Ontario Securities Commission Bulletin
Issue 44/33 - August 19, 2021
Ont. Sec. Bull. Issue 44/33
• OSC Staff Notice 33-752 Summary Report for Dealers, Advisers and Investment Fund Managers
• Sustainable Agriculture & Wellness Dividend Fund
• Jefferies International Limited et al.
• Nexus Real Estate Investment Trust
• Temporary, Permanent & Rescinding Issuer Cease Trading Orders
• Temporary, Permanent & Rescinding Management Cease Trading Orders
• TSX Inc. -- TSX Closing Price, TSX Last Ask Price, TSX Last Bid Price -- Notice of Approval
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OSC Staff Notice 33-752 Summary Report for Dealers, Advisers and Investment Fund Managers
OSC Staff Notice 33-752 Summary Report for Dealers, Advisers and Investment Fund Managers is reproduced on the following separately numbered pages. Bulletin pagination resumes at the end of the Summary Report.
August 10, 2021
CONTENTS
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Director's message |
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Introduction |
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Part 1: Outreach |
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Part 2: Information for dealers, advisers and investment fund managers |
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Part 3: Initiatives impacting registrants |
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Part 4: Acting on registrant misconduct |
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Staff directory |
We are pleased to continue our important outreach through this year's Summary Report for Dealers, Advisers and Investment Fund Managers (Summary Report). It provides an overview of our work during the 2020-2021 fiscal year.
What a year it's been! Along with the rest of the financial industry, staff of the Compliance and Registrant Regulation Branch (CRR) and from across the Ontario Securities Commission (OSC, Commission) have been working remotely for more than a year. I am proud of the entire CRR Team for their flexibility and ability to pivot to our new work situation, while continuing to serve our markets.
This year, we completed our compliance, financial disclosure and conduct reviews remotely through a combination of telephone/video conferencing and desk reviews. Mindful of how our processing times impact registered firms and individuals (collectively, registrants), we strived to process registration and exemptive relief applications as efficiently as possible. Understandably, there have been some challenges including higher than expected volumes of registration-related submissions and applications, which impacted our ability to meet service standards. As communicated in the email blast issued June 29, 2021, we are working to return to our normal processing times as soon as possible. We will keep our registrant community informed of our progress.
Some highlights of 2020-2021 included issuing the 2020 Risk Assessment Questionnaire (RAQ) and a COVID-19 Survey. We took steps to make completing the RAQ easier for registrants this year by pre-populating certain information. The responses to our COVID-19 Survey indicated a few issues at the start of the pandemic from market volatility and the industry's transition to a remote work environment, but there were no systemic issues identified.
Our Registrant Outreach program remains a priority for the OSC. We continue to provide tools and programs to help registrants with their compliance obligations. The Registrant Advisory Committee was re-constituted, welcoming some new members for a two-year term. Visit the Registrant Outreach program webpage to access the Topical Guide for Registrants, a listing of Director's decisions or to obtain information about upcoming educational webinars, which are posted in the calendar of events.
With the publication of regulatory notices on March 29, 2021 setting out the requirements for crypto-asset trading platforms to commence registration as either a dealer and/or marketplace, there will be a significant amount of work to bring these firms into the regulatory framework. We are working to implement an efficient process to onboard these firms and will be transparent with them regarding our progress.
Our compliance review activity will prioritize the following this year:
• firms identified as high-risk through the RAQ process
• Client Focused Reforms review, which will commence after key implementation dates of June 30, 2021 and December 31, 2021
• firms offering online advice or online dealer platforms
• "Registration as the First Compliance Review" for crypto-asset trading platforms.
Finally, we have provided our team structure and staff directory again this year. If you have a question, comment, or would like to discuss regulatory matters, please feel free to reach out to us. As always, we look forward to engaging with you.
Who we are
The CRR Branch of the OSC is responsible for the registration and ongoing regulation of firms and individuals who are in the business of trading in, or advising on, securities or commodity futures and firms that manage investment funds in Ontario. The OSC's mandate is to:
• provide protection to investors from unfair, improper or fraudulent practices,
• foster fair, efficient and competitive capital markets and confidence in capital markets,
• foster capital formation, and
• contribute to the stability of the financial system and the reduction of systemic risk.
CRR's activities are integral to the OSC's vision of being an effective and responsive securities regulator, fostering a culture of integrity and compliance and instilling investor confidence in the capital markets.
The purpose of this report
This Summary Report prepared by staff of the CRR Branch is designed to assist registrants with information on the following:
• Education and outreach
Part 1 of this report provides links and information to the registration and ongoing educational resources and outreach opportunities available to current and prospective registrants.
• Regulatory oversight activities and guidance
Part 2 of this report can be used by registrants as a self-assessment tool to strengthen compliance with Ontario securities law and, as appropriate, to make changes to enhance their systems of compliance, internal controls and supervision.
• Impact of upcoming initiatives
Part 3 of this report provides insights into some of the new and proposed rules and other regulatory initiatives that may impact a registrant's operations.
• Registrant conduct activities
Part 4 of this report is intended to enhance a registrant's understanding of our expectations and our interpretation of regulatory requirements. This section also provides insight into the types of regulatory actions the CRR Branch may take to address non-compliance.
Organizational structure
The following page sets out the organizational structure of the CRR Branch. We encourage registrants to reach out to staff with any inquiries they may have. Contact information for directors, managers and staff within the branch can also be found in the staff directory presented at the end of this report.
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The Operations Unit is comprised of three teams of lawyers and accountants and is responsible for conducting compliance field reviews, reviewing applications for exemptive relief and working on policy initiatives.
The members of this unit also act as subject matter experts in support of registration files.
If you have compliance questions, please contact the managers, based on your registration category, as follows:
• Portfolio Managers -- Elizabeth
• Investment Fund Managers -Vera
• Exempt Market or Scholarship Plan Dealers -- Dena
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The Registrant Conduct Team handles files referred from other CRR teams and other OSC branches for matters that require further regulatory action to remediate registrant misconduct or to review higher-risk registration applications.
Registrant misconduct may be addressed by applying terms and conditions to registration, suspension of registration, or being referred to the Enforcement branch.
This team is also responsible for working on policy initiatives.
If you have conduct matter questions, please contact Mike.
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The Registration Team focuses on the initial registration of firms and individuals, subsequent changes to registration, including the surrender of registration, and ongoing maintenance of registration information.
This team is also responsible for processing registration-related applications for exemptive relief and working on registration-related policy initiatives.
If you have registration-related questions, please contact Jeff.
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The Data Strategy & Risk Team is responsible for:
• supporting the branch's data requirements and conducting data analytics
• leading the business planning and financial reporting processes
• performing financial analysis of registrants' interim and annual financial statements and capital calculations
• leading the Capital Markets Participation Fee process and overseeing all fee matters
• working on policy initiatives
• maintaining CRR's risk register and conducting risk analysis
• coordinating all branch reporting.
If you have questions about CRR's data, reporting, fees or risk operations, please contact Louise.
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Who this report is relevant to
This Summary Report provides information for registrants that are directly regulated by the OSC. These registrants primarily include investment fund managers (IFMs), portfolio managers (PMs), exempt market dealers (EMDs) and scholarship plan dealers (SPDs). At present, registrants overseen by the OSC include:
1,114 Firms{1}
68,343 Individuals
542 IFMs{2}
312 PMs{3}
255 EMDs{4}
5 SPDs{5}
{1} This number excludes firms registered solely in the category of: MFD, ID, commodity trading adviser, commodity trading counsel, commodity trading manager and futures commission merchant.
{2} This number includes firms registered only as IFMs and IFMs also registered in other registration categories (with the exception of SPD).
{3} This number includes firms registered only as PMs and PMs also registered in other registration categories (with the exception of IFM).
{4} This number includes firms registered only as EMDs and EMDs also registered in other registration categories (with the exception of IFM or PM).
{5} This number includes firms registered only as SPDs and SPDs also registered in other registration categories.
In general, firms must register with the OSC if they conduct any of these activities in Ontario:
• are in the business of trading in, or advising on, securities (this is referred to as the "business trigger" for registration)
• direct the business, operations or affairs of an investment fund
• act as an underwriter
• conduct trading or advising activities involving commodity futures contracts or commodity futures options.
Individuals must register if they trade, advise or underwrite on behalf of a registered dealer or adviser, or act as the Ultimate Designated Person (UDP) or Chief Compliance Officer (CCO) of a registered firm.
There are seven dealer and adviser categories for firms trading in or advising on securities, or acting as an underwriter, as applicable:
• EMD
• SPD
• restricted dealer
• PM
• restricted portfolio manager
• investment dealer (ID), who must be a member of the Investment Industry Regulatory Organization of Canada (IIROC)
• mutual fund dealer (MFD), who must, except in Quebec, be a member of the Mutual Fund Dealers Association of Canada (MFDA).
There are four dealer and adviser categories for firms trading in or advising on commodity futures:
• commodity trading adviser
• commodity trading counsel
• commodity trading manager
• futures commission merchant.
There is a separate category for firms that direct the business, operations, or affairs of investment funds:
• IFM.
Although firms registered in the category of MFD, ID or futures commission merchant, and their registered individuals, are directly overseen by the self-regulatory organizations (SROs) (the MFDA and IIROC), the OSC approves the registration of:
• firms in the category of MFD, ID or futures commission merchant
• individuals sponsored by a MFD.
Applications for firm registration are reviewed by CRR staff, but we remind firms seeking registration in the category of ID, MFD or futures commission merchant to also apply separately for membership with the relevant SRO.
While this report focuses primarily on registered firms and individuals directly overseen by the OSC, firms directly overseen by the SROs are encouraged to review the Summary Report as certain information is applicable to them as well.
Service standards
The CRR Branch is committed to accountability and transparency, and to ensuring services are delivered in the most efficient and effective ways possible. All CRR service standards and timelines are incorporated into the OSC Service Commitment. Information about CRR-specific service standards and timelines can also be accessed at:
• Exemption Application
• Registration Materials
• Notices of Termination
• Compliance Reviews -- Registrants
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Outreach program and resources |
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Registration |
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Registrant advisory committee |
1.1 Outreach program and resources
Registrant Outreach since inception
69 ln-person and webinar seminars held
7,416 Web replays viewed
14,725 Individuals that have attended outreach seminars
>13,700 Topical Guide for Registrants -- page views annually
We continue to interact with our stakeholders through our Registrant Outreach program. The objectives of our Registrant Outreach program are to strengthen communication with Ontario registrants that we directly regulate and with other industry participants (such as lawyers and compliance consultants), to promote strong compliance practices and to enhance investor protection.
Interested in attending an upcoming Registrant Outreach seminar? Click here for our calendar of upcoming events.
Looking for information about regulation matters?
Take a look at our Registrant Outreach program webpage or our Topical Guide for Registrants for help with key compliance issues and policy initiatives.
Want to be informed about newly released guidance?
Register to receive our e-mail alerts here.
Looking for a listing of recent e-mail alerts and links to each? Refer to the Compliance-related reports, staff notices and email notifications webpage.
Interested in reading previously published Director's decisions? Refer to the Opportunity to be heard and Director's decisions webpage.
If you have questions related to the Registrant Outreach program or have suggestions for seminar topics, please send an e-mail to ReoistrantOutreach@osc.aov.on.ca
1.2 Registration
Registration Outreach Roadshow
The Registration Team completed another successful Registration Outreach Roadshow (the Roadshow) in early 2021. For the first time, we delivered virtual sessions which allowed us to broaden our reach to include both in-province and out-of-province registered firms as well as a group of law firms. This expanded reach allowed CRR staff to continue to build working relationships with the registration teams of the firms that we have the most interaction with, as well as disseminate information via the law firms to smaller registered firms we may not have had the opportunity to visit.
The five registered firms and group of law firms that we met with were positive about the experience and appreciated the opportunity to have informal sessions with us to better understand our expectations, discuss registration best practices, and discuss how to better integrate the registration process with their business needs.
One of the new elements added to the Roadshow this year was a detailed review of the Form 33-109F4 Registration of Individuals and Review of Permitted Individuals (Form 33-109F4), with a focus on highlighting common deficiencies that slow the review process of otherwise problem-free applications.
We continue to see significant value of these Roadshows and gained useful feedback from our post-meeting survey to the participants, which will be taken into consideration for future Roadshows.
Change of service provider for U.S. background checks
As of May 31, 2021, the OSC has partnered with Mintz Global Screening Inc. (Mintz), a provider of background screening products, to provide United States (U.S.) background checks for the OSC where an applicant has been resident in the U.S. at any time in the 10 years prior to the date of application.
The OSC has been conducting U.S. background checks on applicable applicants using a different service provider since 2018.
Applicants will receive an e-mail from Mintz within 48 hours of filing their application on the National Registration Database (NRD). This e-mail will contain a secure link to an online portal where consent may be provided.
Applicants are not required to consent to a U.S. background check, however, not doing so may impact their ability to become registered in a timely manner, or in some cases, at all.
Voluntary Surrender Process
We expect a registered firm to file an application to surrender its registration (a voluntary surrender application) when it ceases (or intends to cease) conducting registerable activities.
When considering a voluntary surrender application, we look for satisfactory evidence that:
• all financial obligations of the registered firm to its clients have been discharged
• all requirements, if any, prescribed by the regulations for the surrender of registration have been fulfilled or the Director is satisfied that they will be fulfilled in an appropriate manner
• the surrender of the registration is not prejudicial to the public interest.
To initiate the voluntary surrender process, registered firms must submit:
• An application letter for the voluntary surrender that includes:
• a statement that the firm "consents to suspension" of the firm's registration in Ontario
• the correct registration categories of the firm
• why the firm has ceased, or plans to cease, registerable activities
• the date that the firm ceased (or will cease) registerable activities
• the business activities of the firm in the past (both registerable and non-registerable activities)
• a description of what happened to the firm's clients (e.g. accounts transferred to another registrant, client assets liquidated and accounts closed, etc.)
• confirmation whether the firm holds or has ever held client assets
• if operating an investment fund, whether the investment fund has been liquidated and assets returned to clients or whether management of the fund has been transferred to another registrant
• the future plans of the firm and its principals (including non-registerable activities).
• An officer's/director's certificate that confirms:
• when the firm ceased (or intends to cease) registerable activities and in which categories of registration
• the firm has discharged its financial obligations to its clients, including, if applicable, any investment funds or managed accounts that it formerly managed
• the firm does not hold client assets
• there are no existing or potential claims or liabilities against the firm by its clients
• there are no unresolved complaints against the firm by its clients
• the firm's financial statements submitted as part of the surrender application present fairly the financial position of the firm in accordance with International Financial Reporting Standards or U.S. GAAP.
There is no prescribed format for the application letter or officer's/director's certificate. However, to assist applicants, CRR staff can provide, upon request, a template form of certificate to be completed by the firm's officer or director.
The application letter must be filed through the OSC's Electronic Filing Portal by selecting "Application for voluntary surrender of registration" from the drop-down menu. The officer's/director's certificate should be included as an attachment to the application filed through the portal.
In addition to the information above, as part of the voluntary surrender review process, please note the firm may also be required to provide:
• the most recent audited financial statements, and if the audited financial statements are as at a date prior to the date that the registrant ceased registerable activities, unaudited interim financial information dated after the registrant has ceased registerable activities
• an auditor's comfort letter dated after registerable activities have ceased or, depending on the circumstances, a specified procedures report performed by a licensed public accountant/audit firm, to provide evidence that all financial obligations to clients have been discharged.
All voluntary surrender applications are reviewed individually upon receiving the firm's consent to suspension pending surrender, and the information required in order to accept the firm's voluntary surrender may vary on a case-by-case basis. We will not recommend that the Director approve an application to surrender registration if the information that we require is not provided to us. If the Director does not have sufficient information to accept a firm's surrender of registration, the firm's registration will remain in a suspended state.
Most voluntary surrender applications take at least 60 working days to process from the time that a complete application is provided to staff. Please file your complete application as early as possible to avoid delays.
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Registered firms should:
• provide all of the information described above that is required for removing one or more categories of registration and additional information as requested by CRR staff
• ensure that a key principal (either the CCO or UDP) remains with the registrant to complete the voluntary surrender application
• ensure that any outstanding fees owing to the OSC have been paid
• file their complete voluntary surrender application as far in advance as possible and at least 60 working days before the date they would like the surrender to take effect.
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Registration of Client Relationship Managers
As discussed in last year's summary report, the Canadian Securities Administrators (CSA) has updated its expectations for the assessment of Relevant Investment Management Experience (RIME) for advising representatives (ARs) wishing to act as client relationship managers (CRMs). Experience in selecting individual securities is part of the RIME that is required to become registered as an AR. Associate advising representatives (AARs) that act as CRMs typically will not have accumulated sufficient securities-selection RIME to become ARs. However, an AAR or other individual who can demonstrate that they have all of the other proficiencies required for registration as an AR, in addition to significant experience relevant to CRM activity, can be registered as an AR who will specialize in CRM activity (a CRM AR).
Firms seeking CRM AR registration on behalf of individual applicants should note the following:
• The individual must satisfy the education requirements of section 3.11 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and demonstrate sufficient CRM-related RIME.
• CRM activities can vary and be quite broad depending on the experience level of the individual. Some basic CRM experience may be sufficient for registration as an AAR. However, if the individual is seeking registration as a CRM AR, the experience must be significant and typically includes:
• a thorough understanding of the investment decision making strategies and processes of the firm; and/or
• portfolio security selection strategies of the firm (this would not include any stock picking analysis or recommendation).
• Individuals with only mutual fund sales experience are unlikely to qualify as an AAR (please refer to CSA Staff Notice 31-332 Relevant Investment Management Experience for Advising Representatives and Associate Advising Representatives of Portfolio Managers for more information), and therefore would not qualify as a CRM AR.
• Individuals with only financial planning experience are unlikely to qualify as an AAR (but will be assessed on a case-by-case basis), and therefore would likely not qualify as a CRM AR.
As a reminder:
• Firms seeking CRM AR registration on behalf of individual applicants should include a statement in the "Current Employment" entry for the sponsoring firm, stating "Individual is seeking registration as CRM AR". This will facilitate efficiency in the review of the application.
• Terms and conditions are standardized and will be applied to the registration of CRM ARs to restrict their registerable activities to things that do not involve the selection of securities.
• To ensure that there are no misunderstandings on the part of clients, CRM ARs may not use any title that could imply to a reasonable person that their advising activities are materially the same as those of unrestricted ARs. If a CRM AR's title does not include "client relationship manager", "client relationship manager" must be attached to their title as a description of their function in client communications and marketing materials.
For additional information, please refer to the Guidance on Client Relationship Management specialists and related FAQ.
1.3 Registrant Advisory Committee
Established in January 2013, the Registrant Advisory Committee (RAC) is in its fifth term. It is comprised of nine external members and is chaired by the Director of CRR, Debra Foubert. The RAC meets quarterly, with members serving a minimum two-year term.
The RAC's objectives include:
• advising on issues and challenges faced by registrants in interpreting and complying with Ontario securities law, including matters related to registration and compliance
• providing feedback on the development and implementation of policy and rule-making initiatives that promote investor protection, fair and efficient capital markets, and contribute to the stability of the financial system.
Topics of discussion over the past fiscal year included:
• how the COVID-19 pandemic impacted registrant operations
• the OSC's inclusion and diversity initiative
• the January 2021 final report of the Capital Markets Modernization Taskforce
• compliance initiatives, including the marketing review conducted in fiscal year 2020-2021 and the suitability sweep completed in fiscal year 2019-2020
• various discussions on CRR's initiatives related to the OSC's Regulatory Burden Reduction initiative
• the 2020 Risk Assessment Questionnaire.
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COVID-19 Survey |
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2020 Risk Assessment Questionnaire 2.3 Presence review |
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2.4 |
Marketing review |
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2.5 |
Outside business activities |
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2.6 |
Complaint handling processes |
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2.7 |
Net Asset Value adjustments |
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2.8 |
Registration & Commission filings |
Overview of Part 2 of the Summary Report
Part 2 of the Summary Report provides an overview of the compliance initiatives, including findings and outcomes from compliance reviews, conducted during the 2020-2021 fiscal year.
Where applicable, best practices, specific legislation and relevant guidance are provided to assist firms in addressing each of the topic areas discussed. For ease of reference, registration categories are listed beside each topic deficiency heading to indicate that the information is relevant to firms registered in those categories.
We encourage registrants to review the information presented in Part 2 of this report as the guidance presented may be helpful to registration categories other than those listed.
2.1 COVID-19 Survey
In July 2020, we issued a survey to gather information from registrants to better understand the initial impacts of the COVID-19 pandemic on registrants' operations. The survey was sent to registrants domiciled in Ontario and covered the six-month period January 1, 2020 to June 30, 2020. We received over 700 survey responses.
We reviewed and analyzed the survey information provided. We contacted individual firms where necessary to further clarify their responses and ask for additional information if a specific compliance issue was identified.
Questions in the survey focused on collecting information on specific data points including:
• assets under management (AUM), capital raised, gross revenue and net income/loss
• the number of client complaints
• use of leverage by clients
• amount of subscriptions and redemptions
• amount of illiquid securities held in fund portfolios
• gating/suspension of redemptions.
We also asked registrants if they encountered issues in implementing their business continuity plan or receiving services from their service providers during the first half of 2020. The majority of registrants responded that they did not encounter issues in implementing their business continuity plan or receiving services from their service providers as a result of the COVID-19 pandemic.
Overall, the information gathered from the survey demonstrated that registrants adapted well during this unprecedented period.
a) Remote work and "business location" registration considerations (All)
In light of the COVID-19 pandemic and the increased prevalence of registered individuals working remotely, there have been questions on whether such individuals are required to identify their personal residence as a "business location" in accordance with Nl 33-109. We continue to take a flexible and practical approach on this issue considering many firms have established work-from-home (WFH) arrangements with their registered individuals.
Nl 33-109 defines a "business location" as a location where the firm carries out an activity that requires registration, and includes a residence if regular and ongoing activity that requires registration is carried out from the residence or if records relating to an activity that requires registration are kept at the residence.
In considering whether a personal residence is required to be reported as a "business location" in accordance with Nl 33-109, registered firms should consider:
• if there is a regular and ongoing WFH arrangement, and
• if any of the following factors are present:
• more than one registered individual conducts registerable activities on behalf of the firm at the residence
• the residence is held out to the public (signage, business cards, etc.) by the individual or firm
• the individual physically meets with clients at the residence
• the individual maintains books and records at the residence that are not duplicated at the firm's head office.
Registered firms that allow staff to work remotely must have compliance systems in place, including appropriate policies and procedures related to supervision, that adequately address the WFH arrangements.
b) Business continuity planning (All)
Nl 31-103 requires registered firms to establish, maintain and apply policies and procedures that establish a system of controls and supervision to ensure compliance with securities legislation and manage the risks associated with their business in accordance with prudent business practices. Section 11.1 of Nl 31-103CP states an effective compliance system includes internal controls designed to manage the risks that affect a registrant's business, including risks that may relate to business interruption.
The operational challenges arising out of the COVID-19 pandemic demonstrated the importance of business continuity plans (BCPs). It is important that senior management is involved in the creation and approval of the firm's BCP. Senior management's ongoing communication and participation regarding the firm's BCP will demonstrate a positive and strong tone at the top.
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Registered firms should:
• develop procedures to mitigate, respond to, and recover from business interruptions and other types of disturbances that may disrupt the firm's day-to-day operations
• consider how the firm will communicate with clients, key personnel, third-party service providers and regulators in the event of a business interruption
• implement procedures to protect, backup and recover the firm's books and records
• determine and document the firm's alternate/back-up locations in the event of a business interruption
• train the firm's employees on the BCP
• determine and document how often the BCP needs to be updated and tested for effectiveness
• determine and document how the firm will assess the adequacy of the BCPs of outside service providers.
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Legislative reference and guidance
• Section 11.1 Compliance system of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (Nl 31-103) and related Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103CP)
• CSA Staff Notice 31-350 Guidance on Small Firms Compliance and Regulatory Obligations
• OSC Staff Notice 33-747 2016 Annual Summary Report for Dealers, Advisers and Investment Fund Managers, pages 42-43 (OSC Staff Notice 33-747)
2.2 2020 Risk Assessment Questionnaire (All)
In June 2020, we issued the 2020 RAQ to over 1,000 firms that were registered with the OSC in the categories of IFM, PM, restricted portfolio manager, EMD, restricted dealer and SPD.
The RAQ is our primary tool to obtain information about our registrants' business operations, which supports our risk-based approach to select firms for compliance reviews or targeted reviews. The information collected from the 2020 RAQ was analyzed using a risk assessment model. The analysis results in each firm's response being risk-ranked and assigned a risk score.
A firm may be risk-ranked as high based on a variety of factors, including: the broad nature of the firm's business activities, the amount of client AUM, the size of the firm, and the number or type of clients serviced by the firm. Firms that are risk-ranked as high may be selected for a compliance review. In addition, if we conduct a targeted review of a particular topic or issue, we may select firms for this review based on their RAQ responses.
The RAQ is issued on a two-year cycle, and registrants can expect to receive the next version in April 2022. Given the success in pre-populating firm information as part of the 2020 RAQ process, we expect to pre-populate the same information in a firm's 2022 RAQ by carrying forward responses from the firm's 2020 RAQ submission. Pre-populated responses will only be provided to questions where we do not expect the firm's response to change or change materially from their most recent RAQ submission.
2.3 Presence review
In 2020, we conducted reviews of (i) registered firms that had not been included in any recent CRR compliance sweeps, or (ii) firms that were registered and had not been reviewed since their initial compliance review which took place as part of the "Registration as the First Compliance Review" program.{6} This initiative involved reviews of 100 firms across all categories of registration.
The scope of these reviews was primarily determined based on the level of the firm's business activity in Canada.
Sixty-four of the firms reviewed had limited activity in Canada and many were also regulated by foreign regulators. As such, these reviews focused on confirming and updating our understanding of the firm's:
• corporate structure and lines of business
• registerable activities in Ontario, including products and services offered as well as the firm's interaction with its Ontario clients
• marketing activities in Ontario
• compliance function, including the appropriate registration of individuals.
The remaining 36 firms were subject to normal course, on-site compliance reviews (conducted virtually), using a risk-based approach to focus on specific areas of the firm's business activities.
a) Representatives servicing clients without required registration (PM / EMD)
We continued to see representatives of registered firms conducting registerable activities in Ontario without being registered as either ARs, AARs or dealing representatives.
We found this most frequently in registered firms based outside of Canada. In some cases, the unregistered individuals were responsible for collecting and updating know-your-client (KYC) information and discussing investment or account performance with the firm's Ontario clients. In other cases, although the unregistered individuals were not interacting with the firm's Ontario clients, they were, due to other activities they were performing, found to be conducting registerable activity. For example, we found certain firms used computer-based quantitative methods to select securities but did not register the individuals who review or approve system-generated recommendations to buy, sell or hold securities. In our view, these individuals are undertaking registerable advising activity, regardless of whether they interact with the firm's clients.
We recognize that the registration regimes in foreign jurisdictions may differ and do not require that every individual trading in, or advising on, securities on behalf of a firm be registered. However, we remind firms based outside of Canada that individuals trading in, or advising on, securities on behalf of the firm and servicing clients in Ontario must be registered as either an AR, AAR or dealing representative. This includes both individuals who conduct relationship management activities and individuals who select securities for client portfolios.
If we find that a firm is not in compliance with the registration requirements in Ontario, this may raise concerns regarding the adequacy of the firm's compliance system and may reflect poorly on the firm's continued fitness for registration. This may also raise concerns that the firm is not adequately supervising its representatives. Registered firms are responsible for the conduct of individuals acting on behalf of the firm.
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PMs and EMDs should:
• take adequate steps to understand and comply with the registration requirements in Ontario by consulting compliance and/or legal advisors before commencing registerable activities in Ontario
• assess whether an individual assigned to service an Ontario client is conducting activity that would require registration in Ontario, and if so, take immediate steps to apply to register the individual in Ontario
• have measures in place to ensure that only registered individuals are performing duties related to the firm's obligations as a registrant
• provide adequate training to employees on the registration requirements in Ontario.
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Legislative reference and guidance
• Section 25 Registration of the Securities Act (Ontario) (the Act)
• Section 1.3 Fundamental concepts of Nl 31-103CP
• Section 11.1 Compliance system of Nl 31-103 and related Nl 31-103CP
• Guidance on Client Relationship Management specialists and related FAQ
• OSC Staff Notice 33-750 2019 Annual Summary Report for Dealers, Advisers and Investment Fund Managers, page 27 (OSC Staff Notice 33-750)
• OSC Staff Notice 33-747. pages 52-54
b) Policies and procedures not tailored to the firm's operations (IFM / PM / EMD)
While many countries share common regulatory principles, specific securities laws and regulations can differ from one jurisdiction to another. As a result, firms must tailor their policies and procedures to their specific operations and the regulatory requirements in jurisdictions in which the firm is registered.
During our reviews, we noted instances where registrants that operate in multiple countries did not incorporate Ontario-specific requirements into their compliance programs. Specifically:
• Written policies and procedures did not address Ontario regulatory requirements, such as CRM2 guidelines for client account reporting and minimum timelines for retention of books and records.
• The annual compliance report to the Board of Directors (or equivalent) did not address the firm's compliance with Ontario securities regulatory standards or was signed by someone other than the firm's CCO.
• Confidentiality provision language in employment agreements, such as non-disclosure agreements and whistleblower policies, did not permit exceptions for voluntary communication with Ontario regulatory authorities.
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Registered firms should:
• address Ontario-specific requirements in their written policies and procedures
• address the firm's compliance with Ontario securities legislation in the annual compliance report to the Board of Directors (or equivalent); this report is the responsibility of the Ontario-registered CCO and cannot be delegated to unregistered individuals
• allow exceptions for voluntary communication with regulatory authorities in Ontario in confidentiality provision language of key employment agreements
• provide training on Ontario regulatory requirements to staff involved in Ontario operations.
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Legislative reference and guidance
• Section 11.1 Compliance system of Nl 31-103 and related Nl 31-103CP
• Part 5, Ultimate Designated Person and Chief Compliance Officer of Nl 31-103 and related NI31-103CP
• OSC Staff Notice 33-751 2020 Annual Summary Report for Dealers, Advisers and Investment Fund Managers, page 28 (OSC Staff Notice 33-751)
• OSC Staff Notice 33-749 2018 Annual Summary Report for Dealers, Advisers and Investment Fund Managers, pages 35-36 (OSC Staff Notice 33-749)
2.4 Marketing review
We conducted a desk review of the marketing practices of IFMs, PMs and EMDs (the marketing review). Our sample consisted of 45 registrants for which the OSC is the principal regulator (PR). We reviewed sample marketing material for each type of marketing practice indicated by registrants in response to the 2020 RAQ.
For the IFM sample, the review of marketing material focused on the IFMs marketing practices related to the firm's corporate brand. In addition, the sample of IFMs was selected based on firms that offered a "responsible investing" product or service, which could include all or a combination of the incorporation of environmental, social or governance (ESG) factors, socially responsible investing, or impact investing into their investment products or advisory services. We reviewed the IFMs marketing material and internal policies and procedures related to responsible investing and did not identify any substantive concerns specific to this area of the marketing review.
The purpose of the marketing review was to:
• assess the marketing practices of registrants for compliance with Ontario securities law
• verify the existence of an internal compliance infrastructure to support references to or disclosure about ESG investment factors that IFM registrants are making in their marketing material.
The OSC's marketing review is part of a larger initiative involving other CSA jurisdictions that are also executing a similar marketing review of registrants for which they are the PR. The CSA will consider whether updated industry guidance should be published following the conclusion of all the reviews.
a) Inadequate disclosure when using benchmarks (All)
We continued to note instances of registered firms presenting benchmarks in marketing materials to compare to the performance of their investment strategies, without adequate accompanying disclosure for a client to draw correct conclusions from the comparisons.
Registered firms have an obligation to deal fairly, honestly and in good faith with clients. Any statements made about any matter that a reasonable investor would consider relevant in deciding whether to enter into or maintain a trading or advising relationship with the registrant must be true or cannot omit information necessary to prevent the statement from being false or misleading in the circumstances in which it is made.
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Registered firms should:
• provide disclosure accompanying the presentation of a benchmark, including:
• the full name of the benchmark, and information about the relevance and purpose of each benchmark used
• an explanation of the material differences between the benchmark and the investment strategy
• the reporting currency and basis of the benchmark (e.g. net orgross-of-fees, total return or price return)
• the composition of a blended benchmark, including the specific weights that each component within the blended benchmark represents
• if a benchmark is presented for general information purposes and is not meant to be compared to the firm's specific strategy (e.g. widely known and followed indices), how the benchmark information should be used
• any other information necessary to make the comparison fair and meaningful.
b) Misleading marketing material (All)
We found several firms that included claims in marketing material that were misleading. A marketing claim is considered misleading if the claim includes statements that are subjective and cannot be substantiated, incorrect or outdated.
Registrants must ensure that all claims included in marketing material can be substantiated, are factually correct and are up to date to ensure that existing and prospective clients are not misled.
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Registered firms should:
• maintain adequate support to substantiate any claims made in marketing material
• provide adequate context and references to the information supporting claims, including third party sources, so investors can better assess the merits of the claim
• have an individual independent of the preparer review and approve the marketing material prior to its use
• have oversight over the use of claims in marketing material as part of an adequate compliance system
• have written policies and procedures to address all the above.
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Legislative reference and guidance
• Subsection 44(2) Representation prohibited of the Act
• Subsection 2.1 (1) General duties of OSC Rule 31-505 Conditions Of Registration
• Section 11.1 Compliance system of Nl 31-103 and related Nl 31-103CP
• CSA Staff Notice 31-325 Marketing Practices of Portfolio Managers (CSA Staff Notice 31-325). page 5-6
• Section 3.3(a) of OSC Staff Notice 33-747. page 56
• Section 2.2(a) of OSC Staff Notice 33-748 Annual Summary Report for Dealers, Advisers and Investment Fund Managers, page 23
c) Prohibited representations (All)
We identified instances where firms made prohibited representations in their marketing material that:
• implied the OSC had passed upon the financial standing, fitness or conduct of the firm
• resulted in the registration of the firm being improperly marketed
• suggested the firm or an individual employed by the firm is holding out as being registered through the use of misleading titles.
i) OSC has passed upon the financial standing, fitness or conduct of the firm
We found statements in marketing material that could cause investors to believe that the OSC has passed upon the financial standing, fitness or conduct of the firm. For example, the marketing material included statements that the:
• firm worked with the OSC to develop its platform
• OSC oversees the activities of the firm
• firm is governed by the OSC
• firm is subject to regular OSC audits
• firm remains in good standing with the OSC.
