Securities Law & Instruments

Headnote

 

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Large investment dealer, futures commission merchant and derivatives dealer with three distinct operating divisions exempted from the requirement to register an individual as a chief compliance officer (CCO) – permitted to register three CCOs, one for each operating division.

 

Statutes cited

 

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 11.3, 15.1.

Derivatives Act (Québec), s. 86.

Derivatives Regulation (Québec), s. 11.1.

 

Decisions cited

 

In the Matter of Scotia Capital Inc., dated July 16, 2014

 

December 5, 2016

 

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

 

AND

 

IN THE MATTER OF

THE DERIVATIVES LEGISLATION OF QUÉBEC

 

AND

 

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS

 

AND

 

IN THE MATTER OF

SCOTIA CAPITAL INC.

(the Filer)

 

DECISION

 

Background

 

The principal regulator in Ontario has received an application from the Filer for a decision under the securities legislation of Ontario (the Legislation) for relief 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) pursuant to section 15.1 of NI 31-103 to allow the Filer to designate and register three individuals in the category of CCO indefinitely, one for each of its three distinct lines of securities business, each a substantial business operation for the Filer (the Securities Exemption Sought);

 

The securities regulatory authority in Québec (the Derivatives Decision Maker) has received an application from the Filer for a decision under the derivatives legislation of Québec for relief from the requirement contained in section 11.1 of the Derivatives Regulation (Québec) to designate an individual to be the CCO pursuant to section 86 of the Derivatives Act (Québec), (the Derivatives CCO Requirement) to allow the Filer to designate and register three individuals in the category of CCO indefinitely, one for each of its three distinct lines of securities business, each a substantial business operation for the Filer (the Derivatives Exemption Sought).

 

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a hybrid application):

 

(a)           the Ontario Securities Commission (the OSC) is the principal regulator for this application;

 

(b)           the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each jurisdiction of Canada outside of Ontario (together with Ontario, the Jurisdictions);

(c)           the decision with respect to the Securities Exemption Sought is the decision of the principal regulator; and

 

(d)           the decision with respect to the Derivatives Exemption Sought evidences the decision of the Derivatives Decision Maker.

 

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 Filer:

 

The Filer

 

1.             The Filer is a corporation amalgamated under the laws of Ontario on November 1, 2013, and is wholly-owned by the Bank of Nova Scotia.

 

2.             The Filer’s head office is located in Toronto, Ontario.

 

3.             The Filer is registered as:

 

(a)           an investment dealer in each of the Jurisdictions;

 

(b)           a futures commission merchant in Ontario and Manitoba; and

 

(c)           a derivatives dealer in Québec.

 

4.             The Filer is a dealer member of the Investment Industry Regulatory Organization of Canada (IIROC).

 

The Divisions

 

5.             Effective as of November 1, 2013,

 

(a)           the Filer amalgamated with its affiliate, DWM Securities Inc. (the Amalgamation), and carries on business under the name “Scotia Capital Inc.”; and

 

(b)           the Filer carries on the Canadian investment dealer business formerly carried on by each of the Filer and DWM Securities Inc. through the following three distinct lines of securities business, each a substantial business operation for the Filer (each, a Division):

 

(i)            HollisWealth, which prior to the Amalgamation was DWM Securities Inc., and which currently comprises the full service retail brokerage business conducted by agents of the Filer (the HollisWealth Division);

 

(ii)           ScotiaMcLeod, which prior to the Amalgamation was a division of the Filer, and which currently comprises the full service retail brokerage business and the Scotia iTrade discount online brokerage business conducted by employees of the Filer (the ScotiaMcLeod Division); and

 

(iii)          Global Banking and Markets, which prior to the Amalgamation was a division of the Filer, and which currently comprises the institutional business conducted by employees of the Filer (the Global Banking and Markets Division).

 

6.             The Divisions have separate, distinct and independent:

 

(a)           senior managers (each, a Division Head);

 

(b)           CCOs, each having direct access, and reporting, to the Division Head and the ultimate designated person of the respective Division for which they are designated, and the Filer’s board of directors; there are no lines of reporting among the CCOs;

 

(c)           compliance departments;

 

(d)           oversight, supervisory and compliance systems; and

(e)           personnel and infrastructure.

 

7.             Although they are parts of the same corporate entity, namely the Filer, each Division functions as a stand-alone, substantial business operation within the Filer based on the nature of the clients, the types of securities products and services which are provided to them, and whether dealing representatives are agents or employees of the Filer.

 

8.             The HollisWealth Division is a full service retail brokerage firm with over 450 advisors servicing clients in more than 44 offices across Canada. The ScotiaMcLeod Division is a full service retail brokerage firm with over 750 advisors servicing clients in more than 70 offices across Canada. The Global Banking and Markets Division is part of a larger global business that provides corporate and investment banking and capital markets products and services to corporate, institutional and government clients domestically and internationally, with over numerous offices globally and more than 300 relationship managers organized around industry specialties.

 

9.             By a decision dated July 16, 2014, In the Matter of Scotia Capital Inc., the Director of the OSC as the principal regulator exempted the Filer from the CCO Requirement so that the Filer could designate and have registered three individuals as CCO, one for each of its three distinct lines of securities business (the Prior CCO Decision), subject to a two year sunset clause (the Sunset Clause).

 

10.          By a decision dated July 16, 2014, In the Matter of Scotia Capital Inc., the Derivatives Decision Maker as the decision maker exempted the Filer from the Derivatives CCO Requirement so that the Filer could designate and have registered three individuals as CCO (the Prior Derivatives CCO Decision), one for each of its three distinct lines of securities business, subject to the Sunset Clause.

