Frank Russell Company - MRRS Decision
Headnote
MRRS decision in Ontario and Manitoba for relief from the adviser registration requirements of the commodity futures legislation of both provinces in respect of advising certain mutual funds, non-redeemable investment funds and similar investment vehicles established outside of Canada in respect of trades in commodity futures contracts and commodity futures options traded on commodity futures exchanges primarily outside of Canada and cleared through clearing corporations primarily outside of Canada, subject to certain terms and conditions.
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.
December 22, 2005
IN THE MATTER OF
THE COMMODITY FUTURES LEGISLATION
OF ONTARIO AND MANITOBA (the Jurisdictions)
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
FRANK RUSSELL COMPANY (the Filer)
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer for a decision under the commodity futures legislation of the Jurisdictions (the Legislation) for an exemption from the following requirements in the Legislation:
(a) that the requirement to be registered as an adviser (the Registration Requirement) not apply to the Filer and its directors, officers and employees who provide portfolio management services to the clients of its subsidiary, Frank Russell Canada Limited (FRCL) resident in the Jurisdictions (the Clients) regarding trades in commodity futures contracts and related products traded on commodity futures exchanges outside of Canada and cleared through clearing corporations outside of Canada, subject to certain terms and conditions; and
(b) except in Manitoba, that the requirement to be registered as an adviser (the Fund Adviser Registration Requirement) in respect of advising certain mutual funds created outside of Ontario (the Funds) not apply to the Filer and its directors, officers and employees regarding trades in commodity futures contracts and commodity futures options traded on commodity futures exchanges primarily outside of Canada and cleared through clearing corporations primarily outside of Canada, subject to certain terms and conditions.
Under the Mutual Reliance Review System (MRRS) for Exemptive Relief Applications:
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation organized under the laws of the State of Washington, United States, with its principal place of business located in Tacoma, Washington. The Filer is registered with the U.S. Securities and Exchange Commission (the SEC) as an investment adviser, and with the U.S. Commodity Futures Trading Commission (the CFTC) as a commodity trading adviser. The Filer is currently registered with the Ontario Securities Commission (the OSC) as a non-resident commodity trading manager but will not be seeking renewal of such registration at the end of this calendar year.
2. The Filer is the direct parent corporation of FRCL.
3. FRCL is a corporation incorporated under the laws of Canada with its head office located in Toronto, Ontario.
4. FRCL is registered under the Securities Act (Ontario) (the OSA) as an adviser in the categories of investment counsel and portfolio manager and as a dealer in the categories of mutual fund dealer and limited market dealer, and is registered as a commodity trading manager under the Commodity Futures Act (Ontario) (the OntCFA). FRCL is also registered as a portfolio manager under the Securities Act (Manitoba) and as an adviser and commodity trading manager under the Commodity Futures Act (Manitoba).
5. FRCL acts as an adviser to the Clients and may advise Clients to invest in futures and options on futures traded on exchanges outside of Canada and in other derivative instruments traded over-the-counter (the Proposed Advisory Services).
6. FRCL wishes to retain the Filer as a sub-adviser to provide advice to FRCL in connection with accounts managed by FRCL for Clients in respect of the Proposed Advisory Services.
7. The discretionary investment accounts for which the Filer will be retained will be accounts for high net worth individuals or institutional clients.
8. In performing the Proposed Advisory Services, the Filer and FRCL would comply with the requirements of Section 7.3 of OSC Rule 35-502 and accordingly:
(a) the obligations and duties of the Filer will be set out in a written agreement with FRCL;
(b) FRCL will contractually agree with its Clients on whose behalf investment advice is or portfolio management services are to be provided by the Filer, to be responsible for any loss that arises out of the failure of the Filer:
(i) to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of FRCL and each Client of FRCL for whose benefit the advice is or portfolio management services are to be provided, or
(ii) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances; and
(c) FRCL cannot be relieved by its Clients from its responsibility for loss under paragraph (b) above.
