MFDA proposes proficiency standard for selling ETFs

Darin Renton

On July 22, 2015, the Mutual Fund Dealers Association of Canada (MFDA) published a consultation document proposing individual proficiency standards for Approved Persons selling Exchange Traded Funds (ETFs).  The proposal is made in conjunction with proposed amendments announced in June 2015 with respect to MFDA Rule 1.2, which we previously wrote about.

The MFDA’s proposed Rule 1.2.3 would prohibit an Approved Person from performing an activity that requires registration unless the person has the required education, training and experience, in accordance with section 3.4 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

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Analysis of expert recommendations on reforming Ontario business law published on our M&A law blog

Our readers will be interested in a post on our M&A law blog on proposed reforms to modernize Ontario’s business environment.  The post highlights the recommendations of a 13-member expert panel of legal practitioners and academics which include: amendments to the Ontario Business Corporations Act; reducing the potential for limited partner liability among Ontario LPs; amendments to the Personal Property Security Act to permit cash as collateral to be perfected by control as opposed to registration; and repealing the Bulk Sales Act.  For details, please see Modernizing Ontario’s Business Law: Expert Panel Releases its “Wish List”.

OECD Common Reporting Standard to come into effect in Canada on July 1, 2017

Darin Renton and Junaid Subhan

Canadian financial institutions will be subject to the Organisation for Economic Co-operation and Development’s (OECD) Common Reporting Standard as of July 1, 2017 with the first exchanges of financial account information beginning in 2018.  The CRS, known formally as the Standard for Automatic Exchange of Financial Account Information in Tax Matters, was developed by the OECD and approved in July 2014 as a global standard for the automatic exchange of financial account information.  Over 90 jurisdictions have undertaken to join the CRS, which is intended to address tax evasion and to improve international tax compliance.

The CRS will require the Canada Revenue Agency (CRA) to provide information to foreign tax authorities about accounts held in Canada by residents of their jurisdictions.  Consequently, Canadian financial institutions will be required to identify accounts held by non-Canadian residents and report certain information pertaining to these accounts to the CRA.  The CRS is based on the US Foreign Account Tax Compliance Act (FATCA).  It would therefore allow Canadian financial institutions to base CRS compliance partially on existing FATCA compliance procedures.  However, it is expected that the volume of data that would be reported under CRS would be significantly greater than that reported under FATCA.

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Analysis on Quebec mining, oil and gas transparency measures bill published on our mining blog

Many of our readers will be interested in a post by our colleagues on our mining law blog which provides an overview of Quebec’s proposal on the regulation of mining, oil and gas companies with respect to payments in the course of exploration and development activities under Bill 55 An Act respecting transparency measures in the mining, oil and gas industries.  The post also includes an analysis in light of the Federal government’s  Extractive Sector Transparency Act which we’ve previously written about.

Fees and expenses prospectus disclosure featured in most recent OSC Investment Funds Practitioner

Darin Renton

The Ontario Securities Commission (OSC) published the most recent edition of The Investment Funds Practitioner on July 23, 2015.  This edition of The Investment Funds Practitioner features guidance on the OSC’s prospectus review priorities, including with respect to disclosure of fees and expenses; default mutual fund distributions with respect to fixed rate distribution securities and disclosure of Independent Review Committee compensation.

Prospectus Reviews

The OSC noted that in its prospectus reviews of investment funds, it would focus on three key areas of disclosure.  First, OSC staff will focus on fees and expenses disclosure.  In particular, a summary of all applicable fees and expenses and plain language explanations of fees and expenses would have to be provided to enable investors to understand what each fee is for and what services or activities the fee covers.  Fees and expenses would also have to be disclosed in a sufficiently clear manner to allow OSC staff to determine that there is no duplication of fees and expenses and whether the overall cost of the investment fund is similar to comparable funds.

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OSC publishes policy reformulation table of concordance and list of new instruments

The Ontario Securities Commission recently revised OSC Staff Notice 11-739 Policy Reformulation Table of Concordance and List of New Instruments.  The revised table provides stakeholders with an overview of the status of various securities law instruments including their status as either having been published for comment, having received commission approval, having received ministerial approval or having been published.

