Gilder Gagnon Howe & Co. LLC
Headnote
Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- A registered adviser wants an exemption from the excess working capital requirements -- The adviser is registered as a broker-dealer and an investment adviser with the SEC and is a member of the FINRA; the adviser is subject to U.S. regulatory capital requirements and calculates its excess net capital using SEC Form X-17a-5 (FOCUS Report); the adviser will file with securities regulators the FOCUS Report in lieu of Form 31-103F1.
Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- A registered adviser wants an exemption from the financial statements requirements -- The adviser is subject to U.S. reporting requirements and files audited consolidated annual financial statements prepared in accordance with U.S. GAAP; under U.S. requirements, the financial statements are not required to include comparative information relating to the preceding financial year, nor is a signature of at least one director is required on the statement of financial position; the adviser will file with securities regulators the annual financial statements that it files with the SEC and FINRA.
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.
July 28, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA AND ONTARIO (THE JURISDICTIONS) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF GILDER GAGNON HOWE & CO. LLC (THE FILER)
DECISION
Background
1 The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting the Filer from:
(a) the requirements of section 12.1 Capital Requirements of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that the Filer maintain excess working capital calculated using Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1); and
(b) the requirements of section 12.13 Delivering financial information -- adviser of NI 31-103 that the Filer deliver a completed Form 31-103F1 showing the calculation of its excess working capital as at the end of the financial year and as at the end of the immediately preceding financial year,
so long as the Filer calculates excess net capital using the U.S. Securities and Exchange Commission (SEC) Form X-17a-5 (the FOCUS Report) and delivers the FOCUS Report in lieu of delivering Form 31-103F1 as required by NI 31-103 (the Focus Report Relief) and for so long as the Filer is subject to SEA Rule 15c3-1 (as defined below) and SEA Rule 17a-5 (as defined below); and
(c) 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
(d) the requirements of section 12.10 Annual financial statements of 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 the Financial Industry Regulatory Authority (FINRA) (the Financial Statements Relief, and, together with the Focus Report Relief, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the British Columbia Securities Commission (BCSC) is the principal regulator for this application,
(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 Québec, and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Interpretation
2 Terms defined in National Instrument 14-101 Definitions, NI 52-107 and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
3 This decision is based on the following facts represented by the Filer:
1. The Filer is a limited liability company organized under the laws of the State of Delaware. Its head office is located in New York, New York, United States of America (U.S.)
2. The Filer is registered, and in good standing, as a broker-dealer and as an investment adviser with the SEC, and is a member of the FINRA.
3. The Filer is a member of a number of major securities exchanges in the U.S., including the New York Stock Exchange and NASDAQ Stock Market.
4. The Filer provides discretionary brokerage and advisory services for retail clients, primarily in equities, in the U.S.
5. The Filer is not currently registered in any capacity in any Canadian jurisdiction. The Filer submitted an application for registration as a portfolio manager in the Jurisdictions and Québec. It is anticipated that most of Canadian clients will be located in British Columbia; thus, the BCSC was identified as the principal regulator for the Filer's registration and this application.
6. The Filer relies on the international dealer exemption under section 8.18 of NI 31-103 in the Jurisdictions and Québec. The Filer is in compliance with the conditions of the international dealer exemption in NI 31-103 and the fee requirement for entities relying on the international dealer exemption under OSC Rule 13-502 Fees.
7. The Filer is not in default of securities legislation of any jurisdiction.
Focus Report Relief
8. Under NI 31-103, the Filer will be required to calculate its excess working capital using Form 31-103F1.
9. The Filer is subject to U.S. regulatory capital requirements under the 1934 Act, specifically Rule 15c3-1 Net Capital Requirements for Brokers or Dealers (SEA Rule 15c3-1), that are designed to provide regulatory protections that are substantially similar to the protections provided by the regulations regarding excess working capital to which dealer members of the Investment Industry Regulatory Organization of Canada (IIROC) are subject to. The Filer is in compliance in all material respects with SEA Rule 15c3-1. The SEC and FINRA have the responsibility for ensuring that the Filer operates in compliance with SEA Rule 15c3-1.
