Securities Law & Instruments


Headnote

Under paragraph 4.1(1)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations a registered firm must not permit an individual to act as a dealing, advising or associate advising representative of the registered firm if the individual acts as an officer, partner or director of another registered firm that is not an affiliate of the first-mentioned firm. The Filers have sought relief from that prohibition. The firm employing the individual as a registered representative is an owner of the second registered firm and entitled to appoint a director to its board. The individual will have sufficient time to adequately serve both firms. The potential for conflicts of interest is significantly reduced compared to other similar arrangements because the second firm operates as an alternative trading system under National Instrument 21-101 Marketplace Operation. The firm also has policies in place to handle potential conflicts of interest. Relief from the prohibition has been granted.

Applicable Legislative Provisions

Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 4.1, 13.4, 15.1.

August 16, 2016

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
BMO NESBITT BURNS INC.
(NBI)

AND

CANDEAL.CA INC. (CanDeal) AND
CORY CHAD BAST

DECISION

Background

The principal regulator in the Jurisdiction has received an application from NBI and CanDeal (together, the Filers) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for relief from the requirement in paragraph 4.1(1)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), pursuant to section 15.1 of NI 31-103, to permit Cory Chad Bast (the Representative) to be registered as a dealing representative of NBI while also acting as a director of CanDeal (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 sec-tion 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to he relied upon in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Quebec, Saskatchewan, and Yukon (with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

1.             NBI is a wholly-owned indirect subsidiary of Bank of Montreal.

2.             NBI is a corporation amalgamated under the laws of Canada and is registered under the Legislation as an investment dealer and is a dealer member of the Investment Industry Regulatory Organiza-tion of Canada (IIROC). NBI is a full-service investment dealer.

3.             The principal regulator of NBI is the Ontario Securities Commission (OSC) because NBI’s head office is located in Toronto, Ontario.

4.             CanDeal is an Ontario corporation and is registered under the Legislation as an investment dealer and is a member of IIROC. CanDeal is regulated as an alternative trading system under National Instrument 21-101 Marketplace Opera-tion (NI 21-101). The principal regulator of CanDeal is the OSC.

5.             CanDeal operates an institutional multi-dealer to customer electronic trading platform and market data communications network (the CanDeal System or System). The CanDeal System is a vehicle through which institutional clients (Clients) access information, request bids and offers, and effect transactions with liquidity providing dealers (Dealers). CanDeal also offers market data, post-trade straight-through processing, trade reporting, and other support to its Dealers and Clients.

6.             CanDeal Dealers and Clients currently effect transactions using the CanDeal System in Canadian fixed-income securities and interest rate swaps.

7.             The CanDeal System employs request-for-quote (RFQ) electronic trading functionality for the execution of trades. The System displays indicative quotes on fixed-income products that are made available on the platform. Transactions on the System are initiated by RFQ disseminated by a Client to between one and four Dealers. A Dealer to whom an RFQ is disseminated knows the number but not the identity of the Dealers to whom the RFQ is disseminated.

8.             The CanDeal System permits a Dealer to view data relating to its own executed trades and certain aggregate data relating to all trades executed on the System.

9.             The aggregate data available to a Dealer permits the Dealer to know its share of total volume executed on the platform and its rank in terms of total volume executed by Dealers, but does not permit the Dealer to know the rank of or the volume executed by any other Dealer on the platform. A Dealer may also access data as to the total volume inquired of by Clients in the aggregate under RFQs and executed by Clients in the aggregate, in each case by each category of product made available on the System.

10.          The data that a Dealer may view relating to its own executed trades includes the total volume inquired of the Dealer under RFQs received by it, the total and percentage of inquired volume represented by executed trades by that Dealer, the volume inquired of that was not quoted and the average time to respond to a quote. The Dealer may view such data for each Client with whom it has executed trades and may view the volume executed with each Client by product category and maturity range.

11.          CanDeal is owned by TSX Inc. and six bank-owned investment dealers (each, a Shareholder-Dealer), which include RBC Dominion Securities Inc., CIBC Markets Inc., TD Securities Inc., Scotia Capital Inc., National Bank Financial Inc., and NBI.

12.          Each Shareholder-Dealer is also a Dealer.

13.          No functionality exists on the CanDeal System that could enable a Shareholder-Dealer to influence the actions of a Client to the benefit of that Shareholder-Dealer in relation to a trade.