These statements are misleading and inappropriate because they imply that the OSC is involved in the firm's operations or may exaggerate the frequency of OSC compliance reviews conducted on the firm. Registered firms are responsible for their compliance with Ontario securities law and OSC oversight does not in any way lessen the firm's responsibility for compliance.
ii) Improper marketing of registration
Some firms improperly represented their registration with the OSC by omitting or inaccurately marketing:
• their category of registration
• the CSAjurisdiction(s) in which the firm is registered.
It is important that a firm clearly states its category of registration, and the jurisdiction(s) where it is registered when marketing its registration as this information informs investors of registerable services the firm is authorized to provide.
iii) Holding out and misleading use of titles
We observed that some firms and their employees made inappropriate use of titles. For example:
• websites and social media accounts included posts that stated or implied that unregistered individuals were registered to advise or trade in securities
• employment titles of unregistered individuals implied that they were registered
• employment titles used by registered individuals did not accurately reflect the nature of their duties or their category of registration.
Firms and individuals should not use titles or make statements that imply they are registered when they are not. Employment titles should accurately reflect the nature of the employee's duties and registration to avoid misleading investors.
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Registered firms should:
• not make written or verbal representations that the OSC has in any way passed on the firm's financial standing, fitness, or conduct
• when representing the firm's registration category in marketing material, state the category of registration and the jurisdiction(s) that it is registered in
• not permit the use of titles which suggest that individuals are permitted to perform activities they are not registered to perform
• ensure that employees use titles that accurately reflect the nature of their duties and registration
• establish clear policies and procedures for all of the above.
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Legislative reference and guidance
• Subsection 44(1) Representation of registration of the Act
• Subsection 44(2) Representation prohibited of the Act
• Subsection 46 Prohibited representation re Commission approval of the Act
• Section 11.1 Compliance system of Nl 31-103 and related Nl 31-103CP
• CSA Staff Notice 31-325, page 5-6
2.5 Outside business activities (All)
In 2019, we conducted focused compliance reviews of seven firms across various dealer and adviser registration categories to assess their supervision of their representatives' outside business activities (OBAs). This included their supervision of any restricted client terms and conditions (RCTCs) due to an OBA that creates a position of influence over a potential client (such as a representative that is also a religious leader being restricted from trading or advising in securities with a member of their church). These reviews also helped to inform proposed amendments to Nl 33-109 and Nl 31-103 on the regulation of OBAs that were published in February 2021 as part of the OSC's Regulatory Burden Reduction initiative. For more information, please refer to section 3.1 of the Summary Report.
The firms we reviewed had over 21,000 representatives with over 30,000 OBAs. The majority of the OBAs were for providing financial services such as banking, insurance, or financial planning outside of the representatives' sponsoring firms. There were also a significant number of OBAs that were employment or business activities in non-financial services such as restaurants, retail stores or investment properties. There were also a large number of volunteer and community activities, for example with charitable and not-for-profit organizations.
OBAs are a regulatory concern for a number of reasons, including when the OBA:
• creates a material conflict of interest for the representative that must be addressed in the best interest of the client
• places the representative in a position of influence over clients, especially vulnerable clients
• creates the risk for client confusion
• limits the ability of the representative to properly service clients.
As such, firms must supervise their representatives' OBAs as part of their compliance system and respond to material conflicts of interest which include OBAs. Firms are also required to report their representatives' OBAs on each individual's registration application, and report changes to OBAs on the NRD within ten days.
We did not find significant deficiencies in the reviewed firms' OBA supervision and we found no evidence of non-compliance with any RCTCs. Overall, we found that the reviewed firms had effective supervision of their representatives' OBAs, including:
• written policies and procedures on OBAs
• maintaining records of all representatives' OBAs and any RCTCs
• training for representatives on OBAs
• taking appropriate supervisory actions, such as warning letters, when they identified non-compliance with their OBA policies, such as no or late reporting of an OBA.
In addition, the reviewed firms used other effective practices to supervise OBAs, which included:
• using standard forms and/or questionnaires to collect and assess their representatives' OBAs
• having an intake method for representatives to disclose their OBAs to the firm
• providing guidelines that describe what an OBA is and the types of OBAs that are restricted or prohibited by securities laws or by the registered firm
• having active involvement of the appropriate staff of the registered firm in the oversight of OBAs
• performing internet searches or branch reviews to identify non-disclosed OBAs
• having their representatives provide annual certifications for attesting compliance with policies relating to OBAs
• providing monthly or quarterly reminders to their representatives to report changes to their OBAs
• disclosing OBAs to clients using a standard form that is tailored for each OBA
• obtaining acknowledgement from clients of their representative's OBAs
• for representatives with an RCTC, obtaining written confirmation from their clients that they do not have a relationship with the representative in their position of influence.
Legislative reference and guidance
• Section 13.4 Identifying and responding to conflicts of interest of Nl 31-103 and related NI 31-103CP
• Section 11.1 Compliance system of Nl 31-103 and related Nl 31-103CP
• Section 4.1 Notice of Change to an Individual's Information of National Instrument 33-109 Registration Information (Nl 33-109)
• Item 10 and Schedule G of Form 33-109F4 Registration of Individuals and Review of Permitted Individuals (Form 33-109F4)
2.6 Complaint handling processes (PM / EMD / SPD)
In 2020, staff from the CRR Branch and the SROs jointly conducted a review of a sample of registered firms' websites to assess whether their complaint escalation processes and timelines for accessing the services of the Ombudsman for Banking Services and Investments (OBSI) were presented on their websites in a manner consistent with Nl 31-103 and applicable SRO rules. Staff focused primarily on firms that have an internal ombudsperson.
During the review, staff identified a number of issues, including a failure to clearly set out a client's right to immediately access OBSI if they are not satisfied with the firm's response. In some cases, clients were instead directed to the firm's internal ombudsperson. Staff found this practice to be problematic as it may mislead clients to believe that they are required to contact an internal ombudsperson first before escalating their complaints to OBSI, or that the internal ombudsperson is an alternative to OBSI. As well, we observed that the availability of OBSI services was not given at least equal prominence as the information about the firm's internal ombudsperson, which could significantly affect a client's ability to access OBSI services in a timely manner.
Following the review, staff of the OSC and SROs issued a joint letter to the firms and requested that they revise their websites and applicable documents (e.g. brochure, relationship disclosure document, account agreement) to comply with securities laws.
We remind firms that both the UDP and CCO have responsibility for establishing an effective compliance system, which includes maintaining a complaint handling process that is consistent with the firm's obligations to deal fairly, honestly and in good faith with their clients.
We received responses from the firms that appropriate action will be or had already been taken to address the issues, including establishing a timeline for revising websites and reprinting applicable documents. We will continue to monitor firms' complaint handling practices as part of our compliance reviews to verify that the complaint handling and escalation processes are presented in a manner that are clear, fair and not misleading to clients.
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Registered firms should:
• document all complaints in a complaint log
• send an initial response to the complainant within five business days of receipt of a complaint
• provide a substantive response to complaints indicating the firm's decision on the complaint within 90 days of receiving a complaint
• have management (such as the UDP or CCO) review the complaint log periodically to identify patterns or areas where improvements could be made to strengthen the firm's procedures and controls
• provide information to clients about the availability of a dispute resolution service provider at three points in time (i.e. at account opening, at the time of the complaint and at the time of the decision)
• in addition to the above items, if using an internal ombudsperson, disclose all of the following:
• the internal ombudsperson is employed by the firm or is an affiliate of the firm and, unlike OBSI, is not an independent dispute resolution service
• the client may submit a complaint to OBSI without going to the internal ombudsperson if the firm has not provided the client with a written notice of its decision within 90 days of the client's complaint submission
• if a client is not satisfied with the firm's decision, the client may immediately submit a complaint to OBSI without going to the internal ombudsperson and that the client has 180 days after receipt of the firm's decision to submit their complaint to OBSI
• the services of OBSI are free
• the use of the firm's internal ombudsperson process is voluntary, specifying the estimated length of time the internal process is expected to take, based on historical data
• the statutory limitation periods continue to pass while an internal ombudsperson reviews a complaint, which may impact a client's ability to commence a civil action.
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Legislative reference and guidance
• Section 11.1 Compliance system of Nl 31-103 and related Nl 31-103CP
• Sections 13.15 Handling complaints and 13.16 Dispute resolution service of Nl 31-103 and related NI 31-103CP
• Joint CSA Staff Notice 31 -351. IIROC Notice 17-0229. MFDA Bulletin #0736-M Complying with requirements regarding the Ombudsman for Banking Services and Investments
• CSA Staff Notice 31-338 Guidance on Dispute Resolution Services -- Client Disclosure for Registered Dealers and Advisers that are not Members of a Self-Regulatory Organization
2.7 Net Asset Value adjustments (IFM)
Section 12.14 of Nl 31-103 requires an IFM to deliver no later than the 90th day after the end of its financial year and no later than the 30th day after the end of its first, second and third interim period, a completed Form 31-103F4 Net Asset Value Adjustments (Form 31-103F4), if any net asset value (NAV) adjustment has been made in respect of an investment fund managed by the IFM during the financial year, including any interim period. A NAV adjustment is necessary when there has been a material error and the NAV per unit does not accurately reflect the actual NAV per unit at the time of computation.
IFMs are expected to have policies that clearly define what constitutes a material error that requires adjustment.
Staff reviewed 85 Form 31-104F4s received between April 1, 2020 and January 31, 2021, submitted by 35 IFMs relating to NAV adjustments impacting 145 investment funds. The most common causes of NAV adjustments were:
• errors made by third-party fund administrators, including pricing errors and incorrect income/expense accruals
• control failures within the firm, including incorrectly setting up securities on the firm's systems, trading errors, and using stale pricing files
• inadequate communication between PMs and fund administrators especially in the case of trades in derivatives
• mispricing of illiquid or hard-to-value securities
• incorrect recording of corporate actions
• incorrect accounting between different classes and series of units within an investment fund especially when the classes of the funds were in different currencies.
Staff followed up with the IFM regarding the Form 31-103F4 in instances where:
• the reason for the NAV adjustment was unclear
• the error persisted for an extended period
• it was unclear if the unitholders and investment fund were compensated as a result of the NAV adjustment and, if so, by how much
• the error was not detected by the IFM but by a third-party
• no changes were made to the system of controls of the IFM or the third-party administrator after the error was corrected.
While most of the errors were identified by the IFM, there were instances where the error was identified by sub-advisers, auditors, or third-party fund administrators. Staff's review found that most of the errors were identified and rectified in a timely manner, however, we continued to note instances where inadequate controls resulted in the error remaining undetected for an extended period of time (e.g. greater than one month).
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IFMs should:
• maintain and apply written policies and procedures to ensure that the fund's investments are properly valued and that the NAV is accurately calculated
• adequately oversee a service provider's procedures for calculating NAV
• maintain and apply written policies and procedures to identify and correct any NAV calculation errors, including policies and procedures that:
• establish a reasonable materiality threshold for NAV adjustments
• set out how NAV calculation errors will be rectified
• identify how the fund and its unitholders will be made whole (as appropriate) if the NAV has been materially overstated or understated
• adjust the fund's NAV (including retroactive adjustments) and compensate the fund and its unitholders as appropriate when there is a NAV adjustment
• re-assess the control failure that resulted in the incorrect NAV and enhance controls where necessary
• submit Form 31-103F4 within the required time frame to the principal regulator if there has been a NAV adjustment.
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Legislative reference and guidance
• Section 12.14 Delivering financial information -- investment fund manager of Nl 31 -103 and related NI 31-103CP
• Part 11, Division 1 -- Compliance of Nl 31-103 and related Nl 31-103CP
• OSC Staff Notice 33-751. pages 29-30
• OSC Staff Notice 33-742 2013 Annual Summary Report for Dealers, Advisers and Investment Fund Managers, pages 58-61
• Registrant Outreach seminar (June 2017) -- Effective Oversight of Service Providers and Modernization of Investment Fund Product Regulation -- Alternative Funds
2.8 Registration & Commission filings
a) When wholesaling securities is considered registerable activity (All)
The term "wholesaling" in the securities context has no formal definition; however, we understand the term to generally mean the act of soliciting registrants on behalf of one or more issuers in order to have the issuer's securities offered by the registrant to the registrant's clients or prospective clients. Since the registrant's clients become the end-purchasers of the issuer's securities, we would consider wholesaling to be an act or conduct in furtherance of that trade. In staff's view, wholesaling is therefore captured by clause (e) of the definition of "trade" under subsection 1(1) of the Act and, if done with regularity and for a business purpose, may require registration.
Section 8.5 of Nl 31-103 provides an exemption from registration where the trade is made through a registered dealer. This exemption is not available where a person or company conducts trading activities for which they are not registered or exempt from registration and then directs the execution of that trade through a registered dealer. Such trading activities could involve directly contacting persons in the local jurisdiction to solicit their purchase of securities or marketing the securities in the local jurisdiction.
This exemption is only available where the wholesalers deal exclusively with registered dealers and neither contact nor solicit end-purchasers. The concept of solicitation is broadly defined under securities law and can include acts such as creating or adapting communications about the issuer's securities for registered representatives to use in client discussions or posting these materials on a public website available to end-purchasers (including the registered dealer's website).
Furthermore, in accordance with the general condition set out in section 8.0.1 of Nl 31-103, the use of section 8.5 of Nl 31-103 is not available to a person or company if the person or company is registered in the local jurisdiction and if their category of registration permits the person or company to act as a dealer or trade in a security for which the exemption is provided.
Firms not registered as dealer may rely on the exemption in section 8.5 when wholesaling, provided the trade is made exclusively through a registered dealer and there is no intervening trading activity by that person for which that person is not appropriately registered or otherwise exempt from the dealer registration requirement and there is no contact with the end-purchaser. For example, an IFM that is not registered as a dealer may promote the fund to registered dealers, provided they do not solicit or communicate with the end-purchaser.
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Market participants who wholesale should:
• not communicate with end-purchasers when relying on section 8.5 of Nl 31-103, including through written communications and marketing and registered firms should have procedures to prevent their employees from doing so
• seek registration as a dealer if they are not able to rely on section 8.5 of Nl 31-103
• have procedures to prevent their registered individuals from engaging in wholesaling outside of the registered firm.
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Legislative reference and guidance
• Subsection 1 (1) of the Act (definition of "trade")
• Section 8.0.1 General condition to dealer registration requirement exemptions of Nl 31-103
• Section 8.5 Trades through or to a registered dealer of Nl 31-103
b) Ownership changes (All)
i) Missed section 11.9/11.10 notices and missed filings of Form 33-109F5
We continued to see firms not filing the notice of proposed ownership changes in, or asset acquisitions of, registered firms required under sections 11.9 or 11.10 of Nl 31-103. Specifically, during our compliance reviews we noted a number of deficiencies as a result of:
• registered firms or registered individuals (e.g. UDP, CCO, AR or dealing representative of the firm) acquiring 10% or more of the securities of another registered firm, or their sponsoring firm, without first providing the regulator with the required notice
• registrants acquiring all or a substantial part of the assets of another registered firm without first providing the regulator with the required notice
• registered firms not providing the regulator with the required notice as soon as the registered firm knew, or had reason to believe, that 10% or more of its voting securities were going to be acquired.
In staff's view, a "substantial part of the assets" of a registered firm includes the acquisition (whether structured as a "purchase" for compensation or not) of:
• another registered firm's book of business
• a business line or division of another registered firm
• investment fund management contracts of another registered firm that is an IFM.
Where we identify missed notices for completed transactions, we require the registered firm to file the notice materials for review and pay the applicable filing fees. We may also charge late fees for the late section 11.9 notices as well as applicable late fees for each related securities regulatory filing that is also filed late. Failure to provide notice of ownership changes or asset acquisitions may also result in the issuance of a warning letter or further regulatory action.
Registered firms may want to consider using the new template, recently developed as part of the OSC's commitment to reduce regulatory burden, to prepare these notices. For more information, please refer to section 3.1 of the Summary Report.
We also noted instances where, in addition to the registered firm missing the notice under sections 11.9 or 11.10 of Nl 31-103, the firm did not make the required filings under Nl 33-109, in particular the filing of Form 33-109F5 to reflect the change in share ownership or the acquisition of its assets.
ii) Changes to Item 3.12 of Form 33-109F6 and Item 17 of Form 33-109F4
Currently, a registered firm has 30 days to file any changes to information previously reported in Part 3 of Form 33-109F6, which includes Item 3.12 Ownership chart. A registered individual or permitted individual must also update information previously provided under Item 17 Ownership of Securities and Derivatives Firms of Form 33-109F4 within 10 days of such change.
In some cases, a change in ownership will require a filing for both the firm and individual if the change in ownership requires a registered individual or permitted individual to disclose their ownership interest in a registered firm. Often a filing will be made under Item 3.12 for the firm but not under Item 17 for the sponsored or permitted individual.
Registrants should put in place a procedure to review whether a filing is required under Item 17 of Form 33-109F4 for any applicable individuals when making an update under Item 3.12 of Form 33-109F6 and make the required filings within the prescribed time.
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Registered firms should:
• understand when the submission of a section 11.9 or 11.10 notice is required
• provide sufficient information in the notice including all relevant facts regarding the acquisition to enable the regulator to determine if the acquisition is:
• likely to give rise to a conflict of interest
• likely to hinder the registered firm in complying with securities legislation
• inconsistent with an adequate level of investor protection
• otherwise prejudicial to the public interest
• ensure that all changes to Form 33-109F6, resulting from ownership changes, are filed by submitting a completed Form 33-109F5 within the time frames set out in Part 3 of Nl 33-109
• have policies and procedures in place to determine whether a filing is required under Item 17 of Form 33-109F4 for any applicable individuals when making an update under Item 3.12 of Form 33-109F6
• have policies and procedures in place to ensure that required filings are made within the deadlines established under securities laws so as to minimize late filings.
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Legislative reference and guidance
• Section 11.9 Registrant acquiring a registered firm's securities or assets of Nl 31-103 and related NI 31-103CP
• Section 11.10 Registered firm whose securities are acquired of Nl 31-103 and related Nl 31-103CP
• Appendix D of OSC Rule 13-502 Fees
• Sections 3.1 Notice of Change to a Firm's Information and 4.1 Notice of Change to an Individual's Information of Nl 33-109
• Item 17 Ownership of Securities and Derivatives Firms of Form 33-109F4
• Form 33-109F5 Change of Registration Information (Form 33-109F5)
• Item 3.12 Ownership chart of Form 33-109F6 Firm Registration
c) Incomplete Form 33-109F5 submissions (All)
i) Blacklines required for changes to Form 33-109F6 filed via Form 33-109F5
A Form 33-109F5 filing to update information about a registered firm previously filed using Form 33-109F6 requires registered firms to provide a blackline of the amended section of the Form 33-109F6. Not providing this blackline causes delays in processing the submission and may require follow-up with the firm.
Registrants need to provide blacklines showing the amended sections of the form when making an update to information previously provided under Form 33-109F6.
ii) Title of authorized signing officer or partner required in Form 33-109F5
An update to information about a registered firm previously filed using Form 33-109F6 requires that the title of an authorized signing officer or partner be specified in the certification section in Form 33-109F5. Not providing the title when making an update may lead to follow-up questions from staff and delays in processing the submission.
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Registered firms should:
• provide a blackline of the amended sections when making an update to information previously provided under Form 33-109F6
• confirm that the authorized signing officer or partner's title is provided when using Form 33-109F5 to update any changes to Form 33-109F6.
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Legislative reference and guidance
• Section 3.1 Notice of Change to a Firm's Information of Nl 33-109
• Item 1 Type of Form and Item 5 Certification of Form 33-109F5
d) Exemptive relief applications
i) At-will financing/equity lines
Staff of the Corporate Finance Branch have recently reviewed a number of filings by reporting issuers that indicate that the issuers have entered into an "at-will financing facility" or similar type of financing arrangement with an institutional investor. In working with the Corporate Finance Branch on these reviews, CRR staff noted that certain of these financing arrangements appeared to represent an "equity line financing arrangement" or "equity draw down facility" (collectively, an equity line).
Under an equity line, an issuer typically enters into an agreement with an institutional investor (the purchaser) which provides that the issuer may from time to time require the purchaser to purchase a specified number of securities of the issuer, usually at a discount to the then market price. From the perspective of the issuer, an equity line may secure access to a readily available source of funds at a time or times of the issuer's choosing and may serve a similar function to a line of credit from a conventional lender. From the perspective of the purchaser, an equity line provides the purchaser with an opportunity to purchase securities of the issuer at a discount to the market price. The purchaser may seek to offset these purchases through resales of securities or short sales of identical borrowed securities into the secondary market in order to monetize the spread between the discounted purchase price and the market price.
We remind market participants that, to operate an equity line in Canada, both the issuer and the purchaser generally require registration relief. This is because, in an equity line:
• a distribution of securities to the purchaser may represent an indirect distribution of securities by the issuer to the public (i.e., investors in the secondary market) through the purchaser, acting as an intermediary
• the purchaser may be purchasing securities "with a view to distribution" (i.e., the resale of such securities and/or of identical borrowed securities) and may therefore be considered an "underwriter"{7} as defined in subsection 1(1) of the Act.
The nature of the exemptive relief required to operate an equity line is described in the decision Re The Roseworth Group Ltd. and Cell-Loc Inc. dated April 26, 2002 and subsequent decisions that have followed that decision. For an example, see Re Natcore Technology Inc. and Dutchess Opportunity Fund II, LP. dated September 30, 2016.
In view of the fact that an equity line purchaser may be considered to be acting as an underwriter in an indirect distribution of securities to the public, and consistent with the guidance in section 1.7 of Nl 45-106CP, staff take the view that the distributions of securities to the purchaser should be made in reliance on the prospectus exemption in section 2.33 of Nl 45-106, with the result that the resale of these securities will be a distribution.
If a purchaser is acting as an underwriter in an indirect distribution of securities to the public, staff take the view that the issuer would not be able to distribute freely trading securities to the purchaser under other prospectus exemptions, including the prospectus exemptions in Part 2 of OSC Rule 72-503. As explained under "Statement of Principle" in OSC Rule 72-503CP, issuers, registrants and other market participants seeking to distribute freely trading securities to purchasers outside of Canada should take reasonable steps to demonstrate that the purchasers are purchasing the securities with investment intent and not "with a view to distribution" and that they have taken sufficient measures in the circumstances of the distribution to make it reasonable to conclude that the offered securities come to rest outside Canada.
We also remind market participants that other requirements of Ontario securities law, including early warning and insider reporting requirements, the prohibition on trading in securities of a reporting issuer while in possession of material undisclosed information and the prohibition on market manipulation, may also apply to market participants involved in equity line arrangements.{8}
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Market participants should:
• consider whether a proposed financing could be considered an equity line arrangement and, if so, consider whether the issuer and purchaser require exemptive relief
• take sufficient steps to make it reasonable to conclude that the offered securities come to rest outside Canada if seeking to distribute freely trading securities to purchasers outside of Canada, either under a prospectus or a prospectus exemption.
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Legislative reference and guidance
• Subsection 1(1) of the Act (definitions of "dealer", "distribution" and "underwriter")
• Paragraphs 25(1)(a) and 25(2)(a) of the Act
• Section 1.3 Fundamental concepts of Nl 31-103CP
• Section 3.8 Review time frames for "equity line" short form prospectuses of the Companion Policy to National Instrument 44-101 Short Form Prospectus Distributions
• Section 2.33 Acting as an underwriter of National Instrument 45-106 Prospectus Exemptions
• Section 1.7 Underwriters of Companion Policy 45-106CP Prospectus Exemptions
• Part 2 Exemptions from the prospectus requirement of OSC Rule 72-503 Distributions Outside Canada
• Part 1 Statement of Principle of Companion Policy to OSC Rule 72-503CP Distributions Outside Canada
ii) Foreign exchange payment services/money-services businesses
In November 2020, CRR staff, in consultation with staff from the Corporate Finance Branch and Derivatives Branch, finalized a novel application for relief by a firm (the Filer) that had recently acquired the foreign exchange (FX) risk management and payment services business of EncoreFX, a former money-services business (MSB) that had filed for bankruptcy in March 2020. The Filer was granted time-limited relief from the dealer registration and prospectus requirements of the Act to operate the former MSB business of EncoreFX in Ontario on terms and conditions that are based on the proposed regulatory framework for derivatives firms set out in the CSA derivatives business conduct and registration rules (Proposed Nl 93-101 and Nl 93-102).
The relief was novel in that this was the first time in recent years that the Commission granted relief to allow a filer to trade over-the-counter (OTC) derivatives with "non-individual commercial hedgers" who are not otherwise permitted clients. The Commission has previously granted this type of relief on a number of occasions to entities that trade OTC derivatives only with permitted clients.
We anticipate that this relief may be considered a precedent for other FX payment services/MSB firms in Ontario. Accordingly, since the publication of this decision, OSC staff have engaged in outreach sessions with a number of other FX payment services and MSB firms that are active in Ontario with a view to determining whether they may need and wish to apply for similar relief, pending completion of the proposed derivatives business conduct and registration rules.
For more information, see Re Global Reach Financial Solutions Inc. dated November 16, 2020.
Legislative reference and guidance
• National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions
• Section 1.1 Definitions of terms used throughout this Instrument of Nl 31-103
• Proposed National Instrument 93-101 Derivatives: Business Conduct
• Proposed National Instrument 93-102 Derivatives: Registration
3.1 |
Burden reduction |
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3.2 |
Crypto-as set trading platforms |
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3.3 |
Client Focused Reforms |
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3.4 |
Exemption from Underwriting Conflicts Disclosure Requirements |
3.1 Burden reduction
The Burden Reduction Task Force, as announced in OSC Staff Notice 11-784 Burden Reduction,was established to identify ways to enhance competitiveness and save time and money for registrants and other market participants, while protecting investors. The OSC, including the CRR Branch, is taking action to address the concerns identified through the consultation process by committing to the initiatives outlined in the report on Reducing Regulatory Burden in Ontario's Capital Markets published on November 19, 2019 (the Regulatory Burden Report).
As highlighted in section 6.4 Concerns, Decisions and Recommendations Affecting Registrants, of the Regulatory Burden Report, CRR staff specifically identified 44 suggestions through the consultations to change requirements and processes, reflecting nine underlying concerns involving our registrants.
To address the nine concerns, CRR staff has committed to completing 30 initiatives (identified as R-1 to R-30 in the Regulatory Burden Report). CRR staff continues to make significant progress towards completion of all initiatives. In addition to the status update provided in last year's summary report, the following discussions highlight initiatives for which significant progress or completion was achieved during the 2020-2021 fiscal year.
Nl 33-109 Modernization Project
On February 4, 2021, the CSA announced targeted changes to provide registered firms and individuals with greater clarity on what information is required as part of the registration process, while also improving the quality of information received by regulators. These changes are expected to result in a more efficient registration and oversight process.
The CSA is proposing changes to how registrants report, and firms manage, outside activities, including establishing a framework that outlines categories of outside activities that registrants need to report to the regulators. The changes also codify existing requirements regarding the oversight of outside activities that are positions of influence.
The proposed changes also include amending the way certain required information can be disclosed to regulators to minimize duplicate filings. Other amendments are also expected to reduce the number of common errors seen on forms by providing clear requirements on what information must be disclosed.
Changes to reporting deadlines are also being considered, including extending the timeframe in which registrants are required to provide updates to certain registration information.
This project actions two decisions and recommendations set out in the Regulatory Burden Report, namely, to reassess OBA conflicts of interest and reporting obligations (R-2) and to modernize the registration information required by Nl 33-109 and associated forms (R-3).
The proposed amendments are not intended to change the nature of the registration process, the requirement to register, or the assessment of suitability for registration.
For further information, please refer to the notice.
Proposed OSC Rule 32-506 (Under the Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers
On December 1, 2020, the OSC published for comment Proposed OSC Rule 32-506 (Under the Commodity Futures Act) Exemptions for International Dealers. Advisers and Sub-Advisersand related Proposed Amendment to OSC Rule 91-502 Trades in Recognized Options (Under the Securities Act) (collectively, the Proposal).
The Proposal is a regulatory burden reduction initiative led by CRR staff in consultation with staff from the Derivatives Branch and is intended to codify relief that is routinely granted by the OSC under both the Commodity Futures Act (the CFA) and OSC Rule 91-502 Trades in Recognized Options, to international dealers, international advisers and international sub-advisers (collectively, international firms) in order to:
• enhance institutional investor access to international options and futures markets and thereby reduce regulatory costs for such investors
• reduce regulatory burden by eliminating the need for international firms to file applications for exemptive relief.
The Proposal actions a decision and recommendation set out in the Regulatory Burden Report, namely, to develop a rule that exempts international dealers, advisers and sub-advisers from registration under the CFA (R-27).
The comment period on the Proposal expired on March 1, 2021. We received two comment letters, both of which were supportive of the Proposal. Accordingly, staff are considering the comments received with a view to finalizing the Proposal in late 2021 or early 2022.
The commenters asked that the OSC issue an interim order to codify the relief until such time as the Proposals come into force. On April 6, 2021, the OSC granted Ontario Instrument 32-507 (Commodity Futures Act) Exemptions for International Dealers. Advisers and Sub-Advisers (Interim Class Order)and Ontario Instrument 91-505 Exemptions from the Options Proficiency Requirement for International Dealers. Advisers and Sub-Advisers (Interim Class Order)in response to this request. These interim class orders came into force on April 15, 2021.
Template form for notices under section 11.9 or 11.10 of Nl 31-103
CSA staff annually receive several notifications of acquisitions involving registered firms, as required by section 11.9 or section 11.10 of NI 31-103. CSA staff developed a standard template of a 11.9 and 11.10 notice that filers may use to prepare these notices. In February 2021, this template form was posted to the websites of various CSA members and made available for use. Use of this template to prepare notice filings is voluntary.
The purpose of the template is to assist filers in providing the type of information that staff typically request when reviewing a notice. The template may also make it easier for firms to prepare and submit the notice, and reduce the follow-up required with filers through comment letters seeking additional information. Filers can use the tillable PDF document made available on CSA member's websites or use the template as a guide when creating a separate document. If working with the tillable PDF, filers can attach documents to the PDF if more space is needed to answer a question or additional information needs to be provided.
Though the information covered in the template includes the type of information that is typically evaluated in the context of these acquisition transactions, it is still possible that staff reviewing the notice may need to contact the filer to seek additional or clarifying information. Overtime, the template notice may be updated to improve its usefulness.
In Ontario, this template notice actions the decision and recommendation set out in the Regulatory Burden Report, namely, to improve processing of 11.9 and 11.10 notices under Nl 31-103 (R-29).
The template form can be accessed from the Registration forms and documents webpage (refer to "Exemptions and applications for exemptive relief) on the OSC's website.
3.2 Crypto-asset trading platforms
On March 29, 2021, the CSA and IIROC issued Joint CSA/IIROC Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (CSA/IIROC SN 21-329) which sets out how securities legislation applies to crypto-asset trading platforms (CTPs) that facilitate the trading of:
• crypto assets that are securities (Security Tokens), or
• instruments or contracts involving crypto assets (Crypto Contracts), as described in CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets.
Also on March 29, 2021, the Commission issued a press release notifying CTPs that currently offer trading in derivatives or securities to persons or companies located in Ontario, that they must bring their operations into compliance with Ontario securities law or face potential regulatory action.
CSA/IIROC SN 21-329 does not introduce new rules specifically applicable to CTPs, as CTPs were already subject to existing requirements under securities legislation in Canada. Rather, where appropriate, it provides guidance on how the existing requirements of securities legislation may be tailored through terms and conditions on the registration or recognition of CTPs and through discretionary exemptive relief with appropriate conditions.
CSA/IIROC SN 21-329 was a follow-up to the Joint CSA/IIROC Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms (CSA/IIROC CP 21-402) that was published on March 14, 2019. CSA/IIROC CP 21-402 sought feedback on a proposed regulatory framework for CTPs, with a focus on marketplace CTPs, and solicited comments to understand the industry, its risks and how regulatory requirements may be tailored for CTPs.
CTPs that facilitate trading in Security Tokens or Crypto Contracts are expected to be registered in an appropriate dealer category, and where they trade or solicit trades in Crypto Contracts for retail investors, they will generally be required to register as an investment dealer and become a member of IIROC. An interim registration approach may be available, as described in CSA/IIROC SN 21-329. For CTP operators that have determined that their business is subject to securities legislation, CSA/IIROC SN 21-329 is a roadmap for compliance and provides:
• a discussion of how existing regulatory requirements could apply to CTPs that:
• may be operating similar to a marketplace (Marketplace Platform)
• are in the business of trading Security Tokens and/or Crypto Contracts (Dealer Platform)
• in some situations may be carrying out activities that have elements of both a Marketplace Platform and a Dealer Platform,
• an overview of the key risks related to CTPs and areas where requirements may be tailored provided that the risks are addressed and investor protection is not compromised
• guidance on the process to be followed to submit an application to the relevant CSA jurisdictions and IIROC.
In addition, CSA/IIROC SN 21-329 provides clarity regarding the steps that a CTP needs to take to comply with securities legislation.
As the technology and operational models of CTPs continue to evolve, we welcome continued dialogue with CTPs and stakeholders on developing issues and possible ways of complying with requirements, and additional areas where flexibility may be appropriate.
3.3 Client Focused Reforms
The CSA published the Client Focused Reforms (CFRs) on October 3, 2019, making significant amendments to the registrant conduct obligations under Nl 31-103. The CFRs are relevant to all dealers and advisers, with some application to IFMs.
The CFRs demonstrate a shared commitment by the CSA as well as the SROs, to changes that will require registrants to promote the best interests of clients and put clients' interests first. The CFRs are based on the fundamental concept that, in the relationship between registrants and their clients, the clients' interests must come first.
There are two fundamental changes:
• material conflicts of interest, including those resulting from compensation arrangements and incentive practices, will have to be addressed in the best interest of the client
• when making investment suitability determinations, registrants will have to put the client's interest first.
The rest of the CFRs support and build on that core.
Firms must review their policies, procedures and controls and implement any changes necessary to reflect the requirements in the CFRs. This will also require firms to change and update training programs for their staff.
As of June 30, 2021, registrants are required to have implemented the CFRs relating to conflicts of interest, and must have a process in place for identifying material conflicts of interest that arise at both firm and individual registrant levels and ensuring that those material conflicts of interest are addressed in the best interests of their clients.
As of December 31, 2021, registrants are required to have implemented the KYC, know your product (KYP), suitability and relationship disclosure information reforms. Among other things, this includes establishing a framework to ensure that clients' interests are put first when making suitability determinations. Firms will also have to make operational changes in the areas of KYC and KYP to support the enhanced suitability determination requirements, to ensure that sufficient information is collected about a client, and that products and services made available to clients are assessed, approved and monitored for significant changes.
