Flaherty & Crumrine Incorporated -- 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 advice regarding trades in commodity futures contracts and commodity futures options, subject to certain terms and conditions -- Renewal of previous relief -- Relief mirrors exemption available in section 7.3 of OSC Rule 35-502 Non-Resident Advisers made under the Securities Act (Ontario).
Applicable Legislative Provisions
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.
OSC Rule 35-502 Non-Resident Advisers
November 16, 2012
IN THE MATTER OF
THE COMMODITY FUTURES ACT,
R.S.O. 1990, CHAPTER C.20, AS AMENDED
(the CFA)
AND
IN THE MATTER OF
FLAHERTY & CRUMRINE INCORPORATED
ORDER
(Section 80 of the CFA)
UPON the application (the Application) of Flaherty & Crumrine Incorporated (Flaherty & Crumrine) to the Ontario Securities Commission (the Commission) for an order pursuant to section 80 of the CFA, that neither Flaherty & Crumrine, nor any of its directors, officers or employees acting on its behalf as an adviser (collectively, Representatives), shall be subject to paragraph 22(1)(b) of the CFA in respect of advice provided for the benefit of the Fund (as defined below), the principal investment adviser of which is an Ontario registrant, in respect of trades in commodity futures contracts and commodity futures options traded on commodity futures exchanges outside Canada and cleared through clearing houses outside Canada (the Contracts);
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON Flaherty & Crumrine having represented to the Commission that:
1. Flaherty & Crumrine Investment Grade Fixed Income Fund (the Fund) is an investment trust established under the laws of Alberta pursuant to a declaration of trust. The Fund was established for the purpose of holding an actively managed portfolio consisting primarily of various corporate debt securities and hybrid preferred securities of North American issuers (the Fixed Income Portfolio). At the time of purchase, all of the securities held in the Fixed Income Portfolio are required to be rated investment grade.
2. The Fund will not purchase or sell commodities or commodity contracts except that the Fund may purchase and sell financial futures contracts and related options as part of its hedging strategies. Substantially all of the Fixed Income Portfolio will be hedged to the Canadian dollar at all times.
3. Brompton Funds Limited (Brompton) is the principal investment adviser to the Fund and is registered as an investment fund manager, portfolio manager and exempt market dealer under the Securities Act (Ontario) (the OSA) and is registered as a commodity trading manager under the CFA.
4. Flaherty & Crumrine provides investment advisory and portfolio management services for the benefit of the Fund with respect to both the Fixed Income Portfolio and certain of the hedging strategies of the Fund.
5. Flaherty & Crumrine is a corporation headquartered in Pasadena, California and specializes in the active management of preferred shares, hybrid preferred securities and debt instruments for institutional investors and publicly traded closed-end funds. Flaherty & Crumrine is registered as an investment adviser under the Investment Advisers Act 1940, as amended, with the U.S. Commodities Futures Trading Commission as a commodity trading adviser and is a member of the U.S. National Futures Association.
6. In respect of its securities related investment advisory and portfolio management services for the benefit of the Fund, Flaherty & Crumrine and its Representatives rely on the exemption from registration under the OSA set out under section 7.3 of Ontario Securities Commission Rule 35-502 -- Non-Resident Advisers, which provides that a non-resident adviser is exempt from the OSA registration requirement where the principal adviser is a registrant that irrevocably accepts responsibility for the services provided by the exempted non-resident. Flaherty & Crumrine is not registered in any capacity under the CFA and does not intend to seek registration under the CFA.
7. Pursuant to a written agreement among Flaherty & Crumrine, the Fund and Brompton, Brompton monitors the investment advice (both as relates to securities and as relates to commodity futures) provided for the benefit of the Fund by Flaherty & Crumrine and its Representatives and is responsible to the Fund for any loss that arises as a result of Flaherty & Crumrine or its Representatives failing to:
(a) exercise their powers and discharge the duties of their office honestly, in good faith and in the best interests of Brompton and the Fund, or
(b) exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.
8. Continuous disclosure documents of the Fund disclose that Brompton, as the principal investment advisor of the Fund, is responsible to the Fund for the services provided by Flaherty & Crumrine, and that, to the extent applicable, there may be difficulty in enforcing any legal rights against Flaherty & Crumrine because it is resident outside of Canada and all or a substantial portion of its assets are situated outside of Canada.
AND UPON being satisfied that it would not be prejudicial to the public interest for the Commission to grant the exemptions requested on the basis of the terms and conditions proposed,
IT IS ORDERED pursuant to section 80 of the CFA that Flaherty & Crumrine and its Representatives are not subject to the requirements of paragraph 22(1)(b) of the CFA in respect of their investment advice and portfolio management services for the benefit of the Fund, provided that:
(a) the obligations and duties of Flaherty & Crumrine as an adviser are set out in a written agreement with Brompton;
(b) Brompton contractually agrees with the Fund, on whose behalf investment advice and portfolio management services are to be provided by Flaherty & Crumrine and its Representatives, to be responsible for any loss that arises out of the failure of Flaherty & Crumrine and its Representatives so acting as advisers
(i) to exercise the powers and discharge the duties of their office honestly, in good faith and in the best interests of Brompton and the Fund, or
(ii) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances;
(c) Brompton cannot be relieved by the Fund from its responsibility for loss under paragraph (b);
(d) Flaherty & Crumrine is registered as an investment adviser under the Investment Advisers Act 1940, as amended, with the U.S. Commodities Futures Trading Commission as a commodity trading adviser and is a member of the U.S. National Futures Association;
(e) Brompton is registered as an investment fund manager and portfolio manager under the OSA and is registered as a commodity trading manager under the CFA;
(f) continuous disclosure documents of the Fund disclose that Brompton, as the principal investment advisor of the Fund, is responsible to the Fund for the services provided by Flaherty & Crumrine, and that, to the extent applicable, there may be difficulty in enforcing any legal rights against Flaherty & Crumrine because it is resident outside of Canada and all or a substantial portion of its assets are situated outside of Canada; and
(g) this Order shall terminate on November 20, 2017.
November 16, 2012