Securities Law & Instruments

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Large investment dealer, futures commission merchant and derivatives dealer with three distinct operating divisions exempted from the requirement to register an individual as a chief compliance officer (CCO) -- permitted to register three CCOs, one for each operating division, for a period of two years, to provide the firm with the opportunity to integrate the compliance systems of the two retail operating divisions.

Statutes cited

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 11.3, 15.1.

Derivatives Act (Québec) and Derivatives Regulation (Québec), ss. 86 and 11.1, respectively.

Decisions cited

In the Matter of Scotia Capital Inc., BMO Nesbitt Burns Inc., CIBC World Markets Inc. and RBC Dominion Securities Inc., dated February 19, 2010

July 16, 2014

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO AND QUÉBEC AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF THE DERIVATIVES LEGISLATION OF QUÉBEC AND IN THE MATTER OF SCOTIA CAPITAL INC. (the Filer)

DECISION

Background

The principal regulator in Ontario (the Jurisdiction) has received an application from the Filer, pursuant to subsection 15.1(1) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Filer from the requirement (theCCO Requirement) contained in section 11.3 of NI 31-103 to designate an individual to be the chief compliance officer (CCO) so that the Filer may designate and register three individuals to be CCO, one for each of its three distinct lines of securities business, each a substantial business operation for the Filer (the Exemption Sought).

The securities regulatory authority in Québec (the Derivatives Decision Maker) has received an application from the Filer, pursuant to section 86 of the Derivatives Act (Québec), for a decision under the derivatives legislation of Québec exempting the Filer from the requirement (the Derivatives CCO Requirement) contained in section 11.1 of the Derivatives Regulation (Québec) to designate an individual to be the CCO so that the Filer may designate and register three individuals to be CCO, one for each of its three distinct lines of securities business, each a substantial business operation for the Filer (the Derivatives Exemption Sought).

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

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

(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in all of the other provinces and territories of Canada (together with the Jurisdiction, the Jurisdictions);

(c) the decision with respect to the Exemption Sought is the decision of the principal regulator; and

(d) the decision with respect to the Derivatives Exemption Sought evidences the decision of the Derivatives Decision Maker.

By a decision dated February 19, 2010 In the Matter of Scotia Capital Inc., BMO Nesbitt Burns Inc., CIBC World Markets Inc. and RBC Dominion Securities Inc., the Director of the Ontario Securities Commission as the principal regulator exempted Scotia Capital Inc. (SCI) from the CCO Requirement so that SCI could designate and register two individuals as CCO, one for each of its two distinct lines of securities business (the Prior Director's Decision). A copy of the Prior Director's Decision is attached at Schedule "A".

The Prior Director's Decision should be reconsidered at this time because SCI subsequently amalgamated with an affiliate, effective as of November 1, 2013, resulting in the amalgamated entity (i.e., the Filer) having three distinct lines of securities business, each a substantial business operation for the Filer (the Amalgamation).

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:

The Filer

1. The Filer is a corporation amalgamated under the laws of Ontario on November 1, 2013, and is wholly-owned by the Bank of Nova Scotia.

2. The Filer's head office is located in Toronto, Ontario.

3. The Filer is registered as:

(a) an investment dealer in each of the Jurisdictions;

(b) a futures commission merchant in each of Ontario and Manitoba; and

(c) a derivatives dealer in Quebec.

4. The Filer is a dealer member of the Investment Industry Regulatory Organization of Canada.

5. The Filer is not in default of any requirements of the Securities Acts (the Acts) of the Jurisdictions, or the regulations, rules and forms, as applicable, under the Acts; nor is the Filer in default of any rulings or orders issued by the securities regulatory authorities of the Jurisdictions.

The Divisions

6. Effective as of November 1, 2013:

(a) SCI amalgamated with its affiliate, DWM Securities Inc. (DWM Securities), to form the Filer, which carries on business under the name "Scotia Capital Inc."; and

(b) The Filer carries on the Canadian investment dealer business formerly carried on by each of SCI and DWM Securities through the following three distinct lines of securities business, each a substantial business operation for the Filer (each, a Division):

(i) HollisWealth, which prior to the Amalgamation was DWM Securities, and which currently comprises the full service retail brokerage business conducted by agents of the Filer (theHollisWealth Division);

(ii) ScotiaMcLeod, which prior to the Amalgamation was a division of SCI, and which currently comprises the full service retail brokerage business and the Scotia iTrade discount online brokerage business conducted by employees of the Filer (the ScotiaMcLeod Division); and

(iii) Global Banking and Markets, which prior to the Amalgamation was a division of SCI, and which currently comprises the institutional business conducted by employees of the Filer (the Global Banking and Markets Division).

