Wells Fargo Securities, LLC – s. 38 of the CFA and s. 6.1 of Rule 91-502 Trades in Recognized Options
Headnote
Application for a ruling pursuant to section 38 of the Commodity Futures Act granting relief from the dealer registration requirement set out in section 22 of the CFA and the trading restrictions in section 33 of the CFA in connection with certain trades in Exchange-Traded Futures on Non-Canadian Exchanges where the Applicant is acting as principal or agent in such trades to, from or on behalf of Permitted Clients -- relief subject to sunset clause.
Application to the Director for an exemption, pursuant to section 6.1 of OSC Rule 91-502 Trades in Recognized Options (Rule 91-502), exempting the Applicant and its Representatives from the proficiency requirements in section 3.1 of Rule 91-502 for trades in commodity futures options on exchanges located outside Canada.
Statutes Cited
Commodity Futures Act, R.S.O. 1990, c. C.20. as am., ss. 22 and 38.
Rules Cited
Ontario Securities Commission Rule 91-502 Trades in Recognized Options, ss. 3.1 and 6.1.
May 31, 2019
IN THE MATTER OF
THE COMMODITY FUTURES ACT,
R.S.O. 1990, c. C. 20, AS AMENDED
(the CFA)
AND
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
(the OSA)
AND
IN THE MATTER OF
ONTARIO SECURITIES COMMISSION RULE 91-502
TRADES IN RECOGNIZED OPTIONS
(Rule 91-502)
AND
IN THE MATTER OF
WELLS FARGO SECURITIES, LLC
RULING & EXEMPTION
(Section 38 of the CFA and Section 6.1 of Rule 91-502)
UPON the application (the Application) of Wells Fargo Securities, LLC (the Applicant) to the Ontario Securities Commission (the Commission) for
(a) a ruling of the Commission, pursuant to section 38 of the CFA, that the Applicant is not subject to the dealer registration requirements in the CFA (as defined below) or the trading restrictions in the CFA (as defined below) in connection with trades in Exchange-Traded Futures (as defined below) on exchanges located outside Canada (Non-Canadian Exchanges) where the Applicant is acting as principal or agent in such trades to, from or on behalf of Permitted Clients (as defined below);
(b) a ruling of the Commission, pursuant to section 38 of the CFA, that a Permitted Client is not subject to the dealer registration requirements in the CFA or the trading restrictions in the CFA in connection with trades in Exchange-Traded Futures on Non-Canadian Exchanges, where the Applicant acts in respect of the trades in Exchange-Traded Futures on behalf of the Permitted Client pursuant to the above ruling; and
(c) a decision of the Director, pursuant to section 6.1 of Rule 91-502, exempting the Applicant and its salespersons, directors, officers and employees (the Representatives) from section 3.1 of Rule 91-502 in connection with trades in Exchange-Traded Futures (collectively, the Requested Relief);
AND WHEREAS for the purposes of this ruling and exemption (collectively, the Decision):
(i)
"CEA" means the U.S. Commodity Exchange Act;
"CFTC" means the U.S. Commodity Futures Trading Commission;
"dealer registration requirements in the CFA" means the provisions of section 22 of the CFA that prohibit a person or company from trading in Exchange-Traded Futures unless the person or company satisfies the applicable provisions of section 22 of the CFA;
"Exchange Act" means the U.S. Securities Exchange Act of 1934;
"Exchange-Traded Futures" means a commodity futures contract or a commodity futures option that trades on one or more organized exchanges located outside of Canada and that is cleared through one or more clearing corporations located outside of Canada;
"FINRA" means the Financial Industry Regulatory Authority in the U.S.;
"NI 31-103" means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations;
"NFA" means the National Futures Association in the U.S.;
"Permitted Client" means a client in Ontario that is a "permitted client" as that term is defined in section 1.1. of NI 31-103;
"SEC" means the U.S. Securities and Exchange Commission;
"trading restrictions in the CFA" means the provisions of section 33 of the CFA that prohibit a person or company from trading in Exchange-Traded Futures unless the person or company satisfies the applicable provisions of section 33 of the CFA;
"U.S." means the United States of America; and
(ii) terms used in this Decision that are defined in the OSA, and not otherwise defined in this Decision or in the CFA, shall have the same meaning as in the OSA, unless the context otherwise requires;
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON the Applicant having represented to the Commission and the Director as follows:
1. The Applicant is a limited liability company incorporated under the laws of the State of Delaware. Its head office is located at 550 South Tryon Street, Charlotte, North Carolina, 28202, U.S.
