Securities Law & Instruments

Headnote

Application to extend restricted dealer registration, to extend previous order granting the Filers certain relief from National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) under section 15.1 of NI 31-103 and to grant additional relief for three months -- the previous order provided relief to permit filers who are exempt market dealers or restricted dealers and registered with the U.S. Securities Exchange Commission (SEC) and members of the Financial Regulatory Authority (FINRA) to provide margin, to file the US FOCUS Report in lieu of Form 31-103F1, and to file the annual audited financial statements that it files with the SEC and FINRA -- the Filers' registrations and previous order subject to sunset clauses that expire on the earlier of the date on which amendments to NI 31-103 come into force limiting brokerage activities in which exempt market dealers or restricted dealers engage or July 31, 2015 -- interim relief granted.

Applicable Legislative Provisions

Multilateral Instrument 11-102 Passport System, s. 4.7.

National Instrument 14-101 Definitions.

National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations, ss. 7.1(5), 8.0.1, 12.1, 12.10, 12.12(1)(b), 12.13(b), 13.12, 15.1.

National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, s. 3.15(b).

Securities Act, R.S.O. 1990, c. S.5, as am., s. 26, 27

July 10, 2015

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 J.P. MORGAN CLEARING CORP. (JPMCC) AND J.P. MORGAN SECURITIES LLC (JPMSLLC AND, TOGETHER WITH JPMCC, the FILERS)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filers for a decision under the securities legislation of the Jurisdiction (the Legislation) for the Requested Relief (as defined below) to be granted until the date that is the earlier of (a) the date on which Filers have completed transition of their equities and fixed income trading activities with Canadian permitted clients to J.P. Morgan Securities Canada Inc. (JPMSCI), and (b) October 11, 2015:

(a) pursuant to section 26(1) of the Securities Act (Ontario), to amend the terms and conditions of the Filers' existing registrations in the category of restricted dealer (the T&Cs);

(b) pursuant to section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations (NI 31-103):

(i) with respect to the Filers, to extend the previous decision of the principal regulator made under section 15.1 of NI 31-103 with respect to the Filers and certain other exempt market dealer (EMD) and restricted dealer firms entitled In the Matter of Goldman Sachs & Co. et al. dated December 19, 2014 ((2015), 38 OSCB 15) (the Previous Decision);

(ii) to seek a decision of the principal regulator granting interim relief from subsection 7.1(5) of NI 31-103 to permit the Filers to trade in a security if the security is listed, quoted or traded on a marketplace and if the trade in the security does not require reliance on a further exemption from the prospectus requirement; and

(iii) to seek a decision of the principal regulator granting interim relief from section 8.0.1 of NI 31-103 to permit JPMSLLC to rely on the international dealer exemption under section 8.18 of NI 31-103 and the international adviser exemption under section 8.26 of NI 31-103 in the Canadian Jurisdictions (as defined below), except for Nunavut, and to permit JPMCC to rely on the international dealer exemption under section 8.18 of NI 31-103 in the Canadian Jurisdictions (together with (a) above, the Requested Relief).

The Filers' existing registrations in the category of restricted dealer are subject to the T&Cs, including a sunset clause.

The Previous Decision varied previous orders (the Previous Orders) of the principal regulator made under section 15.1 of NI 31-103 with respect to the Filers by extending the expiry date of the sunset clause in the Previous Orders.

The Previous Orders provided that the Filers are exempt, subject to certain terms and conditions, from the following requirements contained in NI 31-103:

(a) the requirement contained in section 13.12 of NI 31-103 that a registrant must not lend money, extend credit or provide margin to a client (the Margin Relief);

(b) the requirement contained in section 12.1 of NI 31-103 to maintain and calculate excess working capital using Form 31-103F1 Calculation of Excess Working Capital and instead use United States Securities and Exchange Commission Form X-17a-5 (FOCUS Report);

(c) the requirement contained in paragraphs 12.12(1)(b) and 12.13(b) of NI 31-103 to deliver Form 31-103F1 and instead to deliver the FOCUS Report (together with (b) above, the FOCUS Relief);

