Clear Street LLC
Headnote
U.S. registered broker-dealer exempted from the dealer registration requirement in subsection 25(1) of the Act to permit its provision of certain prime brokerage services (which do not include the execution of trades) -- Exemption limited to trades in "Canadian securities" (which the decision defines as a security that is not a "foreign security" as that term is defined in subsection 8.18(1) of NI 31-103) for certain (institutional) permitted clients -- Exemption is subject to a 5-year sunset clause.
Applicable Legislative Provisions
Statutes Cited
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 1(1), 19, 19(1), 19(2), 25(1), 74(1).
Instruments Cited
Multilateral Instrument 11-102 Passport System, ss. 4.4(c), 4.7, 4.7(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 1.1, 8.5, 8.18, 8.18(1), 8.18(2), 8.21, Form 31-103F1 Calculation of Excess Working Capital.
National Instrument 81-102 Investment Funds, Part 6.
Ontario Securities Commission Rule 13-502 Fees.
July 26, 2021
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 CLEAR STREET 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 the dealer registration requirement in respect of Prime Services (as defined below) relating to Canadian securities (as defined below) that are provided in Canada to Institutional Permitted Clients (as defined below) (the Exemption 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 British Columbia and Quebec (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 meanings:
"Canadian security" means a security that is not a foreign security;
"foreign security" has the meaning ascribed to that term in subsection 8.18(1) of NI 31-103;
"Institutional Permitted Client" means a "permitted client" as defined in section 1.1 of NI 31-103, except for: (a) an individual, (b) a person or company acting on behalf of a managed account of an individual, (c) a person or company referred to in paragraph (p) of that definition unless that person or company qualifies as an Institutional Permitted Client under another paragraph of that definition, or (d) a person or company referred to in paragraph (q) of that definition unless that person or company has net assets of at least $100 million as shown on its most recently prepared financial statements or qualifies as an Institutional Permitted Client under another paragraph of that definition.
"OSA" means the Securities Act (Ontario).
"Prime Services" means any of the following: (a) settlement, clearing and custody of trades, client cash and securities positions; (b) financing of long inventory; (c) lending and delivering securities on behalf of a client pursuant to a margin agreement to facilitate client short sales; (d) securities borrowing and/or lending pursuant to a securities lending agreement; (e) asset servicing, and (f) reporting of positions, margin and other balances and activity. For greater clarity, Prime Services do not include execution of trades in securities.
Representations
This Decision is based on the following facts represented by the Filer:
1. The Filer is a limited liability company formed under the laws of the State of Delaware. The head office of the Filer is in New York, New York, United States of America (U.S.). The Filer is a wholly owned subsidiary of Clear Street Holdings, LLC.
2. The Filer is registered as a broker-dealer with the SEC and is a member of the Financial Industry Regulatory Authority (FINRA). This registration and membership permits the Filer to provide Prime Services in the U.S. The Filer is also registered with the U.S. Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association (NFA).
3. The Filer is a member of the New York Stock Exchange, the NASDAQ Stock Market and certain other securities exchanges in the U.S.
4. The Filer provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Its businesses include securities lending and distribution, sales, trading and financing activities in equity securities and related products, and fixed income securities and related products.
5. The Filer relies on section 8.18 [International dealer] of NI 31-103 to provide trade execution services in respect of foreign securities with Canadian resident "permitted clients" as that term is defined in section 1.1 of NI 31-103.
6. The Prime Services provided by the Filer consist of any the following: (a) custody of client cash and securities positions, (b) financing of client long inventory, (c) securities financing consisting of delivering securities on behalf of a client pursuant to a margin agreement or securities lending agreement to facilitate client short sales, (d) asset servicing, and (e) reporting of positions, margin and other balances and activity. For greater clarity, Prime Services do not include execution of trades in securities.
7. The Filer wishes to provide Prime Services in the Jurisdictions to Institutional Permitted Clients (the Prime Services Clients) in respect of Canadian securities in addition to foreign securities.
8. In the case of a Prime Services Client that is an investment fund subject to Part 6 of National Instrument 81-102 Investment Funds (NI 81-102), the custodianship requirements in Part 6 of NI 81-102 would only permit the Filer to provide the Prime Services to the investment fund as a sub-custodian of the investment fund in respect of portfolio assets held outside Canada, and the Filer would provide Prime Services to an investment fund in compliance with the securities laws applicable to the investment fund, including Part 6 of NI 81-102 and the custody requirements set out in NI 31-103.
