Freedom International Brokerage Company and BMO Nesbitt Burns Inc.

Decision

Headnote

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 an individual as a registered representative is an owner of the second registered firm and entitled to appoint a director to its board.  The individual representative will have sufficient time to adequately serve both firms. The potential for conflicts of interest is significantly reduced compared to other similar arrangements because the second firm operates as an inter-dealer bond broker and does not compete with the shareholder firm. The filers 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 and 15.1.

June 2, 2021

 

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
(the Principal Jurisdiction)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS

AND
IN THE MATTER OF

FREEDOM INTERNATIONAL BROKERAGE COMPANY (Freedom),
AND BMO NESBITT BURNS INC. (NBI)

 

DECISION


Background

The regulator in the Principal Jurisdiction (the Decision Maker) has received an application from Freedom and NBI (each a Filer) for a decision under the securities legislation of the Principal Jurisdiction (the Legislation), pursuant to section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), providing for an exemption from the requirement contained in paragraph 4.1(1)(a) of NI 31-103 to allow NBI to permit Mr. Jason Park to act as a dealing representative of NBI while also acting as a director of Freedom (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

  1. the Ontario Securities Commission (the OSC) is the principal regulator for this application; and
  2. NBI 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 provinces and territories of Canada (collectively, the Jurisdictions) other than the Principal Jurisdiction.

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.

Representations

This decision is based on the following facts represented by each of the Filers insofar as such facts relate to that Filer:

Freedom

  1. Freedom is an unlimited liability company incorporated under the laws of Nova Scotia.
  2. The principal regulator of Freedom is the OSC because Freedom’s principal office is located in Toronto, Ontario.
  3. Freedom is registered as an exempt market dealer in Ontario and Québec, and has been approved as an inter-dealer bond broker by the Investment Industry Regulatory Organization of Canada (IIROC).
  4. As an inter-dealer bond broker, Freedom provides an integrated voice and electronic brokerage service to its clients in accordance with the requirements of IIROC Dealer Member Rule 2100 Inter-Dealer Bond Brokerage Systems (Rule 2100).
  5. Pursuant to Rule 2100, all of Freedom’s clients are typically Canadian investment dealers, Canadian chartered banks and/or an affiliated entity.
  6. As an inter-dealer bond broker, Freedom acts as an agent for its customers in allowing a customer to buy and/or sell domestic and international corporate and government bonds, derivatives and other related securities (collectively, Debt Securities) to another customer of Freedom.
  7. Freedom never acts as principal in effecting a trade with a client (i.e., Freedom only matches an order by a buyer with a seller and vice versa).
  8. Freedom is owned (i) indirectly by a wholly-owned subsidiary of BGC Partners Inc. (BGC), a leading global brokerage company servicing the financial and real estate markets with its head office in London, England, and (ii) directly by, or indirectly by a wholly-owned subsidiary of NBI, CIBC World Markets Inc., Merrill Lynch Canada Inc., RBC Dominion Securities Inc., Scotia Capital Inc. and TD Securities Inc. (collectively, the Shareholders).
  9. The board of directors of Freedom (the Board) consists of five representatives from BGC and one representative from each of the other Shareholders for a total of 11 directors.  The members of the Board do not receive any compensation for acting as a director of Freedom.  
  10. BGC and the other Shareholders have entered into a unanimous shareholders agreement which effectively limits the ability of the directors of Freedom to oversee the operations of Freedom and imposes restraints on what Freedom can do without shareholder approval.
  11. Freedom and NBI are not affiliates.

NBI

  1. NBI is registered as an investment dealer in each of the provinces and territories of Canada, is a member of IIROC, and is indirectly owned by the Bank of Montreal.
  2. The principal regulator of NBI is the OSC because NBI’s principal office is located in Toronto, Ontario.
  3. Mr. Park is registered, among other things, as a dealing representative (investment dealer) of NBI in each of the provinces and territories of Canada. NBI wants to appoint Mr. Park as its representative on the Board.
  4. Mr. Park is currently a Managing Director at NBI and is responsible for buying and selling Debt Securities for institutional investors, (ii) analyzing current market conditions, and (iii) implementing decisions to yield positive returns / profits for such institutional clients. 
  5. NBI uses the services of Freedom to effect trades of Debt Securities on its own behalf.

