Simon Markets LLC and Axio Financial LLC
Application for a decision exempting the Filer, a U.S. registered broker-dealer, from the dealer registration requirement to permit the Filers to provide services through a technology platform that facilitates education, marketing, and trading of structured products relating to Canadian securities - all execution of trades in securities are made through an executing broker for execution, clearance, and settlement - time-limited registration relief granted to allow the Filers to provide the 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.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1) and 74.
Multilateral Instrument 11-102 Passport System, ss. 4.4(c), 4.7, 4.7(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 1.1, 8.5, 8.18, 8.18, 8.21, Form 31-103F1 Calculation of Excess Working Capital.
Ontario Securities Commission Rule 13-502 Fees.
September 15, 2023
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 SIMON MARKETS LLC AND AXIO FINANCIAL LLC
The principal regulator in the Jurisdiction has received an application (the Application) from SIMON Markets LLC (SIMON) and Axio Financial LLC (Axio, together with SIMON, the Filers or each a Filer) for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filers from the dealer registration requirement in the Legislation in respect of providing Services (as defined below) relating to securities of 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 Filers have 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 other provinces and territories of Canada (together with the Jurisdiction, the Jurisdictions).
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 terms have the following meanings:
"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; and
"NI 31-103" means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
This Decision is based on the following facts represented by the Filers:
1. SIMON is a limited liability company formed under the laws of Delaware. The head office of SIMON is located at 60 East 42nd Street, 26th Floor, New York, NY 10165, United States of America.
2. Axio is a limited liability company formed under the laws of Delaware. The head office of Axio is located at 60 East 42nd Street, 26th Floor, New York, NY 10165, United States of America.
3. SIMON is registered as a broker-dealer with the U.S. Securities and Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority (FINRA). SIMON is approved to perform the following types of regulated business in the U.S. as per FINRA regulations: (i) broker or dealer making inter-dealer markets in corporation securities over-the-counter; (ii) broker or dealer selling corporate debt securities; (iii) underwriter or selling group participant (corporate securities other than mutual funds); (iv) broker or dealer selling variable life insurance or annuities; (v) solicitor of time deposits in a financial institution; (vi) put and call broker or dealer or option writer; and (vii) private placement of securities.
4. Axio is registered as a broker-dealer with the SEC and is a member of FINRA. Axio is approved to perform the following types of regulated business in the U.S. as per FINRA regulations: (i) broker or dealer retailing corporate equity securities over-the-counter; (ii) broker or dealer selling corporate debt securities; (iii) underwriter or selling group participant (corporate securities other than mutual funds); (iv) U.S. government securities dealer; (v) U.S. government securities broker; (vi) municipal securities dealer; (vii) municipal securities broker; (viii) solicitor of time deposits in a financial institution; (ix) put and call broker or dealer or option writer; (x) non-exchange member arranging for transactions in listed securities by exchange member; (xi) trading securities for own account; (xii) private placement of securities; (xiii) financial advisor to companies involved in mergers and acquisitions; (xiv) engaging in the marketing of investment companies (including mutual funds, closed-end funds, unit investment trusts and variable annuities) to other broker-dealers and SEC registered investment advisors and (xv) underwriter or sponsor of unit investment trusts.
5. SIMON's primary line of business, and a significant line of business for Axio in the future, is providing a technology platform (the Platform) referred to currently as the SIMON Platform that facilitates education, marketing, and trading of structured products (collectively, Securities).
6. The Platform features customized tools for: advisor education; product marketing and education; product comparison; historical pricing and performance analysis; and an indication of interest management tool (the Services). The Services do not include trade execution, clearance, or settlement services.
7. The subscribers (Subscribers) to the Platform in Canada are anticipated to be sell-side financial institutions and securities dealers and buy-side institutional users including financial advisors, portfolio managers and similar institutional users.
8. The Filers have applied for the Exemption Sought as they wish to provide similar services to Institutional Permitted Clients in the Jurisdictions (the Canadian Subscribers) in respect of the Securities.
Nature of the Services to be provided to Canadian Subscribers
9. Each of the Filers will enter into a written agreement with each Canadian Subscriber to allow such Canadian Subscriber to access the Services via the Platform.
