Statement of Allegations: In the Matter of Southwest Securities Inc.

Statement of Allegations

IN THE MATTER OF THE
SECURITIES ACT, R.S.O. 1990, c. S.5

AND

IN THE MATTER OF
SOUTHWEST SECURITIES INC.

STATEMENT OF ALLEGATIONS OF STAFF
OF THE ONTARIO SECURITIES COMMISSION

Introduction

1. The respondent Southwest Securities Inc. ("Southwest") is a corporation whose headoffice is located in Dallas, Texas. Southwest has no offices in Ontario.

2. Southwest is a member of the New York Stock Exchange ("the NYSE") and theNational Association of Securities Dealers ("NASD"). Southwest's primary business is toprovide securities transaction processing services to broker-dealers in the United States,Canada, Europe and countries in the Pacific Rim.

3. The allegations set out in this Statement of Allegations arise principally as a resultof a contractual arrangement (more particularly described below) between Southwest andSwift Trade Securities Inc. ("Swift Trade"), and as a result of contractual relationshipsbetween Southwest and customers of Swift Trade ("the Swift Trade Customers").

4. Pursuant to that contractual arrangement, Southwest is, on an ongoing basis,engaging in activity that requires registration under section 25 of the Securities Act ("theAct"). However, Southwest is not registered with the Ontario Securities Commission ("theCommission"). Southwest is therefore contravening Ontario securities law and is actingcontrary to the public interest.

 

Swift Trade

5. Swift Trade is registered with the Commission as a securities dealer. Swift Trade isalso registered with the NASD as an introducing broker-dealer.

6. Swift Trade provides electronic day trading services to the Swift Trade Customers.The trades of Swift Trade Customers are routed electronically to the electronic tradeexecution facilities of the NYSE and NASDAQ.

7. On October 25, 1999, Swift Trade executed a Fully Disclosed Clearing Agreement("the Clearing Agreement") with Southwest. Pursuant to the Clearing Agreement, SwiftTrade is an "introducing broker". Southwest is the "carrying broker" for the Swift TradeCustomers.

 

8. Swift Trade's activities are strictly limited by requirements applicable to itsregistration status with the NASD. Swift Trade:

    (a) is not permitted to receive or hold client funds;

    (b) is not permitted to receive or hold client securities;

    (c) is not permitted to owe funds or securities to customers;

    (d) is required to clear all transactions for customers on a fully disclosed basisthrough a carrying broker;

    (e) is required to rely on a carrying broker to carry the accounts of its customers;and

    (f) is required to rely on a carrying broker to maintain and preserve books andrecords pertaining to the customer accounts.

9. Swift Trade has certified that it complies with the restrictions set out in paragraph 8above. Swift Trade:

    (a) does not receive or hold client funds;

    (b) does not receive or hold client securities;

    (c) does not owe funds or securities to customers;

    (d) clears all transactions for customers on a fully disclosed basis throughSouthwest;

    (e) relies on Southwest to carry the accounts of the Swift Trade Customers; and

    (f) relies on Southwest to maintain and preserve books and records pertaining toSwift Trade's customer accounts.

Southwest's Status and Activities

10. Southwest carries on activities that require registration under the Act. In particular,Southwest:

    (a) receives and holds client funds;

    (b) receives and holds client securities;

    (c) carries client accounts on a fully disclosed basis;

    (d) maintains and preserves books and records pertaining to the client accounts;

    (e) provides margin loans to clients; and

    (f) clears client transactions.

Handling of Client Funds

11. All cheques written by Swift Trade Customers and depositing funds into tradingaccounts are payable to Southwest (not to Swift Trade).

Handling of Client Securities

12. Southwest handles client securities and has control over client securities and funds.

Carrying of Client Accounts

13. The Swift Trade Customers open accounts by executing a Margin and Short AccountCustomer Agreement ("the Margin Agreement") furnished by Southwest. The Swift TradeCustomers' accounts are the responsibility of Southwest.

Books and Records Pertaining to Client Accounts

14. Pursuant to the Clearing Agreement, Southwest is responsible for maintaining thebooks and records relating to the Swift Trade Customers. Client statements are issued bySouthwest.

Margin Lending

 

15. Pursuant to the Margin Agreements furnished by Southwest to the Swift TradeCustomers, those customers are permitted to borrow money on marginable securities usingcredit extended by Southwest. The Swift Trade Customers are required to pay interest toSouthwest on the amount advanced on all margin purchases or short sales.

 

16. Southwest holds the securities purchased on margin as collateral for the debt of theSwift Trade Customers.

 

17. The Margin Agreements contain loan terms and provisions enabling Southwest topledge or lend securities carried for the account of the Swift Trade Customers.

 

Registration Requirement

 

18. Subsection 1(1) of the Act provides that "trade" or "trading" means:

 

    (a) any sale or disposition of a security for valuable consideration, whether the termsof payment be on margin, instalment or otherwise, but does not include apurchase of a security or, except as provided in clause (d), a transfer, pledge orencumbrance of securities for the purpose of giving collateral for a debt made ingood faith,

    (b) any participation as a trader in any transaction in a security through the facilitiesof any stock exchange or quotation and trade reporting system,

    (c) any receipt by a registrant of any order to buy or sell a security,

    (d) any transfer, pledge or encumbrancing of securities of an issuer from the holdingsof any person or company or combination of persons or companies described inclause (c) of the definition of "distribution" for the purpose of giving collateralfor a debt made in good faith, and

    (e) any act, advertisement, solicitation, conduct or negotiation directly or indirectlyin furtherance of any of the foregoing.

 

19. By virtue of its activities, Southwest carries on the business of trading securities inOntario. Section 25 (1) of the Act provides in part as follows:

 

(1) Registration for trading - No person or company shall,

 

    (a) trade in a security or act as an underwriter unless the person or company isregistered as a dealer, or is registered as a salesperson or as a partner or as anofficer of a registered dealer and is acting on behalf of the dealer .

 

and the registration has been made in accordance with Ontario securities law and theperson or company has received written notice of the registration from the Directorand, where the registration is subject to terms and conditions, the person or companycomplies with such terms and conditions.

 

20. Southwest's activities are distinct from, and beyond, mere administrative support thatwould not attract the registration requirement in the Act. Southwest is therefore contraveningsection 25 of the Act.

 

21. By failing to be registered with the Commission, Southwest is not only committingan offence under Ontario securities law, but is also depriving the Swift Trade Customers ofthe protections associated with registration, and is purporting to deprive the Commission ofthe ability to regulate Southwest's affairs for the protection of the Ontario capital marketsand in particular Ontario investors.

 

22. It is in the public interest for the Commission to make an order against Southwest asa result of its conduct set out above.

 

23. Such additional allegations as Staff may make and as the Commission may permit.

 

 

Dated this 15th day of September, 2000.