Foreign Auditors Could Face Oversight in Canada

Stakeholders have been invited to provide feedback on the desirability and feasibility of oversight requirements for work conducted by foreign audit firms for Canadian issuers, as described in a CSA Consultation Paper published on April 25, 2017. Responding to a proposal by the Canadian Public Accountability Board (CPAB), the CSA is exploring amendments to National Instrument 52-108 Auditor Oversight which would require foreign audit firms involved in the audit of a reporting issuer’s financial statements (Component Auditors) to register as a participating audit firm (a PAF).

The Need for Oversight

The Consultation Paper stems from CPAB’s request that the CSA amend NI 52-108 to require that Component Auditors register as PAFs providing CPAB with a legal basis to inspect their audit work in most foreign jurisdictions. Currently, a PAF who engages the work of a Component Auditor must comply with Canadian auditing standards which provide that the PAF is responsible for the direction, supervision and performance of the overall audit but a Component Auditor is not required to register as a PAF. As described in the Consultation Paper, CPAB has not always been granted access to audit evidence in instances where Component Auditors have performed a substantial portion of the audit work for a reporting issuer. According to CPAB, 597 reporting issuer audits in 95 foreign jurisdictions involved a Component Auditor in 2016.

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Update on Cyber Security: CSA publishes results of roundtable on response to Cyber Security Incidents

Jérémie Ste-Marie and Vanessa Coiteux - 

The results of the Canadian Securities Administrators' (CSA) February 27, 2017 roundtable on cyber security issues were published in a Staff Notice on April 6, 2017. Primarily analyzing the importance of cooperation, coordination and information sharing with regards to incident response, the Staff Notice follows this year's publication of CSA Multilateral Staff Notice 51-347, which focused on cyber security risk disclosure, and is in line with CSA Staff Notice 11-332 Cyber Security (Notice 11-332), which reiterated that cyber security is one of CSA's top priorities.

Participants at the roundtable included various Canadian securities market stakeholders – including marketplaces, clearing agencies, registrants, reporting issuers, regulatory authorities and cyber security experts – and focused on two hypothetical cyber security scenarios designed to assess how they would respond in the event of a large-scale cyber security incident in order to gain a better understanding of the respective roles of entities and regulators in case of a cyber-attack. Keeping in mind the potentially have far-reaching implications of cyber-attacks that go well beyond the immediate organizations that are affected, the participants concluded that cooperation, coordination and information sharing were crucial in responding to a cyber incident.

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OSC investor panel supports "Best Interest" standard and ban on conflicted advice by Investment Advisors

Encouraging the adoption of a best interest standard for investment advisors continues to be a key goal of the Investor Advisory Panel (IAP) of the Ontario Securities Commission, according to the IAP’s newly released 2016 Annual Report. Other top priorities of the seven-member panel include:

  • Conflicts of interest and conflicted compensation;
  • Accuracy in risk profiling;
  • Strengthening the Ombudsman for Banking Services and Investments; and
  • The future of the IAP within the new Capital Markets Regulatory Authority.

Eliminating Conflicts

The Report underscores the IAP’s view that conflicts of interest and conflicted compensation are unacceptable and that proposals in CSA Consultation Paper 33-404 requiring merely that such conflicts be disclosed are insufficient from a retail investor perspective. In 2017, the IAP intends to prepare a response to the CSA paper arguing that embedded commissions and conflicted compensation must be banned outright.

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Increased enforcement highlighted in annual IIROC report

The annual Enforcement Report published by the Investment Industry Regulatory Organization of Canada (IIROC) on April 19, 2017 highlights IIROC’s increased enforcement activity in 2016, as well as an increase in complaints, proceedings, and sanctions imposed on disciplined individuals. Notably, however, IIROC’s collection rate for fines levied against individuals dropped to 8% in 2016.

Increased Activity

IIROC’s enforcement activity increased in 2016:

  • 138 investigations were completed (124 in 2015).
  • 1,459 complaints were received (1,341 in 2015).
  • 55 proceedings were commenced (25% increase from 2015).
  • $3.12 million of sanctions were imposed on disciplined individuals ($2.95 million in 2015).
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The OSC's FinTech Hackathon: a hint of what's to come?

