Section 6.1 of NI 24-102 – exemption granted from the requirement in section 4.4(2) of NI 24-102 that a board committee be chaired by an individual who is independent of the clearing agency – exemptions also granted from section 4.4(4) and paragraph 4.3(3)(a) of NI 24-102 relating to requirements for the audit or risk committee and written policies and procedures, subject to the term and condition that the two requirements are met in 12 months – Fundserv is unique due to its limited functions as a clearing agency.
National Instrument 24-102 Clearing Agency Requirements, ss. 4.3(3)(a), 4.4(2), 4.4(4), 6.1.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
The Ontario Securities Commission (OSC) has received an application (Application) from the Filer for a decision, pursuant to section 6.1 of NI 24-102 Clearing Agency Requirements (NI 24-102), providing exemptions from the following requirements of NI 24-102 on either a permanent or temporary basis, as the case may be:
(a) from the requirement in subsection 4.4(2) that each committee of the board of directors of the Filer (Board) be chaired by an individual who is independent of the Filer (Committee Chair Requirement);
(b) for a period of twelve months, from the requirement in subsection 4.4(4) that the Filer’s Audit/Finance/Risk Committee (AFR Committee) have appropriate representation by individuals who are independent of the Filer and who are not employees or executive officers of a participant of the Filer or their immediate family members (AFR Committee Requirement); and
(c) for a period of twelve months, from the requirement in paragraph 4.3(3)(a) that the chief compliance officer of the Filer establish, implement, maintain and enforce written policies and procedures to identify and resolve conflicts of interest and ensure that the Filer complies with securities legislation (Compliance Manual Requirement).
Terms defined in 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 is a corporation continued under the federal laws of Canada, with its head office located in Toronto.
2. For over 25 years, the Filer has been offering electronic business services to the investment industry. The Filer’s core service is its infrastructure for the placement and reconciliation of orders for mutual funds and other investment products. The Filer offers centralized payment exchange facilities to its participants and, for those who choose to settle orders on a net basis, through payment exchange currently handled by a Canadian chartered bank.
3. The Filer operates on a cost-recovery basis, serving more than 700 organizations and their business units, and provides online access to over 80,000 active fund codes.
4. Pursuant to an order dated April 10, 2012 (the Recognition Order) issued pursuant to subsection 21.2(1) of the Act, the Filer was recognized as a clearing agency and became subject to the terms and conditions of the Recognition Order.
5. On February 17, 2016, NI 24-102 and Companion Policy 24-102CP Clearing Agency Requirements became effective.
6. Although a recognized clearing agency under subsection 21.2(1) of the Act, the Filer is not a central counterparty, a central securities depository or a securities settlement system as such terms are defined in NI 24-102 and therefore, all parts of NI 24-102 except for Part 3 apply to the Filer, in addition to the conditions of the Recognition Order.
7. Part 4 of NI 24-102 provides for more specific requirements in respect of the governance structure of the Filer than the Recognition Order.
8. Since the Filer became aware of the application of NI 24-102 to the Filer, the Filer has been working diligently with staff of the OSC to determine an appropriate regulatory solution that would allow the Filer to become fully compliant with NI 24-102.
The Board and Board Committees
9. The Filer is owned by 10 shareholders each holding 10% of the outstanding shares of the Filer. The Filer’s shareholders are comprised of major investment industry participants in Canada and include investment fund managers, life insurance companies, service providers, distributors and a self-regulatory organization.
10. Pursuant to the Filer’s shareholder agreement, each of the above noted shareholders nominates one director to the Filer’s Board. Additionally, the shareholder agreement permits up to four additional directors to be elected by the shareholders.
11. These four additional director positions have typically been filled by individuals who are not employed by a shareholder of the Filer, and therefore have been considered “independent”; however, these individuals may be employed by a firm that is a “participant” of the Filer as that term is defined in NI 24-102. These directors are referred to as the “Non-Shareholder Directors”.
