Heyden & Steindl GmbH - s. 80 of the CFA
Headnote
Section 80 of the Commodity Futures Act (Ontario) -- Relief from the adviser registration requirements of paragraph 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 traded on commodity futures exchanges outside of Canada and cleared through clearing corporations outside of Canada, 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
HEYDEN & STEINDL GmbH
ORDER
(Section 80 of the CFA)
UPON the application (the Application) of Heyden & Steindl GmbH (the Sub-Adviser) to the Ontario Securities Commission (the Commission) for an order, pursuant to section 80 of the CFA, that the Sub-Adviser (including its directors, officers and employees) be exempt, for a period of five years, from the requirements of paragraph 22(1)(b) of the CFA in respect of advice provided with respect to the Niagara Discovery Fund (the Specified Fund), and other mutual funds (the FMGL Managed Funds, as defined below), the principal investment adviser of which is Friedberg Mercantile Group Ltd. (the Principal Advisor) in respect of trades in commodity futures contracts and commodity futures options traded on commodity futures exchanges outside of Canada and cleared through clearing corporations outside of Canada;
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON the Sub-Adviser having represented to the Commission that:
1. The Sub-Adviser was established in 1997 as a private partnership and is a limited liability company (GmbH) incorporated under German law as of February 5, 2002. At the time of incorporation, the Sub-Adviser's name was Heyden & Schreiber GmbH. On February 20, 2004, the name of the Sub-Adviser was changed to Heyden & Steindl GmbH.
2. The Sub-Adviser is duly registered with the Bundesbank and the German Financial Supervisory Authority (the BaFin) to advise in respect of, inter alia, commodity futures contracts and commodity futures options.
3. The Principal Adviser is a corporation continued under the Canada Business Corporations Act and is resident in Ontario. The Principal Adviser is registered:
(a) under the Securities Act (Ontario) (the OSA) as a dealer in the categories of broker and investment dealer; and
(b) under the CFA as a dealer in the category of commodity futures merchant and as an advisor in the category of commodity trading manager.
4. The Specified Fund is a mutual fund (as defined in the OSA), the units of which are distributed on a prospectus exempt basis pursuant to an offering memorandum. The Specified Fund is constituted as a limited partnership organized under the laws of Ontario.
5. The Principal Adviser acts as 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).
6. The FMGL Managed Funds may, as part of their investment program, invest in commodity futures contracts and commodity futures options traded on commodity futures exchanges outside of Canada and cleared through clearing corporations outside of Canada.
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 been, or will be, offered only 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 agreement (the Sub-Advisory Agreement), and may in the future enter into additional Sub-Advisory Agreements, with the Principal Adviser whereby the Principal Adviser provides investment advice and portfolio management services to the FMGL Managed Funds in respect of purchases and sales of commodity futures contracts and commodity futures options and the Sub-Adviser acts as sub-adviser to the Principal Adviser (the Proposed Advisory Services).
9. 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 partner or an officer of a registered adviser and is acting on behalf of a registered adviser. Under the CFA, "adviser" means a person or company engaging in or holding himself, herself or itself out as engaging in the business of advising others as to trading in "contracts", and "contracts" means commodity futures contracts and commodity futures options.
10. By providing the Proposed Advisory Services, the Sub-Adviser will be acting as an adviser with respect to commodity futures contracts and commodity futures options and, in the absence of being granted the requested relief, would be required to register as an adviser under the CFA.
11. 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 in respect of commodity futures contracts and commodity futures options that is similar to the exemption from the adviser registration requirement in section 25(1)(c) of the OSA for acting as an adviser (as defined in the OSA) in respect of securities that is provided under section 7.3 of OSC Rule 35-502 -- Non Resident Advisers (Rule 35-502).
12. As would be required under section 7.3 of Rule 35-502:
(a) the obligations and duties of the Sub-Adviser in connection with the Proposed Advisory Services will be set out in a written agreement with the Principal Adviser;
(b) the Principal Adviser will contractually agree with the FMGL Managed Funds to be responsible for any loss that arises out of the failure of the Sub-Adviser:
(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 the FMGL Managed Funds; 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); and
(c) the Principal Adviser cannot be relieved by the FMGL Managed Funds from its responsibility for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations.
13. The Sub-Adviser is not resident of any province or territory of Canada.
14. The Sub-Adviser is appropriately registered to provide advice to the FMGL Managed Funds pursuant to the applicable legislation of its principal jurisdiction. In particular, the Sub-Adviser is appropriately registered with the BaFin to advise in respect of commodity futures contracts and commodity futures options.
15. Prior to purchasing any securities in one or more of the FMGL Managed Funds, all investors in the FMGL Managed Funds who are Ontario residents will receive written disclosure that includes:
(a) a statement that the Principal Adviser is responsible for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations;
(b) a statement that there may be difficulty in enforcing any legal rights against the Sub-Adviser (or the individual representatives of the Sub-Adviser) advising the relevant FMGL Managed Fund because it is resident outside of Canada and all or substantially all of its assets are situated outside of Canada;
(c) a statement that the Sub-Adviser advising the relevant FMGL Managed Fund is not, or will not be, registered with the Commission under the CFA and, accordingly, the protections available to clients of a registered adviser under the CFA will not be available to purchasers of units of the relevant FMGL Managed Fund.
AND UPON being satisfied that it would not be prejudicial to the public interest for the Commission to grant the exemption requested on the basis of the terms and conditions proposed;
IT IS ORDERED pursuant to section 80 of the CFA that the Sub-Adviser (including its directors, officers or employees) is exempted from the requirements of paragraph 22(1)(b) of the CFA in respect of the Proposed Advisory Services provided to the Principal Adviser, for a period of five years, 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) the Sub-Adviser is appropriately registered to provide advice to the FMGL Managed Funds pursuant to the applicable legislation of its principal jurisdiction;
(c) the obligations and duties of the Sub-Adviser are set out in a written 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 the failure of the Sub-Adviser to meet the Assumed Obligations;
(e) the Principal Adviser cannot be relieved by the respective FMGL Managed Fund from its responsibility for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations; and
(f) prior to purchasing any securities in one or more of the FMGL Managed Funds, all investors in the FMGL Managed Funds who are Ontario residents received written disclosure that includes:
(i) a statement that the Principal Adviser is responsible for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations;
(ii) a statement that there may be difficulty in enforcing any legal rights against the Sub-Adviser (or the individual representatives of the Sub-Adviser) advising the relevant FMGL Managed Fund because it is resident outside of Canada and all or substantially all of its assets are situated outside of Canada; and
(iii) a statement that the Sub-Adviser advising the relevant FMGL Managed Fund is not, or will not be, registered with the Commission under the CFA and, accordingly, the protections available to clients of a registered adviser under the CFA will not be available to purchasers of units of the relevant FMGL Managed Fund.
August 31, 2007