Morgan Stanley & Co. LLC and Morgan Stanley Smith Barney LLC
Headnote
Multilateral Instrument 11-102 section 4.7(1) -- Exemption granted from requirement to prepare financial statements on an audited unconsolidated basis -- Exemption granted from requirements to provide annual financial statements on a comparative basis and that at least one director sign the statement of financial position -- Filers to deliver the annual financial statements that they file with the SEC and FINRA -- Relief conditional on the fact that the Filers were already granted relief to file unconsolidated FOCUS Reports in lieu of Form 31-103F1 -- Filers must append audited supplemental information to annual audited financial statements that corresponds with line 3480 through to and including line 3910 "Computation of Net Capital" in the FOCUS Report and the auditor's report relating to each Filer's financial statements expresses an unmodified opinion on the supplemental information -- The Margin Relief, the FOCUS Relief and the Exemption Sought shall expire on the date that is the earlier of the date that the Filers' registration as an exempt market dealer is terminated or revoked and December 31, 2013.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 12.10, 15.1.
National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, s. 3.15, 5.1.
July 11, 2012
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
MORGAN STANLEY & CO. LLC AND
MORGAN STANLEY SMITH BARNEY LLC
(collectively, the "Filers" and each, a "Filer")
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers (the Application) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting each of the Filers from:
(a) the requirements of subsection 3.15(b) Acceptable Accounting Principles for Foreign Registrants of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (NI 52-107) that financial statements be prepared in accordance with U.S. GAAP, except that any investments in subsidiaries, jointly controlled entities and associates must be accounted for as specified for separate financial statements in International Accounting Standard 27 Consolidated and Separate Financial Statements (IAS 27); and
(b) the requirements of section 12.10 Annual financial statements of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that the Filer prepare a statement of comprehensive income, a statement of changes in equity, a statement of cash flows and a statement of financial position for the financial year immediately preceding the most recently completed financial year and that at least one director of the Filer sign the Filer's statement of financial position;
so long as the Filers deliver to the regulator the annual audited financial statements that they file with the United States (U.S.) Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) (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 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the provinces and territories of Canada, other than Ontario (the Passport Jurisdictions, and together with the Jurisdiction, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions, National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards 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 Filers:
1. Morgan Stanley & Co. LLC (MS&Co) is a limited liability company governed by the laws of the State of Delaware, and is the successor to Morgan Stanley & Co. Incorporated. The head office of MS&Co is located in New York, New York, United States of America. MS&Co is an indirect, wholly-owned subsidiary of Morgan Stanley, a public company listed on the New York Stock Exchange. MS&Co is registered as a broker-dealer and investment adviser with the SEC and is a member of FINRA. MS&Co is a member of all major U.S. stock exchanges and U.S. commodity futures exchanges. MS&Co is registered as an exempt market dealer (EMD) in each of the provinces and territories of Canada.
2. Morgan Stanley Smith Barney LLC (MSSB) is a limited liability company governed by the laws of the State of Delaware. The head office of MSSB is located in Purchase, New York, United States of America. MSSB is a direct, wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (Holdings). MSSB is a joint venture between Morgan Stanley and Citigroup Inc., with Morgan Stanley's and Citigroup Inc.'s interest in the joint venture held through their indirect interests in Holdings. MSSB is registered as a broker-dealer and investment adviser with the SEC and is a member of FINRA. MSSB is a member of all major U.S. stock exchanges and U.S. commodity futures exchanges. MSSB is registered as an EMD in each of the provinces and territories of Canada.
3. The Filers have obtained relief from the principal regulator on September 28, 2010 exempting them from the requirement contained in section 13.12 of NI 31-103 that a registrant must not lend money, extend credit or provide margin to a client (the Margin Relief).
4. The Filers have also obtained relief from the principal regulator on November 15, 2011 which permits them to deliver the Form X-17a-5 (the FOCUS Report) that they file with the SEC and FINRA regarding the calculation of their net capital in lieu of delivering Form 31-103F1 Calculation of Net Working Capital (Form 31-103F1) as required by NI 31-103 (the FOCUS Relief).