For further information, please see OSC Staff Notice 11-739.

Can in-house counsel be summoned by the AMF to testify in an investigation?

Frédéric Paré -

The Supreme Court of Canada denied leave to appeal with respect to the 2014 Quebec Court of Appeal decision requiring in-house counsel to attend an Autorité des Marchés Financiers (AMF) investigation into her employer’s trades.

By refusing leave to appeal, the Supreme Court of Canada confirms the Quebec Court of Appeal’s decision in Autorité des marchés financiers c. X that recognized the validity of a subpoena issued to an in-house counsel (Me X) ordering her to testify on facts in the context of an AMF investigation into Me X’s employer and a confidentiality order with respect to the investigation.  The challenge, based in substance upon the application of solicitor-client privilege, was considered premature given the absence of evidence that the AMF had asked, or was going to ask, Me X to disclose privileged information.  This decision does not affect the scope of in-house counsel’s solicitor-client privilege as such privilege can, and very often does, apply to communications (depending on their nature) between employers and their in-house counsel.  Nor does this decision prevent Me X from objecting to specific disclosure to the AMF later on the basis of such privilege. Given this ruling, the involvement of external counsel early on when such an investigation is launched, or expected to be launched, would be well advised.

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OSC publishes Corporate Finance Branch Annual Report for 2014-2015

The Ontario Securities Commission (OSC) recently published OSC Staff Notice 51-725 Corporate Finance Branch 2014-2015 Annual Report.  The report provides an overview of the OSC Corporate Finance Branch’s operational and policy work over the course of the fiscal year ended March 31, 2015 and provides helpful guidance to market participants.

The OSC reviewed roughly the same number of prospectuses in fiscal 2014 as they did in fiscal 2015.  However, two new industries accounted for an increasing share of the OSC’s prospectus reviews: medical marijuana and gaming.  OSC staff found that reporting issuers in these industries required enhanced disclosure as a result of certain novel considerations that ought to be disclosed to investors including regulation and differences in legal status across jurisdictions.  The OSC also noted that they received the first IPO prospectus filed by a special purpose acquisition corporation in fiscal 2015 and that four SPAC IPO prospectuses have been filed to date.  We discussed SPACs in a prior post and note that Stikeman Elliott LLP is the only law firm to have acted as legal advisors on all four Canadian SPACs filed to date.

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Continuous disclosure review results for fiscal 2015 published by CSA

The Canadian Securities Administrators (CSA) recently published CSA Staff Notice 51-344 Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2015.  The notice provides stakeholders with guidance arising from the key deficiencies identified by CSA members in their continuous disclosure reviews of reporting issuers last year.

The areas covered by the review include deficiencies in financial statements and MD&A as well as related party transactions among other areas.  In addition, the CSA provided guidance on mining issuers' continuous disclosure which we discussed in detail on The following notable areas were highlighted by the CSA as being common sources of disclosure deficiencies:

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CSA withdraw certain staff notices and revoke certain omnibus/blanket orders

The Canadian Securities Administrators (CSA) recently published CSA Staff Notice 11-329 Withdrawal of Notices and Revocation of Omnibus/Blanket Orders.  CSA Staff Notice 11-329 withdraws a number of CSA staff notices and parallel orders as well as Multilateral Policy 34-202 Registrants Acting as Corporate Directors, the majority of which are made obsolete by amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

IIROC proposes amendment to the short-marking exempt order definition

 The Investment Industry Regulatory Organization of Canada (IIROC) published a proposal to amend Rule 1.1 Definitions of the Universal Market Integrity Rules.  The amendment would broaden the definition of “short-marking exempt order” to include an order for an Exempt Exchange-traded Fund security or one of its underlying securities for the principal account of a Participant that: (i) has Marketplace Trading Obligations for the ETF security; or (ii) has entered into an agreement with the ETF issuer to maintain a continuous distribution of the ETF.  In addition, at the end of each trading day, the account must have no more than a minimal exposed risk.  IIROC is accepting comments on the proposed amendment until September 14, 2015.

