Multilateral Instrument 11-102 Passport System -- National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103") -- revocation and replacement of previous relief -- revocation of relief from the requirements contained in sections 11.2 and 11.3 of NI 31-103 to designated an individual to be the ultimate designated person ("UDP") and an individual to be the chief compliance officer ("CCO") so that the Filer could designate two individuals as UDP and two individuals as CCO, one for each distinct operational division of the Filer -- replacement with relief from the requirement contained in section 11.2 of NI 31-103 to designate an individual to be the UDP, and instead be permitted to designate and register two individuals as UDPs in respect of the two distinct operational divisions of the Filer -- relief subject to a sunset clause.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 11.2, 15.1.
January 13, 2017
IN THE MATTER OF THE SECURITIES LEGISLATION OF QUÉBEC AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF NATIONAL BANK INVESTMENTS INC. (the Filer)
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer, for a decision under the securities legislation of the Jurisdictions (the Legislation) for:
1. revocation of the decision dated May 31, 2011 In the Matter of National Bank Securities Inc. (the Previous Relief), which granted the Filer exemptive relief from the requirement contained in section 11.2 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) to designate an individual to be the ultimate designated person (UDP) and from the requirement contained in section 11.3 of NI 31-103 to designate an individual to be the chief compliance officer (CCO) and instead permitted the Filer to designate and register two individuals as UDP and two individuals as CCO in respect of the two distinct operational divisions of the Filer (the Requested Revocation); and
2. relief, pursuant to section 15.1 of NI 31-103, from the UDP Requirement (as defined below) to permit the Filer to designate and register two individuals as UDP in respect of its two distinct operational divisions (the Exemption Sought, and together with the Requested Revocation, the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Autorité des marchés financiers 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 all of the provinces and territories of Canada other than Québec and Ontario; and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
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 the Filer:
1. The Filer, formerly known as National Bank Securities Inc., is a corporation resulting from a merger performed under the Canada Business Corporations Act.
2. The Filer's head office is located in Montréal, Québec.
3. The Filer is registered as:
(a) a mutual fund dealer under the securities legislation of each of the jurisdictions of Canada; and
(b) an investment fund manager in the provinces of Québec, Ontario and Newfoundland and Labrador.
4. The Filer is not in default of any requirements of securities legislation in any jurisdiction of Canada.
5. The Filer's operational structure has always been organized in two distinct divisions (the Divisions), which are based on the nature of its operations:
(a) the product development and manufacturing division (the Investment Fund Manager Division) is responsible for all activities of the Filer related to the creation and management of mutual funds, including all activities related to its independent review committee, the preparation of all outbound documents of the Filer, and the distribution of the Filer's products through dealers other than the Filer.
(b) the internal dealer distribution division (the Mutual Fund Dealer Division) is responsible for all product distribution activities of the Filer within its own dealer network, i.e., all activities of the Filer related to its registered dealing representatives, the implementation of a distribution network with a compliance supervision model for its 453 branches and the implementation of procedures pertaining to the validation of the suitability of transactions.
The Investment Fund Manager Division and the Mutual Fund Dealer Division each have separate and distinct senior management structures. Although they are part of the same corporate entity, each Division is functionally a stand-alone operation within the Filer's business. The Filer therefore seeks to ensure that its operational structure remains aligned with its business model while effectively meeting the policy objectives of NI 31-103.
6. Structural and organizational changes were recently brought to the compliance functions of National Bank of Canada (NBC), the parent entity of the Filer.
7. Since these changes were implemented, many initiatives were taken to bring together into one unit all of the securities compliance expertise and to structure the unit so that it can support all the securities compliance activities of all of NBC's subsidiaries. To that end, in March 2016, the Filer decided to join together its distribution and manufacturing activities into one large division and to entrust the division's compliance supervision to one CCO, who would oversee all of the Filer's activities.
8. The two positions of Senior Adviser, Compliance, which previously reported to the CCO of the Mutual Fund Dealer Division, now report to the person who will be the Filer's sole CCO and a new Senior Adviser, Compliance position was recently created to support the distribution activities.
9. The Filer now has only one compliance team, which is part of the NBC Corporate Compliance function and is composed of the Investment Fund Manager Division compliance staff and the Mutual Fund Dealer Division compliance staff, all reporting to the same manager. In total, five dedicated staff members are responsible for the Filer's compliance supervision.
10. Moreover, the CCO will benefit from all of the expertise of the NBC Corporate Compliance team, including more than one hundred employees with different specializations such as conduct of business, regulatory watch, inspections, anti-money laundering, proceeds of crime, strategy and governance.
11. The Filer's CCO will also have access to the NBC Wealth Management legal team for the settlement of client complaints and the processing of internal investigations.
12. Accordingly, the Previous Relief, which remains in force today, will no longer be aligned with the business model of the Filer, who wants the Previous Relief to be revoked and replaced with the Exemption Sought so that it will be permitted solely to designate and register two individuals as UDP in respect of its two Divisions.
13. There is currently a UDP appointed and registered for each of the Divisions. The current UDPs are the most senior executive member of each Division (the Division Heads). If the Exemption Sought is granted, the Filer will keep its two current UDPs in their respective positions.
14. Despite the fact that only the UDP of the Investment Fund Manager Division holds the title of Chief Executive Officer (CEO) of the Filer, both UDPs have equivalent roles to that of a CEO in respect of their Division. There is no line of reporting between the Division Heads and they each report independently to different members of the senior management team of NBC and have direct access to the Filer's Board of Directors.
15. No other executive officer of the Filer has authority to overrule a decision of either of the UDPs or control either of the UDP's access to the Board of Directors of the Filer.
Reasons for the Exemption Sought
16. Pursuant to section 11.2 of NI 31-103, a registered firm must designate an individual who is registered under securities legislation in the category of UDP and the UDP must be: (i) the CEO or an individual acting in such capacity; (ii) the sole proprietor of the registered firm; or (iii) the officer in charge of a division of the registered firm, if the activity that requires the firm to register occurs only in the division (the UDP Requirement).
17. Granting the Exemption Sought would be consistent with the policy objectives that the UDP Requirement is intended to achieve, because:
(a) each Division is an independent operation that is distinct from the other and is conducted on a very large scale; and
(b) the current Division Heads are effectively the most senior executive member of their respective operation line.
Each of the Decision Makers is 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 Requested Relief is granted as follows:
1. the Requested Revocation is granted; and
2. the Exemption Sought is granted provided that:
(a) each Division shall have its own UDP, who shall be its Division Head;
(b) only one individual shall be the UDP of each Division;
(c) each UDP shall fulfill the responsibilities set out in section 5.1 of NI 31-103, and any successor provision thereto, in respect of the Division for which he/she is designated UDP; and
(d) the decision in respect of the Exemption Sought will cease to be valid three years after the date hereof.