Securities Law & Instruments

 



NOTICE OF PROPOSED RULE 35-502

INTERNATIONAL ADVISERS

Substance and Purpose of Proposed Rule

The Commission considers a person or company to be acting as an adviser in Ontario if it, directlyor through a third party, acts as an adviser for a person or company in Ontario, notwithstandingthat the advice may be given from a place outside of Ontario or that the advice may beunsolicited. The Commission also considers a person or company to be acting as an adviser inOntario if it, directly or through a third party, acts as an adviser for a mutual fund or anon-redeemable investment fund that distributes its securities in Ontario, notwithstanding that theadvice to the fund may be given to, and received by, the fund outside of Ontario. In thesecircumstances, the Commission considers that the Ontario investors in the fund are acquiring theadvisory services of the portfolio adviser of the fund and that the securities of the fund aredistributed in Ontario for the purpose of providing these advisory services in Ontario. Therefore,the portfolio adviser of the fund is considered to be acting as an adviser to Ontario purchasers ofthe fund, and hence acting as an adviser in Ontario, by virtue of the distribution of securities of thefund to those purchasers.

As a result, the activities outside of Ontario of non-resident persons or companies may be such asto bring them within the ambit of the registration requirements under section 25 of the SecuritiesAct (Ontario) (the "Act"). The substance and purpose of the proposed Rule are to provide certainexemptions from section 25 of the Act for non-resident persons or companies in connection withtheir advisory activities in Ontario, where the nature of those activities is not such that the publicinterest requires registration. The substance and purpose of the proposed Rule are also to providethose non-resident persons or companies with an exemption from certain of the requirementsotherwise applicable to applicants for registration as, or registrants in the categories of,investment counsel or investment counsel and portfolio manager, who are prepared to acceptconditions on their registration that limit the clients to whom advisory services may be provided.

The proposed Rule is a reformulation of OSC Policy Statement No. 4.8 ("Policy 4.8") now theRule in the Matter of Certain Advisers (1997), 20 OSCB 1217.

Summary of Proposed Rule

Section 1.1 contains definitions of terms and phrases used in the proposed Rule that are notdefined in Rule 14-501 Definitions. Rule 14-501 Definitions sets out definitions for commonlyused terms and definitions of terms used in more than one Rule and should be read together withthe proposed Rule.

Section 2.1 of the proposed Rule provides that a non-resident person or company (an"international adviser applicant") wishing to register as an adviser in the category of internationaladviser, may do so in reliance upon the exemptions from the requirements of the Act and theRegulation made under the Act (the "Regulation") provided by the Rule by indicating inresponding to question 1 of Form 3 that the category of registration being applied for is that ofinternational adviser.

Section 2.2 of the proposed Rule provides that an international adviser applicant, in completing aForm 3, and that individuals registering as partners or officers, or seeking approval as directors, ofthe person or company, in completing a Form 4, need not complete certain specified items of theForm 3 or Form 4, respectively.

Part 3 of the Rule provides an exemption to an international adviser from certain of therequirements in the Act and the Regulation that would otherwise apply. Exemptions or partialexemptions are provided from bonding and insurance and capital requirements (section 3.1 of theproposed Rule), the requirements concerning the maintenance of books and records (section 3.2of the proposed Rule), the requirement to file a copy of the registrant's standards ensuring fairnessin the allocation of investment opportunities with the Commission and the delivery of thatstatement to clients (section 3.4 of the proposed Rule), and requirements relating to statements ofaccount and portfolio (section 3.7 of the proposed Rule).

Section 3.3 of the proposed Rule provides relief from the requirement in section 19 of the Act toproduce books, records or other relevant documents in Ontario if the laws of the jurisdiction inwhich those books, records or documents are located prohibit their production without theconsent of the relevant client, but the international adviser is required to use its best efforts inthose circumstances to obtain the client's consent. Similarly, the international adviser is requiredto use its best efforts to obtain a client's consent to its employees or other appropriate personsattending in Ontario to give evidence in proceedings relating to its activities in Ontario.

Section 3.5 of the proposed Rule prohibits the international adviser from compensating itspartners or officers in any manner based on the value or volume of transactions initiated for clientsin Ontario.

Section 3.6 of the proposed Rule exempts an international adviser from the requirements ofsection 107 of the Regulation and prescribes who shall hold the securities or money of its Ontarioclients. Section 3.9 of the proposed Rule requires disclosure of these custodial matters in anyprospectus filed in Ontario for a fund to which advice is or portfolio management services areprovided by the international adviser.

Section 3.9 of the proposed Rule requires that the international adviser's agent for service ofprocess in Ontario be disclosed to Ontario clients before the international adviser acts for thoseclients, and those clients must also be advised that the international adviser has been exemptedfrom certain provisions of the Act and the Regulation and that there may be difficulty enforcingany legal rights that an Ontario client may have by virtue of the international adviser's non-residentstatus.

Part 4 of the proposed Rule establishes a procedure whereby an international adviser can obtainrelief from the requirements of section 21 of the Act and section 139 of the Regulation relating tothe filing of audited financial statements and from the requirements of section 2 of the Regulationrelating to the preparation of those financial statements.

Part 5 of the proposed Rule provides a procedure whereby an international adviser can obtainrelief from the requirements of subsection 33(2) of the Act relating to the notification of theDirector appointed under the Act of the changes specified in that subsection. This Part, and Part4 of the proposed Rule, will be unnecessary if certain proposed technical amendments to the Actare passed.