As part of the Ontario Securities Commission’s “OSC LaunchPad” initiative, more than 120 members of the FinTech community were brought together in late 2016 to find solutions to capital markets regulatory problems. The results of this effort are described in the Ontario Securities Commission’s recent publication “OSC RegHackTO: Insights from Canada’s first regulatory hackathon”. “RegHackTO”, the first hackathon by a Canadian securities regulator, aimed at engaging with the FinTech community to better understand how technology could assist in the modernization efforts of the OSC and the financial services sector more broadly.

What is a “Hackathon”?

A hackathon is a design competition in which computer programmers and software developers collaborate on innovative technology projects. Culminating with competitors pitching solutions to a panel of judges, the OSC’s hackathon focused on four key problem areas:

  • RegTech (automated reporting and insider trading detection);
  • Know-Your-Client (KYC)/identity authentication;
  • Financial literacy (advisor ratings and investor education); and
  • Transparency in the capital markets (distribution pricing and fees; access to information).

The competitors worked on their solutions over a period of three days, November 25-27, 2016.

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OSC seeks comments on Proposed Rules of Procedure

Proposed Rules of Procedure and Forms and Practice Guidelines have been published for comment by the Ontario Securities Commission which will replace the current rules and guidelines and apply to all proceedings before the OSC where the OSC is required to hold a hearing pursuant to the Securities Act (Ontario) or the Commodity Futures Act (Ontario). The rules and guidelines are being published for a 60-day comment period ending on June 19, 2017, following which they will be implemented.

For further information, please see “OSC Publishes Updated Rules of Procedure and Practice Guideline for Comment” (April 20, 2017) and Notice and Request for Comments Regarding the Rules of Procedure and Forms and Practice Guideline of the Ontario Securities Commission (April 20, 2017).

TSX revisits proposal for enhanced equity compensation plan and corporate governance disclosure

The disclosure requirements for security-based compensation arrangements for TSX-listed issuers are once again being considered pursuant to proposed amendments to the TSX Company Manual published by the Toronto Stock Exchange (TSX) on April 6, 2017. The revised proposal addresses comments received in response to a TSX request for comments from May 2016, in which a number of commenters expressed concerns about the increase in regulatory burden that could potentially result from the amendments (see our previous post). In this revision, the TSX has scrapped the previously proposed disclosure form (Form 15) and the burn rate formula for the new burn rate disclosure obligation has been revised. Amendments are also being made to better align the time periods covered by TSX-required disclosure with executive compensation disclosure requirements in National Instrument 51-102F6 Statement of Executive Compensation.

Proposed Disclosure Obligations

If adopted, the amendments to the TSX Company Manual would change the proxy circular disclosure obligations with respect to security based compensation arrangements as follows:

  • Plan maximum. Clarification has been made to the disclosure requirement regarding securities awarded or to be awarded under a plan. The maximum number of securities issuable under each plan as either a fixed number (accompanied by the relative percentage of the issuer’s issued and outstanding securities) or fixed percentage will be required.
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Canadian regulators look to reduce public company compliance burden and facilitate capital raising

A Consultation Paper identifying areas of securities legislation where the regulatory burden on non-investment  fund reporting issuers could be reduced was published for comment by the Canadian Securities Administrators (CSA) on April 6, 2017. The Consultation Paper describes options applicable to both capital raising in the public markets and the ongoing costs of remaining a reporting issuer. The potential initiatives outlined in the Consultation Paper fall into five categories and are proffered with an eye to maintaining the appropriate level of investor protection and efficiency in the capital markets:

  • Extending the application of streamlined rules to smaller reporting issuers. Currently, reporting issuers that do not have securities listed or quoted on a senior exchange, including the Toronto Stock Exchange, (generally referred to as “venture issuers”) benefit from less onerous continuous disclosure requirements, including longer filing deadlines and reduced filing obligations. The CSA is considering the use of a size-based metric to reduce the reporting requirements for smaller reporting issuers listed on senior exchanges. Similar size-based thresholds are already available in the United States, where reduced reporting requirements are available for smaller reporting companies under the U.S. Securities and Exchange Commission’s rules and regulations and for “emerging growth companies” under the U.S. Jumpstart Our Business Startups Act of 2012 (the JOBS Act).
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Importance of good faith participation in OBSI processes stressed in JRC's 2016 annual report

