Securities Law & Instruments

Headnote

Filers exempted from section 13.12 [restriction on lending to clients] of National Instrument 31-103 Registration Requirements and Exemptions -- Each of the two filers is registered under the Act as an "exempt market dealer" -- One filer is a registered broker-dealer with the SEC and a member of FINRA, while the other filer is regulated in the UK by the FSA through permissions granted by the FSA -- Terms and conditions on the exemptions require that: (i) the head office or principal place of business of the filer be in, depending upon the filer, either the USA or UK; (ii) in the case of the USA filer, it be registered under the securities legislation of the USA, in a category of registration that permits it to carry on the activities in the USA that registration as an investment dealer would permit it to carry on in Ontario, (iii) in the case of the UK filer, it be regulated under the securities legislation of the UK through permissions granted by the FSA that permit it to carry on the activities in the UK that registration as an investment dealer would permit to carry on in Ontario, (iv) by virtue of the regulation of the USA filer under the securities legislation of the USA, and the regulation of the UK filer under the securities legislation of UK, the USA filer and the UK filer are subject to requirements in respect of lending money, extending credit or providing margin to clients that result in substantially similar regulatory protections to those provided for under the capital and margin requirements of IIROC, that would be applicable if the filer if it were registered under the Act as an investment dealer and were a member of IIROC.

Statute Cited

Securities Act, R.S.O. 1990, c. S.5, as am.

Instruments Cited

National Instrument 14-101 Definitions.

National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.12, 15.1.

Decision Cited

In the Matter of AXA Rosenberg Investment Management LLC, Bloomberg Tradebook (Bermuda) Ltd., Bloomberg Tradebook LLC, BNY Mellon Capital Markets LLC, Credit Suisse Securities (Europe) Limited, Credit Suisse Securities (USA) LLC, Goldman Sachs Execution & Clearing, L.P., Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated and Morgan Stanley Smith Barney LLC., (2009) 32 OSCB 8030

September 28, 2010

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

CREDIT SUISSE SECURITIES (USA) LLC (CSSU)

AND

CREDIT SUISSE SECURITIES (EUROPE) LIMITED

(CSSE) (collectively, the Filers)

DECISION

Background

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 from the requirement contained in section 13.12 [restriction on lending to clients] of National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103) that a registrant must not lend money, extend credit or provide margin to a client (the Exemption Sought).

Interpretation

Terms defined in National Instrument 14-101 Definitions and Multilateral Instrument 11-102 Passport System have the same meaning if used in this decision, unless otherwise defined or the context otherwise requires.

Representations

This decision is based on the following facts represented by the Filers:

CSSU

1. CSSU is a limited liability corporation incorporated under the laws of the State of Delaware. Its head office is located in New York, New York, United States of America (U.S.A.).

2. CSSU is a wholly-owned subsidiary of Credit Suisse (USA), Inc., a Delaware corporation, and an indirect wholly-owned subsidiary of Credit Suisse Group AG, a Swiss corporation.

3. CSSU is registered as a broker-dealer with the United States Securities and Exchange Commission (SEC), and is a member of the Financial Industry Regulatory Authority (FINRA). This registration permits CSSU to carry on in the U.S.A., being its home jurisdiction, substantially similar activities that registration as an investment dealer would authorize it to carry on in the Jurisdiction if CSSU were registered under the Legislation as an investment dealer.

4. CSSU is a member of major securities exchanges, including the NASDAQ OMX, the Chicago Stock Exchange, NYSE Euronext (NYSE), and the Philadelphia Stock Exchange.

5. CSSU is registered as a Futures Commission Merchant with the United States Commodity Futures Trading Commission, and is a member of the National Futures Association. Pursuant to these registrations, CSSU is authorized to handle customer orders and receive and hold customer margin deposits, and otherwise act as a futures broker, in the U.S.A.

6. CSSU is a Foreign Approved Participant of the Montreal Exchange and a Trading Participant of ICE Futures Canada, Inc. CSSU is also a member of the CME Group (including the Chicago Board of Trade), ICE Futures U.S., Inc., and other principal U.S.A. commodity exchanges, and trades through affiliated or unaffiliated member firms on all other exchanges, including exchanges in Canada, France, Italy, Japan, Singapore, Spain, Taiwan, Mexico, Korea and the United Kingdom.

7. CSSU provides a variety of capital raising, investment banking, market making, brokerage, and advisory services, including fixed income and equity sales and research, commodities trading, foreign exchange trading, emerging markets activities, securities lending, investment banking and derivatives dealing for governments, corporate and financial institutions. CSSU also conducts proprietary trading activities.

8. CSSU's Prime Services unit provides services through the following divisions: prime brokerage (i.e. facilitates multi-currency financing, clearance, settlement and custody of securities transactions), structured finance, securities lending, capital introductions, start-up consulting, and risk management.

9. CSSU is registered under the Legislation as a dealer, in the category of "exempt market dealer", and as an adviser, in the category of "portfolio manager", with terms and conditions restricting it to conducting its advising activities in accordance with Ontario Securities Commission Rule 35-502 Non-Resident Advisers for a one-year period ending September 28, 2010. In addition, CSSU acts as a dealer in reliance on section 8.18 [international dealer] of NI 31-103 in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Ontario, Prince Edward Island and Quebec; and CSSU acts as an adviser in reliance on section 8.26 [international adviser] of NI 31-103 in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Ontario, Prince Edward Island, Quebec and Saskatchewan.

CSSE

10. CSSE is a company incorporated under the laws of England and Wales. Its registered office is located in London, England, United Kingdom (the U.K.).