9. Prime Services Clients seek Prime Services from the Filer in order to separate the execution of a trade from the clearing, settlement, custody and financing of the trade. This allows the Prime Services Client to use many executing brokers, without maintaining an active, ongoing custody account with each executing broker. It also allows the Prime Services Client to consolidate settlement, clearing, custody and financing of securities in an account with the Filer.
10. The Filer's Prime Services Clients directly select their executing brokers. The Filer does not require its Prime Services Clients to use specific executing brokers through which Prime Services Clients must execute trades. Prime Services Clients send trade orders to the executing broker who carries out the trade. The executing broker will be an appropriately registered dealer or a person or company relying on an exemption from the dealer registration requirement that permits such executing broker to execute the trade for Prime Services Clients.
11. The Filer provides the Prime Services after the execution of the trade, but any commitment to provide financing or to lend or borrow securities in relation to a trade may be made prior to the execution of the trade. The executing broker will communicate the trade details to a Prime Services Client and the Filer or the Filer's clearing agent, as applicable. A Prime Services Client will also communicate the trade details to the Filer. For trades executed on a Canadian marketplace, the Filer will typically need to clear and settle the trades through a participant of the Canadian depository, clearing and settlement hub, CDS Clearing and Depository Services Inc.
12. The Filer exchanges money or securities and holds the money or securities in an account for each Prime Services Client. If the Filer is clearing and settling the trade through a clearing agent, the Filer's clearing agent exchanges money or securities and holds the money or securities in an omnibus account for the Filer, who in turn maintains a record of the position held for the Prime Services Client on its books and records.
13. On or following settlement, the Filer provides the other Prime Services as set out in paragraph 6.
14. The Filer enters into written agreements with each of its Prime Services Clients for the provision of Prime Services.
15. The Filer is relying on the "international dealer exemption" under section 8.18 [International dealer] of NI 31-103 in the Jurisdictions to provide Prime Services in respect of foreign securities.
16. The Filer is not registered under NI 31-103, is in the business of trading, and, in the absence of the Exemption Sought, cannot provide the full range of Prime Services in the Jurisdictions in respect of Canadian securities without registration, except as permitted under section 8.5 [Trades through or to a registered dealer], under the exemptions found in paragraphs (a), (b) and (f) of subsection 8.18(2) [International dealer], or under section 8.21 [Specified debt] of NI 31-103.
17. The Filer is subject to regulatory capital requirements under the 1934 Act, specifically SEC Rule 15c3-1 Net Capital Requirements for Brokers or Dealers (SEC Rule 15c3-1) and SEC Rule 17a-5 Reports to be Made by Certain Brokers and Dealers (SEC Rule 17a-5).
18. SEC Rule 15c3-1 requires that the Filer account for any guarantee of debt of a third party in calculating its excess net capital when a loss is probable and the amount can be reasonably estimated. Accordingly, the Filer will, in the event that it provides a guarantee of any debt of a third party, take a deduction from net capital when both of the preceding conditions exist. The Filer does not currently guarantee the debt of any third party.
19. SEC Rule 15c3-1 is designed to provide protections that are substantially similar to the protections provided by the capital formula requirements and specifically risk-adjusted capital to which dealer members of the Investment Industry Regulatory Organization of Canada (IIROC) are subject. The Filer is in compliance with SEC Rule 15c3-1 and is in compliance in all material respects with SEC Rule 17a-5. If the Filer's net capital declines below the minimum amount required, the Filer is required to notify the SEC and FINRA pursuant to SEC Rule 17a-11 Notification Provisions for Brokers and Dealers (SEC Rule 17a-11). The SEC and FINRA have the responsibility to provide oversight over the Filer's compliance with SEC Rule 15c3-1 and SEC Rule 17a-5.
20. The Filer is required to prepare and file a financial report, which includes Form X-17a-5 (the FOCUS Report) which is the financial and operational report containing a net capital calculation, and a compliance report annually with the SEC and FINRA pursuant to SEC Rule 17a-5(d). The FOCUS Report provides a more comprehensive description of the business activities of the Filer, and more accurately reflects those activities including client lending activity, than would be provided by Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1) under NI 31-103. The net capital requirements computed using methods prescribed by SEC Rule 15c3-1 are based on all assets and liabilities on the books and records of a broker-dealer whereas Form 31-103F1 is a calculation of excess working capital, which is a computation based primarily on the current assets and current liabilities on the books and records of the dealer. The Filer is up-to-date in its submissions of annual reports under SEC Rule 17a-5(d), including the FOCUS Report.
