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Meraki Global Advisors LLC
Headnote
Application for a decision exempting the Filer, a U.S.-registered broker-dealer, from the dealer registration requirement to permit the Filer to provide an "outsourced trading service" (Trading Services) relating to securities of Canadian issuers to asset managers in Canada to assist the asset managers in achieving best execution -- Trading Services means the communication of trade orders relating to Canadian securities received from asset managers to their executing broker-dealers for execution, clearance, and settlement but does not include the execution of trades in securities -- execution of trades in securities of Canadian issuers will be made by executing brokers that have an existing relationship with the asset managers -- time-limited registration relief granted to allow the Filer to provide Trading Services on the basis of the regulatory framework established in the U.S. and on the basis of the additional terms and conditions as set out in the decision -- registered firms seeking to use this type of service are reminded they remain subject to best execution and conflicts of interest requirements, must be able to reasonably conclude that the use of this type of service is consistent with the firm's best execution and conflicts of interest obligations, and comply with all disclosure requirements applicable to these types of services, including Part 4 of NI 23-102 -- three-year sunset clause included to allow CSA staff in consultation with IIROC staff to review our experience with filers offering this type of service in three years -- CSA staff continue to view this type of business model as novel and filers seeking to provide outsourced trading services in relation to securities and/or exchange-traded derivatives (commodity futures contracts and commodity futures options) and over-the-counter (OTC) derivatives are encouraged to make a pre-file with staff of their principal regulator.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1) and 74.
Instruments Cited
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 8.18.
OSC Rule 31-505 Conditions of Registration, s. 2.1.
National Instrument 23-101 Trading Rules, s. 4.2.
NI 23-102 Use of Client Brokerage Commissions as Payment for Order Execution Services or Research Services, s. 3.1 and Part 4.
April 11, 2022
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 MERAKI GLOBAL ADVISORS 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 the Legislation in respect of providing Trading Services (as defined below) relating to securities of Canadian issuers to Institutional Permitted Clients (as defined below) in the Jurisdictions (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 the Province of Québec (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 term has the following meaning:
"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;
"NI 31-103" means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations; and
"Trading Services" means the communication of trade orders relating to Canadian securities received from Institutional Permitted Clients in the Jurisdictions to their executing broker-dealers for execution, clearance, and settlement. For greater certainty, the term "Trading Services" does not include the 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 Utah. The head office of the Filer is located in Park City, Utah, United States of America.
2. The Filer is registered as a broker-dealer with the United States (U.S.) Securities and Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority (FINRA). The Filer currently conducts, and is approved to perform, a single type of regulated business in the U.S. as per FINRA regulations under the "Other" category.
3. The Filer provides outsourced trading services in the U.S. to asset managers and other clients by acting as an intermediary between such clients and their executing broker-dealers, communicating trade orders received from each client on an unsolicited basis to the dealer for execution, clearance, and settlement.
4. The Filer currently relies on section 8.18 [International dealer] of NI 31-103 in each of the Jurisdictions to provide outsourced trading services in respect of foreign securities with Canadian-resident "permitted clients" (as such term is defined in NI 31-103).
5. The Filer has applied for the Exemption Sought as it wishes to provide similar services to Institutional Permitted Clients in the Jurisdictions (the Trading Services Clients) in respect of Canadian securities.
Nature of the Trading Services to be provided to Trading Services Clients
6. The Filer will enter into a written agreement with each Trading Services Client for the provision of Trading Services (Trading Authorization Agreement).
7. The Filer will communicate a Trading Services Client's trading instructions to an investment dealer or other appropriately registered or exempt dealer (the Executing Broker) for execution. The Executing Broker will be an appropriately registered dealer or a person or company relying on an exemption from dealer registration in the Jurisdictions that permits such executing broker to execute the trade for Trading Services Clients.
8. The Filer will communicate trade instructions in respect of Canadian securities on behalf of Trading Services Clients including trade instructions in relation to foreign exchange (FX); publicly traded fixed income securities (corporate and convertible bonds); listed and over-the-counter (OTC) options, swaps, total return swaps, and index futures.
9. Trading Services Clients will provide an "authorized trader" or similar document to their Executing Brokers that designates the Filer as having authority to communicate trade orders on their behalf. Trading Services Clients will deliver trade orders to the Filer, who will then communicate the order to the Executing Broker for execution, clearance and settlement.
10. Instructions in connection with the trading of Canadian securities will be provided by Trading Services Clients pursuant to the Trading Authorization Agreement on an unsolicited basis to the Filer.
