Securities Law & Instruments

 

        

Under paragraph 4.1(1)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations a registered firm must not permit an individual to act as a dealing, advising or associate advising representative of the registered firm if the individual acts as an officer, partner or director of another registered firm that is not an affiliate of the first-mentioned firm. The Filers have sought relief from that prohibition. Each of the firms employing an individual as a registered representative is an owner of the second registered firm and entitled to appoint a director to its board. The individual representatives will have sufficient time to adequately serve both firms. The potential for conflicts of interest is significantly reduced compared to other similar arrangements because the second firm operates as an inter-dealer bond broker and does not compete with any of the shareholder firms. The filers have policies in place to handle potential conflicts of interest. Relief from the prohibition has been granted.

 

Applicable Legislative Provisions

 

Multilateral Instrument 11-102 Passport System, s. 4.7.

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 4.1, 13.4, 15.1.

 

December 8, 2017

 

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Principal Jurisdiction)

 

AND

 

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS

IN MULTIPLE JURISDICTIONS

 

AND

 

IN THE MATTER OF

FREEDOM INTERNATIONAL BROKERAGE COMPANY

(Freedom)

 

AND

 

BMO NESBITT BURNS INC. (NBI) AND MICHAEL FISHER

 

AND

 

TD SECURITIES INC. (TDSI) AND BRADLEY ALLAN PEDERSON

 

AND

 

MERRILL LYNCH CANADA (ML) AND JOHN ALEXANDER MCARTHUR

 

DECISIONS

 

Background

 

The regulator in the Principal Jurisdiction (the Decision Maker) has received a joint application from Freedom, NBI, TDSI and ML (each a Filer) for decisions under the securities legislation of the Principal Jurisdiction (the Legislation), pursuant to section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), providing for the following exemptions (collectively, the Exemptions Sought):

 

(a)           an exemption from the requirement contained in paragraph 4.1(1)(a) of NI 31-103 to allow NBI to permit Mr. Michael Fisher to act as a dealing representative of NBI while also acting as a director of Freedom (the NBI Exemption Sought);

 

(b)           an exemption from the requirement contained in paragraph 4.1(1)(a) of NI 31-103 to allow TDSI to permit Mr. Bradley (Allan) Pederson to act as a dealing representative of TDSI while also acting as a director of Freedom (the TDSI Exemption Sought); and

 

(c)           an exemption from the requirement contained in paragraph 4.1(1)(a) of NI 31-103 to allow ML to permit Mr. John (Alexander) McArthur to act as a dealing representative of ML while also acting as a director of Freedom (the ML Exemption Sought).

 

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

 

(a)           the Ontario Securities Commission (the OSC) is the principal regulator for this joint application;

 

(b)           in the case of the NBI Exemption Sought, NBI 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 (collectively, the Jurisdictions) other than the Principal Jurisdiction;

 

(c)           in the case of the TDSI Exemption Sought, TDSI has provided notice that section 4.7(1) of MI 11-102 is intended to be relied upon in each of the Jurisdictions other than the Principal Jurisdiction; and

 

(d)           in the case of the ML Exemption Sought, ML has provided notice that section 4.7(1) of MI 11-102 is intended to be relied upon in each of the Jurisdictions other than the Principal Jurisdiction and Nunavut.

 

Interpretation

 

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in these decisions, unless otherwise defined.

 

Representations

 

These decisions are based on the following facts represented by each of the Filers insofar as such facts relate to the corresponding Filer:

 

Freedom

 

1.             Freedom is an unlimited liability company incorporated under the laws of Nova Scotia.

 

2.             The principal regulator of Freedom is the OSC because Freedom’s principal office is located in Toronto, Ontario.

 

3.             Freedom is registered as an exempt market dealer in Ontario and Québec, and has been approved as an inter-dealer bond broker by the Investment Industry Organization of Canada (IIROC).

 

4.             As an inter-dealer bond broker, Freedom provides an integrated voice and electronic brokerage service to its clients in accordance with the requirements of IIROC Dealer Member Rule 2100 Inter-Dealer Bond Brokerage Systems (Rule 2100).

 

5.             Pursuant to Rule 2100, all of Freedom’s clients are typically Canadian investment dealers, Canadian chartered banks and/or an affiliated entity.