10. The Filer is required to prepare and file a FOCUS Report with the U.S. regulators, which is the financial and operational report containing a net capital calculation.
11. The FOCUS Report provides a more comprehensive description of the business activities of the Filer, and more accurately reflects those activities, than would be provided by Form 31-103F1, and the minimum capital requirements of SEA Rule 15c3-1 applicable to the Filer are a substantially greater amount than the minimum capital requirement of NI 31-103.
12. The net capital calculations prescribed by SEA Rule 15c3-1 for credit risk and operational risk are generally more conservative than the calculations prescribed by Form 31-103F1. SEA Rule 15c3-1 also requires each Filer to account for any guarantee of debt of a third party in calculating its excess net capital.
13. 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 a guarantee under Form 31-103F1.
14. The Filer has been approved by the SEC pursuant to SEA Rule 15c3-1 to use the alternative method of computing net capital contained in Appendix E to SEA Rule 15c3-1, and therefore files such supplemental and alternative reports as may be prescribed by the SEC. The Alternative Net Capital (ANC) method provides large broker/dealers meeting specified criteria with an alternative to use mathematical models such as the value at risk model to calculate capital requirements for market and derivatives related credit risk. Firms must document and implement a comprehensive internal risk management system, which addresses market, credit, liquidity, legal and operational risks at the firm. The ANC model better recognizes the true underlying risk from the hedging positions held versus the traditional "haircut" method, which can overstate the true risk of certain security positions.
Financial Statements Relief
15. 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 1934 Act (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.
16. The SEC currently permits the Filer to file audited consolidated annual financial statements that are prepared in accordance with U.S. GAAP, whereas subsection 3.15(b) of NI 52-107 would require the Filer to prepare non-consolidated financial statements.
17. 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.
18. 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.
19. The accounting principles and methods used to prepare the FOCUS Reports that the Filer will deliver 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.
20. Audited supplemental information to the Filer's annual audited financial statements, as required by SEA Rule 17a-5, which includes supplemental information that correspond 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 they were required to prepare and file unconsolidated annual audited financial statements.
Decision
4 Each of the Decision Makers 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 Makers under the Legislation is that the Exemption Sought is granted provided that:
(a) the Filer is registered, and in good standing, under the securities legislation of the U.S. in a category of registration that permits it to carry on the activities in the U.S. 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, the Filer is subject to SEA Rule 15c3-1 and SEA Rule 17a-5; and that the protections provided by SEA Rule 15c3-1and SEA Rule 17a-5 in respect of maintaining excess net capital are substantially similar to the protections provided by the capital requirements of IIROC that would be applicable to the Filer if it were registered under the Legislation as an investment dealer and were a member of IIROC;
(c) the Filer delivers to the principal regulator no later than the 90th day after the end of its financial year its annual financial statements prepared in accordance with U.S. GAAP as permitted by SEA Rule 17a-5 and its FOCUS Report as filed with the SEC and FINRA;
(d) the Filer prepares the FOCUS Report on an unconsolidated basis;
(e) 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 SEA Rule 15c3-1;
(f) the Filer notifies the principal regulator as soon as possible if at any time its excess net capital as reported in box 3920 of its most recently filed FOCUS Report, declines to or is less than zero for two consecutive days;
(g) the Filer gives prompt written notice to the principal regulator of any significant issues arising from analysis by U.S. securities regulators of the FOCUS Report filed by the Filer pursuant to SEC and FINRA requirements;
(h) 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;
(i) the Filer provides the principal regulator with at least five days written notice prior to any repayment of subordinated intercompany debt or termination of a subordination agreement with respect to intercompany debt;
(j) 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
(k) the auditor's report relating to the Filer's financial statements expresses an unmodified opinion on the supplemental information referred to in (j).