Mackenzie Financial Corporation et al. – ss. 78(1), 80 of the CFA
Headnote
Subsection 78(1) and section 80 of the Commodity Futures Act (Ontario) -- Variation of previous order to add new sub-advisers -- Relief from the adviser registration requirements of subsection 22(1)(b) of the CFA granted to sub-advisers 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 -- Relief mirrors exemption available in section 7.3 of OSC Rule 35-502 Non-Resident Advisers made under the Securities Act (Ontario).
March 6, 2018
IN THE MATTER OF THE COMMODITY FUTURES ACT, R.S.O. 1990, CHAPTER C.20, AS AMENDED (the CFA) AND IN THE MATTER OF MACKENZIE FINANCIAL CORPORATION, SETANTA ASSET MANAGEMENT LIMITED, THE PUTNAM ADVISORY COMPANY, LLC, AND PUTNAM INVESTMENTS LIMITED
ORDER (Subsection 78(1) and Section 80 of the CFA)
UPON the application (the Application) of The Putnam Advisory Company, LLC (PAC), Putnam Investments Limited (PIL), and Setanta Asset Management Limited (each a Sub-Adviser and collectively, the Sub-Advisers), and Mackenzie Financial Corporation (the Principal Adviser) to the Ontario Securities Commission (the Commission) for an order (the Order):
(a) pursuant to subsection 78(1) of the CFA, revoking the exemption order granted by the Commission to the Principal Adviser and certain sub-advisers dated March 8, 2013 which was varied by an order granted by the Commission dated May 3, 2013 (the Previous Order); and
(b) pursuant to section 80 of the CFA, that each Sub-Adviser and any individual engaging in, or holding themselves out as engaging in, the business of advising others when acting on behalf of a Sub-Adviser in respect of the Sub-Advisory Services (as defined below) (the Representatives) be exempt, for a specified period of time, from the adviser registration requirements of paragraph 22(1)(b) of the CFA when acting as a sub-adviser to the Principal Adviser for the benefit of the Clients (as defined below) regarding commodity futures contracts and commodity futures options (collectively, the Contracts) traded on commodity futures exchanges and cleared through clearing corporations;
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON the Principal Adviser and the Sub-Advisers having represented to the Commission that:
1. The Principal Adviser is a corporation governed by the laws of Ontario with its head office located in Toronto, Ontario.
2. The Principal Adviser is registered as: (a) an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer under the Securities Act (Ontario) (the OSA) and under the securities legislation of each of the other provinces and territories of Canada; (b) an investment fund manager under the securities legislation of each of Ontario, Québec and Newfoundland & Labrador; and (c) an adviser in the category of commodity trading manager under the CFA.
3. Each Sub-Adviser is organized under the laws of a jurisdiction other than Canada or the provinces or territories thereof. In particular, the Sub-Advisers are:
a. PAC, a limited liability company organized under the laws of the State of Delaware, with its principal place of business located in Boston, State of Massachusetts in the United States. PAC is registered with the Securities and Exchange Commission of the United States of America (the SEC) as an investment adviser under the Investment Advisers Act of 1940. Although PAC advises on derivative products, including Contracts, to clients in the United States, it is currently exempt from registration under the United States Commodity Exchange Act as a commodity trading adviser with the United States Commodity Futures Trading Commission;
b. PIL, a company organized under the laws of England and Wales with its principal place located in London, United Kingdom. PIL is registered with the Financial Conduct Authority in the United Kingdom (FCA) as an adviser. PIL's permitted activities pursuant to its registration with the FCA include advising on Contracts;
c. Setanta Asset Management Limited, a corporation organized under the laws of Ireland. Setanta is regulated by the Central Bank of Ireland to provide the services of portfolio management and the reception and transmission of order in relation to one or more financial instruments. Setanta's permitted activities pursuant to such authority include advising on Contracts.
4. The Sub-Advisers and the Principal Adviser are affiliates, as defined in the OSA.
5. Each Sub-Adviser is registered in a category of registration, or operates under an exemption from registration, under the commodity futures or other applicable legislation of the jurisdiction in which its head office is located that permits it to carry on the activities in that principal jurisdiction that registration as an adviser under the CFA would permit it to carry on in Ontario. As such, each Sub-Adviser is authorized and permitted to carry on the Sub-Advisory Services (as defined below) in its principal jurisdiction.