 

6.             As an inter-dealer bond broker, Freedom acts as an agent for its customers in allowing a customer to buy and/or sell domestic and international corporate and government bonds, derivatives and other related securities (collectively, Debt Securities) to another customer of Freedom.

 

7.             Freedom never acts as principal in effecting a trade with a client (i.e., Freedom only matches an order by a buyer with a seller and vice versa).

 

8.             Freedom is owned (i) indirectly by a wholly-owned subsidiary of BGC Partners Inc. (BGC), a leading global brokerage company servicing the financial and real estate markets with its head office in London, England, and (ii) directly by, or indirectly by a wholly-owned subsidiary of, NBI, CIBC World Markets Inc., ML, RBC Dominion Securities Inc., Scotia Capital Inc. and TDSI (collectively, the Shareholders).

 

9.             The board of directors of Freedom (the Board) consists of five representatives from BGC and one representative from each of the other Shareholders for a total of 11 directors. The members of the Board do not receive any compensation for acting as a director of Freedom.


10.          BGC and the other Shareholders have entered into a unanimous shareholders agreement which effectively limits the ability of the directors of Freedom to oversee the operations of Freedom and imposes restraints on what Freedom can do without shareholder approval.

 

11.          None of NBI, TDSI, or ML (each a Shareholder-Dealer) is an affiliate of Freedom.

 

Shareholder-Dealers

 

12.          NBI and TDSI are each, among other things, an investment dealer in all of the Jurisdictions, and is each a member of IIROC. NBI is indirectly owned by the Bank of Montreal (BMO) and TDSI is directly owned by The Toronto-Dominion Bank.

 

13.          ML is, among other things, an investment dealer in all of the Jurisdictions except Nunavut, and is a member of IIROC. ML is indirectly owned by Bank of America Corporation.

 

14.          The principal regulator of each Shareholder-Dealer is the OSC because each Shareholder-Dealer’s principal office is located in Toronto, Ontario.

 

15.          Mr. Fisher is a director of Freedom and is NBI’s representative on the Board. NBI now wants to register him as a dealing representative of NBI in all of the Jurisdictions.

 

16.          Mr. Fisher is currently a Managing Director and head of BMO’s and NBI’s Fixed Income group which are involved in (i) buying and selling Debt Securities for institutional investors, (ii) analyzing current market conditions, and (iii) implementing decisions to yield positive returns / profits for such institutional clients.

 

17.          Recently, BMO has reorganized its Fixed Income and Commodities group, and Mr. Fisher’s role will be expanded such that part of his duties may, in the future, include contact with NBI’s clients and providing back-up support when other NBI team members are absent. As a result, NBI wants to register Mr. Fisher as a dealing representative of NBI in all of the Jurisdictions.

 

18.          Mr. Pederson is registered as a dealing representative of TDSI in Ontario, and TDSI wants to appoint Mr. Pederson as its representative on the Board.

 

19.          Mr. Pederson is currently a Managing Director and Head of Canadian Rates Trading, Sales and Government Finance of TDSI.

 

20.          Mr. McArthur is a dealing representative of ML in Ontario, Québec, Alberta and British Columbia, and ML wants to appoint Mr. McArthur as its representative on the Board.

 

21.          Mr. McArthur is currently Managing Director and Head of Fixed Income Trading of ML.

 

22.          Each Shareholder-Dealer uses the services of Freedom to effect trades of Debt Securities on behalf of their clients from time to time.

 

Dual Registration

 

23.          Because each of Mr. Fisher, Mr. Pederson, and Mr. McArthur (each a Representative) has extensive knowledge about fixed income securities and the marketplace in which Freedom operates, Freedom wants each Representative to be a director of Freedom and a member of its Board. Appointing the Representatives to be directors of Freedom will help Freedom remain competitive and be responsive to its clients’ interests.

 

24.          Each Shareholder-Dealer has determined that its Representative is the appropriate person to sit on the Board and that it does not have another individual that is not registered in the Jurisdictions who has the necessary expertise.

 

25.          Each Representative will be supervised by the applicable Shareholder-Dealer.

 

26.          The day-to-day operations of Freedom are carried out by the executive management and employees of Freedom. The Representatives will not have any role in the day-to-day operations of Freedom.

