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. The firm employing the individual as a registered representative is an owner of the second registered firm and entitled to appoint a director to its board. The individual will have sufficient time to adequately serve both firms. The potential for conflicts of interest is significantly reduced compared to other similar arrangements because of the firms’ business models; the first firm is a traditional investment dealer and the second firm operates as an alternative trading system under National Instrument 21-101 Marketplace Operation. The firms 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.
January 15, 2019
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
SCOTIA CAPITAL INC.
OLA FREDRIK NILSSON
The principal regulator in the Jurisdiction has received an application from SCI and CanDeal (together, the Filers) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for relief from the restrictions in paragraph 4.1(1)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), pursuant to section 15.1 of NI 31-103, to permit Ola Fredrik Nilsson (the Representative) to be registered as a dealing repre-sentative of SCI while also acting as a director of CanDeal (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 sub-section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec, Saskatchewan, and Yukon (with Ontario, the Jurisdictions).
Terms defined in 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 represented by the Filers:
1. SCI is a wholly-owned subsidiary of The Bank of Nova Scotia.
2. SCI is a corporation incorporated under the laws of Ontario and is registered under the Legislation as an investment dealer and is a dealer member of the Investment Industry Regulatory Organization of Canada (IIROC).
3. The principal regulator of SCI is the Ontario Securities Commission (OSC) because SCI’s head office is located in Toronto, Ontario.
4. CanDeal is an Ontario corporation and is registered under the Legislation as an investment dealer and is a member of IIROC. CanDeal is regulated as an alternative trading system under National Instrument 21-101 Marketplace Operation (NI 21-101). The principal regulator of Can-Deal is the OSC because CanDeal’s head office is located in Toronto, Ontario.
5. CanDeal operates an institutional multi-dealer to customer electronic trading platform and market data communications network (the CanDeal System). The CanDeal System is a vehicle through which institutional clients (Clients) access information, request bids and offers, and effect transactions with liquidity providing dealers (Dealers). CanDeal also offers market data, post-trade straight-through processing, trade reporting, and other support to its Dealers and Clients.
6. CanDeal Dealers and Clients currently effect transactions using the CanDeal System in Canadian fixed-income securities and interest rate swaps.
7. The CanDeal System employs request-for-quote (RFQ) electronic trading functionality for the execution of trades. The CanDeal System displays indicative quotes on fixed-income products that are made available on the CanDeal System. Transactions on the CanDeal System are initiated by an RFQ disseminated by a Client to between one and four Dealers. A Dealer to whom an RFQ is disseminated knows the number but not the identity of the Dealers to whom the RFQ is disseminated.
8. The CanDeal System permits a Dealer to view data relating to its own executed trades and certain aggregate data relating to all trades executed on the CanDeal System.
9. The aggregate data available to a Dealer permits the Dealer to know its share of total volume executed on the platform and its rank in terms of total volume executed by Dealers, but does not permit the Dealer to know the rank of or the volume executed by another Dealer on the platform. A Dealer may also access data as to the total volume inquired of by Clients in the aggregate under the RFQs and executed by Clients in the aggregate, in each case by each category of product made available on the CanDeal System.
10. The data that a Dealer may view relating to its own executed trades includes the total volume inquired of by the Dealer under RFQs received by it, the total and percentage of inquired volume represented by executed trades by that Dealer, the volume inquired of that was not quoted and the average time to respond to a quote. The Dealer may view such data for each Client with whom it has executed trades and may view the volume executed with each Client by product category and maturity range.
11. CanDeal is owned by TSX Inc. and six bank-owned investment dealers (each, a Shareholder-Dealer), which include SCI, RBC Dominion Securities Inc., CIBC World Markets Inc., TD Securities Inc., National Bank Financial Inc., and BMO Nesbitt Burns Inc.
12. Each Shareholder-Dealer is also a Dealer.
13. No functionality exists on the CanDeal System that could enable a Shareholder-Dealer to influence the actions of a Client to the benefit of that Shareholder-Dealer in relation to a trade.
14. No shareholder of CanDeal controls (as such term is interpreted in subsection 1.3(2) of NI 21-101) CanDeal.
15. CanDeal has no affiliates and, accordingly, is not affiliated with SCI, nor is SCI a related company of CanDeal within the meaning of the IIROC Dealer Member Rules.
16. CanDeal is governed by an executive management team, and a board of directors (Board) consisting of representatives from TSX Inc., each Shareholder-Dealer, CanDeal’s Chief Executive Officer, and one independent member. The Board meets on a quarterly basis.