We encourage registrants to continue to plan and effectively execute their transition to the new requirements so that they will be in compliance with the CFRs.
The CFRs Implementation Committee and your questions
Staff from the CSA, along with the SROs, have established the CFRs Implementation Committee to consider and provide guidance on operational issues and questions shared by industry stakeholders relating to the implementation of the CFRs. Responses to questions received by the CFRs Implementation Committee from industry stakeholders have been published on the CFRs FAQ webpage to assist registrants as they prepare for the new requirements. We will periodically publish responses to additional questions considered by the CFRs Implementation Committee as we develop additional guidance.
Stakeholders are invited to provide the CFRs Implementation Committee with their feedback and questions regarding operational challenges they are facing implementing the CFRs. To provide their questions, stakeholders including law firms, consultants and others that provide services to industry, are encouraged to complete the form on the CFRs website, found here.
Next steps
The CSA is committed to ensuring these reforms are effective. Compliance review programs and processes in the CSA jurisdictions will reflect the new requirements for registrants as soon as the CFRs come into effect.
Staff will test for compliance with these new requirements and identify where processes need improvement. CRR staff recognize that the CFRs require firms to make significant changes in their operations. Registrants are required to comply with the CFR requirements after the end of the transition periods, however we recognize that some implementation issues may take longer to resolve and will look at the demonstrated good faith efforts registrants make to comply with these new requirements. As with all registrant conduct requirements, the compliance review process will be supported by the appropriate regulatory actions along the compliance-enforcement continuum.
The CSA is working closely with the SROs to ensure that the CFRs are incorporated into SRO member rules and guidance as well as into SRO compliance review programs and processes. The SROs will harmonize their implementation timelines with the timeline adopted by the CSA.
3.4 Exemption from Underwriting Conflicts Disclosure Requirements
On February 18, 2021, the Commission issued a class order entitled Ontario Instrument 33-507 Exemption from Underwriting Conflicts Disclosure Requirements(the Class Order).
The Class Order was issued in response to concerns raised by a number of institutional investors that the underwriting conflicts disclosure requirements in National Instrument 33-105 Underwriting Conflicts(Nl 33-105) may create barriers that prevent institutional investors in Ontario from participating in global offerings on a timely basis. These institutional investors also expressed similar concerns to the Capital Markets Modernization Taskforce (the Taskforce) established by the Government of Ontario. On January 22, 2021, the Taskforce published its final report (the Taskforce Final Report). The Taskforce Final Report included a recommendation that the Commission provide an exemption from the disclosure of conflicts of interest in connection with private placements to institutional investors.
The Class Order provides that a person or company is exempt from the underwriting conflicts of interest disclosure requirements in Nl 33-105 if:
• the distribution of securities is made under an exemption from the prospectus requirement
• the distribution is of a security that is an "eligible foreign security" as defined in Nl 33-105
• each purchaser in Ontario that purchases a security through such person or company is a "permitted client" as defined in Nl 31-103.
The Class Order is effective for a period of no longer than 18 months unless extended pursuant to paragraph 143.11 (3)(b) of the Act. Accordingly, staff are presently considering an amendment to Nl 33-105 to deal with this issue on a permanent basis.
4.1 |
Annual highlights and trends |
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4.2 |
Prompt and effective regulatory action |
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4.3 |
Director's decisions and settlements |
4.1 Annual highlights and trends
The Registrant Conduct Team is responsible for investigating conduct issues involving individual and firm registrants, recommending regulatory action where appropriate, and conducting Opportunity to be Heard (OTBH) proceedings before the Director.
Before a Director of the OSC imposes terms and conditions on registration, refuses an application for registration, or suspends a registration, an applicant or registrant has the right under section 31 of the Act to request an OTBH before the Director. A registrant or applicant may also request a hearing and review by the Commission of a Director's decision under section 8 of the Act.
Identifying and acting on registrant misconduct
Potential registrant misconduct is identified through compliance reviews, applications for registration, disclosures on NRD, and by other means such as complaints, inquiries or tips. CRR staff also identifies registrant misconduct through background and solvency checks on individual registrants or individual applicants, responses to the RAQ, and referrals from SROs and other organizations.
Acting on registrant misconduct matters is central to effective compliance oversight. It also promotes confidence in Ontario's capital markets, both among the investing public and among the registrants who make best efforts to comply with Ontario securities law. Registrants must remain alert and monitor for potential misconduct by enacting and implementing appropriate policies and procedures, and ensuring that controls are in place to detect and address instances of misconduct.
The Registrant Conduct Team is also responsible for overseeing terms and conditions on registered firms and individuals as a result of a regulatory decision, including a Director's decision or a Commission Order. For example, a registered firm may have terms and conditions requiring it to engage an independent compliance consultant to assist the firm in remediating its compliance deficiencies identified from a compliance review. In this case, we oversee the consultant's work to assess if the identified deficiencies have been adequately addressed by the firm. For more information, see CSA Staff Notice 31-356 Guidance on Compliance Consultants Engaged by Firms Following a Regulatory Decision.
The following chart summarizes the regulatory actions taken by CRR staff against firms or individuals engaged in registrant misconduct or serious non-compliance with Ontario securities law.
The chart illustrates that CRR makes use of regulatory actions along the compliance-enforcement continuum, the action being commensurate with the magnitude of misconduct or non-compliance in a given situation. Terms and conditions, denials of registration and suspensions of registration are all tools available to CRR staff to address serious non-compliance.
As the chart demonstrates, while some categories of CRR regulatory actions have remained relatively constant, denials of registration have declined in the three most recent fiscal years. However, this does not reflect any reduced vigilance in CRR's exercise of its gatekeeper responsibilities when reviewing registration applications.
We believe that the July 2017 publication of CSA Staff Notice 33-320 The Requirement for True and Complete Applications for Registrationcontinues to provide valuable guidance to registered firms performing due diligence on their individual applicants, and has been effective in deterring some non-disclosure by applicants for registration.
In addition, staff continues to conduct early-stage conference calls with firms' CCOs (or their delegates) where material non-disclosure or other concerns have been identified, which has led to firms reviewing and, in 14 cases this year, withdrawing a number of applications that might otherwise have resulted in denial of registration.
Notwithstanding the success of these measures, CRR continues to identify material non-disclosure of regulatory, criminal and/or financial information in registration applications, and this concern still comprises a substantial number of the cases reviewed by CRR where registration is ultimately denied.
In cases where there appear to be issues with an application that could bear on the applicant's suitability for registration, such as past misconduct or untrue or misleading information given in the application itself, the file may be referred by the Registration Team to the Registrant Conduct Team for further investigation, requiring a longer review time. Each phase in the registration process when applications transition from the Registration Team to the Registrant Conduct Team are illustrated in this process chart.
Referrals are made to the Enforcement Branch in cases where the appropriate tool is a power that can only be exercised by the Commission. In fiscal 2020-2021, there were four referrals to the Enforcement Branch.
One example of a previous referral made by CRR that was recently concluded was in the matter of Issam El-Bouji. Global RESP Corporation and Global Growth Assets Inc. (Bouji, Global RESP, and GGAI) in which the Commission issued an order on March 10, 2020 approving a joint settlement agreement for continued non-compliance with Ontario securities law.
As part of the settlement, Bouji was permanently banned from acting as a registrant and an officer and director of any registrant or reporting issuer in Ontario, and Global RESP surrendered its scholarship plan dealer registration.
Significant terms and conditions were placed on GGAI's IFM registration to remedy past violations, compensate plan beneficiaries, and ensure GGAI's independence from the Bouji family. GGAI was permanently banned from acting as an IFM for any funds other than the funds it currently manages, which includes the scholarship plans (the Global scholarship plans). It is also not permitted to enrol any new subscribers in the plans.
This settlement agreement followed numerous compliance reviews where CRR staff uncovered significant deficiencies including conflicts of interest failures, not reimbursing sales charges as required by an earlier order of the Commission, and failing to meet its KYC and suitability obligations. Global RESP, GGAI and Bouji demonstrated continued non-compliance with Ontario securities law, and had already been subject to a variety of past regulatory actions.
Subscribers who received a commitment to have their enrolment fees reimbursed in prospectuses dated 2002-2004 will be reimbursed by Global RESP and GGAI. Over $900,000 was set aside for this purpose.
GGAI's continued registration as an IFM preserves the assets contained in the Global scholarship plans with the least amount of disruption to subscribers and beneficiaries of the plans.
4.2 Prompt and effective regulatory action
The Registrant Conduct Team may pursue immediate regulatory action against a registrant while an investigation into their conduct continues. These interim measures are taken, in appropriate circumstances, to reduce or stop harm to investors, and may include terms and conditions to limit the registrant's ability to trade, advise or make investor transactions for investment funds it manages, or place other financial restrictions on their operations.
As an example, in November 2019, CRR's Director imposed terms and conditions on the registration of Stableview Asset Management Inc. (Stableview), an IFM, PM and EMD. These had the effect of prohibiting the firm from opening any new client accounts, accepting additional assets from existing clients, and distributing or redeeming units of its three investment funds. It also restricted the firm's ability to pay management fees to its UDP, reduce its capital, or charge new legal fees to its funds.
Subsequently, in June 2020, on application by Enforcement staff, the Court approved the appointment of a receiver for Stableview.
4.3 Director's decisions and settlements
Director's decisions on OTBH proceedings are published in the OSC Bulletin and on the OSC website at Opportunity to be heard and Director's decisions, where they are presented by topic and by year. Director's decisions can be used as an important resource for registrants, as they highlight matters of concern to the OSC, as well as the regulatory action that may be taken as a result of misconduct and non-compliance. The publication of Director's decisions also ensures that CRR's response to serious misconduct is visible to market participants and investors.
Eight Director's decisions were published in the fiscal year 2020-2021 on registrant conduct issues. Three decisions followed contested OTBHs, two decisions were issued in cases where the registrant did not request an OTBH, and three decisions approved settlement agreements between staff and the registrant. A settlement agreement typically contains an agreed statement of facts and a joint recommendation to the Director. Proceeding by way of a settlement agreement with staff allows the registrant to participate in setting out the factual narrative that becomes the basis for the Director's decision.
A summary of all Director's decisions and settlements by topic for fiscal 2020-2021 follows.
Beckslev Capital Inc. and Fabrizio Lucchese (November 20. 2020)
Topics: Financial condition (including requirement to report capital deficiencies); Appointment of UDP or CCO
Becksley Capital Inc. (Becksley) was an EMD, and Fabrizio Lucchese (Lucchese) was its UDP. Staff recommended to the Director that Becksley's registration be suspended because it failed to meet the minimum working capital requirement imposed by Ontario securities law, and because the firm did not have a CCO. Staff also based its recommendation on Becksley's history of non-compliance with Ontario securities law, which included selling securities where no prospectus exemption applied to the transaction, or where the investment was unsuitable for the investor. Staff also recommended that Lucchese's individual registration be suspended.
Neither Becksley nor Lucchese requested an OTBH, and the Director suspended both.
Becksley and Lucchese have applied for a hearing and review of the Director's decision, and as of the date of this writing that application is pending before the Commission.
Kyle Kraiewski (September 23. 2020)
Topics: Misleading staff or sponsor firm; Non-securities related conduct
Kyle Krajewski (Krajewski) was terminated for cause from his position as a registered mutual fund dealing representative after he inappropriately accessed customer accounts for no valid business purpose. When he applied for registration with a new firm, staff took the position that Krajewski had not been truthful with an internal investigator at his prior firm when the investigator met with Krajewski to interview him about the conduct at issue. Staff recommended to the Director that Krajewski's application for re-registration with the new firm be refused, but following an OTBH the Director determined that Krajewski had been truthful with the internal investigator. The Director granted the application, but imposed a term and condition on Krajewski's registration requiring him to successfully complete an ethics course because he inappropriately accessed customer accounts.
W.A. Robinson Asset Management Ltd. (August 7. 2020)
Topics: KYC, KYP and suitability
The firm is a registered PM, IFM and EMD. Following a compliance review, staff identified that the firm did not have an adequate suitability process and had overly concentrated the majority of its managed account clients in one product, the Frontenac Mortgage Investment Corporation (FMIC), which is managed by the firm. Staff recommended interim terms and conditions to proactively address these deficiencies and the firm requested an OTBH. While the firm did not agree with staff's findings as set out in the compliance review, the firm entered into a joint recommendation with staff and agreed to having interim terms and conditions imposed on its registration which was accepted by the Director.
The interim terms and conditions require the firm to retain an independent consultant to prepare a report that outlines a reasonable, appropriate, and empirically supported methodology (including specific criteria) for determining the appropriate level of investment concentration in FMIC for the firm's managed account clients. Following the acceptance of the report by the OSC Manager, the firm shall perform a new suitability assessment for each managed account client holding shares in FMIC, and until the new suitability assessment for a client has been completed, the firm will not accept any further investment in FMIC shares for the client.
John Doe (July 20. 2020)
Topic: Misleading staff or sponsor firm
John Doe (Doe) applied for registration as a mutual fund dealing representative. In 2015, the applicant was sentenced to four months in prison after pleading guilty to one count of possessing child pornography. Staff took the position that Doe had not been truthful about the circumstances surrounding his offence during an interview regarding his application, and consequently recommended to the Director that the application be refused. Following an OTBH, the Director concluded that Doe had in fact been truthful during his interview and granted the application.
Ramzee Tarns (June 29. 2020)
Topic: Misleading staff or sponsor firm
Ramzee Tarns (Tarns) was a registered mutual fund dealing representative at a time when he was charged with impaired driving. Tarns did not disclose this charge to the OSC as required by Ontario securities law. Tarns subsequently left his sponsor firm, and then applied for registration with a new firm. At the time of his application, his criminal charge was still outstanding, but Tarns did not disclose the existence of that charge on his registration application, as he was required to by Ontario securities law. Staff recommended to the Director that Tarns' application be refused on the basis that he lacked the requisite integrity for registration in light of his failure to disclose his criminal charge. Following an OTBH, the Director agreed with Staff's recommendation and refused the application.
PACE Securities Corp. (June 5. 2020)
Topic: Other order made against registrant
The firm was an investment dealer and IFM. On May 14, 2020 the Ontario Superior Court of Justice granted an order authorizing the windup of the firm and appointing Ernst and Young Inc. to oversee the firm's liquidation. The Firm's membership with IIROC was suspended effective May 21, 2020. As a result of subsection 29(1 )(2) of the Act, the firm's registration as an investment dealer was automatically suspended but not its registration as an IFM. Therefore, staff subsequently recommended to the Director that the firm's registration as an IFM also be suspended. Neither the firm nor anyone acting on its behalf opposed staff's recommendation and the Director suspended the firm's registration as an IFM stating that it would be inconsistent with the OSC's mandate, and objectionable, to permit the firm to continue to be registered as an IFM when its registration as an investment dealer had been suspended and in light of the court-ordered windup of the firm.
Michael Forsey (April 22. 2020) and Trevor Rosborouah (May 4. 2020)
Topics: Trading or advising without appropriate registration; Misleading investors or the public
These were two related files. Michael Forsey (Forsey) and Trevor Rosborough (Rosborough) were registered as mutual fund dealing representatives with the same firm, and separately sold mutual fund securities through a financial services company owned by Rosborough. In October 2017, both individuals were terminated by their sponsor firm. In April 2018, Forsey was registered with a new firm, and in July 2018, Rosborough reactivated his registration with that same firm. In the intervening periods when Rosborough and Forsey were not registered, they engaged in a "stealth advising" scheme with registered individuals. In this scheme, Rosborough and Forsey advised clients about mutual fund transactions and provided them with all of the necessary paperwork to effect those transactions. This paperwork was later signed by registered individuals who otherwise had no involvement in the transaction.
Staff recommended to the Director that the registration of both individuals be suspended, and each entered into separate settlement agreements with Staff that were approved by the Director. Forsey agreed to have his registration revoked, and Rosborough agreed to a five-year suspension of his registration.
Debra Foubert, Director |
416-593-8101 |
| |
dfoubert@osc.gov.on.ca |
Elizabeth King, Deputy Director, Registrant Conduct |
416-204-8951 |
| |
eking@osc.gov.on.ca |
Felicia Tedesco, Deputy Director, Operations |
416-593-8273 |
| |
ftedesco@osc.gov.on.ca |
Ranjini Srikantan, Branch Administrator |
416-593-2320 |
| |
rsrikantan@osc.gov.on.ca |
Elizabeth Topp, Manager |
416-593-2377 |
| |
etopp@osc.gov.on.ca |
Sabrina Philips, Administrative Assistant |
416-593-2302 |
| |
sphilips@osc.gov.on.ca |
Andrea Maggisano, Senior Legal Counsel |
416-204-8988 |
| |
amaggisano@osc.gov.on.ca |
Chris Jepson, Senior Legal Counsel |
416-593-2379 |
| |
cjepson@osc.gov.on.ca |
Kat Szybiak, Senior Legal Counsel |
416-593-3686 |
| |
kszybiak@osc.gov.on.ca |
Rachel Keane, Legal Counsel |
416-263-7681 |
| |
rkeane@osc.gov.on.ca |
Nona Larionova, Legal Counsel |
416-593-8171 |
| |
ilarionova@osc.gov.on.ca |
Carlin Fung, Senior Accountant |
416-593-8226 |
| |
cfung@osc.gov.on.ca |
Daniel Panici, Senior Accountant |
416-593-8113 |
| |
dpanici@osc.gov.on.ca |
Scott Laskey, Senior Accountant |
416-263-3790 |
| |
slaskey@osc.gov.on.ca |
Eugenie Chung, Accountant |
416-597-7223 |
| |
echung@osc.gov.on.ca |
Gemma Coppins, Accountant |
416-597-7226 |
| |
gcoppins@osc.gov.on.ca |
Mark Delloro, Accountant |
416-597-7225 |
| |
mdelloro@osc.gov.on.ca |
Tai Mu Xiong, Accountant |
416-263-3797 |
| |
txiong@osc.gov.on.ca |
Vanesa Pavlovski, Accountant |
416-597-7207 |
| |
vpavlovski@osc.gov.on.ca |
Vera Nunes, Manager |
416-593-2311 |
| |
vnunes@osc.gov.on.ca |
Margot Sobers, Administrative Assistant |
416-593-8229 |
| |
msobers@osc.govon.ca |
Erin Seed, Senior Legal Counsel |
416-596-4264 |
| |
eseed@osc.govon.ca |
Maye Mouftah, Senior Legal Counsel |
416-593-2358 |
| |
mmouftah@osc.gov.on.ca |
Robert Kohl, Senior Legal Counsel |
416-593-8233 |
| |
rkohl@osc.gov.on.ca |
Faustina Otchere, Legal Counsel |
416-596-4255 |
| |
fotchere@osc.gov.on.ca |
Luis Chacin, Legal Counsel |
416-593-8220 |
| |
lchacin@osc.gov.on.ca |
Alizeh Khorasanee, Senior Accountant |
416-593-8129 |
| |
akhorasanee@osc.gov.on.ca |
Estella Tong, Senior Accountant |
416-593-8219 |
| |
etong@osc.gov.on.ca |
Merzana Martinakis, Senior Accountant |
416-593-2398 |
| |
mmartinakis@osc.gov.on.ca |
Saleha Haji, Senior Accountant |
416-593-2397 |
| |
shaji@osc.gov.on.ca |
Teresa D'Amata, Senior Accountant |
416-595-8925 |
| |
tdamata@osc.gov.on.ca |
Awais Ullah, Accountant |
416-263-7715 |
| |
aullah@osc.gov.on.ca |
Catherine Muhindi, Accountant |
416-597-7808 |
| |
cmuhindi@osc.gov.on.ca |
Daniel Brown, Accountant |
416-593-2353 |
| |
dbrown@osc.gov.on.ca |
Daniela Schipani, Accountant |
416-263-7671 |
| |
dschipani@osc.gov.on.ca |
Lisa Piebalgs, Accountant |
416-593-8147 |
| |
lpiebalgs@osc.gov.on.ca |
Paul Bertucci, Accountant |
416-593-8159 |
| |
pbertucci@osc.gov.on.ca |
Kelsie Bishop, Accounting Analyst |
416-204-8958 |
| |
kbishop@osc.gov.on.ca |
Dena Staikos, Manager |
416-593-8058 |
| |
dstaikos@osc.gov.on.ca |
Gloria Tsang, Senior Legal Counsel |
416-593-8263 |
| |
gtsang@osc.gov.on.ca |
Paul Hayward, Senior Legal Counsel |
416-593-8288 |
| |
phayward@osc.gov.on.ca |
Brendan Smith, Legal Counsel |
416-263-7746 |
| |
bsmith@osc.gov.on.ca |
Elaine Wong, Legal Counsel |
416-263-7685 |
| |
ewong@osc.gov.on.ca |
Jeff Sockett, Senior Accountant |
416-593-8162 |
| |
jsockett@osc.gov.on.ca |
Stratis Kourous, Senior Accountant |
416-593-2340 |
| |
skourous@osc.gov.on.ca |
Susan Pawelek, Senior Accountant |
416-593-3680 |
| |
spawelek@osc.gov.on.ca |
Andre Colangelo, Accountant |
416-593-8104 |
| |
acolangelo@osc.gov.on.ca |
George Rodin, Accountant |
416-263-3798 |
| |
grodin@osc.gov.on.ca |
Jason Brito, Accountant |
416-263-7716 |
| |
jbrito@osc.gov.on.ca |
Kevieon Barker, Accountant |
416-593-8311 |
| |
kbarker@osc.gov.on.ca |
Michael Man, Accountant |
416-593-8145 |
| |
mman@osc.gov.on.ca |
Vincent Chow, Accountant |
416-593-8127 |
| |
vchow@osc.gov.on.ca |
Michael Denyszyn, Manager |
416-595-8775 |
| |
mdenyszyn@osc.gov.on.ca |
Judy Ross, Administrative Assistant |
416-593-8284 |
| |
jross@osc.gov.on.ca |
Joyce Taylor, Senior Legal Counsel |
416-596-4273 |
| |
jtaylor@osc.gov.on.ca |
Mark Skuce, Senior Legal Counsel |
416-593-3734 |
| |
mskuce@osc.gov.on.ca |
Anastasija Sumakova, Legal Counsel |
416-593-8152 |
| |
asumakova@osc.gov.on.ca |
Marlene Costa, Legal Counsel |
416-593-2192 |
| |
mcosta@osc.gov.on.ca |
Moira Hare, Legal Counsel |
416-593-8306 |
| |
mhare@osc.gov.on.ca |
Trevor Walz, Senior Accountant |
416-593-3670 |
| |
twalz@osc.govon.ca |
Allison McBain, Compliance Examiner |
416-593-8164 |
| |
amcbain@osc.govon.ca |
Rita Lo, Registration Research Officer |
416-593-2366 |
| |
rlo@osc.govon.ca |
Louise Brinkmann, Manager |
416-596-4263 |
| |
lbrinkmann@osc.govon.ca |
Kian Sleggs, Senior Business Analyst |
416-593-8142 |
| |
ksleggs@osc.govon.ca |
TanvirTaher, Senior Business Analyst |
416-263-7692 |
| |
ttaher@osc.govon.ca |
Anita Chung, Registration Accountant |
416-593-8131 |
| |
achung@osc.govon.ca |
Isabelita Chichioco, Financial Analyst |
416-593-8105 |
| |
ichichioco@osc.govon.ca |
Lucy Gutierrez, Registration Officer |
416-593-8277 |
| |
lgutierrez@osc.govon.ca |
Andrea Gochuico, Participation Fees Revenue Clerk |
416-593-2386 |
| |
agochuico@osc.govon.ca |
Jeff Scanlon, Manager |
416-597-7239 |
| |
jscanlon@osc.gov.on.ca |
Anuja Sothirajah, Administrative Assistant |
416-263-7708 |
| |
asothirajah@osc.gov.on.ca |
Feryal Khorasanee, Registration Supervisor |
416-595-8781 |
| |
fkhorasanee@osc.govon.ca |
Jenny Tse Lin Tsang, Registration Supervisor |
416-593-8224 |
| |
jtselintsang@osc.govon.ca |
Kamaria Hoo, Registration Supervisor |
416-593-8214 |
| |
khoo@osc.govon.ca |
Colin Yao, Legal Counsel |
416-593-8059 |
| |
cyao@osc.govon.ca |
Adrienne Chao, Corporate Registration Officer |
416-597-7201 |
| |
achao@osc.govon.ca |
Amy Fraser, Corporate Registration Officer |
416-593-3674 |
| |
afraser@osc.govon.ca |
Anne Leung, Corporate Registration Officer |
416-593-8235 |
| |
anneleung@osc.govon.ca |
Anthony Ng, Corporate Registration Officer |
416-263-7655 |
| |
ang@osc.govon.ca |
Edgar Serrano, Corporate Registration Officer |
416-593-8331 |
| |
eserrano@osc.govon.ca |
Jane Chieu, Corporate Registration Officer |
416-593-3671 |
| |
jchieu@osc.govon.ca |
Leszek Jurczak, Corporate Registration Officer |
416-263-7672 |
| |
ljurczak@osc.govon.ca |
Pamela Woodall, Corporate Registration Officer |
416-593-8225 |
| |
pwoodall@osc.govon.ca |
Robert Adah, Corporate Registration Officer |
416-597-7814 |
| |
radah@osc.govon.ca |
Zeeshan Mukaddam, Corporate Registration Officer |
416-263-7689 |
| |
zmukaddam@osc.govon.ca |
Cheryl Pereira, Individual Registration Officer |
416-593-8149 |
| |
cpereira@osc.govon.ca |
Dianna Cober, Individual Registration Officer |
416-593-8107 |
| |
dcober@osc.govon.ca |
Linda Tarn, Individual Registration Officer |
416-204-8957 |
| |
ltam@osc.govon.ca |
Michael John Egerdie, Individual Registration Officer |
416-597-7806 |
| |
megerdie@osc.govon.ca |
NasirAbdulkareem, Individual Registration Officer |
416-597-7232 |
| |
nabdulkareem@osc.govon.ca |
Yemisi Ashaolu, Individual Registration Officer |
416-597-7250 |
| |
yashaolu@osc.govon.ca |
If you have questions or comments about this report, please contact:
Daniel PaniciSenior AccountantCompliance and Registrant Regulationdpanici@osc.gov.on.ca416-593-8113Kevieon BarkerAccountantCompliance and Registrant Regulationkbarker@osc.gov.on.ca416-593-8311
{6} For more information on the "Registration as the First Compliance Review" program, please refer to section 3.1a) Pre-registration reviews of OSC Staff Notice 33-745 2014 Annual Summary Report for Dealers, Advisers and Investment Fund Managers.
{7} The U.S. Securities and Exchange Commission (the SEC) similarly takes the view that an equity line financing is an indirect primary offering and an equity line purchaser is an underwriter. See the SEC Compliance and Disclosure Interpretations (C&Ds) in response to Question 139.12 and 139.13.
{8} See also the commentary in Recommendation No. 26 [Prohibit short selling in connection with prospectus offerings and private placements] in the Final Report of the Capital Markets Modernization Taskforce released on January 22, 2021.
FOR IMMEDIATE RELEASE
August 16, 2021
TORONTO -- Take notice that an attendance in the above-named matter is scheduled to be heard on August 18, 2021 at 10:00 a.m.
For Media Inquiries:
For General Inquiries:
Sustainable Agriculture & Wellness Dividend Fund
Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Closed-end investment fund exempted from the prospectus requirement in connection with the sale of units repurchased from existing security holders pursuant to market purchase programs and units surrendered by security holders pursuant to redemption programs, subject to conditions.
Securities Act, R.S.A. 2000, c. S-4, ss. 110 and 144.
Citation: Re Sustainable Agriculture & Wellness Dividend Fund, 2021 ABASC 125
August 6, 2021
The securities regulatory authority or regulator in each of the Jurisdictions (each a Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting the Filer from the requirement to file a prospectus (the Prospectus Requirement) in connection with the distribution of units of the Filer (the Units) that have been repurchased by the Filer pursuant to the Purchase Programs (as defined below) or redeemed by the Filer pursuant to the Redemption Programs (as defined below) in the period prior to a Conversion (as defined below) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application),
(a) the Alberta Securities Commission 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 British Columbia, Saskatchewan, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Northwest Territories, Nunavut and Yukon, and
(c) this decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in National Instrument 14-101 Definitions, National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR) or MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.
This decision is based on the following facts represented by the Filer:
1. The Filer is an unincorporated closed-end investment trust established under the laws of Alberta.
2. The Filer is not considered to be a "mutual fund" as defined in the Legislation because the holders of Units are not entitled to receive on demand an amount computed by reference to the value of a proportionate interest in the whole or in part of the net assets of the Filer.
3. The Filer is a reporting issuer in each of the provinces of Canada and is not in default of securities legislation in any jurisdiction of Canada.
4. The Units are listed and posted for trading on the Toronto Stock Exchange (the TSX). As of July 30, 2021 the Filer had 5,160,000 Units issued and outstanding.
5. Middlefield Limited (the Manager), which is incorporated under the Business Corporations Act (Alberta), is the manager and the trustee of the Filer.
6. Subject to applicable law, which may require approval from the holders of the Units (the Unitholders) or regulatory approval, the Manager may (a) merge or otherwise combine or consolidate the Filer with any one or more other funds managed by the Manager or an affiliate thereof or (b) where it determines that to do so would be in the best interest of Unitholders, merge or convert the Filer into a listed exchange-traded mutual fund, an open-end mutual fund, a split trust fund, an alternative mutual fund, or another type of non-redeemable investment fund (each a Conversion).
Mandatory Purchase Program
7. The constating document of the Filer provides that the Filer, subject to certain exceptions and compliance with any applicable regulatory requirements, is obligated to purchase (the Mandatory Purchase Program) any Units offered on the TSX or such other exchange or market on which the Units are then listed and primarily traded (the Exchange) if, at any time after the closing of the Filer's initial public offering, the price at which Units are then offered for sale on the Exchange is less than 95% of the net asset value of the Filer per Unit, provided that the maximum number of Units that the Filer is required to purchase pursuant to the Mandatory Purchase Program in any calendar quarter is 1.25% of the number of Units outstanding at the beginning of each such period.
Discretionary Purchase Program
8. The constating document of the Filer also provides that the Filer, subject to applicable regulatory requirements and limitations, has the right, but not the obligation, exercisable in its sole discretion at any time, to purchase outstanding Units in the market at prevailing market prices (the Discretionary Purchase Program and together with the Mandatory Purchase Program, the Purchase Programs).
Monthly Redemptions
9. Subject to the Filer's right to suspend redemptions, Units may be surrendered for redemption (the Monthly Redemption Program) on the second last business day of each month in order to be redeemed at a redemption price per Unit equal to the Monthly Redemption Price per Unit (as defined in the Filer's long form prospectus dated May 18, 2021 (the Prospectus)).
Annual Redemption
10. Subject to the Filer's right to suspend redemptions, Units may be surrendered for redemption (the Annual Redemption Program) on the second last business day of June in each year commencing in 2023 at a redemption price per Unit equal to the Redemption Price per Unit (as defined in the Prospectus).
Additional Redemptions
11. At the sole discretion of the Manager and subject to the receipt of any necessary regulatory approvals, the Manager may from time to time allow additional redemptions of Units (Additional Redemptions and collectively with the Monthly Redemption Program and the Annual Redemption Program, the Redemption Programs), provided that the holder thereof shall be required to use the full amount received on such redemption to purchase treasury securities of a new or existing fund promoted by the Manager or an affiliate thereof then being offered to the public by prospectus.
Resale of Repurchased Units or Redeemed Units
12. Purchases of Units made by the Filer under the Purchase Programs or Redemption Programs will be made pursuant to exemptions from the issuer bid requirements of applicable securities legislation.
13. The Filer wishes to resell, in its sole discretion and at its option, through one or more securities dealers and through the facilities of the Exchange, the Units repurchased by the Filer pursuant to the Purchase Programs (Repurchased Units), or redeemed pursuant to the Redemption Programs (Redeemed Units).
14. All Repurchased Units and Redeemed Units will be held by the Filer for a period of four months after the repurchase or redemption thereof by the Filer (the Holding Period), prior to any resale.
15. The resale of Repurchased Units and Redeemed Units will be effected in such a manner as not to have a significant impact on the market price of the Units.
16. Repurchased Units and Redeemed Units that the Filer does not resell within 12 months after the Holding Period (that is, within 16 months after the date of repurchase or redemption, as applicable) will be cancelled by the Filer.
17. During any calendar year, the Filer will not resell an aggregate number of Repurchased Units and Redeemed Units that is greater than 5% of the number of Units outstanding at the beginning of such calendar year.
18. Prospective purchasers of Repurchased Units or Redeemed Units will have access to the Filer's continuous disclosure, which will be filed on SEDAR.
19. The Legislation provides that a trade by or on behalf of an issuer in previously issued securities of that issuer that have been purchased by that issuer is a distribution and, as such, is subject to the Prospectus Requirement. In the absence of the Exemption Sought, any sale by the Filer of Repurchased Units or Redeemed Units would be a distribution that is subject to the Prospectus Requirement.
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 Exemption Sought is granted provided that
(a) the Repurchased Units and Redeemed Units are otherwise sold by the Filer in compliance with applicable securities legislation, and through the facilities of and in accordance with the regulations and policies of the Exchange,
(b) the Filer complies with paragraphs 1 through 5 of section 2.8(2) of National Instrument 45-102 Resale of Securities as if it were a selling security holder thereunder, and
(c) the Filer complies with the representations made in paragraphs 15, 16 and 17 above.
For the Commission:
"Stan Magidson"Chair"Kari Horn"Vice-ChairApplication File #: 2021/0373
Jefferies International Limited et al.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Application for revocation of a previous decision dated July 28, 2017, In the Matter of Jefferies International Limited, Jefferies Financial Services, Inc. and Jefferies Derivative Products, LLC -- Previous decision had exempted the applicants from the dealer registration and the prospectus requirement, in sections 25(1) and 53(1) of the Securities Act, for certain trades in over-the-counter (OTC) derivatives that are made by the filers with a "permitted counterparty" -- Permitted counterparties consist exclusively of persons or companies who are non-individual "permitted clients" as defined in Section 1.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations -- New Decision provides exemptions on the same terms and conditions except that: (i) the exemptions apply to the merged entity of two of the Filers and (ii) the "sunset date" date of July 28, 2021 is extended.
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1), 53(1) and 74.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 1.1 ("permitted client").
July 27, 2021
Previous Decision
Jefferies International Limited, Jefferies Financial Services, Inc., and Jefferies Financial Products, LLC (the "Previous Filers") made an application (the "Previous Application") to the Ontario Securities Commission (the "Commission") and obtained from the Commission, as the principal regulator for the Previous Application, a decision dated July 28, 2017, In the Matter of Jefferies International Limited, Jefferies Financial Services, Inc. and Jefferies Financial Products, LLC (the "Previous Decision").
