Amendments to registrant regulatory framework place restrictions on exempt market dealers, limit availability of registration exemptions and harmonize sub-adviser exemption

Jeffrey Elliott, Alix d’Anglejan-Chatillon, Kenneth G. Ottenbreit and Terence W. Doherty -

The Canadian Securities Administrators recently published final amendments to NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations which will have a significant impact on the registration requirements for dealers, advisers and investment fund managers (the Amendments) and include (i) restrictions on the activities that exempt market dealers may conduct, including a prohibition on brokerage activities; (ii) limits on the availability of certain registration exemptions for registrants; (iii) the addition of an adviser registration exemption for trades through a registered dealer; (iv) a harmonized adviser registration exemption for international sub-advisers; and (v) exemptions from certain registration requirements for registered sub-advisers.

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IIROC adopts amendments regarding order execution services

IIROC yesterday announced the adoption of amendments to UMIR and its Dealer Member Rules intended to achieve consistency in the oversight of similar activity occurring through different forms of third-party electronic access. 

Among other things, the amendments introduce a requirement that dealers providing order execution services include a client ID on each order entered on a marketplace for or on behalf of any client (i) whose trading activity on marketplaces exceeds a daily average of 500 orders per trading day in any calendar month; (ii) that is not an individual and is registered as a dealer or adviser in accordance with applicable securities legislation; or (iii) that is not an individual and is in the business of trading securities in a foreign jurisdiction in a manner analogous to a dealer or adviser.

Pursuant to the amendments, an OES dealer will be required to provide IIROC the identification of the client associated with the client ID and Participants providing execution services for OES dealers will also have to ensure that each order sent to a marketplace includes the client ID on each order.

IIROC first proposed the amendments in October 2013 and republished them in April 2014. The amendments come into effect on June 1, 2015.

For more information, see IIROC Notice 14-0263 and Notice 14-0264 for associated guidance.

IIROC revises requirement to disclose IIROC membership

The Investment Industry Regulatory Organization of Canada today republished for comment proposed changes to its Dealer Member Rules related to the requirement to disclose membership in IIROC as a Dealer Member.

IIROC initially proposed the changes in December 2011 to require that dealers display the IIROC decal at business locations to which clients have access and display the IIROC logo on client trade confirmations, account statements and on the dealer's website.

Among other things, the updated proposal removes the requirement that the IIROC logo be included on client account statements and trade confirmations.

IIROC is accepting comment on the updated proposal for 60 days. For more information, see IIROC Notice 14-0265.

OSC Staff take narrow view on application of "hedger" exemption under the CFA

Margaret Grottenthaler, Kenneth G. Ottenbreit and Terence W. Doherty

In a recently released staff notice, staff of the Ontario Securities Commission (OSC) have provided guidance on the availability of certain exemptions from the dealer registration requirement under the Commodity Futures Act (CFA) that we believe is contrary to the prevailing interpretation among market participants. As we reported in September, under OSC Staff Notice 33-744 – Availability of registration exemptions to foreign dealers in connection with trades in options and futures contracts under the Commodity Futures Act (Ontario) (the Notice), OSC staff take the view that an unregistered dealer may not rely on the “hedger” exemption and also take a very narrow view of the availability of the “unsolicited trade” exemption under the CFA.

In the Notice, OSC staff state their view that the hedger exemption is not available to an unregistered non-Canadian dealer that wishes to trade with a hedger. In our view, the longstanding and accepted interpretation of the hedger exemption has been that the exemption may be relied on by an unregistered non-Canadian dealer. The Notice represents a surprising and very restrictive interpretation of the availability of the “hedger” exemption commonly relied on by unregistered non-Canadian dealers when trading futures with Ontario resident “hedgers”, and runs counter to over thirty years of accepted legal interpretation and industry practice.

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Glass Lewis, ISS update proxy guidelines for 2015 season

On November 5, Glass Lewis released updates to its Canadian voting guidelines for the upcoming 2015 proxy season.

Notable updates to the guidelines include those in respect of shareholder rights and defences, including (i) recommending that shareholders withhold votes from all members of an uncontrolled TSX-listed company’s governance committee where such company has not adopted a majority voting policy, in light of changes to TSX rules; (ii) amending the circumstances in which Glass Lewis will consider support for shareholder rights plans to require that the plan not allow the board the discretion to amend the material provisions without shareholder approval in addition to Glass Lewis’ previously considered attributes; and (iii) amending its position with regard to advance notice policies such that Glass Lewis may now consider recommending a vote against a policy that does not allow for the commencement of a new time period where an annual meeting is adjourned or postponed (an issue we discussed in our recent post).

