Application to recognize FundSERV Inc. as a clearing agency under subsection 21.2 of the Securities Act (Ontario).
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., s. 21.2.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5
IN THE MATTER OF
WHEREAS FundSERV Inc. (FundSERV) had filed an application dated February 13, 2012 (Application) with the Ontario Securities Commission (Commission) pursuant to section 21.2 of the Act requesting an order recognizing FundSERV as a clearing agency.
AND WHEREAS FundSERV has represented to the Commission that:
1. FundSERV is a Canadian corporation with its head office located in Toronto, Ontario;
2. FundSERV is a provider of electronic business services to the Canadian investment industry;
3. FundSERV's core service is to provide the network infrastructure for its customers to place and reconcile orders through efficient, secure data exchange;
4. FundSERV provides centralized payment exchange facilities (clearing agency services), for those customers who so elect, to settle orders, on a net basis, through payment exchange currently handled by a Canadian chartered bank utilizing the Large Value Transfer System operated by the Canadian Payments Association;
5. FundSERV's business model does not involve credit enhancement, the assumption of counter-party risk, novation or custody;
6. FundSERV operates on a cost-recovery basis, serving more than 700 organizations and their business units and providing online access to over 10,000 investment fund instruments;
7. While FundSERV has developed business continuity systems, market participants can and do transact without FundSERV's assistance; and
8. FundSERV also supports the customer staffed committees and working groups, that include users of the clearing agency services, that address issues and develop electronic data and security standards for the industry;
AND WHEREAS the Commission considers it appropriate to set out in an order the terms and conditions for the recognition of FundSERV as a clearing agency, which terms and conditions are set out in Schedule "A" attached;
AND WHEREAS FundSERV has agreed to the terms and conditions as set out in Schedule "A";
AND WHEREAS based on the Application and the representations FundSERV has made to the Commission, the Commission is satisfied that granting an order would not be prejudicial to the public interest;
THE COMMISSION HEREBY RECOGNIZES FundSERV as a clearing agency pursuant to section 21.2 of the Act, subject to the terms and conditions set out in Schedule "A";
DATED April 10, 2012
TERMS AND CONDITIONS
1. FundSERV's governance arrangements will be designed to promote the objectives of the users (participants) of its services and its shareholders.
2. Without limiting the generality of the foregoing, FundSERV's governance structure and governance arrangements will ensure:
(a) effective oversight of FundSERV;
(b) FundSERV takes into consideration the public interest ;
(c) fair, meaningful and diverse representation on the Board and any committees of the Board, including a reasonable proportion of independent directors;
(d) FundSERV's Board has the capacity to effectively consider the interests of FundSERV's various stakeholders;
(e) FundSERV has policies and procedures to appropriately identify and manage conflicts of interest;
(f) each director or officer of FundSERV, and each person or company that owns or controls, directly or indirectly, more than 10 percent of FundSERV is a fit and proper person; and
(g) there are appropriate qualifications, limitation of liability and indemnity provisions for directors and officers of FundSERV.
3. FundSERV will not, without the Commission's prior written approval, make significant changes to its governance structure or constating documents.
4. Fees imposed by FundSERV for the clearing agency services will be equitably allocated. The fees will not have the effect of creating unreasonable barriers to access.
5. The process for setting such fees will be fair and the fee model will be transparent.
6. FundSERV will have transparent written standards for access to its clearing agency services.
7. The access standards and the process for granting, limiting or denying access to the clearing agency services will be fair and transparent. FundSERV will keep records of
(a) each grant of access, and
(b) each denial or limitation of access, including the reasons for denying or limiting access to an applicant.
RULES AND RULEMAKING
8. FundSERV will establish rules that are necessary or appropriate to govern the clearing agency services it offers.
9. FundSERV will ensure that its rules relating to the clearing agency services
(a) are not inconsistent with securities legislation,
(b) do not permit unreasonable discrimination among participants, and
(c) do not impose a burden on competition that is not necessary or appropriate.
10. FundSERV will submit its rules for approval in accordance with the rule protocol attached as Appendix "A" to this Schedule "A", as amended from time to time.
11. FundSERV's rules and the processes for adopting new rules or amending existing rules will be transparent to participants.
12. FundSERV will monitor participant activities to ensure compliance with such rules. Such rules will set out appropriate sanctions in the event of non-compliance by participants.
13. For any decision made by FundSERV that materially affects an applicant or a participant in respect of the clearing agency services, including a decision in relation to access, FundSERV will ensure that:
(a) an applicant or a participant is given an opportunity to be heard or make representations; and
(b) FundSERV keeps a record of, gives reasons for, and provides for appeals or reviews of, its decisions.
14. FundSERV will maintain appropriate risk management policies and procedures.
15. FundSERV will carry its activities that do not relate to the clearing agency services in a manner that minimizes the spillover of risk that might adversely affect its financial viability or operations or negatively impact any of its participants.