The Previous Decision provided that the dealer registration requirement and the prospectus requirement in the securities legislation of the jurisdiction of the principal regulator (the "Legislation") that may otherwise be applicable to a trade in or a distribution of an OTC Derivative (as defined below) made by either;
(i) a Previous Filer to a "Permitted Counterparty" (as defined below), or
(ii) a Permitted Counterparty to a Previous Filer,
shall not apply to the Previous Filers or the Permitted Counterparty, as the case may be, subject to certain terms and conditions (the "Previous Requested Relief").
The Previous Decision stated that under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Commission was the principal regulator for the Previous Application; and
(b) the Previous Filers had provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") was intended to be relied upon in Newfoundland and Labrador, Northwest Territories, Prince Edward Island, New Brunswick (to the extent Local Rule 91-501 Derivatives does not apply), Yukon and Nunavut (the "Previous Passport Jurisdictions").
The Previous Decision provided that the Previous Requested Relief would terminate on the date that is the earlier of: (i) the date that is four years after the date of the Previous Decision (being July 28, 2021) (the "Pending Expiry Date"); and (ii) the coming into force in the jurisdiction of legislation or a rule that specifically governs the conduct of OTC Derivatives transactions.
New Decision
The principal regulator has now received an application (the "Application") from Jefferies International Limited, Jefferies Financial Services, Inc. and Jefferies Financial Products, LLC (collectively, the "Filers") for: (a) revocation of the Previous Decision, and (b) issuance of a new replacement decision, on substantially the same terms as the Previous Decision, except that the new decision being sought would extend the Pending Expiry Date.
Under this Application, the Filers have applied to the Commission, as the principal regulator for the Application, for a decision under the Legislation that the dealer registration requirement and the prospectus requirement in the Legislation that may otherwise be applicable to a trade in or distribution of an OTC Derivative made by either;
(i) a Filer to a Permitted Counterparty, or
(ii) a Permitted Counterparty to a Filer,
shall not apply to the Filers or the Permitted Counterparty, as the case may be (the "Requested Relief").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Commission is the principal regulator for the Application; and
(b) the Filers have provided notice that section 4.7(1) of MI 11-102 is intended to be relied upon in Newfoundland and Labrador, New Brunswick (to the extent Local Rule 91-501 Derivatives does not apply), Northwest Territories, Nunavut, Prince Edward Island and Yukon (the "Passport Jurisdictions").
Terms defined in National Instrument 14-101 Definitions or MI 11-102 have the same meanings if used in this decision, unless otherwise defined.
The terms OTC Derivative and Underlying Interest are defined in the appendix (the "Appendix") to this decision.
The term Permitted Counterparty means a person or company that:
is a "permitted client", as that term is defined in section 1.1 [Definition of terms used throughout this Instrument] of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103").
The term Home Jurisdiction means the jurisdiction in which each Filer's head office is located, specifically for:
(a) Jefferies International Limited, London, United Kingdom;
(b) Jefferies Financial Services, Inc., New York, United States of America; and
(c) Jefferies Financial Products, LLC, New York, United States of America.
This decision is based on the following facts represented by the Filers:
The Filers
1. Each of the Applicants is an affiliate of the other as a result of their common parent, Jefferies Group LLC ("Jefferies Group").
2. Jefferies International Limited ("JIL") is a financial services firm that has been granted permission to conduct a number of different financial services in the United Kingdom by the Financial Conduct Authority. These services include arranging and dealing in investments as both a principal and an agent in respect of, among other things, securities, contracts for differences, options, futures, rolling spot forex contracts and commodity futures contracts. JIL is therefore qualified to rely on the international dealer exemption (the "IDE") that is available pursuant to section 8.18 of NI 31-103 in Ontario and each of the Passport Jurisdictions. JIL's head office is located in London, United Kingdom.
3. Jefferies Financial Products, LLC ("JFP") is a provisionally registered swap dealer with the CFTC and it is a member of the NFA. JFP carries on the business of trading equity swaps on a principal basis with other institutional counterparties. JFP additionally trades Equity Options with JIL and interest rate swaps with Jefferies Group. All of JFP's derivative transactions are currently conducted as uncleared OTC Derivative transactions. The head office of JFP is located in New York, United States of America.
4. Jefferies Financial Services, Inc. ("JFSI") is a provisionally registered swap dealer with the U.S. Commodity Futures Trading Commission ("CFTC") and it is a member of the National Futures Association (the "NFA"). JFSI carries on the business of trading on a principal basis with market counterparties in interest rate swaps, swaptions (defined in the Appendix), credit default swaps, and foreign exchange products, including, but not limited to, spot, forward, non-deliverable forward, option and swap transactions. Such transactions may be cleared by a derivatives clearing organization or may be uncleared, and are executed either over-the-counter or on a swap execution facility/exchange, as applicable, depending on the transaction. The head office of JFSI is located in New York, United States of America.
5. At the time of application JFP was planning to merge into JFSI, with JFSI as the surviving entity. The merger was completed on July 16, 2021. Following that merger, JFSI's trading business will expand to include the products currently traded by JFP, as well as additional products such as Equity Options or forwards with non-affiliate counterparties. Additionally, following the merger, JFSI intends to register as a security-based swap dealer and as an OTC derivatives dealer with the U.S. Securities and Exchange Commission (the "SEC"). As of the date of this decision, neither JFSI nor JFP is currently registered in any capacity with the SEC. As such, each of JFSI and JFP is unable to rely on the IDE because it is not registered under the securities legislation of its home jurisdiction in a category of registration that permits it to carry on the activities in that jurisdiction that registration as a dealer would permit it to carry on in a local Canadian jurisdiction.
6. The Filers are not currently registered in any capacity in Canada. The Filers do not maintain an office, sales force or physical place of business in Canada.
7. The Filers are not in default of any requirements of securities, commodity futures or derivatives legislation in any jurisdiction of Canada.
8. The Filers are in material compliance with securities, commodity futures and derivatives laws of their Home Jurisdictions.
Proposed Conduct of OTC Derivative Transactions
9. Each Filer proposes to enter into bilateral OTC Derivatives with counterparties located in all provinces and territories of Canada that consist exclusively of persons or companies that are Permitted Counterparties. The Underlying Interest of the OTC Derivatives that are entered into between a Filer and a Permitted Counterparty will consist of one of the following: a commodity; an interest rate; a currency; a foreign exchange rate; a security; an economic indicator, an index; a basket; a benchmark; another variable; another OTC Derivative; or some relationship between, or combination of, one or more of the foregoing.
10. While a Permitted Counterparty may deposit margin or collateral with the Filers in respect of its obligations under an OTC Derivative transaction, the Filers themselves will not offer or provide credit or margin to any of their Permitted Counterparties for purposes of an OTC Derivative transaction.
11. Each Filer seeks the Requested Relief as an interim, harmonized solution to the uncertainty and fragmentation that currently characterizes the regulation of OTC Derivatives across Canada, pending the development of a uniform framework for the regulation of OTC Derivative transactions in all provinces and territories of Canada. The Filers acknowledge that registration and prospectus requirements may be triggered for the Filers in connection with the derivative contracts under any such uniform framework to be developed for the regulation of OTC Derivative transactions.
Regulatory Uncertainty of the Regulation of OTC Derivative Transactions in Canada
12. There has generally been a considerable amount of uncertainty respecting the regulation of OTC Derivative transactions as "securities" in the provinces and territories of Canada other than Quebec.
13. In each of Alberta, British Columbia, the Northwest Territories, Nunavut, Prince Edward Island and Yukon, OTC Derivative transactions are regulated as securities on the basis that the definition of the term "security" in the securities legislation of each of these jurisdictions includes an express reference to a "futures contract" or a "derivative".
14. In Manitoba, Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia and Saskatchewan, OTC Derivative transactions are regulated as derivatives; however, in Manitoba, Ontario and Newfoundland and Labrador, certain OTC Derivative transactions also meet the definition of "security".
15. In October 2009, staff of the Ontario Securities Commission (the "OSC") published OSC Staff Notice 91-702 Offerings of Contracts for Difference and Foreign Exchange Contracts to Investors in Ontario ("OSC Notice 91-702"). OSC Notice 91-702 states that OSC staff take the view that contracts for differences, foreign exchange contracts and similar OTC Derivative products, when offered to investors in Ontario, engage the purposes of the Securities Act (Ontario) (the "OSA") and constitute "investment contracts" and "securities" for the purposes of Ontario securities law. However, OSC Notice 91-702 also states that it is not intended to address direct or intermediated trading between institutions. OSC Notice 91-702 does not provide any additional guidance to the Filers on the extent to which OTC Derivative transactions between a Filer and a Permitted Counterparty may be subject to Ontario securities law.
16. In Quebec, OTC Derivative transactions are subject to the Derivatives Act (Quebec), which sets out a comprehensive scheme for the regulation of derivative transactions that is distinct from Quebec's securities regulatory requirements.
17. In each of Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia and Saskatchewan (the "Blanket Order Jurisdictions") and Quebec (collectively, the "OTC Exemption Jurisdictions"), OTC derivative transactions are generally not subject to securities or derivative regulatory requirements, pursuant to applicable exemptions (the "OTC Derivative Exemptions"), when they are negotiated, bi-lateral contracts that are entered into between sophisticated non-retail parties referred to as "Qualified Parties" in the Blanket Order Jurisdictions and "accredited counterparties" in Quebec.
18. The corresponding OTC Derivative Exemptions are as follows:
Alberta
ASC Blanket Order 91-507 Over-the-Counter Trades in Derivatives
British Columbia
BC Instrument 91-501 Over-the-Counter Derivatives
Manitoba
Blanket Order 91-501 Over-the-Counter Trades in Derivatives
New Brunswick
Local Rule 91-501 Derivatives
Nova Scotia
Blanket Order 91-501 Over the Counter Trades in Derivatives
Saskatchewan
General Order 91-908 Over-the-Counter Derivatives
Quebec
Section 7 of the Quebec Derivatives Act
The Evolving Regulation of OTC Derivative Transactions as Derivatives
19. Each of the OTC Exemption Jurisdictions has sought to address the regulatory uncertainty associated with the regulation of OTC Derivative transactions as securities by regulating them as derivatives rather than securities, whether directly through the adoption of a distinct regulatory framework for derivatives in Quebec, or indirectly through amendments to the definition of the term "security" in the securities legislation of the OTC Exemption Jurisdictions and the granting of the OTC Derivative Exemptions.
20. The Final Report of the Ontario Commodity Futures Act Advisory Committee, published in January, 2007, concluded that OTC Derivative contracts are not suited to being regulated in accordance with traditional securities regulatory requirements and should therefore be excluded from the scope of securities legislation, because they are used for commercial-risk management purposes and not for investment or capital-raising purposes.
21. Ontario has now established a framework for regulating the trading of derivatives in Ontario (the "Ontario Derivatives Framework") through amendments to the OSA that were made by the Helping Ontario Families and Managing Responsibility Act, 2010 (Ontario).
22. The amendments to the OSA establishing the Ontario Derivatives Framework will not become effective until the date on which they are proclaimed in force. These amendments are not expected to be proclaimed in force until an ongoing public consultation on the regulation of OTC Derivatives has been completed. On April 19, 2018, the Canadian Securities Administrators (the "CSA") published a Notice and Request for Comment on the Proposed National Instrument 93-102 Derivatives: Registration, and on June 14, 2018, the CSA published a Notice and Second Request for Comment on the Proposed National Instrument 93-101 Derivatives: Business Conduct, which, together, are intended to implement a comprehensive regime for the regulation of persons or companies that are in the business of trading or advising on derivatives.
Reasons for the Requested Relief
23. The Requested Relief would substantially address, for each Filer and its Permitted Counterparties, the regulatory uncertainty and fragmentation that is currently associated with the regulation of OTC Derivative transactions in Canada, by permitting the Filers to enter into OTC Derivative transactions in reliance upon exemptions from the dealer registration and prospectus requirements of the securities legislation of each of the Passport Jurisdictions that are comparable to the OTC Derivative Exemptions.
Books and Records
24. Each Filer will become a "market participant" for the purposes of the OSA if the Requested Relief is granted. For the purposes of the OSA, and as a market participant, each Filer is required by subsection 19(1) of the OSA to: (i) keep such books, records and other documents as are necessary for the proper recording of its business transactions and financial affairs, and the transactions that it executes on behalf of others; and (ii) keep such books, records and documents as may otherwise be required under Ontario securities law.
25. For the purposes of its compliance with subsection 19(1) of the OSA, the books and records that each Filer will keep will include books and records that:
(a) demonstrate the extent of the Filers' compliance with applicable requirements of securities legislation;
(b) demonstrate compliance with the policies and procedures of the Filers for establishing a system of controls and supervision sufficient to provide reasonable assurance that the Filers, and each individual acting on their behalf, complies with securities legislation; and
(c) identify all OTC Derivatives transactions entered into by the Filers and each of their clients, including the name and address of all parties to the transaction and its terms.
26. To the extent necessary and in respect of the OTC Derivative transactions, the Filers will comply with the derivatives trade reporting rules and instruments in effect in the provinces and territories of Canada.
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 is that the Requested Relief is granted provided that:
(a) the counterparty to any OTC Derivative transaction that is entered into by the Filers is a Permitted Counterparty;
(b) in the case of any trade entered into by the Filers and a Permitted Counterparty, the Filers do not offer or provide any credit or margin to the Permitted Counterparty; and
(c) the Requested Relief shall terminate on the date that is the earlier of:
(i) the date that is four years after the date of this decision; and
(ii) the coming into force in the Jurisdiction of legislation or a rule which specifically governs dealer, adviser or other registration requirements applicable to market participants in connection with OTC Derivative transactions.
In addition, it is the decision of the principal regulator that the Previous Decision is revoked.
"Clearing Corporation" means an association or organization through which Options or futures contracts are cleared and settled.
"Contract for Differences" means an agreement, other than an Option, a Forward Contract, a spot currency contract or a conventional floating rate debt security, that provides for:
(a) an exchange of principal amounts; or
(b) the obligation or right to make or receive a cash payment based upon the value, level or price, or on relative changes or movements of the value, level or price of, an Underlying Interest.
"Equity Option" means an Option where the Underlying Interest of the Option is a security, an index, a basket of securities or a basket of indices, or any combination thereof.
"Forward Contract" means an agreement, not entered into or traded on or through an organized market, stock exchange or futures exchange and cleared by a Clearing Corporation, to do one or more of the following on terms or at a price established by or determinable by reference to the agreement and at or by a time established by or determinable by reference to the agreement:
(a) make or take delivery of the Underlying Interest of the agreement; or
(b) settle in cash instead of delivery.
"Option" means an agreement that provides the holder with the right, but not the obligation, to do one or more of the following on terms or at a price determinable by reference to the agreement at or by a time established by the agreement:
(a) receive an amount of cash determinable by reference to a specified quantity of the Underlying Interest of the Option.
(b) purchase a specified quantity of the Underlying Interest of the Option.
(c) sell a specified quantity of the Underlying Interest of the Option.
"OTC Derivative" means one or more of, or any combination of, an Option, a Forward Contract, a Contract for Differences or any instrument of a type commonly considered to be a derivative, in which:
(a) the agreement relating to, and the material economic terms of, the Option, Forward Contract, Contract for Differences or other instrument have been customized to the purposes of the parties to the agreement and the agreement is not part of a fungible class of agreements that are standardized as to their material economic terms;
(b) the creditworthiness of a party having an obligation under the agreement would be a material consideration in entering into or determining the terms of the agreement; and
(c) the agreement is not entered into or traded on or through an organized market, stock exchange or futures exchange.
"Swaption" means a right, but not the obligation, to enter into a swap transaction, usually an interest rate swap transaction, on the exercise date. The buyer of the swaptions gains the right to cause the issuer to enter into the swap transaction. The rates under the swap transaction are determined on the trade date of the swaption.
"Underlying Interest" means, for a derivative, the commodity, interest rate, currency, foreign exchange rate, security, economic indicator, index, basket, benchmark or other variable, or another derivative, and, if applicable, any relationship between, or combination of, any of the foregoing, from or on which the market price, value or payment obligations of the derivative are derived or based.
National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- Related issuer relief conditional on IRC approval, compliance with independent pricing and transparency requirements -- Investment restrictions for primary offerings.
Securities Act (Ontario), ss. 111(2)(a), 111(2)(c)(i), 111(2)(c)(ii), 111(4) and 113.
National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5(2)(a) and 15.1.
National Instrument 81-102 Investment Funds, ss. 4.1(2) and 19.1.
August 10, 2021
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Filer, and any affiliate of the Filer, which acts as the manager and/or portfolio manager for each existing investment fund or future investment fund to which National Instrument 81-102 Mutual Funds (NI 81-102) applies (each an NI 81-102 Fund, or collectively, the NI 81-102 Funds) and does not apply (each a Pooled Fund, or collectively, the Pooled Funds), for a decision under the securities legislation of the Jurisdiction of the Principal Regulator (the Legislation):
1. exempting the Funds (as defined below) from the requirements (the Related Securityholder Requirements) of the securities legislation that prohibit an investment fund from making an investment, or holding an investment, in:
(a) any person or company who is a substantial securityholder of the investment fund, its management company or distribution company (each a Related Securityholder), or
(b) an issuer in which any officer or director of the investment fund, its management company or distribution company or an associate of any of them, or a Related Securityholder (each, a Related Person), has a significant interest;
(the Requested Related Securityholder Relief);
2. exempting the NI 81-102 Funds from the requirements of subsection 4.1(2) of NI 81-102 (the NI 81-102 Related Issuer Requirements) that prohibit a dealer managed investment fund from knowingly making an investment in a class of securities of an issuer, of which:
(a) a partner, director, officer or employee of the dealer manager of the investment fund, or
(b) a partner, director, officer or employee of an affiliate or associate of the dealer manager of the investment fund,
is a partner, director, officer or employee, unless the partner, director, officer or employee:
(i) does not participate in the formulation of investment decisions made on behalf of the dealer managed investment fund;
(ii) does not have access before implementation to information concerning investment decisions made on behalf of the dealer managed investment fund; and
(iii) does not influence, other than through research, statistical and other reports generally available to clients, the investment decisions made on behalf of the dealer managed investment fund;
3. exempting the Filer and its affiliates, as the registered advisers of the Funds, from the requirements of section 13.5 of NI 31-103 (the NI 31-103 Related Issuer Requirements) that prohibit a registered adviser of an investment portfolio, including an investment portfolio of an investment fund, from causing the investment portfolio managed by it to invest in any issuer in which a responsible person or an associate of a responsible person is a partner, officer or director, unless the specific fact is disclosed to the client and the written consent of the client to the investment is obtained;
(the NI 31-103 Related Issuer Requirements and the NI 81-102 Related Issuer Requirements, together, the Related Issuer Requirements and 2 and 3 together, the Requested Related Issuer Relief);
to enable the Funds (as defined below) to invest in non-exchange-traded debt securities of Related Issuers in a Primary Offering and in the secondary market having a "designated rating" within the meaning of that term in NI 44-101, and, as applicable, to enable the Pooled Funds to invest in exchange-traded securities of Related Issuers in the secondary market, in conjunction with the replacement of the Original Decisions.
4. revoking the Original Decisions (as defined below), insofar as the Original Decisions pertain to prior relief granted to the Filer, its affiliated and predecessor entities, and the Funds (as defined below), from the Related Securityholder Requirements and Related Issuer Requirements (the Revocation Relief).
The proposed transactions outlined in 1, 2 and 3 above are referred to in this decision as the Related Issuer Transactions.
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 (the Principal Jurisdiction); and
(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 on in Alberta, British Columbia, Saskatchewan, Manitoba, Québec, Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, Yukon Territory, Northwest Territories and Nunavut Territory (the Non-Principal Jurisdictions and collectively with the Principal Jurisdiction, the Jurisdictions).
Terms defined in the Legislation, MI 11-102, National Instrument 14-101 Definitions, NI 81-102 and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) have the same meaning if used in this decision, unless otherwise defined.
In addition, in this decision the following terms have the following meanings:
Fund means a Pooled Fund and/or a NI 81-102 Fund, and Funds means two or more of such Funds;
NI 31-103 means National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations;
NI 44-101 means National Instrument 44-101 Short Form Prospectus Distributions;
Primary Offering means a primary distribution or treasury offering of non-exchange-traded debt securities of a Related Issuer;
Related Issuer means a Related Securityholder, a Related Person, or an issuer of the type described under the Requested Related Issuer Relief (as defined above); and
Related Funds includes one or more other Funds under common management with the relevant Fund.
A. The Filer
1. The Filer is a corporation amalgamated under the laws of Ontario and is wholly-owned by CI Financial Corp (CIX) with its head office in Toronto, Ontario.
2. The Filer is registered:
(a) as an investment fund manager under the securities legislation in Ontario, Québec and Newfoundland and Labrador,
(b) as a portfolio manager and exempt market dealer under the securities legislation of each of the Jurisdictions, and
(c) as a commodity trading counsel and commodity trading manager under the Commodity Futures Act (Ontario).
B. The Funds
3. Each of the NI 81-102 Funds and the Pooled Funds is, or will be, an investment fund established under the laws of Ontario or the laws of one of the other Non-Principal Jurisdictions.
4. The securities of each of the NI 81-102 Funds are, or will be, qualified for distribution pursuant to prospectuses and annual information forms that have been, or will be, prepared and filed in accordance with the securities legislation of each of the Jurisdictions. The NI 81-102 Funds will include conventional mutual funds subject to NI 81-102, exchange-traded funds that meet the definition of 'mutual fund' in securities legislation and non-redeemable investment funds that, in each case, are subject to NI 81-102.
5. Each of the NI 81-102 Funds is, or will be, a reporting issuer in the Principal Jurisdiction and one or more of the Non-Principal Jurisdictions.
6. The securities of each of the Pooled Funds are, or will be, distributed on a private placement basis pursuant to available prospectus exemptions in the Jurisdictions. The Pooled Funds are not, or will not be, reporting issuers.
7. The Filer, or an affiliate of the Filer, is, or will be, the manager and/or portfolio manager of each of the Funds. Each NI 81-102 Fund is or will be a "dealer managed investment fund" within the meaning set out in NI 81-102.
8. Except as noted in paragraph 19 below, neither the Filer nor the Funds are in default of securities legislation.
C. Substantial Securityholders, Significant Issuers and Common Officers/Directors
9. CIX is a substantial securityholder of the Filer. By virtue of its affiliation through CIX with "specified dealers" Assante Capital Management Ltd. and CI Investment Services Inc, the Filer is a "dealer manager" within the meaning of section 4.1(2) of NI 81-- 102 and the NI 81-102 Funds are "dealer managed investment funds".
10. A director, officer or employee of the Filer (including that acts as the portfolio manager of a Fund), an associate of a director, officer or employee of the Filer (including that acts as the portfolio manager of a Fund), or a director, officer or employee of an affiliate or associate of the Filer, may also be a director, officer or employee of a Related Issuer of the Filer.
D. The Independent Review Committees of the Funds
11. Each NI 81-102 Fund has, or will have, an independent review committee (an IRC) in accordance with the requirements of NI 81-107. The mandate of the IRC of each NI 81-102 Fund will include approving Related Issuer Transactions involving an NI 81-102 Fund. The IRC of an NI 81-102 Fund will not approve a Related Issuer Transaction subject to its mandate unless the IRC has made the determination set out in subsection 5.2(2) of NI 81-107 and the manager and the IRC of the NI 81-102 Fund, as applicable, will comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Related Issuer Transaction.
12. Though the Pooled Funds are not, or will not be, subject to the requirements of NI 81-107, each Pooled Fund has, or will have, an IRC at the time the Pooled Fund conducts a Related Issuer Transaction. All existing Pooled Funds have already established an IRC in order to comply with the conditions of previously granted exemptive relief. The mandate of the IRC of each Pooled Fund will include approving Related Issuer Transactions involving a Pooled Fund.
13. The IRC of a Pooled Fund will be composed in accordance with section 3.7 of NI 81-107 and will comply with the standard of care set out in section 3.9 of NI 81-107. The IRC of a Pooled Fund will not approve a Related Issuer Transaction subject to its mandate unless the IRC has made the determination set out in subsection 5.2(2) of NI 81-107.
14. If the IRC of a Fund becomes aware of an instance where the Filer or an affiliate of the Filer, as manager of the Fund, did not comply with the terms of this decision or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Fund will, as soon as practicable, notify in writing the securities regulatory authority or regulator in the jurisdiction under which the Fund is organized.
E. Investment in Securities of Related Issuers
15. The Related Issuers are or may be significant issuers of investment grade quality fixed income securities in the debt market. The Filer considers that it would be in the best interest of the Funds to have access, on the terms and conditions described herein, to non-exchange-traded debt securities of the Related Issuers with a "designated rating" by a "designated rating organization" within the meaning of those terms in NI 44-101, for the reasons set out below:
(a) there is a limited supply of debt securities issued by an issuer other than the federal or a provincial government which have a "designated rating" by a "designated rating organization" within the meaning of those terms in NI 81-102;
(b) diversification is reduced to the extent that a Fund is limited with respect to investment opportunities; and
(c) investing in debt securities of Related Issuers is a fundamentally distinct investment and cannot simply be replicated by investing in other securities of similarly situated issuers. A Fund may be prejudiced if it cannot purchase, in either a Primary Offering or the secondary market, non-exchange-traded debt securities of a Related Issuer that are consistent with the Fund's objective.
16. Section 6.2 of NI 81-107 provides the NI 81-102 Funds with an exemption from the Related Securityholder Requirements and the NI 31-103 Related Issuer Requirements in respect of purchasing exchange-traded securities, such as common shares, in the secondary market. It does not permit an NI 81-102 Fund, or the Filer on behalf of an NI 81-102 Fund, to purchase non-exchange-traded securities issued by Related Issuers.
17. NI 81-107 does not apply to the Pooled Funds as they are not reporting issuers. Accordingly, it does not permit the Pooled Funds to purchase exchange-traded securities such as common shares of Related Issuers in the secondary market, or non-exchange-traded securities issued by Related Issuers.
18. The Filer and the Funds (as defined, including the Pooled Funds) previously received relief in the Original Decisions (defined below). The Original Decisions granted relief, subject to conditions:
(a) In the Original Decision dated December 11, 2008, from the Related Securityholder Requirements to:
(i) the Funds which allows them to invest in non-exchange traded debt securities of one or more Related Issuers having a "designated rating" within the meaning of that term in NI 81-102; and
(ii) the Pooled Funds to invest in exchange-traded securities of Related Issuers in the secondary market; and
(b) In the Original Decision dated August 16, 2012, from the Related Securityholder Requirements and the NI 31-103 Related Issuer Requirements to the Filer and the Funds which allows the Funds to invest in non-exchange-traded debt securities of Related Issuers purchased in a Primary Offering having a "designated rating" within the meaning of that term in NI 81-102.
19. The Filer inadvertently failed to seek exemptive relief:
(a) from the NI 31-103 Related Issuer Requirements in respect of investments by the Funds described in paragraph 18(a) above; and
(b) from the NI 81-102 Related Issuer Requirements in respect of investments by the NI 81-102 Funds described in paragraphs 18(a)(i) and 18(b) above when the NI 81-102 Funds became "dealer-managed investment funds".
Any such investments have been conducted subject to the conditions of the Original Decisions, which the Filer submits are the conditions of exemptive relief from the Related Issuer Requirements that the Filer would have proposed based on previous relief granted had it sought same.
20. The debt securities of Related Issuers that are purchased by a Fund in a Primary Offering pursuant to the Requested Related Securityholder Relief and Requested Related Issuer Relief will be non-exchange-traded debt securities, other than asset backed commercial paper securities, with a term to maturity of 365 days or more, that have been given and continue to have, at the time of purchase, a "designated rating" by a "designated rating organization" within the meaning of those terms in NI 44-101, and will be purchased in a Primary Offering where the terms, such as the size and the pricing, will be a matter of public record as evidenced in a prospectus, offering memorandum, press release or other public document.
21. Each non-exchange-traded debt security of a Related Issuer purchased by a Fund in the secondary market pursuant to the Requested Related Securityholder Relief and Requested Related Issuer Relief, will have been given, and continue to have, at the time of purchase, a "designated rating" by a "designated rating organization" within the meaning of those terms in NI 44-101.
22. Each exchange-traded security of a Related Issuer purchased by a Pooled Fund in the secondary market pursuant to the Requested Related Securityholder Relief and Requested Related Issuer Relief, will be purchased on an exchange where the securities are listed.
23. Each Related Issuer Transaction conducted by a Fund will represent the business judgement of 'responsible persons' uninfluenced by considerations other than the best interests of the Funds.
Original Decisions
24. As referenced above, subject to the terms and conditions described therein, the Filer, and certain of its affiliates and predecessor entities, obtained orders on the dates set forth below (the Original Decisions), which permit, among other things, a Fund, as a result of a Related Issuer Transaction, to make and hold an investment in non-exchange-traded debt securities of one or more Related Issuers in a Primary Offering or the secondary market. The dates of the orders are: December 11, 2008 and August 16, 2012.
25. As of the date of this decision, the Original Decisions will no longer be relied upon by the Filer or the Funds in respect of the Related Issuer Transactions.
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:
A) The Revocation Relief is granted.
B) The Requested Related Securityholder Relief and the Requested Related Issuer Relief are granted:
1. to permit a Fund to make and hold an investment in non-exchange-traded debt securities of a Related Issuer in the secondary market on the following conditions:
(a) the purchase or holding is consistent with, or is necessary to meet, the investment objective of the Fund;
(b) at the time of the purchase, the IRC of the Fund has approved the transaction on behalf of the Fund in accordance with subsection 5.2(2) of NI 81-107;
(c) the manager of the Fund complies with section 5.1 of NI 81-107 and the manager and the IRC of the Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the investment;
(d) the security has been given and continues, at the time of the purchase, to have a "designated rating" by a "designated rating organization" within the meaning of those terms in NI 44-101;
(e) the price payable for the security is not more than the ask price of the security;
(f) the ask price of the security is determined as follows:
(i) if the purchase occurs on a marketplace, the price payable is determined in accordance with the requirements of that marketplace; or
(ii) if the purchase does not occur on a marketplace,
(A) the Fund may pay the price for the security at which an independent, arm's-length seller is willing to sell the security; or
(B) if the Fund does not purchase the security from an independent arm's-length seller, the Fund must pay the price quoted publicly by an independent marketplace or obtain, immediately before the purchase, at least one quote from an independent, arm's-length purchaser or seller and not pay more than that quote;
(g) the transaction complies with any applicable "market integrity requirements" as defined in NI 81-107;
(h) no later than the time the Fund files its annual financial statements, and no later than the 90th day after each financial year-end, the Filer, or an affiliate of the Filer, as manager of the Fund, files with the securities regulatory authority or regulator the particulars of any such investments; and
2. to permit a Fund to make and hold an investment in non-exchange-traded debt securities of a Related Issuer in a Primary Offering on the following conditions:
(a) the purchase or holding is consistent with, or is necessary to meet, the investment objective of the Fund;
(b) at the time of the purchase, the IRC of the Fund has approved the investment in accordance with subsection 5.2(2) of NI 81-107;
(c) the manager of the Fund complies with section 5.1 of NI 81-107 and the manager and the IRC of the Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the investment;
(d) the security has been given and continues, at the time of the purchase, to have a "designated rating" by a "designated rating organization" within the meaning of those terms in NI 44-101;
(e) the size of the Primary Offering is at least $100 million;
(f) at least two purchasers who are independent, arm's-length purchasers, which may include "independent underwriters" within the meaning of National Instrument 33-105 Underwriting Conflicts, collectively purchase at least 20% of the Primary Offering;
(g) no Fund shall participate in the Primary Offering if following its purchase the Fund would have more than 5% of its net assets invested in non-exchange-traded debt securities of a Related Issuer;
(h) no Fund shall participate in the Primary Offering if following its purchase the Fund together with Related Funds will hold more than 20% of the securities issued in the Primary Offering;
(i) the price paid for the securities by a Fund in the Primary Offering shall be no higher than the lowest price paid by any of the arm's-length purchasers who participate in the Primary Offering;
(j) no later than the time the Fund files its annual financial statements, and no later than the 90th day after each financial year-end, the Filer, or an affiliate of the Filer, as manager of the Fund, files with the securities regulatory authority or regulator the particulars of any such investments; and
3. to permit a Pooled Fund to make and hold an investment in exchange-traded securities of a Related Issuer listed and traded on an exchange on the following conditions:
(a) the purchase is made on an exchange where the securities are listed and traded;
(b) the purchase or holding is consistent with, or is necessary to meet, the investment objective of the Pooled Fund;
(c) at the time of the purchase, the IRC of the Pooled Fund has approved the transaction on behalf of the Pooled Fund in accordance with subsection 5.2(2) of NI 81-107;
(d) the manager of the Pooled Fund complies with section 5.1 of NI 81-107 and the manager and the IRC of the Pooled Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the investment;
(e) the transaction complies with any applicable "market integrity requirements" as defined in NI 81-107; and
(f) no later than the time the Pooled Fund files its annual financial statements, and no later than the 90th day after each financial year-end, the Filer, or an affiliate of the Filer, as manager of the Pooled Fund, files with the securities regulatory authority or regulator the particulars of any such investments.
The Revocation Relief and the Requested Related Issuer Relief
The Revocation Relief and the Requested Related Securityholder Relief
Nexus Real Estate Investment Trust
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions -- issuer holds properties through several limited partnerships -- the units of the limited partnerships are exchangeable into, and in all material respects economically equivalent to, the issuer's publicly traded units -- the issuer may include the indirect interest in the issuer held by the holders of exchangeable units of the limited partnerships when calculating the issuer's market capitalization for the purposes of the 25% market capitalization exemption for related party transactions -- relief granted subject to conditions.
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, Part 5, ss. 5.5(a), 5.7(1)(a) and 9.1.
August 12, 2021
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) for an exemption pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) from the minority approval and formal valuation requirements under Part 5 of MI 61-101 relating to any related party transaction of the Filer entered into indirectly through: (a) Edgefront Limited Partnership (Edgefront), Edgefront Barrie Limited Partnership (Barrie), Nobel REIT LP (Nobel), or Nexus Richmond LP (Richmond, and together with Edgefront, Barrie and Nobel, the Existing Partnerships); (b) any New Partnership (as defined below); or (c) any subsidiary entity of an applicable Partnership (as defined below), if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(1)(a) of MI 61-101 if the indirect equity interest in the Filer, which is held by holders of the Exchangeable LP Units (as defined below) of each of the Partnerships were included in the calculation of the Filer's market capitalization (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 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 Alberta, Saskatchewan, Manitoba, Québec and New Brunswick.
