Phase 2 of IIROC transaction reporting for debt securities effective on November 1, 2016

The Investment Industry Regulatory Organization of Canada (IIROC) recently published an update on the implementation of transaction reporting for debt securities.   By way of Notice 16-0238 on October 17, 2016, IIROC advised dealer members that phase 2 implementation of Rule 2800C will become effective on November 1, 2016.  IIROC further advised dealer members that prior to November 1, all dealer members that transact in debt securities must complete the MTRS 2.0 Dealer Member Enrollment Form and obtain the applicable credentials.

Notably, phase 2 of the implementation of Rule 2800C will expand reporting obligations to all dealer members (which includes those that were not included as part of the phase 1 implementation).  Phase 2 will also expand the reporting obligations of dealer members included in the phase 1 implementation to include all foreign-currency denominated transactions.

For further information, please consult the Debt Securities Transaction Reporting MTRS 2.0 User Guide.

Modernizing the CBCA--aligning diversity and director election requirements

Laura Levine and Alethea Au -

Board and management diversity, director election processes and notice-and-access procedures are the key issues dealt with by proposed amendments to Canada’s corporate law that were recently introduced in the House of Commons by the federal government. Known as Bill C-25, the proposed amendments, if adopted, would make significant changes to the Canada Business Corporations Act (CBCA), the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act, as described below.


The proposed amendments support increased diversity for CBCA “distributing corporations” (generally, public companies) through the imposition of what is expected to be a “comply or explain” model. Under that approach, public companies would be required to disclose the gender composition of their boards and senior management and to describe their diversity policies (or, alternatively, explain why no such policies have been adopted). The regulations to the CBCA are also proposed to be amended to prescribe the actual disclosure that is required and will set out what will be considered to be “senior management” roles but will not define the concept of “diversity”. The amended regulations have yet to be made public. 

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Court of Appeal provides guidance for securities class actions

Alan D’Silva, Alexander Rose and David Spence - 

In the proposed $1 billion class action Rooney v. ArcelorMittal S.A., the Ontario Court of Appeal has clarified that security holders who sell their securities in the secondary market in connection with a take-over bid have no right to pursue an action for misrepresentation under Section 131(1) of the Securities Act (Ontario). The question was one of first impression before the Court. Consistent with the overriding policy objectives of the Securities Act, the Court confirmed that security holders who sell their securities in the secondary market cannot bypass the strict leave requirements, liability caps, and other elements of Part XXIII.1 included by the Legislature as part of the balance struck in creating statutory secondary market liability for misrepresentations.

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Canadian securities regulators publish capital markets guidance update on cyber security

Vanessa Coiteux and Laura Levine - 

Responding to the evolving cyber security landscape and the considerable increase in number of cyber-attacks, the Canadian Securities Administrators (CSA) has published CSA Staff Notice 11-332 Cyber Security (the 2016 Notice) as an update to CSA Staff Notice 11-326 Cyber Security published in September 2013. The 2016 Notice seeks to, among other things, highlight the importance of cyber risks, inform stakeholders about recent and upcoming CSA cyber related initiatives, promote cyber security awareness, preparedness and resilience in Canadian capital markets and communicate general expectations for market participants.

As we previously noted, cyber security was identified as a priority in the CSA 2016-2019 Business Plan. In the coming months, CSA members intend to re-examine large issuers’ disclosure of cyber security risks and controls and, where appropriate, contact such issuers to get a better understanding of their assessment of the materiality of cyber security risks and cyber-attacks. On an ongoing basis, CSA members also intend to gather data about registered firms’ cyber security practices, and enhance cross-border information sharing between regulators related to cyber security. Furthermore, the CSA also intends to hold roundtable sessions to discuss cyber security issues and risks, regulatory expectations and the need for coordination. 

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Hedge fund investments survive section 94.1 challenge

Marianne Kennedy Beaulne - 

Although based in low-tax jurisdictions, Tax Court finds business reasons for investments overshadowed their tax benefits

Section 94.1 of the Income Tax Act (Canada) is an anti-avoidance rule aimed at attempts to divert investment income to an offshore entity in a low (or no) tax jurisdiction. In Gerbro Holdings Company v. The Queen [1] the Tax Court of Canada considered, for the first time, the application of this rule to investments in offshore hedge funds.[2]The Court concluded that the underlying assets of such funds may be “portfolio investments” for purposes of section 94.1, but the section did not apply in Gerbro because none of the main reasons for investing in the hedge funds was to defer or avoid Canadian taxes.

