Securities Law & Instruments

Headnote

National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions. Foreign registered broker/dealers granted relief, subject to certain conditions, from the dealer registration requirements in respect of the resale of securities by Canadian resident employees of the corporate clients of the Applicants for whom the Applicants provide certain stock plan administration services.

Applicable Ontario Statutory Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1)(a), 74(1).

Applicable National Rules

National Instrument 45-106 Prospectus and Registration Exemptions, ss. 2.24, 2.28.

National Instrument 45-102 Resale of Securities, s. 2.14.

April 21, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

E*TRADE FINANCIAL CORP.,

E*TRADE SECURITIES LLC,

E*TRADE CLEARING LLC AND

E*TRADE CAPITAL MARKETS, LLC

 

DECISION

Background

The principal regulator in the Jurisdiction has received an application from E*TRADE Financial Corp. (the Filer), E*TRADE Securities LLC (ET Securities), E*TRADE Clearing LLC (ET Clearing) and E*TRADE Capital Markets, LLC (ET Capital Markets, and together with ET Securities and ET Clearing, the Affiliates) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from the dealer registration requirements in the Legislation in respect of the resale of securities by Canadian resident employees of the corporate clients of the Filer and its Affiliates for whom the Filer and its Affiliates provide certain stock plan administration services (the Requested 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Newfoundland and Labrador, New Brunswick, Prince Edward Island and Nova Scotia (together with Ontario, the Jurisdictions).

Interpretation

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

Representations

This decision is based on the following facts represented by the Filer and the Affiliates:

Parties

1. The Filer is a corporation incorporated under the laws of Delaware and is listed on the National Association of Securities Dealers Automated Quotation System. The Filer is a financial services company that, through its affiliates, provides a wide range of financial services to retail investors, including trading and investing services.

2. ET Securities, the Filer's U.S. broker-dealer affiliate, is incorporated under the laws of Delaware and is a member of the Financial Industry Regulatory Authority. ET Securities carries on business in the U.S. as an online brokerage firm, providing, inter alia, electronic securities trading services to self-directed investors.

3. ET Clearing is a single member limited liability company formed under the laws of Delaware. ET Clearing clears and settles securities transactions for the Filer and its affiliates and is a U.S. broker-dealer and a member of the Financial Industry Regulatory Authority.

4. ET Capital is a single member limited liability company formed under the laws of Illinois. ET Capital provides brokerage and market making services to institutional investors and is a U.S. broker-dealer and a member of the Financial Industry Regulatory Authority.

5. E*TRADE Financial Corporate Services, Inc. (Corporate Services) is a corporation incorporated under the laws of Delaware and a wholly-owned subsidiary of the Filer, which carries on business in the U.S. as a provider of stock plan administration services (Stock Plan Administration Services) to certain corporate clients of the Filer and its Affiliates (the Issuer Clients).

6. Prior to the Transaction (as defined below), E*TRADE Canada Securities Corporation (E*Trade Canada) was a wholly owned subsidiary of the Filer and was registered as a dealer in the category of investment dealer, or the equivalent, in each of the Jurisdictions and was a member of the Investment Industry Regulatory Organization of Canada.

The Transaction

7. On September 22, 2008, the Bank of Nova Scotia announced that it had completed the transaction originally announced on July 14, 2008 (the Transaction) and had purchased E*Trade Canada from the Filer. E*Trade Canada has now changed its name to Scotia iTRADE Corp. and proposes to carry on business as Scotia iTRADE.

Stock Plan Administration Services Prior to the Transaction

8. The Issuer Clients are predominantly headquartered in the U.S. and include multi-national corporations. The Issuer Clients have adopted incentive stock benefit plans, including stock option and stock purchase plans, pursuant to which they may issue securities (the Plan Securities) from time to time to their and their related entities' employees, executive officers, directors or consultants, or to permitted assigns of any of the foregoing persons (the Employees). A small number of the Employees of some of the Issuer Clients are Canadian residents (the Canadian Employees).

9. Under the Stock Plan Administration Services, Corporate Services provides access to proprietary software and technology that allows Issuer Clients to manage the administration of their incentive stock benefit plans. Through the Stock Plan Administration Services, the Filer and/or its Affiliates allow Employees to track and maintain records and provide instructions with respect to the purchase of Plan Securities under these plans, the grant and exercise of options, and the holding and resale of the Plan Securities issued upon exercise of options under these plans. Each Issuer Client and Employee provides contractual representations to the Filer and/or its Affiliates regarding compliance with law (which includes applicable securities laws) in respect of their participation in the Stock Plan Administration Services. The contractual arrangement between an Employee and ET Securities includes a representation from the Employee that his or her securities transactions will be executed in compliance with the requirements of applicable laws and regulations.