7. The Divisions have separate, distinct and independent:

(a) senior managers (each, a Division Head);

(b) compliance departments;

(c) oversight, supervisory and compliance systems; and

(d) personnel and infrastructure.

8. Upon the Exemption Sought and the Derivatives Exemption Sought being granted, the Divisions will have separate, distinct and independent CCOs, each having access and reporting to the Division Head of the respective Division for which the CCO is designated, as well as the Filer's board of directors (the Board).

9. Although they are parts of the same corporate entity, namely the Filer, each Division functions as a stand-alone, substantial business operation within the Filer based on the nature of the clients, the types of securities products and services which are provided to them, and whether dealing representatives will be agents or employees of the Filer.

10. The ScotiaMcLeod Division is a full service retail brokerage firm with over 750 advisors serving clients in more than 70 offices across the country. The Global Banking and Markets Division provides corporate and investment banking and capital markets products and services to corporate, institutional and government clients domestically and internationally, with over 30 offices globally and more than 300 relationship managers organized around industry specialties. The HollisWealth Division is a full service retail brokerage firm with over 450 advisors servicing clients in more than 44 offices across the country.

The CCO

11. Pursuant to the Prior Director's Decision, SCI was exempted from the CCO Requirement so that SCI could designate and have registered two individuals as CCO, one for each of its two distinct lines of securities business, namely the ScotiaMcLeod Division (the Retail CCO) and the Global Banking and Markets Division (the Institutional CCO). Accordingly, pursuant to the Prior Director's Decision, there are two CCOs designated and registered for the Filer.

12. Following the Amalgamation, the Retail CCO became responsible for an additional Division, namely the HollisWealth Division. Accordingly, the Retail CCO is currently responsible for two retail Divisions, the HollisWealth Division and the ScotiaMcLeod Division. The Institutional CCO remains responsible for the Global Banking and Markets Division only.

13. Upon the Exemption Sought and the Derivatives Exemption Sought being granted, the Filer proposes that each Division have its own CCO. The Retail CCO will be responsible for the ScotiaMcLeod Division, the Institutional CCO will be responsible for the Global Banking and Markets Division, and a new CCO will be designated and registered to be responsible for the HollisWealth Division.

14. There will be no line(s) of reporting between the CCOs. The CCO of each Division will report directly to the ultimate designated person (UDP) of that Division and will have direct access to the Board. The CCOs of the retail Divisions, namely the ScotiaMcLeod Division and the HollisWealth Division, will report to a single UDP.

Reasons for the Exemption Sought and the Derivatives Exemption Sought

15. Pursuant to the CCO Requirement and the Derivatives CCO Requirement, a registered firm is required to designate and have registered an individual to be the CCO.

16. Section 5.2 Responsibilities of the chief compliance officer of Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations states, in part, 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. [The Canadian Securities Administrators] will consider applications, on a case-by-case basis, for different individuals to act as the CCO of a firm's operating divisions."

17. Granting the Exemption Sought and the Derivatives Exemption Sought would be consistent with the policy objectives that the CCO Requirement and the Derivatives CCO Requirement are intended to achieve, because each of the Filer's Divisions is an independent operation that is distinct from the other Divisions and is conducted on a very large scale.

18. Given the size, autonomy and complexity of each Division, granting the Exemption Sought and the Derivatives Exemption Sought allows each CCO to communicate and engage directly with the Division for which he/she is the designated CCO for more effective management of compliance programs tailored to the needs of the business. Not granting the Exemption Sought and the Derivatives Exemption Sought would have the detrimental effect of reducing the CCOs' effectiveness in this regard.

19. Each of the CCOs will oversee a compliance system that is designed to ensure that his/her respective Division, and each person acting on that Division's behalf, comply with applicable securities legislation and derivatives legislation and manage the risks associated with that Division in accordance with prudent business practices.

20. Upon the Exemption Sought and the Derivatives Exemption Sought being granted, each of the CCOs will have direct access to the UDP for his/her respective Division, will report as required to the Board and will comply in all other respects with applicable securities legislation and derivatives legislation, including the requirements set out in NI 31-103 and theDerivatives Regulation (Québec) and the Derivatives Act (Québec), respectively.

