Plans of the Applicant and its affiliates. The Applicant is able to provide advisory services in securities to the IBM Canada Plans in reliance on the exemption set out in Section 7.6 of OSC Rule 35-502. However, the Applicant is precluded from offering the Futures Advisory Services to the IBM Canada Plans due to lack of a statutory exemption from registration as an adviser under the CFA. If the requested relief is granted, the IBM Canada Plans will benefit from having access to the full scope of In-House Services available from the IBM In-House Team.

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

IT IS ORDERED, pursuant to section 80 of the CFA, that the Applicant and its Representatives are exempt from the adviser registration requirement in paragraph 22(1)(b) of the CFA in respect of the provision of Futures Advisory Services to the IBM Canada Plans as to the trading of Foreign Contracts provided that and for so long as:

1. the IBM Canada Plans are sponsored or administered by an affiliate of the Applicant;

2. neither the Applicant nor any members of the IBM In-House Team provide investment advisory services to any person or company in Canada other than the Applicant, IBM Canada or the IBM Canada Plans;

3. neither the Applicant nor any members of the IBM In-House Team maintain an office in Canada to provide investment advisory services to the Applicant, IBM Canada or the IBM Canada Plans; and

4. neither the Applicant nor any members of the IBM In-House Team becomes subject to registration requirements under the 1940 Act or the CEA in order for the IBM In-House Team to provide investment advisory services to the Applicant or the IBM Employee Plans, provided that the Applicant may continue to rely on the exemptive relief provided in this Order for a period of 90 days following such time as the Applicant becomes subject to a registration requirement under the 1940 Act or the CEA.

IT IS FURTHER ORDERED that this Order will terminate on the earliest of:

1. such transition period as provided by operation of law after the effective date of the repeal of the CFA;

2. six months, or such other transition period as provided by operation of 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 Applicant to act as an adviser to the IBM Canada Plans; and

3. five years after the date of this Order.

DATED at Toronto, Ontario, this 5th day of July, 2016.

"Grant Vingoe"
Vice Chair
Ontario Securities Commission
 
"Janet Leiper"
Commissioner
Ontario Securities Commission