2. The Applicant provides execution and clearing services on derivatives exchanges located in the U.S. and Europe. The Applicant is indirectly wholly-owned by Wells Fargo & Co.
3. Wells Fargo Securities Canada, Ltd. is an affiliate of the Applicant and is an indirect wholly-owned subsidiary of Wells Fargo & Co. Wells Fargo Securities Canada, Ltd. is registered under the OSA as a dealer in the category of investment dealer and is a dealer member of the Investment Industry Regulatory Organization of Canada. Wells Fargo Securities Canada, Ltd. is not registered as a dealer under the CFA and does not act as a broker for trades in Exchange-Traded Futures.
4. The Applicant relies on the international dealer exemption (the IDE) in section 8.18 of NI 31-103 in Ontario and all other Canadian provinces and territories and therefore is not registered under the OSA.
5. The Applicant currently relies on discretionary relief similar to the Requested Relief, which is set to expire on May 30, 2019.
6. The Applicant is a broker-dealer registered with the SEC, a member of FINRA, a registered futures commission merchant (FCM) with the CFTC and a member of the NFA.
7. The Applicant is also a member of the Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX), Commodity Exchange, Inc. (COMEX), Eris Exchange, Minneapolis Grain Exchange (MGEX), NASDAQ Futures Exchange (NFX), LCH, ICE Futures U.S., ICE Clear U.S., ICE Futures Europe, ICE Clear Europe, BATS Y-Exchange, Inc. (BATS-YX), BATS Z-Exchange, Inc. (BATS-ZX), Boston Options Exchange Group, LLC (BOX), Chicago Board Options Exchange (CBOE), CBOE Futures Exchange (CFE), Chicago Stock Exchange (CHX), EDGA Exchange, Inc. (EDGA), EDGX Exchange, Inc. (EDGX), International Securities Exchange, LLC (ISE), NASDAQ OMX, BX (BX), NASDAQ OMX PHLX, LLC (PHLX), NASDAQ Stock Exchange, (NQX), NYSE Arca, NYSE MKT, LLC, National Stock Exchange (NSX), and New York Stock Exchange.
8. The Applicant is not in default of securities legislation in any jurisdiction in Canada or under the CFA, subject to the matter to which this Decision relates. The Applicant is in compliance in all material respects with U.S. securities and commodity futures laws.
9. Pursuant to its registrations and memberships, the Applicant is authorized to handle customer orders and receive and hold customer margin deposits, and otherwise act as a futures broker, in the U.S. Rules of the CFTC and NFA require the Applicant to maintain adequate capital levels, make and keep specified types of records relating to customer accounts and transactions, and comply with other forms of customer protection rules, including rules respecting: know-your-customer obligations, account-opening requirements, anti-money laundering checks, trading limits, counterparty credit due diligence, delivery of confirmation statements, clearing deposits and initial and maintenance margins. These rules require the Applicant to treat Permitted Clients materially the same as its U.S. customers with respect to transactions made on U.S. exchanges. With respect to transactions made on U.S. exchanges, in order to protect customers in the event of the insolvency or financial instability of the Applicant, the Applicant is required to ensure that customer securities and monies be separately accounted for, segregated at all times from its own securities and monies (including the securities and monies of its affiliates) and custodied exclusively with such banks, trust companies, clearing organizations or other licensed futures brokers and intermediaries as may be approved for such purposes under the CEA and the rules promulgated by the CFTC thereunder (collectively, the "WFS Approved Depositories"). The Applicant is further required to obtain acknowledgements from any WFS Approved Depository holding customer funds or securities related to U.S.-based transactions or accounts that such funds and securities are to be separately held on behalf of such customers, with no right of set-off against the Applicant's obligations or debts.
10. The Applicant wishes to continue to offer certain of its Permitted Clients in Ontario the ability to trade in Exchange-Traded Futures through the Applicant.
11. The Applicant will execute and clear trades in Exchange-Traded Futures on behalf of Permitted Clients in Ontario in the same manner that it executes and clears trades on behalf of its U.S. clients, all of which are "Eligible Contract Participants" as defined in the CEA. The Applicant will follow the same know-your-customer and segregation of assets procedures that it follows in respect of its U.S. clients. Permitted Clients will be afforded the benefits of compliance by the Applicant with the requirements of the CEA and the regulations thereunder, and the Exchange Act and the regulations thereunder. Permitted Clients in Ontario will have the same contractual rights against the Applicant as U.S. clients of the Applicant.
12. The Applicant will not maintain an office, sales force or physical place of business in Ontario.
13. The Applicant will solicit trades in Exchange-Traded Futures in Ontario only from persons who qualify as Permitted Clients.