21. The Filer is subject to regulations of the Board of Governors of the U.S.A. Federal Reserve Board (FRB), the SEC, and FINRA regarding the lending of money, extension of credit and provision of margin to clients (the U.S. Margin Regulations) that provide protections that are substantially similar to the protections provided by the requirements regarding the lending of money, extension of credit and provision of margin to clients to which dealer members of IIROC are subject. In particular, the Filer is subject to the margin requirements imposed by the FRB, including Regulation T, and under applicable SEC rules and under FINRA Rule 4210. The Filer is in compliance in all material respects with applicable U.S. Margin Regulations.
22. The Filer holds customer assets in accordance with Rule 15c3-3 of the 1934 Act (SEC Rule 15c3-3). SEC Rule 15c3-3 requires the Filer to segregate and keep segregated all "fully-paid securities" and "excess margin securities" (as such terms are defined in SEC Rule 15c3-3) of its customers from its proprietary assets. In addition to the segregation of customers' securities, SEC Rule 15c3-3 requires the Filer to deposit an amount of cash or qualified government securities determined in accordance with a reserve formula set forth in SEC Rule 15c3-3 in an account entitled "Special Reserve Account for the Exclusive Benefit of Customers" of the Filer at separate banks and/or custodians. The combination of segregated securities and cash reserve are designed to ensure that the Filer has sufficient assets to cover all net equity claims of its customers and provide protections that are substantially similar to the protections provided by the requirements to which dealer members of IIROC are subject. If the Filer fails to make an appropriate deposit, the Filer is required to notify the SEC and FINRA pursuant to SEC Rule 15c3-3(i). The Filer is in material compliance with the possession and control requirements of SEC Rule 15c3-3.
23. The Filer is a member of the Securities Investors Protection Corporation (SIPC) and, subject to the eligibility criteria of SIPC, Prime Services Clients' assets held by the Filer are insured by SIPC against loss due to insolvency.
24. 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.
25. The Filer submits that the Exemption Sought would not be prejudicial to the public interest because:
(a) the Filer is regulated as a broker-dealer under the securities legislation of the U.S., and is subject to the requirements listed in the above paragraphs 17 to 23;
(b) the availability of and access to Prime Services in respect of Canadian securities is important to Canadian institutional investors who are active participants in the international marketplace;
(c) the Filer will provide Prime Services in the Jurisdictions in respect of Canadian securities only to Institutional Permitted Clients;
(d) the OSC has entered into a memorandum of understanding with the SEC regarding mutual assistance in the supervision and oversight of regulated entities that operate on a cross-border basis in the U.S. and Canada; and
(e) the OSC has entered into a memorandum of understanding with FINRA to provide a formal basis for the exchange of regulatory information and investigative assistance.
26. The Filer is a "market participant" as that term is defined in the OSA. As a market participant, among other requirements, the Filer is required to comply with the record keeping and provision of information provisions under section 19 of the OSA, which include the requirement to keep such books, records and other documents as are necessary for the proper recording of its business transactions and financial affairs and transactions it executes on behalf of others and to deliver such records to the OSC if required.
27. If in the future the Filer wishes to offer Prime Services in Alberta, the Filer will not rely on subsection 4.7(1) of MI 11-102 to passport this decision into in Alberta.
