J.P. Morgan Securities LLC
Headnote
U.S. registered broker-dealer exempted from dealer and adviser registration requirements in section 25 of the Act to allow the Filer to conduct trading and advising activities with "Additional Category Permitted Clients" on the same terms and conditions as if the Filer had relied on the international dealer and international adviser exemptions in NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations -- "Additional Category Permitted Clients" includes certain family trusts, similar to clause (w) added to the "accredited investor" definition in NI 45-106 Prospectus Exemptions in May 2015 -- requested relief intended to benefit individual permitted clients in Canada in that it allows the Filer to provide services to individual permitted clients and their immediate family members collectively as a family unit, allowing the individual permitted client to make use of a family trust or otherwise organize their financial affairs in an efficient manner for estate planning, business succession planning, charitable or other purposes.
Applicable Legislative Provisions
Statutes Cited
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1), 25(3), and 74(1).
Instruments Cited
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 1.1 definition of "permitted client" and ss. 8.18 and 8.26.
National Instrument 45-106 Prospectus Exemptions, clause (w) of the definition of "accredited investor" in s. 1.1 of NI 45-106.
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 J.P. MORGAN SECURITIES LLC (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer (the Application) for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filer from
(a) the dealer registration requirement under the Legislation in respect of trades in Prescribed Securities (as defined below) to, with or on behalf of Additional Category Permitted Clients (as defined below) on the same terms and conditions as would apply to the Filer as if the Filer had made the trades to, with or on behalf of a permitted client (as defined below) in reliance on the international dealer exemption (as defined below) in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103); and
(b) the adviser registration requirement under the Legislation in respect of advising Additional Category Permitted Clients in respect of investing in or buying or selling Prescribed Securities on the same terms and conditions as would apply to the Filer as if the Filer had provided such advice to a permitted client in reliance on the international adviser exemption (as defined below) in NI 31-103 (collectively, the Exemptions Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (OSC) 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 each of the other provinces of Canada (the Passport Jurisdictions and together with the Jurisdiction, 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.
For the purposes of this decision, the following terms have the following meaning:
"Additional Category Permitted Client" means any of the following:
(a) a trust established by a permitted client for the benefit of the permitted client's family members of which a majority of the trustees are permitted clients and all of the beneficiaries are the permitted client's spouse, a former spouse of the permitted client, or a parent, grandparent, brother, sister, child or grandchild of that permitted client, of that permitted client's spouse or of that permitted client's former spouse;
(b) an individual who is not a permitted client under clause (o) of the definition of "permitted client" in NI 31-103 but who, together with a spouse and/or a family trust as described in clause (a) above established by the individual or the individual's spouse, beneficially own financial assets, as defined in section 1.1 of National Instrument 45-106 Prospectus Exemptions (NI 45-106), having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5 million;
(c) a person or company that distributes securities of its own issue in Canada only to persons or companies who are permitted clients or who are referred to in clauses (a) and (b) above;
"foreign security" has the meaning ascribed to that term in subsection 8.18(1) of NI 31-103;
"international adviser exemption" means the exemption in section 8.26 of NI 31-103;
"international dealer exemption" means the exemption in section 8.18 of NI 31-103;
"permitted client" means a "permitted client" as defined in section 1.1 of NI 31-103;
"Prescribed Security" means a foreign security or other security that may be traded by a person or company to a permitted client in reliance on the international dealer exemption in NI 31-103 or in respect of which a person or company may provide advice to a permitted client in reliance on the international adviser exemption in NI 31-103.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a limited liability company incorporated under the laws of the State of Delaware. Its head office is located at 383 Madison Avenue, New York, NY 10179, USA. It is a wholly owned subsidiary of J.P. Morgan Securities Holdings LLC, a Delaware limited liability company, and an indirect wholly owned subsidiary of J.P. Morgan Chase & Co. (JPM Chase), a Delaware corporation.
2. The Filer is registered as a broker-dealer with the U.S. Securities and Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization. This registration subjects the Filer to requirements over regulatory capital, lending of money, extension of credit and provision of margin, financial reporting to the SEC and FINRA, and segregation and custody of assets, as well as conduct rules, which provide protections that are substantially similar to the protections provided by the rules to which dealer-members of the Investment Industry Regulatory Organization of Canada (IIROC) are subject.
3. The Filer is a member of a number of major U.S. securities exchanges, including the New York Stock Exchange and NASDAQ.
4. The Filer provides a variety of capital raising, investment banking, market making, brokerage, and advisory services, including fixed income and equity sales and research, commodities trading, foreign exchange sales, emerging markets activities, securities lending and derivatives dealing for governments, corporate and financial institutions.
5. J.P. Morgan Securities Canada Inc. (JPMSCI) is an affiliate of the Filer. JPMSCI is registered as an investment dealer in each of the provinces of Canada, and as a derivatives dealer in Quebec, and is a dealer member of IIROC.
6. The Filer is currently relying on the international dealer exemption in NI 31-103 in each of the Jurisdictions to trade Prescribed Securities with permitted clients without being registered as a dealer and the international adviser exemption in NI 31-103 to provide advice in respect of Prescribed Securities to permitted clients without being registered as an adviser.
7. The definition of permitted client in NI 31-103 includes various categories that are generally similar to corresponding categories of the definition of "accredited investor" in subsection 73.3(1) of the Securities Act (Ontario) (OSA) and s. 1.1 of NI 45-106. However, as a result of minor differences in drafting, it appears that the categories in the definition of permitted client in NI 31-103 do not include certain persons or companies included in the corresponding categories in the definition of "accredited investor" in NI 45-106.