14. Permitted Clients of the Applicant will only be offered the ability to effect trades in Exchange-Traded Futures on Non-Canadian Exchanges.
15. The Exchange-Traded Futures to be traded by Permitted Clients will include, but will not be limited to, Exchange-Traded Futures for equity index, interest rate, foreign exchange, bond, energy, agricultural and other commodity products.
16. Permitted Clients of the Applicant will be able to execute Exchange-Traded Futures orders through the Applicant by contacting the Applicant's global execution desk. Permitted Clients may also be able to self-execute Exchange-Traded Futures orders electronically via an independent service vendor and/or other electronic trading routing. Permitted Clients may also be able to execute Exchange-Traded Futures orders through third party brokers and then "give up" the transaction for clearance through the Applicant.
17. The Applicant may execute a Permitted Client's order on the relevant Non-Canadian Exchange in accordance with the rules and customary practices of the exchange or engage another broker to assist in the execution of orders. The Applicant will remain responsible for all executions when the Applicant is listed as the executing broker of record on the relevant Non-Canadian Exchange.
18. The Applicant may perform both execution and clearing functions for trades in Exchange-Traded Futures or may direct that a trade executed by it be cleared through a carrying broker if the Applicant is not a clearing member of the Non-Canadian Exchange on which the trade is executed and cleared. Alternatively, the Permitted Client of the Applicant will be able to direct that trades executed by the Applicant be cleared through clearing brokers not affiliated with the Applicant in any way (each a Non-WFS Clearing Broker).
19. If the Applicant performs only the execution of a Permitted Client's Exchange-Traded Futures order and "gives-up" the transaction for clearance to a Non-WFS Clearing Broker, such clearing broker will also be required to comply with the rules of the exchanges of which it is a member and any relevant regulatory requirements, including requirements under the CFA as applicable. Each such Non-- WFS Clearing Broker will represent to the Applicant, in an industry-standard give-up agreement, that it will perform its obligations in accordance with applicable laws, governmental, regulatory, self-regulatory, exchange and clearing house rules and the customs and usages of the exchange or clearing house on which the relevant Permitted Client's Exchange-Traded Futures order will be executed and cleared. The Applicant will not enter into a give-up agreement with any Non-WFS Clearing Broker located in the U.S. unless such clearing broker is registered with the CFTC and/or the SEC, as applicable.
20. As is customary for all trades in Exchange-Traded Futures, a clearing corporation appointed by the exchange or clearing division of the exchange is substituted as a universal counterparty on all trades in Exchange-Traded Futures and Permitted Client orders that are submitted to the exchange in the name of the Non-WFS Clearing Broker or the Applicant or, on exchanges where the Applicant is not a member, in the name of another carrying broker. The Permitted Client of the Applicant is responsible to the Applicant for payment of daily mark-to-market variation margin and/or proper margin to carry open positions and the Applicant, the carrying broker or the Non-WFS Clearing Broker is in turn responsible to the clearing corporation/division for payment.
21. Permitted Clients that direct the Applicant to give up transactions in Exchange-Traded Futures for clearance and settlement by Non-WFS Clearing Brokers will execute the give-up agreements described above.
22. Permitted Clients will pay commissions for trades to the Applicant. In the event that the Applicant needs to utilize a Non-WFS Clearing Broker for clearing or execution services in relation to such trades, the Applicant will generally pay commissions to the Non-WFS Clearing Broker.
23. The trading restrictions in the CFA apply unless, among other things, an Exchange-Traded Future is traded on a recognized or registered commodity futures exchange and the form of the contract is approved by the Director. To date, Non-Canadian Exchanges have been recognized or registered under the CFA.
24. If the Applicant were registered under the CFA as a "futures commission merchant", it could rely upon certain exemptions from the trading restrictions in the CFA to effect trades in Exchange-Traded Futures to be entered into on certain Non-Canadian Exchanges.
25. Section 3.1 of Rule 91-502 provides that no person shall trade as agent in, or give advice in respect of, a recognized option, as defined in section 1.1 of Rule 91-502, unless he or she has successfully completed the Canadian Options Course (which has been replaced by the Derivatives Fundamentals Course and the Options Licensing Course).
26. All Representatives of the Applicant who trade options in the U.S. have passed the National Commodity Futures Examination (Series 3), being the relevant futures and options proficiency examination administered by FINRA.