While international advisers are exempted from a number of the requirements otherwise imposedupon those applying for registration or upon registrants under the Act and Regulation, they arelimited to acting in Ontario only for permitted clients, pursuant to section 6.1 of the proposedRule. The list of permitted clients is set out in section 1.1 of the proposed Rule.

Under 6.2 of the proposed Rule, an international adviser is prohibited from doing indirectly whatsection 6.1 prevents it from doing directly. An international adviser must be registered in its homejurisdiction in connection with the type of investment management services it is providing inOntario, under section 6.3 of the proposed Rule, and the international adviser is prohibited fromacting as an adviser for Canadian securities unless that activity is incidental to its acting as anadviser in Ontario for foreign securities, under section 6.4 of the proposed Rule.

Under section 6.5 of the proposed Rule, the revenues that the international adviser and certainaffiliates may derive in any financial year from acting for clients in Ontario is limited to 25% of itsaggregate consolidated gross revenues in the financial year.

Part 7 of the proposed Rule sets out certain advisory activities that a non-resident entity canundertake in Ontario without having to be registered as an adviser in Ontario. These exemptionsare the provision of unsolicited advice or portfolio management services to no more than fiveclients in Canada, provided certain conditions are met (section 7.1 of proposed Rule). There isalso an exemption for the provision of advice or portfolio management services to commoditypool programs by non-residents registered under the Commodity Futures Act (section 7.2 of theproposed Rule), to a person or company registered under the Act as an investment counsel orportfolio manager or registered under the Act as a broker or investment dealer that is acting as aportfolio manager under section 148(1) of the Regulation (section 7.3 of the proposed Rule) or toa pension plan of the non-resident or its affiliates (section 7.5 of the proposed Rule).

Part 7 of the proposed Rule also provides certain exemptions for advisory services provided tofunds. A non-resident entity may provide investment advice or portfolio management services tocertain funds located outside of Ontario (section 7.4 of the proposed Rule), to non-Canadianfunds that have previously distributed securities in Ontario and are now only distributing securitiesin Ontario under a dividend or distribution reinvestment plan, under a right to acquire securities ofthe fund previously granted or in a transaction in which securities of the fund are acquired bysubstantially all holders of securities of a class of the fund or another fund that has the sameportfolio manager (section 7.6 of the proposed Rule). Advice or portfolio management servicesmay also be provided to a Canadian fund that was previously sold on a prospectus exempt basis inOntario and that is similarly now only distributing securities in Ontario on the same basis asspecified in section 7.6 (section 7.7 of the proposed Rule). Advice or portfolio managementservices may also be provided to a fund where the non-resident or an affiliate has acted as anadviser continuously since before May 1, 1967 and the fund has distributed securities by way ofprospectus in Ontario continuously since that date (section 7.8 of the proposed Rule), or to fundsoffered primarily outside of Canada that are distributed in Ontario through registrants in relianceupon a prospectus exemption (section 7.9 of the proposed Rule).

Pursuant to section 7.10 of the proposed Rule, if a prospectus is filed in Ontario for a fund towhich advice is or portfolio management services are provided, either directly or through anotherportfolio adviser, by a person or company relying upon one of the registration exemptions set outin Part 7 of the proposed Rule, the prospectus must state that there may be difficulties inenforcing legal rights against the international adviser because of its non-resident status and, if theexemption provided by section 7.3 of the proposed Rule is being relied on, the prospectus mustalso state that the Ontario registrant to which advice is given by the international adviser hasresponsibility for that advice.

Part 8 of the proposed Rule permits the Director to grant an exemption to the proposed Rule, inwhole or in part, subject to such conditions or restrictions as may be imposed in the exemption.

Background

On June 10, 1987, changes to the Regulation removed the prohibition on foreign-owned firmsbecoming registered as advisers under the Act. Advisers were, however, generally neverthelessrequired to have an office in Ontario, although advisers having an office in another Canadianjurisdiction were exempted from the requirement to have an office in Ontario by CommissionStaff on a case-by-case basis.

Policy 4.8 was initially published in draft form on November 11, 1988 and republished in draftform on November 10, 1989. These drafts set out the conditions under which an adviser wouldbe registered in Ontario without having a place of business in Canada with Canadian partners orofficers who were advising Canadian clients. A related policy, OSC Policy No. 4.9, waspublished in draft form on May 31, 1989 and dealt with the conditions under which an adviser thatwas registered in another Canadian jurisdiction would be registered in Ontario without having anoffice or partners, directors, or officers resident in Ontario. The final version of Policy 4.8, whichbecame effective June 1, 1992, incorporated both the previous drafts of Policy 4.8 and theprovisions of Policy 4.9.

The proposed Rule is intended to continue substantially the regulatory regime provided by Policy4.8. A summary of the material changes made in the proposed Rule from Policy 4.8 is set out asAppendix A.

Authority for the Proposed Rule

The following provisions of the Act provide the Commission with the authority to make theproposed Rule. Paragraph 143(1)1 of the Act authorizes the Commission to make rulesprescribing requirements in respect of applications for registration and the renewal, amendment,expiration or surrender of registration and in respect of suspension, cancellation or reinstatementof registration. Paragraph 143(1)2 of the Act authorizes the Commission to make rulesprescribing categories or sub-categories of registration, classifying registrants into categories orsub-categories and prescribing the conditions of registration or other requirements for registrantsor any category or sub-category. Paragraph 143(1)7 of the Act authorizes the Commission tomake rules regarding the disclosure or furnishing of information to the public or the Commissionby registrants. Paragraph 143(1)8 of the Act authorizes the Commission to make Rules providingfor exemptions from the registration requirements under the Act or for the removal of exemptionsfrom those requirements.

