National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Large portfolio manager, exempt market dealer, commodity trading counsel, commodity trading manager and investment fund manager with separate operating divisions exempted from the requirement to register an individual as a chief compliance officer (CCO) -- permitted to register two CCOs, one for each operating division.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 11.3, 15.1.
June 23, 2017
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 CI INVESTMENTS INC. (the Filer)
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filer from section 11.3 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) to permit the Filer to designate two individuals as chief compliance officer (CCO), with the result that there will be a separate CCO in respect of each of the two distinct lines of business carried on by the Filer (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission (the OSC) 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 each of the other provinces and territories of Canada (the Other Jurisdictions and, together with the Jurisdiction, the Jurisdictions).
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 31-103 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 corporation subsisting under the laws of Ontario with its head office located in Toronto, Ontario. The Filer is registered:
(a) under the securities legislation of all provinces of Canada as a portfolio manager;
(b) under the securities legislation of Ontario, Québec, and Newfoundland and Labrador as an investment fund manager;
(c) under the securities legislation of Ontario as an exempt market dealer; and
(d) under the Commodity Futures Act (Ontario) as a commodity trading counsel and a commodity trading manager.
2. The Filer has applied to extend its registration in the categories of portfolio manager and exempt market dealer to each Jurisdiction.
3. The Filer is not in default of securities legislation in any Jurisdiction.
4. The Filer agreed to a no-contest settlement agreement with the OSC, which was approved on February 5, 2016, in relation to a matter that the Filer discovered and self-reported to the OSC. 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 within its compliance systems to prevent a recurrence of this matter.
5. The Filer has two distinct operating lines of business (each, a Division):
(a) One Division (the IFM/EMD Division) currently provides investment fund management services to several families of investment funds representing a total of approximately 245 investment funds (the Funds), and distributes securities to accredited investors.
(b) One Division (the PM Division) provides discretionary portfolio management services to the Funds and to institutional clients, including financial intermediaries, pension funds, endowments, foundations and corporations. As of December 31, 2016, the PM Division had approximately $117.9 billion of assets under management. The PM Division currently comprises five distinct portfolio management teams.
6. The Filer wishes to designate one individual who is registered in the category of CCO under the securities legislation of the Jurisdictions as CCO of the IFM/EMD Division and a different individual who is registered in the category of CCO under the securities legislation of the Jurisdictions as CCO of the PM Division.
7. Each of the IFM/EMD Division and the PM Division has a well-established separate and distinct business supervisory and operational structure. Currently, each of the Filer's compliance professionals supports both Divisions. If the Exemption Sought is granted, each of the IFM/EMD Division and the PM Division will have specific compliance professionals designated to each Division.
8. Given the large scope and the specialized and diversified business operations of each Division, the Filer believes that having a separate CCO for each Division will allow it to more effectively manage its compliance program by enabling it to focus resources on the specific requirements of each Division.
9. If the Exemption Sought is granted, the CCO of the PM Division will oversee the compliance systems that are reasonably designed to ensure that each portfolio manager team, and each person acting on their behalf, complies with securities legislation. The CCO of the PM Division will focus on the applicable laws, regulations, rules, policies and codes of conduct which govern the portfolio management and commodity trading manager activities of the Filer in the jurisdictions in which it operates. To this end, the CCO of the PM Division will maintain a compliance process and infrastructure throughout the portfolio management business so as to enable the Filer's management to fulfill their portfolio management compliance responsibilities. This includes maintaining appropriate policies and procedures and overseeing a supervisory structure that monitors the portfolio management activities, employee trading, conflicts of interest, self-dealing and the commodity trading manager activities conducted by the Filer's personnel.
10. If the Exemption Sought is granted, the CCO of the IFM/EMD Division will oversee compliance systems that are reasonably designed to ensure that the investment fund manager and exempt market dealer businesses, and each person acting on their behalf, comply with securities legislation. To this end, the CCO of the IFM/EMD Division will maintain appropriate policies and procedures for investment fund management and exempt market dealer activities and will oversee a supervisory structure that monitors compliance. This will include overseeing compliance with the requirements governing: (i) public offering and continuous disclosure of the Funds; (ii) sales practices and sales communications; (iii) fiduciary obligations for management functions that are outsourced; (iv) conflict identification and management; and (v) self-dealing.
11. The CCO of each Division will report directly to the Senior Vice-President, Compliance and will have direct access to the ultimate designated person (UDP) and the board of directors of the Filer.
12. Under section 11.3 of NI 31-103, a registered firm is required to designate an individual to be the CCO (the CCO Requirement).
13. Given the size, diversity and increasing complexity of the Filer's PM Division and IFM/EMD Division, it is (i) unreasonable for one individual to be expected to effectively carry out all of the responsibilities of the CCO for both the PM Division and the IFM/EMD Division, and (ii) difficult for one CCO to effectively identify and stay abreast of the different issues and risks applicable to clients and the capital markets stemming from both the PM Division and the IFM/EMD Division.
14. If the Exemption Sought is granted, each CCO will have direct access to the Filer's UDP, will provide reports to the board of directors of the Filer and will comply in all other respects with applicable securities requirements, including the requirements set out in NI 31-103.
15. With the granting of the Exemption Sought, the Filer would continue its operations with enhanced compliance effectiveness, since one individual would no longer continue to divide his or her time between the compliance oversight of the IFM/EMD Division and the PM Division. Not granting the Exemption Sought would prevent the CCOs from responding more quickly to address the Filer's compliance issues, providing a higher level of senior participation on the Filer's compliance projects and initiatives, and undertaking more detailed reviews of the Filer's compliance monitoring programs to assist in reducing the risks of non-compliance.
16. In section 5.2 of Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations, the Canadian Securities Administrators state 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. We will consider applications, on a case-by-case basis, for different individuals to act as the CCO of a firm's operating divisions."
17. Designating only one CCO for purposes of satisfying the CCO Requirement in the circumstances of the Filer is not consistent with the policy objectives the CCO Requirement is intended to achieve because the PM Division and the IFM/EMD Division are independent operations that are distinct from one another in kind and conducted on a very large scale.
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) each Division has its own CCO;
(b) each CCO fulfils 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; and
(c) each CCO has access to the UDP and the board of directors of the Filer.