On March 23, 2017, the Joint Regulators Committee (JRC) of the Ombudsman for Banking Services and Investments (OBSI) released its 2016 Annual Report (the Report) which summarizes the JRC’s activities in 2016, including, as is periodically required by its agreement with the Canadian Securities Administrators (CSA), an independent evaluation of OBSI’s operations and practices for its investment mandate.

The evaluator (a former New Zealand Banking Ombudsman) recommended a number of enhancements to OBSI’s mandate, including the ability to make binding awards and a public policy function under which it would prepare submissions on regulatory and legislative proposals and advise regulators on the effectiveness of existing regulations. The evaluator also recommended raising OBSI’s compensation cap and increasing clarity around the negotiated settlement process by, for example, including a rationale for settlement amounts in settlement letters and by publishing a short guide to the process for firms and consumers.

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CSA Proposes Market Conduct Rule for Derivatives Dealers and Advisors

On April 4, 2017, the Canadian Securities Administrators (CSA) published a notice and request for comment on their proposed business conduct rule that sets out a regime for regulating the conduct of dealers and advisers in over-the-counter derivatives markets.  The CSA’s Proposed National Instrument 93-101 Derivatives: Business Conduct, along with Proposed Companion Policy 93-101 Derivatives: Business Conduct (together the proposed rule), is aimed at protecting parties using over-the-counter derivatives products by requiring derivatives firms to meet certain minimum standards in relation to their business conduct towards their customers and counterparties. The types of measures proposed will be familiar to dealers and advisers in securities markets, albeit with modifications tailored to the nature of the OTC derivatives market. The introduction of this proposed rule is the first of two highly anticipated regulatory developments in the Canadian OTC derivatives space, with the second being the derivatives registration rule, which is expected to be published in the summer of this year. Comments on the proposed rule are being accepted until September 1, 2017.

A separate regime for market conduct and derivatives registration

The CSA’s decision to separate the market conduct rule (which will apply to a certain extent to federal financial institutions) from the derivatives registration rule may foreshadow that federal financial institutions will be exempt from the registration rule. The proposed rule is intended to establish a robust derivatives market conduct regime that is harmonized across Canada and is consistent with IOSCO’s international standards.  The regime would apply as a baseline standard to “help protect investor, reduce risk, improve transparency and accountability and promote responsible business conduct” in the OTC derivatives markets in the wake of the global financial crisis and what the CSA note have been “numerous cases of serious market misconduct in the global derivatives market including, for example, misconduct relating to the manipulation of benchmarks and alleged front running of customer orders”.

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Common Reporting Standard guidance published by the CRA

Roanne C. Bratz -

On March 22, 2017, the Canada Revenue Agency (CRA) issued the long awaited “Guidance on the Common Reporting Standard”.  The Common Reporting Standard (CRS), which is formally referred to as “Standard for Automatic Exchange of Financial Account Information in Tax Matters”, is contained in under Part XIX of the Income Tax Act (the Act).

Within the publication are various commentaries that cross-reference the U.S. Foreign Account Tax Compliance Act (FATCA) contained in Part XVIII of the Act in the implementation of CRS.  Of note is the recognition that for the purposes of Part XVIII, non-reporting financial institutions are listed in Annex II of the IGA  and are identified as exempt beneficial owners or deemed-compliant financial institutions.  Since CRS does not contain the concepts of exempt beneficial owners and deemed-compliant financial institutions, certain Canadian financial institutions that do not have obligations under Part XVIII will have obligations under Part XIX. Moreover, charities, religious organizations and other types of non-profit organizations can be treated differently for the purposes of Part XVIII and Part XIX.  That is, for the purposes of Part XVIII these entities are non-reporting financial institutions, while under Part XIX these entities can be active NFEs or financial institutions.  In addition, Part XVIII and IGA use the term "non-financial foreign entity” (NFFE) which excludes U.S. entities, whereas for the purposes of Part XIX, a U.S. entity that is not a financial institution is a NFE. Lastly, under Part XIX, a financial institution is required to review all individual accounts and so certain accounts that were not required to be reviewed under Part XVIII because of a de minimus exception may have to be reviewed under Part XIX.