6. Each Sub-Adviser engages in the business of an adviser in respect of Contracts in its principal jurisdiction.
7. None of the Sub-Advisers is a resident of any province or territory of Canada.
8. None of the Sub-Advisers is or will be registered in any capacity under the CFA nor is required to be so registered under the laws of its principal jurisdiction.
9. None of the Principal Adviser or the Sub-Advisers is in default of securities legislation, commodity futures legislation or derivatives legislation in any jurisdiction in Canada. Each Sub-Adviser is in compliance in all material respects with the securities laws, commodity futures laws and derivatives laws in its principal jurisdiction.
10. The Principal Adviser provides discretionary and/or non-discretionary portfolio management services to (i) investment funds, the securities of which are qualified by prospectus for distribution to the public in Ontario and certain other provinces and territories of Canada (the Investment Funds); (ii) pooled funds, the securities of which are sold on a private placement basis in Ontario and certain other provinces and territories of Canada pursuant to prospectus exemptions contained in National Instrument 45-106 Prospectus Exemptions (the Pooled Funds); (iii) managed accounts of clients who have entered into investment management agreements with the Principal Adviser (the Managed Accounts); and (iv) other Investment Funds, Pooled Funds and Managed Accounts that may be established in the future in respect of which the Principal Adviser engages a Sub-Adviser to provide portfolio advisory services (the Future Clients) (where each of the Investment Funds, Pooled Funds, Managed Accounts and Future Clients are referred to individually as a Client and collectively as the Clients).
11. The portfolio management services provided by the Principal Adviser to its Clients include, or will include, acting as an adviser with respect to both securities and Contracts where such investments are part of the investment program of such Clients.
12. In connection with the Principal Adviser acting as an adviser to Clients in respect of the purchase or sale of Contracts, the Principal Adviser has retained, pursuant to a written agreement made between the Principal Adviser and each Sub-Adviser, each Sub-Adviser to act as a sub-adviser to the Principal Adviser by exercising discretionary authority on behalf of the Principal Adviser, in respect of all or a portion of the assets of the investment portfolio of the respective Client, which may include discretionary authority to buy or sell Contracts for the Client (the Sub-Advisory Services), provided that:
a. in each case, the Contracts must be cleared through an "acceptable clearing corporation" (as defined in National Instrument 81-102 Investment Funds (NI 81-102)) or a clearing corporation that clears and settles transactions made on a futures exchange listed in Appendix A of NI 81-102; and
b. such investments are consistent with the investment objectives and strategies of the applicable Client.
13. The written agreement between the Principal Adviser and each Sub-Adviser sets out the obligations and duties of each party in connection with the Sub-Advisory Services and permits the Principal Adviser to exercise the degree of supervision and control it is required to exercise over the applicable Sub-Adviser in respect of the Sub-Advisory Services.
14. 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 representative or as a partner or an officer of a registered adviser and is acting on behalf of such 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.
15. By providing the Sub-Advisory Services, each Sub-Adviser and its Representatives will be engaging in, or holding himself, herself or itself out as engaging in, the business of advising others in respect of Contracts and, in the absence of being granted the requested relief, would be required to register as an adviser, or a representative of an adviser, as the case may be, under the CFA.
16. There is presently no rule or regulation under the CFA that provides an exemption from the adviser registration requirement in paragraph 22(1)(b) of the CFA that is similar to the exemption from the adviser registration requirement in subsection 25(3) of the OSA which is provided under section 8.26.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).
17. The relationship among the Principal Adviser, each Sub-Adviser and any Client is, or will be, consistent with the requirements of section 8.26.1 of NI 31-103. As would be required under section 8.26.1 of NI 31-103:
a. the obligations and duties of each Sub-Adviser are set out in a written agreement with the Principal Adviser; and
b. the Principal Adviser has entered into, or will enter into, a written contract with each Client, agreeing to be responsible for any loss that arises out of the failure of the applicable 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 each Client; 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).