SYSTEMS AND TECHNOLOGY
16. For its systems, FundSERV will:
(a) develop and maintain,
(i) reasonable business continuity and disaster recovery plans,
(ii) an adequate system of internal control,
(iii) adequate general computer controls, including controls relating to information systems operations, information security, change management, problem management, network support, and system software support;
(b) on a reasonably frequent basis, and in any event, at least annually, and in a manner that is consistent with prudent business practice,
(i) make reasonable current and future capacity estimates,
(ii) conduct capacity stress tests to determine the ability of those systems to process transactions in an accurate, timely and efficient manner,
(iii) test its business continuity and disaster recovery plans; and
(c) promptly notify the Commission staff of any material systems failures.
17. FundSERV will annually engage a qualified party to conduct an independent systems review and prepare a report in accordance with established audit standards regarding its compliance with section 16(a) and such report will be provided to Commission staff.
FINANCIAL VIABILITY AND REPORTING
18. FundSERV will maintain sufficient financial resources to meet its responsibilities and allocate sufficient financial and staff resources to carry out its clearing agency services.
19. FundSERV will provide to Commission staff unaudited quarterly financial statements within 60 days of each quarter end and audited annual financial statements, together with any annual report to the shareholders and participants, within 145 days of each year end.
20. If FundSERV fails to maintain, or anticipates that it will fail to maintain a cash and accounts receivable balance equal to or greater than four months of expenses, it shall immediately notify Commission staff and advise what steps are being taken to address the situation.
21. Where FundSERV decides to outsource any of its functions supporting or critical to its clearing agency services, it will have appropriate and formal arrangements and processes in place that permit it to meet its obligations in the provision of the clearing agency services and under this Order, and which are in accordance with industry best practices.
22. The outsourcing arrangement shall provide Commission staff with access to all data, information, and systems maintained by the third party service provider required for the purposes of regulatory oversight.
INFORMATION SHARING AND REGULATORY COOPERATION
23. FundSERV will provide such information as may be reasonably requested from time to time by, and otherwise cooperate with, the Commission or its staff.
24. Unless otherwise prohibited under applicable law, FundSERV will share information and otherwise cooperate with recognized self-regulatory organizations, investor protection funds, marketplaces, recognized and exempt clearing agencies, and other regulatory bodies as appropriate.
25. FundSERV will comply with Appendix "B" to this Schedule setting out the reporting obligations, as amended from time to time, regarding the reporting of information to the Commission.
RULE PROTOCOL REGARDING THE REVIEW AND APPROVAL
OF FUNDSERV INC. RULES
BY THE ONTARIO SECURITIES COMMISSION
1. Purpose of the Protocol
On April 10, 2012, the Ontario Securities Commission (Commission) issued a recognition order ("Recognition Order") with terms and conditions governing the recognition of FundSERV Inc. (FundSERV) as a clearing agency pursuant to subsection 21.2(1) of the Securities Act (Ontario) ("Act"). To comply with the Recognition Order, FundSERV must , among other things, submit its rules to the Commission for approval. This protocol sets out the procedures for the submission of a rule by FundSERV and the review and approval of the rule by the Commission.
In this protocol:
"rule" means any new requirement or an amendment to or deletion of an existing requirement relating to the clearing agency services as defined in the Recognition Order, that would have an impact on FundSERV, its participants, other market participants, or the capital markets in general, relating to:
(a) Access to the clearing agency services;
(b) The rights and obligations of FundSERV or participants using the clearing agency services;
(c) Fees or costs charged to participants for use of the clearing agency services;
(d) Risks to FundSERV or its participants;
(e) The process for or the transparency of making rules;
(f) Competition among participants, other market participants or in the capital markets; or
(g) Material costs of compliance with the rule.
All other terms have the respective meanings ascribed to them in the Recognition Order and in securities legislation as that term is defined in NI 14-101.
3. Procedures for Review and Approval of Rules
For a rule, FundSERV will provide to the Commission, where applicable, the following documents in electronic format or by other means as agreed to by Commission staff and FundSERV from time to time:
(i) a cover letter that indicates:
(a) a description of the rule and its nature and purpose; and
(b) a description and analysis of the possible effects of such rule on FundSERV, its participants, other market participants and the capital markets in general, including but not limited to competition, risks and the costs of compliance borne by any of the foregoing parties;
(ii) the rule and a blacklined version of the rule indicating the proposed changes to an existing rule;
(iii) the concept and business case; and
(iv) the cost/benefit analysis.
(b) Confirmation of Receipt
Commission staff will within 3 business days send to FundSERV confirmation of receipt of documents submitted by FundSERV under subsection (a).
(c) Notice of Rules to Participants
FundSERV will provide notice to participants of any rules with an opportunity to comment and the notice will be posted on the FundSERV website for a period of not less than four (4) weeks.
