Securities Law & Instruments

Headnote

Section 80 of the Commodity Futures Act (Ontario) -- Applicant exempted from the suitability requirements in paragraph 28(1)(b) of Regulation 90 made pursuant to the CFA that it make enquiries that will enable it to assess the suitability of trading by the client in view of the markets in which the client intends to trade, the scale of trading the client intends to undertake, and the general financial needs and objectives of the client in connection with offering online discount brokerage services to clients in Ontario for trades in commodity futures contracts and commodity futures options -- Exemption subject to a "sunset clause" clause.

Statutes Cited

Regulation 90 of the Commodity Futures Act, R.S.O. 1990, c. C.20. as am., ss. 28(1)(b), 80.

Instruments Cited

OSC Rule 31-505 Conditions of Registration, ss. 1.1(2), 1.5(1)(b).

IN THE MATTER OF

THE COMMODITY FUTURES ACT

R.S.O 1990, CHAPTER C.20, AS AMENDED

(the CFA)

AND

IN THE MATTER OF

OPTIONSXPRESS CANADA CORP.

ORDER

(Section 80 of the CFA)

UPON the application (the Application) of optionsXpress Canada Corp. (the Applicant) to the Ontario Securities Commission (the Commission) for an order (the Order), pursuant to section 80 of the CFA, that the Applicant be exempt from the requirements contained in paragraph 28(1)(b) of Regulation 90 made pursuant to the CFA (the Regulation) that the Applicant make enquiries that will enable the Applicant to assess the suitability of trading by the client in view of the markets in which the client intends to trade, the scale of trading the client intends to undertake, and the general financial needs and objectives of the client (the CFA Suitability Requirements);

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

AND UPON the Applicant having represented to the Commission that:

1. The Applicant is a corporation incorporated under the Companies Act (Nova Scotia).

2. The Applicant is registered as a dealer with an unrestricted practice (discount broker) in Québec, as an investment dealer in Ontario, Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island and Saskatchewan (together with Québec, the Jurisdictions) and is a member of the Investment Industry Regulatory Organization of Canada (IIROC).

3. The head office of the Applicant is located in Chicago, Illinois, United States of America.

4. The Applicant currently provides online discount brokerage services to retail clients in the Jurisdictions for trades in securities.

5. The Applicant is seeking registration as a futures commission merchant on a non-resident basis in Ontario in order to offer online discount brokerage services to retail clients in Ontario for trades in commodity futures contracts and commodity futures options (collectively, Futures Contracts).

6. IIROC requires that its members perform client suitability investigations for trades in securities and Futures Contracts (the IIROC Suitability Requirements) unless IIROC is satisfied that the IIROC member will comply with the policies and procedures outlined in IIROC Rule 3200 of the IIROC Rule Book (IIROC Rule 3200), which has been approved by the Commission. IIROC has confirmed that the Applicant has been approved under IIROC Rule 3200 for trades in securities and Futures Contracts.

7. Pursuant to subsection 1.1(2) of OSC Rule 31-505 -- Conditions of Registration (OSC Rule 31-505), an investment dealer can comply with the suitability requirements for trades in securities under paragraph 1.5(1)(b) of OSC Rule 31-505 (the OSA Suitability Requirements) by complying with a by-law, rule, regulation, policy, procedure, interpretation or practice of IIROC which deals with the same subject matter and has been approved by the Commission. There is presently no rule under the CFA that is similar to section 1.1(2) of OSC Rule 31-505 for trades in Futures Contracts for IIROC members.

8. By obtaining approval under IIROC Rule 3200, the Applicant is deemed to comply with the OSA Suitability Requirements for trades in securities. However, approval under IIROC Rule 3200 does not provide the Applicant with the equivalent deemed compliance of the CFA Suitability Requirements for trades in Futures Contracts. Accordingly, when the Applicant provides trade execution services to clients with respect to Futures Contracts, it would, in the absence of this Order, be required to comply with the CFA Suitability Requirements.

9. The Applicant and its registered salespersons, partners, officers and directors (Registered Representatives) do not and will not provide advice or recommendations regarding the purchase and sale of Futures Contracts. The Applicant has adopted policies and procedures to ensure that the Applicant and its Registered Representatives do not provide advice or recommendations regarding the purchase or sale of Futures Contracts.

10. Clients who request the Applicant or its Registered Representatives to provide advice or recommendations or advice as to suitability of a proposed purchase or sale of Futures Contracts will be referred to a dealer or adviser, appropriately registered under the CFA, that provides those services.

11. The Applicant does not and will not compensate its Registered Representatives on the basis of transactional values.

12. Each prospective client of the Applicant will be advised of the relief from the CFA Suitability Requirements provided in this Order and is required to acknowledge, in writing, that:

(a) no advice or recommendations will be provided by the Applicant or its Registered Representatives regarding the purchase or sale of Futures Contracts;

(b) the Applicant and its Registered Representatives will not consider the client's financial situation, investment knowledge, investment objectives and risk tolerance and will not determine the suitability of a proposed purchase or sale of Futures Contracts for the client when accepting orders from the client; and

(c) the client alone is responsible for his or her own investment decisions ((a), (b) and (c) together constitute the Prospective Client Acknowledgement),

prior to the Applicant opening an account for such prospective client.

13. The Applicant has adopted polices and procedures to ensure:

(a) that evidence of all Prospective Client Acknowledgements is established and retained pursuant to the record keeping requirements of the CFA, and

(b) all client accounts of the Applicant are appropriately designated as being a client account to which Prospective Client Acknowledgement has been received or being a client account to which a Prospective Client Acknowledgement has not been received.

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 Applicant is exempted from the CFA Suitability Requirements in respect of trades in Futures Contracts performed for clients, for a period of five years, provided that, at the relevant time such activities are engaged in:

(a) the Applicant has obtained approval from IIROC under IIROC Rule 3200 for trades in securities and Futures Contracts;

(b) the Applicant and its Registered Representatives do not provide any advice or recommendations regarding the purchase or sale of Futures Contracts;

(c) clients who request the Applicant or its Registered Representatives provide advice or recommendations as to suitability of a proposed purchase or sale of Futures Contracts are referred to a dealer or adviser, appropriately registered under the CFA, that provides those services;

(d) the Applicant is a distinct legal entity which provides order-execution only services;

(e) the Applicant does not compensate its Registered Representatives on the basis of transactional values;

(f) the Applicant has written policies and procedures in place to ensure that the Applicant and its Registered Representatives do not provide advice or recommendations regarding the purchase or sale of Futures Contracts and a program is in place for communicating those policies and procedures to all of the Applicant's Registered Representatives and ensuring that the policies and procedures are understood and implemented;

(g) each prospective client of the Applicant is advised of the relief from the CFA Suitability Requirements provided in this Order and obtains, in writing, a Prospective Client Acknowledgment prior to the Applicant opening an account for such prospective client;

(h) evidence of all Prospective Client Acknowledgements is established and retained pursuant to the record keeping requirements of the CFA;

(i) the order-entry systems and records of the Applicant must be capable of labelling all account documentation relating to clients, including monthly statements and confirmations, as "order-execution only accounts" or some variant thereof;

(j) each prospective client of the Applicant is provided applicable risk disclosure documents in a form acceptable to IIROC;

(k) the Applicant's policies and procedures, amongst other things, assesses the depth of investment knowledge and trading experience of a prospective client before an account is approved to be opened; and

(l) cumulative loss parameters for each client account have been established.

January 5, 2010

"David L. Knight"
Commissioner
Ontario Securities Commission
 
"Mary Condon"
Commissioner
Ontario Securities Commission