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and MI 61-101 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 an unincorporated, open-ended real estate investment trust established under the laws of the Province of Ontario. The Filer is governed pursuant to a declaration of trust dated May 10, 2013, as most recently amended and restated on August 13, 2020, (the Declaration of Trust) and as may be further amended and/or restated from time to time.
2. The Filer's head office is located at 211-1540 Cornwall Road, Oakville, Ontario, L6J 7W5.
3. The Filer is a reporting issuer in each province and territory of Canada and is not in default of any applicable requirements under the securities legislation thereunder.
4. The Filer is authorized to issue an unlimited number of trust units (the Trust Units) and an unlimited number of special voting units (the Special Voting Units). As at August 6, 2021, the Filer had 33,788,421 Trust Units and 16,442,442 Special Voting Units issued and outstanding. The number of Special Voting Units outstanding at any point in time is equal to, and accompanies, the number of issued and outstanding Exchangeable LP Units.
5. The Trust Units are listed and posted for trading on the Toronto Stock Exchange (the TSX) under the symbol "NXR.UN".
6. Edgefront is a limited partnership existing under the laws of the Province of Ontario and is governed by an amended and restated limited partnership agreement dated December 4, 2013, as amended as of April 2, 2017 (the Edgefront LP Agreement). Edgefront's head office is located at 211-1540 Cornwall Road, Oakville, Ontario, L6J 7W5.
7. Barrie is a limited partnership existing under the laws of the Province of Ontario and is governed by a limited partnership agreement dated July 7, 2015, as amended as of April 2, 2017 and January 14, 2021 (the Barrie LP Agreement). Barrie's head office is located at 211-1540 Cornwall Road, Oakville, Ontario, L6J 7W5.
8. Nobel is a limited partnership existing under the laws of the Province of Québec and is governed by an amended and restated limited partnership agreement dated August 31, 2018, as amended as of January 15, 2021 (the Nobel LP Agreement). Nobel's head office is located at 211-1540 Cornwall Road, Oakville, Ontario, L6J 7W5.
9. Richmond is a limited partnership existing under the laws of the Province of Ontario and is governed by a limited partnership agreement dated April 12, 2018, as amended as of November 2, 2020 (the Richmond LP Agreement, and collectively with the Edgefront LP Agreement, Barrie LP Agreement and the Nobel LP Agreement, the Existing Partnership Agreements). Richmond's head office is located at 211-1540 Cornwall Road, Oakville, Ontario, L6J 7W5.
10. The operating business of the Filer is carried on through the Existing Partnerships and other subsidiaries of the Filer. As of August 6, 2021, through the Existing Partnerships and other subsidiaries of the Filer, the Filer owns and operates a portfolio of 89 commercial properties, of which 34 industrial properties and 1 retail property are located in Western Canada, 11 industrial properties and 1 retail property are located in Ontario, 8 industrial properties, 19 retail properties and 12 office properties are located in Québec, and 1 industrial property, 1 office property and 1 retail property are located in Atlantic Canada. The total gross leasable area of the properties comprising the Filer's portfolio is approximately 6.6 million square feet.
11. Other than (a) differences relating to the name, formation and capitalization amounts, or which are administrative or clerical in nature, and (b) the fact that Nobel, a wholly-owned subsidiary of the Filer, is the holder of Class A limited partnership units (the Class A Units) of Richmond (whereas the Filer is the holder of the Class A Units of Edgefront and Barrie), the Edgefront LP Agreement, the Barrie LP Agreement, and the Richmond LP Agreement (collectively, the Ontario LP Agreements) are identical.
12. The Nobel LP Agreement is substantively the same as the Ontario LP Agreements, other than differences reflecting the formation of Nobel under the laws of Québec and its ownership by Nobel Real Estate Investment Trust prior to its acquisition by the Filer, along with certain other administrative matters.
13. The Filer may, from time to time, establish, form or acquire additional limited partnerships in the future (each of which would be a subsidiary entity of the Filer), in connection with future acquisitions (the New Partnerships, and together with the Existing Partnerships, the Partnerships). Each New Partnership will be formed under the laws of the Province of Ontario and their head office will be located in the Province of Ontario. Each New Partnership will be governed by a partnership agreement (each a New Partnership Agreement and together with the Existing Partnership Agreements, the Partnership Agreements) that is identical to the Ontario LP Agreements, other than differences relating to the name, formation and capitalization amounts of each such Partnership, or which are administrative or clerical in nature.
14. Each Partnership is, and will be, authorized to issue an unlimited amount of general partnership units or interests (the GP Units), Class A Units, and exchangeable Class B limited partnership units (the Exchangeable LP Units).
15. All of the outstanding GP Units of the Partnerships are, and will be, held by a wholly-owned subsidiary of the Filer which manages and controls the operations and affairs of the applicable Partnership and makes all decisions regarding the business and activities of such Partnership. All of the outstanding Class A Units are, and will be, held directly or indirectly by the Filer. All of the Exchangeable LP Units are, and will be, held by parties that have vended assets indirectly to the Filer. As at August 6, 2021, the holders of the Exchangeable LP Units hold, in the aggregate, 16,442,442 Exchangeable LP Units, representing an approximate 32.73% effective interest in the Filer assuming that all of the Exchangeable LP Units are exchanged for Trust Units.
16. As at August 6, 2021,
(a) Edgefront's GP Units and Class A Units are 100% owned, directly or indirectly, by the Filer, and Edgefront has 2,500 Exchangeable LP Units issued and outstanding;
(b) Barrie's GP Units and Class A Units are 100% owned, directly or indirectly, by the Filer, and Barrie has 867,746 Exchangeable LP Units issued and outstanding;
(c) Nobel's GP Units and Class A Units are 100% owned, directly or indirectly, by the Filer, and Nobel has 15,451,364 Exchangeable LP Units issued and outstanding; and
(d) Richmond's GP Units and Class A Units are 100% owned, directly or indirectly, by Nobel, and Richmond has 120,832 Exchangeable LP Units issued and outstanding.
17. None of the Partnerships are, or will be, a reporting issuer in any jurisdiction and none of the securities of the Partnerships are, or will be, listed or posted for trading on any stock exchange or other market.
18. The rights and privileges attaching to the GP Units, Class A Units and Exchangeable LP Units, respectively, of each Partnership are, and will be, substantively identical (other than differences relating to the name, formation and capitalization amounts of each Partnership, or which are administrative or clerical in nature).
19. The Exchangeable LP Units are, and will be, in all material respects, economically equivalent to the Trust Units on a per unit basis. Each of the Partnerships is, or will be, party to an exchange agreement with the Filer (the Exchange Agreements) that expressly provides that Exchangeable LP Units are, and will be, treated economically equivalent to the Trust Units and ensures that Exchangeable LP Units are treated as identically as possible to holders of Trust Units, such that holders of Exchangeable LP Units (regardless of the Partnership that issued such Exchangeable LP Units) are, in effect, holding the equivalent of a Trust Unit in all but name. Each New Partnership will enter into an Exchange Agreement that is identical to the Exchange Agreements entered into by Edgefront, Barrie and Richmond (collectively, the Ontario LPs) other than differences relating to the name of each such Partnership, or which are administrative or clerical in nature.
20. Holders of Exchangeable LP Units are, and will be, entitled to receive distributions, on a per unit basis, from their respective Partnerships equal to, and at the same time as, those paid by (a) the Filer to the holders of Trust Units on a per unit basis, and (b) each of the other Partnerships to the holders of Exchangeable LP Units of each of their respective Partnerships, on a per unit basis. Other than these distributions, the holders of Exchangeable LP Units have no economic rights or interests in respect of the Partnerships to which the Exchangeable LP Units relate.
21. Pursuant to the applicable Partnership Agreement and its associated Exchange Agreement, each Exchangeable LP Unit is, and will be, exchangeable at the option of the holder for one Trust Unit (subject to customary anti-dilution adjustments) and is, and will be, accompanied by a Special Voting Unit that entitles the holder to receive notice of, attend and to vote together with the holders of Trust Units at all meetings of voting unitholders of the Filer. Other than in a circumstances where a matter would affect the rights, benefits or entitlements of the holders of the Exchangeable LP Units, or where required by applicable law, the holders of Exchangeable LP Units have no voting rights in respect of the Partnerships to which they relate and are non-voting units of such Partnerships.
22. The Exchangeable LP Units are, and will be, subject to limitations on transfer set out in the applicable Partnership Agreement, and each Partnership Agreement requires, and will require, that the holders of Exchangeable LP Units not to take any action that would result in the Exchangeable LP Units being held by a non-resident of Canada.
23. The Exchangeable LP Units are, or will be, neither exchangeable for any other securities other than Trust Units, nor for cash.
24. The Exchangeable LP Units represent, or will represent, part of the equity value of the Filer and provide, or will provide, the holder of the Exchangeable LP Units with the economic rights which are, in all material respects, equivalent to the Trust Units. The effect of the holders' exchange rights are that holders of Exchangeable LP Units will receive Trust Units upon the exchange of the Exchangeable LP Units. Moreover, the economic interests that underlie the Exchangeable LP Units are identical to those underlying the Trust Units; namely, the assets and operations held directly or indirectly by the Partnerships and the Filer's other subsidiaries.
25. It is anticipated that the Filer may from time to time enter into transactions with certain related parties indirectly through the Partnerships and/or a subsidiary entity of an applicable Partnership.
26. If Part 5 of MI 61-101 applies to a related party transaction by an issuer and the transaction is not otherwise exempt:
(a) the issuer must obtain a formal valuation of the transaction in a form satisfying the requirements of MI 61-101 by an independent valuator; and
(b) the issuer must obtain approval of the transaction by disinterested holders of the affected securities of the issuer (together, requirements (a) and (b) are referred to as the Minority Protections).
27. A related party transaction that is subject to MI 61-101 may be exempt from the Minority Protections if at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, exceeds 25% of the issuer's market capitalization (the Transaction Size Exemption).
28. The Filer may not be entitled to rely on the Transaction Size Exemption available under the Legislation because the definition of market capitalization in the Legislation does not contemplate securities of another entity that are exchangeable into equity securities of the issuer.
29. If the Exchangeable LP Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of the interests in the Filer represented by the outstanding Exchangeable LP Units (approximately 32.73% as at August 6, 2021). As a result, related party transactions of the Filer may be subject to the Minority Protections in circumstances where the fair market value of the transactions is effectively less than 25% of the fully-diluted market capitalization of the Filer.
30. Section 1.4 of MI 61-101 treats an operating entity of an "income trust", as such term is defined in National Policy 41-201 Income Trusts and Other Indirect Offerings (NP 41-201), on a consolidated basis with its parent trust entity for the purpose of determining which entities are related parties of the issuer and to which transactions MI 61-101 should apply. Section 1.2 of NP 41-201 provides that references to an "income trust" refer to a trust or other entity (including corporate and non-corporate entities) that issues securities which provide for participation by the holder in net cash flows generated by an underlying business owned by the trust or other entity. Accordingly, it is consistent with MI 61-101 that securities of an operating entity, such as the Exchangeable LP Units, be treated on a consolidated basis for the purposes of the Transaction Size Exemption.
31. The inclusion of the Exchangeable LP Units when determining the Filer's market capitalization is consistent with the logic of including unlisted equity securities of the issuer which are convertible into listed securities of the issuer in determining an issuer's market capitalization in that both are securities that are considered part of the equity value of the issuer whose value is measured on the basis of the listed securities into which they are convertible or exchangeable.
32. Although the Exchangeable LP Units are not securities of the Filer, they are, or will be, as a result of the rights, privileges and restrictions attaching to such Exchangeable LP Units and the various material agreements relating to and governing the Exchangeable LP Units, equivalent to the Trust Units in all material respects, in that:
(a) they are, or will be, exchangeable into Trust Units on a one-for-one basis;
(b) they have, or will have, the same economic rights as Trust Units;
(c) together with the Special Voting Units, they carry, or will carry, the same voting rights as Trust Units; and
(d) any additional rights attached to the Exchangeable LP Units arise, or will arise, solely by virtue of the Exchangeable LP Units being limited partnership units and are customary rights associated with limited partnership units.
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 applicable transaction would qualify for the Transaction Size Exemption contained in MI 61-101 if the Exchangeable LP Units were considered an outstanding class of equity securities of the Filer that were convertible into Trust Units;
(b) the applicable transaction is made in compliance with the rules and policies of the TSX or such other exchange upon which the Filer's securities trade;
(c) there are no changes to the rights, privileges and restrictions attached to the GP Units, the Exchangeable LP Units and/or the Special Voting Units, including the exchange rights associated therewith, as described above and in the Declaration of Trust, the Existing Partnership Agreements, and the Exchange Agreements, whether by amendment to, or waiver of, such documents, contractual agreement or otherwise;
(d) there are no material changes to the terms of the Existing Partnership Agreements or the Exchange Agreements, other than those which are administrative or clerical in nature, whether by amendment to, or waiver of, such documents, contractual agreement or otherwise;
(e) the terms of the Exchangeable LP Units of any New Partnership, including the terms of any New Partnership Agreement relating thereto, are identical to those of the Ontario LP Agreements and the Exchange Agreements entered into by the Ontario LPs (other than differences relating to the name, formation and capitalization amounts of such New Partnership, or which are administrative or clerical in nature);
(f) upon the issuance of any Exchangeable LP Units of a New Partnership to which the Exemption Sought would apply, the Filer will promptly issue a press release disclosing the issuance of such Exchangeable LP Units and which contains the following disclosure, with any immaterial modifications as the context may require;
"Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction does not exceed 25% of the market capitalization of the issuer. Nexus Real Estate Investment Trust (the REIT) has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for transactions that would have a value of less than 25% of the REIT's market capitalization, if the exchangeable Class B limited partnership units (the Class B LP Units) of certain of the REIT's subsidiary limited partnerships are included in the calculation of the REIT's market capitalization. Following the issuance of the Class B LP Units of [the New Partnership], the 25% threshold, above which the minority approval and valuation requirements would apply, has now been increased by approximately [x]% to reflect the inclusion of the Class B LP Units of [the New Partnership] and an aggregate of approximately [x]% indirect exchangeable interest in the REIT held by the holders of Class B LP Units of the REIT's various subsidiary limited partnerships."
(g) any annual information form of the Filer that is required to be filed in accordance with applicable Canadian securities law contain the following disclosure, with any immaterial modifications as the context may require:
"Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction does not exceed 25% of the market capitalization of the issuer. Nexus Real Estate Investment Trust (the REIT) has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for transactions that would have a value of less than 25% of the REIT's market capitalization, if the exchangeable Class B limited partnership units (the Class B LP Units) of certain of the REIT's subsidiary limited partnerships are included in the calculation of the REIT's market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements would apply, is increased to include the approximately [x]% indirect exchangeable interest in the REIT held by the holders of Class B LP Units of the REIT's various subsidiary limited partnerships."
Mackenzie Financial Corporation
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval of investment fund reorganization because the reorganization does not meet all the pre-approval criteria -- relief granted to permit top funds to invest in reorganized and continuing funds that hold securities of a fund established for tax deferral purposes post-reorganization -- subject to conditions.
National Instrument 81-102 Investment Funds, ss. 2.1(1), 2.5(2)(b), 5.5(1)(b), 5.6(1) and 19.1(2).
August 13, 2021
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for:
(i) on behalf of the Reorganizing Fund (as defined below), approval under clause 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) for the proposed reorganization (the Reorganization) of certain series of the Reorganizing Fund as set out below (the Affected Series) with the applicable Canada Life Fund (as defined below) (the Approval Sought);
(ii) on behalf of the Filer's current and future mutual funds managed by the Filer or an affiliate of the Filer (the Top Funds), an exemption from the prohibition in paragraph 2.5(2)(b) of NI 81-102 to permit the Top Funds to purchase and hold a security of the Reorganizing Fund or the Canada Life Fund that holds more than 10% of its NAV in securities of its corresponding LP Fund and other investment funds in the aggregate (the Three-Tier Relief).
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 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 of the provinces and territories of Canada, other than Ontario (together with Ontario, the Canadian Jurisdictions).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:
Canada Life Fund means Canada Life Global Resources Fund;
CLIML means Canada Life Investment Management Ltd., an affiliate of the Filer, subsidiary of The Canada Life Assurance Company and manager and trustee and manager of the Canada Life Funds;
LP Fund means Mackenzie CL Global Resource LP;
Meeting Materials means the notice of meeting and management information circular in respect of the Meeting dated August 20, 2021;
Reorganizing Fund means Mackenzie Global Resource Fund; and
Tax Act means the Income Tax Act (Canada)
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation governed by the laws of Ontario and is registered as follows: as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador; as a portfolio manager and exempt market dealer in the Canadian Jurisdictions; as an adviser in Manitoba; and as a commodity trading manager in Ontario.
2. The Filer, with its head office in Toronto, Ontario, is or will be the trustee and manager of the Reorganizing Fund, the LP Fund and the Top Funds that are not managed by its affiliates.
3. Neither the Filer, the Reorganizing Fund, the LP Fund nor the Top Funds are in default of securities legislation in any of the Canadian Jurisdictions.
CLIML
4. CLIML is a corporation governed under the laws of Canada.
5. CLIML is registered as a portfolio manager in each province and territory of Canada, as an investment fund manager in each of Ontario, Quebec and Newfoundland and Labrador, and as a commodity trading manager in Ontario.
6. CLIML will act as manager and trustee for the Canada Life Fund.
The Reorganizing Fund, Canada Life Fund and the LP Fund
7. The Reorganizing Fund is, and the Canada Life Fund is expected to be, a mutual fund established under the laws of Ontario. The Reorganizing Fund is, and the Canada Life Fund is expected to be, a reporting issuer under the securities legislation of the Canadian Jurisdictions.
8. Units of the Affected Series of the Reorganizing Fund and Canada Life Fund generally are, or will be, qualified for sale under one or more simplified prospectuses, annual information forms and fund facts documents (collectively, the Offering Documents).
9. Series S units of the Reorganizing Fund and the corresponding Canada Life Fund will be offered only on an exempt distribution basis.
10. Each of the other series of units of each of the Canada Life Fund that correspond to the Affected Series will be newly created and will be qualified for distribution under a prospectus.
11. The LP Fund will be a reporting issuer under the applicable securities legislation of the Province of Ontario.
12. Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted the Reorganizing Fund therefrom, the Reorganizing Fund follows the standard investment restrictions and practices established under NI 81-102.
13. The NAV for each series of the Funds and the LP Fund is, or will be, calculated on a daily basis in accordance with that fund's valuation policy and as described in the applicable Offering Documents.
The Top Funds
14. Each Top Fund is, or will be, a mutual fund established under the laws of Ontario. Each Top Fund is, or will be, a reporting issuer under the securities legislation of the Canadian Jurisdictions.
15. Each Top Fund distributes, or will distribute, some or all of its securities pursuant to a prospectus, annual information form and fund facts or ETF facts documents (as applicable).
16. Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Reorganizing Fund therefrom, each Top Fund follows, or will follow the standard investment restrictions and practices established under NI 81-102.
17. Each Top Fund is, or will be, subject to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).
The Proposed Reorganization and the Approval Sought
18. Pursuant to the Reorganization, unitholders of the Reorganizing Fund would become unitholders of the Canada Life Fund, as follows:
<<Reorganizing Fund>>
<<Canada Life Fund>>
<<Affected Series>>
<<Nature of Reorganization>>
<<Expected Reorganization Date>>
Mackenzie Global Resource Fund
Canada Life Global Resources Fund
Q, L, N, QF, H, QFW, HW, S
Tax Deferred
September 17, 2021
19. In the opinion of the Filer, the Qualifying Disposition (as defined below) satisfies all of the criteria for pre-approved reorganizations and transfers set forth in section 5.6 of NI 81-102 except that:
(i) The Qualifying Disposition is not a "qualifying exchange" within the meaning of section 132.2 of the Tax Act or tax deferred transactions under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act;
(ii) The Reorganization does not contemplate the wind-up of the Reorganizing Fund as soon as reasonably possible following the Reorganization; and
(iii) Unitholders of the Reorganizing Fund will not be provided with a fund facts document prior to the time they are asked to approve the Reorganization for the reasons described below.
The Qualifying Disposition
20. The proposed Reorganization is in connection with a larger set of transactions that were announced on December 31, 2020. Although the Affected Series of the Reorganizing Fund are presently offered under the Filer's Mackenzie Canada Life Mutual Funds simplified prospectus and set out below, except those offered on an exempt distribution basis as described above, the Reorganizing Fund also offers series of units under the Filer's Mackenzie Investments simplified prospectus.
21. Causing the Affected Series unitholders to redeem their units (in cash or in kind) in which they are invested and using the redemption proceeds to subscribe for units of the corresponding Canada Life Fund (each, a Redemption Transaction) would in some instances trigger the realization of significant capital gains by the Affected Series unitholders.
22. The Filer intends to carry out a "qualifying disposition" with respect to the transfer of property from the Reorganizing Fund to a newly created Canada Life Fund under section107.4 of the Tax Act. That provision exempts transfers of property from one trust to another (each a Qualifying Disposition) from being a taxable event for the transferring trust (i.e., the Reorganizing Fund) and its unitholders (essentially allowing for a pro-rata partition of the Reorganizing Fund on a tax deferred basis).
23. The Canada Life Fund will have the same investment objectives as the Reorganizing Fund and substantially the same investment objectives as the LP Fund.
24. The Canada Life Fund and the LP Fund will have substantially the same investment strategies and valuation procedures and, in the case of the Canada Life Fund, the same fee structure as the Reorganizing Fund. No fees or expenses will be charged at the LP Fund level other than expenses that otherwise would have been borne at the Reorganizing Fund level had the Reorganization not occurred.
25. The chart immediately below paragraph 18 sets out the Affected Series of the Reorganizing Fund.
Details of the Proposed Reorganization
26. On completion of the Reorganization, the Filer will become sub-advisor of the Canada Life Fund. in accordance with the terms of a sub-advisory agreement between the Filer and CLIML.
27. No sales charges will be payable in connection with the transfer to the Canada Life Fund or LP Fund of the investment portfolio by the Reorganizing Fund.
28. Unitholders of each Affected Series of the Reorganizing Fund will continue to have the right to redeem their units or exchange such units for units of any other mutual fund offered under the applicable Offering Documents at any time up to close of business on the day of the Reorganization.
29. In accordance with National Instrument 81-106 - Investment Fund Continuous Disclosure (NI 81-106), press releases in respect proposed Reorganization were issued and filed via SEDAR on August 4, 2020 and February 12, 2021. A material change report and amendment to the Offering Documents with respect to the proposed Reorganization was filed in accordance with NI 81-106.
30. By way of order dated October 21, 2016, the Filer was granted relief (the Notice-and-Access Relief) from the requirement set out in paragraph 12.2(2)(a) of NI 81-106 to send a printed management information circular to unitholders while proxies are being solicited, and, subject to certain conditions, instead allows a notice-and-access document (as described in the Notice-and-Access Relief) to be sent to such unitholders. Pursuant to the requirements of the Notice-and-Access Relief, the notice-and-access document and a form of proxy in connection with each special meeting of unitholders of the Affected Series of the Reorganizing Fund will be mailed to unitholders of the Affected Series of the Reorganizing Fund commencing on or about July 14, 2021 and will be concurrently filed on SEDAR. The Meeting Materials will also appear on the SEDAR website at www.sedar.com. If approved, unitholders of Affected Series of the Reorganizing Fund will receive fund facts document(s) for the corresponding Canada Life Fund in their first confirmation statement following the Reorganization.
31. The Meeting Materials describe all relevant facts concerning the Reorganization, including the Qualifying Disposition, the tax implications and other consequences of the Reorganization, as well as the view of the Reorganizing Fund's Independent Review Committee (the IRC) that the Reorganization achieves a fair and reasonable result for the Reorganizing Fund, so that unitholders of the Affected Series of the Reorganizing Fund may consider this information before voting on the Reorganization.
32. All of the series of the Canada Life Fund (other than Series S) and the single series of the LP Fund will be newly created and will be qualified for distribution under a prospectus.
33. In order to effect the Reorganization, Series S units of the Canada Life Fund will be distributed to the Canada Life Unitholders currently in the corresponding Reorganizing Fund in reliance on the prospectus exemption contained in section 2.11 of National Instrument 45-106 -- Prospectus Exemptions.
34. A current simplified prospectus and fund facts documents are not available in respect of the Canada Life Fund as that fund is new. Instead of delivering these documents, the Filer has included information in respect of the Canada Life Fund and the LP Fund in the Meeting Materials. This will include the fact that the investment objective of the Canada Life Fund and the corresponding LP Fund, will be the same as that of the Reorganizing Fund. The management fees and administration fees of the Canada Life Fund will be the same as those of the Reorganizing Fund. It will also disclose that the investment strategies and valuation procedures of the Canada Life Fund and the LP Fund will be substantially the same as those of the Reorganizing Fund. The fact that the LP Fund will not charge management fees, administration fees or other expenses (other than expenses that otherwise would have been borne at the Reorganizing Fund level had the Reorganization not occurred) will also be disclosed. The Filer believes that with this information, together with the information contained in the fund facts of the relevant series of the Reorganizing Fund that each unitholder of the Affected Series of the Reorganizing Fund received when their initial investment was made, unitholders in the Reorganizing Fund have access to prospectus-level disclosure with respect to the applicable Canada Life Fund.
35. If the necessary unitholder approval is obtained and the Filer decides to proceed with the Reorganization, it will occur at or about the close of business on or about September 17, 2021.
36. The Filer and CLIML will pay for the costs of the proposed Reorganization. No management fees, administration fees or other expenses (other than expenses that would have been borne at the Reorganizing Fund level had the Reorganization not occurred) will be charged at the LP Fund level. There are no charges payable by unitholders in the Reorganizing Fund who acquire units of the corresponding Canada Life Fund as a result of the Reorganization.
37. The LP Fund will dispose of its assets as expeditiously as is consistent with prudent portfolio management and it is not anticipated that it will accept new money or assets by way of subscription after the completion of the Reorganization. With the exception of the Reorganizing Fund and Canada Life Fund no other unitholders will be allowed to invest in the LP Fund.
38. In order to provide Affected Series investors that hold their units outside of a registered account with the ability to continue to indirectly benefit from the capital losses within the Reorganizing Fund following the Reorganization, we expect the Canada Life Fund will invest a portion of its assets in the Reorganizing Fund. That investment will enable these Affected Series investors to continue to indirectly benefit from the capital losses of the Mackenzie Global Resource Fund. As of March 31, 2021, Mackenzie Global Resource Fund had capital losses of approximately $124 million. The amount of the net capital losses of the Fund could change significantly in advance of the effective date of the Reorganization.
39. As required by NI 81-107, the IRC has been appointed for the Reorganizing Fund. The Canada Life mutual funds established their own independent review committee and appointed their initial members on December 22, 2020. The IRC of the LP Fund will be comprised of the same members as the IRC of the Reorganizing Fund.
40. The Filer presented the potential conflict of interest matters related to the proposed Reorganization to the IRC for a recommendation. On June 10, 2021, the IRC reviewed the potential conflict of interest matters related to the proposed Reorganization and provided its positive recommendation for the Reorganization, after determining that the proposed Reorganization, if implemented, would achieve a fair and reasonable result for the Reorganizing Fund.
Reasons for the Approval Sought
41. The purpose of the Qualifying Disposition in respect of each of the Reorganizing Fund is to allow the Affected Series unitholders to be moved to the corresponding Canada Life Fund in the most cost and/or tax-efficient manner.
42. Proceeding by way of Redemption Transactions would cause the realization of significant capital gains by certain taxable investors in the Reorganizing Fund.
43. The Reorganization is not expected to have any material impact on the unitholders in the Reorganizing Fund other than Affected Series unitholders. The Reorganization will not negatively affect any unitholder's interest in the assets and liabilities of the Reorganizing Fund and the Reorganizing Fund's investment objectives will be the same as the Canada Life Fund and substantially the same as the LP Fund. The Qualifying Disposition is being structured to be a non-taxable event to the Affected Series unitholders and the remaining unitholders of the Reorganizing Fund.
44. Affected Series unitholders will continue to have the right to redeem units of the Reorganizing Fund for cash at any time up to the close of business on the last business day before the Reorganization. Units so redeemed will be redeemed at a price equal to their NAV per unit on the redemption date.
Required Relief for the LP Fund
45. One of the requirements to effecting the Reorganization as a Qualifying Disposition is that each asset (or group of identical assets) of the Reorganizing Fund must be capable of being divided into a precise percentage allocable to each unitholder or class of unitholders (the Transfer Percentage). In recognition of the fact that it may not always be practicable to effect such a division, the Tax Act contains a "safe harbour" exception to this requirement. The "safe harbour" provides that the Canada Life Fund may receive as part of the Qualifying Disposition, in lieu of a fractional interest in a share that would otherwise be required, a disproportionate amount of money or interest in the share, provided that its value does not exceed the lesser of $200 and the fair market value of the fractional interest. This "safe harbour" only applies in respect of equity securities (and specifically equity securities that do not exceed the specified value threshold) and does not adequately address the difficulties that the precise Transfer Percentage requirement poses more generally.
46. In addition, certain assets (or group of identical assets) may not be readily divisible for other reasons. In order to meet this condition, certain assets (or groups of identical assets) will be transferred on a tax deferred basis by the Reorganizing Fund to the LP Fund in exchange for units of the LP Fund. The units of the LP Fund will then become an asset (or group of identical assets) of the corresponding Reorganizing Fund and a portion of those units will be transferred to the corresponding Canada Life Fund based on the Transfer Percentage.
47. In summary, where it would otherwise be difficult or impossible to effect a transfer in the required precise Transfer Percentage of certain assets of the Reorganizing Fund, those assets will be transferred to the LP Fund, whose units are readily capable of being transferred in the required Transfer Percentage.
The Three-Tier Relief
48. As the LP Fund is being qualified by prospectus, the Reorganizing Fund or Canada Life Fund may invest up to 100% of their NAV in the LP Fund under section 2.5 of NI 81-102.
49. However, if the Reorganizing Fund or Canada Life Fund invests more than 10% of their NAV in other investment funds and the LP Fund in aggregate, it would preclude other investment funds managed by the Filer or its affiliates from investing in that Reorganizing Fund or Canada Life Fund under paragraph 2.5(2)(b) of NI 81-102.
50. Prior to the Reorganization, the Top Funds would have been permitted to invest in the Reorganizing Fund and Canada Life Fund in accordance with section 2.5 of NI 81-102.
51. The Reorganization may result the Reorganizing Fund and/or the Canada Life Fund holding more than 10% of its NAV in other investment funds due to these funds holding securities of the LP Fund.
52. The Three-Tier Relief is required for the Top Funds to continue investing in the Reorganizing Fund or the Canada Life Fund that invest more than 10% of its NAV in other investment funds, which includes holdings of its corresponding LP Fund that were received as a result of the Reorganization, in order for the Top Funds to further their investment objectives and investment strategies (the Three-Tier Structure).
53. Except for paragraph 2.5(2)(b) of NI 81-102, a Fund's use of the Three-Tier Relief will be made in accordance with the provisions of section 2.5 of NI 81-102.
54. The Reorganizing Fund and Canada Life Fund that is part of a Three-Tier Structure will not invest more than 10% of its NAV in other investment funds, excluding investments in (i) one or more money market funds, (ii) one or more index participation units as defined in NI 81-102 (IPUs) and (iii) corresponding LP Fund.
55. The LP Fund is being introduced into the structure to further the best interests of unitholders in the Reorganizing Fund.
56. The LP Fund will dispose of its assets as expeditiously as is consistent with prudent portfolio management and it is not anticipated that it will accept new money or assets by way of subscription after the completion of the Reorganization.
57. There will be no duplication of fees between each tier of the Three-Tier Structure. The prospectus of the Top Fund, Reorganizing Fund and Canada Life Fund will disclose that fees and expenses will not be duplicated as a result of investments in underlying funds.
58. To ensure investors continue to have transparency into the portfolio securities attributable to the Reorganizing Fund and/or Canada Life Fund mandates, the Filer and CLIML intend to disclose the individual LP Fund positions within the quarterly portfolio disclosures, MRFP holdings disclosure and manager website holdings disclosure at the Reorganizing Fund level.
59. Each Top Fund will comply with the requirement under NI 81-106 relating to the top 25 positions portfolio holdings disclosure in its management report of fund performance and the requirements of Form 81-101F3 Contents of Fund Facts Document relating to top 10 position portfolio holdings disclosure in its fund facts documents as if the Top Fund were investing directly in the LP Fund held by the corresponding Reorganizing Fund or Canada Life Fun
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:
1. the Approval Sought is granted, provided that the Filer obtains the prior approval of the applicable unitholders of the Reorganizing Fund for the Reorganization at a special meeting held for that purpose;
2. the Three-Tier Relief is granted, provided that:
a. an investment by a Top Fund in securities of the Reorganizing Fund or the Canada Life Fund is in accordance with the investment objectives of the Top Fund;
b. the Reorganizing Fund and Canada Life Fund which are part of a Three-Tier Structure do not invest more than 10% of NAV in other investment funds, excluding investments in (i) one or more money market funds; (ii) one or more IPUs; and (ii) in its corresponding LP Fund;
c. the Reorganizing Fund and Canada Life Fund will not make additional investments in the LP Fund after the Reorganization is completed;
d. the investment of each Top Fund in securities of the Reorganizing Fund or Canada Life Fund is otherwise made in compliance with all other requirements of section 2.5 of NI 81-102, except to the extent that discretionary relief has been granted from any such requirement;
e. each Top Fund complies with the requirements under NI 81-106 relating to top 25 positions portfolio holdings disclosure in its management reports of fund performance and the requirements of Form 81-101F3 Contents of Fund Facts Document relating to top 10 position portfolio holdings disclosure in its fund facts documents as if the Reorganizing Fund or Canada Life Fund was investing directly in the LP Fund; and
f. the prospectus of each Top Fund discloses, or will disclose in the next renewal of its prospectus following the date of this decision, the fact that the Top Fund has obtained the Exemption Sought.
Canada Life Investment Management Ltd.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from paragraphs 2.2(1)(a), 2.5(2)(a) and (c) of National Instrument 81-102 Investment Funds to allow mutual funds to invest in ETFs in the United States -- U.S. Underlying ETFs are subject to the United States Investment Company Act of 1940 -- Investments in U.S. ETFs limited to 10% of a fund's net asset value -- Relief subject to terms and conditions based on investment restrictions of NI 81-102 such that top funds cannot do indirectly via investment in underlying ETFs what they cannot do directly under NI 81-102.
National Instrument 81-102 Investment Funds, ss. 2.2(1)(a), 2.5(2)(a) and (c), 19.1.
