OSC follows CSA in issuing registration exemptions for certain U.S. Broker-Dealers and Advisers

Darin Renton -

Today, the OSC published OSC Rule 32-505 Conditional Exemption from Registration for United States Broker-Dealers and Advisers Servicing U.S. Clients from Ontario.

OSC Rule 32-505 provides an exemption from the dealer and adviser registration requirements, subject to certain conditions, for certain U.S. broker-dealers and U.S. advisers.  Such entities that trade to, with, or on behalf of, clients that are resident in the U.S. or that act as advisers to clients resident in the U.S. but that trigger the registration requirement in Ontario because they have offices or employees in Ontario will be exempted from the dealer and adviser registration requirements.  The exemption is not available to broker-dealers that trade to, with or on behalf of persons or companies that are resident in Ontario or to advisers that act as advisers to Ontario residents.  One of the conditions of OSC Rule 32-505 is that broker-dealers and advisers relying on this exemption must complete Form 32-505F1 Information Report for United States Broker-Dealers and Advisers Servicing U.S. Clients from Ontario and submit it to the OSC. 

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BCSC Releases First Annual Enforcement Report

Earlier this week, the British Columbia Securities Commission (BCSC) released its 2014 Enforcement Report, which represents the first annual enforcement report to be published by the BCSC.

The 31-page report provides an overview of the BCSC’s enforcement activities in 2014 which consisted, in part, of 22 administrative and three criminal proceedings.  In 2014, the BCSC handled 173 new cases.  The most common violations included those related to unregistered activity, illegal sales of securities and fraud. 

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Supreme Court of Canada denies authorization in first Quebec secondary market securities class action

Alan D’Silva and Sinziana Hennig -

On April 17, 2015, the Supreme Court of Canada released its decision in Theratechnologies inc. v. 121851 Canada inc., the first case to consider the authorization of a secondary market class action under the provisions of the Quebec Securities Act that came into force in 2007. These provisions created a new statutory cause of action that enabled investors to bring claims against reporting issuers who breach their obligations to disclose material facts and changes; however, investors must obtain court authorization to commence such claims.

In a unanimous judgment, the Supreme Court held that the threshold for authorization to commence a secondary market action under the Quebec legislation requires showing “a reasonable or realistic chance that the action will succeed.” The Court allowed the appeal, concluding that the evidence did not credibly point to any material change that could have triggered timely disclosure obligations for the reporting issuer; accordingly, there was no reasonable possibility that the action could succeed.

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OSC hopes to ramp up enforcement efforts with whistleblower program

Simon Romano and Jeffrey Singer

The Ontario Securities Commission (OSC) recently announced that it will be hosting a roundtable to explore the issues raised in its proposal to implement a whistleblower program. The OSC first published details of the proposed program (the Program) under Consultation Paper 15-401 Proposed Framework for an OSC Whistleblower Program, (the Paper), which outlines the main components of the program, how OSC staff envision it would work, as well as possible issues raised.

The Program is intended to encourage individuals to report breaches of Ontario securities laws and would provide an incentive of up to 15% of the total monetary sanctions imposed on wrongdoers (up to a maximum of $1.5 million) to eligible whistleblowers who provided the OSC with information that leads to administrative proceedings resulting in sanctions of more than $1 million. The Program would also protect whistleblower confidentiality and include anti-retaliation measures to deter employers from acting against employees.

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CSA propose expanding passport system

The Canadian Securities Administrators yesterday released proposed amendments to the passport system of securities regulation that would expand the regime to cover applications to cease to be a reporting issuer and failure-to-file case trade orders. While the OSC is not a passport regulator, under the proposal, it will continue to coordinate with the passport systems and all passport regulators, as is currently the case.

Under the passport system, the process for registration, prospectus reviews and exemptive relief applications are generally harmonized across Canada, with issuers being able to access markets while dealing only with their principal regulator. Currently, applications to cease to be a reporting issuer are filed and reviewed by each applicable securities regulator in a coordinated review procedure set out in National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions. Pursuant to the proposed amendments to MI 11-102 Passport System and new proposed national policies announced today, applications to cease to be a reporting issuer would no longer need to be filed with and reviewed by each provincial or territorial regulator. Instead, an issuer can engage with its principal regulator to obtain an order to cease to be a reporting issuer. In addition, no coordinated process currently exists for when regulators will reciprocate a cease-trade order issued against a reporting issuer for being in default of certain continuous disclosure obligations. Under the proposed amendments, an initial cease trade order granted because of a failure to comply with continuous disclosure obligations would be coordinated across participating passport jurisdictions.