Unpublished Materials

In proposing the Rule, the Commission has not relied on any significant unpublished study, reportor other written materials.

Alternatives Considered

The Commission has determined that it is appropriate that the exemptive relief provided to non-resident entities that permits them to undertake certain advisory activities in Ontario withouthaving to register as advisers, and that relief from certain of the requirements of the Act andRegulation provided to international adviser applicants and international advisers, should be setforth in a rule. The alternative methods of achieving this result would involve extensiveamendments to the Act and Regulation; however, this alternative is not considered appropriate atthis time.

Anticipated Costs and Benefits

It is anticipated that non-resident advisers will benefit from the proposed Rule in that they willeither not be required to register under the Act, or will be able to register as international advisers;thus eliminating the costs of registration in situations where the public interest does not requireregistration, or simplifying the registration process and on-going compliance with the Act andRegulation in situations where the public interest does not require full compliance, therebyreducing costs to the non-resident adviser.

Amendment of Regulation

The Commission proposes to amend section 99 of the Regulation to add "international adviser" asan additional category of registration for advisers.

Comments

Interested parties are invited to make written submissions with respect to the proposed Rule.Submissions received by December 31, 1998 will be considered.

Submissions should be made to the Commission in duplicate, as indicated below:

c/o Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8

A diskette containing the submissions (in DOS or Windows format, preferably Wordperfect)should also be submitted. As Ontario securities legislation requires that a summary of writtencomments received during the comment period be published, confidentiality of submissions cannotbe maintained.

Questions may be referred to either of the following:

Randee Pavalow
Policy Co-ordinator/Advisor
Ontario Securities Commission
(416) 593-8257

Nancy Ross
Legal Advisor, Market Operations - Registration
Ontario Securities Commission
(416) 593-8154

Proposed Rule

The text of the proposed Rule follows, together with footnotes that are not part of the Rule buthave been included to provide background and explanation.

Dated: October 2, 1998.

 

 


ONTARIO SECURITIES COMMISSION RULE 35-502
INTERNATIONAL ADVISERS
APPENDIX A
SUMMARY OF MATERIAL CHANGES MADE IN RULE 32-502
FROM OSC POLICY NO. 4.8

Rule 32-502Reference Policy4.8Reference
Explanation of Change
s.1.1 - "fund" -

"non-redeemableinvestment fund"

I.2(m) The proposed Rule uses the definition of a "non-redeemableinvestment fund" from Rule 14-501. It attempts to clarifywhat it means for the assets of a fund to be invested "in amanner similar to the manner in which the assets of a mutualfund are invested", by providing that the fund shall not makethose investments for the purposes of exercising controlover, or being actively involved in the management of, theissuers in which it invests.
s.1.1 - "permittedclient" paragraph9 III.1.(i) In determining whether a pension plan has assets of at least$100 million, the proposed Rule clarifies that the liability ofthe pension fund for future pension payments shall not beincluded.
s.1.1 - "permittedclient" paragraph13 III.1.(m) In determining whether a corporation has shareholdersequity of at least $100 million, the proposed Rule clarifiesthat the equivalent amount in another currency is acceptable.
s.1.1 - "permittedclient" paragraph14 III.1(n) The proposed Rule clarifies that a fund is a permitted clientonly if the manager of the mutual fund is an adviserregistered in the categories of investment counsel orportfolio manager or both (that is, that registration as asecurities adviser is not sufficient) in Ontario or, unlikePolicy 4.8, in an equivalent category of registration inanother jurisdiction. The requirement in Policy 4.8 thatthese funds be distributed by a registrant in Ontario that isnot related to the manager or principal distributor of the fundhas been deleted as being an unnecessary condition.
s.1.3 I.2(c) Policy 4.8 referred in certain places to affiliates of aninternational adviser. Because advisers may be structured aspartnerships, the proposed Rule adds a definition of affiliatedpartnerships corresponding to the definition of affiliatedcorporations in the Act, and refers where appropriate toaffiliates or affiliated partnerships.
s.6.3(2) N/A The proposed Rule provides a limitation on the liability anOntario registrant must assume in circumstances where theOntario registrant agrees to be responsible for the advisoryactivities of a non-resident sub-adviser.
s.7.2 VI.2 The proposed Rule clarifies that while a non-resident doesnot need to be registered under the Act to advise acommodity pool program, the non-resident will need to beregistered under the Commodity Futures Act.
s.7.4 VI.4 Section 7.4 of the proposed Rule provides that registration isnot required for advisory services provided to a fund outsideOntario by registrants of another Canadian jurisdiction. Theproposed Rule clarifies that the adviser must be registered ina category of registration in that other jurisdiction thatpermits discretionary portfolio management to be provided.
N/A I.2(h) andPart V The provisions of Policy 4.8 dealing with "extra-provincialadvisers" (that is, those advisers registered in anotherjurisdiction in Canada without an office in, or personnelresident in, Ontario) have been deleted.
N/A II.2, II.3 The provisions of Policy 4.8 setting out the views of theCommission as to when an international adviser would berequired to be registered in Ontario have been included inthis notice but do not form part of the proposed Rule.
N/A IV.3 andpassim Policy 4.8 took the approach of exempting internationaladvisers from all of the requirements of the Act and theRegulation, except those set out in the Policy. Underproposed amendments to the Regulation, internationaladvisers are a new category of adviser registration, subjectto the requirements of the proposed Rule, and subject to allof the requirements of the Act and Regulation that apply toadvisers or registrants in general, except those for whichexemptions are provided in the proposed Rule.
N/A IV.4(a) The requirement in Policy 4.8 that an international adviserfile a Submission to Jurisdiction and Appointment of Agentfor Service of Process form has not been included in theproposed Rule. That requirement will be contained inproposed Rule 35-501.
N/A IV.10 Policy 4.8 set out a requirement that an international adviserproduce certain books and records in Ontario. Thisrequirement has not been included in the proposed Rule, assection 19 of the Act applies and imposes a similarrequirement. Section 3.3 of the proposed Rule providesrelief from the requirements of section 19 of the Act incircumstances where applicable foreign laws makecompliance with section 19 problematic.
N/A IV.11 The requirement in Policy 4.8 to inform the Director if theinternational adviser becomes subject to an investigation ordisciplinary action has not been included in the proposedRule. That requirement is anticipated to be contained inproposed Rule 33-503 Change of Registration Information.

