Passport relief from NI 31-103 s.11.2 requirement for the Chief Executive Officer (CEO) or one of certain other individuals to be designated Ultimate Designated Person (UDP), and s. 11.3 requirement for a single individual to be designated Chief Compliance Officer (CCO) for a registered firm. Co-CEOs, each responsible for a separate operating division of the firm to be designated as UDP. Two individuals to be designated as CCO, one for each operating division in view of kind and scale of operations.
August 24, 2010
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUEBEC AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
NATIONAL BANK FINANCIAL INC.
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption for the Filer from the requirement contained in section 11.2 of National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103) to designate an individual to be the ultimate designated person (UDP) and the requirement contained in section 11.3 of NI 31-103 to designate an individual to be the chief compliance officer (CCO) and instead be permitted to designate and register two individuals as UDP and two individuals as CCO in respect of two distinct lines of securities business of the Filer (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
a) the Autorité des marchés financiers is the principal regulator for this application;
b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in all of the jurisdictions in Canada outside of Quebec and Ontario (the Non-principal Jurisdictions, or together with the Jurisdictions, the Filing Jurisdictions); and
c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer has its head office in Quebec.
2. The Filer is registered under the Legislation in the category of investment dealer, is a member of the Investment Industry Regulatory Organization of Canada (IIROC).
3. The Filer is also registered as an investment dealer in each of the Non-Principal Jurisdictions.
4. The Filer is not, to the best of its knowledge, in default of any requirements of securities legislation in any of the Filing Jurisdictions.
5. The Filer's business structure is organized as follows:
a) The Filer has two distinct lines of securities business (each a Division) based on the nature of the client served -- an Institutional Division and a Retail Division.
b) The Institutional Division of the Filer forms part of the Financial Markets group of National Bank Financial Group. The Institutional Division consists of Fixed Income, Institutional Equities, Corporate and Investment Banking and certain Derivatives and Proprietary Trading businesses.
c) The rest of the Financial Markets group includes other Derivatives and Proprietary Trading activities, Specialty Finance and US merchant Banking. These activities are conducted through other affiliates of the Filer who are not members of IIROC (and do not need to be because of the nature of their specific activities).
d) The Financial Markets group includes two support units, being Corporate Development and Governance and Business Strategy Management.
e) The Retail Division of the Filer forms part of the Wealth Management group of National Bank Financial Group. The Retail Division conducts its activities principally in Quebec. The Retail Division provides discretionary managed and non-discretionary advisory and other wealth management related services to retail clients.
f) The Wealth Management group also includes the retail investment dealer activities conducted by National Bank Financial Ltd., whose principal jurisdiction is Ontario and is registered to do business in each of the other provinces and territories of Canada, except Quebec and New Brunswick. The Wealth Management group also includes NBCN Inc., which undertakes carrying broker activities for a number of third party IIROC member firms and National Bank Direct Brokerage Inc, which offers discount brokerage services to clients who may carry out their transactions via Internet, automated telephone system or deal with representatives at the customer contact centre. In addition, the Wealth Management group includes other activities conducted by affiliates of the Filer who are not members of IIROC (and do not need to be because of the nature of their specific activities). The Wealth Management group is also supported by Corporate Development and Governance.
g) The Institutional Division and the Retail Division each have separate and distinct senior management structures. Although they are part of the same corporate entity (i.e. the Filer), each Division is functionally a stand-alone operation within their parent bank's group of financial services companies and each Division Heads has the title of co-President and co-Chief Executive Officer (co-CEO) of the Filer.
h) As co-CEO's, both Division Heads are a Chief Executive Officer (CEO) in respect of the Division for which the Division Head is responsible. Each Division Head reports independently to the CEO of National Bank Financial Group and each has access to the Filer's Board of Directors.
i) Each of the Division Heads has final authority to effect decisions in respect of their Division (subject to the Board of Directors of the Filer).
j) There is a separate compliance department with its own CCO for each of the Institutional Division and the Retail Division and each CCO has access to their Division Head and regularly provides reports to the Board of Directors of the Filer.
This decision is also based on the following facts represented by the Filer:
1. NI 31-103 was implemented on September 28, 2009 (the Implementation Date).
2. Under paragraph 11.2(a) of NI 31-103, a registered firm is required to designate an individual to be the UDP (the UDP Requirement) and the UDP must be the CEO or equivalent of the registered firm.
3. Under section 16.8 of NI 31-103, there is a 3-month transition period from the implementation Date for a registered firm to comply with the UDP Requirement.
4. Prior to the implementation of NI 31-103, there was no requirement under the securities legislation of any Filing Jurisdiction for an investment dealer to designate an individual, and have him or her registered, as the UDP.
5. Prior to the implementation of NI 31-103, under IIROC Rules, there was a requirement for a member to have a UDP which had to be one of the member's senior management. IIROC Rule 38 required a member to appoint a senior management person to the UDP position but did not require the person to be the CEO.
6. Prior to the implementation of NI 31-103, the Filer was permitted by IIROC to have its Executive Vice President, Corporate Development and Governance in the position of UDP. This individual had been the UDP for a number of years.
7. Designating only one of the Division Heads for purposes of satisfying the UDP Requirement would not be consistent with the policy objectives it is intended to achieve because the Division Heads are effectively CEOs of their respective Divisions.
1. Under section 11.3 of NI 31-103, a registered firm is required to designate an individual to be the CCO (the CCO Requirement).
2. Under subsection 16.9(1) of NI 31-103, there is a 3-month transition period from the Implementation Date for a registered firm to comply with the CCO Requirement.
3. Prior to the implementation of NI 31-103, there was a requirement under the securities legislation of many of the Filing Jurisdictions to designate a registered partner or officer as the "compliance officer" who was responsible for discharging the obligations of the registered dealer under the applicable securities legislation.
4. Prior to the implementation of NI 31-103, under IIROC Rules, there was a requirement for a member to appoint a senior officer to the position of Chief Compliance Officer (as defined under IIROC Rules).
5. Prior to the Implementation Date, the Filer had only one individual appointed as Chief Compliance Officer for both the Institutional Division and the Retail Division. However, the Filer has recently reorganized its compliance structure and decided to have two CCOs, one for the Institutional Division and one for the Retail Division.
6. In section 5.2 of Companion Policy 31-103CP Registration Requirements and Exemptions, the Canadian Securities Administrators indicate that:
"Firms must designate one CCO. However, in large firms, the scale and kind of activities carried out by different operating divisions may warrant the designation of more than one CCO. We will consider applications, on a case-by-case basis, for different individuals to act as the CCO of a firm's operating divisions."
7. Under paragraph 7(d) of IIROC Rule 38 Compliance and Supervision, IIROC indicates that:
"Where a Dealer Member is organized into two or more separate business units or divisions, a Dealer Member may, with approval of the Corporation, designate a Chief Compliance Officer for each separate business unit or division."
8. Designating only one of the CCOs for purposes of satisfying the CCO Requirement would not be consistent with the policy objectives it is intended to achieve because the Divisions are independent operations that are distinct from one another in kind and conducted on a very large scale.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted to the Filer provided that:
i) each Division shall have its own UDP, who shall be its Division Head; and
ii) each Division shall have its own CCO.