(d) the requirement contained in subsection 3.15(b) Acceptable Accounting Principles for Foreign Registrants of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards that financial statements be prepared in accordance with U.S. GAAP, except that any investment in subsidiaries, jointly controlled entities and associates must be accounted for as specified for separate financial statements in International Accounting Standard 27 Consolidated and Separate Financial Statements; and

(e) the requirement contained in section 12.10 Annual financial statements of NI 31-103 that the registrant prepare a statement of comprehensive income, a statement of changes in equity, a statement of cash flows and a statement of financial position for the financial year immediately preceding the most recently completed financial year and that at least one director of the registrant sign the registrant's statement of financial position so long as the registrant delivers to the principal regulator the annual audited financial statements that it files with the Securities Exchange Commission (SEC) and the Financial Regulatory Authority (FINRA) (together with (d) above, the Financial Statement Relief).

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 section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is being relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon Territory, North West Territories, Nunavut (and together with the Jurisdiction, the Canadian Jurisdictions).

Interpretation

Defined terms contained in National Instrument 14-101 Definitions and the Previous Orders have the same meaning in this decision unless they are defined in this decision.

Representations

1. JPMSLLC is a company incorporated under the laws of the State of Delaware. Its head office is located at 383 Madison Avenue, New York, NY 10179, United States of America (U.S.A.).

2. JPMSLLC is a wholly owned subsidiary of J.P. Morgan Securities Holdings LLC, a Delaware corporation, and an indirect wholly owned subsidiary of JP Morgan Chase & Co. (JPMChase), a Delaware corporation.

3. JPMSLLC 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 sales, emerging markets activities, securities lending, investment banking and derivatives dealing for governments, corporate and financial institutions.

4. JPMSLLC is a member of major securities exchanges, including the NASDAQ and NYSE Euronext (NYSE). JPMCC is also a member of major securities exchanges, including the Chicago Stock Exchange and the NYSE.

5. JPMCC is a company incorporated under the laws of the State of Delaware. Its head office is located at One Metrotech Center North, Brooklyn, NY 11201, U.S.A.

6. JPMCC is a wholly owned subsidiary of JPMSLLC and an indirect wholly owned subsidiary of JPMChase.

7. JPMCC is a Foreign Approved Participant of the Montreal Exchange and a Registered Futures Commission Merchant of ICE Futures Canada, Inc. JPMCC is also a member of the CME Group (including the Chicago Board of Trade), ICE Futures U.S., Inc., and other principal U.S. commodity exchanges, and may facilitate 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.

8. JPMCC was established for the express purpose of holding and financing customer accounts and clearing and settling transactions. JPMCC does not make proprietary investments or engage in market making activities.

9. JPMCC may engage in activities which may be considered lending money, extending credit or providing margin to clients. All such activities are conducted in compliance with the rules of its home jurisdiction.

10. Each of JPMSLLC and JPMCC is registered as a restricted dealer, with terms and conditions including that it may only deal with permitted clients as defined in section 1.1. of NI 31-103, in the following Canadian provinces and territories, as applicable:

JPMCC

New Brunswick, Newfoundland & Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec, Saskatchewan

 

JPMSLLC

Alberta, New Brunswick, Newfoundland & Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Québec, Saskatchewan, Yukon

11. Each of JPMSLLC and JPMCC is registered as a broker-dealer with the SEC, and is a member of FINRA. This registration permits each of JPMSLLC and JPMCC to carry on in the U.S.A., being their home jurisdiction, substantially similar activities that registration as an investment dealer would authorize them to carry on in Ontario if each of JPMSLLC and JPMCC were registered under the Legislation as an investment dealer.

12. JPMSLLC is relying on the international dealer exemption under section 8.18 of NI 31-103 and the international adviser exemption under section 8.26 of NI 31-103 in the Canadian Jurisdictions, except for Nunavut. JPMCC is relying on the international dealer exemption under section 8.18 of NI 31-103 in the Canadian Jurisdictions, except for Nunavut, Northwest Territories, and Yukon Territory.

13. The Filers are currently in compliance with all registration and other requirements of applicable securities laws of the United States. The Filers will continue to comply with all registration and other requirements of applicable securities laws of the United States. The Filers are not in default of securities laws of any province or territory of Canada.