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 so long as the Filer:
(a) has its head office or principal place of business in the U.S.;
(b) is registered as a broker-dealer under the securities legislation of the U.S., which permits the Filer to provide the Prime Services in the U.S.;
(c) is a member of FINRA;
(d) is a member of SIPC;
(e) is subject to requirements over regulatory capital, lending of money, extension of credit, provision of margin, financial reporting to the SEC and FINRA, and segregation and custody of assets which provide protections that are substantially similar to the protections provided by the rules to which dealer members of IIROC are subject;
(f) limits its provision of Prime Services in the Jurisdictions in respect of Canadian securities to Institutional Permitted Clients;
(g) does not execute trades in Canadian securities with or for Prime Services Clients, except as permitted under applicable Canadian securities laws;
(h) does not require its Prime Services Clients to use specific executing brokers through which Prime Services Clients must execute trades;
(i) notifies the OSC of any regulatory action initiated after the date of this decision in respect of the Filer, or any predecessors or specified affiliates of the Filer, by completing and filing with the OSC Appendix "A" hereto within ten days of the commencement of any such action; provided that the Filer may also satisfy this condition by filing with the OSC within ten days of the date of this decision a notice making reference to and incorporating by reference the disclosure made by the Filer pursuant to U.S. federal securities laws that is identified in the FINRA BrokerCheck system, and any updates to such disclosure that may be made from time to time, and by providing notification, in a manner reasonably acceptable to the Director, of any filing of a Form BD "Regulatory Action Disclosure Reporting Page";
(j) submits the financial report and compliance report as described in SEC Rule 17a-5(d) to the OSC on an annual basis, at the same time such reports are filed with the SEC and FINRA;
(k) submits audited financial statements to the OSC on an annual basis, within 90 days of the Filer's financial year end;
(l) submits to the OSC immediately a copy of any notice it files under SEC Rule 17a-11 or under SEC Rule 15c3-3(i) with the SEC and FINRA;
(m) complies with the filing and fee payment requirements that would be applicable to the Filer if it were a registrant firm under OSC Rule 13-502 Fees;
(n) files in an electronic and searchable format with the OSC such reports as to any or all of its trading activities in Canada as the OSC may, upon notice, require from time to time; and
(o) pays the increased compliance and case assessment costs of the principal regulator due to the Filer's location outside Ontario, including, as required, the reasonable cost of hiring a third party to perform a compliance review on behalf of the principal regulator.
This decision shall expire five years after the date hereof.
This decision may be amended by the OSC from time to time upon prior written notice to the Filer.
APPENDIX "A"{1}
NOTICE OF REGULATORY ACTION
Has the firm, or any predecessors or specified affiliates of the firm entered into a settlement agreement with any financial services regulator, securities or derivatives exchange, SRO or similar agreement with any financial services regulator, securities or derivatives exchange, SRO or similar organization?
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Yes |
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No |
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If yes, provide the following information for each settlement agreement:
- - - - - - - - - - - - - - - - - - - -
Name of entity:
Regulator/organization:
Date of settlement (yyyy/mm/dd):
Details of settlement:
Jurisdiction:
- - - - - - - - - - - - - - - - - - - -
Has any financial services regulator, securities or derivatives exchange, SRO or similar organization:
Yes
No
Determined that the firm, or any predecessors or specified affiliates of the firm violated any securities regulations or any rules of a securities or derivatives exchange, SRO or similar organization?
_____
_____
Determined that the firm, or any predecessors or specified affiliates of the firm made a false statement or omission?
_____
_____
Issued a warning or requested an undertaking by the firm, or any predecessors or specified affiliates of the firm?
_____
_____
Suspended or terminated any registration, licensing or membership of the firm, or any predecessors or specified affiliates of the firm?
_____
_____
Imposed terms or conditions on any registration or membership of the firm, or predecessors or specified affiliates of the firm?
_____
_____
Conducted a proceeding or investigation involving the firm, or any predecessors or specified affiliates of the firm?
_____
_____
Issued an order (other than an exemption order) or a sanction to the firm, or any predecessors or specified affiliates of the firm for securities or derivatives-related activity (e.g. cease trade order)?
_____
_____
If yes, provide the following information for each action:
- - - - - - - - - - - - - - - - - - - -
Name of entity:
Type of action:
Regulator/organization:
Date of investigation commenced (yyyy/mm/dd)
Reason for action:
Jurisdiction:
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Is the firm aware of any ongoing investigation of which the firm or any of its specified affiliate is the subject?
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Yes |
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No |
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If yes, provide the following information for each investigation:
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Name of entity
Reason or purpose of investigation
Regulator/organization
Date of investigation commenced (yyyy/mm/dd)
Jurisdiction
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Name of firm:
Name of firm's authorized signing officer or partner:
Title of firm's authorized signing officer or partner:
Signature
Date (yyyy/mm/dd):
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Witness
The witness must be a lawyer, notary public or commissioner of oaths.
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Name of witness
Title of witness
Signature
Date (yyyy/mm/dd)
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This form is to be submitted through the Ontario Securities Commission's Electronic Filing Portal:
https://www.osc.gov.on.ca/filings
{1} Terms defined for the purposes of Form 33-109F6 Firm Registration to National Instrument 33-109 Registration Information Requirements have the same meaning if used in this Appendix except that any reference to "firm" means the person or company relying on relief from the requirement to register as an adviser or dealer under the Commodity Futures Act (Ontario).