10. Using the Services, Canadian Subscribers may choose to enter into trades with respect to Securities. All execution of trades in securities will be made through an investment dealer or other appropriately registered or exempt dealer (the Executing Broker) selected by the Canadian Subscriber. Each 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 person or company to execute trades for Canadian Subscribers.
11. A Canadian Subscriber may communicate indications of interest through the Platform to the Executing Broker selected by the Canadian Subscriber.
12. The Filers will not require Canadian Subscribers to use specific Executing Brokers through whom trades must be executed. The Filers will not direct or otherwise communicate trades to Executing Brokers and no trade orders will be matched on the Platform.
13. The Filers will track indications of interest of Canadian Subscribers.
14. Executing Brokers will execute transactions on behalf of Canadian Subscribers by: (i) accepting the trade orders received from the Canadian Subscriber; (ii) transmitting and executing the securities transactions or acting as counterparty to an over-the-counter (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 Canadian Subscriber.
15. The compensation for the Services provided by the Filers will be a fee based on the notional volume of trades executed based on information exchanged on the Platform by Canadian Subscribers, and will be paid by the issuers of the Securities. This compensation will be in addition to any compensation paid by Canadian Subscribers directly to the applicable Executing Brokers.
Why is relief required?
16. The Filers are not registered under NI 31-103 and are, or will be, in the business of trading in securities by virtue of providing the Services. Only dealers that are registered or firms relying on an applicable exemption from the dealer registration requirement are permitted to engage in the business of trading in securities in the Jurisdictions.
17. In the absence of the Exemption Sought, the Filers cannot provide the Services in the jurisdictions 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.
18. The "international dealer exemption" under section 8.18 [International dealer] of NI 31-103 is unavailable as the exemption under section 8.18 does not apply to certain of the Securities on the Platform, including certain Canadian debt securities.
19. The Filers do not hold, take custody of, remit, or exchange money or Securities on behalf of Canadian Subscribers.
20. The Filers will not lend money, extend credit, or provide margin to Canadian Subscribers.
21. The Filers are 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).
22. 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 the Canadian Investment Regulatory Organization are subject, and the Filers are in compliance with SEC Rule 15c3-1. If the Filers' net capital declines below the minimum amount required, the each of the Filers 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 responsibility to provide oversight over the Filers' compliance with SEC Rule 15c3-1.
23. The Filers are 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 each of the Filers, and more accurately reflects such activities than would otherwise be provided by Form 31-103FI Calculation of Excess Working Capital (Form 31-103FI). 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 31-103Fl 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.
24. The Filers are in compliance in all material respects with U.S. securities laws. The Filers are not in default of securities legislation in any jurisdiction in Canada.
25. The Filers submit that the Exemption Sought would not be prejudicial to the public interest because:
(a) Each of the Filers is regulated as a broker-dealer under the securities legislation of the United States, and is subject to the requirements listed above;
(b) the availability of, and access to, the Services is important to Canadian institutional investors who are active participants in the international marketplace;
(c) the Filers will provide 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 United States 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.
26. Each of the Filers is a "market participant" as defined under subsection 1(1) of the Securities Act (Ontario) (Act). As a market participant, among other requirements, the Filers are required to comply with the record keeping and provision of information provisions under section 19 of the Act, which includes 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.
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 each of the Filers:
(a) has its head office or principal place of business in the United States;
(b) is registered as a broker-dealer under the securities legislation of the United States, which permits it to provide the Services in the United States;
(c) is a member of FINRA;
(d) limits its provision of Services in the Jurisdictions under this decision in respect of Institutional Permitted Clients;
(e) does not provide Services in relation to Securities with or for Institutional Permitted Clients except as permitted under Canadian securities laws;
(f) enters into an agreement with each Canadian Subscriber;
(g) does not require its Canadian Subscribers to use specific executing brokers through which Canadian Subscribers must execute trades;
(h) 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;
(i) submits audited financial statements to the OSC on an annual basis, within 90 days of the applicable Filer's financial year end;
(j) 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;
(k) 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, if applicable, and capital markets activities conducted in reliance on the exemption in this Decision;
(l) 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
(m) 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 Filers.