The requirement to advise the Director if the internationaladviser exceeds the limitation on gross revenues fromactivities in Canada set out in section 6.5 of the proposedRule has also not been included. The Director has the rightpursuant to section 31 of the Act to require internationaladvisers to provide this information to the Director.

 

 


ONTARIO SECURITIESCOMMISSION RULE 35-502
INTERNATIONAL ADVISERS
TABLE OF CONTENTS

PART TITLE
PART 1 DEFINITIONS ANDINTERPRETATION
1.1 Definitions
1.2 Interpretation
1.3 Affiliated Partnerships

PART 2 INTERNATIONAL ADVISERAPPLICANTS
2.1 Applications forRegistration as anInternational Adviser
2.2 Completion of Form 3 andForm 4

PART 3 INTERNATIONAL ADVISERS
3.1 Bonding and Insurance andCapital Requirements
3.2 Maintenance of Books andRecords
3.3 Production of Records andWitnesses
3.4 Standards Ensuring Fairnessin the Allocation ofInvestment Opportunities
3.5 Compensation of Partnersor Officers of InternationalAdvisers
3.6 Holding of Client Assets
3.7 Statements of Account andPortfolio
3.8 Disclosure to Clients
3.9 Disclosure in OfferingDocuments

PART 4 EXEMPTION FROMFINANCIAL STATEMENTPREPARATION AND FILINGREQUIREMENTS
4.1 Exemption from FinancialStatement PreparationRequirements and Filings
4.2 Order Granting Exemption

PART 5 EXEMPTION FROMREPORTING OF CERTAINCHANGES
5.1 Exemption from Reportingof Certain Changes
5.2 Order Granting Exemption

PART 6 RESTRICTED ADVISORYACTIVITIES FORINTERNATIONAL ADVISERS
6.1 Permitted Clients
6.2 Indirect Advising
6.3 Advising in AnotherCountry
6.4 Advising in Respect ofForeign Securities
6.5 Limitation on Revenues

PART 7 EXEMPTIONS FROMREGISTRATION
7.1 Unsolicited Advising of notMore than Five Clients inCanada
7.2 Commodity Pool Programs
7.3 Sub-Adviser for RegisteredAdviser
7.4 Advising Funds OutsideOntario
7.5 Advising Pension Funds ofAffiliates
7.6 Distributions to ExistingHolders
7.7 Existing Privately PlacedFunds
7.8 Funds Managed Under
Prior Legislation
7.9 Privately Placed FundsOffered Primarily Abroad
7.10 Disclosure in OfferingDocuments

PART 8 EXEMPTION
8.1 Exemption


 

ONTARIO SECURITIESCOMMISSION RULE 35-502

 

INTERNATIONAL ADVISERS(1)

PART 1 DEFINITIONS ANDINTERPRETATION(2)

1.1 Definitions - In this Rule

"book-based system" has the meaningascribed to that term in NationalInstrument 81-102 Mutual Funds;

"Canadian security" means a securityother than a foreign security;

"client" means a person or companyto whom advice is, or portfoliomanagement services are, providedby an international adviser;

"foreign security" has the meaningascribed to that term in subsection204(1) of the Regulation;

"fund" means a mutual fund or a non-redeemable investment fund(3);

"international adviser applicant"means a person or company applyingfor registration as an internationaladviser(4) under the Act;

"international adviser" means

(a) an international adviserapplicant who has beengranted registration as aninternational adviser underthe Act, and

(b) a registrant whoseregistration was subject to therestrictions set out in formerRule In the Matter of CertainAdvisers (1997), 20 OSCB1217;

"manager" has the meaning ascribedto that term in National Instrument81-102;

"Ontario client" means a permittedclient who is ordinarily resident inOntario;

"permitted client" means one of thefollowing clients:

1. A bank listed in Schedule I orII to the Bank Act (Canada),acting as principal or as agentfor accounts fully managed byit.

2. A loan corporation or trustcorporation registered underthe Loan and TrustCorporations Act, actingas principal or as trusteeor agent for accounts fullymanaged by it.

3. An insurance companylicensed under the InsuranceAct.

4. Credit Union Central ofCanada, Credit Union Centralof Ontario or La Fédérationdes Caisses Populaires del' Ontario Inc.

5. The Business DevelopmentBank of Canada incorporatedunder the BusinessDevelopment Bank ofCanada Act (Canada).

6. Her Majesty in right ofCanada or of anyjurisdiction(5).

7. A portfolio manager(6) actingas principal or as agent foraccounts fully managed by it.

8. A broker(7) or investmentdealer(8) acting as principal or,under section 148 of theRegulation, as agent foraccounts fully managed by it.