The CRA’s guidance follows the publication of draft legislative proposals and explanatory notes on July 29, 2016.

Proposed Ontario legislation would strengthen shareholder rights and board diversity

Laura Levine and Alethea Au - 

Say-on-pay, board diversity and majority voting requirements are among the key proposals aimed at modernizing the Business Corporations Act (Ontario) (OBCA) in the recently introduced Bill 101, Enhancing Shareholder Rights Act, 2017. Following the lead of amendments to the Canada Business Corporations Act (CBCA) proposed in late 2016, Bill 101, a private member’s bill, addresses some of the hot button issues facing corporations in Canada.

Diversity: Keeping Shareholders Informed

Bill 101 proposes provisions that support diversity for certain OBCA corporations. Using the same language as the proposed amendments for the CBCA addressing diversity, Bill 101 would require prescribed OBCA corporations:

  • to provide shareholders with prescribed information about diversity among directors and senior management on an annual basis; and
  • to send this information to all shareholders, except for shareholders who have informed the corporation in writing that they do not want to receive such information.
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OSC publishes draft 2017-2018 statement of priorities

The Ontario Securities Commission (OSC) will seek opportunities to reduce the regulatory burden on market participants while maintaining investor protections as one of the 14 priority areas further described in the OSC’s draft Statement of Priorities for 2017-2018, published on March 23, 2017. Organized under five regulatory goals, the Statement of Priorities outlines where the OSC intends to focus resources and actions  for the coming year. The draft Statement of Priorities is open for comment until May 23, 2017. 

The OSC’s five regulatory goals for 2017-2018 are consistent with those outlined in the past: 

  • Deliver strong investor protection.
  • Deliver effective compliance, supervision and enforcement.
  • Deliver responsive regulation. 
  • Promote financial stability through effective oversight. 
  • Be an innovative, accountable and efficient organization.
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Climate change disclosure gets its day in the sun

The Canadian Securities Administrators will review TSX-listed issuers’ disclosure of the material risks and financial impacts associated with climate change and related governance processes as part of a disclosure review project announced on March 21, 2017. The CSA will also consult with reporting issuers through focus groups and an anonymous online survey and will review the related international disclosure requirements and voluntary frameworks. The review project is intended to be conducted in spring and summer of 2017 with a progress report being published shortly thereafter.

The CSA’s disclosure review project follows the December 2016 publication of a set of disclosure recommendations by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures and investor requests for improved disclosure in respect of climate change risks and impacts. Currently, Canadian reporting issuers are required to disclose material risks in their continuous disclosure, which may include risks associated with climate change and other environment-related matters, as applicable. Guidance in respect of these disclosure obligations as they specifically relate to environmental reporting was previously published in CSA Staff Notice 51-333 Environmental Reporting Guidance (October 27, 2010).

For more information please see “Canadian securities regulators announce climate change disclosure review project” (March 21, 2017) and the CSA’s Backgrounder: CSA climate change disclosure review project

TSX publishes guidance on advance notice policies

The Toronto Stock Exchange (TSX) has reviewed 25 randomly selected advance notice policies adopted by TSX-listed issuers and has identified a number of its concerns in a Staff Notice published on March 9, 2017. The Staff Notice acknowledges the underlying reasons for the adoption of an advance notice policy but suggests that certain provisions in advance notice policies are not consistent with the stated objectives of the TSX rules related to director elections, including specifically where policies require the nominating security holder to:

  • Attend the meeting at which his or her nominees is standing for election.
  • Provide unduly burdensome or unnecessary disclosure.
  • Complete a TSX personal information form, unless otherwise generally required to be completed by management and board nominees.
  • Complete a questionnaire, make representations, submit an agreement or provide written consent, unless otherwise generally required from management and board nominees. 
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