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Merrill Lynch, Pierce, Fenner & Smith Incorporated - OSC Rule 35-502
Headnote
Decision pursuant to section 10.1 of OntarioSecurities Commission Rule 35-502 (the Rule) exempting applicantfrom the requirement under section 3.7 of the Rule.
Statutes Cited
Securities Act, R.S.O. 1990, c. S.5, as am.
Rules Cited
Ontario Securities Commission Rule 35-502 (2000)23 O.S.C.B. 7989, ss. 3.7, 10.1.
IN THE MATTER OF
THE SECURITIES ACT
R.S.O. 1990, c.S. 5, as amended(the Act)
AND
IN THE MATTER OF
MERRILL LYNCH, PIERCE, FENNER& SMITH INCORPORATED
EXEMPTION ORDER
(Rule 35-502)
UPON the application of Merrill Lynch,Pierce, Fenner & Smith Incorporated (Merrill Lynch) datedMarch 14, 2003, pursuant to section 10.1 of Ontario SecuritiesCommission Rule 35-502 (the Rule) for an exemption from therequirement under subsection 3.7(1)(b)(ii) of the Rule thatMerrill Lynch be subject to the agreement announced by the Bankfor International Settlements on July 1, 1988 concerning internationalconvergence of capital measurement and capital standards (theBIS Agreement) in order for it to act as custodian for its Ontarioclients (the Application);
AND UPON considering the Application;
AND UPON Merrill Lynch having representedto the Director that:
1. Merrill Lynch is a corporation formed underthe laws of the State of Delaware and is a wholly owned subsidiaryof Merrill Lynch & Co., Inc. (ML&Co.). The head officeof Merrill Lynch is located in New York, New York.
2. Merrill Lynch is registered under the SecuritiesAct (Ontario) as an international dealer and an internationaladviser. Merrill Lynch is also registered as a broker-dealerand an investment adviser with the United States Securitiesand Exchange Commission.
3. Merrill Lynch provides investment, financing,and related services to individuals and institutions on aglobal basis. Services provided to clients include securitiesbrokerage, trading, and underwriting; investment banking,strategic services, including mergers and acquisitions, andother corporate finance advisory activities; origination,brokerage, dealer and related activities; securities clearanceand settlement services and investment advisory and relatedrecord keeping services.
4. ML&Co. had shareholders' equity asat December 28, 2001 of US$20 billion. Merrill Lynch, as ofDecember 28, 2001 had regulatory net capital of US$2.521 billionas determined under Rule 15c3-1 under the United States SecuritiesExchange Act of 1934.
5. Merrill Lynch has two affiliated financialinstitutions: Merrill Lynch Bank USA (shareholders' equity:US$3.5 billion as at December 31, 2001) and Merrill LynchBank & Trust (shareholders' equity: US$1 billion as atDecember 31, 2001). Merrill Lynch Bank USA and Merrill LynchBank & Trust are collectively referred to as the MerrillLynch Banks.
6. Merrill Lynch acts as custodian for itsclients in the United States and throughout the world. Itcurrently has custody of over US$1 trillion of client assets.Merrill Lynch proposes to act a custodian for its clientsin Ontario.
7. Section 3.7 of the Rule provides that securitiesand money of an Ontario client of an international advisermust be held by (a) the Ontario client or (b) a custodianor sub-custodian that meets the requirements for acting asa custodian or sub-custodian of a mutual fund in NationalInstrument 81-102 (NI 81-102) and that is subject to the BISAgreement.
8. Merrill Lynch meets the requirements foracting as a custodian or sub-custodian of a mutual fund inNI 81-102.
9. The BIS Agreement is a framework for measuringcapital adequacy that was designed to strengthen the soundnessand stability of the international banking system. The BISAgreement provides minimum levels of capital that are intendedto be applied to banks on a consolidated basis, includingsubsidiaries undertaking banking and financial business.
10. Merrill Lynch is an affiliate of the MerrillLynch Banks, but is not a subsidiary of either of the MerrillLynch Banks. Accordingly, because of Merrill Lynch's corporatestructure and because Merrill Lynch is not a bank, the BISAgreement does not apply to it.
11. There are no apparent concerns as to thecapital adequacy of Merrill Lynch given its capital resourcesnoted above.
IT IS ORDERED, pursuant to section 10.1of the Rule, that Merrill Lynch is exempt from the requirementof subsection 3.7(1)(b)(ii) of the Rule that it be subject tothe BIS Agreement in order for it to act as custodian for itsOntario clients, provided that there is no material adversechange in the ownership or capitalization of Merrill Lynch.
March 28, 2003.
"David M. Gilkes"