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 a sub-adviser 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) – Subsection 78(1) of the CFA - order to revoke previous order granting relief from the adviser registration requirement.

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.

October 7, 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
VANGUARD INVESTMENTS CANADA INC. AND
THE VANGUARD GROUP, INC.

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

                UPON the application (the Application) of Vanguard Investments Canada Inc. (the Principal Adviser) and The Vanguard Group, Inc. (the Sub-Adviser) 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 Sub-Adviser on October 14, 2011 (the Previous Order) and (b) pursuant to section 80 of the CFA, that the Sub-Adviser and any individuals engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of the Sub-Adviser in respect of the Sub-Advisory Services (as defined below) (the Sub-Adviser Individuals) 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 for the Principal Adviser in respect 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;

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

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

1.             The Principal Adviser is a corporation established under the laws of the Canada with its head office located in Toronto, Ontario.

2.             The Principal Adviser is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, as an adviser in the category of portfolio manager and as a commodity trading manager in Ontario and as an exempt market dealer in each province of Canada.

3.             The Principal Adviser is an indirect wholly-owned subsidiary of the Sub-Adviser.

4.             The Sub-Adviser is a corporation established under the laws of the Commonwealth of Pennsylvania, United States, with its principal office in Malvern, Pennsylvania. The Sub-Adviser is wholly-owned by U.S. registered investment companies that are part of the Vanguard family of U.S. mutual funds and that are widely held by the public.

5.             The Sub-Adviser is not a resident of any province or territory of Canada.

6.             The Sub-Adviser is currently registered as an investment advisor in the United States with the U.S. Securities and Exchange Commission. The Sub-Adviser is also currently registered as a commodity trading advisor and commodity pool operator in the United States with the U.S. Commodity Futures Trading Commission, which 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, it is authorized and permitted to carry on the Sub-Advisory Services (defined below).

7.             The Sub-Adviser engages in the business of an adviser in respect of Contracts in the United States.

8.             The Sub-Adviser is not registered in any capacity under the CFA or the Securities Act (Ontario) (the OSA). The Sub-Adviser acts in reliance on the exemptions from the requirement to register as an adviser under the OSA pursuant to section 8.26.1 of National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).

9.             The Principal Adviser and the Sub-Adviser are not in default of securities legislation, commodity futures legislation or derivatives legislation in any jurisdiction of Canada. The Sub-Adviser is in compliance in all material respects with U.S. securities and commodity futures laws.

10.          The Principal Adviser is the investment fund manager of and provides discretionary portfolio management services in Ontario to: (i) existing Vanguard Canada exchange-traded funds (the Existing Vanguard Canada ETFs), the securities of which are qualified by prospectus for distribution to the public in all of the provinces and territories of Canada; and (ii) existing pooled funds (the Existing Pooled Funds), the securities of which are sold on a private placement basis in Ontario and certain other provinces of Canada pursuant to prospectus exemptions contained in National Instrument 45-106 – Prospectus Exemptions (NI 45-106) or the OSA.

11.          In the future, the Principal Adviser may provide discretionary portfolio management services in Ontario to: (i) additional Vanguard Canada exchange-traded funds (the Future Vanguard Canada ETFs and together with the Existing Vanguard Canada ETFs, the Vanguard Canada ETFs), the securities of which will be qualified by prospectus for distribution to the public in all of the provinces and territories of Canada; (ii) additional pooled funds (the Future Pooled Funds and together with the Existing Pooled Funds, the Pooled Funds), the securities of which will be sold on a private placement basis in Ontario and certain other provinces of Canada pursuant to prospectus exemptions contained in NI 45-106 or the OSA; (iii) investment funds, the securities of which will be qualified by prospectus for distribution to the public in Ontario and the other provinces and territories of Canada and will not be exchange-traded (the Investment Funds); and (iv) managed accounts of clients who will enter into investment management agreements with the Principal Adviser (the Managed Accounts) (each of the Vanguard Canada ETFs, Investment Funds, Pooled Funds and Managed Accounts is referred to individually as a Client and collectively as the Clients).