Dual Registration

  1. Mr. Park has extensive knowledge about fixed income securities and the marketplace in which Freedom operates, and as such, subject to regulatory approval, Freedom would like to appoint Mr. Park to act as a member of the Board as it will assist Freedom to remain competitive and to be responsive to its clients’ interests.
  2. NBI has determined that Mr. Park is the appropriate person to sit on the Board and that it does not have another individual that is not registered in the Jurisdictions who has the necessary expertise.
  3. Mr. Park will be supervised by NBI.
  4. The day-to-day operations of Freedom are carried out by the executive management and employees of Freedom.  Mr. Park will not have any role in the day-to-day operations of Freedom.
  5. Neither NBI or Mr. Park will have access to Freedom’s systems, which access would enable either NBI or Mr. Park to influence the actions of a client of Freedom to the benefit of NBI or Mr. Park in relation to a trade.
  6. At no time will the interests of NBI be favoured over the other clients of Freedom as a result of Mr. Park being a member of Freedom’s Board.
  7. It is anticipated that Mr. Park will spend between four to six hours per quarter on his duties as a director of Freedom.
  8. The directors of Freedom are subject to a detailed policy governing conflicts of interest (the Freedom Policy).  The Freedom Policy specifically addresses the situation where a representative, that is a director appointed by a Shareholder, has a conflict of interest or duty arising from the concurrent fiduciary duties owed to Freedom and the respective Shareholder.
  9. The Freedom Policy proceeds from the principle that as a director of Freedom and as a member of the Board, Mr. Park owes an unqualified fiduciary duty to Freedom.  The Freedom Policy enforces that principle by providing that where a director or the Board identifies a conflict of interest, the Board will adopt a protocol for managing the conflict which must include provisions relating to:
    1. whether the conflicted director must withdraw from the Board meeting for the duration of any discussion on a relevant matter, and whether the Board may waive such a requirement;
    2. 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
    3. 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 (the Information).  Where the Board decides that Mr. Park may not receive the Information, and the Board further decides that the conflict of duty is of such nature or sensitivity that it is not appropriate for Mr. Park to be made aware of the nature of the Information, Mr. Park will not be notified of the nature of the Information.
  10. To further protect Freedom, the Freedom Policy contains guidelines relating to:
    1. the circumstances in which the Information may be passed on by Mr. Park to NBI, who nominated Mr. Park;
    2. the right of Freedom to place an embargo on the Information which must not be passed on because of its sensitivity; and
    3. acceptance by NBI of the obligation of confidentiality in relation to any Information received.
  11. NBI has appropriate compliance and supervisory policies and procedures to deal with any conflicts of interest that may arise as a result of Mr. Park being a director of Freedom.
  12. The potential for conflicts of interest or client confusion due to Mr. Park acting as a director of Freedom and a dealing representative of NBI is mitigated by the following:
    1. NBI does not compete with Freedom;
    2. members of the Board serve without remuneration;
    3. Mr. Park will not be involved in the day-to-day operations of Freedom’s operations;
    4. neither NBI or Mr. Park will have access to Freedom’s systems, which access would enable NBI or Mr. Park to influence the actions of a client of Freedom to the benefit of NBI or Mr. Park in relation to a trade; and
    5. at no time will Freedom favour the interests of NBI as a result of Mr. Park being a member of the Board.
  13. Neither Filer is in default of securities, commodities or derivatives legislation in any Jurisdiction.
  14. In the absence of the Exemption Sought, NBI would be prohibited under section 4.1(1)(a) of NI 31-103 from allowing Mr. Park to act as a dealing representative of NBI while also acting as a director of Freedom.

Decision

The Decision Maker is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Maker under the Legislation is that the Exemption Sought is granted, provided that the circumstances described above remain in place.

 

“Felicia Tedesco”

____________________________

Deputy Director, Compliance & Registrant Regulation
Ontario Securities Commission

OSC File no. 2021/0243