9. A pension fund that isregulated either by the Officeof the Superintendent ofFinancial Institutions(Canada) or a provincialpension commission, or agroup of pension funds thatare so regulated, if thepension fund has, or thegroup of pension funds have,net assets of at least $100million, provided that, indetermining net assets, theliability of the pension fundfor future pension paymentsshall not be included.

10. A registered charity underthe ITA(9) with assets notused directly in charitableactivities oradministration of at least$5 million or itsequivalent in anothercurrency.

11. An individual who has anet worth of at least $5million or its equivalent inanother currency,excluding the value of hisor her principal residence,as certified by theindividual.

12. A person or company thatis entirely owned, legallyand beneficially, byindividuals referred to inparagraph 11, who holdtheir ownershipinterest in the personor company directlyor through a trust thetrustee(10) of which is atrust companyregistered under theLoan and TrustCorporations Act.

13. A corporation that hasshareholders' equity of atleast $100 million on aconsolidated basis or itsequivalent in anothercurrency.

14. A fund that distributes itssecurities in Ontario, if

(a) the manager of the fund isordinarily resident in ajurisdiction and isregistered under the Actas a portfolio manager,broker, investment dealeror mutual fund dealer(11),or is registered underCanadian securitieslegislation other than theAct in an equivalentcategory of registration,and

(b) the manager referred to insubparagraph (i) is a partyto the contract underwhich the internationaladviser provides advice tothe fund.

15. A fund that distributes itssecurities in Ontario onlyto persons or companiesreferred to in paragraphs1 through 13 or describedin section 7.6 or 7.7; and

"portfolio adviser" has the meaningascribed to that term in NationalInstrument 81-102.

1.2 Interpretation - References in thisRule to National Instrument 81-102mean, until that National Instrumentcomes into force, National PolicyStatement No. 39.

1.3 Affiliated Partnerships - Aninternational adviser that is apartnership shall be deemed to beaffiliated with another partnership ifthe partnerships would be affiliates ofeach other under the definition of"affiliated companies" in the Act, ifthat definition and the relateddefinitions of "controlled companies"and "subsidiary companies" wereeach read as if references to a"company" were references to a"partnership".

PART 2 INTERNATIONAL ADVISERAPPLICANTS

2.1 Applications for Registration as anInternational Adviser - A person orcompany that wishes to register as aninternational adviser shall indicate inresponse to question 1 of Form 3 thatthe person or company is applyingfor registration as an internationaladviser.

2.2 Completion of Form 3 and Form 4

(1) An international adviser applicantis not required to complete items3 and 11, other than item 11A(b),of Form 3, and in responding toitems 9 and 10 of Form 3 needonly list and provide informationabout

(a) those officers or partners whowill be counselling orresponsible for the business ofthe international adviserapplicant in Ontario; and

(b) each director of theinternational adviserapplicant.

(2) A person that applies forregistration as a partner orofficer, or that seeks approval asa director, of an internationaladviser applicant is not requiredto complete items 7, 8, 10, 20and 21 of Form 4.

PART 3 INTERNATIONALADVISERS

3.1 Bonding and Insurance andCapital Requirements - Subsections107(3) and 108(3) of the Regulationdo not apply to an internationaladviser.

3.2 Maintenance of Books andRecords - Subsections 113(3), (5)and (6) of the Regulation do notapply to an international adviser.

3.3 Production of Records andWitnesses

(1) If the laws of the foreignjurisdiction(12) in which the books,records or documents of aninternational adviser referred to insubsection 19(3) of the Act arelocated prohibit production of thebooks, records or documents inOntario without the consent ofthe relevant client, aninternational adviser shall

(a) so advise the person orcompany requesting theproduction of the books,records or documents; and

(b) use its best efforts to obtainthe client's consent.

(2) At the request of the Director,the Commission or a personappointed by the Commission tomake an investigation under theAct relating to the internationaladviser's activities in Ontario, aninternational adviser shall

(a) produce forthwith in Ontario,at the international adviser'sexpense, appropriate personsin its employ as witnesses togive evidence on oath orotherwise;

(b) if the appropriate personsreferred to in paragraph (a)are not in its employ, use itsbest efforts to produceforthwith in Ontario, at theinternational adviser'sexpense, the persons togive evidence on oath orotherwise, subject to thelaws of the foreignjurisdiction that areotherwise applicable tothe giving of evidence;and

(c) if the laws of a foreignjurisdiction that are otherwiseapplicable to the giving ofevidence prohibit theinternational adviser givingthe evidence without theconsent of the relevant client

(i) so advise the person orcompany making therequest, and

(ii) use its best efforts toobtain the client's consent.

3.4 Standards Ensuring Fairness inthe Allocation of InvestmentOpportunities - An internationaladviser shall maintain the standardsdirected to ensuring fairness in theallocation of investment opportunitiesamong its clients that an investmentcounsel is required to maintain undersubsection 115(1) of the Regulationbut shall not be required to file acopy of those standards with theCommission or to furnish a copy toits clients.

3.5 Compensation of Partners orOfficers of International Advisers -An international adviser shall notcompensate its partners or officers inany manner that is based upon thevalue or the volume of thetransactions initiated for its Ontarioclients.

3.6 Holding of Client Assets

(1) Subject to subsections (2) and(3), an international adviser shallensure that the securities andmoney of an Ontario client areheld

(a) by the Ontario client; or

(b) by a custodian or sub-custodian

(i) that meets therequirements prescribedfor acting as a custodianor sub-custodian ofportfolio assets of amutual fund in NationalInstrument 81-102(13), and

(ii) that is subject to theagreement announced bythe Bank for InternationalSettlements on July 1,1988 concerninginternational convergenceof capital measurementand capital standards.

