The Equity Margin Project: IIROC Withdraws Phase II of the Main Proposal for the New Methodology for Margining Equity Securities

 On July 13, 2017, the Investment Industry Regulatory Organization of Canada published IIROC Notice 17-0144 Withdrawal of the New Methodology for Margining Equity Securities-Dealer Member Rule 100 and Form 1 withdrawing Phase II of IIROC’s proposed amendments to Dealer Member Rule 100.2 and Form 1, originally published for comment on January 13, 2006 (the Methodology Amendments). The Methodology Amendments were intended to be implemented in two phases, with Phase I amendments became effective as of September 17, 2007 granting, among other things, margin eligibility to a larger group of securities listed on foreign exchanges outside of Canada and the United States. The remainder of the Methodology Amendments (the Phase II Amendments) were to be implemented at a later date but, as described in Notice 17-0144, have now been withdrawn.

In addition, IIROC has also published IIROC Notice 17-0145 Withdrawal of Proposed Amendments to Simply the Equity Margin Project, withdrawing IIROC Notice 09-0125 Proposed Amendments to Simply the Equity Margin Project regarding proposed amendments to Dealer Rule 100.2(f) which were originally published for comment on May 1, 2009 (the Simplification Amendments).

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IIROC Best Execution Amendments and Guidance

Darin Renton

On July 6, 2017, the Investment Industry Regulatory Organization of Canada (IIROC) published final amendments to the Universal Market Integrity Rules (UMIR) and the Dealer Member Rules (DMR) related to best execution requirements which will come into effect on January 2, 2018. Associated guidance was published concurrently.

The amendments, which are set out in IIROC Notice 17-0137 -- Amendments Affecting Best Execution (Amendments), consolidate the existing UMIR best execution requirements and the DMR for fair pricing of over-the-counter securities into Rule 3300 Best Execution of Client Orders. Among other things, the Amendments will require a Dealer Member to adopt written policies and procedures reasonably designed to ensure best execution when acting for a client and a Dealer Member must provide training to ensure its employees know and understand the requirements. Under Rule 3300, Dealer Members will be required to review their best execution policies and procedures at least annually and provide clients with written best execution disclosures prescribed in the Rule, including a description of the Dealer Member's best execution obligation under the Rule and the factors considered for the purpose of achieving best execution.

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NI 31-103 Amendments: EMDs Banned from Prospectus Offerings

Alix d’Anglejan-Chatillon and Darin Renton - 

New custody rules for non-SRO registrants also introduced

Under a series of amendments to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations published on July 27, 2017, the CSA have banned exempt market dealers (EMDs) from participating in prospectus offerings in any capacity, including as underwriters and selling group members. The ban extends to securities underlying special warrants that are qualified by a prospectus and to the sale of prospectus-qualified investment funds.  For prospectus deals, EMDs will be restricted to participating in a concurrent private placement, if any, meaning EMD clients will receive securities subject to a four-month hold rather than freely tradable securities under the prospectus. This is not the first time the concept of a ban was raised; similar amendments were first proposed in December 2013 but later withdrawn.

The Amendments

The Amendments are organized into four tranches, specifically “Custody Amendments”, “Exempt Market Dealer Amendments”, “Client Relationship Model Phase 2 Amendments” and “Housekeeping Amendments”.  According to the CSA, the Custody Amendments are intended to:

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CSA Staff Publish Commentary on MI 61-101 Including the Use of Special Committees and Fairness Opinions

Staff of the securities regulatory authorities in each of Ontario, Quebec, Alberta, Manitoba, and New Brunswick have published commentary on Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) which advises of a “real time” review program of transactions to which MI 61-101 applies and puts forward Staff’s views with regard to the use of special committees and fairness opinions. Issuers are reminded that MI 61-101 should be interpreted with a view to its underlying policy purpose.

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Stikeman Co-hosts Board Diversity Workshop With Women Get on Board

Last month Stikeman Elliott’s Toronto office was delighted to co-host “Getting Yourself on a Board” with Women Get On Board (WGOB), a member-based company that connects,  promotes and empowers women to corporate boards.  Led by Deborah Rosati, Corporate Director, Co-founder and CEO of WGOB, and facilitated by a number of leading and serving corporate directors and board recruiters, this workshop provided tips and tools for board career planning, board resumes and interview preparation for aspiring corporate directors. 