12. Currently, the Board consists of 10 nominees from the Filer’s shareholders and three Non-Shareholder Directors. One Non-Shareholder Director position is currently vacant.
13. The Filer’s shareholder nominee directors include senior individuals at some of the largest participants in the Canadian investment industry, including, but not limited to, some of Canada’s largest mutual fund manufacturers, integrated fund manufacturers/distributors, and the industry’s regulatory and standard setting organization, Investment Industry Regulatory Organization of Canada. These shareholder nominee directors provide their expertise and are essential in assisting the Filer achieve its mission of providing a reliable and resilient value-added network with a variety of application services for business-to-business initiatives. These services minimize risk and promote timely and automated interactions that reduce costs and improve the ease of doing business within the Canadian investment industry. The Filer continuously draws on its shareholder nominee directors and their internal resources, and attributes much of its success, efficiency and positive impact on the market to this approach.
14. The directors of the Filer have a variety of skill sets and backgrounds, making some more suitable to chair certain committees than others. Absent relief from the Committee Chair Requirement, the Filer may be required to appoint as chair of a Board committee an individual who, while considered independent, is not the individual best suited for the role. Further, this requirement will make it more difficult for the Filer to achieve its other obligation under subsection 4.4(2) of NI 24-102 of appointing a sufficiently knowledgeable person as chair of each Board committee. Accordingly, the Filer submits relief should be granted from this provision to allow it to continue to appoint a shareholder nominee director to the role of chair of a Board committee.
15. Currently, the Filer’s AFR Committee does not meet the AFR Committee Requirement since all of its members are employees or executive officers of participants of the Filer.
16. The Filer is actively searching for an additional director to fill the Non-Shareholder Director vacancy. Once appointed, that director will also sit on the AFR Committee. Due to the Filer’s dominant presence in the investment industry, its open access model, and the inclusive definition of participant in NI 24-102, it will take some time to identify a candidate that has the requisite skill set and knowledge required for the position, and that is not employed by a participant of the Filer, in compliance with NI 24-102.
17. Ultimately, the Filer believes a 12 month exemption from the requirements will help the Filer locate a suitable Board candidate who will also sit on the AFR Committee in order to allow it to meet the AFR Committee Requirement.
18. The Filer is also actively working towards complying with the Compliance Manual Requirement, and fully expects to comply within 12 months.
19. Paragraph 4.3(3)(a) of NI 24-102 requires that a chief compliance officer establish, implement, maintain and enforce written policies and procedures to identify and resolve conflicts of interest and ensure that the clearing agency complies with securities legislation.
20. Currently, the Filer’s Chief Operating Officer also acts as chief compliance officer in compliance with the requirements of NI 24-102.
21. The chief compliance officer is overseeing the development of a compliance manual that will include the requisite policies, procedures and processes for monitoring compliance with applicable securities laws, including NI 24-102 and the Recognition Order. Further, it will include policies on how the Filer manages conflicts of interest and reports to the Board and the OSC, as required.
22. The Filer monitors and enforces compliance with securities laws, including the Recognition Order, and the Filer’s written policies and procedures as they currently exist.
23. Other than as set out herein, the Filer is in compliance with Part 4 of NI 24-102 and applicable securities laws, including the Recognition Order, and the governance structure of the Filer and its Board operations and composition is in compliance with the conditions of the Recognition Order, which provides, among other things, specific governance conditions to be adhered to.
UPON considering the Application and representations made by the Filer;
AND UPON the Director being satisfied to do so would not be prejudicial to the public interest;
IT IS ORDERED by the Director pursuant to section 6.1 of NI 24-102 that the Filer is exempted from the Committee Chair Requirement.
IT IS ALSO ORDERED by the Director pursuant to section 6.1 of NI 24-102 that the Filer is exempted from the AFR Committee Requirement and the Compliance Manual Requirement on the term and condition that the said two requirements are met by May 31, 2019.
DATED this 7th day of June, 2018.
Director, Market Regulation Branch
Ontario Securities Commission