Multilateral Instrument 11-102 Passport System -- National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Registered investment dealer firm with two distinct operating lines of business exempted from the requirement to designate a [single] individual to act as its chief compliance officer (CCO) -- Firm permitted to register two CCOs, one for each operating division.
Multilateral Instrument 11-102 Passport System, s. 4.7(2).
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 11.3(1), 11.3(2) and 15.1.
Companion Policy 31-103 CP Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 5.2.
March 28, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF QUEBEC AND ONTARIO AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF INDUSTRIAL ALLIANCE SECURITIES INC. ("IAS") AND MGI SECURITIES INC. ("MGI") (collectively, the "Filers")
The securities regulatory authority in Quebec and the regulator in Ontario (collectively, the Decision Makers) have received an application from the Filers, on behalf of the continuing corporation (the Amalgamated Corporation) resulting from the proposed amalgamation (the Amalgamation) of IAS and MGI, for a decision under the securities legislation of Quebec and Ontario (the Legislation) exempting the Amalgamated Corporation from the requirement contained in subsection 11.3(1) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) to designate "an [single] individual" to be its chief compliance officer ("CCO"), so that the Amalgamated Corporation may, instead, be permitted to designate two different individuals as CCO, with the result that there will be a separate CCO in respect of each of the two distinct lines of its securities business, each of whom must be registered under the Legislation in the category of CCO and satisfy the applicable conditions specified in subsection 11.3(2) of NI 31-103 (the "Exemption Sought")
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Autorité des marchés financiers (the Principal Decision Maker) is the principal regulator for this application;
(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador (together with Quebec and Ontario, the Jurisdictions); and
(c) the decision is the decision of the Principal Regulator and evidences the decision of the regulator in Ontario (the Ontario Decision Maker).
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by each Filer on behalf of themselves and the Amalgamated Corporation:
1. IAS is a corporation incorporated under the Canada Business Corporations Act (the CBCA) that has its head office in Quebec. IAS is registered in all Jurisdictions as an investment dealer. IAS is also registered as a derivatives dealer in Quebec. IAS is a dealer member of the Investment Industry Regulatory Organization of Canada (IIROC).
2. MGI is a corporation incorporated under the CBCA that has its head office in Ontario. MGI is registered under the securities legislation of each Jurisdiction as an investment dealer. MGI is also registered as a derivatives dealer in Quebec. MGI is a dealer member of IIROC.
3. The Filers are not in default of any requirement of securities legislation in any of the Jurisdictions.
4. For various business and other reasons, IAS and MGI propose to amalgamate, so that, upon the Amalgamation, the Amalgamated Corporation will carry on all activities currently conducted by IAS and MGI. Upon the Amalgamation, the Amalgamated Corporation will have the following two distinct operating lines of business (the "Divisions"):
(a) one Division (the Capital Markets Division), which is currently operated by both IAS and MGI, that will provide a broad spectrum of services to institutional clients, including: equity, fixed income and options sales and trading; investment banking; and research; and
(b) one Division (the "Retail Division"), which is currently operated by both IAS and MGI, that will provide diversified wealth-management services to retail clients, including: full-service retail accounts; and suitability-based investments advice.
4. The Capital Markets Division will oversee the trading desks of the Amalgamated Corporation. The Retail Division will oversee: managed-account programmes; the registration department; complaints and investigations; retail sales and communications; and the training of branch managers.
5. The Filers wish to designate one individual who is registered under the securities legislation of each Jurisdiction in the category of CCO as CCO of the Capital Markets Division and a different individual who is registered under the securities legislation of each Jurisdiction in the category of CCO as CCO of the Retail Division.
6. Each of the Capital Markets Division and the Retail Division has a well-established separate and distinct business supervisory and operational structure with specific compliance professionals.
7. Given the scope and nature of the business operations of each Division, the CCO of each Division requires a different set of skills, experience and focus to effectively manage the applicable compliance program.
8. The CCO of the Capital Markets Division will focus on the needs of institutional clients and will, for all of the Amalgamated Corporation's clients, oversee compliance systems that are reasonably designed to ensure integrity of the marketplace. The CCO of the Capital Markets Division's responsibilities will include: supervising the trade desks; supervising all trades in options; overseeing trade matching and settlement; conducting quarterly trade desk reviews.
9. The CCO of the Capital Markets Division will sit on the Amalgamated Corporation's "new names committee"; manage the Amalgamated Corporation's "restricted lists" and "grey lists" ; and be responsible for overseeing research at the Amalgamated Corporation.
10. The CCO of the Retail Division will focus on the needs of retail clients and will oversee compliance systems that are reasonably designed to ensure suitability of investment advice and products and services for retail clients. The CCO of the Retail Division will sit on the managed account committee and be responsible for overseeing management of the managed account programs of the Amalgamated Corporation. The CCO of the Retail Division will also be responsible for "tier 2 supervision" of investment advisors and branch audits of branches and sub-branches.
11. Given the increase in size, diversity and complexity of the Capital Markets Division and Retail Division resulting from the Amalgamation, it would be: (i) difficult for one individual to effectively carry out all of the responsibilities of CCO for both Divisions, (ii) difficult for one CCO to effectively identify and stay abreast of the different issues and risks applicable to both Divisions; and (iii) difficult for one CCO to appropriately elevate relevant issues and risks to the ultimate designated person and/or board of directors of the Amalgamated Corporation in a timely and effective manner. Each CCO will be directly supervised by the ultimate designated person of the Amalgamated Corporation. Each CCO will have access to the board of directors of the Amalgamated Corporation for the purpose of elevating relevant issues and will also submit an annual report to the board for the purposes of assessing compliance by the Amalgamated Corporation, and individuals acting on its behalf, with securities legislation.
12. Section 5.2 [Responsibilities of the chief compliance officer] of Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations, states 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.
13. In 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.
14. Designating only one of the current CCOs of IAS and MGI to become the CCO of the Amalgamated Corporation for purposes of satisfying subsection 11.3(1) of NI 31-103 would not be consistent with the policy objectives intended to be achieved by subsection 11.3(1) because the Divisions have complex operations and supervision that are distinct from one another in kind and conducted on a relatively large scale.
The Principal Decision Maker and the Ontario Decision Maker (collectively the Decision Makers) are each 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 provided that the Amalgamated Corporation designates:
1. only one individual to be CCO of the Retail Division; and
2. only one individual to be CCO of the Capital Markets Division.