The evening began with an update on developments in board diversity from Raman Grewal, counsel in the Corporate Group of Stikeman Elliott. 

“An interesting trend in our more recent research shows shift in how asset managers and proxy advisors are emphasizing substantive inclusion in leadership positions along with structural changes to promote diversity,” said Raman. “This facet of gender diversity initiatives will be very interesting to watch going forward.”

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OSC 2017 Annual Report for Registrants: 10 Take-aways

Darin Renton

On July 11, 2017, the Ontario Securities Commission released Staff Notice 33-748 Annual Summary Report for Dealers, Advisers and Investment Fund Managers (the Report). Prepared by the Compliance and Registrant Regulation (CRR) Branch, the six-part Report addresses current trends in registration and deficiencies identified through compliance reviews of registrants, the CRR Registrant Outreach program and various policy initiatives – areas that the CRR Branch continues to focus on for the 2017-2018 fiscal year. Like previous reports, the Report summarizes regulatory actions taken, highlights cases of interest and provides additional resources for registrants.

Specific issues discussed in the Report include several that will be familiar from our earlier discussion of the Alberta Securities Commission’s (ASC) Exempt Market Dealer Sweep, including Know Your Client (KYC), Know Your Product (KYP) and suitability, as well as an emphasis on registrants’ obligations to seniors and trending issues such as fintech and cybersecurity (with respect to which a survey has been conducted, with results to follow). 

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Alberta, Manitoba and New Brunswick Adopt MI 61-101

Minority security holders in Alberta, Manitoba and New Brunswick will enjoy enhanced protections as the result of the adoption by their respective provincial securities regulators of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions. MI 61-101 will take effect in the three provinces on July 31, 2017 and will not differ in any substantial respect from the instrument previously adopted in Ontario and Quebec.

Enhanced Protection for Investors

Although reporting issuers listed on major Canadian exchanges have generally been subject to MI 61-101, this initiative by the Alberta, Manitoba and New Brunswick regulators should reduce regulatory burden and provide additional investor protection in those jurisdictions by:

  • Increasing the efficiency of local compliance and enforcement mechanisms;
  • Further harmonizing Canadian securities law; and
  • Providing a local regulator with whom parties may engage.   
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TSX Ex-Dates Transition to T+2

In connection with the settlement cycles in Canadian and U.S. capital markets being shortened to trade date plus two business days (T+2) from trade date plus three business days (T+3), 2017, the TSX is making certain amendments to the TSX Company Manual effective September 5, 2017. In particular the change to T+2 results in the ex-dates for dividends, distributions and other corporate actions being reduced to one business day prior to the record date as will be reflected in the amendments. For further information, please see TSX Notice of Housekeeping Rule Amendments (July 13, 2017).

TSX Adopts Housekeeping Amendments to Company Manual

On May 11, 2017, the TSX published housekeeping amendments to the TSX Company Manual related to non-public interest changes. The amendments include fixing typographical errors, clarifying provisions, updating references to securities legislation and cross references, amending language to reflect changes in technology and the addition of a newly authorized newswire service provider. For further information, please see TSX Notice of Housekeeping Rule Amendments to the TSX Company Manual – Amendments to Parts IV, VI and IX, Form 12 and Appendix B of the TSX Company Manual (May 11, 2017).

IIROC Proposed Amendments to Client ID and Verification Requirements: The Argument for Red Tape Reduction

Darin Renton -

On July 6, 2017, IIROC published for comment IIROC Notice 17-0139 Proposed Amendments to Client Identification and Verification Requirements. IIROC is proposing changes to Part A of Rule 3200 of the proposed IIROC Dealer Member Plain Language Rule Book (the Proposed Amendments). The Proposed Amendments are designed to make IIROC rules consistent with National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and the Proceeds of Crime (Money Laundering) and Terrorist Act and its accompanying regulations, including the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (defined in the Notice as the “AML Requirements”).