(d) Publication of a Rule by the Commission
If a rule has an impact on market participants (other than FundSERV participants) or the capital markets in general, then Commission staff may require that a notice of rule change and, where applicable, a blacklined version of the rule, be published in the OSC Bulletin or the OSC website for a comment period of not less than four (4) weeks. The notice and accompanying rule will be published as soon as reasonably practicable.
(e) Review by Commission Staff
Commission staff will use their best efforts to conduct their initial review of the rule and provide comments to FundSERV within 30 days of FundSERV filing materials with the Commission. However, there will be no restriction on the amount of time necessary to complete the review of the rule.
(f) FundSERV Responses to Commission Staff's Comments
FundSERV will respond to any comments received to Commission staff in writing.
(g) Approval by the Commission
Commission staff will use their best efforts to prepare the rule for approval by the later of (i) 45 days receipt of the filing of the rule from FundSERV including the filing of all relevant documents in subsection (a) above, and (ii) 30 days after receipt of written responses from FundSERV to staff's comments or requests for additional information, and the summary of industry comments and FundSERV's response to the industry comments (and upon the request of Commission staff, copies of the original comments), or confirmation from FundSERV that there were no comments received. If at any time during the review period, Commission staff determine that they have further comments or require further information from FundSERV in order to prepare the materials for Commission approval, the review period will be extended by an additional period of 21calendar days commencing on the day that Commission staff receive responses to the comments or the information requested. Commission staff will promptly notify FundSERV of the Commission's approval.
(h) Effective Date of a Rule
A rule will be effective as of the date of approval by Commission in accordance with subsection (g) or on a date determined by FundSERV, if such date is later.
4. Immediate Implementation of a Rule
(a) Criteria for Immediate Implementation
FundSERV may make a rule effective immediately where FundSERV determines that there is an urgent need to implement the rule because of a substantial and imminent risk of significant harm to FundSERV, participants, other market participants, or the capital markets.
(b) Prior Notification
Where FundSERV determines that immediate implementation is appropriate, FundSERV will advise Commission staff in writing as soon as possible but in any event at least 5 business days prior to the implementation of the rule. Such written notice will include an analysis to support the need for immediate implementation.
(c) Disagreement on Need for Immediate Implementation
If Commission staff do not agree that immediate implementation is necessary, the process for resolving the disagreement will be as follows:
(i) Commission staff will notify FundSERV, in writing, of the disagreement, or request more time to consider the immediate implementation, within 3 business days of being advised by FundSERV under subsection (b).
(ii) Commission staff and FundSERV will discuss and resolve any concerns raised by Commission staff.
(iii) If no notice is received by FundSERV by the 3rd business day after Commission staff received FundSERV's notification, FundSERV may assume that Commission staff does not disagree with their assessment.
(d) Review of Rule Implemented Immediately
A rule that has been implemented immediately will be reviewed and approved by the Commission in accordance with the procedures set out in section 3 with necessary modifications. If the Commission subsequently disapproves the rule, FundSERV will immediately repeal the rule and inform its participants of the disapproval.
5. Miscellaneous Provisions
(a) Waiving Provisions of the Protocol
Commission staff may waive any part of this protocol upon request from FundSERV or as determined by Commission staff. Such a waiver must be granted in writing by Commission staff.
This protocol and any provision hereof may be amended at any time with the approval of the Commission and FundSERV.
In addition to the notification, reporting and filing obligations set out in Schedule "A" to the Recognition Order, FundSERV will also comply with the reporting obligations set out below.
1. Prior Notification
1.1 FundSERV will provide to Commission staff reasonable prior notification of:
(a) any proposed change to FundSERV's corporate governance structure other than significant changes to the governance structure or constating documents for which prior approval is required under item 3 of Schedule "A" to the Recognition Order;
(b) entering into an agreement, memorandum of understanding or other similar arrangement with any governmental or regulatory body, self-regulatory organization, clearing agency, stock exchange, other marketplace or market, other than an agreement, memorandum of understanding or similar arrangement for normal commercial purposes; or
(c) engaging in a new type of business activity or cease to engage in a business activity in which FundSERV is then engaged;
2. Immediate Notification
2.1 FundSERV will provide to Commission staff immediate notice of:
(a) the appointment of any new director or officer, including a description of the individual's employment history; and
(b) the resignation of a director or officer or the auditors of FundSERV.
2.2 FundSERV will immediately notify Commission staff if it:
(a) becomes the subject of any order, directive or other similar action of a governmental or regulatory authority;
(b) becomes aware that it is the subject of a criminal or regulatory investigation; or
(c) becomes, or is aware that it may become, the subject of a material lawsuit.
3. Annual Reporting
3.1 FundSERV will provide to Commission staff annually:
(a) a list of the directors and officers of FundSERV, and identify which directors are independent;
(b) a list of the committees of the FundSERV board of directors, setting out the members, mandate and responsibilities of each of the committees;
(c) a list of all participants in the clearing agency services; and
(d) FundSERV's annual report.