10. Under the Stock Plan Administration Services, the Filer (through its Affiliates) acts as custodian in respect of all Plan Securities issued under an Issuer Client's incentive stock benefit plan. All such Plan Securities are held by the Filer and/or its Affiliates on behalf of the Employees (whether Canadian or not) in accounts located in the U.S. that provide for the final custody of assets by the Filer and/or its Affiliates in the U.S.

11. For all Employees other than Canadian Employees, the Filer (through its Affiliates) also acts as broker in respect of limited purpose accounts held by the Filer in the U.S. for the Employees (Stock Plan Accounts). The Stock Plan Account is a restricted brokerage account that permits solely the holding of Plan Securities and the resale of the Plan Securities. On receipt of an Employee's resale order, the Filer (through its Affiliates) sells the Plan Security on a market outside Canada, clears the trade through a clearing corporation outside Canada, and settles the trade with a counterparty outside Canada. The trading process as between Employee and the Filer and/or its Affiliates has been wholly automated through online and interactive voice response trading technology. Cash proceeds received from the resale of the Plan Security are delivered to the Employee or, at the direction of the Employee, to a brokerage account of the Employee's choice.

12. Prior to the Transaction, any Canadian Employee that wished to resell the Plan Securities opened a Stock Plan Account at E*TRADE Canada. The Canadian Employee placed the resell order with E*Trade Canada and then E*Trade Canada placed the resell order with the Filer and/or its Affiliates. This process could be conducted wholly online by the Canadian Employee, with no intermediation by the Canadian broker, through integrated technology in place between E*Trade Canada and the Filer and/or its Affiliates. Though orders could have been placed at E*Trade Canada by phone, the vast majority of Stock Plan Account orders were placed online as part of the online Stock Plan Administration Services.

13. Once the Canadian Employee placed their order with E*Trade Canada and the order was submitted by E*Trade Canada to the Filer and/or its Affiliates, the process followed was as described in paragraph 11. All Plan Securities of the Canadian Employee were traded by the Filer and/or its Affiliates on exchanges located outside of Canada, in accordance with all applicable rules and policies of the applicable exchange, to non-Canadian counterparties. The trades were cleared and settled outside Canada through non-Canadian clearing corporations and settlement agents. The cash proceeds on the sale of the Plan Securities were then delivered to the Canadian Employee or, at the Canadian Employee's direction, deposited to the Employee's brokerage account at E*Trade Canada or at another Canadian broker-dealer.

14. The development and implementation of the technology infrastructure required to integrate Stock Plan Account functionality in Canada at E*Trade Canada with Stock Plan Account functionality in the U.S. at the Filer to permit the resale of Plan Securities by the Canadian Employee through the facilities of E*Trade Canada before entering the facilities of the Filer was a complex, costly, and lengthy undertaking.

Stock Plan Administration Services After the Transaction

15. As a result of the Transaction, and following full integration of E*Trade Canada with the Bank of Nova Scotia, Canadian Employees will have lost their connectivity to the Stock Plan Account infrastructure in the U.S. and will not be able to conduct trades of Plan Securities through E*Trade Canada in the manner in which they were conducted prior to the Transaction.

16. With respect of the issuance of the Plan Securities to Canadian Employees, the Filer and the Affiliates are exempt from the dealer registration requirements in each of the Jurisdictions pursuant to section 2.24 of National Instrument 45 -106 -- Prospectus and Registration Exemptions (NI 45-106).

17. With respect to the participation of the Filer and the Affiliates in the resale of Plan Securities on behalf of Canadian Employees, an exemption from the dealer registration requirements is available under section 2.28 of NI 45-106 (the Resale Exemption). However, the Resale Exemption is only available if the conditions set out in section 2.14 of NI 45-102 -- Resale of Securities (NI 45-102) are satisfied.

18. Section 2.14 of NI 45-102 provides:

(1) The prospectus requirement does not apply to the first trade of a security distributed under an exemption from the prospectus requirement if

(a) the issuer of the security

(i) was not a reporting issuer in any jurisdiction of Canada at the distribution date, or

(ii) is not a reporting issuer in any jurisdiction of Canada at the date of the trade; (the Reporting Issuer Condition)

(b) at the distribution date, after giving effect to the issue of the security and any other securities of the same class or series that were issued at the same time as or as part of the same distribution as the security, residents of Canada

(i) did not own directly or indirectly more than 10 percent of the outstanding securities of the class or series, and

(ii) did not represent in number more than 10 percent of the total number of owners directly or indirectly of securities of the class or series; and (the 10% Condition)

(c) the trade is made

(i) through an exchange, or a market, outside of Canada, or

(ii) to a person or company outside of Canada.

