Securities Law & Instruments
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Large portfolio manager, exempt market dealer, commodity trading manager and investment fund manager with separate investment fund manager and portfolio manager operating divisions exempted from the requirement to register an individual as a chief compliance officer (CCO) -- permitted to register two CCOs, one for each operating division.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 11.3, 15.1.
May 17, 2012
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
TD ASSET MANAGEMENT INC.
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 an exemption from the requirement contained in section 11.3 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that the Filer designate an individual to be the chief compliance officer (CCO) so that the Filer will be permitted to designate two individuals as CCOs, with the result that there will be a separate CCO in respect of each of two distinct lines of business carried on by the Filer (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 the purpose of the 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 all of the provinces and territories of Canada outside of Ontario (the Non-principal Jurisdictions and, together with the Jurisdiction, the Filing Jurisdictions).
Terms defined in NI 31-103, National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts by the Filer:
1. The Filer is a corporation amalgamated under the laws of the Jurisdiction, on January 1, 1996.
2. The Filer has its head office in the Jurisdiction.
3. The Filer is registered as an investment fund manager in the Jurisdiction and will register as an investment fund manager in any other Non-principal Jurisdiction where such registration may be required.
4. The Filer is registered as a portfolio manager in the Jurisdiction and in each of the Non-principal Jurisdictions.
5. The Filer is registered as a commodity trading manager in the Jurisdiction.
6. The Filer is registered as an exempt market dealer in the Jurisdiction and in each of the Non-principal Jurisdictions.
7. The Filer is not, to the best of its knowledge, in default of any requirements of securities legislation in any of the Filing Jurisdictions.
8. The Filer has two distinct operating lines of business (each, a Division):
(a) one Division (the IFM Division) currently provides investment fund management services to six families of investment funds that are subject to National Instrument 81-102 Mutual Funds (the NI 81-102 Funds) and to five families of investment funds that are not NI 81-102 Funds (the Pooled Funds) representing a total of 193 investment funds; and
(b) one Division (the PM Division) provides discretionary portfolio management services to institutional clients, including corporations, pension plans, endowments, unions, the NI 81-102 Funds and the Pooled Funds, and high-net-worth individuals, and distributes securities to accredited investors.
9. The Filer wishes to designate one individual who is registered under securities legislation in the Filing Jurisdictions in the category of CCO as CCO of the IFM Division and a different individual who is registered under securities legislation in the Filing Jurisdictions in the category of CCO as CCO of the PM Division.
10. Each of the IFM Division and the PM Division has a well-established separate and distinct business supervisory and operational structure. Each of the IFM Division and the PM Division has specific compliance professionals designated to each Division.
11. Given the scope and specialized and diversified business operations within each Division of the Filer, the CCO of each Division requires a different set of skills, experience and focus to effectively manage the applicable compliance program.
12. If the Exemption Sought is granted, the CCO of the PM Division will oversee compliance systems that are reasonably designed to ensure that the portfolio manager and each person acting on its behalf comply with securities legislation. The CCO of the PM Division will focus on the applicable government laws, rules, regulations, policies and codes of conduct which govern the portfolio management, exempt market dealer and commodity trading manager activities of the Filer in the jurisdictions in which it operates. To this end, the CCO of the PM Division will maintain a compliance process and infrastructure throughout the portfolio management business so as to enable the Filer's management to fulfill its portfolio management compliance responsibilities. This includes maintaining appropriate policies and procedures and overseeing a supervisory structure that monitors the portfolio management activities, employee trading, conflicts of interest and the exempt market dealer and commodity trading manager activities.
13. If the Exemption Sought is granted, the CCO of the IFM Division will oversee compliance systems that are reasonably designed to ensure that the investment fund manager and each person acting on its behalf comply with securities legislation. To this end, the CCO of the IFM Division will maintain appropriate policies and procedures for investment fund management activities and oversee a supervisory structure that monitors compliance. This includes overseeing compliance with the requirements governing: (i) public offering and continuous disclosure of the NI 81-102 Funds and Pooled Funds; (ii) sales practices and sales communications; (iii) fiduciary obligations for management functions that are outsourced; (iv) conflict identification and management; and (v) self dealing.
14. Considering the Filer is part of a large financial institution, the CCO of the IFM Division will report to the CCO of the PM Division for corporate organizational purposes. The matters on which the CCO of the IFM Division will report to the CCO of the PM Division include, but are not limited to, the following: human resources matters (including staffing levels, hiring decisions, performance appraisals and vacation approvals), departmental initiatives (including strategic planning, goal setting and efficiency evaluation) and governance reporting. However, in the event that the CCO of the IFM Division determines, in his/her sole discretion, that any of these matters overlap with, or directly or indirectly influence or affect, matters set out in section 5.2 of NI 31-103, the CCO of the IFM Division shall report directly to the ultimate designated person (UDP) on such matters. As well, each of the CCOs has responsibilities that are in addition to his/her CCO responsibilities. For example, the CCO of the PM Division has executive level management responsibilities. It is intended that the CCO for the IFM Division will also be CCO of another affiliated investment fund manager.
15. NI 31-103 was implemented on September 28, 2009 (the Implementation Date). Under sections 11.2 and 11.3 of NI 31-103, a registered firm is required to designate an individual to be the UDP and an individual to be the CCO (the CCO Requirement).
16. Prior to the Implementation Date, the Filer had one CCO for the PM Division as required by applicable law and had another compliance professional acting in a capacity similar to a CCO for the IFM Division. The person acting in this capacity reported to the CCO of the PM Division. Since the Implementation Date, the Filer has had one individual registered as CCO for both the PM Division and the IFM Division. The CCO is supported by a team of compliance professionals with responsibilities targeted for each Division.
17. Given the size, diversity and increasing complexity of the Filer's PM Division and the IFM Division, it is (i) unreasonable for one individual to be expected to effectively carry out all of the responsibilities of the CCO for both the PM Division and the IFM Division, (ii) difficult for one CCO to effectively identify and stay abreast of the different issues and risks applicable to clients and the capital markets stemming from both the PM Division and the IFM Division, and (iii) difficult to escalate all such issues and risks to the UDP and the board of directors of the Filer in a timely and effective manner. If the Exemption Sought is granted, each CCO will have direct access to the Filer's UDP, will provide reports to the board of directors of the Filer and will comply in all other respects with applicable securities requirements, including the requirements set out in NI 31-103.
18. With the granting of the Exemption Sought, the Filer would continue its operations with enhanced compliance effectiveness, since one individual would no longer continue to divide his/her time between the compliance oversight of the IFM Division and the PM Division. Not granting the Exemption Sought would prevent the CCOs from responding more quickly to address the Filer's compliance issues, providing a higher level of senior participation on the Filer's compliance projects and initiatives, and undertaking more detailed reviews of the Filer's compliance monitoring programs to assist in reducing the risks of non-compliance.
19. In section 5.2 of Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registration Obligations, the Canadian Securities Administrators indicate that:
"Firms must designate one CCO. However, in large firms, the scale and kind of activities carried out by different operating divisions may warrant the designation of more than one CCO. We will consider applications, on a case-by-case basis, for different individuals to act as the CCO of a firm's operating divisions."
20. Designating only one CCO for the purposes of satisfying the CCO Requirement in the Legislation in the circumstances of the Filer is not consistent with the policy objectives the Legislation is intended to achieve because the PM Division and the IFM Division are independent operations that are distinct from one another in kind and conducted on a large scale.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that the Filer designate:
1. only one individual to be CCO of the PM Division; and
2. only one individual to be CCO of the IFM Division.