Covenant Capital Management of Tennessee, LLC - s. 80 of the CFA
Headnote
Section 80 of the Commodity Futures Act (Ontario) -- relief from the adviser registration requirements of subsection 22(1)(b) of the CFA granted to sub-adviser not ordinarily resident in Ontario in respect of advising certain funds, subject to certain terms and conditions. Relief mirrors exemption available in section 7.3 of OSC Rule 35-502 -- Non-Resident Advisers made under the Securities Act (Ontario).
Statutes Cited
Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 22(1)(b), 80.
Securities Act, R.S.O. 1990, c. S.5, as am. -- Rule 35-502 -- Non Resident Advisers.
IN THE MATTER OF
THE COMMODITY FUTURES ACT,
R.S.O. 1990, CHAPTER C.20,
AS AMENDED (the CFA)
AND
IN THE MATTER OF
COVENANT CAPITAL MANAGEMENT
OF TENNESSEE, LLC
ORDER
(Section 80 of the CFA)
UPON the application of Covenant Capital Management of Tennessee, LLC (the Sub-Adviser) to the Ontario Securities Commission (the Commission) for an order pursuant to section 80 of the CFA, that neither the Sub-Adviser, nor its directors, officers or employees acting on its behalf as an adviser (the Sub-Advisers Representatives), shall be subject to the requirements of paragraph 22(1)(b) of the CFA in respect of advice regarding trades in commodity futures contracts and commodity futures options provided to Friedberg Mercantile Group Ltd. (the Principal Adviser) for the benefit of the Niagara Discovery Fund (the Specified Fund), and other mutual funds for which FMGL acts as portfolio manager and engages the Sub-Adviser to provide advisory services;
AND UPON considering the application and the recommendation of staff of the Commission;
AND UPON the Sub-Adviser having represented to the Commission as follows:
1. The Sub-Adviser is a limited liability company originally organized in 1999 under the laws of the State of Delaware in the United States, and subsequently reorganized in 2000 under the laws of the State of Tennessee.
2. The Sub-Adviser is registered with the U.S. Commodity Futures Trading Commission (the CFTC) as a Commodity Trading Advisor and is a member of the U.S. National Futures Association (the NFA).
3. The Principal Adviser is a corporation continued under the Canada Business Corporations Act and is resident in Ontario. The Principal Adviser is registered under the CFA as a dealer in the category of commodity futures merchant and as an advisor in the category of commodity trading manager. The Principal Adviser is also registered as a dealer under the Securities Act (Ontario) (the OSA) in the categories of broker and investment dealer.
4. Albert D. Friedberg is the Chief Executive Officer and principal investment strategist of the Principal Adviser. Mr. Friedberg's family indirectly controls the Principal Adviser. Mr. Friedberg has an indirect 7.5% ownership interest in the Sub-Adviser.
5. The Specified Fund will be a mutual fund (as defined in the OSA), the units of which will be distributed on a prospectus exempt basis pursuant to an offering memorandum. The Specified Fund will be constituted as a limited partnership organized under the laws of Ontario.
6. The Principal Adviser will be the portfolio manager for the Specified Fund. The Principal Adviser is also the portfolio manager for various other investment funds, which are currently constituted as limited partnerships or trusts, and may in the future act as portfolio manager for additional funds, however constituted (such current and future funds, together with the Specified Fund, being the FMGL Managed Funds).
7. Units of certain of the existing FMGL Managed Funds have been offered by prospectus, or simplified prospectus and annual information form, while units of the other existing FMGL Managed Funds, including the Specified Fund, have or will, only been offered on a prospectus exempt basis. Securities of future FMGL Managed Funds may be offered through a prospectus or on a prospectus exempt basis.
8. The Sub-Adviser will be entering into a sub-advisory agreements with the Principal Adviser in respect of the Specified Fund, to provide advise in respect of purchases and sales of commodity futures contracts and commodity futures options. The Principal Adviser and Sub-Adviser may in the future wish to enter into similar agreements to provide services to other FMGL Managed Funds (the Proposed Advisory Services).
9. In connection with any of the Proposed Advisory Services, the Sub-Adviser will enter into written agreements with the Principal Adviser and the respective FMGL Managed Fund setting out the obligations and duties of the Sub-Adviser (each, a Sub-Advisory Agreement).
10. There is presently no rule under the CFA that provides an exemption from the adviser registration requirement in paragraph 22(1)(b) of the CFA, for a person or company acting as an adviser to another registered adviser in respect of commodity futures options and commodity futures contracts that is similar to the exemption in section 7.3 of Commission Rule 35-502 - Non-Resident Advisers, from the adviser registration requirement in section 25(1)(b) of the OSA.
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 neither the Sub-Adviser nor any of the Sub-Adviser's Representatives is subject to the requirement of section 22(1)(b) of the CFA in respect of the Proposed Advisory Services provided to the Principal Adviser, provided that:
(a) the Principal Adviser is registered under the CFA as an adviser in the category of commodity trading manager;
(b) the Sub-Adviser is registered with the CFTC as a commodity trading adviser and is a member of the NFA;
(c) the duties and obligations of the Sub-Adviser are set out in a Sub-Advisory Agreement with the Principal Adviser;
(d) the Principal Adviser has contractually agreed with the respective FMGL Managed Fund to be responsible for any loss that arises out of any failure of the Sub-Adviser:
(i) to exercise the powers and discharges the duties of its office honestly, in good faith and in the best interests of the respective FMGL Managed Fund and its securityholders, or
(ii) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances;
(e) the Principal Adviser cannot be relieved by the respective FMGL Managed Fund or its securityholders from its responsibility for any loss referred to in paragraph (c) above;
(f) the securityholders of the respective FMGL Managed Fund have received written disclosure, in a prospectus or other offering document to the extent applicable, disclosing;
(i) the responsibility of the Principal Adviser for losses arising out of any failure of the Sub-Adviser referred to in paragraph (c) above, and
(ii) that there may be difficulty in enforcing legal rights against the Sub-Adviser because it is resident outside Canada and all or substantially all of the Sub-Adviser's assets may be situated outside of Canada; and
(g) this Order shall terminate three years from the date of the Order.
May 23, 2006
"Paul M. Moore"
"Robert W. Davis"