August 16, 2021
The principal regulator in the Jurisdiction has received an application from the CLIML, on behalf of existing and future mutual funds (the Funds) managed by the CLIML or an affiliate or associate of CLIML (collectively, the Filer) for a decision (the Exemption Sought) under the securities legislation of the principal regulator (the Legislation) exempting each Fund from the following provisions of National Instrument 81-102 Investment Funds (NI 81-102) in order to permit the Funds to invest in securities of existing and future exchange-traded funds that are not index participation units (IPUs) and whose securities are, or will be, listed for trading on a stock exchange in the United States (the U.S. Underlying ETFs):
(a) paragraph 2.2(1)(a) (the Control Restriction) to permit each Fund to purchase securities of a U.S Underlying ETF even though, immediately after the purchase, the Fund would hold securities representing more than 10% of: (i) the votes attaching to the outstanding voting securities of the U.S. Underlying ETF, or (ii) the outstanding equity securities of the U.S. Underlying ETF (the Control Relief);
(b) paragraph 2.5(2)(a) to permit each Fund to invest in securities of a U.S. Underlying ETF even though the U.S. Underlying ETF is not subject to NI 81- 102; and
(c) paragraph 2.5(2)(c) to permit each Fund to invest in securities of a U.S. Underlying ETF even though the U.S. Underlying ETF is not a reporting issuer in any province or territory of Canada (a Jurisdiction).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the 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 all of the provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, the Jurisdictions).
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 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. CLIML:
(a) is a corporation governed under the laws of Canada;
(b) is a wholly-owned investment management subsidiary of The Canada Life Assurance Company;
(c) has its head office in London, Ontario;
(d) is registered as a portfolio manager in each province and territory of Canada; as an investment fund manager in each of Ontario, Québec and Newfoundland and Labrador; and as a commodity trading manager in Ontario;
(e) or an affiliate or associate of CLIML is, or will be, the manager of the Funds; and
(f) is not in default of applicable securities legislation in any Jurisdiction.
2. Each Fund:
(a) is, or will be, an open-end mutual fund established under the laws of Ontario;
(b) is, or will be, governed by the applicable provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities;
(c) is, or will be, a reporting issuer in one or more of the Jurisdictions;
(d) is, or will be, subject to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107);
(e) that is an existing Fund is not in default of applicable securities legislation in any Jurisdiction; and
(f) may, from time to time, wish to invest in U.S. Underlying ETFs in accordance with their investment objectives.
3. Each:
(a) U.S. Underlying ETF's securities are not IPUs as it does not:
(i) hold the securities that are included in a specified widely quoted market index in substantially the same proportion as those securities are reflected in that index; or
(ii) invest in a manner that causes the U.S. Underlying ETF to replicate the performance of that index.
(b) U.S. Underlying ETF is, or will be, listed on a recognized exchange in the United States and the market for them is, or will be, liquid because it is, or will be, supported by designated brokers. As a result, the Filer expects a Fund to be able to dispose of such securities through market facilities in order to raise cash, including to fund the redemption requests of its securityholders.
(c) U.S. Underlying ETF will not hold more than 10% of its net asset value (NAV) in securities of another investment fund unless: (i) the U.S. Underlying ETF is a clone fund, as defined in NI 81-102, (ii) the other investment fund is a money market fund, as defined in NI 81-102, or (iii) securities of the other investment fund are IPUs;
(d) U.S. Underlying ETF may be managed by the Filer and sales fees or redemption fees may be payable by a Fund in relation to its purchase or redemption of the securities of the U.S. Underlying ETF; and
(e) U.S. Underlying ETF is, or will be, a publicly offered mutual fund subject to the United States Investment Company Act of 1940 (Investment Company Act).
4. No Fund will pay management or incentive fees which to a reasonable person would duplicate a fee payable by a U.S. Underlying ETF for the same service.
5. Absent the Exemption Sought, an investment by a Fund in a U.S. Underlying ETF would:
(a) be prohibited by paragraph 2.5(2)(a)(i) of NI 81-102 because such U.S. Underlying ETF may not be subject to NI 81-102;
(b) be prohibited by paragraph 2.5(2)(c) of NI 81-102 because such U.S. Underlying ETF may not be a reporting issuer in any Jurisdiction; and
(c) not qualify for the exception in paragraph 2.5(3)(a) of NI 81-102 because the securities of the U.S. Underlying ETF are not IPUs.
6. The Filer has concluded that it could not currently gain exposure to applicable asset classes, sectors and/or markets entirely through existing Canadian mutual funds or exchanged traded funds (the Canadian Funds).
7. The key benefits of a Fund investing in the U.S. Underlying ETFs are greater choice, improved portfolio diversification and potentially enhanced returns. For example:
(a) an investment in the U.S. Underlying ETFs will provide the Funds with access to specialized knowledge expertise and/or analytical resources of the investment adviser to the U.S. Underlying ETFs;
(b) the U.S. Underlying ETFs provide a potentially better risk profile, diversification and improved liquidity/tradability than direct holdings of asset classes to which the U.S. Underlying ETFs provide exposure; and
(c) the investment strategies of the U.S. Underlying ETFs offer significantly broader exposure to asset classes, sectors and markets than those available in the existing Canadian exchange-traded fund market.
8. The Filer submits that having the option to allocate a limited portion of each Fund's assets to U.S. Underlying ETFs will increase diversification opportunities and may improve a Fund's overall risk/reward profile.
9. An investment in a U.S. Underlying ETF by a Fund is an efficient and cost effective alternative to obtaining exposure to securities held by the U.S. Underlying ETF rather than purchasing those securities directly in the Fund.
10. An investment in a U.S. Underlying ETF by a Fund should pose limited investment risk to the Fund because each U.S. Underlying ETF will be subject to the Investment Company Act, subject to any exemption therefrom that may in the future be granted by the applicable securities regulatory authority.
11. Due to the potential size disparity between the Funds and the U.S. Underlying ETFs, particularly when U.S. Underlying ETFs are initially launched, it is possible that a relatively small investment, on a percentage of NAV basis, by a relatively larger Fund in securities of a U.S. Underlying ETF could result in such Fund holding securities representing more than 10% of: (i) the votes attaching to the outstanding voting securities of the Underlying ETF, or (ii) the outstanding equity securities of that Underlying ETF, contrary to the Control Restriction.
12. Absent the Control Relief, an investment by a Fund in securities of a U.S. Underlying ETF will not qualify for the exemption set out in paragraph 2.2(1.1)(b) of NI 81-102 in respect of the Control Restriction because securities of the U.S. Underlying ETFs are not IPUs.
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 investment by a Fund in securities of a U.S. Underlying ETF is in accordance with the investment objectives of the Fund;
(b) a Fund does not purchase securities of a U.S. Underlying ETF if, immediately after the purchase, more than 10% of the NAV of the Fund in aggregate, taken at market value at the time of the purchase, would consist of securities of U.S. Underlying ETFs;
(c) a Fund does not short sell securities of a U.S Underlying ETF;
(d) securities of each U.S. Underlying ETF are listed on a recognized exchange in the United States;
(e) each U.S. Underlying ETF is, immediately before the purchase by a Fund of securities of that U.S. Underlying ETF, an investment company subject to the Investment Company Act in good standing with the United States Securities and Exchange Commission; and
(f) the prospectus of each Fund discloses, or will disclose in the next renewal of its prospectus following the date of this decision, in the investment strategy section, the fact that the Fund has obtained the Exemption Sought to permit investments in U.S. Underlying ETFs on the terms described in this decision.
National Policy 11-206 Process for Cease to be a Reporting Issuer Applications -- The issuer ceased to be a reporting issuer under securities legislation.
Securities Act, R.S.O. 1990, c. S.5, as am., s. 1(10)(a)(ii).
August 12, 2021
The principal regulator in the Jurisdiction has received an application from the Filer for an order under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that the Filer has ceased to be a reporting issuer in all jurisdictions of Canada in which it is a reporting issuer (the Order Sought).
Under the Process for Cease to be a Reporting Issuer Applications (for a passport application):
1. the Ontario Securities Commission is the principal regulator for this application, and
2. the Filer has provided notice that subsection 4C.5(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland & Labrador, Northwest Territories, Yukon and Nunavut.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this order, unless otherwise defined.
This order is based on the following facts represented by the Filer:
1. the Filer is not an OTC reporting issuer under Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets;
2. the outstanding securities of the Filer, including debt securities, are beneficially owned, directly or indirectly, by fewer than 15 securityholders in each of the jurisdictions of Canada and fewer than 51 securityholders in total worldwide;
3. no securities of the Filer, including debt securities, are traded in Canada or another country on a marketplace as defined in National Instrument 21-101 Marketplace Operation or any other facility for bringing together buyers and sellers of securities where trading data is publicly reported;
4. the Filer is applying for an order that the Filer has ceased to be a reporting issuer in all of the jurisdictions of Canada in which it is a reporting issuer; and
5. the Filer is not in default of securities legislation in any jurisdiction.
The principal regulator is satisfied that the order meets the test set out in the Legislation for the principal regulator to make the order.
The decision of the principal regulator under the Legislation is that the Order Sought is granted.
Pinnacle Renewable Energy Inc.
National Policy 11-206 Process for Cease to be a Reporting Issuer Applications -- Application for an order that the issuer is not a reporting issuer under applicable securities laws -- The issuer is not an OTC reporting issuer; the securities of the issuer are beneficially owned by fewer than 15 securityholders in each of the jurisdictions of Canada and fewer than 51 securityholders worldwide; no securities of the issuer are traded on a market in Canada or another country; the issuer is not in default of securities legislation except it has not filed certain continuous disclosure documents -- Requested relief granted.
Securities Act, R.S.O. 1990, c. S.5, as am., s. 1(10)(a)(ii).
June 14, 2021
¶ 1 The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for an order under the securities legislation of the Jurisdictions (the Legislation) that the Filer has ceased to be a reporting issuer in all jurisdictions of Canada in which it is a reporting issuer (the Order Sought).
Under the Process for Cease to be a Reporting Issuer Applications (for a dual application):
(a) the British Columbia Securities Commission is the principal regulator for this application,
(b) the Filer has provided notice that subsection 4C.5(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Yukon, the Northwest Territories and Nunavut, and
(c) this order is the order of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
¶ 2 Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this order, unless otherwise defined.
¶ 3 This order is based on the following facts represented by the Filer:
1. the Filer is incorporated under the Business Corporations Act (British Columbia) (the BCBCA);
2. the Filer's head office is in Richmond, British Columbia;
3. the Filer's authorized share capital consists of an unlimited number of common shares (Common Shares);
4. on April 13, 2021, all of the Common Shares were acquired by Drax Canadian Holdings Inc., a wholly-owned subsidiary of Drax Group plc, by way of a plan of arrangement under the BCBCA;
5. the Common shares were delisted from the Toronto Stock Exchange on April 14, 2021;
6. the Filer is not an OTC reporting issuer under Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets;
7. the outstanding securities of the Filer, including debt securities, are beneficially owned, directly or indirectly, by fewer than 15 securityholders in each of the jurisdictions of Canada and fewer than 51 securityholders in total worldwide;
8. no securities of the Filer, including debt securities, are traded in Canada or another country on a marketplace as defined in National Instrument 21-101 Marketplace Operation or any other facility for bringing together buyers and sellers of securities where trading data is publicly reported;
9. the Filer is applying for an order that the Filer has ceased to be a reporting issuer in all of the jurisdictions of Canada in which it is a reporting issuer;
10. the Filer is not in default of securities legislation in any jurisdiction, other than the obligation to file by May 15, 2021 its interim financial statements and related management's discussion and analysis for the interim period ended March 31, 2021 as required under National Instrument 51-102 Continuous Disclosure Obligations and the related certification of interim filings as required under National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (collectively, the Filings); and
11. consequently, the Filer is not eligible to use the simplified procedure under National Policy 11-206 Process for Cease to be a Reporting Issuer Applications as it is in default for failure to file the Filings.
¶ 4 Each of the Decision Makers is satisfied that the order meets the test set out in the Legislation for the Decision Maker to make the order.
The decision of the Decision Makers under the Legislation is that the Order Sought is granted.
Temporary, Permanent & Rescinding Issuer Cease Trading Orders
Company Name |
Date of Temporary Order |
Date of Hearing |
Date of Permanent Order |
Date of Lapse/Revoke |
|
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THERE IS NOTHING TO REPORT THIS WEEK. |
||||
Company Name |
Date of Order |
Date of Revocation |
|
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Pure Hydrogen Corporation Limited |
May 21, 2021 |
August 11, 2021 |
Temporary, Permanent & Rescinding Management Cease Trading Orders
Company Name |
Date of Order |
Date of Lapse |
|
||
THERE IS NOTHING TO REPORT THIS WEEK. |
||
Outstanding Management & Insider Cease Trading Orders
Company Name |
Date of Order or Temporary Order |
Date of Hearing |
Date of Permanent Order |
Date of Lapse/ Expire |
Date of Issuer Temporary Order |
|
|||||
Performance Sports Group Ltd. |
19 October 2016 |
31 October 2016 |
31 October 2016 |
__________ |
__________ |
Company Name |
Date of Order |
Date of Lapse |
|
||
Agrios Global Holdings Ltd. |
September 17, 2020 |
__________ |
|
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New Wave Holdings Corp. |
August 3, 2021 |
__________ |
|
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Reservoir Capital Corp. |
May 5, 2021 |
__________ |
|
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Rapid Dose Therapeutics Corp. |
June 29, 2021 |
__________ |
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Project #3259239
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Project #3259622
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Project #3261589
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Project #3259613
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Project #3186538
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Project #3226707
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Project #3235703
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Project #3235865
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Project #3254350
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Project #3173967
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Type |
Company |
Category of Registration |
Effective Date |
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Consent to Suspension (Pending Surrender) |
Pennant Capital Partners Inc. |
Exempt Market Dealer |
August 10, 2021 |
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New Registration |
Balyasny Asset Management (Canada) ULC |
Portfolio Manager |
August 11, 2021 |
GLMX Technologies, LLC -- Application for an Exemption from the Marketplace Rules -- Notice and Request for Comment
GLMX Technologies, LLC (GLMX) has applied for an exemption from National Instrument 21-101Marketplace Operation (NI 21-101), National Instrument 23-101 Trading Rules (NI 23-101), and National Instrument 23-103 Electronic Trading and Direct Electronic Access to Marketplaces (NI 23-103 and, together with NI 21-101 and NI 23-101, the Marketplace Rules), in their entirety.
GLMX is registered as an alternative trading system (ATS) with the Securities and Exchange Commission (SEC) and is an SEC registered broker-dealer, a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation. GLMX operates and maintains an electronic trading platform that facilitates the negotiation of securities financing transactions (SFT) between institutional counterparties that have pre-existing relationships with each other.
GLMX will enable its users to negotiate SFTs that are predominantly US dollar denominated, US securities, and also include Repos using Canadian Government Debt Securities. Government Debt Securities are defined as debt instruments denominated in Canadian dollars and issued domestically by the Government of Canada or provincial governments and municipalities. Repos using Canadian Government Debt Securities would be subject to a 10% annual ceiling, measured by the last 12 months of volume traded on GLMX.
In its application, GLMX has described how it meets criteria for exemption from the Marketplace Rules. These criteria are consistent with those described in CSA Staff Notice 21-328 Regulatory Approach to Foreign Marketplaces Trading Fixed Income Securities. The application and draft exemption order with terms and conditions are attached at Appendix A to this Notice.
We are seeking public comment on all aspects of GLMX's application and, in particular, the negotiation of Repos based on Canadian Government Debt Securities on GLMX's platform.
Please provide your comments in writing, or via email, on before September 11, 2021.
Questions may be referred to:
Ruxandra SmithSenior Accountant, Market RegulationOntario Securities CommissionEmail: ruxsmith@osc.gov.on.caKortney ShapiroLegal Counsel, Market RegulationOntario Securities CommissionEmail: kshapiro@osc.gov.on.ca
McCarthy Tétrault LLP |
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PO Box 48, Suite 5300 |
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Toronto-Dominion Bank Tower |
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Toronto ON M5K 1E6 |
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Canada |
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Office Phone |
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Fax: 416-868-0673 |
April 13, 2021
Dear Sirs/Mesdames:
PART I BACKGROUND
1. As counsel for GLMX, we hereby submit this application for an exemption order contemplated by Staff Notice 21-328 Regulatory Approach to Foreign Marketplaces Trading Fixed Income Securities ("21-328"). The exemption is sought in Alberta, British Columbia, Ontario, Quebec, and Nova Scotia (the "Jurisdictions").
2. We are filing this coordinated review application (the Application) on behalf of GLMX pursuant to Section 3.4 of National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions (NP 11-203). We are filing this Application on behalf of GLMX in Nova Scotia, Ontario, Quebec British Columbia and Alberta (the Jurisdictions).
3. In accordance with the guidelines set out in Section 3.6 of NP 11-203, the Ontario Securities Commission (the OSC) has been selected as the principal regulator for the purposes of this Application on the basis that GLMX has the most significant connection to Ontario. In accordance with Section 5.2(3) of NP 11-203, this Application is being filed with each of the securities regulatory authorities in the Jurisdictions (the ATS Relief Decision Makers) for relief from the securities legislation of each of those Jurisdictions (the Legislation).
4. 21-328 contemplates an exemption from Canadian marketplace and related requirements for certain foreign alternative trading systems (each an "ATS"). Two exemptions have so far been granted to each of Creditex Securities Corporation ("Creditex") and Trumid Financial, LLC ("Trumid") under 21-328{1}.
5. Under 21-328 if a foreign ATS is subject to a comparable and comprehensive regulatory regime in its home jurisdiction, which meets certain criteria and can be relied on for investor protection and the promotion of a fair and efficient market, such home jurisdiction regulatory regime may by exemption order provide a substitute compliance regime for the foreign ATS carrying on activities with Canadian participants. Under the exemption order, the foreign ATS would have to comply with any relevant terms and conditions imposed upon the operations of the foreign ATS.
PART II APPLICATION OF APPROVAL CRITERIA TO THE PLATFORM
Description of GLMX and certain of its relevant operating entities
6. Global Liquid Markets LLC ("GLM"), the holding company for various GLMX entities described below, has its registered office and head office at 330 Seventh Avenue, Floor 17 New York, NY 10001. None of the GLMX entities has an office in Canada.
7. GLM has three subsidiaries GLMX LLC, GLMX and GLMX Europe Limited.
8. GLMX was formed in June 2017. It is registered as an ATS with the United States Securities and Exchange Commission ("SEC"), is an SEC registered broker-dealer and is a member of the Financial Industry Regulatory Authority, Inc. ("FINRA") and the Securities Investor Protection Corporation;
9. GLMX LLC licenses an electronic trading platform ("Platform") described below to GLMX, and GLMX operates and maintains it. The Platform facilitates the negotiation of securities financing transactions (SFTs) which collectively fit under the rubric of "repo" :repurchase and reverse repurchase transactions and securities lending arrangements sale/buy back agreements, and margin lending agreements between institutional counterparties that have pre-existing relationships with each other.
SFTs and the Parties to SFTs
10. SFTs are transactions where securities are used to borrow cash, or vice versa. This mainly includes repos. The principal participants in these markets are broker-dealers acting as intermediaries and their diverse institutional clients. In these transactions, securities are exchanged for collateral which can be in the form of cash or different securities. Transactions are driven by a need to lend/borrow specific securities or to lend/borrow cash.
11. Cash lenders use SFTs as a way to securely invest cash. Typical cash lenders include money market funds, central banks, bank investment portfolio and others. Securities lenders enter into SFTs to finance their securities positions or to obtain leverage. Typical cash borrowers/securities lenders are hedge funds, mortgage REITs, pension funds, asset managers, insurance companies and sovereign wealth funds.
SFTs negotiated on the Platform
12. The SFTs negotiated on the Platform use the securities listed in section 13. In addition, repos using Canadian Government Securities will also be negotiated on the Platform. For purposes of this Application, Canadian Government Securities is defined as all debt instruments denominated in Canadian dollars and issued domestically by the Government of Canada or provincial governments or municipalities. As discussed below, under the exemption terms proposed for GLMX, repo utilizing Canadian Government Securities would be subject to a 10% annual ceiling as measured by the last 12 months of volume. For the purposes of this Application, GLMX will not allow Canadian issued equity securities or Canadian issued corporate debt securities to be used as collateral in SFTs at this time.
13. GLMX uses or envisages using the following securities as collateral for SFT negotiated through the Platform
A. Major sovereign debt including:
• US Treasuries
• UK Government Debt
• Euro Government Debt
• Japan, Singapore, Australia and New Zealand
B. Canadian Government Securities, subject to the 10% annual ceiling described above.
C. Debt issued by Agency, Sub-sovereign and Supranational institutions including:
• U.S. Agency debentures (FNMA, Freddie, FHLC)
• Provincials
• International Finance Corporation (IFC)
• World Bank
• Länder
• US Municipal debt
D. Mortgage-backed securities including:
• Agency mortgage-backed securities pools
• Agency collateralized mortgage obligations (CMOs)
• CMO private label (investment-grade and non-investment-grade)
• Crown
E. Non-Canadian issued Corporate debt including
• Investment grade
• Non-investment grade
F. Asset-backed securities and Re-securitizations including
• Consumer (credit cards, auto loans)
• Collateralized Debt Obligations
• Collateralized Loan Obligations
• Covered Bonds
G. Loans
• Bank loans
• Whole loans
H. Money Market instruments
• Term Deposits
• Certificates of Deposit
• Commercial Paper
I. Non-Canadian issued Equities
• Common
• Preferred
• Convertible
• ETF
Subscription Online Services Agreements with Subscribers to Platform
14. Prior to getting access to the Platform, a subscriber (customer) must sign an agreement ("Subscription Online Services Agreement") with GLMX that covers, among other things, obligations of the subscriber, and termination events.
15. The subscriber identifies to GLMX by name each employee or contractor of subscriber that is authorized to use the Platform. These "named users" are the only individuals within the subscriber licensed to access and use the service ("Online Service").
16. GLMX will provide the subscriber access to the online service through a web-based interface that can only be accessed when GLMX white-lists subscriber's IP addresses. GLMX will provide each named user a unique username and password to enable such named user to access the Online Service.
17. Once a trade is mutually agreed and completed by the counterparties, the GLMX platform will send trade details to the parties of the transaction via a pre-approved method (e.g. email).Subscribers, independently and in advance, notify GLMX that they are properly documented with and able to trade with specific counterparties prior to engaging in transactions with that counterparty. GLMX is not a party to the SFT transaction and is not involved in the direct execution or for clearing and settlement.
18. GLMX proposes to offer direct access to its Platform to prospective subscribers in the Jurisdictions ("Canadian Subscribers") to facilitate trades. Access to the Platform will be limited to Canadian Subscribers who meet GLMX's eligibility criteria. Subscribers generally fall into the following categories: large multi-national bank; insurance company; US registered investment company; derivatives dealer; and/or any other person (whether a corporation, partnership, trust or otherwise) with total assets of at least $50 million which can include pension funds and hedge funds.
19. Before being provided direct access to the Platform, GLMX will confirm that each Canadian Subscriber is a "permitted client" as that term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103"). Retail customers will not be provided with access to the Platform.
20. Once a Canadian Subscriber demonstrates that it satisfies the eligibility criteria, the Canadian Subscriber must execute a Subscription Online Services Agreement in which the prospective Canadian Subscriber agrees to use the online service and the related user documentation only in the ordinary course of its own business for its own internal use and be and remain at all times a "permitted client" as defined in NI 31-103.
21. Under the Subscription Online Services Agreement, a Canadian Subscriber and its affiliates constitute a "Subscriber Group" and the Subscriber Group will authorize certain individuals ("Named Users") who are the only persons authorized to use the online service. The Subscriber Group's right to use the Online Service is conditioned upon Subscriber Group obtaining and maintaining all government, legal and regulatory approvals, consents, authorizations, registrations, permits and licenses required for the conduct of its activities and its use of the Online Services and using the Online Service only in compliance with applicable law.
22. GLMX will maintain a current list of all Canadian Subscribers. It is proposed that GLMX will provide to its Canadian Subscribers disclosure that states that:
A. rights and remedies against it may only be governed by the laws of the home jurisdiction, rather than the laws of Canada, and may be required to be pursued in the home jurisdiction rather than in Canada;
B. the rules applicable to trading on Platform may be governed by the laws of the home jurisdiction, rather than the laws of Canada; and
C. GLMX is regulated by the regulator in the home jurisdiction rather than the securities regulators in Canada.
Other Information about the Platform
23. The hours of operation for the Platform are 6:30 a.m. GMT to 6 p.m. EST ("Market Hours").
24. GLMX intends to make available training for each person who has access to trade on the Platform. The sales team provides training sessions to new users to learn the functionality of the Platform.
25. GLMX may, at any time, in its sole discretion and without incurring any liability to a subscriber, temporarily or permanently suspend, restrict or terminate the Subscriber Group's use of the Online Service in the event of (a) any failures, malfunctions, faults or errors within the Online Service, (b) external events or circumstances affecting use of the Online Service, or (c) a request or requirement by any government or regulatory organization or body. As an SEC registered broker-dealer and operator of a registered Platform in the US, GLMX is required to comply with applicable law with respect to the operation of its marketplaces and "observe high standards of commercial honor and just and equitable principles" in the conduct of its business (see FINRA Rule 2010), which includes ensuring that subscribers have the capacity and the ability to meet their commitments when trading on the Platform.
26. GLMX seeks to ensure that trading on the ATS Platform is consistent with the requirements of US law by monitoring the trading activity occurring on its marketplace primarily by looking for unusual activity in negotiations.
27. Suspected material breaches of rules promulgated by applicable regulatory authorities related to fair and orderly trading on the Platform will be reviewed by GLMX primarily based on information gleaned by GLMX from monitoring electronic SFT negotiations. If necessary, the information from such review may be reported to the regulatory authorities and other appropriate organizations in a timely manner. GLMX is committed to fully cooperating with its regulators in investigating any suspected breach or suspected market abuse.
28. In addition, GLMX may immediately deny the access privileges of any subscriber or any individual user.
29. It is proposed that GLMX will maintain the following information for each product traded on the Platform:
A. the total trading volume and value originating from Canadian Subscribers, presented on a per provincial Canadian Subscriber basis, and
B. the proportion of worldwide trading volume and value on the Platform conducted by Canadian Subscribers, presented in the aggregate per province for such Canadian Subscribers.
PART III REGULATION OF GLMX
Regulation of the Platform
30. In the Jurisdictions, an ATS is required by section 6.1 of NI 21-101 to be registered as an investment dealer and be a member of the IIROC in order to operate a business as an ATS in each of the Jurisdictions.
31. In addition, it is subject to registration requirements under applicable Canadian securities law when engaging in the business of trading. Similarly, in the U.S., all broker-dealers and their associated persons must be registered with the SEC pursuant to section 15 of the Exchange Act and are subject to its regulations. They must as well be a member of at least one securities self-regulatory organization ("SRO"), which is further delegated some regulatory authority. Most broker-dealers in the U.S. are members of FINRA.
32. In April of 2018, the SEC approved GLMX as a broker-dealer and in May, 2018, GLMX was approved as an ATS. GLMX remains compliant with its regulatory requirements as demonstrated by its continued status as an ATS.
33. GLMX is subject to a comprehensive regulatory regime in the US both as a registered broker-dealer and as an operator of the Platform. In such capacity, GLMX is registered with the SEC and FINRA and is also subject to regulation by New York state regulators under state securities rules and regulations (collectively, the "US Regulators"). The US Regulators set rules, conduct compliance reviews and perform surveillance and enforcement. The US regulatory structure for broker-dealers such as GLMX includes: financial and other fitness criteria for subscribers; reporting and record-keeping requirements; procedures governing the treatment of customer funds and property and business conduct standards; provisions designed to protect the integrity of the markets; and statutory prohibitions on fraud, abuse and market manipulation.
34. In the US, broker-dealers are primarily governed by the Exchange Act, and the rules and regulations promulgated thereunder. Section 4 of the Exchange Act provides for the creation of the SEC, which was established in 1934. The Exchange Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as US SROs, including FINRA. The Exchange Act also identifies and prohibits certain types of conduct in the markets and provides the SEC with examination and disciplinary powers over regulated entities and persons associated with them. As an SRO, FINRA has significant authority over broker-dealers, delegated to them by the SEC and consented to by their members, to adopt and enforce rules; impose fines and other sanctions; and conduct examinations and investigations.
35. In the US, investors are protected by comprehensive regulation that governs the conduct of broker-dealers, including GLMX, and other market participants. These regulatory frameworks include, but are not limited to, the Securities Act of 1933 (the "Securities Act"), the Exchange Act (including Regulation ATS, as set forth in greater detail below) the anti-money laundering and know-your-customer rules and regulations of the US Department of the Treasury Financial Crimes Enforcement Network ("FinCEN"), and state securities rules and regulations.
36. With respect to the agencies and organizations that regulate broker- dealers and ATSs, the SEC and FINRA, share common goals of protecting investors and other market participants, maintaining fair, orderly, and efficient markets, and facilitating capital formation. Of these goals, investor protection is the primary focus.
Authority of SEC and FINRA as Foreign Regulators
37. The SEC and FINRA have the appropriate authority and procedures for ensuring that ATSs such as GLMX continue to comply with their regulatory requirements. FINRA and the SEC have the power to direct any ATS that is failing, or has failed, to comply with the any applicable rules or regulations to take action to remedy such non-compliance. It also has the power to revoke or suspend the registration of any ATS that fails to meet its regulatory requirements.
Scope of authority and authorizing statutes
38. The SEC has delegated certain of its day-to-day regulatory oversight responsibility of broker-dealers to FINRA. FINRA's rules, which are approved by the SEC, allow for disciplining member firms, including GLMX, for improper conduct and for establishing measures to ensure market integrity and investor protection.
39. As set forth in greater detail below, broker-dealers in the US are subject to routine and for-cause examinations by the SEC and FINRA. Broker-dealers are also subject to periodic financial and operational reporting (quarterly and annually) through the filing of Financial and Operational Combined Uniform Single ("FOCUS") Reports, which are filed with FINRA.
40. Further, a broker-dealer is subject to a number of self-reporting obligations imposed by the SEC and FINRA, including the requirement to: self-report certain events, such as certain criminal charges or convictions on Form U4 and Form U5.
41. In addition to the above, broker-dealers that operate an ATS are subject to additional oversight and reporting under Regulation ATS (as discussed in greater detail below), including the requirements to file and keep current Form ATS. In addition, the SEC and the securities regulatory authorities in the Jurisdictions are parties to a memorandum of understanding related to securities market oversight and enforcement, available at: https://www.sec.gov/about/offices/oia/oia_bilateral/canada_regcoo p.pdf. In addition, the ASC, Autorité des Marchés Financiers ("AMF"), British Columbia Securities Commission ("BCSC") and OSC are parties to memoranda of understanding with FINRA related to securities market oversight and enforcement, available at https://www.finra.org/sites/default/files/Industry/p141242.pdf (ASC), https://www.finra.org/sites/default/files/?Industry/p122060.pdf (AMF) of Quebec, https://www.bcsc.bc.ca/-/media/PWS/Resources/About_Us/?Other_Jusrisdictions/FINRABCSC_International_Information_Sharing_Memorandum_of_Understanding_effective_July_1__2016.pdf (BCSC) and https://www.finra.org/sites/default/files/Industry/p125113.pdf (OSC).
US regulation of broker-dealers and Platform -- Source of its authority to supervise the ATS
42. Pursuant to Section 15(a) of the Exchange Act, subject to certain exceptions, all persons that use the mails or any means or instrumentality of interstate commerce to effect securities transactions must register with the SEC and become members of a national securities association, of which there is only one, FINRA. ATS status and registration is a supplement to broker-dealer registration; in other words, an ATS can only be operated by a registered broker-dealer. Therefore, as an ATS, GLMX is subject to all applicable rules and regulations to which broker-dealers are subject, as well as specific rules and regulations applicable to the operation of an ATS.
43. ATSs are subject to a comprehensive regulatory framework in the US. First, subject to certain limited exceptions, all US ATSs must be registered with the SEC as a broker-dealer and be a member of FINRA. In this regard, ATSs are subject to extensive regulation and oversight by the SEC and FINRA, not only with respect to ATS operation, but also with respect to the broker-dealer's operations as a whole. Further, in becoming a member of FINRA, each broker-dealer must enter into a membership agreement that sets forth the parameters of the broker-dealer's operations, not only with respect to business lines, but also with respect to minimum net capital requirements, number of offices, and number of client-facing registered representative that the broker-dealer may employ.
44. In addition to the foregoing, to acquire and maintain its status as an ATS, GLMX must satisfy several statutorily-prescribed requirements set out in Regulation ATS (17 C.F.R. § 242.300 et seq.) ("Regulation ATS"), which sets forth additional guidelines and requirements with respect to
A. Broker-dealer registration
B. Notice
C. Order display and execution access
D. Fees
E. Fair access
F. Capacity, integrity, and security of automated systems
G. Recordkeeping
H. Reporting obligations
I. Compliance and controls
45. Broker-dealer registration. As noted above, pursuant to Exchange Act Rule 301(b)(1), an ATS shall be registered as a broker-dealer under Section 15 of the Exchange Act. When the SEC adopted Regulation ATS in 1998 it revised the definition of "exchange" to clarify that electronic communication networks ("ECNs") were deemed to be exchanges. The SEC then in permitted ECNs to be regulated as a broker-dealer rather than as a traditional stock exchange.
46. Notice. Form ATS requires GLMX to provide the SEC with details relating to the operation of the ATS, including (but not limited to):
A. The type of subscribers (e.g. retail, broker-dealers, institutional clients, etc.) that will be permitted to access the ATS, and any differences in access that will be offered by the ATS to the different groups of subscribers, if applicable.
B. A list of the types of securities the ATS trades (e.g. debt etc.) and whether such securities will not be registered under Section 12(a) of the Exchange Act.
C. A list of the securities (as opposed to the "types") the ATS trades.
D. The manner of operation of the ATS, procedures governing orders, means of access, procedures governing execution, reporting, clearing and settlement of securities transactions effected through the ATS.
E. system guidelines, and any other manuals or other materials provided to the subscriber relating to the ATS.
F. the ATS' procedures for reviewing systems capacity, security and contingency planning.
47. Rule 301(b)(2)(ii) requires an amendment to Form ATS be filed with the SEC at least 20 days prior to implementing a material change to the operation of its ATS;
48. Rule 301(b)(2)(iii) requires a quarterly filing be made with the SEC in the event that any information previously provided pursuant to Rules 301(b)(2)(i) and (ii) become inaccurate;
49. Rule 301(b)(2)(iv) requires that a filing be made with the SEC promptly in order to correct information previously reported on Form ATS pursuant to Rules 301(b)(2)(i) and (ii) become inaccurate; and
50. Rule 301(b)(2)(v) requires that a filing be made with SEC promptly in the event that the ATS ceases operations.
51. Order display and execution access. Section 8.2 of NI 21-101 in the Jurisdictions imposes certain pre-trade and post-trade information transparency requirements on ATSs displaying orders of corporate debt-securities. These order display and reporting requirements are not used in the US and are not appropriate for SFTs and our proposed exemption order includes an exemption in this regard.
