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-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).

 

Applicable Legislative Provisions

 

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

 

February 3, 2017

 

IN THE MATTER OF

THE COMMODITY FUTURES ACT,

R.S.O. 1990, CHAPTER C.20,

AS AMENDED

(the CFA)

 

AND

 

IN THE MATTER OF

COUNSEL PORTFOLIO SERVICES INC.

 

AND

 

IRISH LIFE INVESTMENT MANAGERS LIMITED

 

ORDER

(Section 80 of the CFA)

 

                UPON the application (the Application) of Irish Life Investment Managers Limited (ILIM) and Counsel Portfolio Services Inc. (the Principal Adviser) to the Ontario Securities Commission (the Commission) for an order, pursuant to section 80 of the CFA, that ILIM (and individuals engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of ILIM 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 Adviser 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 Principal Adviser and ILIM having represented to the Commission that:

 

1.             The Principal Adviser is a corporation governed by the laws of the Province of Ontario, with its head office located in Mississauga, Ontario. The Principal Adviser is registered (i) as an adviser in the category of portfolio manager under the Securities Act (Ontario) (the OSA); (ii) as an investment fund manager in each of Ontario, Québec and Newfoundland and Labrador and (iii) as an adviser in the category of commodity trading manager under the CFA.

 

2.             ILIM is a corporation organized under the laws of Ireland and its principal place of business is located in Dublin, Ireland. ILIM is authorized to provide investment services by the Central Bank of Ireland under the European Communities (Markets in Financial Instruments) Regulations 2007 (MiFID). As a MiFID authorized investment firm, ILIM is subject to prudential regulation and on-going supervision by the Central Bank of Ireland. ILIM is authorized under MiFID to advise on, among other things, options, futures, swaps, forward rate agreements and any other derivative contracts relating to any of the following: (a) securities, currencies, interest rates or yields, or other derivative instruments, financial indices or financial measures which may be settled physically or in cash and (b) commodities (other than commodities that can be physically settled, provided that they are traded on a regulated market or on a multilateral trading facility), and not being for commercial purposes, if the commodities can be physically settled and have the characteristics of other derivative financial instruments, having regard to whether, among other things, they are cleared and settled through recognized clearing houses or are subject to regular margin calls. ILIM is also registered as an investment adviser with the Securities and Exchange Commission of the United States of America (the SEC).

 

3.             ILIM is not registered in any capacity under the securities legislation of Ontario or any other jurisdiction of Canada or under the CFA. However, ILIM is relying on the international adviser exemption in section 8.26 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) in each of Ontario and Manitoba.

 

4.             ILIM is registered in a category of registration under the commodity futures or other applicable legislation of Ireland that permits it to carry on the activities in Ireland that registration as an adviser under the CFA would permit it to carry on in Ontario. As such, ILIM is authorized and permitted to carry on the Sub-Advisory Services (as defined below) in Ireland.

 

5.             ILIM engages in the business of an adviser in respect of Contracts in Ireland. Among other activities, ILIM engages in the business of advising others as to trading in commodity futures contracts, commodity futures options and options on commodity futures in Ireland.

 

6.             The Principal Adviser and ILIM are affiliates.

 

7.             Neither the Principal Adviser nor ILIM is in default of securities legislation, commodity futures legislation or derivatives legislation in any jurisdiction of Canada. ILIM is in compliance in all material respects with securities laws, commodity futures laws and derivatives laws in Ireland.

 

8.             The Principal Adviser provides, or may in the future provide, investment advice and/or discretionary portfolio management services in Ontario to: (i) investment funds, the securities of which are either qualified by prospectus for distribution to investors in Ontario and the other provinces, excluding Québec, and territories of Canada, or are available for purchase on a private placement basis in Ontario and the other provinces and territories of Canada pursuant to prospectus exemptions contained in National Instrument 45-106 Prospectus Exemptions (the Investment Funds); (ii) clients who have entered into investment management agreements with the Principal Adviser to establish managed accounts (the Managed Account Clients); and (iii) other Investment Funds and Managed Account Clients that may be established or retained in the future and in respect of which the Principal Adviser will engage ILIM to provide portfolio advisory services (the Future Clients) (each of the Investment Funds, Managed Account Clients and Future Clients being referred to individually as a Client and collectively as the Clients).

 

9.             Certain of the Clients may, as part of their investment program, invest in Contracts. The Principal Adviser acts, or will act, as a commodity trading manager in respect of such Clients.

 

10.          In connection with the Principal Adviser acting as an adviser to Clients in respect of the purchase or sale of Contracts, the Principal Adviser, pursuant to a written agreement made between the Principal Adviser and ILIM, will retain ILIM to act as a sub-adviser to the Principal Adviser in respect of Contracts in which ILIM 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; and

 

(b)           such investments are consistent with the investment objectives and strategies of the applicable Client.

 

11.          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 such registered adviser.

 

12.          By providing the Sub-Advisory Services, ILIM will be engaging in, or holding 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.

 

13.          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.

 

14.          ILIM 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.

 

15.          The relationship among the Principal Adviser, ILIM and any Client will be consistent with the requirements of section 8.26.1 of NI 31-103.

 

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

 

(a)           the obligations and duties of ILIM will be set out in a written agreement with the Principal Adviser; and

 

(b)           the Principal Adviser will enter into a written contract with each Client, agreeing to be responsible for any loss that arises out of the failure of ILIM:

 

(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).

 

17.          The written agreement between the Principal Adviser and ILIM will set out the obligations and duties of each party in connection with the Sub-Advisory Services and permit the Principal Adviser to exercise the degree of supervision and control it is required to exercise over ILIM in respect of the Sub-Advisory Services.

 

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

 

19.          The offering document (the Offering Document) for each Client that is an Investment Fund and for which the Principal Adviser engages ILIM 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 ILIM to meet the Assumed Obligations; and

 

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

 

20.          Prior to purchasing any securities of one or more of the Clients that are Investment Funds directly from the Principal Adviser, all investors in these Investment 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).

 

21.          Each Client that is a Managed Account Client for which the Principal Adviser engages ILIM 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 ILIM and its Representatives are exempt from the adviser registration requirement in paragraph 22(1)(b) of the CFA when acting as a sub-adviser to the 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)           ILIM’s head office or principal place of business is in a foreign jurisdiction;

 

(c)           ILIM 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)           ILIM 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 ILIM 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 ILIM to meet the Assumed Obligations;

 

(g)           the Offering Document of each Client that is an Investment Fund and for which the Principal Adviser engages ILIM 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 directly from the Principal Adviser, all investors in these Investment 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); and

 

(i)            each Client that is a Managed Account Client for which the Principal Adviser engages ILIM 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)           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 a 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 3 day of February, 2017.

 

“William Furlong”

Commissioner

 Ontario Securities Commission

“Janet Leiper”

Commissioner

Ontario Securities Commission