Additional updates include the increase in guidance with regard to directors who have served on boards or as executives of companies with poor performance records, the additional recommendation that routine director evaluation be performed by an independent external firm and new guidance about “one-off awards” with Glass Lewis stating the companies should redesign their compensation programs where such programs fail to provide adequate incentives to executives, rather than make additional grants.

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AMF issues exemptions from trade reporting rule

On October 31, 2014, the Autorité des marchés financiers du Québec (the AMF) exempted the Fédération des caisses Desjardins du Québec (the Quebec Federation), all the Quebec Federation’s Caisse Desjardins members, the Quebec Federation’s subsidiaries, Caisse centrale Desjardins du Québec (Caisse centrale), the Fédération des caisses populaires de l’Ontario inc. (the Ontario Federation) and all of the Ontario Federation’s caisse populaire members (together, the Desjardins Group) from their obligations under section 26 of Regulation 91-507 to report derivatives trade data to a recognized central repository in respect of trades among the entities of the Desjardins Group.

The AMF highlighted the following facts in support of the exemption demand:

  • the AMF exercises prudential supervision over the Desjardins Group, including over the Ontario Federation and its members;
  • the Deposit Insurance Corporation of Ontario exercises prudential supervision over the Ontario Federation’s caisse populaire members; and
  • Caisse centrale acts as treasurer and financial agent within the Desjardins Group and as a counterparty both within the Group and externally.

IIROC adopts debt transaction reporting rule

Last week, the Investment Industry Regulatory Organization of Canada (IIROC) adopted a new rule requiring dealers to report debt securities transactions.

Under this new Dealer Member Rule 2800C, and subject to certain exceptions, debt market transactions executed by a dealer member must be reported to IIROC on a post-trade basis (on T+1), including those executed on an Alternative Trading System or through an Inter-Dealer Bond Broker. Transaction information will have to include certain specified data elements, and the Customer Legal Entity Identifier and Customer Account Identifier will remain optional fields for the time being, although the requirement will be reassessed by the Bank of Canada and IIROC within the next few years. IIROC advises that dealer members who choose to report the Customer LEI should ensure that their customer has authorized such disclosure to IIROC. Similar reporting requirements for transactions of dealer members’ affiliates who are Government Securities Distributors (GSD) are also being implemented.

The first phase of reporting responsibilities will be implemented beginning on November 1, 2015 for dealer members who are GSDs (or have affiliates who are GSDs) and are participants in the Market Trading Reporting System, with a second phase taking effect on November 1, 2016 for all other debt securities transaction reporting by GSD and non-GSD dealer members. The new rule is intended to enable IIROC to carry out its responsibilities with respect to surveillance and oversight of over-the-counter (OTC) debt market trading.

As we previously discussed, IIROC released a proposed version of the rule for comment early last year and republished the proposed rule in January 2014. The final version of the rule takes into account public comments received in response to the previous proposals and includes minor revisions intended to enhance the clarity and consistency of the earlier drafts. For more information, see IIROC Notice 14-0250.

Participation fees due December 31

The OSC is reminding firms registered in Ontario that, except in the case of unregistered Investment Fund Managers, participation fee forms are due to the OSC on December 1, while participation fees are due December 31.

To assist registered firms in satisfying their obligations, the OSC is hosting a seminar on November 6 to discuss the calculation of participation fees, key issues and common errors.

AMF recognizes CFTC and ESMA rules for trade reporting

Quebec's Autorité des marchés financiers yesterday issued a decision in which it recognizes that the trade reporting rules of the U.S. Commodity Futures Trading Commission and those of the European Securities and Markets Authority are equivalent to the requirements imposed under Regulation 91-507. Under s. 26(5) of  the Regulation, a reporting counterparty is deemed to satisfy certain obligations  of the Regulation where it reports a transaction to a recognized trade repository pursuant to the laws of a foreign jurisdiction which appear on a list determined by the Autorité and certain other conditions are met.

Market participants may consult the list of laws of jurisdictions other than Quebec that are equivalent for the purposes of this deemed compliance provision on the AMF website.

As we've previously discussed, the trade reporting rules come into force beginning today.

