Piper Jaffray & Co.
Headnote
Multilateral Instrument 11-102 subsection 4.7(1) -- US broker-dealer applied as or registered as restricted dealer -- Variation of prior relief granted to filer permitting it to file SEC Form X-17a-5 (FOCUS Report) in lieu of Form 31-103F1 -- Condition that the filer not guarantee any debt of a third party removed -- Representation that the filer will, in the event that it provides a guarantee of any debt of a third party, deduct the total amount of the guarantee from its excess net capital on the FOCUS Report, consistent with the requirements of SEC Rule 15c3-1 -- 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 -- Filer to deliver the annual financial statements that it files with the SEC and FINRA -- Filer 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 the Filer's financial statements expresses an unmodified opinion on the supplemental information -- Exemption Sought shall expire when Filer's registration as a restricted dealer is terminated or revoked or on December 31, 2013.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 14-101 Definitions.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 12.1, 12.10, 15.1.
National Instrument 52-107 Acceptable Accounting Principles and Accounting Standards, ss. 3.15, 5.1.
October 9, 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
PIPER JAFFRAY & CO.
(the Filer)
DECISION
BACKGROUND
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):
(a) to vary the decision (the Previous Decision) it granted to the Filer on November 4, 2011 (the FOCUS Relief) which permits the Filer to deliver the Form X-17a-5 (the FOCUS Report) that it files with the United States (U.S.) Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) regarding the calculation of its net capital in lieu of delivering Form 31-103F1 Calculation of Net Working Capital (Form 31-103F1) as required by NI 31-103 by removing condition (e) which reads "the Filer does not guarantee any debt of a third party" and, instead, adding the following representation:
"SEC Rule 15c3-1 requires that the Filer account for any guarantee or debt of a third party in calculating its excess net capital. Accordingly, the Filer will, in the event that it provides a guarantee of any debt of a third party, deduct the total amount of the guarantee from its excess net capital on the FOCUS Report, consistent with the requirements of SEC Rule 15c3-1."
(the FOCUS Variation Relief)
(b) exempting the Filer from:
(i) 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
(ii) 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 Filer delivers to the regulator the annual audited financial statements that it files with the SEC and FINRA (the Financial Statements Relief)
(collectively, the Exemptions 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 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 Ontario, Quebec, British Columbia and Manitoba (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 facts set out in paragraphs 1 to 10 under "Representations" in the Previous Decision, as well as the following additional facts represented by the Filer:
Financial Statements Relief
1. The Filer is a corporation formed under the laws of the State of Delaware. Its head office is located at 800 Nicollet Mall Minneapolis, MN 55402-7020.
2. The Filer is a direct wholly-owned subsidiary of the Piper Jaffray Companies.
3. The Filer is registered as a broker-dealer with the SEC, and is a member of the FINRA. The Filer is a member of a number of major U.S. securities exchanges, including the New York Stock Exchange (NYSE) and NASDAQ.
4. The Filer is relying on the international dealer exemption under s. 8.18 of NI 31-103 (International Dealer Exemption) in Manitoba, Quebec, Ontario and British Columbia.
5. The Filer is registered as a restricted dealer, with terms and conditions, in Ontario and Quebec. The Filer has applied to be registered as a restricted dealer, with terms and conditions, in British Columbia and Manitoba, and if registered will no longer rely on the International Dealer Exemption in British Columbia and Manitoba if so required.
6. The Filer provides a variety of capital raising, investment banking, market making, brokerage, and advisory services, including fixed income and equity sales and research, investment banking and derivatives dealing for governments, corporate, financial institutions and retail customers. The Filer also conducts proprietary trading activities.
7. The Filer has obtained relief from the principal regulator on October 29, 2010 exempting it 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).
8. The Filer has also obtained the FOCUS Relief on November 4, 2011.
9. The Filer is 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 Filer be filed with the SEC and FINRA.
10. The SEC currently permits the Filer to file audited consolidated annual financial statements that are prepared in accordance with U.S. GAAP.
11. 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.
12. The annual audited financial statements that the Filer prepares and files 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 Filer for the statement of financial position required. These are requirements under section 12.10 of NI 31-103.
13. The accounting principles and methods used to prepare the FOCUS Reports that the Filer delivers in lieu of Form 31-103F1 are consistent with the accounting principles and methods used to prepare the annual audited financial statements that the Filer files with the SEC and FINRA.
14. Audited supplemental information to the 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 the Filer and, therefore, achieve 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 Filer, if it were required to prepare and file unconsolidated annual audited financial statements.
Focus Variation Relief
15. The Filer guarantees an account (the Guarantee) for the benefit of Piper Jaffray Financial Products II (PJFP) at R.J. O'Brien (RJO). PJFP is a wholly-owned subsidiary of the Piper Jaffray Companies, that is utilized for certain derivative products used to hedge certain of the Filer's fixed income inventories and houses certain customer swap transactions. The Guarantee supports the trading account that PJFP maintains with RJO, a derivatives dealer, in the case of any failure to pay by PJFP.
16. The Filer obtained relief from the principal regulator on November 4, 2011 permitting it to deliver the Form X-17a-5 (the FOCUS Report) that it files with the SEC and FINRA regarding the calculation of its net capital in lieu of delivering Form 31-103F1 Calculation of Net Working Capital (Form 31-103F1) as required by NI 31-103.
17. The Previous Decision was granted with the condition that the Filer not guarantee any debt of a third party. It was an oversight of the Filer not to have raised the Guarantee at the time.
18. Such Guarantee is not currently reflected in the FOCUS Report but would be reflected in the FOCUS Report if there were any amount that the Filer had to pay on behalf of PJFP. This is a contingent arrangement that only arises if PJFP is unable to pay for its trades. If there were an amount that the Filer had to pay to RJO, an unsecured receivable from PJFP would be reflected on the Filer's balance sheet (and therefore would appear on the FOCUS Report). As of the date hereof, there has been no requirement to reflect this on the Filer's balance sheet and therefore nothing to record in the FOCUS Report.
19. SEC Rule 15c3-1 Net Capital Requirements for Brokers or Dealers requires that the Filer account for any guarantee or debt of a third party in calculating its excess net capital. Accordingly, the Filer will, in the event that it provides a guarantee of any debt of a third party, deduct the total amount of the guarantee from its excess net capital on the FOCUS Report, consistent with the required treatment of such guarantee under Form 31-103F1.
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) the Filer will, in the event that it provides a guarantee of any debt of a third party, deduct the total amount of the guarantee from its excess net capital on the FOCUS Report, consistent with the requirements of SEC Rule 15c3-1.
(b) the 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;
(c) by virtue of the registration referred to in paragraph (b), including required membership in one or more self-regulatory organizations, the Filer is subject to SEA Rule 17a-5 for the preparation of annual financial statements;
(d) the 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;
(e) the 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;
(f) the Filer continues to be able to rely on the relief previously obtained permitting it to deliver the unconsolidated FOCUS Report that it files with the SEC and FINRA regarding the calculation of its net capital in lieu of delivering Form 31-103F1 as required by NI 31-103 and the Filer selects Box 199 ("Unconsolidated") on the FOCUS Report;
(g) the 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
(h) the auditor's report relating to the Filer's financial statements expresses an unmodified opinion on the supplemental information referred to in (g).
It is further the decision of the principal regulator that the Margin Relief, the FOCUS Relief and the Exemptions Sought shall expire on the date that is the earlier of:
(i) the date that the Filer's registration as a restricted dealer is terminated or revoked; and
(j) December 31, 2013.