52. Section 10.1 of NI 21-101 requires disclosure by a marketplace (including an exchange and an ATS) on its website of certain information reasonably necessary to enable a person or company to understand the marketplace's operations or services it provides, including information related to the system's protocols and rulebook. Since the Platform only offers participants the ability to the negotiate SFTs, it is not standard practice or appropriate to have a rulebook There is currently no requirement to post fees on company websites for a US ATS.
53. Rule 301(b)(3) of Regulation ATS in the US imposes similar market transparency requirements. The rule requires ATSs with five per cent or more of trading volume in any covered security to publicly disseminate their best priced orders in those securities. GLMX does not meet this threshold. GLMX does not trade equities. Also, the debt securities that collateralize the SFT obligations are not traded outright on the Platform. We note with respect to the Platform the requirements under Exchange Act Rule 301(b)(3) are inapplicable, as the Platform is not an NMS stock ATS, nor are NMS stocks available on the Platform.
54. Fees. Exchange Act Rule 301(b)(4) is generally inapplicable to the Platform. In practice, GLMX is required to comply with the rules or standards of practice governing fees established by FINRA, including FINRA Rule 2010 (Standards of Commercial Honor and Just and Equitable Principles of Trade) and FINRA Rule 2121 (Fair Prices and Commissions (also known as the 5% Rule). While neither rule prescribes a specific limitation on the amount of fees that may be charged to a client with respect to effecting a securities transaction either as agent or principal, each rule requires that GLMX implement its fees in a manner that is fair and reasonable under the circumstances. GLMX's standard fee schedule is provided to all clients at the time of on-boarding and reflects GLMX expectations and fee policy.
55. Fair access. While the Platform is not currently required to comply with the "Fair Access" requirements of Exchange Act Rule 301(b)(5), GLMX monitors on an ongoing basis the level of trading activity that occurs on its ATS to ensure that it complies with the relevant rules relating to "Fair Access". More specifically, Exchange Act Rule 301(b)(5) requires an ATS that meets the trading volume thresholds (which GLMX does not) to establish written standards for granting access to its system and apply those standards fair and non-discriminatory manner.
56. With respect to the Platform, the "Fair Access" requirements will be triggered if during at least 4 of the preceding 6 calendar months, an ATS had with respect to municipal securities, 5 percent or more of the average daily trading volume traded in the US, or with respect to corporate debt securities, 5 percent or more of the average daily volume traded in the US. Once the volume thresholds are met, the ATS, pursuant to Exchange Act Rule 301(b)(5)(C), is required to make and keep records of all grants and denials of access, including for all subscribers, the reason for granting or denying such access to the ATS. Such information is required to be filed with the SEC on a quarterly basis on Form ATS-R. In the US, since GLMX does not engage in outright trading of collateral, volumes are below the thresholds and these reporting requirements are not well-suited to the SFT market in any event GLMX would maintain updated information, regarding Canadian Subscribers who were provided with direct access and Canadian applicants for status as a Canadian Subscriber who were denied such status, and submit such information in a manner and form acceptable to the ATS Relief Decision Makers on a semi-annual basis.
57. Capacity, integrity, and security of automated systems. Exchange Act Rule 301(b)(6) is triggered by a trading volume threshold that is currently not satisfied by the Platform. However, GLMX monitors on an ongoing basis the level of trading activity that occurs on its ATS to ensure that it complies with the relevant requirements of Exchange Act Rule 301(b)(6). More specifically, Exchange Act Rule 301(b)(6) requires an ATS that meets the trading thresholds to establish reasonable capacity estimates (both current and future), develop and implement procedures to review system development and testing methodology, review system vulnerability from external and internal threats, physical hazards and natural disasters and establish adequate contingency and disaster recovery plans. With respect to the last two items, GLMX, as a broker-dealer, is separately subject to such requirements; As previously stated, since GLMX does not engage in outright trading of collateral, volumes are below the thresholds and since these reporting requirements apply to the underlying collateral only, they are not as relevant to the SFT markets as to regular fixed income markets
58. Recordkeeping. Pursuant to Exchange Act Rule 301(b)(8) as an ATS, GLMX shall make, keep and preserve certain records relating to the operation of its ATSs, including those records required to be maintained pursuant to Exchange Act Rule 302 and in the manner provided in Exchange Rule 303. Further, as a registered broker-dealer, GLMX is required pursuant to Section 17(a)(1) to make, keep, furnish and disseminate records and reports as prescribed by the SEC. The SEC's books and records rules applicable to broker-dealers, Exchange Act Rules 17a-3 and 17a-4, specify minimum requirements with respect to the records that broker-dealers must make, how long those records and other documents relating to a broker-dealer's business must be kept and in what format they may be kept. The SEC requires that broker-dealers create and maintain certain records so that, among other things, the SEC and self-regulatory organizations can use such records in the conduct of their examinations.
59. Reporting Obligations. Pursuant to Exchange Act Rule 301(b)(9), an ATS is required to file with the SEC on a quarterly basis the information required by Form ATS-R.
60. Form ATS-R (Quarterly Report of Platform Activities) requires the submitter to provide the SEC with details relating to the operation of the ATS during the previous calendar quarter, including (but not limited to):
A. The total unit and dollar volume of transaction in various categories of securities.
B. A list of all persons granted, denied, or limited access to the ATS during the period covered by the report.
61. Written procedures to protect confidential trading information. Pursuant to Exchange Act Rule 301(b)(10) as an ATS, GLMX is required to establish adequate written safeguards and written procedures to protect subscribers' confidential trading information. Such written safeguards and written procedures must include:
A. Limiting access to the confidential trading information of subscribers to those employees of the Platform who are operating the system or responsible for its compliance with these or any other applicable rules;
B. Implementing standards controlling employees of the Platform trading for their own accounts; and
C. Adopting and implementing adequate written oversight procedures to ensure that the written safeguards and procedures established are followed.
62. Compliance and controls. Finally, broker-dealers and ATSs that provide market access, including GLMX, are subject to an additional layer of regulatory oversight under Exchange Act Rule 15c3-5 (17 C.F.R. 240.15c3-5) (the "Market Access Rule"), which imposes additional financial and regulatory risk management controls and supervisory procedure requirements on the ATS or broker-dealer. This includes the requirement for GLMX to establish, maintain and ensure compliance with risk management and supervisory controls, policies, and procedures that are reasonably designed to manage, in accordance with prudent business practices, the financial, regulatory and other risks associated with market access or providing clients with market access. These risk management and supervisory controls, policies and procedures are required to be reasonably designed to ensure that all orders are monitored and include pre-trade controls and regular post-trade review. Under the Market Access Rule, a broker-dealer must preserve a copy of its supervisory procedures and a written description of its risk management controls as part of its books and records obligations under SEC Rule 17a-4.
63. Additionally, the risk management controls and supervisory procedures required pursuant to the Market Access Rule must be reasonably designed to systematically limit the financial exposure of the broker-dealer (e.g., preventing the entry of one or more orders that exceed pre-determined price or size parameters); ensure compliance with the broker-dealer's regulatory obligations (e.g., restricting access to trading systems and technology that provide market access to persons and accounts pre-approved and authorized by the broker-dealer); and ensure that the entry of orders does not interfere with fair and orderly markets.
64. A broker-dealer's risk management controls and supervisory procedures should be reasonably designed to:
A. Prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds in the aggregate for each customer and the broker or dealer and, where appropriate, more finely-tuned by sector, security, or otherwise by rejecting orders if such orders would exceed the applicable credit or capital thresholds; and
B. Prevent the entry of erroneous orders, by rejecting orders that exceed appropriate price or size parameters, on an order by-order basis or over a short period of time, or that indicate duplicative orders.
65. Under the Market Access Rule, a broker-dealer must (a) regularly assess and document the adequacy and effectiveness of its risk management and supervisory controls, policies and procedures; and (b) document any material deficiencies in the adequacy or effectiveness of a risk management or supervisory control, policy or procedure and promptly remedy these deficiencies.
66. Broker-dealers are also subject to the general supervision and monitoring requirements of FINRA Rule 3110, which requires broker-dealers to establish and maintain a system to supervise the broker-dealer's business and the activities of each associated person employed by the broker-dealer that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.
67. GLMX must continue to fulfil these obligations to maintain its registration and ability to operate the Platform. Taking into account its SFT business model, GLMX is required to:
A. have systems and controls in place to monitor transactions on the Platform;
B. retain sufficient financial resources for the performance of its functions as ATS operator;
C. operate its Platform with due heed to the protection of investors;
D. ensure that trading is conducted in an orderly and fair manner;
E. monitor compliance with the SEC, FINRA, and the rules of the Platform;
F. investigate complaints with respect to its business;
G. maintain high standards of integrity and fair dealing; and
H. prevent abuse.
68. Regulation ATS was most recently amended in 2018, such amendment being a significant tightening of the regulation and a signal from the SEC that strict ATS regulation is among the SEC's regulatory priorities.
Rules and policy statements
69. As noted above, the primary regulatory frameworks governing broker-dealer activity in the US include, the Securities Act and the Exchange Act (and the rules and regulations promulgated thereunder, including Regulation ATS), FINRA and MSRB rules, FinCEN anti-money laundering and know-your-customer rules and regulations, and state securities rules and regulations. SEC and FINRA also publish guidance and regulatory interpretations, including through SEC no-action letters, and FINRA regulatory notices.
Financial protections afforded to customer funds
70. The Platform operated by GLMX does not hold customer funds or securities.
Authorization, licensure or registration of the Platform
71. As noted above, ATSs, including GLMX are subject to a comprehensive regulatory framework in the US. Subject to certain limited exceptions, all US ATSs must be registered with the SEC as a broker-dealer and be a member of FINRA. In this regard, ATSs are subject to extensive regulation and oversight by the SEC and FINRA, not only with respect to ATS operation, but also with respect to the broker-dealer's operations as a whole. Failure to comply with the obligations pursuant to this regulatory framework can lead to suspension, fines, and other sanctions, including the cessation of the operations of an ATS operated by a broker-dealer.
72. As set forth in greater detail below, broker-dealers in the US are subject to routine and for-cause examinations by the SEC and FINRA. Broker-dealers are also subject to periodic financial and operational reporting (monthly and annually) through the filing of Financial and Operational Combined Uniform Single ("FOCUS") Reports, which are filed with FINRA. Further, a broker-dealer is subject to a number of self-reporting obligations imposed by the SEC and FINRA, including the requirement to self-report certain events pursuant to FINRA Rule 4530 (as discussed in greater detail below) and file and keep current certain information with respect to the broker-dealer's business and operations on Form BD and Form ATS. In addition, pursuant to FINRA Rule 3110 and 3130, a broker-dealer's chief executive officer (or equivalent officer) must certify annually that the broker-dealer has in place processes to establish, maintain, review, test and modify written compliance policies and written supervisory procedures reasonably designed to achieve compliance with applicable FINRA rules and federal securities laws and regulations. This report must be supported by an underlying report and discussion with the broker-dealer's chief compliance officer with respect to the same. FINRA Rule 3130 also requires the compliance report underlying this certification be submitted to the broker-dealer's board of directors and audit committee.
The foreign regulator's approach to the detection and deterrence of abusive trading practices, market manipulation, and other unfair trading practices or disruptions of the market
73. Pursuant to FinCEN rules and regulations, broker-dealers are required to file with FinCEN, a Suspicious Activity Report ("SAR") to report any suspicious transaction or pattern of transactions relevant to a possible violation of law or regulation, including, but not limited to, transactions involving market manipulation, wash trading, or insider trading.
74. Additionally, broker-dealers and market participants are subject to a number of rules and regulations with respect to securities fraud, market manipulation, and abusive trading practices. Section 10(b) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder prohibits any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
Laws, rules, regulations and policies that govern the authorization and ongoing supervision and oversight of market intermediaries in the US
75. The US has a comprehensive financial services regime. The laws, rules, regulations and policies that govern the authorization and ongoing supervision and oversight of market intermediaries, include, but are not limited to, the Securities Act and the Exchange Act (and the rules and regulations promulgated thereunder), the Investment Company Act of 1940, the Investment Advisers Act of 1940, the rules of FINRA, the MSRB, and the NFA, FinCEN anti-money laundering and know-your-customer rules and regulations, and state securities rules and regulations.
76. Of the subscribers that have trading rights and could therefore deal with customers located in the Jurisdictions, the vast majority are companies incorporated in the US.
Procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk for market intermediaries who may deal with members and other participants located in Canada
77. FINRA members, such as GLMX, are required to maintain membership with the Securities Investor Protection Corporation ("SIPC"). SIPC was created under the Securities Investor Protection Act of 1970 ("SIPA") as a non-profit membership corporation. SIPC oversees the liquidation of member firms that close when the firm is bankrupt or in financial trouble, and customer assets are missing. In a liquidation under the SIPA, SIPC and a court-appointed trustee work to return customers' funds and securities as quickly as possible.
Examination and reporting requirements
78. As set forth above, the SEC and FINRA exercise their supervisory responsibility by conducting examinations of whether GLMX's rules, procedures and practices are adequate for the protection of investors and for the maintenance of an orderly market.
79. Broker-dealers in the US, including GLMX, are subject to periodic examinations by FINRA and the SEC. Types of examinations include: (i) cause examinations, which are initiated in order to investigate some particular issue or event; (ii) sweep examinations, in which multiple firms receive, and must respond to, written inquiries regarding a particular issue; and (iii) cycle examinations, which occur periodically over the life of the broker-dealer. Both FINRA and the SEC conduct examinations of these kinds, and both have considerable resources, and staff, to conduct such examinations.
80. During examinations, the examination staff seek to determine whether the entity being examined is: conducting its activities in accordance with the federal securities laws and rules adopted under these laws, as well as the rules of self-regulatory organizations, such as FINRA; adhering to the disclosures it has made to its clients, customers, the general public and/or the SEC and FINRA; and implementing supervisory systems and/or compliance policies and procedures that are reasonably designed to ensure that the entity's operations are in compliance with applicable legal requirements.
81. In addition, as described above, pursuant to Regulation ATS, each ATS, including GLMX, must file an initial operation report with the SEC on Form ATS, prior to commencing operations. Form ATS requires detailed disclosures regarding a wide range of information concerning the ATS, its owners, its businesses, and its operating procedures, including disclosure to the applicable regulators (FINRA and the SEC) of the subscriber terms (and/or user guide(s)). Form ATS serves as a supplement to Form BD, which is filed by firms seeking registration with the SEC as broker-dealers, and the new membership application process, which is required for broker-dealers to become members of FINRA. Information required to be provided in these forms and applications include ownership and corporate governance information, affiliate information, details regarding the manner of operation of the ATS and its associated functions, including the structure, means of access, description of trade reporting procedures, contingency planning, and marketplace participants, similar to the information that is required to be provided to the Canadian securities regulators in a Form 21-101F2.
82. Form ATS and Form BD must be amended, as necessary, to correct any previously provided information that becomes inaccurate for any reason. Amendments include changes to information regarding GLMX's ownership, corporate governance information, affiliate information, details regarding the manner of operation of the ATS and its associated functions, including the structure, means of access, description of trade reporting procedures, contingency planning and marketplace participants, similar to the information that is required to be provided to the Canadian securities regulators in a Form 21-101F2.
83. In addition, as noted above, pursuant to FINRA Rule 3110 and 3130, a broker-dealer's chief executive officer (or equivalent officer) must certify annually that the broker-dealer has in place processes to establish, maintain, review, test and modify written compliance policies and written supervisory procedures reasonably designed to achieve compliance with applicable FINRA rules, MSRB rules, and federal securities laws and regulations. This report must be supported by an underlying report and discussion with the broker-dealer's chief compliance officer with respect to the same. FINRA Rule 3130 also requires the compliance report underlying this certification be submitted to the broker-dealer's board of directors and audit committee.
84. Pursuant to SEC and FINRA rules, broker-dealers are subject to periodic financial and operational reporting (monthly and annually) through the filing of FOCUS Reports, which are filed with FINRA. The net capital rule, Exchange Act Rule 15c3-1 (17 C.F.R. §240.15c3-1), is the principal rule by which the financial health of US broker-dealers, including GLMX, is regulated and monitored. The net capital rule requires US broker-dealers to maintain "net capital" (i.e., capital in excess of liabilities) in specified amounts that are determined by the types of business conducted by the broker-dealer. The net capital rule requires broker-dealers to compute net worth based on US generally accepted accounting principles ("GAAP"), as modified by the various provisions and interpretations of the rule.
85. Regulation ATS also requires GLMX, as an ATS, to permit the examination and inspection of its premises, systems, and records, and cooperate with the examination, inspection, or investigation of subscribers, whether such examination is being conducted by the SEC or by a self-regulatory organization of which such subscriber is a member.
86. Regulation ATS also requires that GLMX, as an ATS, report information regarding marketplace activity on a quarterly basis on Form ATS-R, including for example, general trading activity, fixed income activity, and traded fixed income securities, similar to certain information a Canadian ATS is required to provide in Form 21-101F3 Quarterly Report of Marketplace Activities ("Form 21101F3").
87. Finally, a FINRA-member broker-dealer is required under FINRA Rule 4530 to report to FINRA certain specified events, including the broker-dealer's conclusion that it has discovered significant, widespread, or systemic violations of securities and investment related laws by the broker-dealer or any of its associated persons. Rule 4530 not only requires self-reporting of violations of securities law and regulation, but also of specified events, such as certain criminal convictions, certain customer complaints, and ongoing regulatory actions. Finally, the self-reporting and reporting rule also requires that a broker-dealer report to FINRA certain statistical and summary information regarding written customer complaints on a quarterly-basis.
88. Regulation ATS requires that an ATS, including GLMX, that intends to cease carrying on business as an ATS must file a cessations report with the SEC promptly upon ceasing to operate as an ATS. This requirement is similar to the requirement for a Canadian ATS to provide prior notice to the regulator of an intention to cease carrying on business as an ATS and the requirement to file a Form 21-101F4 Cessation of Operations Report for Platform.
The protection of customer funds and securities by market intermediaries who may deal with Canadian Subscribers
89. The Exchange Act Rule 15c3-3, which is commonly known as the "customer protection rule," is intended to protect customers' funds held by their broker-dealers and prohibit broker-dealers from using customer funds and securities to finance any part of their business that is unrelated to servicing securities customers. GLMX does not hold customer funds.
Governance
90. GLMX is a wholly-owned subsidiary of GLM. GLM is a holding company. The GLM board consists of 3 managers. The board of managers generally meets on a quarterly basis. During the meetings, the CEO updates the board on the current state of the business. The board also reviews and discusses all ongoing business, assesses potential new business activities and hires, analyzes existing and potential risks and reviews updated financials. The board holds ad hoc meetings as necessary for time sensitive matters.
Appropriate provisions for directors and officers
91. GLMX has policies and procedures in place to recruit, hire and onboard new employees. Its policies ensure that all staff are qualified for their roles and receive security awareness, compliance and job-specific training. GLMX's Chief Administrative Officer conducts annual security awareness training, reviews training compliance and confirms that all staff complete training appropriately. All internal and external training undertaken by staff is documented by human resources. In the event that an employee termination occurs, robust off-boarding procedures are followed to secure access to accounts and physical hardware.
92. GLMX has established, maintains and reviews compliance with policies and procedures that identify and manage any conflicts of interest arising from the operation of the marketplace or the services it provides. GLMX conducts its business with the highest standards of commercial honour and just and equitable principles of trade. GLMX's supervisory policies and procedures provide guidance to designated supervisors in their oversight of GLMX's business. GLMX recognizes that compliance is not a static event. The supervisory policies and procedures are updated as necessary.
93. To ensure compliance with FINRA Rules 3110 and 3310, GLMX has implemented compliance policies and procedures outlining its regulatory obligations and written supervisory procedures and designed to achieve compliance with applicable securities laws and regulations. As a broker- dealer, GLMX has an obligation to identify and respond to existing conflicts of interest and any potential conflicts of interest it expects to arise between GLMX, including each individual acting on GLMX's behalf, and a subscriber or other party and resolve the actual or potential conflict of interest by putting the customer's interest before its own. Further, GLMX must design its organizational structures, lines of reporting and physical locations to control conflicts of interest. GLMX must ensure that before or at the time it provides a service that gives rise to a conflict, that it discloses the conflict.
94. Additionally, GLMX relies on its employees to adhere to written standards of conduct. The written supervisory manual outlines the rules and principles by which GLMX operates, which include but are not limited to its core competencies, protecting confidential information and conflicts of interest. A conflict of interest is a situation where an opportunity for personal gain conflicts with GLMX's best interests. While it is GLMX's preference to avoid conflicts of interest, if a conflict of interest cannot be avoided, or an employee cannot determine whether a given situation presents a conflict, it is GLMX's policy for the conflict or the potential conflict to be immediately discussed with a manager to determine the appropriate course of action. Further, to avoid potential conflicts of interest, it is GLMX's policy that work performed or positions held by GLMX employees outside of working at GLMX must not interfere with employees' duties at GLMX, and outside business activities generally are required to be approved by GLMX. GLMX has adopted policies that require employees to proactively address potential conflicts of interest related to an employee's family member or other person with whom an employee has a close personal relationship. Conflicts regarding a financial interest in a customer, competitor or supplier as well as conflicts relating to business gift, meal and entertainment conflicts of interest policies are also addressed in GLMX's policies.
95. GLMX has appropriate conflict of interest provisions for all directors, officers and employees. GLMX has implemented reasonable safeguards and procedures to protect its subscriber's order and trade information, including limiting access to order or trade information or subscribers and users to employees of GLMX and implementing standards controlling trading by employees of GLMX for their own accounts. GLMX has implemented effective oversight procedures to ensure that the safeguards and procedures established by it are followed.
PART IV REGULATION OF PRODUCTS
Review and Approval of Products -- Business lines must be approved by the Foreign Regulator
96. Business lines, including the operation of an ATS, must be approved by FINRA, listed on a broker-dealer's Form BD, as filed with the SEC, and listed on the broker-dealer's membership agreement with FINRA. Any addition of business lines to GLMX must be approved by FINRA prior to implementation by the broker-dealer.
97. Pursuant to Regulation ATS, when filing its initial operation report on Form ATS, an ATS is required to provide the SEC with a list of the types of transactions the ATS trades or expects to trade, as well as a list of the securities the ATS trades or expects to trade. As noted above, an ATS is required to update its Form ATS, as necessary, to correct any previously provided information that becomes inaccurate for any reason.
98. Pursuant to FINRA Rule 3110, each broker-dealer must establish, maintain, and enforce written procedures to supervise the activities of its registered representatives and associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable FINRA rules. In this regard, GLMX must ensure that the operation of the Platform, as well as the written procedures, comply with applicable securities laws and regulations and with applicable FINRA rules. In addition, the Market Access Rule, which GLMX is subject to, imposes additional financial and regulatory risk management controls and supervisory procedure requirements on the ATS or broker-dealer. This includes the requirement for GLMX to establish, maintain and ensure compliance with risk management and supervisory controls, policies, and procedures that are reasonably designed to manage, in accordance with prudent business practices, the financial, regulatory and other associated with market access or providing clients with market access.
PART V ACCESS
99. The requirements of the ATS relating to access to the facilities of the ATS change are fair, transparent and reasonable.
Details of access criteria
100. In particular, the ATS:
A. has written standards for granting access to trading on its facilities to ensure users have appropriate integrity and fitness;
B. has financial standards for those persons who enter orders for execution on the system, including, the need for pre-existing contractual relationship with each counterparty;
C. does not unreasonably prohibit or limit access by a person or company to services offered by it;
D. keeps records of each grant and denial or limitation of access, including reasons for granting, denying or limiting access; and
E. restricts access to adequately trained system users who have demonstrated competence in the functions that they perform.
101. GLMX has established written standards for granting access to each of its services to ensure Users are appropriately eligible to access the ATS Platform, as described above. GLMX keeps records of each grant of access including the reasons for granting access to an applicant, and each denial or limitation of access, including the reasons for denying or limiting access to an applicant.
102. In addition, Regulation ATS sets forth certain fair access requirements for ATSs which do not apply to GLMX because it does not engage in outright trading of collateral, if, during at least four of the preceding six calendar months, such ATS had:
A. With respect to any NMS stock, 5 percent or more of the average daily volume in that security reported by an effective transaction reporting plan;
B. With respect to an equity security that is not an NMS stock and for which transactions are reported to a self-regulatory organization, 5 percent or more of the average daily trading volume in that security as calculated by the self-regulatory organization to which such transactions are reported;
C. With respect to municipal securities, 5 percent or more of the average daily volume traded in the US; or
D. With respect to corporate debt securities, 5 percent or more of the average daily volume traded in the US.
103. If any of these requirements is met, subject to certain exceptions, an ATS must:
A. Establish written standards for granting access to trading on its system;
B. Not unreasonably prohibit or limit any person in respect to access to services offered by such alternative trading system by applying the written standards required above in an unfair or discriminatory manner;
C. Make and keep records of:
1. All grants of access including, for all subscribers, the reasons for granting such access; an
2. All denials or limitations of access and reasons, for each applicant, for denying or limiting access; and
D. Report the information required on SEC Form ATS-R regarding grants, denials, and limitations of access.
104. These access requirements are similar to the required access requirements for ATSs in Canada.
Due diligence and ongoing supervision
105. To satisfy its regulatory requirements under SEC and FINRA rules, GLMX conducts due diligence on subscribers prior to permitting a subscriber to access the Platform to ensure that such subscriber meets the eligibility criteria required pursuant to US Regulators and to protect the integrity of GLMX and the orderliness of its trading on the Platform.
106. Access to the GLMX Platform will be limited to Canadian Subscribers who must meet GLMX's eligibility criteria. Subscribers generally fall into the following categories: large multi-national banks; insurance company; US registered investment company; derivatives dealers; and/or any other person (whether a corporation, partnership, trust or otherwise) with total assets of at least $50 million which can include hedge funds and pension funds. Before being provided direct access to the Platform, each Canadian Subscriber will be required to confirm that it is a "permitted client" as that term is defined in NI 31-103. Retail customers will not be provided access to the Platform. Retail customers will not be provided access to the Platform.
107. Once a Canadian Subscriber demonstrates that it satisfies the eligibility criteria, the Canadian Subscriber must:
A. Execute a Subscription Online Services Agreement;
B. Be and remain at all times either an (x) "institutional account" as defined in FINRA Rule 45125, or (y) a broker-dealer registered pursuant to Section 15 of the Exchange Act.
108. A Canadian Subscriber will be required to confirm that it continues to satisfy the eligibility criteria for access to the Platform on an ongoing basis. Specifically, GLMX will reach out at least every two years to a Canadian Subscriber to confirm that a Canadian Subscriber continues to satisfy the eligibility requirements for access to the GLMX. A Canadian Subscriber will be required to provide prompt notification to GLMX if it no longer qualifies as a "permitted client".
109. GLMX is required to comply with the existing rules imposed by US Regulators on an ongoing basis.
110. A Canadian Subscriber will be required to confirm that it continues to comply with the eligibility criteria periodically on an ongoing basis. A Canadian Subscriber will be required to provide prompt notification to GLMX if it no longer qualifies as a permitted client.
111. GLMX will maintain the following updated information and submit such information in a manner and form acceptable to the ATS Relief Decision Makers on a semi-annual basis (within 30 days of the end of each six-month period), and at any time promptly upon the request of the ATS Relief Decision Makers:
A. a current list of all Canadian Subscribers on a per province basis, specifically identifying for each Canadian Subscriber the basis upon which it represented to GLMX that it could be provided with direct access;
B. a list of all Canadian applicants for status as a Canadian Subscriber on a per provincial basis who were denied such status or access or who had such status or access revoked during the period;
C. for those Canadian Subscribers who had their status revoked, an explanation as to why their status was revoked;
D. for each product:
1. the total trading volume and value originating from Canadian Subscribers, presented on a per provincial Canadian Subscriber basis and
2. the proportion of worldwide trading volume and value on the GLMX conducted by Canadian Subscribers, presented in the aggregate per province for such Canadian Subscribers and
E. a list of any system outages that occurred for any system impacting Canadian Subscribers' trading activity on the GLMX which were reported to the regulator in the home jurisdiction, if any.
112. As required under the Bank Secrecy Act ("BSA") and its implementing regulations, GLMX is required to have anti-money laundering policies and procedures (collectively, an "AML Policy") which prohibits and actively prevents money laundering and any activity that facilitates money laundering or the funding of terrorist or criminal activities. Contained in its AML Policy is GLMX's Customer Identification Program that complies with the requirements of the BSA and applicable regulations. Additionally, as a US entity, GLMX complies with the requirements outlined by the Office of Foreign Assets Control.
PART VI REGULATION OF PARTICIPANTS ON THE ALTERNATIVE TRADING SYSTEMS
113. Regulation -- The alternative trading system has the authority, resources, capabilities, systems and processes to set requirements governing the conduct of its participants, monitoring their conduct, and appropriately disciplining them by exclusion from participation in the marketplace.
Members and other participants are required to demonstrate their compliance with these requirements
114. GLMX's Platform, FINRA and the SEC maintain appropriate systems and resources for conducting member regulation and market regulation, for evaluating compliance with ATS, FINRA and SEC requirements and disciplining participants.
115. Subscribers to an ATS are subject to the SEC rules and regulations applicable to securities transactions generally, and the SEC has investigation, examination, and enforcement power with respect to subscribers who violate these rules and regulations. In addition, subscribers that are FINRA-member broker-dealers are subject to FINRA rules, with FINRA having investigation, examination, and enforcement power with respect subscribers who violate applicable FINRA rules.
GLMX Operating Procedures
116. The Platform provides other controls such as a protocol for dealing with "fat finger" errors.
117. As noted above, broker-dealers, including those that operate an ATS, are subject to market surveillance by the SEC and FINRA, which is largely accomplished through various trade-reporting forms and systems, including OATS, TRACE, ACT, CAT, and SEC Form 13H. Regulation ATS also requires ATSs to report certain information regarding marketplace activity on a quarterly basis on Form ATS-R.
118. A characteristic of an ATS that distinguishes it from that of an exchange in the US is that an ATS is not permitted to "[s]et rules governing the conduct of subscribers other than the conduct of such subscribers' trading on the system; or (ii) discipline subscribers other than by exclusion from trading. To the extent that a subscriber breaches the Platform's terms and conditions, GLMX is limited to either suspending or terminating their access to GLMX's ATS. If the subscriber's acts are thought to be violation of law, GLMX will refer the subscriber to FINRA or the SEC.
119. Clearing and Settlement. The Platform will not be involved in clearing or settlement activities which will be handled by the market participants.
Systems and Technology
120. GLMX's critical systems provide for the continuing function of the overall application presented to customers. This application enables the communication and negotiation of securities finance transactions between financial institutions. Settlement is not part of GLMX's services.
Infrastructure -- Data Center Redundancy
121. GLMX manages infrastructure which comprises the ATS at a primary site, also referred to as the 'production' site located in a private locked cage in New Jersey and a secondary site in Illinois.
122. Each site contains self-contained infrastructure which can handle all traffic if necessary. Each datacenter site contains various redundancy features at both the hardware level, as well as the software level.
123. Each server features disks in a RAID1 or RAID10 configuration, dual power supplies connected to separate PDUs (each connected to a separate circuit) and has ethernet connections to two separate switches. There are dual firewalls (each with separate connections to each switch), acting as highly available pairs, as well as redundant load balancers in isolated networks servicing externally facing virtual IPs.
124. Data for the application is stored in a database, which is live-replicated to a second database in the same cage, as well as to a DR database at the DR site. Application servers respond to requests forwarded by the load balancers, with multiple instances of each application server available to handle the requests both for load balancing as well as redundancy. In addition to live replication off-site for customer data, it is also backed up daily.
Infrastructure -- External Connectivity
125. GLMX offers its services over the public internet, and optionally enables customers to connect directly, via a cross-cage interconnect or other means of private connectivity.
126. GLMX uses multiple public internet service providers to provide reliable access. There are a pair of routers interconnected with each other as well as our providers, with BGP sessions to provide neighbor information for the GLMX AS.
Infrastructure -- Security / Protection
127. Customers using the web UI connect to SSL endpoints using a strong cipher and key exchange. In order to access the system, their IP range has to be whitelisted in the firewall, and they have to enter a user-specific username and password.
128. Customers using the FIX API also connect to an SSL endpoint using a strong cipher and key exchange, on an organization-specific port, and have to use a pre-arranged CompID and password in order to establish a FIX session. Each such port has an organization- specific IP whitelist.
129. Direct connections are handled in the same manner as ones over the public internet, with the same security precautions. The only difference is that the traffic is routed over a private line rather than over the internet.
130. Internally, all communication is restricted between zones. Any inbound TCP connections terminating in the DMZ and redirected to the application zone. The application zone may in turn access the databases. The firewalls prevent any other direct communication between zones.
Financial Viability and Reporting
131. Financial viability -- The ATS has sufficient financial resources for the proper performance of its functions and to meet its responsibilities.
132. Pursuant to Exchange Act Rule 15c3-1, GLMX must have financial resources sufficient for the proper performance of its functions as an ATS. GLMX maintains the current minimum capital amounts needed, and will maintain any future minimum capital amounts needed to meet SEC and FINRA requirements
Recordkeeping
133. The ATS has and maintains adequate systems in place for the keeping of books and records, including, but not limited to, those concerning the operations of the ATS, audit trail information on all trades, and compliance with, and/or violations of the ATS requirements.
134. GLMX rules require that GLMX keeps books, records and other documents as are reasonably necessary for the proper recording of its business in electronic form. This includes a record of all subscribers who have been granted access to the ATS Platforms, daily trading summaries including securities financed and transaction volumes, correspondence, agreements, detailed order records and ATS report details of orders, as applicable. Records are kept in electronic form and readily accessible.
135. The GLMX written supervisory procedures refer to the GLMX record retention policy that details how all relevant records must be kept, and for how long. This is maintained by the GLMX CCO and ensures that GLMX remains in compliance with all relevant regulatory requirements, which include SEC and FINRA rules. GLMX has implemented a policy, which outlines its regulatory requirements under Exchange Act Rules 15c3-1, 17a-3 17a-4, 17a-5, 17a-8, 17a-11,17f-2, Regulation ATS, FINRA Rules 1250, 2210, 2111, 2232, 3010, 3110, 3170, 3270, 3280, 3310 4511, 4512, 4513, 4515, 4517, 4530, MSRB Rules G-5, G-7, G-9, G-10, G-20, G-27 G-37 and CFR 1023.100 to 1023.670.