Effects of the Proposed Amendments

The Proposed Amendments would:

  • Update the information Dealer Members are required to collect on clients who are not natural persons (such as corporations, partnerships and trusts)
  • Change the amount of time Dealer Members have to confirm certain client information
  • Reduce the number of clients who are exempt from Part A of Rule 3200 of the proposed IIROC Dealer Member Plain Language Rule Book (the IIROC Rules)
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Regulating the Regulators: IIROC 2016 Report Card Released

Darin Renton -

The Investment Industry Regulatory Organization of Canada (IIROC) is the national self-regulatory organization (SRO) that oversees all investment dealers, as well as trading activity on debt and equity marketplaces in Canada. Like other regulated entities, IIROC is subject to the oversight of securities regulators, in this case each of the ten provincial securities regulators that have recognized IIROC as an SRO, collectively, the Recognizing Regulators (RRs). On July 4, 2017, the participating RRs issued their Oversight Review Report of the Investment Industry Regulatory Organization of Canada with the results of their review for the period from April 1, 2015 to July 31, 2016. The previous review was conducted in 2015.

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CSA Withdraw Best Execution Disclosure Proposal

The CSA is withdrawing the best execution disclosure rules proposed in May 2014 in light of amendments to IIROC’s best execution rules which were approved on June 28, 2017. The 2014 proposed amendments to National Instrument 23-101 Trading Rules would have mandated specific dealer disclosure relating to best execution policies. At the time of the proposal, IIROC’s best execution rules did not apply to IIROC dealer members that were not IIROC participants (under the Universal Market Integrity Rules) and the rules did not require participants to disclose best execution policies. The recently approved amendments to IIROC’s best execution rules make the best execution requirements applicable to all IIROC dealer members and impose new disclosure requirements which are substantially similar to those originally proposed by the CSA.

For further information, please see CSA Staff Notice 23-318 Withdrawal of Proposed Amendments Regarding Best Execution Disclosure Under National Instrument 23-101 Trading Rules (July 6, 2017). 

CSA Propose Amendments for Designated Rating Organizations

Proposed rule amendments and policy changes related to designated rating organizations (DROs) and the credit ratings of DROs were published for comment by the Canadian Securities Administrators on July 6, 2017. The amendments to National Instrument 25-101 Designated Rating Organizations are being proposed in an effort to ensure that the European Union continues to recognize the Canadian DRO regime as “equivalent” to new EU requirements for credit rating organizations coming into force on June 1, 2018. In addition, the proposed amendments include revisions to NI 25-101 that reflect new provisions in the March 2015 International Organization of Securities Commissions (IOSCO) Code of Conduct Fundamentals for Credit Rating Agencies.

Concurrently, the CSA are proposing amendments to National Instrument 44-101 Short Form Prospectus Distributions and National Instrument 44-101 Shelf Distributions to recognize the credit ratings of Kroll Bond Rating Agency, Inc. for limited purposes.

The comment period is open until October 4, 2017. For further information, please see CSA Notice and Request for Comment Relating to Designated Rating Organizations (July 6, 2017). 

New Proposal for Prospectus-Exempt Resale of Foreign Issuers' Securities

The Canadian Securities Administrators have published for comment a new prospectus exemption for the resale of securities of a foreign issuer. The proposed amendments would replace the “10% shareholder ownership tests” under section 2.14 of National Instrument 45-102 Resale of Securities with an issuer-focused “Canadian connection” test exempting the resale of securities for non-reporting issuers if the resale is on an exchange or market, or to a person or company, outside of Canada and the issuer is a foreign issuer. Comments are being accepted until September 27, 2017. For further information, please see CSA Notice and Request for Comment Proposed Amendments to national Instrument 45-102 Resale of Securities Proposed Changes to Companion Policy 45-102CP to National Instrument 45-102 Resale of Securities, Proposed Consequential Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, and Proposed Consequential Changes to National Policy 11-206 Process for Cease to be a Reporting Issuer Applications (June 29, 2017).

OSC Republishes Rule for Distributions Outside of Canada

The Ontario Securities Commission has published amendments to its proposed OSC Rule 72-503 Distributions Outside of Canada originally published last year. The proposed rule is intended to replace “Interpretation Note 1 Distributions of Securities Outside of Ontario” and is being published for comment until September 27, 2017. For further information, please see Second Notice and Request for Comment Proposed OSC Rule 72-503 Distributions Outside Canada and Proposed Companion Policy 72-503 Distributions Outside Canada(June 29, 2017).