Large asset manager with three separate operating divisions each headed by a de facto co-CEO exempted from requirements to register a single ultimate designated person (UDP) permitted to register three UDPs and three CCOs, one for each operating division.
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 11.2, 11.3.
June 30, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF 1832 ASSET MANAGEMENT L.P. (the Filer)
The principal regulator in the Jurisdiction has received an application from the Filer for the revocation and replacement of an existing decision (the Prior Director's Decision described below) under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) with a decision for an exemption from the requirement contained in section 11.3 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) to designate an individual to be the chief compliance officer (CCO) so that the Filer may increase the number of its designated and registered CCOs from two to three individuals (the CCO Decision) and a new decision for an exemption from the requirement contained in section 11.2 of NI 31-103 for the Filer to designate and have registered an individual to be the ultimate designated person (UDP) so that the Filer may increase the number of its designated and registered UDPs from one to three individuals (the UDP Decision) in respect of its three distinct lines of business (the CCO Decision and the UDP Decision are collectively, 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 Filer has 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 other provinces and territories of Canada [except Nunavut] (the Non-Principal Jurisdictions, and together with the Jurisdiction, the Jurisdictions).
By decision dated March 21, 2011 In the Matter of Scotia Asset Management L.P., the Director of the OSC as the principal regulator exempted the Filer from the requirement of NI 31-103 to have one CCO so that the Filer could designate and have registered two individuals as CCO (i.e., one for each of its then two distinct lines of business) (the Prior Director's Decision).
The Prior Director's Decision should be reconsidered at this time because the Filer, as of November 1, 2013, through the acquisition of assets from affiliates, carries on the Canadian asset management business through three distinct lines of securities business.
Terms defined in National Instrument 14-101 Definitions and NI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a limited partnership formed under the laws of the Province of Ontario and its head office is located in Toronto, Ontario. Its general partner is wholly owned by The Bank of Nova Scotia.
2. The Filer is registered as:
(a) a portfolio manager in all of the provinces and territories of Canada (except Nunavut) (each, a "Jurisdiction" and collectively, the "Jurisdictions");
(b) an exempt market dealer in all of the provinces of Canada (except Prince Edward Island and Saskatchewan);
(c) an investment fund manager in Ontario, Quebec, and Newfoundland and Labrador; and
(d) a commodity trading manager in Ontario.
3. The Filer is not, to the best of its knowledge, in default of any requirements of securities legislation in the Jurisdictions.
4. Effective as of September 30, 2013, the Filer changed its name to 1832 Asset Management L.P. from Scotia Asset Management L.P. ("SAM LP"). In addition, the Filer acquired the asset management businesses of its affiliates, CPA Securities Inc. ("CPA") and WaterStreet Family Capital Counsel Inc. ("WaterStreet").
5. Effective as of November 1, 2013, the Filer acquired the asset management business of its affiliate, GCIC Ltd. ("GCIC").
6. The Filer now carries on the Canadian asset management business through the following three distinct lines of securities business (each, a "Division") based on the business conducted by each Division and the nature of the Filer's clients:
(a) Fund Division -- The Fund Division continues to carry on the business of providing investment fund management and portfolio adviser services to open-ended mutual fund trusts and corporations, closed-end funds, institutional portfolios and certain private pooled funds, including the ScotiaFunds and Pinnacle Portfolios, and the Dynamic Funds and Marquis funds acquired from GCIC.
(b) Private Client Division -- The Private Client Division continues to carry on the Private Investment Counsel business under the Scotia Private Client Group brand and carries on the ultra-high net worth client business acquired from CPA and WaterStreet under the WaterStreet Family Offices brand.
(c) Institutional Division -- The Institutional Division is a newly created division that brings together the former SAM LP institutional business, operating under the Scotia Institutional Asset Management brand, and the former Dundee Wealth Investment Counsel business, acquired from GCIC, operating under the 1832 Asset Management brand. It provides a broad range of discretionary investment management and investment counseling services to institutions, foundations and endowments.