11. The Filer does not require its Trading Services Clients to use specific Executing Brokers through whom trades must be executed. Pursuant to the Trading Authorization Agreement, Trading Services Clients will provide the Filer with a list of approved Executing Brokers through whom trading instructions may be executed.
12. A Trading Services Client may provide the Filer with specific instructions (Specific Instructions) regarding, inter alia, the Executing Broker to be utilized for a trade. In such circumstances, the Filer will be obligated to communicate the Trading Services Client's instructions to the Executing Broker in accordance with the Specific Instructions.
Best execution obligations applicable to the Filer
13. In the absence of Specific Instructions from the Trading Services Client, the Filer has discretion with respect to the routing of trade instructions among the Executing Brokers authorized by the client. The choice of Executing Broker will be made in accordance with the Filer's best execution policy (Best Execution Policy). The Best Execution Policy provides that, in the absence of Specific Instructions, an Executing Broker will be selected from the Trading Services Client's list of authorized Executing Brokers based on factors which include: price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order (Execution Factors).
14. The Filer will take into account the following specific Execution Factors in selecting an Executing Broker:
(a) the execution price without any costs charged to the Trading Services Client, or the Filer's own commissions;
(b) the speed and/or likelihood of execution;
(c) the impact on market prices of displaying and/or executing an order or part of an order;
(d) the opportunity for an order to be executed at a better price than what is currently quoted publicly; and
(e) any other consideration relevant to the efficient execution of the order.
15. When communicating orders for securities with the Trading Services Client's Executing Broker, the Filer will take into account the following criteria for determining the relative importance of the Execution Factors in the circumstances:
(a) the characteristics of the Trading Services Client including the regulatory categorization of the Trading Services Client;
(b) the characteristics of the trade order;
(c) the characteristics of Canadian securities that are the subject of that relevant order; and
(d) the characteristics of the Executing Broker to which that relevant order can be directed.
16. The Trading Authorization Agreement will include a provision whereby the Filer agrees that it will be responsible for any loss that arises out of its failure
(a) to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the Trading Services Client; or
(b) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.
17. The Filer will accept and track Trading Services Client trading instructions for the purpose of communicating such instructions to Executing Broker(s) for execution and maintaining an audit trail.
18. The Executing Broker will execute transactions on behalf of Trading Services Clients by: (i) accepting the trade orders received from the Filer; (ii) transmitting and executing the securities transactions or acting as counterparty to an OTC transaction; (iii) taking financial responsibility for the completion of the transaction; (iv) making and/or monitoring records related to such transactions, as required by applicable laws, rules, and regulations; (v) effecting settlement of the transaction; and (vi) providing all post trade confirmations and reports directly to the Trading Services Client.
19. The compensation for Trading Services provided by the Filer in relation to trades in Canadian securities on a stock exchange or marketplace will be included in the total commission paid by a Trading Services Client to its Executing Broker and is included as an additional commission for trades pursuant to the terms of a commission sharing or similar agreement entered into between either the Filer and the Executing Broker or the Filer, the Trading Services Client and the Executing Broker. The Filer will receive payment for the Trading Services directly from the Executing Broker.
20. The compensation for Trading Services provided by the Filer in relation to trades in Canadian securities on an OTC market will be directly paid to the Filer by the Trading Services Client pursuant to the terms of the Trading Authorization Agreement.
21. Only investment dealers that are dealer members of the Investment Industry Regulatory Organization of Canada (IIROC) or firms relying on an applicable exemption from the dealer registration requirement are permitted to engage in trading in Canadian securities if the Canadian security is listed, quoted or traded on a marketplace in Canada and if the trade in the Canadian security does not require reliance on a further exemption from the prospectus requirement in the Jurisdictions.
Best execution obligations that may be applicable to Trading Services Clients
22. In the U.S., the Filer is able to offer outsourced trading services to asset managers (including registered investment advisers) and other clients on the basis of an exemption in section 28(e) of the Exchange Act. Specifically, the Filer's outsourced trading services come within the "safe harbor" for "brokerage and research services" that are permitted by section 28(e) of the Exchange Act{1} and asset managers that are registered investment advisers are permitted to use client commissions for such outsourced trading services pursuant to this safe harbor.
23. In Canada, the Trading Services provided by the Filer constitute "order execution goods and services" and "research goods and services" within the meaning of section 3.1(a) of National Instrument 23-102 Use of Client Brokerage Commissions in that the Trading Services are directly related to order execution.
24. To assist Trading Services Clients that are registrants in determining if they are meeting their "best execution" obligation under Part 4 of National Instrument 23-101 Trading Rules, the Filer provides Trading Services Clients at their request with a detailed Trade Cost Analysis report (TCA) on a quarterly basis which compares trade execution on behalf of the Trading Services Client against benchmarks selected by the Trading Services Client.