21. Allowing the Filer to designate and have registered three CCOs, one for each of its Divisions, is:

(a) consistent with the policy objectives of the CCO Requirement and the Derivatives CCO Requirement;

(b) consistent with the Prior Director's Decision; and

(c) consistent with other decisions of the principal regulator granted in similar circumstances, for example the decision dated May 17, 2012 In the Matter of TD Asset Management Inc., which granted the filer exemptive relief to designate and register two CCOs, one for each of its two distinct lines of business.

22. While the Filer is not aware of exemptive relief being granted to permit a registered firm to designate and register three CCOs, there is no public policy basis on which such exemptive relief should be denied when the same rationale for permitting the designation and registration of two CCOs applies, namely that there are distinct lines of business of a large scale that warrant separate CCOs. This was recognized in a slightly different context in the decision dated January 19, 2011In the Matter of TD Waterhouse Canada Inc., where the filer was permitted to designate and register three UDPs, one for each of its three distinct lines of business.

Decision

Each of the principal regulator and the Derivatives Decision Maker is satisfied that the decision meets the test set out in the Legislation and the Derivatives Act (Québec) for the principal regulator and the Derivatives Decision Maker, respectively, to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted so that the Filer may have a separate CCO for each of its three Divisions, provided that:

(a) each Division shall have its own CCO;

(b) only one individual is the CCO of each Division;

(c) each CCO reports to the UDP of the Division for which he/she is the designated CCO;

(d) each CCO fulfills the responsibilities set out in section 5.2 of NI 31-103, or any successor provision thereto, in respect of the Division for which he/she is the designated CCO;

(e) each CCO has direct access to the Board;

(f) this decision will terminate two years from the date hereof to provide the Filer with the opportunity to integrate the compliance systems of the retail Divisions, namely the ScotiaMcLeod Division and the HollisWealth Division; and

(g) the Prior Director's Decision will not be relied upon by the Filer to exempt the Filer from the CCO Requirement.

The decision of the Derivatives Decision Maker under the Derivatives Act (Québec) is that the Derivatives Exemption Sought is granted so that the Filer may have a separate CCO for each of its three Divisions, provided that:

(a) each Division shall have its own CCO;

(b) only one individual is the CCO of each Division;

(c) each CCO reports to the UDP of the Division for which he/she is the designated CCO;

(d) each CCO fulfills the responsibilities set out in section 11.11 of the Derivatives Regulation (Québec), or any successor provision thereto, in respect of the Division for which he/she is the designated CCO;

(e) each CCO has direct access to the Board; and

(f) this decision will terminate two years from the date hereof to provide the Filer with the opportunity to integrate the compliance systems of the retail Divisions, namely the ScotiaMcLeod Division and the HollisWealth Division.

"Marrianne Bridge"
Deputy Director, Compliance and Registrant Regulation
Ontario Securities Commission

 

Schedule "A"

(See attached Prior Director's Decision)

February 19, 2010

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 SCOTIA CAPITAL INC., BMO NESBITT BURNS INC., CIBC WORLD MARKETS INC. AND RBC DOMINION SECURITIES INC. (each a Filer or collectively, the Filers)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption for each Filer from the requirement contained in section 11.2 of National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103) to designate an individual to be the ultimate designated person (UDP) and the requirement contained in section 11.3 of NI 31-103 to designate an individual to be the chief compliance officer (CCO) and instead be permitted to designate and register two individuals as UDP and two individuals as CCO in respect of two distinct lines of securities business of 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 this application; and

(b) the Filers have provided notice that subsection 4.7(1) of Multilateral Instrument 11-102Passport System (MI 11-102) is intended to be relied upon in all of the jurisdictions in Canada outside of Ontario (the Non-principal Jurisdictions, or together with the Jurisdiction, the Filing 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 each Filer:

1. The Filer is registered under the Legislation in the category of investment dealer, is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and has its head office in Ontario.

2. The Filer is also registered as an investment dealer in each of the Non-principal Jurisdictions.

3. The Filer is not, to the best of its knowledge, in default of any requirements of securities legislation in any of the Filing Jurisdictions.

4. The Filer's business structure is organized as follows:

(a) There are two distinct lines of securities business based on the nature of the client (each a Division).

(b) One business line is referred to as the Institutional or Wholesale Banking Division (the Institutional Division) and provides a broad spectrum of services to institutional clients including equity, derivative and fixed income sales and trading; equity and fixed income research; investment banking; mergers and acquisitions and prime brokerage.

(c) The other business line is referred to as the Retail Division and provides discretionary managed and non-discretionary advisory and other wealth management related services to retail clients. In Scotia Capital Inc.'s case, the Retail Division also includes online brokerage.