7. The Fund Division, the Private Client Division and the Institutional Division each have separate and distinct management structures and operating models. Although they are part of the same legal entity, each Division functions as a separate and distinct business operation within the Filer's operations.
8. As measured by the most recent IFIC statistics, 1832 Asset Management LP is among the largest asset managers in Canada.
9. Previously, the Filer had one UDP (the "Filer UDP"), responsible for the investment fund business and the private client/institutional businesses of the Filer. The Filer UDP held the title, Managing Director, Scotia Asset Management. Similarly, GCIC had one UDP (the "GCIC UDP") responsible for the investment funds and the private client/institutional businesses of GCIC. The GCIC UDP held the title, President and Chief Executive Officer.
10. Effective November 1, 2013, the Filer replaced the Filer UDP with the GCIC UDP.
11. Effective upon the Exemption Sought being granted, the Filer UDP will become the UDP of the Fund Division (the "Fund UDP") and the Filer will appoint a new UDP for each of its Institutional Division (the "Institutional UDP") and Private Client Division (the "Private Client UDP") (collectively, the "New UDPs"). Each of the New UDPs is the most senior manager of the respective Division. Each of the New UDPs is a senior officer of the Filer.
12. The UDPs of the Fund Division, Institutional Division and Private Client Division, (each, a Division Head), while having different titles, each have the role that is the equivalent of chief executive officer in respect of his Division for which he is responsible and is the most senior and final decision maker for his Division. This means that each Division Head fulfills the following roles for his Division:
(a) supervises, oversees, and otherwise is responsible for running the Division;
(b) provides clear leadership and promotes a culture of compliance within the Division;
(c) is accountable for the operations and financial performance of the Division;
(d) is the individual that the executive management within the Division reports to;
(e) is responsible for setting and implementing the business objectives, strategies and plans for the Division;
(f) is accountable for reporting to the Board of Directors of the Filer's general partner with respect to the Division; and
(g) is responsible for the organizational structure and succession planning for the Division.
13. There will be no line of reporting between the New UDPs, each UDP will have direct access to the Board of Directors of the Filer's general partner, and no other executive officer of the Filer will have the authority to overrule a decision of either of them.
14. By decision dated March 21, 2011 In the Matter of Scotia Asset Management L.P., the Director of the OSC as the principal regulator exempted the Filer from the CCO requirement of NI 31-103 so that the Filer could designate and have registered two individuals as CCO (i.e., one for each of its then two distinct lines of business) (the "Prior Director's Decision"). A copy of the Prior Director's Decision is attached as Schedule A. Accordingly, currently, there are two CCOs of the Filer: one responsible for the investment management business (the "CCO-IFM") and the other responsible for the combined private client/institutional business (the "CCO-PM") of the Filer.
15. Previously, there was one CCO responsible for the asset management business of GCIC (the "GCIC CCO"). Effective November 1, 2013, the GCIC CCO became the Filer CCO-IFM and the Filer CCO-IFM became the Filer CCO-PM.
16. Upon the Exemption Sought being granted, the Filer proposes that each Division have its own CCO. The Filer proposes replacing the current CCO-IFM with the GCIC CCO for the Fund Division (the "Fund CCO"), replacing the CCO-PM with the CCO-IFM for the newly created Institutional Division (the "Institutional CCO") and appointing the previous Filer CCO-PM as the CCO for the Private Client Division (the "Private Client CCO"). The proposed Private Client CCO will be appointed as an officer of the Filer.
17. The CCO of each Division will report directly to the respective Division UDP and will have direct access to the Board of Directors of the Filer's general partner.
REASONS FOR EXEMPTION SOUGHT
18. Under section 11.2 of NI 31-103, a registered firm is required to designate and have registered an individual to be the UDP (the "UDP Requirement") and the UDP must be: (i) the chief executive officer; (ii) an officer in charge of a division of the registered firm, if the activity that requires the firm to register occurs only in the division; or (iii) an individual acting in a capacity similar to that of an officer described in (i) or (ii).
