Open Access Limited
Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions. Relief from the requirement in paragraph 14.5.3(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (the Custodial Records Requirement) requiring firms to take reasonable steps to ensure that cash and securities of each client or investment fund are held by a qualified custodian using an account number or other designation in the records of the qualified custodian sufficient to show that the beneficial ownership of the cash or securities of the client or investment fund is vested in that client or investment fund. The registered firm is a manager of Capital Accumulation Plans, typically providing investment and retirement saving services to small Canadian businesses. The registered firm will continue its historical relationship with its custodian, which qualifies as a "Canadian custodian" as defined in NI 31-103 -- the registered firm and its Canadian custodian have implemented enhanced and improved contractual arrangements and systems so the Canadian Custodian has access to data showing the beneficial ownership of the individual cash and securities positions of each individual client independently of the registered firm.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 1.1, 14.2(2) (a.1), 14.2(2) (a.2), 14.5.2(5), 14.5.3(a), 14.6, and 15.1.
January 14, 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 OPEN ACCESS LIMITED (the Filer)
On June 4, 2018, amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) came into effect that enhanced the custody requirements applicable to registered advisers, dealers and investment fund managers that are not members of a self-regulatory organization (SRO) such as the Investment Industry Regulatory Organization of Canada or the Mutual Fund Dealers Association of Canada (the Custody Amendments). The Custody Amendments primarily (a) address potential intermediary risks when registered firms that are not members of an SRO are involved in the custody of client assets; (b) enhance the protection of client assets; and (c) codify existing custodial best practices of registered firms that are not members of an SRO.
The principal regulator in the Jurisdiction received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption under section 15.1 of NI 31-103 from the requirement in paragraph 14.5.3(a) of NI 31-103 that a registered firm such as the Filer must take reasonable steps to ensure that the cash and securities of a client or investment fund are held by a qualified custodian (or, in respect of cash, by a Canadian financial institution) using an account number or other designation in the records of the qualified custodian or financial institution sufficient to show that the beneficial ownership of the cash or securities is vested in that client or investment fund (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated since 1995 under the Ontario Business Corporations Act. The Filer is registered as a dealer in the categories of exempt market dealer and mutual fund dealer and as an adviser in the category of portfolio manager in Ontario, as a dealer in the category of mutual fund dealer and as an adviser in the category of portfolio manager in Nunavut, and as an adviser in the category of portfolio manager in each of the other provinces and territories of Canada.
2. The Filer is a provider of Capital Accumulation Plans (CAP). A typical client of the Filer is a small business employer (Plan Sponsor) that has established a group retirement plan for its employees (Plan Members). The Filer provides discretionary investment management services to Plan Members of defined contribution pension plans, group registered retirement savings plans and other group retirement plans, as well as non-registered accounts and tax-free savings accounts. Plan Members typically contribute to their respective plan via ongoing payroll deductions ranging from 1% to 6% of their gross earnings.
3. The core of the Filer's product offering is nine CAP mandates of institutionally-priced mutual funds. Each Plan Member must complete an Investor Profile Risk Assessment Form (IP Form), which generates a score for the Plan Member. This score determines the CAP mandate the Plan member is invested in.
4. Canadian Western Trust (CWT) is currently the custodian of the cash and securities for the Plan Members, having been appointed as custodian in 2013. The securities of Plan Members are registered in the name of CWT, and cash is held by CWT in one of seven trust accounts in trust for the Plan Members.
5. CWT is a "Canadian financial institution" as defined in NI 31-103 and a "Canadian custodian" under paragraph (b) of the definition of that term in section 1.1 of NI 31-103. It is accordingly qualified to continue to act as the custodian of the assets of Clients of the Filer, and it is intended that it do so.
6. The seven trust accounts are bulk accounts (sometimes referred to as omnibus accounts) for Plan Members in the following plan types: (i) group registered retirement savings plans; (ii) individual registered retirement savings plans; (iii) locked-in registered retirement income funds, registered retirement income funds or life income funds; (iv) non-registered plans; (v) defined contribution pension plans; (vi) deferred profit sharing plans; and (vii) tax-free savings accounts.
7. In accordance with the agreements (the Agency Agreements) between CWT and the Filer, the Filer is the record keeper for these trust accounts. As the record keeper, the Filer maintains all records of the underlying ownership of cash and securities by each individual Plan Member and the related transactions which produce those balances. The Filer administers all records at the individual Plan Member level on behalf of CWT in accordance with the Agency Agreements.
8. All of the Filer's record keeping is performed on Basis, which is a record keeping system created, owned and maintained by Buck Canada HR Services Limited (Buck). Buck, and its predecessors, have provided this service to the Filer since 2012, as per a Software License and Cosourcing Agreement, dated February 17, 2012, as amended on December 7, 2020 (the Agreement). All client data resides on Buck servers and these servers reside in Canada.
9. Daily transactions of each Plan Member are recorded in Basis by the Filer, including all portfolio transactions, contributions and withdrawals, and Basis is able to produce detailed reporting at period ends. This includes the Plan Members' period end portfolio positions and the portfolio transactional details and performance for the period.
10. Holding plan members' cash and securities in bulk accounts gives the Filer the ability to offer institutional class mutual fund units to their Plan Members, who would otherwise not qualify for this class of securities.
11. On a daily basis, the Filer performs a reconciliation of cash and securities on the Basis record keeping system to the cash and securities in each trust account at CWT (the Reconciliation). The Reconciliation is not complex due to the limited number of investment options offered to Clients. The nine CAP mandates currently hold a combined total of 14 mutual funds offered by four mutual fund companies. The Reconciliation is for internal control purposes and a Reconciliation report is provided to CWT on a monthly basis in a format agreed to by CWT and the Filer.
12. Pursuant to the Agreement, the Filer has instructed Buck to provide CWT with direct access to the Basis record keeping system. CWT staff have been fully trained on how to use the system. As a result of the access and training, CWT staff are able to independently view and download individual plan member records at any time and generate any reports independent of the Filer, which allows CWT to view the allocation of cash and securities held in each bulk account to individual account holders.
13. Under the terms of the Agreement, CWT has the right to periodically audit the Reconciliation on a scheduled or unscheduled basis. In the event the Agreement between the Filer and Buck or its successor terminates, CWT will continue to have access to the Basis record keeping system for a period of up to 12 months post-termination of the Agreement
14. Despite the arrangement described above, the Filer will, however, continue to be the recordkeeper in the first instance of individual Plan Member records. This is contrary to section 14.5.3(a) of NI 31-103, as the Filer is required to take reasonable steps to ensure that Clients' cash and securities is held by a qualified custodian (or, in respect of cash, a Canadian financial institution) using an account number or other designation in the records of the qualified custodian sufficient to show that the beneficial ownership of the cash or securities of a Client is vested in that Client. CWT's records outside of Basis do not show that the beneficial ownership of the cash or securities of a Client is vested in that Client.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision provided that:
(i) the Filer conducts daily reconciliations between its client account records and the records of CWT, and retains records of the results of these reconciliations;
(ii) the Filer completes a monthly review of its reconciliation process which includes an internal certification of account reconciliations, and retains records of the results of these reconciliations;
(iii) the Filer continues to provide CWT with direct access to the Basis record keeping system through its Agreement with Buck or Buck's successor; and
(iv) the Filer continues to permit CWT to conduct scheduled and unscheduled audits of the Filer.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted.
Deputy Director, Compliance And Registrant Regulation
Ontario Securities Commission