19. The Filer and its Affiliates will be able to rely on the Resale Exemption for the resale of Plan Securities made on behalf of the vast majority of Canadian Employees. However, the Resale Exemption will not be available to the Filer and its Affiliates in respect of a small number of Canadian Employees because a very limited number of Issuer Clients (who fall into two distinct groups) will not satisfy all of the conditions under section 2.14 of NI 45-102. Each such Issuer Client is referred as a Non-Exempt Client and the Canadian Employee of such Non-Exempt Client is referred to as the Non-Exempt Employee.

20. The first group of Non-Exempt Clients which does not satisfy all of the conditions under section 2.14 of NI 45-102 is referred to as Reporting Issuer Non-Exempt Clients. The Reporting Issuer Non-Exempt Clients satisfy all of the conditions set out under section 2.14 of NI 45-102 except the Reporting Issuer Condition.

21. The second group which does not satisfy all of the conditions under section 2.14 of NI 45-102 consists of four Non-Exempt Clients who are referred to as 10% Non-Exempt Clients. These 10% Non-Exempt Clients satisfy all of the conditions set out under section 2.14 of NI 45-102 except it is reasonably likely that they do not satisfy the 10% Condition. Of the four 10% Non-Exempt Clients, one has an ownership interest exceeding 30%, while the other three are significantly closer to the 10% threshold.

22. All the 10% Non-Exempt Clients are registered with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 and are not exempt from the reporting requirements of that Act pursuant to Rule 12g3-2(b) made under that Act.

23. Based on the current records of the Filer, it is estimated that that the total number of Non-Exempt Employees constitutes approximately 0.03% of the total number of Employees who have access to the Stock Plan Administration Services.

24. In the absence of obtaining the Requested Relief, the Filer and the Affiliates would be subject to the dealer registration requirements in the Legislation in respect to the participation of the Filer and the Affiliates in the resale of Plan Securities on behalf of Non-Exempt Employees.

Decision

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 Requested Relief is granted provided that at the relevant time that trading activity is engaged in:

(a) the Filer or the Affiliates will facilitate resales in the Plan Securities only on instructions received from the Non-Exempt Employee, and any cash proceeds resulting from such resales will be delivered to the Non-Exempt Employee or to a Canadian registered broker-dealer acting for the Non-Exempt Employee;

(b) all Plan Securities will be traded on exchanges located outside of Canada to non-Canadian counterparties, and cleared and settled outside Canada through non-Canadian clearing corporations and settlement agents in accordance with all applicable rules and policies governing such activities;

(c) Non-Exempt Employees will be treated in the same manner as international employees of Issuer Clients under the Stock Plan Administration Services;

(d) each of the Filer and its Affiliates will be registered as a U.S. broker-dealer;

(e) Non-Exempt Employees will, at all times, constitute less than one (1) percent of the total number of Employees who have access to the Stock Plan Administration Services;

(f) in respect of the first trades of the Plan Securities of a Reporting Issuer Non-Exempt Client by a Non-Exempt Employee, each of the conditions set out under section 2.14 of NI 45-102 is satisfied except the Reporting Issuer Condition;

(g) in respect of the first trades of the Plan Securities of a 10% Non-Exempt Client by a Non-Exempt Employee:

(i) each of the conditions set out under section 2.14 of NI 45-102 is satisfied except the 10% Condition; and

(ii) the applicable 10% Non-Exempt Client is registered with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 and is not exempt from the reporting requirements of that Act pursuant to Rule 12g3-2(b) made under that Act, and

(h) prior to opening a new trading account with the Filer or an Affiliates, all Non-Exempt Employees will receive disclosure that includes:

(i) a statement that the Non-Exempt Employees may not have the same rights against the Filer, or any of its Affiliates, as U.S. Employees because the Filer and its Affiliates are resident outside of Canada and all or substantially all of their assets are located outside of Canada; and

(ii) a statement that neither the Filer, nor any of its Affiliates, is registered under the Legislation as a dealer for the purposes of participation of the Filer, or any of its Affiliates, in the resale of Plan Securities on behalf of Non-Exempt Employees and any investor protections that might otherwise be available in the Jurisdictions to clients of a registered dealer under the Legislation, may not be available to Non-Exempt Employees in the Jurisdictions who participate in the Stock Plan Administration Services.

"James E. A. Turner"
Commissioner
Ontario Securities Commission
 
"Carol S. Perry"
Commissioner
Ontario Securities Commission