(2) An international adviser or anaffiliate or affiliated partnershipof the international adviser thatholds the securities or money ofan Ontario client as custodian orsub-custodian shall hold thesecurities and money incompliance with sections 116,117, 118 and 119 of theRegulation.

(3) The securities of an Ontario clientmay be deposited with ordelivered to a depository orclearing agency that is authorizedto operate a book-based system.

3.7 Statements of Account andPortfolio - Section 123 of theRegulation does not apply to aninternational adviser.

3.8 Disclosure to Clients - Aninternational adviser shall deliver toan Ontario client, before acting as aadviser to the Ontario client, astatement in writing disclosing

(a) the name and address of the agentfor service of process of theinternational adviser in Ontario orthat this information is availablefrom the Commission;

(b) to the extent applicable, thatthere may be difficulty enforcingany legal rights the Ontario clientmay have against the internationaladviser because

(i) the international adviser isordinarily resident outsideCanada and all or asubstantial portion of itsassets are situated outsideCanada, and

(ii) if applicable, that the laws ofthe foreign jurisdiction inwhich the books, records anddocuments of theinternational adviser referredto in subsection 19(3) of theAct are located prevent theproduction of those books,records and documents inOntario; and

(c) to the extent applicable, that theinternational adviser is not fullysubject to the requirements of theAct and the Regulationconcerning proficiency, capital,insurance, record keeping,segregation of funds andsecurities, statements of accountand portfolio and conflicts ofinterest.

3.9 Disclosure in Offering Documents -A prospectus filed in Ontario for afund to which advice is or portfoliomanagement services are provided byan international adviser, eitherdirectly or through the portfolioadviser of the fund, shall disclose thematters referred to in section 3.7.

PART 4 EXEMPTION FROMFINANCIAL STATEMENTPREPARATION AND FILINGREQUIREMENTS

4.1 Exemption from FinancialStatement PreparationRequirements and Filings - Anapplication under section 147 of theAct for an exemption from therequirement of section 21 of the Actthat registrants, and from section 139of the Regulation that advisers, fileannual audited financial statementsmay consist of the following sentenceif the international adviser applicantor the international adviser is notapplying for registration or is notregistered in any category ofregistration in addition to registrationas a international adviser and ifthe application is made by aninternational adviser applicantconcurrently with the filing of anapplication for registration or byan international adviser before oron the first aniversary ofregistration as an adviser after thedate this Rule comes into force:

"[Name of applicant] applies foran exemption from therequirement of the Act forregistrants, and from therequirement of the Regulation foradvisers, to file annual auditedfinancial statements, suchexemption to terminate if andwhen the applicant becomes aregistrant in any category inaddition to, or instead of, theapplicant's registration as anadviser in reliance upon Rule 35-502."

4.2 Order Granting Exemption - Theissuance by the Director of acertificate of registration or renewalof registration to the internationaladviser applicant or to theinternational adviser is evidence ofthe approval of the application madeunder section 4.1, if that section hasbeen complied with, unless theexemption request is denied inwriting by the Director.

PART 5 EXEMPTION FROMREPORTING OF CERTAINCHANGES

5.1 Exemption from Reporting ofCertain Changes - An applicationunder subsection 33(4) of the Act foran exemption from the requirementof subsection 33(2) of the Act thatadvisers notify the Director of thechanges in information required to bereported under that subsection, to theextent that the change required to bereported relates to information thatwas not required to be furnished tothe Director upon the filing of theapplication for registration by aninternational adviser, may consist ofthe following sentence if theinternational adviser applicant or theinternational adviser is not applyingfor registration or is not registered inany category of registration inaddition to registration as ainternational adviser and if theapplication is made by aninternational adviser applicantconcurrently with the filing of anapplication for registration or by aninternational adviser before orconcurrently with the first renewal ofregistration as an adviser made afterthe date this Rule comes into force:

"[Name of applicant] applies foran exemption from therequirement of subsection 33(2)of the Act for advisers to notifythe Director of changes in theinformation required to bereported by that subsection, tothe extent that the change relatesto information that was notrequired to be furnished to theDirector upon the filing of theapplicant's application forregistration as an internationaladviser, such exemption toterminate if and when theapplicant becomes a registrant inany category of adviser inaddition to, or instead of, theapplicant's registration as anadviser in reliance upon Rule35-502."

5.2 Order Granting Exemption - Theissuance by the Director of acertificate of registration or renewalof registration to the internationaladviser applicant or the internationaladviser is evidence of the approval ofthe application made under section5.1, if that section has been compliedwith, unless the exemption request isdenied in writing by the Director.

PART 6 RESTRICTED ADVISORYACTIVITIES FORINTERNATIONALADVISERS

6.1 Permitted Clients

(1) An international adviser shall onlyact as an adviser in Ontario for apermitted client.

(2) In determining at any timewhether a pension fund, group ofpension funds, registered charityor corporation meets the financialrequirements referred to inparagraphs 9, 10 and 11 of thedefinition of a "permitted client"in section 1.1, respectively, themost recent audited financialstatements of the pension fund,group of pension funds,registered charity or corporationavailable at that time shall beused.

(3) The financial requirementsreferred to in paragraphs 9, 10,11 and 13 of the definition of theterm "permitted client" in section1.1 are only required to besatisfied at the time theinternational adviser first acts asan adviser for the client.

(4) Despite subsection (2), if aninternational adviser has beenacting as an adviser for a clientsince before June 1, 1992, thefinancial requirements referred toin section 1.1 shall be satisfied asof June 1, 1992.