5. The Filers are subject to certain U.S. reporting requirements under Rule 17a-5 Reports to Be Made by Certain Brokers and Dealers of the Securities and Exchange Act, 1934 (SEA Rule 17a-5), including the requirement to prepare and file annual audited financial statements. SEA Rule 17a-5 requires that the annual audited financial statements of the Filers be filed with the SEC and FINRA.
6. The SEC currently permits the Filers to file audited consolidated annual financial statements that are prepared in accordance with U.S. GAAP.
7. Section 12.10 of NI 31-103 provides that annual financial statements delivered to the regulator must include a statement of comprehensive income, a statement of changes in equity, a statement of cash flows and a statement of financial position for the most recently completed financial year and the financial year immediately preceding the most recently completed financial year, along with notes thereto. Further, section 12.10 of NI 31-103 also requires that the statement of financial position be signed by at least one director of the registered firm.
8. The annual audited financial statements that the Filers prepare and file with the SEC and FINRA are not required to include the statement of comprehensive income, the statement of changes in equity, the statement of cash flows and the statement of financial position for the financial year immediately preceding the most recently completed financial year , nor is a signature of at least one director of the Filers for the statement of financial position required. These are requirements under section 12.10 of NI 31-103.
9. The accounting principles and methods used to prepare the FOCUS Reports that the Filers deliver in lieu of Form 31-103F1 are consistent with the accounting principles and methods used to prepare the annual audited financial statements that each Filer files with the SEC and FINRA.
10. Audited supplemental information to each Filer's annual audited financial statements, as required by SEA Rule 17a-5, which includes supplemental information that corresponds with line 3480 through to and including line 3910 "Computation of Net Capital" in the FOCUS Report, along with the auditor's report which expresses an unmodified opinion on this supplemental information, would allow the regulator to assess the capital position of each Filer and, therefore, achieving the same regulatory outcomes as the requirements for annual audited financial statements prepared in accordance with subsection 3.15(b) of NI 52-107 and section 12.10 of NI 31-103. Accordingly, it would be burdensome and costly for the Filers, if they were required to prepare and file unconsolidated annual audited financial statements.
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 provided that:
(a) each Filer is registered, and in good standing, under the securities legislation of the United States in a category of registration that permits it to carry on the activities in the United States that registration as an investment dealer would permit it to carry on in the Jurisdictions;
(b) by virtue of the registration referred to in paragraph (a), including required membership in one or more self-regulatory organizations, each Filer is subject to SEA Rule 17a-5 for the preparation of annual financial statements;
(c) each Filer delivers to the principal regulator no later than the 90th day after the end of its respective financial year its annual financial statements prepared in accordance with U.S. GAAP as permitted by SEA Rule 17a-5;
(d) each Filer gives prompt written notice to the principal regulator if the Filer has received written notice from the SEC or FINRA of any material non-compliance in the preparation and filing of its annual financial statements pursuant to the requirements of SEA Rule 17a-5;
(e) each Filer continues to be able to rely on the relief previously obtained permitting them to deliver the unconsolidated FOCUS Report that they file with the SEC and FINRA regarding the calculation of their net capital in lieu of delivering Form 31-103F1 as required by NI 31-103 and each filer selects Box 199 ("Unconsolidated") on the FOCUS Report;
(f) each Filer appends audited supplemental information to its annual audited financial statements, as required by SEA Rule 17a-5, which includes supplemental information that corresponds with line 3480 through to and including line 3910 "Computation of Net Capital" in the FOCUS Report; and
(g) the auditor's report relating to each Filer's financial statements expresses an unmodified opinion on the supplemental information referred to in (f).
It is further the decision of the principal regulator that the Margin Relief, the FOCUS Relief and the Exemption Sought shall expire on the date that is the earlier of:
(a) the date that the Filers' registration as an EMD is terminated or revoked; and
(b) December 31, 2013.