14. This decision is based on the same representations made by the Filers in the Previous Orders and the Previous Decision, which remain true and complete and on the additional representations made by the Filers in this decision.

15. The Filers were granted registration as restricted dealers and Margin Relief, FOCUS Relief and Financial Statement Relief, as noted in Schedule A, subject to certain terms and conditions including a sunset clause while the Canadian Securities Administrators considered the regulatory issues arising from FINRA member firms that are conducting brokerage activities seeking registration in the EMD category.

16. The Filers were granted registration in the category of restricted dealer until the date that is the earlier of:

(a) The date on which amendments to NI 31-103 come into force limiting the brokerage activities in which EMDs or restricted dealers may engage; and

(b) July 31, 2015.

17. Following the Previous Decision, the sunset clause of the Previous Orders shall expire on the date that is the earlier of:

(a) The date on which amendments to NI 31-103 come into force limiting the brokerage activities in which EMDs or restricted dealers may engage; and

(b) July 31, 2015.

18. Amendments to NI 31-103 (the Rule Amendments) came into effect on January 11, 2015. A six month transition period was provided for the amendments adding new restrictions on trading activities by EMDs and the new prohibitions will come into effect on July 11, 2015 (the Effective Date).

19. Under the Rule Amendments, the Filers will be prohibited from trading in a security if the security is listed, quoted or traded on a marketplace and if the trade in the security does not require reliance on a further exemption from the prospectus requirement.

20. As a result, the Filers have been diligently working to transition their respective equities and fixed income trading activities with Canadian clients to their Canadian affiliate JPMSCI, which is registered as an investment dealer in the Canadian Jurisdictions and is a Dealer Member of the Investment Industry Regulatory Organization of Canada (IIROC). In addition, JPMSCI's existing brokerage services are being expanded to allow for onboarding and trading with Canadian clients of the Filers.

21. Specifically, beginning in October 2014, the Filers carried out various tasks to transition trading activity from the Filers to the JPMSCI, including establishing a governance model, engagement of a program management team to oversee the project, analyzing and evaluating trade flows for impacted activity, identifying new documentation requirements, and performing end-to-end testing.

22. In addition, JPMSCI has been working with and continues to work with IIROC regarding the changes to JPMSCI's business to address the amendments to NI 31-103.

23. The Filers and JPMSCI have been diligently working to complete the transition by the Effective Date. However, due to the scope of the implementation of systemic changes that is required and certain unforeseen complexities encountered during the transition and build out process, the Filers will not be able to complete the transition of the trading activity from the Filers to JPMSCI by the Effective Date.

24. The Filers and JPMSCI anticipate completing outstanding tasks related to the transition of the trading activity from the Filers to JPMSCI by October 11, 2015. Such tasks include finalizing policies and procedures, executing agreements, conducting end-to-end systems and applications testing, and onboarding clients. The Filers have requested the Requested Relief in order to complete these outstanding tasks.

25. The Filers submit that granting the Requested Relief is not prejudicial to the public interest or otherwise objectionable because:

a. The Filers and JPMSCI will continue to diligently work to complete the transition by October 11, 2015.

b. Without the Requested Relief, the Filers will not be able to continue to provide these services to Canadian clients after July 11, 2015 and Canadian clients will be negatively impacted.

c. Granting relief will allow JPMSCI to complete its new client documentation and policies and procedures and to onboard Canadian clients of the Filers in a seamless manner and without any interruptions in service.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

It is the decision of the principal regulator that the Requested Relief is granted.

This decision shall expire the earlier of:

(a) the date on which Filers have completed transition of their equities and fixed income trading activities with Canadian clients to JPMSCI, and

(b) October 11, 2015;

This decision may be amended by the OSC from time to time upon prior written notice to the Filer.

"Debra Foubert"
Director, Compliance & Registrant Regulation
Ontario Securities Commission

 

Schedule A

Filer

Date of Previous Order

Type of Relief

Jurisdictions

 

J.P. Morgan Securities LLC

November, 11, 2011 and November 7, 2012, and December 20, 2013

Margin Relief, FOCUS Relief, Financial Statements Relief

Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon Territory, North West Territories, Nunavut

 

J.P. Morgan Clearing Corp.

April 9, 2013

Margin Relief

Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon Territory, North West Territories, Nunavut