6.2 Indirect Advising - An internationaladviser shall not act as an adviser inOntario to a person or company whois not a permitted client indirectly, byproviding the advice through anotherperson or company, other than aperson or company referred to inparagraphs 1, 2, 7 or 8 of thedefinition of the term "permittedclient" in section 1.1 or except aspermitted by Part 7.

6.3 Advising in Another Country - Aninternational adviser shall not act asan adviser in Ontario for a type ofsecurity unless it is engaged in thebusiness of an adviser in a foreignjurisdiction for that type of security.

6.4 Advising in Respect of ForeignSecurities - An international advisershall not act as an adviser in Ontariofor Canadian securities unless thisactivity is incidental to its acting asan adviser in Ontario for foreignsecurities.

6.5 Limitation on Revenues - No morethan 25 per cent of the aggregateconsolidated gross revenues fromadvisory activities of an internationaladviser and its affiliates oraffiliated partnerships, in anyfinancial year of the internationaladviser, shall arise from theinternational adviser and itsaffiliates or affiliated partnershipsacting as advisers for clients inCanada.

PART 7 EXEMPTIONS FROMREGISTRATION

7.1 Unsolicited Advising of not Morethan Five Clients in Canada

(1) The adviser registrationrequirement(14) does not apply to aperson or company, not ordinarilyresident in Ontario, if

(a) it, and its affiliates oraffiliated partnerships that arenot ordinarily resident inOntario, acted as an adviserduring the preceding 12months for not more than fiveclients in Canada;

(b) it acts as an adviser in Ontarioin reliance upon theexemption provided by thissection solely for permittedclients, other than a fund;

(c) it does not solicit clients inOntario;

(d) its acting as an adviser inOntario for Canadiansecurities is incidental to itsacting as an adviser inOntario for foreignsecurities;

(e) before advising an Ontarioclient, it notifies the Ontarioclient that it is not registeredas an adviser in Ontario; and

(f) all assets of its Ontario clientsare held by persons orcompanies that meet therequirements of paragraph3.6(1)(b) or subsection3.6(3).

(2) For purposes of subsection (1), indetermining whether a person orcompany has acted as an adviserfor more than five clients inCanada

(a) two or more persons who areor intend to become the jointregistered owners ofsecurities or an account inrespect of which the personor company acts as an adviserare counted as one client;

(b) a person or company actingas trustee or agent for morethan one fully managedaccount is counted as oneclient;

(c) clients referred to in sections7.2 through 7.9 are excluded;and

(d) clients who would beexcluded by sections 7.2through 7.9 if they wereresidents of Ontario areexcluded.

7.2 Commodity Pool Programs - Theadviser registration requirements donot apply to a person or company,not ordinarily resident in Ontario,that is registered under theCommodity Futures Act, inconnection with that person orcompany acting as an adviser for amutual fund that is subject toNational Instrument 81-104Commodity Pools or anon-redeemable investment fund thatwould be subject to that NationalInstrument if it were a mutual fund.

7.3 Sub-Adviser for RegisteredAdviser

(1) The adviser registrationrequirements do not apply to aperson or company, not ordinarilyresident in Ontario, in connectionwith that person or companyacting as an adviser for aninvestment counsel or portfoliomanager, for a broker orinvestment dealer acting as aportfolio manager undersubsection 148(1) of theRegulation or for a person that isexempted from the adviserregistration requirements undersection 7.4, if

(a) the obligations and duties ofthe person or company are setout in a written agreementwith the registrant;

(b) the registrant agrees, in adocument providing rights tothe beneficiaries of the advice,to be responsible for theadvice received from orportfolio managementservices provided by theperson or company, and thisresponsibility cannot bewaived; and

(c) the person or company, if aresident of a jurisdiction, isregistered as an adviser in thejurisdiction.

(2) For the purposes of paragraph(1)(c), the documents referred toin that paragraph may providethat the registrant shall have nogreater liability under theagreement with an internationaladviser for the activities of theinternational adviser than theregistrant would have if theadvice given or portfoliomanagement services provided bythe international adviser had beenprovided by the registrant itself.

7.4 Advising Funds Outside Ontario -The adviser registration requirementsdo not apply to a person or company,not ordinarily resident in Ontario, inconnection with that person orcompany acting as an adviser for afund that does not have an address inOntario, if

(a) the advice to the fund is givenand received outside of Ontario;and

(b) the person or company isregistered in a jurisdiction in acategory of registration thatpermits the person or company toprovide discretionaryportfolio managementservices or as a broker orinvestment dealer acting as aportfolio manager under aprovision similar tosubsection 148(1) of theRegulation.

7.5 Advising Pension Funds ofAffiliates - The adviser registrationrequirements do not apply to aperson or company, not ordinarilyresident in Ontario, in connectionwith that person or company actingas an adviser for a pension fundsponsored by an affiliate of theperson or company for the benefit ofthe employees of the affiliate or itsaffiliates.

7.6 Distributions to Existing Holders -The adviser registration requirementsdo not apply to a person or company,not ordinarily resident in Ontario, inconnection with that person orcompany acting as an adviser for afund, if the fund

(a) does not have an address inCanada;

(b) is not organized under the laws ofCanada or a jurisdiction; and

(c) only distributes securities to aperson or company in Ontario

(i) under a plan permitting orrequiring the automaticinvestment of dividends ordistributions of income orcapital gains attributable tosecurities of the fund,

(ii) upon the exercise of a right topurchase, convert orexchange previously grantedby the fund, or

(iii) in a transaction in whichsecurities of the fund areacquired by substantiallyall holders of securities ofa class of the fund oranother fund that has thesame portfolio manager.