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New TSX dividend reinvestment plan rules adopted

The Toronto Stock Exchange (TSX) has adopted amendments to the TSX Company Manual (the Manual) intended to provide a complete set of standards and practices (the DRIP Rules) for dividend reinvestment plans (DRIPs). The amendments follow the TSX’s publication for comment of the proposed DRIP Rules earlier this year and represent a departure from the current process whereby DRIPs that provide for the issuance of securities from treasury are treated as additional listings of securities under the Manual.  

Among other things, the DRIP Rules would require a DRIP and any amendments thereto, to be pre-cleared with the TSX at least 5 days before the effective date, unless the DRIP provides for the payment of dividends or distributions solely with securities purchased on the secondary market. The TSX will require that the price per listed security at which securities will be issued pursuant to the DRIP not be lower than the 5-day VWAP of the securities on the TSX, less a 5% discount. In addition, the DRIP must permit all security holders to participate in the DRIP, other than holders residing outside of Canada, and provisions must be made for fractional security interests. In order to list additional securities under an existing DRIP, listed issuers must file a DRIP additional listing application with the TSX.  

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Rights offering amendments for TSXV issuers

Amendments to TSX Venture Exchange (TSXV) Policy 4.5 – Rights Offerings are now in effect reflecting guidance released by the TSXV earlier this year following the adoption by the Canadian Securities Administrators (the CSA) of amendments relating to rights offerings in Canada in December 2015. Notably, while CSA review and approval of a rights offering circular is no longer required under Canadian securities laws, the TSXV will still require the pre-clearance of the circular under its Policy 4.5. Rights offering documentation should be filed in draft form with the TSXV prior to finalization in order to provide sufficient time for the TSXV to review the pricing, mechanics and timing of the rights offering and maintain an orderly market for the trading of the listed securities and rights.

A number of other substantive amendments were made to Policy 4.5:

  • The minimum subscription price for securities acquired on the exercise of rights has been lowered to $0.01 from $0.05.
  • Deficiencies in rights offering documents must be resolved at least five trading days prior to the record date as opposed to seven.
  • Rights are no longer required to be listed on the TSXV, but may be at the option of the issuer; however rights must be transferable.
  • Shareholder approval of any new control person (20% holder) resulting from a stand-by commitment for a rights offering will not be required provided that the rights are listed on the TSXV and the subscription price for a right is at a significant discount to the market price.
  • Fractional rights may be issued; however the number of rights required to purchase a security must be a whole number.
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T+2 settlement prompts proposed amendments to NI 24-101 and publication of consultation paper

The migration to a standard T+2 settlement cycle on September 5, 2017 is part of the impetus for amendments proposed by the Canadian Securities Administrators (CSA) to National Instrument 24-101 Institutional Trade Matching and Settlement (NI 24-101) and Companion Policy 24-101 Institutional Trade Matching and Settlement.  In addition to these proposed amendments, the CSA has published CSA Consultation Paper 24-402 Policy Considerations for Enhancing Settlement Discipline in a T+2 Settlement Cycle Environment(Consultation Paper 24-402).

While NI 24-101 does not mandate T+3 settlement and does not prevent T+2 settlement, the proposed amendments are intended to facilitate the move to a T+2 settlement cycle.  They are also intended to reform NI 24-101 to reflect developments that have occurred since it came into force in 2007 (such as the rise in ETF trading) and to revise the requirements applicable to matching service utility systems and business continuity planning.

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Common Reporting Standard legislative proposals published in Canada

Roanne C. Bratz -

On July 29, 2016, the Department of Finance Canada released for public comment a package of draft legislative proposals and explanatory notes relating to a number of measures announced in the 2016 federal budget, which included, amongst other proposals, the introduction of a Common Reporting Standard penalty and relating consequential amendments to the Income Tax Act (the ITA).

Specifically, the proposed amendments will incorporate new section 281 into the ITA and will require that a “reportable person” must provide its taxpayer identification number, or “TIN” (the number used by the Minister of National Revenue to identify an individual or entity), to any person required to make an information return under the Common Reporting Standard (CRS) to be implemented in Canada as of July 1, 2017.  This section also empowers the Minister of National Revenue to assess a $500 penalty against any reportable person for each failure to provide its TIN upon request.

For CRS purposes, the term “reportable person” generally refers to a natural person or entity that is resident in a reportable jurisdiction (excluding Canada and the United States) under the tax laws of that jurisdiction, or an estate of an individual who was a resident of a reportable jurisdiction under the tax laws of that jurisdiction immediately before death, other than: (i) a corporation the stock of which is regularly traded on one or more established securities markets; (ii) any corporation that is a related entity of a corporation described in clause (i); (iii) a governmental entity; (iv) an international organization; (v) a central bank; or (vi) a financial institution.  See definitional subsection ITA 270 (1).