17. The Representative is registered as a dealing representative of SCI. The Representative is Managing Director & Global Head, Fixed Income Trading & Latin American Foreign Exchange, with responsibility for Global Fixed Income Trading, Latin American foreign exchange trading, derivatives valuation adjustments, government finance, securitization and fixed income sales in Europe and Asia. He has responsibility for the trading and market risk for all fixed income products globally and all fixed income, commodities and currency products in Latin America for SCI, The Bank of Nova Scotia and their foreign trading affiliates.
18. As a dealing representative of SCI, the Repre-sentative may access the data referred to in paragraphs 8 to 10 above, as well as data pertaining to those of SCI’s trades or pending trades on the CanDeal System for which the Representative is responsible.
19. Neither a Dealer, nor a dealing representative, has access to any data relating to (i) the activity of any other identifiable Dealer on the CanDeal System or (ii) any identifiable Client other than in respect of the Dealer’s or dealing representative’s own trading activity with such Client.
20. In his role as dealing representative, the Repre-sentative has acquired comprehensive knowledge of the fixed-income trading environment and business, and, as such, is qualified to provide competent business counsel on issues relating to the institutional trading of fixed-income products and the institutional fixed-income markets generally.
21. The Representative has been nominated as a director of CanDeal.
22. It is anticipated that the Representative will spend four to six hours per quarter on CanDeal directorship duties. Accordingly, the Represen-tative will have sufficient time and resources to adequately meet his obligations to both SCI and CanDeal. The Chief Compliance Officer and Ultimate Designated Person of each Filer will ensure that the Representative has sufficient time and resources to adequately serve each Filer and the clients of SCI.
23. Due to the Representative’s fixed-income markets experience, there is no more suitable individual at SCI than the Representative to serve as SCI’s representative on the CanDeal Board.
24. The day-to-day operations of CanDeal are carried out by the executive management and employees of CanDeal. The Representative will not have any role in the day-to-day operations of CanDeal.
25. The directors of CanDeal are subject to a com-prehensive policy governing conflicts of interest (the Policy). The Policy specifically addresses the situation where a “nominee director”, that is a director appointed by a Shareholder-Dealer, has a conflict of interest or duty arising from the concurrent fiduciary duties he or she owes to CanDeal and to the Shareholder-Dealer.
26. The Policy proceeds from the principle that a nominee director of CanDeal owes an unqualified fiduciary duty to CanDeal. The Policy enforces the principle by providing that, where the Board determines that a director has a conflict of duty, the Board will adopt a protocol for managing the conflict which must include provisions relating to:
(a) whether the conflicted director must withdraw from Board meetings 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 (Information). Where the Board decides under the protocol that the director may not receive 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 director to be made aware of the nature of the Information, the director will not be notified of the nature of the Information.
27. To further protect CanDeal, the Policy requires that clear guidelines be established relating to:
(a) the circumstances in which Information may be passed on by a director to the Shareholder-Dealer who nominated him or her;
(b) the right of CanDeal to place an embargo on Information which must not be passed on because of its sensitivity; and
(c) acceptance by each Shareholder-Dealer of obligations of confidentiality in relation to any Information received.
28. SCI has appropriate compliance and supervisory policies and procedures to deal with any conflicts of interest that may arise as a result of the Representative being a director of CanDeal. The Representative is subject to these policies and procedures.
29. The Filers will be able to deal with any conflicts of interest that arise out of the Representative being a dealing representative of one firm and a director of the other firm, including supervising how the Representative will deal with these conflicts.
30. The potential for conflicts of interest or client confusion is mitigated by the following:
(a) None of the Shareholder-Dealers, inclu-ding SCI, is a competitor of CanDeal;
(b) Members of the Board serve without remuneration;
(c) The Representative will not be involved in the day-to-day operations of CanDeal;
(d) No functionality exists on the CanDeal System that could enable a Shareholder-Dealer to influence the actions of a Client to the benefit of that Shareholder-Dealer in relation to a trade; and
(e) At no time will CanDeal favour the interest of SCI as a result of the Representative being a member of its Board.
31. Neither SCI nor CanDeal is in default of securities, commodities or derivatives legislation in any Jurisdiction.
32. In the absence of the Exemption Sought, SCI would be prohibited under paragraph 4.1(1)(a) of NI 31-103 from permitting the Representative to act as a dealing representative of SCI and be a director of CanDeal.
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 circumstances described above remain in place.
Deputy Director, Compliance and Registrant Regulation
Ontario Securities Commission