For further information, please consult the IIROC Rule Notice 15-0156.

SEC proposes expanding the corporate "clawback" rules

Katy M. Pitch - 

On July 1, 2015, following a 3-2 vote, the U.S. Securities and Exchange Commission (SEC) announced proposed rules that would implement the incentive-based compensation recovery (clawback) provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. With this announcement, the SEC has completed its task of producing proposals on all executive compensation rules required by Dodd-Frank. 

The proposals would significantly expand the range of situations in which such clawbacks would be required. Under existing rules, clawbacks are triggered only in a narrow set of circumstances involving misconduct that results in the restatement of a company’s financial statements. Under this proposal, clawbacks would apply to all manner of accounting restatements due to material non-compliance of the company, including non-compliance that is the result of erroneous data. 

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Index tracking funds: OSC guidance on use of "index" in fund names and objectives

Darin Renton -

The Ontario Securities Commission (OSC) recently published guidance on investment funds whose investment objectives are to replicate the performance of an index and that include the word “index” in their names (Index Tracking Funds).  In OSC staff’s view, the applicable index should generally (a) not allow for the application of material discretion; and (b) be transparent.  In cases where these conditions are not satisfied, in the course of prospectus reviews, OSC staff will ask that references to the index be removed from the fund’s name and investment objectives to avoid potentially misleading investors.

Absence of Discretion: First, the methodology governing the applicable index (Methodology) must not allow for material discretion in respect of administering the index.  OSC staff’s view is that replicating the performance of an index is a passive investment strategy.  The ability of the index provider or another party to employ material discretion in administering the index results in the Methodology being more like an active investment strategy according to OSC staff.

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Venture Issuers now subject to less disclosure regarding business acquisitions and other matters

As previously discussed, Canadian venture issuers are now subject to a more streamlined continuous disclosure regime.  The amendments, which came into force on June 30, 2015, aim to focus venture issuers’ continuous disclosure and ease the burden of costly continuous disclosure obligations.

As discussed in detail in our original post, the key changes are as follows:

  1. Quarterly highlights instead of interim MD&A.  Venture issuers will have the option to provide quarterly disclosure in the form of a “highlights” document rather than full interim MD&A. The quarterly highlights would be comprised of a brief discussion of the venture issuer’s operations, liquidity and capital resources.
  2. Fewer business acquisition reports.  The significant acquisition threshold under the asset or investment test, which triggers the requirement to file a business acquisition report, is now increased from 40% to 100%.  The same 100% threshold will also apply to prospectus disclosure of significant acquisitions as well as the “prospectus level disclosure” that is required for information circulars, thereby significantly reducing the circumstances in which business acquisition disclosure would be required.
  3. Reduced executive compensation disclosure.  Venture issuers will now have the option to provide executive compensation disclosure for two years and in respect of three named executive officers only.  Previously, disclosure was required for three years in respect of five named executive officers.
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Prior announced restrictions on exempt market dealer activities are effective July 11, 2015

As part of a broader set of amendments which came into force earlier this year, as of July 11, 2015 exempt market dealers will no longer be permitted to engage in brokerage activities, including trading securities listed on an exchange in foreign or Canadian markets.

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) regulates the activities in which registrants such as exempt market dealers may partake.  Effective January 11, 2015, amendments to NI 31-103 were enacted to codify exemptive relief and narrow the scope of activities that are conducted by certain registrants.  One of these amendments, which came into force on July 11, 2015, prohibits an exempt market dealer from trading a security if: (i) the security is listed, quoted or traded on a marketplace; and (ii) the trade in the security does not require reliance on a further exemption from the prospectus requirement.  The Companion Policy to NI 31-103 further provides that exempt market dealers are not permitted to participate in a resale of securities traded on a domestic or foreign marketplace, whether on-exchange or off-exchange, unless the transaction requires further reliance on a prospectus exemption.  Such prohibited activity includes establishing an omnibus account with an investment dealer and trading securities for clients through that account.