Comment period on cooperative capital markets regime extended to December 8

Canadian jurisdictions participating in the cooperative capital markets regulator project announced today that the consultation period in respect of the draft Provincial Capital Markets Act (PCMA) and Capital Markets Stability Act (CMSA) has been extended to December 8, 2014. The comment period had been originally scheduled to end on November 7, 2014.

For more information on the proposed regime, see our posts on the infrastructure of the proposed new regime, the proposed provincial acts, and the effects of the proposals on derivatives regulation.


CCGG releases annual best practices for proxy circular disclosure

Kevin Smyth and Marshall Eidinger

Recently, the Canadian Coalition for Good Governance (CCGG) released its 2014 Best Practices for Proxy Circular Disclosure. The annual publication, which is intended to provide issuers with guidance on corporate governance and executive compensation disclosure, also includes a list of the CCGG's "Governance Gavel Awards" winners. In determining the winners, which this year includes Canadian Pacific Railway, Pembina Pipeline and Vermilion Energy, the CCGG considered the alignment between an issuer's governance practices and the recommended practices found in its publication Building High Performance Boards.

With respect to the review of disclosure practices, the publication sets out the CCGG’s expectations in respect of such issues as majority voting, director independence, board succession, director skills and education, risk management oversight, executive compensation and shareholder engagement, and provides a number of examples of actual disclosure the CCGG deems as “excellent”. Such disclosure included examples from Potash Corporation of Saskatchewan, ShawCor and Canadian Pacific Railway. 

The following is a summary of guidance provided by the CCGG.

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Amendments to Regulation 91-507 approved in Quebec

 Quebec's Regulation to amend Regulation 91-507 respecting Repositories and Derivatives Data Reporting has now received Ministerial approval. As we wrote last week, the amended regulation comes into force tomorrow.

Canadian rules on trade repositories and data reporting - Where we are on the eve of reporting

Margaret Grottenthaler -

The trade reporting rules of the securities regulatory authorities in Ontario, Manitoba and Quebec will require reporting beginning October 31. A number of changes to the rules have been made since they were first published in June 2013. On the eve of these rules coming into force, we thought it a good time to republish our article from earlier this year, but incorporating developments since then. Other provinces have still not announced any rules or instruments dealing with trade reporting, but rules are expected in the near future from many of them.

The OTC Derivatives Committee of the Canadian Securities Administrators published model provincial rules with respect to trade reporting for comment in December 2012 and Ontario, Quebec and Manitoba each published proposed harmonized rules in June 2013. The final rules in these three provinces came into force on December 31, 2013, but with staggered implementation of reporting obligations over the course of this following year and next. The initial reporting deadline of July 2, 2014 was extended in all three jurisdictions to October 31, 2014. There have also been further changes to the rules to limit dual reporting by incorporating the ISDA reporting logic. We will refer to Rule 91-507 (or in Quebec Regulation 91-507) as the TR Rule. At the end of this article you will find links to the amended TR Rules.

We have focused our comments on the data reporting and dissemination aspects of the rules.

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Legal Entity Identifiers required for derivatives reporting as of October 31

The Ontario Securities Commission, AMF and MSC have now released notices reminding derivatives market participants of the imminent requirement to identify counterparties to a transaction by a Legal Entity Identifier (LEI). The OSC further advises that “non-reporting counterparties should provide all relevant information to reporting counterparties under OSC Rule 91-507, including their LEI, to assist reporting counterparties in complying with their obligations”. The obligations in Quebec and Manitoba are similar.

As we've recently discussed, trade reporting rules in Ontario Manitoba and Quebec will require reporting beginning October 31. The requirement to identify counterparties by an LEI will apply to all transactions for which the reporting counterparty is a derivatives dealer or recognized or exempt clearing agency.

The OSC, AMF and MSC also state that reporting counterparties faced with legal barriers to reporting counterparty-identifying information in their jurisdiction should apply for exemptive relief. Meanwhile, while derivatives market participants may face operation challenges not related to legal impediments to obtaining counterparty LEIs by October 31, the notices advise that best efforts should be used to obtain counterparty LEIs as soon as possible.

OSC launches online compliance and regulation guide

On October 27, the Ontario Securities Commission launched a webpage to help registrants find OSC guidance in respect of compliance and regulation matters. Specifically, the webpage, which is organized by topic, provides links to existing OSC notices, reports and guidance.