 

27.          No Representative or Shareholder-Dealer will have access to Freedom’s systems, which access would enable the Representative or Shareholder-Dealer to influence the actions of a client of Freedom to the benefit of that Representative or Shareholder-Dealer in relation to a trade.

 

28.          At no time will the interests of any Shareholder-Dealer be favoured over the other clients of Freedom as a result of the Representative of that Shareholder-Dealer being a member of Freedom’s Board.

 

29.          It is anticipated that each Representative will spend between four to six hours per quarter on his duties as a director of Freedom.

 

30.          The directors of Freedom are subject to a detailed policy governing conflicts of interest (the Freedom Policy). The Freedom Policy specifically addresses the situation where a Representative, that is a director appointed by a Shareholder-Dealer, has a conflict of interest or duty arising from the concurrent fiduciary duties he owes to Freedom and his Shareholder-Dealer.

 

31.          The Freedom Policy proceeds from the principle that a Representative owes an unqualified fiduciary duty to Freedom. The Freedom Policy enforces that principle by providing that where a director or the Board identifies a conflict of interest, the Board will adopt a protocol for managing the conflict which must include provisions relating to:

 

(a)           whether the conflicted director must withdraw from the Board meeting for the duration of any discussion on a relevant matter, and whether the Board may waive such a requirement;

 

(b)           whether, in light of applicable law or other relevant circumstances, the conflicted director may vote in connection with any Board decision on that matter; and

 

(c)           whether, subject to such restrictions as the Board may impose, the conflicted director may receive Board papers or other information which relates in any way to the subject-matter that gives rise to the conflict (the Information). Where the Board decides that the Representative may not receive the Information, and the Board further decides that the conflict of duty is of such nature or sensitivity that it is not appropriate for the conflicted Representative to be made aware of the nature of the Information, the Representative will not be notified of the nature of the Information.

 

29.          To further protect Freedom, the Freedom Policy contains guidelines relating to:

 

(a)           the circumstances in which the Information may be passed on by a director to the Shareholder-Dealer who nominated him;

 

(b)           the right of Freedom to place an embargo on the Information which must not be passed on because of its sensitivity; and

 

(c)           acceptance by each Shareholder-Dealer of the obligation of confidentiality in relation to any Information received.

 

30.          Each of the Shareholder-Dealers has appropriate compliance and supervisory policies and procedures to deal with any conflicts of interest that may arise as a result of their Representative being a director of Freedom.

 

31.          The potential for conflicts of interest or client confusion due to a Representative acting as a director of Freedom and a dealing representative of his Shareholder-Dealer is mitigated by the following:

 

(a)           none of the Shareholder-Dealers competes with Freedom;

 

(b)           members of the Board serve without remuneration;

 

(c)           the Representatives will not be involved in the day-to-day operations of Freedom’s operations;

 

(d)           no Representative or Shareholder-Dealer will have access to Freedom’s systems, which access would enable the Representative or Shareholder-Dealer to influence the actions of a client of Freedom to the benefit of that Representative or Shareholder-Dealer in relation to a trade; and

 

(e)           at no time will Freedom favour the interests of any Shareholder-Dealer as a result of their Representative being a member of its Board.

 

32.          None of the Filers is in default of securities, commodities or derivatives legislation in any Jurisdiction.

 

33.          In the absence of the Exemptions Sought, each of the Shareholder-Dealers would be prohibited under paragraph 4.1(1)(a) of NI 31-103 from permitting its respective Representative to act as a dealing representative of the Shareholder-Dealer while also acting as a director of Freedom.


Decisions

 

The Decision Maker is satisfied that the following decisions meet the test set out in the Legislation for the Decision Maker to make the decisions.

 

The NBI Exemption Sought

 

The decision of the Decision Maker under the Legislation is that the NBI Exemption Sought is granted, provided that the circumstances described above, insofar as they relate to NBI and Freedom, remain in place.

 

The TDSI Exemption Sought

 

The decision of the Decision Maker under the Legislation is that the TDSI Exemption Sought is granted, provided that the circumstances described above, insofar as they relate to TDSI and Freedom, remain in place.

 

The ML Exemption Sought

 

The decision of the Decision Maker under the Legislation is that the ML Exemption Sought is granted, provided that the circumstances described above, insofar as they relate to ML and Freedom, remain in place.

 

“Pat Chaukos”

Deputy Director, Compliance & Registrant Regulation

Ontario Securities Commission