7.7 Existing Privately Placed Funds -The adviser registration requirementsdo not apply to a person or company,not ordinarily resident in Ontario, inconnection with that person orcompany acting as an adviser for afund, if the fund

(a) has sold its securities in Ontarioin a distribution to which section53 or section 62 of the Act wouldapply but for the availability ofone or more of the exemptionscontained in clause 72(1)(a), (c),(d) or (p) of the Act orsubsection 1.2(a) of Rule 32-503Registration and ProspectusExemption for Trades byFinancial Intermediaries inMutual Fund Securities toCorporate Sponsored Plans; and

(b) only distributes securities to aperson or company in Ontario

(i) under a plan permitting orrequiring the automaticinvestment of dividends ordistributions of income orcapital gains attributable tosecurities of the fund,

(ii) upon the exercise of a right topurchase, convert orexchange previously grantedby the fund, or

(iii) in a transaction in whichsecurities of the fund areacquired by substantiallyall holders of securities ofa class of the fund oranother fund that has thesame portfolio manager.

7.8 Funds Managed Under PriorLegislation - The adviser registrationrequirements do not apply to aperson or company, not ordinarilyresident in Ontario, in connectionwith that person or company actingas an adviser for a fund, if

(a) the person or company or anaffiliate or affiliated partnershipof the person or company hasacted continuously as an adviserfor the fund since before May 1,1967;

(b) securities of the fund havecontinuously been distributed inOntario since May 1, 1967 bymeans of a prospectus preparedand filed in accordance with theAct or its predecessor legislation;and

(c) the person or company has notbeen registered as an adviser.

7.9 Privately Placed Funds OfferedPrimarily Abroad - The adviserregistration requirements do notapply to a person or company that isnot ordinarily resident in Ontario thatacts as an adviser for a fund, if thesecurities of the fund are

(a) primarily offered outside ofCanada;

(b) only distributed in Ontariothrough one or more registrants;and

(c) distributed in Ontario in relianceupon an exemption from therequirements of sections 53 and62 of the Act.

7.10 Disclosure in Offering Documents -A prospectus filed in Ontario for afund to which advice is provided,either directly or through theportfolio adviser of the fund, by aperson or company that relies uponan exemption from the adviserregistration requirements provided bythis Part shall state

(a) if the person or company advisingthe fund is relying on theexemption in section 7.3, that theregistrant to which the advice isgiven has responsibility for theadvice given to the fund; and

(b) to the extent applicable, thatthere may be difficulty inenforcing any legal rights againstthe person or company advisingthe fund because it is residentoutside Canada and all or asubstantial portion of its assetsare situated outside Canada.

PART 8 EXEMPTION

8.1 Exemption - The Director may grantan exemption to this Rule, in wholeor in part, subject to suchconditions or restrictions as maybe imposed in the exemption.

 

Footnotes


1. This proposed Rule is based on OSC Policy StatementNo. 4.8 ("Policy 4.8"), now the Rule In the Matter ofCertain Advisers (1997), 20 OSCB 1217.

2. A general definition rule has been adopted as Rule 14-501 Definitions ("Rule 14-501"). It contains definitionsof certain terms used in more than one rule. Rule 14-501also provides, among other things, that terms used in arule and defined in section 1 of the Securities Act orsubsection 1(2) of the Regulation will have the respectivemeaning given to them in the Securities Act orRegulation, as appropriate. Rule 14-501 alsoincorporates terms defined in National Instrument 14-101Definitions ("NI 14-101"). NI 14-101 contains, amongother things, definitions for terms used in more than onenational instrument.

3. The term "non-redeemable investment fund" is defined inRule 14-501 as meaning "an issuer (a) whose primarypurpose is to invest money provided by itssecurityholders; (b) that does not invest for the purpose ofexercising effective control, seeking to exercise effectivecontrol, or being actively involved in the management ofthe issuers in which it invests, other than other mutualfunds or non-redeemable investment funds; and (c) that isnot a mutual fund".

4. Section 99 of the Regulation will be amended to add"international adviser" as an additional category ofadviser registration.

5. The term "jurisdiction" is defined in NI 14-101 asmeaning "a province or territory of Canada except whenused in the term foreign jurisdiction".

6. The term "portfolio manager" is defined in Rule 14-501as meaning "a person or company that is registered underthe Act in the category of portfolio manager".

7. The term "broker" is defined in Rule 14-501 as meaning"a person or company registered under the Act in thecategory of broker".

8. The term "investment dealer" is defined in Rule 14-501as meaning "a person or company registered under theAct in the category of investment dealer".

9. The term "ITA" is defined NI 14-101 as meaning "theIncome Tax Act (Canada)".

10. The term "trustee" is defined in Rule 14-501 as meaning"a person or company named as trustee under a trustindenture".

11. The term "mutual fund dealer" is defined in Rule 14-501as meaning "a person or company registered under theAct in the category of mutual fund dealer".

12. The term "foreign jurisdiction" is defined in NI 14-101 asmeaning "a country other than Canada, or a politicalsubdivision of a country other than Canada".

13. Part 6 of proposed National Instrument 81-102 prescribesinstitutions that qualify as custodians and sub-custodiansfor mutual funds.

14. The Commission published for comment in September,1998 proposed amendments to Rule 14-501 at (1998) 21OSCB 5811. Among other things, this proposedamendment would amend Rule 14-501 to include adefinition of the term "adviser registration requirements".The definition would be "the requirement in securitieslegislation that prohibits a person or company from actingas an adviser unless the person or company is registeredin the appropriate category of registration under securitieslegislation".