8. Specifically, under clause (o) of the definition of "permitted client" in section 1.1 of NI 31-103, "permitted client" includes "an individual who beneficially owns financial assets, as defined in section 1.1 of NI 45-106, having an aggregated realizable value that, before taxes but net of any related liabilities, exceeds $5 million" (an Individual Permitted Client).
9. The financial test under clause (o) only applies to the Individual Permitted Client, and not to a spouse of the Individual Permitted Client. Under clause (o) as it is currently written a spouse of the Individual Permitted Client would also be required to satisfy the financial test under clause (o) separately.
10. Additionally, trusts are often used by individual investors for estate planning, business succession planning, charitable and other purposes. Under the current definition of "permitted client", the only category that applies to a trust is clause (q) (i.e., a person or company, other than an individual or an investment fund, that has net assets of at least $25 million as shown on its most recently prepared financial statements). Therefore, in order to qualify as a "permitted client", a trust would be required to meet the $25 million net asset test. This is too restrictive because it would exclude many family-oriented trusts, including most spousal trusts.
11. On or about May 5, 2015, the definition of "accredited investor" in s. 1.1 of NI 45-106 was amended to include new clause (w):
(w) a trust established by an accredited investor for the benefit of the accredited investor's family members of which a majority of the trustees are accredited investors and all of the beneficiaries are the accredited investor's spouse, a former spouse of the accredited investor or a parent, grandparent, brother, sister, child or grandchild of that accredited investor, of that accredited investor's spouse or of that accredited investor's former spouse;
12. However, a corresponding change has not been made to the definition of "permitted client" in NI 31-103.
13. The Filer currently has Canadian clients who are Individual Permitted Clients and would like to establish relationships with prospective Canadian clients who may not qualify as Individual Permitted Clients because they are unable to satisfy the financial test under clause (o). Such current and prospective Canadian clients often want to receive trading and advisory services for their spouses as part of an integrated family wealth management and tax and succession planning program.
14. There are many possible scenarios in which a Canadian client and his or her spouse may collectively satisfy the financial test, but fail to do so individually, including where:
(a) the Canadian client accumulated the bulk of the family's assets and has sole beneficial ownership of those assets, so that the Canadian client qualifies as an Individual Permitted Client;
(b) the Canadian client accumulated the bulk of the family's assets but put those assets in the name of his or her spouse, so that the spouse qualifies as an Individual Permitted Client; and
(c) the family's assets are divided among the family members so that no individual family member satisfies the financial test to qualify as an Individual Permitted Client, but the family unit satisfies the financial test collectively.
15. In the above scenarios, one or more members of the family unit fail to satisfy the financial test and therefore do not qualify as an Individual Permitted Client. As a result, the Filer is prohibited under the terms of the international dealer exemption and the international adviser exemption from servicing such family members individually or collectively as a family unit.
16. The Filer wishes to treat (i) Canadian clients that are Individual Permitted Clients and their spouses, and (ii) Canadian clients that do not qualify as Individual Permitted Clients, but who collectively with their family members satisfy the financial test under clause (o) of the definition of "permitted client", as applicable, as a single investing unit for purposes of the international dealer exemption and the international adviser exemption, regardless of the actual ownership allocation.
17. Similarly, the Filer wishes to treat Canadian clients that are Individual Permitted Clients and their family trusts as described in clause (a) of the definition of "Additional Category Permitted Client" as a single investing unit. In determining whether a trust is a family trust as described in clause (a) of the definition of "Additional Category Permitted Client", the Filer will take reasonable steps to confirm that
(a) a majority of the trustees are permitted clients;
(b) actions by the trustees require consent of at least a majority of the trustees; and
(c) all of the beneficiaries of the trust are within the class of persons described in clause (a) of the definition of "Additional Category Permitted Client".
18. The Filer is a "market participant" as defined under the Legislation. As a market participant, among other requirements, the Filer is required to comply with the record keeping and provision of information provisions under the Legislation, which include the requirement to keep such books, records and other documents (a) as are necessary for the proper recording of business transactions and financial affairs, and the transactions executed on behalf of others, (b) as may otherwise be required under Ontario securities law, and (c) as may reasonably be required to demonstrate compliance with Ontario securities laws, and to deliver such records to the OSC if required.
19. The Filer is in compliance in all material respects with U.S. securities laws. The Filer is not in default of securities legislation in any jurisdiction in Canada.
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 Exemptions Sought are granted provided that
(a) in the case of the exemption from the dealer registration requirement, the Filer complies with the terms and conditions of the international dealer exemption as if the Filer had made the trades to, with or on behalf of a permitted client in reliance on the international dealer exemption; and
(b) in the case of the exemption from the adviser registration requirement, the Filer complies with the terms and conditions of the international adviser exemption as if the Filer had provided such advice to a permitted client in reliance on the international adviser exemption;
(c)
It is further the decision of the principal regulator that this decision shall expire on the date that is the earlier of
(a) the date on which amendments to NI 31-103 come into force that address the subject matter of this decision; and
(b) five years after the date of this decision.
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"Grant Vingoe"
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"Tim Moseley"
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Vice-Chair
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Vice-Chair
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Ontario Securities Commission
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Ontario Securities Commission
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