12.          The discretionary portfolio management services provided by the Principal Adviser to its Clients include acting as an adviser with respect to both securities and Contracts where such investments are part of the investment program of such Clients.

13.          In connection with the Principal Adviser acting as an adviser to Clients in respect of the purchase or sale of securities and Contracts, the Principal Adviser, pursuant to a written agreement made between the Principal Adviser and the Sub-Adviser, has retained the Sub-Adviser to act as a sub-adviser to the Principal Adviser in respect of securities and Contracts in which the 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 are 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.

14.          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 partner or an officer of a registered adviser and is acting on behalf of a registered adviser.

15.          By providing the Sub-Advisory Services, the Sub-Adviser and any Sub-Adviser Individuals will be engaging in, or holding himself, herself or itself out as engaging in, the business of advising others in respect of Contracts and, in the absence of being granted the requested relief, would be required to register as an adviser under the CFA.

16.          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 that is provided under section 8.26.1 of NI 31-103.

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

18.          The Sub-Adviser and the Sub-Adviser Individuals will only provide the Sub-Advisory Services as long as the Principal Adviser is, and remains, registered under the CFA as an adviser in the category of commodity trading manager.

19.          As would be required under section 8.26.1 of NI 31-103:

(a)           the obligations and duties of the Sub-Adviser are set out in a written agreement with the Principal Adviser; and

(b)           the Principal Adviser has entered or will enter into a written agreement with each of the Clients on whose behalf investment advice is or portfolio management services are being provided, agreeing to be responsible for any loss that arises out of the failure of the 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).

20.          The written agreement between the Principal Adviser and the Sub-Adviser sets out the obligations and duties of each party in connection with the Sub-Advisory Services and will permit 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.

21.          The Principal Adviser will deliver to the Clients all applicable reports and statements required under applicable securities, commodity futures and derivatives legislation.

22.          The prospectus or other offering document, if any, (in either case, the Offering Document) for each Client that is a Vanguard Canada ETF, a Pooled Fund or an Investment Fund and for which the Principal Adviser engages the Sub-Adviser 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 the Sub-Adviser to meet the Assumed Obligations; and

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

23.          Prior to purchasing any securities of one or more of the Clients that is a Vanguard Canada ETF, an Investment Fund or a Pooled Fund, any investor in such Client that resides in Ontario and purchases securities of such Client directly from the Principal Adviser will receive the Required Disclosure in writing (which may be in the form of an Offering Document).

24.          Each Client that is a Managed Account Client for which the Principal Adviser engages the Sub-Adviser to provide the Sub-Advisory Services will receive the Required Disclosure in writing prior to the purchasing of any Contracts for such Client.

25.          The Principal Adviser and the Sub-Adviser obtained substantially similar relief in the Previous Order, pursuant to which the Sub-Adviser provided Sub-Advisory Services to the Principal Adviser in respect of the Clients.

26.          The expiry of the five year period set out in the Previous Order has triggered the requested Order.

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

                IT IS ORDERED, pursuant to subsection 78(1) of the CFA, that the Previous Order is revoked;

                IT IS ORDERED, pursuant to section 80 of the CFA, that the Sub-Adviser and its Sub-Adviser Individuals are exempt from the adviser registration requirements of paragraph 22(1)(b) of the CFA when acting as a sub-adviser for the Principal Adviser in respect of the Clients regarding Contracts, 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 commodity 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 for each Client that is a Vanguard Canada ETF, a Pooled Fund or an Investment Fund and for which the Principal Adviser engages the 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 Vanguard Canada ETFs, Investment Funds or Pooled Funds directly from the Principal Adviser, all investors in these Clients 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 the Principal Adviser engages the 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;

                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 the Sub-Adviser to act as a sub-adviser to the Principal Adviser in respect of the Sub-Advisory Services; and

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

                DATED at Toronto, Ontario, this 7th day of October, 2016

 

“Anne Marie Ryan”
Commissioner
Ontario Securities Commission

“Christopher Portner”
Commissioner
Ontario securities Commission