Securities Law & Instruments


Headnote

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 a foreign jurisdiction 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).

Applicable Legislative Provisions

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

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,
TEMPLETON GLOBAL ADVISORS LIMITED,
K2/D&S MANAGEMENT CO., LLC,
TEMPLETON INVESTMENT COUNSEL, LLC AND
FRANKLIN TEMPLETON INVESTMENT MANAGEMENT LIMITED

ORDER
(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”) and Franklin Templeton Institutional, LLC (“FTI LLC”) and Franklin Mutual Advisers, LLC (“FMA”) and Templeton Global Advisors Limited (“TGAL”) and K2/D&S Management Co., LLC (“K2”),Templeton Investment Counsel, LLC (“TIC”) and Franklin Templeton Investment Management Limited (“FTIML”) (each referred to individually as a “Sub-Adviser” and collectively as the “Sub-Advisers”) to the Ontario Securities Commission (the “Commission”) for an order, pursuant to section 80 of the CFA, that each of the Sub-Advisers (and 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 traded on commodity futures exchanges (collectively, the “Contracts”) and cleared through clearing corporations;

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

                AND UPON the Sub-Advisers and the Principal 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 under the securities legislation in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, Saskatchewan and Yukon as an adviser in the category of portfolio manager and as a dealer in the categories of mutual fund dealer and exempt market dealer. FTIC is also registered under securities legislation in Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia, Ontario and Quebec as an investment fund manager and in Ontario as a commodity trading manager. FTIC is also registered with the Securities and Exchange Commission (“SEC”) in the U.S. 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 corporation incorporated under the laws of Canada, having its head office in Toronto, Ontario. FTCC is registered as a portfolio manager in each of the provinces of Canada and in the Yukon and as a commodity trading manager in Ontario. FTCC and FTIC are affiliates as FTCC is a wholly-owned subsidiary of FTIC.

Sub-Advisers

4.             FAI is 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 is registered as an investment adviser with the SEC and as a commodity pool operator with the U.S. Commodity Futures Trading Commission (“CFTC”).

5.             FTI LLC is 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 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.

6.             FMA is 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 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.

7.             K2 is 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 is registered as an investment adviser with the SEC and is registered as a commodity trading adviser and commodity pool operator with the CFTC.

8.             TGAL is 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 is registered as an investment fund administrator with the Securities Commission of the Bahamas, as an investment adviser with the SEC, and it is exempted from registration as a commodity trading adviser and commodity pool operator with the CFTC.

9.             TIC is 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 is registered as an investment adviser with the SEC. TIC claims an exclusion from the definition of “commodity pool operator” and is exempted from registration as a “commodity trading advisor” under the Commodity Exchange Act and the rules of the CFTC.

10.          FTIML is a company organized and existing under the laws of England. FTIML is resident in the United Kingdom, with a principal office and place of business at Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority in the United Kingdom, with permission to advise on and manage investments. FTIML is also registered as an investment adviser with the SEC, and it is exempted from registration as a commodity trading adviser and commodity pool operator with the CFTC. FTIML’s branch in Bucharest, Romania, is also regulated as an investment management company by the Romanian Financial Supervisory Authority.

11.          Each Sub-Adviser is registered in a category of registration, claims an exclusion from the definition of “commodity pool operator”, and/or operates under an exemption from registration, under the commodities futures or other applicable legislation of the United States or the Bahamas, as applicable, 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.

12.          None of the Sub-Advisers is registered in any capacity under the CFA or the Securities Act (Ontario) (“OSA”). The Sub-Advisers each act in reliance on the exemption from the requirement to register as an adviser under the OSA available to it pursuant to section 8.26.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”).

13.          Each of the Sub-Advisers is an affiliate of the Principal Advisers.

14.          The Principal Advisers and the Sub-Advisers are not in default of securities legislation, commodity futures legislation or derivatives legislation in any jurisdiction of Canada.

15.          The Principal Advisers provide investment advice and/or 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 “Investment Funds”); (ii) 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”); (iii) clients who have entered into investment management agreements with a Principal Adviser to establish managed accounts (the “Managed Account Clients”); and (iv) other Investment Funds, Pooled Funds and Managed Account Clients that may be established or retained in the future and in respect of which a Principal Adviser engages a Sub-Adviser to provide portfolio advisory services (the “Future Clients”) (each of the Investment Funds, Pooled Funds, Managed Account Clients and Future Clients being referred to individually as a “Client” and collectively as the “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 written agreements 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 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, 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, 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 a registered adviser.

19.          By providing the Sub-Advisory Services, the Sub-Advisers will be engaging in, or holding themselves out as engaging in, the business of advising others with respect to Contracts and, in the absence of being granted the requested relief, would be required to register as advisers 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 which is provided under section 8.26.1 of NI 31-103.

21.          The relationship among any Principal Adviser, the Sub-Advisers and any Client is 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 set out in a written agreement with each Principal Adviser; and

(b)           the relevant Principal Adviser or Principal Advisers have entered 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 a Sub-Adviser sets out the obligations and duties of each party in connection with the Sub-Advisory Services and permits the Principal Adviser to exercise the degree of supervision and control it is required to exercise over the 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, if any, (in either case, the “Offering Document”) for 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 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.

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

            IT IS ORDERED, pursuant to section 80 of the CFA, that each Sub-Adviser and its Representatives are exempt from the adviser registration requirement in paragraph 22(1)(b) of the CFA when acting as sub-adviser to a Principal Adviser in respect of the Sub-Advisory Services provided that at the relevant 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 foreign jurisdiction;

(c)           the Sub-Adviser is registered in a category of registration, or operates under an exemption from registration, under the commodities 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 into a written agreement with the Clients, agreeing to be responsible for any loss that arises out of any failure of the Sub-Adviser to meet the Assumed Obligations;

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

(h)           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; and

(i)            each Client that is a Managed Account Client for which a 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


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

(a)           such transition period as provided by operation of law, after the effective date of the repeal of the CFA;

(b)           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 Sub-Advisers to act as sub-advisers 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 19th day of July, 2016

“Edward P. Kerwin”
Commissioner
Ontario Securities Commission

“Tim Moseley”
Commissioner
Ontario Securities Commission