136. Regulation ATS, SEC Rules 17a-3 and 17a-4, and FINRA Rule 4511 set forth record keeping requirements that detail the types of information that must be retained by broker-dealers, as well as the duration for which these records must be maintained. The types of information include business records and other records, including, but not limited to, those subscribers who have been granted access to GLMX, daily trading summaries for GLMX, and records of each order. The SEC and FINRA have mechanisms in place to ensure that the information necessary to conduct adequate surveillance of ATSs for supervisory and enforcement purposes is available to the US Regulators on a timely basis.
137. The SEC and FINRA conduct periodic compliance reviews and examinations and require that records comply with SEC and FINRA rules and are readily accessible, on an ongoing basis.
The record preservation requirements for ATSs are set forth in Section 303 of Regulation ATS and SEC Rule 17a-4. These rules and regulations establish the time period, which varies depending on the record being retained, for which certain books and records are to be retained and preserved.
Outsourcing
138. Where the ATS has outsourced any of its key services or systems to a service provider, it has appropriate and formal arrangements and processes in place that permit it to meet its obligations, and that are in accordance with industry best practices.
139. GLMX LLC licenses the Platform to GLMX, and GLMX operates and maintains it. GLMX will outsource certain services (listed below) related to operation of the Platform to other entities.
140. Technology services including system maintenance, payroll and human resources services are provided by GLMX LLC. There are administrative services agreements between GLMX LLC, GLMX and GLM that describe services rendered and the cost associated with these services.
141. The Platform is hosted on infrastructure managed by GLMX staff, hosted within a facility managed by a third party vendor. The vendor does not have logical access to GLMX devices or data. The vendor provides GLMX with space, power, interconnectivity, and cooling within a SOC2 Type 2 certified secure facility. GLMX has chosen to co-locate in facilities with direct access to market participants in order to support private network connectivity.
142. Market data vendors provide securities reference data and securities pricing services.
143. Pursuant to FINRA Rule 3110, each broker-dealer must establish, maintain, and enforce written procedures to supervise the activities of its registered representatives and associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable FINRA rules.
144. If a broker-dealer, as part of its business structure, outsources certain covered activities (e.g. data center services), the broker-dealer's supervisory system and written supervisory procedures must include procedures regarding its outsourcing practices to ensure compliance with applicable securities laws and regulations and FINRA rules. The broker-dealer's procedures should include, without limitation, a due diligence analysis of all of its current or prospective third-party service providers to determine whether they are capable of performing the outsourced activities. In addition, when a broker-dealer outsources covered activities to a third-party, the broker-dealer has a continuing responsibility to oversee, supervise, and monitor the service provider's performance of covered activities. This requires the broker-dealer to have in place specific policies and procedures that will monitor the service providers' compliance with the terms of any agreements and assess the service provider's continued fitness and ability to perform the covered activities being outsourced. GLMX satisfies the foregoing regulatory requirements as outlined in GLMX's written supervisory procedures, created to ensure compliance with applicable regulations. As required under FINRA Rule 3110, GLMX has implemented policies{2} and procedures in connection with its use of third-party services providers. When entering into an outsourcing agreement, GLMX's policies require that GLMX has a written contract with the service provider that includes the expectations of GLMX and the other party to the services agreement. GLMX is required to follow prudent business practices and conduct a due diligence analysis of prospective service providers, including an assessment of its reputation, financial stability, capability to deliver the services and have adequate confidentiality safeguards. On an ongoing basis but at least annually, GLMX reviews certain third-party service providers to determine the quality of services provided, whether such third-party service providers are providing the services in a satisfactory manner consistent with the requirements outlined in such third-party service provider's contract.
Fees
145. The ATS's process for setting fees is fair, transparent and appropriate. Any and all fees imposed by the ATS on its participants are equitably allocated, do not have the effect of creating barriers to access and are balanced with the criterion that the ATS has sufficient revenues to satisfy its responsibilities.
Information Sharing and Oversight Arrangements
146. Information sharing and regulatory cooperation -- The ATS has mechanisms in place to enable it to share information and otherwise cooperate with the securities regulatory authorities in the Jurisdictions, self-regulatory organizations, other exchanges, clearing agencies, investor protection funds, and other appropriate regulatory bodies.
147. The CEO of GLMX undertakes to notify staff of the securities regulators in each of the Jurisdictions promptly if any of the representations made in connection with or related to this application cease to be true or correct in any material respect, or become incomplete or misleading.
148. Oversight Arrangements -- Satisfactory information sharing and oversight agreements exist between the securities regulatory authorities in the Jurisdictions and the Foreign Regulator.
149. As noted above, the SEC and the securities regulatory authorities in the Jurisdictions are parties to a memorandum of understanding related to securities market oversight and enforcement. In addition, the ASC, AMF and OSC are parties to memoranda of understanding with FINRA related to securities market oversight and enforcement.
PART VII SUBMISSIONS OF GLMX
150. GLMX is regulated and operates in the US as an ATS and, therefore, may be considered an "alternative trading system" as defined in section 1.1 of NI 21-101 and is prohibited from carrying on business in the Jurisdictions unless it (a) is registered as a dealer, (b) is a member of a self-regulatory entity and (c) complies with the provisions of the Marketplace Rules. GLMX seeks to provide Canadian Subscribers that enter into SFTs with access to the Platform and, therefore, may be considered to be engaging in the business of trading in the Jurisdictions. GLMX is not registered with the ATS Relief Decision Makers in the Jurisdictions as an investment dealer and is not a member of any Canadian self-regulatory entity.
151. GLMX is registered with the SEC as a broker-dealer and an ATS and is a member of FINRA, a self-regulatory organization in the US with a mandate similar to that of IIROC in Canada. GLMX satisfies all of the criteria for registration with the SEC as a broker-dealer and continues to satisfy the requirements under Regulation ATS and is a member of FINRA. It is our position that as described in "Part II -- Application of Approval Criteria to the Platform", above, GLMX is subject to a substantially similar regulatory regime in the US to that in Canada.
152. In 21-328, CSA staff provide an exemption model where foreign ATSs may be permitted to offer direct access to Canadian participants without having to establish a Canada-based affiliate provided they meet certain terms and conditions, including a requirement that they comply with the applicable regulations in their home jurisdiction. In 21-328, CSA Staff state that to offer direct access to Canadian participants, a foreign ATS would need to apply for an exemption from the Marketplace Rules and provide details of the application process, exemption criteria, and sample terms and conditions that may be included in a foreign ATS's exemption order. A foreign ATS may be exempt from the Marketplace Rules provided that certain conditions of the CSA's proposed exemption and regulatory framework are met, including maintaining regulatory compliance in its home jurisdiction, providing the appropriate CSA jurisdictions with ongoing information about its operations and trading activity in Canada and ensuring that there is sufficient transparency for participants of the regulatory structure, specifically the substitute compliance model. Although the proposed exemption would grant foreign ATSs relief from the Marketplace Rules, depending on their model of operations, foreign ATSs or their participants may, as discussed below, still be subject to the dealer registration requirements under applicable Canadian securities legislation for engaging in the business of trading.
153. GLMX submits that it satisfies the criteria in the exemption model for foreign ATSs to offer direct access to Canadian participants without having to establish a Canada-based affiliate, as set out in 21-328. GLMX has submitted this Application for an exemption from the Marketplace Rules and has provided details demonstrating how it meets the criteria set out in 21-328, including maintaining regulatory compliance in its home jurisdiction, providing the Jurisdictions with ongoing information about its operations and trading activity in Canada and ensuring that there is sufficient transparency for participants of the regulatory structure, specifically the substitute compliance model.
154. Under NI 21-101, s 6.1 registration exemptions are denied for marketplaces. 21-328 does not purport to alter the registration regime for marketplaces:
"We note that although the proposed exemption would grant foreign ATSs relief from the Marketplace Rules, depending on their model of operations, foreign ATSs or their participants may still be subject to registration under applicable securities legislation. Foreign ATSs may trigger registration requirements under applicable Canadian securities laws because they may engage in the business of trading. A common exemption available in these cases would be the International Dealer Exemption (IDE). The IDE may be available where the foreign ATS offers trading in foreign securities. Foreign ATSs should consider the registration requirement and available exemptions when determining which securities to offer for trading.
In the case of participants on foreign ATSs, they may also need to be registered where they are dealing with Canadian participants. For example, in the case of a request-for-quote system that results in agreements to trade where a foreign participant is interacting directly with Canadian participants, the foreign participant may need to be registered as a dealer or rely on a registration exemption (emphasis added)
155. By its terms, NI 21-328 was designed for foreign ATS platforms trading non-Canadian fixed income products. The Creditex{3} and Trumid{4} exemption applications so far granted have each involved platforms trading non-Canadian fixed income instruments. Based on GLMX's model of operations, GLMX will not be trading outright in "foreign securities" but may use collateral to support SFTs that go beyond the foreign security category.
156. GLMX currently offers and intends in the future to offer repo on its platform using Canadian Government Securities as an incidental part of its business which will constitute less than 10% measured by total GLMX volume for the last 12 months. GLMX has determined that it may be subject to dealer registration under applicable Canadian securities legislation and so it proposes with respect to collateral consisting of "foreign securities" as defined in s 8.18(1) of NI 31-103 to rely on the "international dealer exemption" under section 8.18 of NI 31-103 in the Jurisdictions and, subject to observing the revenue/volume ceiling just mentioned, it proposes for collateral consisting of federal or provincial government debt securities, on the specified debt exemption under section 8.21(2)(a) of NI 31-103.
157. The robust US regulatory regime governing ATSs provides adequate investor protection and oversight and supervision of GLMX. It is appropriate for GLMX to rely on the regulatory regime in the US as a substitute for the regulatory regime in Canada, as the oversight, supervision and regulatory requirements are sufficiently similar to that of the Canadian regulatory regime applicable to ATSs.
158. By complying with the regulatory regime applicable to ATSs in the US, GLMX considers that it will be complying with the substantially similar requirements of the Canadian regulatory regime. Access to the Platform will be limited to Canadian Subscribers who must meet GLMX's eligibility criteria. Before being provided direct access to the Platform, GLMX will confirm that each Canadian Subscriber is a "permitted client" as that term is defined in NI 31-103. A Canadian Subscriber will be required to confirm that it continues to satisfy the eligibility criteria for access to the Platform on an ongoing basis.
159. Canadian Subscribers that engage in SFTs in non-Canadian fixed Income securities would benefit from the ability to trade on GLMX's Platform, as they would have access to a range of non-Canadian fixed income securities as collateral, which is not currently widely available in the Jurisdictions. GLMX would offer subscribers resident in the Jurisdictions a transparent, efficient market to engage in negotiation of SFTs. GLMX uses sophisticated information systems and has adopted rules and compliance functions that will ensure that Canadian subscribers are adequately protected. GLMX therefore submits that it would not be prejudicial to the public interest to grant the Requested Relief.
160. In Canada, an ATS can only execute trades in exchange-traded securities, corporate debt securities, government debt securities, or foreign exchange-traded securities, as defined in section 1.1 of NI 21-101; GLMX wishes to accommodate negotiation of SFTs in categories of collateral broader than this and 21-328 seems well- adapted to permitting this objective for foreign ATSs and this result is therefore not at odds with the basic objectives of NI 21-101 insofar as SFT platforms are concerned.
161. In the US, GLMX is not subject to pre-trade or post-trade transparency requirements. In Canada, pre-trade transparency requirements are not applicable to GLMX pursuant to sections 7.1 and 8.1 of NI 21-101 because orders capable of acceptance in foreign exchange-traded securities and exchange-traded securities and debt securities will not be displayed on the Platform as there is no outright trading in these instruments on the GLMX Platform.
162. The Canadian rules as to post-trade transparency are somewhat different than in the US where no such rules apply to SFTs. Section 7.4 of NI 21-101 imposes post-trade transparency requirements for exchange-traded securities and foreign exchange-traded securities and subsection 8.2(3) of NI 21-101 imposes post-trade transparency requirements for government debt securities and corporate debt securities. These provisions were not drafted with SFTs in mind.
163. SFTs do not need and cannot accommodate the same level of transparency as a marketplace in which outright trading in fixed income instrument occurs. SFTs are uniquely driven by credit risk determinations with respect to the borrower. For this reason, if 21-328 were not relied upon, exemptive relief from transparency requirements would likely have been granted in Canada following Equilend{5}. This would make the resulting Canadian regulatory approach consistent with the one in the US and should not therefore be a basis for denying the exemption sought.
PART VIII FEES
164. Filing fees totalling $7 thousand have been paid or are in the process of being paid to the securities regulatory authorities in the Jurisdiction Fees.
PART IX OTHER MATTERS
165. In connection with this Application we enclose:
166. Appendix A -- Draft Decision, and
167. Appendix B -- Authorization and Verification Statement GLMX, authorizing us to file this Application and confirming the truth of the facts contained herein.
Should you have any questions regarding this Application, please contact me at the number above with any questions regarding this Application.
Yours truly,
{1} https://www.osc.gov.on.ca/documents/en/Marketplaces/20200625_notice-commission-order-application-exemptive-relief-ice-bonds.pdf. This order was granted by various provincial securities regulators in respect of trading in Canada of "any debt security that is a foreign security or a debt security that is denominated in a currency other than the Canadian dollar. See also Trumid Financial, LLC https://www.osc.ca/en/securities-law/orders-rulings-decisions/trumid-financial-llc-0
{2} For additional information with respect to broker-dealer obligations with respect to third-party service providers, please see Notice to Members 05-48 -- Members' Responsibilities When Outsourcing Activities to Third-Party Service Providers, available at https://www.finra.org/rules-guidance/notices/05-48.
{3} https://www.osc.gov.on.ca/static/images/Marketplaces/Marketplaces_20200408_creditex-application-exemptive relief.pdf
{4} https://www.osc.gov.on.ca/en/Marketplaces_20200305_rfc-trumid-application-exemption-marketplace-rules.htm
{5} https://www.osc.ca/en/securities-law/orders-rulings-decisions/equilend-canada-corp
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) that the Filer be:
(a) exempt pursuant to subsection 15.1 of National Instrument 21-101 Marketplace Operation (NI 21-101) from NI 21-101 in whole;
(b) exempt pursuant to subsection 12.1 of National Instrument 23-101 Trading Rules (NI 23-101) from NI 23-101 in whole;
(c) exempt pursuant to subsection 10(1) of National Instrument 23-103 Electronic Trading and Direct Electronic Access to Marketplaces (NI 23-103) from NI 23-103 in whole
(the relief mentioned in paragraphs (a) to (c) being collectively referred to herein as the Exemptive Relief Sought).
Under National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions (for a coordinated review application):
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) the decision is the decision of the principal regulator and evidences the decision of each other Decision Maker.
Terms defined in National Instrument 14-101 Definitions and Multilateral Instrument 11-102 Passport System have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer which is sometimes referred to herein as "GLMX":
1. The Filer is a private limited liability company incorporated under the laws of Delaware whose registered and head office is at 330 Seventh Avenue, Floor 17, New York, New York, United States of America.
2. The Filer is an (in)direct wholly owned subsidiary of Global Liquid Markets, LLC (GLM). GLM is a holding company for various GLMX entities. GLM has three subsidiaries: GLMX, LLC, the Filer and GLMX Europe Limited. GLMX, LLC licenses an electronic trading platform (Platform) to GLMX and GLMX operates and maintains it. The Platform facilitates the negotiation of securities financing transactions including repurchase and reverse purchase transactions and securities lending arrangements, sale/buy back agreements and margin lending (collectively, SFTs) between institutional counterparties that have pre-existing contractual relationships with each other.
3. The Filer was formed in June 2017. It is registered as an alternative trading system (ATS) and a broker-dealer registered with the Securities and Exchange Commission (SEC) pursuant to section 15 of the Securities Exchange Act of 1934, as amended, (Exchange Act). The Filer is also a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation. The Filer operates one ATS that is registered with the SEC.
4. The Filer is subject to a comprehensive regulatory regime in the US. The Filer operates as an ATS and a broker-dealer registered with the SEC. The Filer is regulated by the SEC and FINRA as a broker-dealer and an ATS. The SEC and FINRA fulfil their regulatory responsibilities within the framework established by the Exchange Act and FINRA member rules.
5. SFTs are transactions where securities are used to borrow cash, or vice versa. The principal participants in these markets are broker-dealers acting as intermediaries and their diverse institutional clients. In these transactions, securities are exchanged for collateral which can be in the form of cash or different securities. Transactions are driven by a need to lend/borrow specific securities or to lend/borrow cash.
6. Cash lenders use SFTs as a way to securely invest cash. Typical cash lenders include money market funds, central banks, bank investment portfolio and others. Securities lenders enter into SFTs to finance their securities positions or obtain leverage. Typical cash borrowers/securities lenders are hedge funds, mortgage REITs, pension funds, asset managers, insurance companies and sovereign wealth funds.
7. The securities exchanged in SFTs negotiated on the Platform are as follows: major sovereign debt including US Treasuries, UK Government Debts, Euro Government Debt, Japan, Singapore, Australia and New Zealand, debt issued by agency; sub-sovereign and supranational institutions including U.S. agency debentures (FNMA, Freddie, FHLC), provincials, International Finance Corporation (IFC), World Bank, Länder, US Municipal Debt; Mortgage-Backed Securities including Agency Mortgage-Backed Securities Pools, Agency Collateralized Mortgage Obligations (CMOs), CMO Private Label (Investment-Grade And Non-Investment-Grade), Crown; non-Canadian issued corporate debt including Investment Grade, Non-investment grade, asset-backed securities; and re-securitizations including consumer (credit cards, auto loans), collateralized debt obligations, collateralized loan obligations, covered bonds; loans including bank loans, whole loans; money market instruments including term deposits, certificates of deposit, commercial paper; and non-Canadian issued equities including common, preferred, convertible and ETF.
8. In addition, GLMX currently offers and intends in the future to offer SFTs on its platform using Canadian Government Securities, defined as all debt instruments denominated in Canadian dollars and issued domestically by the Government of Canada or provincial governments or municipalities, as an incidental part of its business which will constitute less than 10% measured by total GLMX volume for the last 12 months.
9. The Filer does not have any offices or maintain other physical installations in Alberta, British Columbia, Nova Scotia, Ontario, Québec or any other Canadian province or territory.
10. Prior to getting access to the Platform, a subscriber (customer) must sign an agreement (Subscription Online Services Agreement) with GLMX that covers, among other things, obligations of the subscriber, and termination events.
11. The subscriber identifies to GLMX by name each employee or contractor of subscriber that is authorized to use the Platform. These "named users" are the only individuals within the subscriber licensed to access and use the service (Online Service).
12. GLMX will provide the subscriber access to the online service through a web based interface that can only be accessed when GLMX white lists subscriber's IP addresses. GLMX will provide each named user a unique username and password to enable such named user to access the Online Service.
13. Once a trade is mutually agreed and completed by the counterparties, the GLMX platform will send trade details to the parties of the transaction via a pre-approved method (e.g. email). Subscribers, independently and in advance, notify GLMX that they are properly documented with and able to trade with specific counterparties prior to engaging in transactions with that counterparty. GLMX is not a party to the SFT transaction and is not involved in the direct execution or clearing and settlement.
14. GLMX proposes to offer direct access to its Platform to prospective subscribers in the Jurisdictions (Canadian Subscribers) to facilitate trades. Access to the Platform will be limited to Canadian Subscribers who meet GLMX's eligibility criteria. Subscribers generally fall into the following categories: large multi-national bank; insurance company; US registered investment company; derivatives dealer; and/or any other person (whether a corporation, partnership, trust or otherwise) with total assets of at least $50 million which can include pension funds and hedge funds.
15. Before being provided direct access to the Platform, GLMX will confirm that each Canadian Subscriber is a "permitted client" as that term is defined in National Instrument 31 103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31 103). Retail customers will not be provided with access to the Platform.
16. Once a Canadian Subscriber demonstrates that it satisfies the eligibility criteria, the Canadian Subscriber must execute a Subscription Online Services Agreement in which the prospective Canadian Subscriber agrees to use the online service and the related user documentation only in the ordinary course of its own business for its own internal use and be and remain at all times a "permitted client" as defined in NI 31-103.
17. Under the Subscription Online Services Agreement, a Canadian Subscriber and its affiliates constitute a "Subscriber Group" and the Subscriber Group will authorize named users (Named Users) who are the only persons authorized to use the online service. The Subscriber Group's right to use the Online Service is conditioned upon Subscriber Group obtaining and maintaining all government, legal and regulatory approvals, consents, authorizations, registrations, permits and licenses required for the conduct of its activities and its use of the Online Services and using the Online Service only in compliance with applicable law.
18. GLMX has determined that it may be subject to dealer registration under applicable Canadian securities legislation and so it proposes to rely on the "international dealer exemption" under section 8.18 of NI 31-103 in the Jurisdictions and, subject to observing the revenue/volume ceiling just mentioned, on the specified debt exemption under section 8.21 of NI 31-103.
19. The Filer will ensure that all applicants who become Canadian Subscribers satisfy the Filer's eligibility criteria, including, among other things, that each Canadian Subscriber is a "permitted client" as that term is defined in NI 31-103.
The Filer is not in default of securities legislation in any Jurisdiction.
The Decision Maker 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 Maker under the Legislation is that the Exemptive Relief Sought is granted provided that the Filer complies with the terms and conditions attached hereto as Schedule A.
1. The Filer will continue to be subject to the regulatory oversight of the regulator in its home jurisdiction;
2. The Filer will either be registered in an appropriate category or rely on an exemption from registration under Canadian securities laws;
3. The Filer will promptly notify the Decision Makers if its status in its home jurisdiction has been revoked, suspended, or amended, or the basis on which its status has significantly changed;
4. The Filer will not provide direct access to a Canadian Subscriber unless the Canadian Subscriber is a "permitted client" as that term is defined in NI 31-103;
5. The Filer will require Canadian Subscribers to provide prompt notification to the Filer if they no longer qualify as "permitted clients";
6. The Filer must make available to Canadian Subscribers appropriate training for each person who has access to trade on the Platform;
7. The Filer will only offer SFTs to Canadian Subscribers and in that context use only the collateral listed in accordance with representation numbers 7 and 8 of this Decision;
8. Trades on the Platform by Canadian Subscribers will be cleared and settled through clearing arrangements used outside the Platform by subscribers;
9. The Filer will only permit Canadian Subscribers to trade those securities which are permitted to be traded in the United States under applicable securities laws and regulations;
10. The Filer will promptly notify staff of the Decision Makers of any of the following:
(a) any material change to its business or operations or the information provided in the Application, including, but not limited to:
i. changes to its regulatory oversight;
ii. the access model, including eligibility criteria, for Canadian Subscribers;
iii. systems and technology; and
iv. its clearing and settlement arrangements;
(b) any change in its regulations or the laws, rules, and regulations in the home jurisdiction relevant to the products traded;
(c) any known investigations of, or regulatory action against, the Filer by the regulator in the home jurisdiction or any other regulatory authority to which it is subject;
(d) any matter known to the Filer that may affect its financial or operational viability, including, but not limited to, any significant system failure or interruption; and
(e) any default, insolvency, or bankruptcy of any subscriber known to the Filer or its representatives that may have a material, adverse impact upon the Platform, the Filer or any Canadian Subscriber;
11. The Filer will maintain the following updated information and submit such information in a manner and form acceptable to staff of the Decision Makers on a semi-annual basis (within 30 days of the end of each six-month period), and at any time promptly upon the request of staff of the Decision Makers:
(a) a current list of all Canadian Subscribers on a per provincial basis, specifically identifying for each Canadian Subscriber the basis upon which it represented to the Filer that it could be provided with direct access;
(b) a list of all Canadian applicants for status as a Canadian Subscriber on a per provincial basis who were denied such status or access or who had such status or access revoked during the period;
i. for those Canadian applicants for status as a Canadian Subscriber that were denied access, an explanation as to why access was denied;
ii. for those Canadian Subscribers who had their status revoked, an explanation as to why their status was revoked;
(c) for each product:
i. the total trading volume and value originating from Canadian Subscribers, presented on a per provincial Canadian Subscriber basis;
ii. the proportion of worldwide trading volume and value on the Platform conducted by Canadian Subscribers, presented in the aggregate per province for such Canadian Subscribers;
iii. the trading volume and value of Canadian Government Securities (as defined in representation 8 of this Decision) used in SFTs and proportion of trading volume in Canadian Government Securities relative to the total volume traded on GLMX for the six month period, calculated in a manner acceptable to the Decision Makers; and
iv. a list of any system outages that occurred for any system impacting Canadian Subscribers' trading activity on the Platform which were reported to the regulator in the home jurisdiction;
(d) a list of any system outages that occurred for any system impacting Canadian Subscribers' trading activity on the Platform which were reported to the regulator in the home jurisdiction;
12. The Filer will provide to its Canadian Subscribers disclosure that states that:
(a) rights and remedies against it may only be governed by the laws of the home jurisdiction, rather than the laws of Canada, and may be required to be pursued in the home jurisdiction rather than in Canada;
(b) the rules applicable to trading on the Platform may be governed by the laws of the home jurisdiction, rather than the laws of Canada; and
(c) the Filer is regulated by the regulator in the home jurisdiction, rather than the Decision Makers;
13. With respect to a proceeding brought by the Decision Makers, staff of the Decision Makers or another applicable securities regulatory authority in Canada arising out of, related to, concerning or in any other manner connected with such regulatory authority's regulation and oversight of the activities of the Filer in Canada, the Filer will submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Canada, and (ii) an administrative proceeding in Canada;
14. The Filer will file with the Decision Makers a valid and binding appointment of McCarthy Tetrault LLP, or any subsequent agent, as the agent for service in Canada upon which the Decision Makers or other applicable regulatory authority in Canada may serve a notice, pleading, subpoena, summons, or other process in any action, investigation, or administrative, criminal, quasi-criminal, penal, or other proceeding arising out of or relating to or concerning the regulation and oversight of the Platform or the Filer's activities in Canada; and
15. The Filer must, and must cause its affiliated entities, if any, to promptly provide to the Decision Makers, on request, any and all data, information, and analyses in the custody or control of the Filer or any of its affiliated entities, without limitations, redactions, restrictions or conditions, including, without limiting the generality of the foregoing:
(a) data, information, and analyses relating to all of its or their businesses; and
(b) data, information, and analyses of third parties in its or their custody or control; and
16. The Filer must share information and otherwise cooperate with other recognized or exempt exchanges, recognized self-regulatory organizations, investor protection funds and other appropriate legal and regulatory bodies.
TO: |
Alberta Securities Commission |
Autorité des marches financiers |
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British Columbia Securities Commission |
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Ontario Securities Commission |
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Nova Scotia Securities Commission |
______________________________
The undersigned, an authorized signatory of GLMX LLC, hereby authorizes the making and the filing of the attached application by McCarthy Tétrault LLP, and confirms the truth of the facts contained therein.
DATED at New York, New York this 10th day of August, 2021.
GLMX LLC |
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By: |
"Lauren Carroll" |
Name: Lauren Carroll |
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Title: General Counsel & CAO |
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TSX Inc. -- TSX Closing Price, TSX Last Ask Price, TSX Last Bid Price -- Notice of Approval
In accordance with the Process for the Review and Approval of the Information Contained in Form 21-101F1 and the Exhibits Thereto, the Ontario Securities Commission has approved amendments to the TSX Inc. ("TSX") Rule Book to add the definitions for TSX Last Ask Price, TSX Last Bid Price, and TSX Closing Price,
TSX will be amending the TSX Rule Book by adding three new definitions to Rule 1-101 as follows: TSX Last Ask Price ("TSX Ask"), TSX Last Bid Price ("TSX Bid"), and TSX Closing Price ("TSX Closing Price"), (together, the "Amendments"). The Amendments will provide market participants with better and more indicative reference points for Exchange Traded Funds ("ETFs") and listed securities and meaningfully improve valuations helping reduce investor confusion.
The Amendments were published for comment on June 19, 2021, and five (5) comment letters were received. A summary of the comments submitted, together with TSX's responses, is attached as Appendix A. TSX thanks the commenters for their feedback.
The Amendments will be implemented and available on September 27, 2021, subject to stakeholder feedback and industry readiness and feedback.
Summary of Comments and Responses
List of Commenters:
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Jack Rando, IIAC
Shalomi Abraham, Invesco
Nasdaq CXC Limited
Ed Bundy, RBC Capital Markets
Alex Perel, Scotiabank Global Banking and Markets
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Capitalized terms used and not otherwise defined in the Notice of Approval shall have the meaning in the Notice of Proposed Amendments and Request for Comments dated June 19, 2021.
Summary of Comments Received |
TSX Responses |
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All five commenters were supportive of the TSX Closing Price, TSX Last Bid, and TSX Last Ask proposal ("Proposal"). |
TSX thanks the commenters for their input and support. |
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One commenter noted that the Proposal would provide investors with better and more indicative valuations for ETFs and listed securities and meaningfully improve valuations and help reduce investor confusion. |
TSX also thanks the commenters and industry participants for their time in collaborating with TSX on this proposal. |
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Another commenter added that the Proposal will move the industry closer to addressing long-standing valuation/reporting issues experienced by market participants in relation to these securities. |
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Another commenter noted that the dissemination of the proposed data elements through changes to existing market data feeds, rather than through a zero-volume trade or FTP site, will greatly increase the range of downstream users that could take advantage of these calculated valuations. |
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Three commenters noted that the value of the calculations would be improved if they were based on the consolidated market quotations and not just the TSX BBO. |
TSX thanks the commenters for their input and suggestions. |
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One of these commenters suggested that TSX explore with other marketplaces the possibility of including away quotes in the calculations. |
TSX continually evaluates its broad offering of products to ensure that it consistently offers market participants options that offer value and reflect market needs. As with our normal process, any changes will involve industry consultation, may require regulatory approval, and appropriate notice will be given. |
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Another commenter suggested that marketplaces contributing to the NBBO allow TSX to use their data for this purpose at no incremental cost. The commenter added that TSX should also provide their data for similar calculations at other listing markets should those needs arise in the future. |
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Another commenter suggested that the use of consolidated data be made a condition for approval as the creation of accurate reference last sale information is a matter of investor protection and market efficiency. |
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Two commenters suggested that all other Canadian listing exchanges also adopt similar methodologies for closing prices. |
TSX thanks the commenters for their input and suggestions. We will continue to engage with industry participants on these suggestions. |
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Three commenters suggested that the industry work together to settle on one single set of harmonized rules for derived closing valuations. These commenters noted the difference in the Proposal versus the solution currently being used by another Canadian marketplace which utilizes the last 15 minutes of trading. |
TSX continually evaluates its broad offering of products to ensure that it consistently offers market participants options that offer value and reflect market needs. As with our normal process, any changes will involve industry consultation, may require regulatory approval, and appropriate notice will be given. |
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Two of these three commenters encouraged TSX and the other Canadian marketplace that currently offers derived closing valuations to adopt the same TWAP time period for their respective calculations. |
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All five commenters suggested that the Proposal be extended to also include all thinly-traded securities in Canada. |
TSX thanks the commenters for their input and suggestions. |
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One commenter added that Canadian preferred shares, convertible debt instruments and smallcap equities would all benefit from this approach. |
TSX continually evaluates its broad offering of products to ensure that it consistently offers market participants options that offer value and reflect market needs. TSX will explore extending the Proposal to additional securities in the future. |
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One of the commenters noted that some thinly traded securities may be holdings of ETFs so there is added value in being consistent with the two approaches. |
As with our normal process, any changes will involve industry consultation, may require regulatory approval, and appropriate notice will be given. |
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One commenter suggested that the methodology can be refined by consistently representing the TSX Bid and TSX Ask for ETFs and stocks, with a common methodology. The purpose of averaging the BBO over the final 10 minutes of trading is to overcome data quality issues, particularly in cases where a security is thinly-traded. The same data integrity concerns are lessened when price discovery occurs in the market. |
TSX thanks the commenter for the suggestion. |
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The commenter suggested that: |
TSX continually evaluates its broad offering of products to ensure that it consistently offers market participants options that offer value and reflect market needs. As with our normal process, any changes will involve industry consultation, may require regulatory approval, and appropriate notice will be given. |
• In situations where a security has not traded in the last 10 minutes of regular market hours, the BBO is represented as the 10-minute TWAP of the displayed bid and offer respectively. This is the methodology currently proposed for all ETFs. |
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• In cases where a trade has occurred in the final 10 minutes, the closing BBO is observed immediately after the last board lot trade has taken place, including in the closing auction. This approach would capture the market impact of the last execution of the day, including the impact of the closing auction. In the case of frequently-traded securities, and all securities where a closing auction has taken place, it would be functionally equivalent to the closing price snapshot at 4:00 PM currently proposed for common stocks. |
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Two commenters noted that regulatory changes are needed so that stakeholders are permitted to use calculated prices/quotations beyond indicative valuations so that they can be incorporated into other official uses. |
TSX thanks the commenters for their suggestions. |
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One of the commenters specifically referred to the codification of valuation approach in IIROC Dealer Member Rule 200 and Form 1 and asked that IIROC, in collaboration with the CSA, investigate suitable amendments to the Dealer Member Rules to permit dealers to use derived valuations. |
TSX would welcome the opportunity to work with IIROC, CSA and other industry participants in pursuing suitable amendments to the Dealer Member Rules to permit dealers to use derived valuations. |
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One commenter noted that the Proposal does not consider situations where the last board lot may have traded on a different venue than that of the TSX. |
TSX thanks the commenter for their input. |
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TSX continually evaluates its broad offering of products to ensure that it consistently offers market participants options that offer value and reflect market needs. As with our normal process, any changes will involve industry consultation, may require regulatory approval, and appropriate notice will be given. |
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Canada Life U.S. Small-Mid Cap Growth Fund et al.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption from subsection 2.1(2) of NI 81-101 to file a prospectus more than 90 days after the date of the receipt for the preliminary prospectus.
National Instrument 81-101 Mutual Fund Prospectus Disclosure, ss. 2.1(2), 6.1.
August 11, 2021
Attention: Shawn Cymbalisty
By letter dated July 30, 2021 (the Application), Canada Life Investment Management Ltd., the investment fund manager of the Funds, applied to the Director of the Ontario Securities Commission (the Director) under section 6.1 of NI 81-101 for relief from the operation of subsection 2.1(2) of NI 81-101, which prohibits an issuer from filing a prospectus more than 90 days after the date of the receipt for the preliminary prospectus.
This letter confirms that, based on the information and representations made in the Application, and for the purposes described in the Application, the Director intends to grant the requested exemption to be evidenced by the issuance of a receipt for the Funds' prospectus, subject to the condition that the prospectus be filed no later than January 28, 2022.
Yours very truly,