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Lehman Brothers Inc. - OSC Rule 35-502 Non-Resident Advisors
Headnote
Decision pursuant to section 10.1 of Ontario Securities Commission Rule 35-502 (the Rule) exempting applicant from the requirement under section 3.7 of the Rule.
Statutes Cited
Securities Act, R.S.O. 1990, c. S. 5, as am.
Rules Cited
Ontario Securities Commission Rule 35-502 (2000) 23 OSCB 7989, ss. 3.7, 10.1.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED (the Act)
AND
IN THE MATTER OF
LEHMAN BROTHERS INC.
EXEMPTION ORDER
(Ontario Securities Commission Rule 35-502
Non-Resident Advisers)
UPON the application of Lehman Brothers Inc. (LBI or the Applicant), pursuant to section 10.1 of Ontario Securities Commission Rule 35-502 Non-Resident Advisers (the Rule) for an exemption from the requirement under subsection 3.7(1)(b)(ii) of the Rule that the Applicant be subject to the agreement announced by the Bank for International Settlements on July 1, 1988 concerning international convergence of capital measurement and capital standards (the BIS Agreement) in order for it to act as custodian for its Ontario clients (the Application);
AND UPON considering the Application;
AND UPON the Applicant having represented to the Director that:
1. LBI is a limited liability company formed under the laws of the State of Delaware and is a wholly owned subsidiary of Lehman Brothers Holdings Inc. The head office of LBI is located in New York, New York.
2. LBI is registered under the Act as dealer in the category of international dealer and an adviser in the category of international adviser. The Applicant is also registered as a broker-dealer and an investment adviser with the United States Securities and Exchange Commission (SEC) and as a futures commission merchant with the Commodity Futures Trading Commission (CFTC).
3 LBI provides investment, financing, and related services to individuals and institutions on a global basis. Services provided to clients include securities brokerage, investment advisory, trading, and underwriting; investment banking, strategic services, including mergers and acquisitions, and other corporate finance advisory activities; origination, brokerage, dealer and related activities; securities clearance and settlement services and related record keeping services.
4 LBI is the wholly owned US broker-dealer subsidiary of Lehman Brothers Holdings Inc. (LBHI). As of November 30, 2006 LBHI had shareholders' equity of US$ 19.191 billion. The Applicant, as at April 30, 2007 had regulatory net capital of US$4.5 billion as determined under Rule 15c3-1 under the United States Securities Exchange Act of 1934 and had shareholders' equity of approximately US$4 billion.
5 The Applicant has 3 principal affiliated financial institutions: (i) Lehman Brothers Bank, FSB (shareholders' equity: US$2,080,316,000 as at March 31, 2007), (ii) Lehman Brothers Commercial Bank (shareholders' equity: US$462,838,000 as at March 31, 2007), and (iii) Lehman Brothers Trust Company, N.A (shareholders' equity: US$25,310,000 as at March 31, 2007), (collectively, the LBI Banks).
6 As a broker-dealer regulated by the SEC, LBI must comply with the SEC's regulations with respect to protection of customer's cash and securities. LBI has a number of additional safeguards in place to protect client funds and securities over which it has responsibility.
7. The Applicant acts as custodian for its clients in the United States and throughout the world. The Applicant currently has custody of approximately US$225 billion of client assets. The Applicant proposes to act as a custodian for its clients in Ontario.
8. Section 3.7 of the Rule provides that securities and money of an Ontario client of an international adviser must be held by (a) the Ontario client; or (b) a custodian or sub-custodian that meets the requirements for acting as a custodian or sub-custodian of a mutual fund in National Instrument 81-102 -- Mutual Funds (NI 81-102), and that is subject to the BIS Agreement.
9. The Applicant meets the requirements for acting as a custodian or sub-custodian of a mutual fund in NI 81-102.
10. The BIS Agreement is a framework for measuring capital adequacy that was designed to strengthen the soundness and stability of the international banking system. The BIS Agreement provides minimum levels of capital that are intended to be applied to banks on a consolidated basis, including subsidiaries undertaking banking and financial business.
11. The Applicant is an affiliate of the LBI Banks, but is not a subsidiary of any of the LBI Banks. Accordingly, because of the Applicant's corporate structure and because the Applicant is not a bank, the BIS Agreement does not apply to the Applicant.
12. There are no apparent concerns as to the capital adequacy of the Applicant given its capital resources noted above.
IT IS ORDERED, pursuant to section 10.1 of the Rule, that the Applicant is exempt from the requirement of subsection 3.7(1)(b)(ii) of the Rule that it be subject to the BIS Agreement in order for it to act as custodian for its Ontario clients, provided that there is no material adverse change in the ownership or capitalization of the Applicant.
August 24, 2007
"David M. Gilkes"