19. Given the autonomy, size, diversity, and complexity of each of the Filer's Divisions, designating only one of the Division Heads for purposes of satisfying the UDP Requirement would not be consistent with the policy objectives the securities legislation is intended to achieve. Each of the Fund Division, the Institutional Division and the Private Client Division is an independent operation with separate and distinct senior management structures of which each Proposed UDP is effectively the CEO. Each UDP requires different subject matter and business expertise, with different experience and focus to effectively discharge their respective responsibilities. It would be difficult for any one of the Division Heads to: (i) act as the Filer's UDP; (ii) identify and stay abreast of the different issues and risks applicable to each Division; and (iii) escalate all such issues and risks to the general partner of the Filer in a timely and effective manner.
The CCO Requirement
20. Under section 11.3 of NI 31-103, a registered firm is required to designate and have registered an individual to be the CCO (the "CCO Requirement").
21. Companion Policy 31-103 ("CP") Registration Requirements, Exemptions and Ongoing Registrant Obligations, at Section 5.2 Responsibilities of the chief compliance officer, states, in part, 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. [The Canadian Securities Administrators] will consider applications, on a case-by-case basis, for different individuals to act as the CCO of a firm's operating divisions."
22. Designating only one CCO for purposes of satisfying the CCO Requirement would not be consistent with the policy objectives it is intended to achieve because the Fund Division, the Institutional Division and the Private Client Division are independent operations that are distinct from one another and conducted on a very large scale.
23. Each of the Proposed CCOs will oversee a compliance system that is reasonably designed to ensure that the Division for which they are the CCO, and each person acting on its behalf, comply with applicable securities legislation and will manage the risks associated with their respective Division in accordance with prudent business practices.
24. Upon the Exemption Sought being granted, each of the Proposed CCOs will have direct access to the Filer's UDP for the applicable Division, will report as required to the Board of Directors of the general partner of the Filer and will comply in all other respects with applicable securities requirements, including the requirements set out in NI 31-103.
25. Considering the Filer is part of a large financial institution, the Private Client CCO will report to the Institutional CCO for corporate organizational purposes. The matters on which the Private Client CCO will report to the Institutional CCO include, but are not limited to, the following: human resources matters (including staffing levels, hiring decisions, performance appraisals and vacation approvals) and departmental initiatives (including strategic planning, goal setting and efficiency evaluation). However, in the event that the Private Client CCO determines, in his/her sole discretion, that any of these matters overlap with, or directly or indirectly influence or affect, matters set out in section 5.2 of NI 31-103, as they relate to the Private Client Division, the Private Client CCO shall report directly to the UDP on such matters.
26. Allowing the Filer to designate and have registered the three Proposed UDPs and three Proposed CCOs is consistent with:
(a) the policy objectives of the UDP Requirement and of the CCO Requirement, respectively;
(b) the Prior Director's Decision; and
(c) other Director's decisions granted in similar circumstances, for example, the Director's decision dated March 18, 2011 In the Matter of RBC Global Asset Management Inc. where RBC Global Asset Management Inc. was permitted to designate and register two CCOs and two UDPs.
27. While the Filer is not aware of the Director having granted relief to allow a registered firm to have three CCOs, there is no public policy basis on which such relief should be denied when the same rationale for permitting two CCOs applies. This was recognized in a slightly different context by the Director's decision dated January 19, 2011 In the Matter of TD Waterhouse Canada Inc. where TD Waterhouse Canada Inc. was permitted to designate and register three UDPs.
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 so that the Filer may have a separate CCO and a separate UDP for each of its three Divisions, provided that:
(a) each Division shall have its own UDP;
(b) each UDP fulfills the responsibilities set out in section 5.1 of NI 31-103, or any successor provision thereto, in respect of the Division for which he or she is the designated UDP;
(c) each Division shall have its own CCO;
(d) each CCO reports to the UDP of the Division for which he or she is the designated CCO;
(e) each CCO fulfills the responsibilities set out in section 5.2 of NI 31-103, or any successor provision thereto, in respect of the Division for which he or she is the designated CCO;
(f) each CCO and UDP has access to the Board of Directors of the Filer's general partner ; and
(g) the Prior Director's Decision is revoked.