14.          No shareholder of CanDeal controls (as such term is interpreted in subsection 1.3(2) of NI 21-101) CanDeal.

15.          CanDeal has no affiliates.

16.          CanDeal is governed by an executive management team, and a board of directors (Board) comprised of representatives from TSX Inc., each Shareholder-Dealer, CanDeal’s Chief Executive Officer, and one independent member. The Board meets on a quarterly basis.

17.          The Representative is registered as a dealing representative of NBI. The Representative is Managing Director of NBI’s Debt Products sales group, the activities of which include (i) buying and selling debt securities for institutional investors based on study of varying market trends (ii) analysis of current market conditions and (ii) implementing decisions to yield profits for such institutional investors.

18.          As a dealing representative of NBI, the Representative may access the data referred to in paragraphs 8 to 10 above as well as data pertaining to those of NBI’s trades or pending trades on the System for which the Representative is responsible.

19.          Neither a Dealer nor a dealing representative has access to any data relating to (i) the activity of any other identifiable Dealer on the System or (ii) any identifiable Client other than in respect of the Dealer’s or dealing representative’s own trading activity with such Client.

20.          In his role as dealing representative, the Representative has acquired comprehensive knowledge of the fixed-income trading environment and business, and as such is qualified to provide competent business counsel on issues relating to the institutional trading of fixed-income products and the institutional fixed-income markets generally.

21.          It is proposed that the Representative be appointed as a director of CanDeal.

22.          It is anticipated that the Representative will spend four to six hours per quarter on CanDeal directorship duties.

23.          There is not a more suitable individual at NBI than the Representative, who has the fixed-income markets experience required to serve as NBI’ s representative on the CanDeal Board.

24.          The day-to-day operations of CanDeal are carried out by the executive management and employees of CanDeal. The Representative will not have any role in the day-to-day operations of CanDeal.

25.          The directors of CanDeal are subject to a comprehensive policy governing conflicts of interest (the Policy). The Policy specifically addresses the situation where a “nominee director”, that is a director appointed by a Shareholder-Dealer, has a conflict of interest or duty arising from the concurrent fiduciary duties he or she owes to CanDeal and to the Shareholder-Dealer.

26.          The Policy proceeds from the principle that a nominee director of CanDeal owes an unqualified fiduciary duty to CanDeal. The Policy enforces the principle by providing that. where the Board determines that a director has a conflict of duty, the Board will adopt a protocol for managing the conflict which must include provisions relating to:

(a)           whether the conflicted director must withdraw from Board meetings for the duration of any discussion on a relevant matter, and whether the Board may waive such a requirement;

(b)           whether, in light of applicable law or other relevant circumstances, the conflicted director may vote in connection with any Board decision on that matter; and

(c)           whether, subject to such restrictions as the Board may impose, the conflicted director may receive Board papers or other information which relates in any way to the subject-matter that gives rise to the conflict (Information). Where the Board decides under the protocol that the Director may not receive Information, and the Board further decides that the conflict of duty is of such nature or sensitivity that it is not appropriate for the conflicted Director to be made aware of the nature of the Information, the Director will not be notified of the nature of the Information.

27.          To further protect CanDeal, the Policy requires that clear guidelines be established relating to:

(a)           the circumstances in which Information may be passed on by a director to the Shareholder-Dealer who nominated him or her;

(b)           the right of CanDeal to place an embargo on Information which must not be passed on because of its sensitivity; and

(c)           acceptance by each Shareholder-Dealer of obligations of confidentiality in relation to any Information received.

28.          Neither NBI nor CanDeal is in default of securities, commodities or derivatives legislation in any Jurisdiction.

29.          In the absence of the Exemption Sought, NBI would be prohibited under paragraph 4.1(1)(a) of NI 31-103 from permitting the Representative to act as a dealing representative of NBI and be a director of CanDeal.

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.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that (a) the circumstances described above remain in place, and (b) the Exemption Sought shall cease to be effective when:

(i)            the Representative is no longer registered in any of the Jurisdictions as a dealing representative of NBI; or

(ii)           the Representative is no longer a director of CanDeal.

“Marrianne Bridge”
Director, Compliance and Registrant Regulation
Ontario Securities Commission