18. Each Sub-Adviser will only provide the Sub-Advisory Services as long as the Principal Adviser is, and remains, registered under the CFA as an adviser in the category of commodity trading manager.
19. The Principal Adviser will deliver to the Clients all required reports and statements under applicable securities, commodity futures and derivatives legislation.
20. The prospectus or other offering document (in either case, the Offering Document) of each Client that is an Investment Fund or a Pooled Fund and for which the Principal Adviser engages a Sub-Adviser to provide the Sub-Advisory Services will include the following disclosure (the Required Disclosure):
a. a statement that the Principal Adviser is responsible for any loss that arises out of the failure of the applicable Sub-Adviser to meet the Assumed Obligations; and
b. a statement that there may be difficulty in enforcing any legal rights against the applicable Sub-Adviser (or any of its Representatives) because such Sub-Adviser is resident outside of Canada and all or substantially all of its assets are situated outside of Canada.
21. Prior to purchasing any securities of a Client that is an Investment Fund or a Pooled Fund directly from the Principal Adviser, each investor in any of these Investment Funds or Pooled Funds who is an Ontario resident receives, or will receive, the Required Disclosure in writing (which may be in the form of an Offering Document);
22. Each Client that is a Managed Account for which the Principal Adviser engages a Sub-Adviser to provide the Sub-Advisory Services receives, or will receive, the Required Disclosure in writing prior to the purchasing of any Contracts for such Client.
23. The Sub-Advisers obtained substantially similar relief in the Previous Order, pursuant to which the Sub-Advisers have been providing Sub-Advisory Services to the Principal Adviser in respect of the Clients.
24. The pending expiry of the Previous Order, pursuant to the terms of the Previous Order, has triggered the need for the requested Order.
AND UPON the Commission being of the opinion that to do so would not be prejudicial to the public interest;
IT IS ORDERED pursuant to subsection 78(1) of the CFA, that the Previous Order is revoked;
IT IS FURTHER ORDERED pursuant to section 80 of the CFA that each Sub-Adviser and its Representatives is exempt from the adviser registration requirements of paragraph 22(1)(b) of the CFA when acting as a sub-adviser to the Principal Adviser in respect of the Sub-Advisory Services provided that at the 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's head office or principal place of business is in a jurisdiction outside of Canada;
(c) the Sub-Adviser is registered in a category of registration, or operates under an exemption from registration, under the commodity futures or other applicable legislation of its principal jurisdiction that permits it to carry on the activities in that jurisdiction that registration as an adviser under the CFA would permit it to carry on in Ontario;
(d) the Sub-Adviser engages in the business of an adviser in respect of Contracts in the jurisdiction outside of Canada in which its head office or principal place of business is located;
(e) the obligations and duties of the Sub-Adviser are set out in a written agreement with the Principal Adviser;
(f) the Principal Adviser has entered into a written agreement with each Client, agreeing to be responsible for any loss that arises out of any failure of the Sub-Adviser to meet the Assumed Obligations;
(g) the Offering Document of each Client that is an Investment Fund or a Pooled Fund and for which the Principal Adviser engages the Sub-Adviser to provide the Sub-Advisory Services includes the Required Disclosure;
(h) prior to purchasing any securities of a Client that is an Investment Fund or a Pooled Fund directly from the Principal Adviser, each investor in any of these Investment Funds or Pooled Funds who is an Ontario resident receives the Required Disclosure in writing (which may be in the form of an Offering Document); and
(i) each Client that is a Managed Account for which the Principal Adviser engages a Sub-Adviser to provide the Sub-Advisory Services receives the Required Disclosure in writing prior to the purchasing of any Contracts for such Client.
IT IS FURTHER ORDERED that this Order will terminate on the earliest of:
(a) the expiry of any transition period as may be provided by law, after the effective date of the repeal of the CFA;
(b) six months, or such other transition period as may be provided by law, after the coming into force of any amendment to Ontario commodity futures law (as defined in the CFA) or Ontario securities law (as defined in the OSA) that affects the ability of any Sub-Adviser to act as a sub-adviser to the Principal Adviser in respect of the Sub-Advisory Services; and
(c) five years after the date of this Order.
Dated at Toronto, Ontario, this 6 of March, 2018.