Legg Mason Canada Inc. - s. 80 of the CFA

Order

Headnote

Application to the Commission for an order, pursuant to section 80 of the Commodity Futures Act (the CFA), that certain affiliated companies of the applicant and other future sub-advisers and any of their directors, officers or employees, acting as sub-advisers to the Principal Adviser in connection with portfolio managed clients resident in Ontario shall not be subject to the adviser registration requirement in section 22(1)(b) of the CFA. The principal investment adviser of the portfolio managed clients is an Ontario registrant.

Statutes Cited

Commodity Futures Act, R.S.O. 1990. c. C.20., as am., ss. 22(1)(b), 80.

Ontario Securities Commission Rule 35-502 Non-Resident Advisers.

IN THE MATTER OF

THE COMMODITY FUTURES ACT,

R.S.O. 1990, c. C.20, AS AMENDED (the CFA)

AND

IN THE MATTER OF

LEGG MASON CANADA INC.

 

ORDER

(Section 80 of the CFA)

UPON the application (the Application) of Legg Mason Canada Inc. (the Filer) to the Ontario Securities Commission (the Commission) for an order, under section 80 of the CFA, that the adviser registration requirements of subsection 22(1)(b) (the Registration Requirement) shall not apply to certain affiliated companies of the Filer identified in Schedule "A" (the Foreign Adviser Affiliates) and other future sub-advisers and their respective directors, officers and employees (collectively, the Foreign Sub-Advisers), in connection with such Foreign Sub-Advisers acting as advisers for the Filer with respect to trades in commodity futures contracts and related products traded on commodity futures exchanges for the benefit of clients of the Filer resident in Ontario (the Clients);

AND UPON considering the Application and the recommendations of staff of the Commission;

AND UPON the Filer having represented to the Commission that:

1. The Filer is a corporation incorporated under the laws of Canada with its head office located in Toronto, Ontario. It is registered as an adviser in the categories of investment counsel and portfolio manager and as a dealer in the category of mutual fund dealer and as a commodity trading manager in Ontario.

2. The Filer acts as an adviser to the Clients and, from time to time, advises Clients to invest in futures and options on futures traded on Canadian or other organized exchanges outside of Canada and in other derivative instruments traded over-the-counter.

3. The Foreign Adviser Affiliates are registered with the Securities and Exchange Commission (the SEC) in the United States as investment advisers and are either registered with or exempted from registration with the Commodity Futures Trading Commission (the CFTC) in the United States. The Filer may wish to retain the Foreign Adviser Affiliates to advise the Filer in respect of trades in commodity futures contracts and related products traded on commodity futures exchanges for the Clients (the Commodity Advising Services). The Foreign Adviser Affiliates are not resident in Canada and are not registered and have no current intention of becoming registered in any capacity under the CFA.

4. The Filer wishes to retain, as sub-advisers, the Foreign Adviser Affiliates, along with any other entity that the Filer considers appropriate, subject to the requirements of this Order, to provide Commodity Advising Services for the Clients. Those other entities will not be resident in Canada and may not be registered and may have no current intention of becoming registered in any capacity under the Act.

5. The Clients will be high net worth individuals or institutional clients, including the mutual funds or the pooled funds managed by the Filer.

6. In providing the Commodity Advising Services to the Filer and indirectly to Clients of the Filer, the Foreign Sub-Advisers may be considered to be acting as "advisers" under the CFA and, in the absence of the requested relief, would be subject to the Registration Requirement.

7. There is presently no rule under the CFA that provides an exemption from the Registration Requirement for a person or company acting as a sub-adviser to another registered adviser in respect of commodity futures options and contracts that is similar to the exemption from the adviser registration requirement in section 25(1)(c) of the Ontario Securities Act available in section 7.3 of Ontario Securities Commission Rule 35-502 Non-Resident Advisers (the Ontario Rule).

8. The exemption granted under section 7.3 of the Ontario Rule recognizes that, provided certain safeguards are put into place, regulatory oversight need not extend to a non-resident sub-adviser when a domestic, Ontario-registered adviser assumes responsibility for the securities advice provided by the sub-advisers to clients of the Ontario-registered adviser. The Filer seeks to extend the securities legislative exemption to the commodity futures legislation on exactly the same grounds, for the same reasons and on the same conditions.

9. The Filer will establish the same arrangements with the Foreign Sub-Advisers when they are providing Commodity Advising Services to the Clients that they are mandated to establish by section 7.3 of the Ontario Rule.

10. The Filer will be responsible for providing all Client reports and statements required under the CFA and meeting all other conditions of registration under the CFA. All direct contact with Clients concerning the Commodity Advising Services will be with the Filer and its directors, officers or employees although representatives of the Foreign Sub-Advisers may participate in such communications from time to time.

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 the Foreign Sub-Advisers are not subject to subsection 22(1)(b) of the CFA with respect to the proposed Commodity Advising Services, provided that:

(a) the obligations and duties of the Foreign Sub-Advisers are set out in a written agreement with the Filer;

(b) the Filer contractually agrees with the Clients on whose behalf the Commodity Advising Services are to be provided by the Foreign Sub-Adviser to be responsible for any loss that arises out of the failure of the Foreign 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 Filer and each Client of the Filer 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;

(c) the Filer cannot be relieved by any Client from its responsibility for loss under paragraph (b) above;

(d) the Foreign Sub-Adviser is not resident in Canada and is licensed or otherwise legally qualified to provide the Commodity Advising Services by the applicable regulator in the jurisdiction in which it resides, and

(e) in respect of any Foreign Sub-Adviser whose name does not specifically appear in this Order and who proposes to rely on the exemption granted under this Order, the Filer shall have executed and filed with the Commission a verification certificate referencing this Order, identifying such Foreign Sub-Adviser and confirming the truth and accuracy of the Application with respect to that particular Foreign Sub-Adviser.

(f) this Order shall terminate on the day that is three years after the date of the Order.

March 28, 2006

"Susan Wolburgh Jenah"

"Suresh Thakrar"

 

Schedule "A"

1. Batterymarch Financial Management, Inc.

2. Brandywine Asset Management, LLC

3. Western Asset Management Company

4. Legg Mason Capital Management, Inc.

5. Private Capital Management, LP

6. Royce & Associates LLC

7. Smith Barney Fund Management, LLC.