Why is relief required?
25. The Filer relies on the "international dealer exemption" under section 8.18 [International dealer] of NI 31-103 in the Jurisdictions to provide Trading Services in respect of "foreign securities" to Canadian "permitted clients" as defined in section 8.18 of NI 31-103.
26. The Filer is not registered under NI 31-103 and is in the business of trading in securities by virtue of providing the Trading Services. In the absence of the Exemption Sought, the Filer cannot provide the Trading Services in the Jurisdictions in respect of Canadian securities issuers without registration, except as permitted under section 8.5 [Trades through or to a registered dealer], the exemptions found in paragraphs (a), (b) and (f) of subsection 8.18(2) [International dealer], and under section 8.21 [Specified debt] of NI 31-103.
27. The Filer does not hold, take custody of, remit or exchange money or Canadian securities on behalf of Trading Services Clients.
28. The Filer will not lend money, extend credit or provide margin to Trading Services Clients.
29. The Filer is subject to regulatory capital requirements under the Securities Exchange Act of 1934 (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).
30. 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 IIROC are subject, and 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.
31. The Filer is required to prepare and file a financial report, which includes Form X-17a-5 (FOCUS Report) which is a 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 such activities than would otherwise be provided by Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1). 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.
32. 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.
33. 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 paragraphs 29 to 31;
(b) the availability of, and access to, the Trading Services is important to Canadian institutional investors who are active participants in the international marketplace;
(c) the Filer will provide Trading Services in the Jurisdictions 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.
34. The Filer is a "market participant" as defined under subsection 1(1) of the Act. 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 Act, which include the requirement to keep such books, records and other documents as are necessary for the proper recording of business transactions and financial affairs and the transactions executed on behalf of others and to deliver such records to the OSC if required.
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 Trading Services in the U.S.;
(c) is a member of FINRA;
(d) limits its provision of Trading Services in the Jurisdictions under this decision in respect of Canadian securities to Institutional Permitted Clients;
(e) enters into a Trading Authorization Agreement with each Trading Services Client;
(f) does not provide Trading Services in relation to Canadian securities with or for Institutional Permitted Clients except as permitted under Canadian securities laws;
(g) does not require its Trading Services Clients to use specific executing brokers through which Trading Services Clients must execute trades;
(h) 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";
(i) 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;
(j) submits audited financial statements to the OSC on an annual basis, within 90 days of the Filer's financial year end;
(k) submits to the OSC immediately a copy of any notice filed under SEC Rule 17a-11 or under SEC Rule 15c3-3(i) with the SEC and FINRA;
(l) complies with the filing and fee payment requirements applicable to a registrant under OSC Rule 13-502 Fees, including, for clarity, participation fees based on its specified Ontario revenues attributable to capital markets activities conducted in reliance on the "international dealer exemption" under section 8.18 [International dealer] of NI 31-103 and capital markets activities conducted in reliance on the exemption in this Decision;
(m) 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
(n) 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 three (3) years after the date hereof.
This decision may be amended by the OSC from time to time upon prior written notice to the Filer.
"Tim Moseley"
Vice-Chair
Ontario Securities Commission
"Mary Anne De Monte-Whelan"
Commissioner
Ontario Securities Commission
OSC File #: 2021/0157
{1} SEC Guidance Regarding Client Commission Practices Under Section 28(e) of the Exchange Act dated July 24, 2006 https://www.govinfo.gov/content/pkg/FR-2006-07-24/pdf/06-6410.pdf
APPENDIX "A"
NOTICE OF REGULATORY ACTION
1. Has the firm, or any predecessors or specified affiliates{2} 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 affiliate 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 Meraki Global Advisers LLV
Name of firm's authorized signing officer or partner: Benjamin R. Arnold
Title of firm's authorized signing officer or partner: Founding Partner and CEO
Signature:
Date (yyyy/mm/dd): 20••/••/••
- - - - - - - - - - - - - - - - - - - -
Witness:
The witness must be a lawyer, notary public or commissioner of oaths.
- - - - - - - - - - - - - - - - - - - -
Name of witness:
Title of witness:
Signature:
Date (yyyy/mm/dd): 20••/••/••
- - - - - - - - - - - - - - - - - - - -
This form is to be submitted through the Ontario Securities Commission's Electronic Filing Portal: https://www.osc.gov.on.ca/filings
{2} "specified affiliate" means a person or company that is a parent of a firm, a specified subsidiary of a firm, or a specified subsidiary of a firm's parent.