Passport application on behalf of investment dealer subsidiaries of four chartered banks where fact situation similar. 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. Two senior executives, in title or in fact 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.
February 19, 2010
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
SCOTIA CAPITAL INC., BMO NESBITT BURNS INC.,
CIBC WORLD MARKETS INC. AND
RBC DOMINION SECURITIES INC.
(each a Filer or collectively, the Filers)
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption for each 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 passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filers have 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 Ontario (the Non-principal Jurisdictions, or together with the Jurisdiction, the Filing Jurisdictions).
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 each Filer:
1. 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) and has its head office in Ontario.
2. The Filer is also registered as an investment dealer in each of the Non-principal Jurisdictions.
3. The Filer is not, to the best of its knowledge, in default of any requirements of securities legislation in any of the Filing Jurisdictions.
4. The Filer's business structure is organized as follows:
(a) There are two distinct lines of securities business based on the nature of the client (each a Division).
(b) One business line is referred to as the Institutional or Wholesale Banking Division (the Institutional Division) and provides a broad spectrum of services to institutional clients including equity, derivative and fixed income sales and trading; equity and fixed income research; investment banking; mergers and acquisitions and prime brokerage.
(c) The other business line is referred to as the Retail Division and provides discretionary managed and non-discretionary advisory and other wealth management related services to retail clients. In Scotia Capital Inc.'s case, the Retail Division also includes online brokerage.
(d) The Retail Division and the Institutional Division each have separate and distinct senior management structures. Although they are parts of the same corporate entity (i.e. the Filer), and regardless of the titles of their most senior managers (for purposes of this Order, the Division Heads), each Division is functionally a stand-alone operation within their parent bank's group of financial services companies.
(e) Currently, for purposes of IIROC requirements, each of the Retail Division and the Institutional Division has its own UDP except in the case of CIBC World Markets Inc. (CIBC WM) where there is a UDP for the Institutional Division and an Alternate Designated Person (ADP) for the Retail Division. The UDP or ADP is the Division Head. If exemptive relief is granted, CIBC WM will appoint a UDP for its Retail Division.
(f) At least one of the Division Heads has the title of Chief Executive Officer (CEO).
(g) Regardless whether a Division Head has the title of CEO (or "co-CEO"), the Division Heads have equivalent roles to that of a CEO in respect of the Division for which the Division Head is responsible. Each Division Head reports independently to the senior management team of the Filer's parent bank in respect of their Division and each has access to the Filer's Board of Directors.
(h) There is no line of reporting between the Division Heads and no other executive officer of the Filer who has the authority to overrule a decision of either or both of them.
(i) There is a separate compliance department with its own CCO for each of the Retail Division and the Institutional Division and each CCO has access to their Division Head and regularly provides reports to the Board of Directors.
This decision is also based on the following facts represented by the Filers.
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, each Filer was permitted by IIROC to have two individuals in the position of UDP. Each Filer, except CIBC WM, has had two UDPs for a number of years -- one for the Retail Division and one for the Institutional Division. CIBC WM has had the UDP and ADP structure, which is functionally equivalent to having two UDPs, for many years as well.
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 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, each Filer was permitted by IIROC to have two individuals fulfil the role of Chief Compliance Officer under IIROC rules that is equivalent to the role of CCO under NI 31-103. Consequently, each Filer has had two CCOs, one for the Retail Division and one for the Institutional Division, for a number of years.
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. Designating only one of the current 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.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted to each Filer provided that in respect of each Filer:
(i) each Division shall have its own UDP, who shall be its Division Head; and
(ii) each Division shall have its own CCO.