AND UPON the Commission and Director being satisfied that it would not be prejudicial to the public interest to grant the exemptions requested;
IT IS RULED, pursuant to section 38 of the CFA, that the Applicant is not subject to the dealer registration requirements set out in the CFA or the trading restrictions in the CFA in connection with trades in Exchange-Traded Futures where the Applicant is acting as principal or agent in such trades to, from or on behalf of Permitted Clients provided that:
(a) each client effecting trades in Exchange-Traded Futures is a Permitted Client;
(b) any Non-WFS Clearing Broker, has represented and covenanted to the Applicant that it is appropriately registered or exempt from registration under the CFA;
(c) the Applicant only executes and clears trades in Exchange-Traded Futures for Permitted Clients on Non-Canadian Exchanges;
(d) at the time trading activity is engaged in, the Applicant:
(i) has its head office or principal place of business in the U.S.;
(ii) is registered as a FCM with the CFTC;
(iii) is a member firm of the NFA;
(iv) engages in the business of a FCM in Exchange-Traded Futures in the U.S.;
(e) the Applicant has provided to the Permitted Client the following disclosure in writing:
(i) a statement that the Applicant is not registered in Ontario to trade in Exchange-Traded Futures as principal or agent;
(ii) a statement that the Applicant's head office or principal place of business is located in Charlotte, North Carolina, U.S.;
(iii) a statement that all or substantially all of the Applicant's assets may be situated outside of Canada;
(iv) a statement that there may be difficulty enforcing legal rights against the Applicant because of the above; and
(v) the name and address of the Applicant's agent for service of process in Ontario;
(f) the Applicant has submitted to the Commission a completed Submission to Jurisdiction and Appointment of Agent for Service in the form attached as Appendix "A" hereto;
(g) the Applicant notifies the Commission of any regulatory action after the date of this ruling in respect of the Applicant, or any predecessors or specified affiliates of the Applicant, by completing and filing with the Commission Appendix "B" hereto within ten days of the commencement of such action; provided that this condition shall not be required to be satisfied for so long as Wells Fargo Securities Canada, Ltd. remains an investment dealer in good standing under Ontario securities laws;
(h) if the Applicant does not rely on the IDE by December 31st of each year, the Applicant pays a participation fee based on its specified Ontario revenues for its previous financial year in compliance with the requirements of Part 3 and section 6.4 of OSC Rule 13-502 Fees as if the Applicant relied on the IDE;
(i) by December 1st of each year, the Applicant notifies the Commission of its continued reliance on the exemption from the dealer registration requirement granted pursuant to this Decision by filing Form 13-502F4 Capital Markets Participation Fee Calculation; and
(j) this Decision will terminate on the earliest of:
(i) the expiry of any transition period as may be provided by law, after the effective date of the repeal of the CFA;
(ii) six months, or such other transition period as may be provided by law, after the coming into force of any amendment to Ontario commodity futures law (as defined in the CFA) or Ontario securities law (as defined in the OSA) that affects the dealer registration requirements in the CFA or the trading restrictions in the CFA; and
(iii) five years after the date of this Decision.
AND IT IS FURTHER RULED, pursuant to section 38 of the CFA, that a Permitted Client is not subject to the dealer registration requirement in the CFA or the trading restrictions in the CFA in connection with trades in Exchange-Traded Futures on Non-Canadian Exchanges where the Applicant acts in connection with trades in Exchange-Traded Futures on behalf of the Permitted Clients pursuant to the above ruling.
May 31, 2019
IT IS THE DECISION of the Director, pursuant to section 6.1 of Rule 91-502, that section 3.1 of Rule 91-502 does not apply to the Applicant or its Representatives in respect of trades in Exchange-Traded Futures, provided that:
(a) the Applicant and its Representatives maintain their respective registrations and memberships with the CFTC and NFA which permit them to trade and clear commodity futures options in the U.S.; and
(b) this Decision will terminate on the earliest of:
(i) the expiry of any transition period as may be provided by law, after the effective date of the repeal of the CFA;
(ii) six months, or such other transition period as may be provided by law, after the coming into force of any amendment to Ontario commodity futures law (as defined in the CFA) or Ontario securities law (as defined in the OSA) that affects the dealer registration requirements in the CFA or the trading restrictions in the CFA; and
(iii) five years after the date of this Decision.
June 3, 2019
APPENDIX A
SUBMISSION TO JURISDICTION AND APPOINTMENT OF AGENT FOR SERVICE INTERNATIONAL DEALER OR INTERNATIONAL ADVISER EXEMPTED FROM REGISTRATION UNDER THE COMMODITY FUTURES ACT, ONTARIO
1. Name of person or company ("International Firm"):
2. If the International Firm was previously assigned an NRD number as a registered firm or an unregistered exempt international firm, provide the NRD number of the firm:
3. Jurisdiction of incorporation of the International Firm:
4. Head office address of the International Firm:
5. The name, e-mail address, phone number and fax number of the International Firm's individual(s) responsible for the supervisory procedure of the International Firm, its chief compliance officer, or equivalent.