 

11.          The Filer relied on the Prior CCO Decision and Prior Derivatives CCO Decision for the duration of the Sunset Clause.

 

12.          The Filer and certain affiliated parties agreed to a no-contest settlement agreement with the OSC, which was approved on July 29, 2016 in relation to a matter that the parties discovered and self-reported to the OSC (the Settlement Agreement). While having neither admitted nor denied the accuracy of the facts and conclusions of OSC staff, the Filer provided prompt, detailed and candid co-operation to OSC staff, and also implemented additional controls and supervision to prevent a recurrence of this matter.

 

13.          The Securities Exemption Sought and Derivatives Exemption Sought by the Filer are substantially similar to the relief sought in the Prior CCO Decision and Prior Derivatives CCO Decision, with the exception that the Filer now requests that the relief be granted for an indefinite period.

 

14.          This decision is based on the same representations made by the Filer in each of the Prior CCO Decision and the Prior Derivatives CCO Decision, which remain true and complete, and on the additional representations made by the Filer in this decision.

 

Reasons for the Securities Exemption Sought and the Derivatives Exemption Sought

 

15.          The purpose of the Sunset Clause was to provide the Filer with an opportunity to consider integrating the compliance systems of the HollisWealth Division and the ScotiaMcLeod Division.

 

16.          Having considered its options, the Filer concluded that the compliance systems of the HollisWealth Division and the ScotiaMcLeod Division cannot be effectively integrated for the reasons given in the Prior CCO Decision and the Prior Derivatives CCO Decision, including because: (i) the two retail Divisions have their own corporate cultures and operate independently of each other with a high degree of autonomy; (ii) the two retail Divisions use distinct business models, systems, technology, and supporting infrastructure; and (iii) the HollisWealth Division is subject to IIROC’s comprehensive rules regarding principal/agent relationships in IIROC dealer member rule 39 which are substantially different from those applying to the employer/employee relationships of the Scotia McLeod Division (the IIROC Principal/Agent Requirements).

 

17.          Given the size, autonomy and complexity of each Division, each CCO requires different subject matter and business expertise, with different experience and focus, to effectively discharge his/her compliance responsibilities. It would be difficult for any CCO to: (i) act as the Filer’s CCO; (ii) identify and stay abreast of the different compliance issues applicable to each Division; and (iii) escalate all such compliance issues to the Filer’s board of directors in a timely and effective manner.

 

18.          Each CCO communicates and engages directly with the Division for which he/she is the designated CCO for more effective management of compliance programs tailored to the needs of the Division. Not granting the Securities Exemption Sought and the Derivatives Exemption Sought would have the detrimental effect of reducing the CCOs’ effectiveness in this regard.

 

19.          There are no lines of reporting among the CCOs. The CCO of each Division reports directly to the ultimate designated person of that Division and has direct access, and reports annually, to the Filer’s board of directors.

 

20.          Subject to the matters to which the Securities Exemption Sought and the Derivatives Exemption Sought relate, the Filer is not in default of securities legislation in any jurisdiction in Canada or under the Derivatives Act (Québec).

 

21.          Permitting the Filer to continue to designate and have registered a separate CCO for each Division is:

 

(a)           consistent with the policy objectives that the CCO Requirement and the CCO Derivatives Requirement are intended to achieve, because each of the Divisions is an independent operation that is distinct from the other Divisions and is conducted on a very large scale;

 

(b)           consistent with the Prior CCO Decision and the Prior Derivatives CCO Decision;

 

(c)           appropriate in view of the idiosyncratic IIROC Principal/Agent Requirements; and

 

(d)           consistent with the Director’s decision dated June 30, 2014 In the Matter of 1832 Asset Management L.P., where the Filer’s affiliate, 1832 Asset Management L.P., was permitted to designate and register three CCOs.

 

Decision

 

Each of the principal regulator and the Derivatives Decision Maker is satisfied that the decision meets the test set out in the Legislation and the Derivatives Act (Québec) for the principal regulator and the Derivatives Decision Maker, respectively, to make the decision.

 

The decision of the principal regulator under the Legislation is that the Securities Exemption Sought is granted so that the Filer may have a separate CCO for each of its three Divisions, provided that:

 

(a)           each Division has its own CCO;

 

(b)           only one individual is the CCO of each Division;

 

(c)           each CCO reports to the ultimate designated person of the Division for which he/she is the designated CCO;

 

(d)           each CCO fulfills the responsibilities set out in section 5.2 of NI 31-103, or any successor provisions thereto, in respect of the Division for which he or she is the designated CCO; and

 

(e)           each CCO has direct access to the Filer’s board of directors.

 

The decision of the Derivatives Decision Maker under the Derivatives Act (Québec) is that the Derivatives Exemption Sought is granted so that the Filer may have a separate CCO for each of its three Divisions provided that:

 

(a)           each Division has its own CCO;

 

(b)           only one individual is the CCO of each Division;

 

(c)           each CCO reports to the ultimate designated person of the Division for which he/she is the designated CCO;

(d)           each CCO fulfills the responsibilities set out in section 11.11 of the Derivatives Regulation (Québec), or any successor provisions thereto, in respect of the Division for which he or she is the designated CCO; and

 

(e)           each CCO has direct access to the Filer’s board of directors.

“Marrianne Bridge”

Deputy Director, Compliance and Registrant Regulation

Ontario Securities Commission