Online business models and findings from compliance reviews are the focus of OSC annual registrant report

Viviana Beltrametti Walker  & Junaid K. Subhan

An update on registration initiatives, including the registration of online business models, and current trends in deficiencies and acceptable practices of market participants are the focus of OSC annual summary report.

Trends in registration, including online business models, and common deficiencies identified in compliance reviews are the focus of the Ontario Securities Commission’s (OSC) Annual Summary Report for Dealers, Advisers and Investment Fund Managers.  The following summary highlights key points in the report. We recommend that market participants review in detail the portions of the report that may be applicable to their businesses.

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To pay or not to pay: whistleblower programs launch in Ontario and Quebec

Julien Robitaille-Rodriguez and Laura Levine -

Whistleblower programs aimed at encouraging individuals to report securities related misconduct that occurs in Ontario and Quebec have been launched by the Ontario Securities Commission (the OSC) and the Autorité des marchés financiers (AMF) on July 14, 2016 and June 20, 2016, respectively. While the underlying policy rationale of each of the OSC whistleblower program (the OSC Program) and the AMF whistleblower program (the AMF Program) is substantially similar, under the OSC Program whistleblowers who meet certain criteria will be eligible to receive a monetary award for their information whereas the AMF Program will not offer financial awards at all. Both programs provide anti-reprisal and confidentiality protections to whistleblowers. The OSC Program is accompanied by recently adopted amendments to the Securities Act (Ontario) (the OSA) which provide anti-retaliation protections for individuals reporting misconduct. 

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New exempt market disclosure obligations - impact on investment funds

Anne Ramsay and Laura Levine -

The new harmonized Form 45-106F1 Report of Exempt Distribution (the New Report) that came into effect on June 30, 2016 imposes new disclosure obligations, including specific requirements applicable only to investment funds. As previously discussed, on April 7, 2016, the Canadian Securities Administrators (the CSA) announced amendments to National Instrument 45-106 Prospectus Exemptions (NI 45-106) which introduce the New Report. As was the case for the prior form of report, the New Report applies to all types of public and private issuers in all Canadian jurisdictions and, as a new requirement, is to be filed electronically.

New disclosure requirements

Investment funds covered by the reporting obligation include both public and private non-redeemable funds and mutual funds, including non-Canadian funds that distribute securities to Canadian investors. Some of the enhanced disclosure requirements for investment funds in the New Report include:

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Custody requirements and EMD permitted activities targeted in proposed amendments to NI 31-103

The Canadian Securities Administrators (CSA) have proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) in respect of custody arrangements for certain registered firms and permitted activities of exempt market dealers relating to prospectus-qualified securities.  The proposed amendments also incorporate relief previously granted in respect of the CRM2 requirements and effect minor housekeeping changes to NI 31-103.

The proposed amendments will require that registered firms ensure that a “Canadian custodian” or a “foreign custodian” holds securities and cash of a client or an investment fund in certain circumstances.  The terms “Canadian custodian” and “foreign custodian” would be newly defined in NI 31-103.  Self-custody and the use of a custodian that is not functionally independent of a registered firm would be prohibited under the proposed amendments, subject to certain exceptions.  The proposed amendments also contemplate certain disclosure requirements with respect to where and how client assets are held and accessed.  Registered firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) would be exempted from these particular elements of the proposed amendments so long as they comply with the corresponding IIROC and MFDA rules, as applicable.

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NI 33-109 and Commodity Futures Act registration forms proposed to be amended

The Canadian Securities Administrators (CSA) have proposed amendments to certain forms under National Instrument 33-109 Registration Information.  Consequently, the Ontario Securities Commission (OSC) has proposed corresponding amendments to the equivalent forms under OSC Rule 33-506 (Commodity Futures Act) Registration Information Requirements.

Proposed amendments were published to Forms 33-109F4 Registration of Individuals and Review of Permitted Individuals and 33-506F4 Registration of Individuals and Review of Permitted Individuals; Forms 33-109F6 Firm Registration and 33-506F6 Firm Registration;and Forms 33-109F7 Reinstatement of Registered Individuals and Permitted Individuals and 33-506F7 Reinstatement of Registered Individuals and Permitted Individuals

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Looking back and moving forward: CSA announces past achievement highlights and future business plan

Laura Levine -

The Canadian Securities Administrators (the CSA) recently published the highlights of their achievements over the past three years (the Highlights), as well as their business plan for 2016 to 2019 (the Business Plan). Looking forward, the CSA’s priorities are:

  1. The protection of investors from unfair, improper and fraudulent practices
  2. The ongoing efficient functioning of capital markets
  3. The reduction of risks to market integrity and to investor confidence in the markets
  4. The enhancement of information technology 
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