Name:
E-mail address:
Phone:
Fax:
6. The International Firm is relying on an exemption order under section 38 or section 80 of the Commodity Futures Act (Ontario) that is similar to the following exemption in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (the "Relief Order"):
[ ] Section 8.18 [international dealer]
[ ] Section 8.26 [international adviser]
[ ] Other [specify]:
7. Name of agent for service of process (the "Agent for Service"):
8. Address for service of process on the Agent for Service:
9. The International Firm designates and appoints the Agent for Service at the address stated above as its agent upon whom may be served a notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal or other proceeding (a "Proceeding") arising out of or relating to or concerning the International Firm's activities in the local jurisdiction and irrevocably waives any right to raise as a defence in any such proceeding any alleged lack of jurisdiction to bring such Proceeding.
10. The International Firm irrevocably and unconditionally submits to the non-exclusive jurisdiction of the judicial, quasi-judicial and administrative tribunals of the local jurisdiction in any Proceeding arising out of or related to or concerning the International Firm's activities in the local jurisdiction.
11. Until 6 years after the International Firm ceases to rely on the Relief Order, the International Firm must submit to the regulator
a. a new Submission to Jurisdiction and Appointment of Agent for Service in this form no later than the 30th day before the date this Submission to Jurisdiction and Appointment of Agent for Service is terminated;
b. an amended Submission to Jurisdiction and Appointment of Agent for Service no later than the 30th day before any change in the name or above address of the Agent for Service;
c. a notice detailing a change to any information submitted in this form, other than the name or above address of the Agent for Service, no later than the 30th day after the change.
12. This Submission to Jurisdiction and Appointment of Agent for Service is governed by and construed in accordance with the laws of the local jurisdiction.
Dated: _______________
______________________________
(Signature of the International Firm or authorized signatory)
______________________________
(Name of signatory)
______________________________
(Title of signatory)
Acceptance
The undersigned accepts the appointment as Agent for Service of _______________ [Insert name of International Firm] under the terms and conditions of the foregoing Submission to Jurisdiction and Appointment of Agent for Service.
Dated: _______________
______________________________
(Signature of the Agent for Service or authorized signatory)
______________________________
(Name of signatory)
______________________________
(Title of signatory)
This form, and notice of a change to any information submitted in this form, is to be submitted through the Ontario Securities Commission's Electronic Filing Portal:
https://www.osc.gov.on.ca/filings
APPENDIX B
NOTICE OF REGULATORY ACTION{1}
1. 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?
Yes _____ No _____
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
- - - - - - - - - - - - - - - - - - - -
2. Has any financial services regulator, securities or derivatives exchange, SRO or similar organization:
Yes
No
(a)
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?
_____
_____
(b)
Determined that the firm, or any predecessors or specified affiliates of the firm made a false statement or omission?
_____
_____
(c)
Issued a warning or requested an undertaking by the firm, or any predecessors or specified affiliates of the firm?
_____
_____
(d)
Suspended or terminated any registration, licensing or membership of the firm, or any predecessors or specified affiliates of the firm?
_____
_____
(e)
Imposed terms or conditions on any registration or membership of the firm, or predecessors or specified affiliates of the firm?
_____
_____
(f)
Conducted a proceeding or investigation involving the firm, or any predecessors or specified affiliates of the firm?
_____
_____
(g)
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 action (yyyy/mm/dd)
Reason for action
Jurisdiction
3. Is the firm aware of any ongoing investigation of which the firm or any of its specified affiliates is the subject?
Yes _____ No _____
If yes, provide the following information for each investigation:
- - - - - - - - - - - - - - - - - - - -
Name of entity
Reason or purpose of investigation
Regulator/organization
Date investigation commenced (yyyy/mm/dd)
Jurisdiction
- - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - -
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)
- - - - - - - - - - - - - - - - - - - -
Witness
The witness must be a lawyer, notary public or commissioner of oaths.
- - - - - - - - - - - - - - - - - - - -
Name of witness
Title of witness
Signature
Date (yyyy/mm/dd)
- - - - - - - - - - - - - - - - - - - -
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 33-506F6 Firm Registration to Ontario Securities Commission Rule 33-506 (Commodity Futures Act) Registration Information 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).