(d) The Retail Division and the Institutional Division each have separate and distinct senior management structures. Although they are parts of the same corporate entity (i.e. the Filer), and regardless of the titles of their most senior managers (for purposes of this Order, the Division Heads), each Division is functionally a stand-alone operation within their parent bank's group of financial services companies.

(e) Currently, for purposes of IIROC requirements, each of the Retail Division and the Institutional Division has its own UDP except in the case of CIBC World Markets Inc. (CIBC WM) where there is a UDP for the Institutional Division and an Alternate Designated Person (ADP) for the Retail Division. The UDP or ADP is the Division Head. If exemptive relief is granted, CIBC WM will appoint a UDP for its Retail Division.

(f) At least one of the Division Heads has the title of Chief Executive Officer (CEO).

(g) Regardless whether a Division Head has the title of CEO (or "co-CEO"), the Division Heads have equivalent roles to that of a CEO in respect of the Division for which the Division Head is responsible. Each Division Head reports independently to the senior management team of the Filer's parent bank in respect of their Division and each has access to the Filer's Board of Directors.

(h) There is no line of reporting between the Division Heads and no other executive officer of the Filer who has the authority to overrule a decision of either or both of them.

(i) There is a separate compliance department with its own CCO for each of the Retail Division and the Institutional Division and each CCO has access to their Division Head and regularly provides reports to the Board of Directors.

This decision is also based on the following facts represented by the Filers.

UDP Requirement

1. NI 31-103 was implemented on September 28, 2009 (the Implementation Date).

2. Under paragraph 11.2(a) of NI 31-103, a registered firm is required to designate an individual to be the UDP (theUDP Requirement) and the UDP must be the CEO or equivalent of the registered firm.

3. Under section 16.8 of NI 31-103, there is a 3-month transition period from the Implementation Date for a registered firm to comply with the UDP Requirement.

4. Prior to the implementation of NI 31-103, there was no requirement under the securities legislation of any Filing Jurisdiction for an investment dealer to designate an individual, and have him or her registered, as the UDP.

5. Prior to the implementation of NI 31-103, under IIROC Rules, there was a requirement for a member to have a UDP which had to be one of the member's senior management. IIROC Rule 38 required a member to appoint a senior management person to the UDP position but did not require the person to be the CEO.

6. Prior to the implementation of NI 31-103, each Filer was permitted by IIROC to have two individuals in the position of UDP. Each Filer, except CIBC WM, has had two UDPs for a number of years -- one for the Retail Division and one for the Institutional Division. CIBC WM has had the UDP and ADP structure, which is functionally equivalent to having two UDPs, for many years as well.

7. Designating only one of the Division Heads for purposes of satisfying the UDP Requirement would not be consistent with the policy objectives it is intended to achieve because the Division Heads are effectively CEOs of their Divisions.

CCO Requirement

1. Under section 11.3 of NI 31-103, a registered firm is required to designate an individual to be the CCO (the CCO Requirement).

2. Under subsection 16.9(1) of NI 31-103, there is a 3-month transition period from the Implementation Date for a registered firm to comply with the CCO Requirement.

3. Prior to the implementation of NI 31-103, there was a requirement under the securities legislation of many of the Filing Jurisdictions to designate a registered partner or officer as the "compliance officer" who was responsible for discharging the obligations of the registered dealer under the applicable securities legislation.

4. Prior to the implementation of NI 31-103, under IIROC rules, there was a requirement for a member to appoint a senior officer to the position of Chief Compliance Officer (as defined under IIROC Rules).

5. Prior to the Implementation Date, each Filer was permitted by IIROC to have two individuals fulfil the role of Chief Compliance Officer under IIROC rules that is equivalent to the role of CCO under NI 31-103. Consequently, each Filer has had two CCOs, one for the Retail Division and one for the Institutional Division, for a number of years.

6. In section 5.2 of Companion Policy 31-103CP Registration Requirements and Exemptions, 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."

7. Designating only one of the current CCOs for purposes of satisfying the CCO Requirement would not be consistent with the policy objectives it is intended to achieve because the Divisions are independent operations that are distinct from one another in kind and conducted on a very large scale.

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 Exemption Sought is granted to each Filer provided that in respect of each Filer:

(i) each Division shall have its own UDP, who shall be its Division Head; and

(ii) each Division shall have its own CCO.

"Erez Blumberger"
Deputy Director, Registrant Regulation
Ontario Securities Commission