9. FRCL will be responsible for providing all Client reports and statements required under the Legislation. All direct contact with Clients will be from FRCL and its directors, officers or employees although representatives of the Filer may participate in such communications from time to time.
10. The Filer, in providing the Proposed Advisory Services to FRCL and indirectly to Clients of FRCL, may be considered to be acting as an adviser under the Legislation and, in the absence of the requested relief, would be subject to the Registration Requirement.
11. The Filer cannot rely on any adviser registration exemptions in the Legislation to provide the Proposed Advisory Services to the Clients.
12. The Filer also acts as an investment adviser in respect of other investment funds: Russell Alternative Strategies Fund II plc and Frank Russell Alternative Investment Funds plc -- The Alternative Strategies Fund (collectively, the Funds) and other similar non-Canadian investment funds managed by the Filer in the future.
13. The Funds may from time to time invest in commodity futures contracts and commodity futures options traded on organized exchanges primarily outside of Canada and cleared through clearing corporations primarily outside of Canada.
14. The Filer, as investment manager of the Fund, will make all decisions with respect to the overall management of the Funds.
15. By advising the Funds directly on investing in commodity futures contracts and commodity futures options, the Filer will be providing advice to the Funds with respect to commodity futures contracts and commodity futures options.
16. The Funds are all established outside of Canada. Securities of the Funds are or will be:
(a) primarily offered outside of Canada;
(b) only distributed in Ontario through one or more registrants under the OSA; and
(c) distributed in Ontario in reliance upon an exemption from the prospectus requirements of the OSA.
17. Prospective investors in the Funds who are Ontario residents will receive disclosure that includes:
(a) a statement that there may be difficulty in enforcing any legal rights against the Filer (or its directors, officers and employees) and the Funds (or their directors, officers and employees), because such entities are resident outside of Canada and all or substantially all of their assets are situated outside of Canada; and
(b) a statement that the Filer effective January 1, 2006 is not, or will not be, registered with the OSC under the OntCFA and, accordingly, the protections available to clients of a registered adviser under the OntCFA will not be available to purchasers of securities of the Funds.
18. None of the Funds has any intention of becoming a reporting issuer in Ontario or in any other Canadian jurisdiction.
19. The Filer, in advising the Funds, may be considered to be acting as an adviser under the Legislation in Ontario, and in the absence of the requested relief, would be subject to the Fund Adviser Registration Requirement.
20. The Filer cannot rely on any adviser registration exemptions in the Legislation in Ontario to provide advice to the Funds.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met;
The Decision of the Decision Makers under the Legislation is that, for a period of three years, the Requested Relief is granted as follows:
(a) the Registration Requirement shall not apply to the Filer with respect to its activities in providing the Proposed Advisory Services for the benefit of FRCL and FRCL's Clients; and
(b) except in Manitoba, the Fund Adviser Registration Requirement shall not apply to the Filer, and its directors, officers and employees, with respect to its activities in providing advisory activities in connection with the Funds, provided that at the time such activities are engaged in:
(i) the Filer continues to be registered as an investment adviser with the SEC and registered as a commodity trading adviser with the CFTC or otherwise exempt from such registrations;
(ii) the Funds invest in commodity futures contracts and commodity futures options traded on organized exchanges primarily outside of Canada and cleared through clearing corporations primarily outside of Canada;
(iii) securities of the Funds will be offered primarily outside of Canada and will only be distributed in Ontario through a registrant under the OSA and in reliance upon an exemption from the prospectus requirements of the OSA; and
(iv) prospective investors in the Funds who are Ontario or Manitoba residents will receive disclosure that includes:
(i) a statement that there may be difficulty in enforcing any legal rights against the Filer (or its directors, officers and employees) and or the Funds (or its directors, officers and employees), because such entities are resident outside of Canada and all or substantially all of their assets are situated outside of Canada; and
(ii) a statement that the Filer, effective January 1, 2006 is not, or will not be, registered with the OSC under the OntCFA and, accordingly, the protections available to clients of a registered adviser under the OntCFA will not be available to purchasers of securities of the Funds.