11. CSSE is a wholly-owned subsidiary of Credit Suisse Investment Holdings, a U.K. company, and an indirect wholly-owned subsidiary of Credit Suisse Group, a Swiss company.

12. CSSE is authorized and regulated in the U.K. by the Financial Services Authority (the FSA) and is a listed money market institution under the Financial Services and Markets Act, 2000.

13. CSSE has permissions from the FSA that include advising on investments, arranging deals in investments, arranging, safeguarding and administering assets, dealing in investments as principal and agent and managing investments. CSSE's principal activities are the arranging of finance for clients in the international capital markets, the provision of financial advisory services and acting as dealer in securities, derivatives and foreign exchange on a principal and agency basis. These permissions authorize CSSE to carry on in the UK, being its home jurisdiction, substantially similar activities that registration as an investment dealer would authorize it to carry on in the Jurisdiction if CSSE were registered under the Legislation as an investment dealer.

14. CSSE is registered under the Legislation as a dealer in the category of "exempt market dealer". In addition, CSSE acts as a dealer in reliance on section 8.18 [international dealer] of NI 31-103 in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Ontario, Prince Edward Island, Quebec and Saskatchewan.

Section 13.12 of NI 31-103

15. By virtue of its registration under the Legislation as an exempt market dealer, each of the Filers is subject to the prohibition on lending money, extending credit or providing margin to a client in section 13.12 of NI 31-103.

16. In certain comments received on NI 31-103, after it was published for comment, it was suggested that the prohibitions in section 13.12 should not apply to exempt market dealers that are members of foreign self-regulatory organizations, or subject to regulatory requirements in a foreign jurisdiction, where the dealer is subject to margin regimes similar to that imposed by the Investment Industry Regulatory Organization of Canada (IIROC). The Canadian Securities Administrators responded to these comments by suggesting that these circumstances could be considered on a case-by-case basis, through exemption applications, and that an exemption should be made available to registrants who have "adequate measures in place to address the risks involved and other related regulatory concerns".

17. Each of the Filers was granted a temporary one-year exemption from section 13.12 of NI 31-103 in a decision of the principal regulator dated September 28, 2009, In the Matter of AXA Rosenberg Investment Management LLC, Bloomberg Tradebook (Bermuda) Ltd., Bloomberg Tradebook LLC, BNY Mellon Capital Markets LLC, Credit Suisse Securities (Europe) Limited, Credit Suisse Securities (USA) LLC, Goldman Sachs Execution & Clearing, L.P., Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated and Morgan Stanley Smith Barney LLC. This temporary exemption addresses an immediate transition difficulty for each of the Filers which arose on September 28, 2009 with the coming into force of NI 31-103. As indicated in that decision, the temporary exemption was intended to facilitate the case-by case assessment of exemption applications referred to in paragraph 16.

18. CSSU is subject to regulations of the Board of Governors of the U.S.A. Federal Reserve System, the SEC, FINRA and the New York Stock Exchange (the NYSE) regarding the lending of money, extension of credit and provision of margin to clients (the U.S.A. Margin Regulations) that provide protections that are substantially similar to the protections provided by the requirements regarding the lending of money, extension of credit and provision of margin to clients to which dealer members of IIROC are subject. In particular, CSSU is subject to the margin requirements imposed by the Board, including Regulations T, U and X, under applicable SEC rules and under NYSE Rule 431. CSSU is in compliance in all material respects with all applicable U.S.A. Margin Regulations.

19. While the regulatory environment in which CSSE operates does not currently contain specific restrictions or regulations on how much credit may be extended by a lender to a borrower, nor how much credit a borrower may receive, such activity is covered by the prudential rules governing credit risk management and capital adequacy (the U.K. Rules). The UK Rules provide protections that are substantially similar to the protections provided by the requirements regarding the lending of money, extension of credit and provision of margin to clients to which dealer members of IIROC are subject. In particular, CSSE is subject to Basel II requirements, as adopted by the European Union Capital Requirements Directive and implemented in the FSA's Prudential Sourcebook for Banks, Building Societies and Investment Firms. CSSE is in compliance in all material respects with all applicable U.K Rules.

Decisions

The principal regulator is satisfied that each of these decisions meet 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 by CSSU is granted so long as:

(a) the head office or principal place of business of CSSU is in the U.S.A.;

(b) CSSU is registered under the securities legislation of the U.S.A. in a category of registration that permits it to carry on the activities in the U.S.A. that registration as an investment dealer would permit it to carry on in the Jurisdiction; and

(c) by virtue of the registration referred to in paragraph (b), including required membership in one or more self-regulatory organizations, CSSU is subject to requirements in respect of its lending money, extending credit or providing margin to clients (including clients that are located in Canada) that result in substantially similar regulatory protections to those provided for under the capital and margin requirements of IIROC that would be applicable to CSSU if it were registered under the Legislation as an investment dealer and were a member of IIROC.

The decision of the principal regulator under the Legislation is that the Exemption Sought by CSSE is granted so long as:

(d) the head office or principal place of business of CSSE is in the U.K.;

(e) CSSE is regulated under the securities legislation of the UK, through permissions granted by the FSA, that permits it to carry on the activities in the UK that registration as an investment dealer would permit it to carry on in the Jurisdiction; and

(f) by virtue of the permissions referred to in paragraph (e), CSSE is subject to requirements in respect of its lending money, extending credit or providing margin to clients (including clients that are located in Canada) that result in substantially similar regulatory protections to those provided for under the capital and margin requirement of IIROC that would be applicable to CSSE if it were registered under the Legislation as an investment dealer and were a member of IIROC.

"Erez Blumberger"
Deputy Director, Registrant Regulation
Ontario Securities Commission