In addition to the foregoing amendments, the Canadian Securities Administrators, including the Ontario Securities Commission, published two new proposed National Policies: NP 11-206 Process for Cease to be a Reporting Issuer Applications and NP 11-207 Failure-to-File Cease Trade Orders and Revocations under Passport. The CSA, including the OSC is also proposing to replace NP 12-202 Revocation of a Compliance-Related Cease Trade Order with NP 12-202 Revocations of Non-Passport Cease Trade Orders and NP 12-203 Cease Trade Orders for Continuous Disclosure Defaults with NP 12-203 Management Cease Trade Orders.

Stakeholders comments are being accepted by the CSA for 60 days.

Prospectus exemption proposed for distributions to retail investors relying on investment dealers' advice

Ramandeep K. Grewal and Alex Colangelo

Securities regulators in British Columbia, New Brunswick and Saskatchewan yesterday proposed a new prospectus exemption that would allow issuers listed on certain Canadian exchanges to distribute securities to retail investors that have obtained suitability advice from an investment dealer.

Currently, in these provinces, the principal prospectus exemptions available to issuers seeking to raise capital from retail investors that are not existing security holders require an offering document. According to the participating regulators, Canadian issuers are not generally using these exemptions due to the time and cost involved in preparing such a document.

Under the proposal, issuers seeking to rely on the new exemption would have to meet certain conditions, including (i) being a reporting issuer in at least one Canadian jurisdiction and having a class of equity securities listed on one of the designated Canadian exchanges (being the TSX, the TSX-V, the CSE and Aequitas Neo Exchange); (ii) having filed all required timely and periodic disclosure documents; (iii) issuing a news release disclosing details of the distribution, including use of proceeds and any material fact not yet generally disclosed and including a statement that there is no material fact or material change about the issuer that has not been generally disclosed; and (iv) providing the investor with a contractual right of action in the event of a misrepresentation in the issuer's continuous disclosure record regardless of whether the investor relied on the misrepresentation.

Although an offering document is not required, if one is provided, investors will have certain rights of action in the event of a misrepresentation in the document. Furthermore, the offering can consist only of a listed security, a unit consisting of a listed security and a warrant to acquire another listed security, or another security convertible into a listed security at the security holder’s sole discretion.

Finally, and as noted above, the investor must obtain suitability advice from a registered investment dealer. The exemption is not available if the dealer is a restricted dealer or an exempt market dealer or if the dealer is exempted from providing suitability advice (such as discount brokers).

The proposed safeguards have been introduced to provide sufficient alternative protections for investors such that the prospectus requirement is not necessary. According to these regulators, this addresses the inconsistency in securities legislation that retail investors can purchase any amount of securities of a reporting issuer through the secondary market based on the issuer’s continuous disclosure but cannot purchase any securities directly from the issuer without obtaining some form of offering document.

The participating CSA members are proposing that the exemption expire after three years during which time its usefulness would be monitored and an extension would be considered. According to the proposal, in developing the proposed exemption, the regulators considered the balance of "fostering fair, efficient and innovative capital markets” with “ensuring appropriate investor protection."

Comments are being accepted until June 15, 2015.

For more information, see Multilateral CSA Notice 45-315 Proposed Prospectus Exemption for Certain Distributions Through an Investment Dealer.

Yukon joins Cooperative Capital Markets Regulatory System

The Canadian Department of Finance announced yesterday that Yukon has now joined the Cooperative Capital Markets Regulatory System. The project now includes British Columbia, Ontario, Saskatchewan, New Brunswick, and Prince Edward Island, Yukon and the federal government.

The Department of Finance also announced the members of the nominating committee that will recommend candidates for the initial board of directors to the Capital Markets Regulatory Authority. Participating jurisdictions also intend to release updated consultation draft federal, provincial and territorial capital markets legislation and draft initial regulations this summer.

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.

Important amendments to exempt financing regime to come into force on May 5, 2015

Junaid K. Subhan -

As we noted previously, important amendments to NI 45-106 Prospectus and Registration Exemptions are set to come into force on May 5, 2015.

Notably, the amendments will require issuers relying on the accredited investor prospectus exemption to obtain a signed risk acknowledgment form when selling securities to individual accredited investors. Such risk acknowledgement forms must be retained for a period of 8 years from the distribution. Individual accredited investors who are permitted clients (i.e. who have net financial assets with an aggregate realizable value in excess of $5 million) are exempt from the requirement to complete and execute a risk acknowledgement form. Amendments to 45-106CP Companion Policy also underscore CSA staff’s views that issuers and selling security holders may need to undertake enhanced due diligence to ascertain the status of a given purchaser and that, depending on the circumstances, relying on a signed risk acknowledgment form or representation in a subscription agreement may no longer be sufficient. These amendments will likely come into force in unison with other Ontario-specific amendments which will, among other things, move certain accredited investor categories from NI 45-106 to equivalent provisions in s. 73.3 of the Securities Act (Ontario).

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OSC Enforcement Branch to launch mediation pilot program

The OSC has announced that beginning on May 1, its Enforcement Branch will launch a pilot mediation program for respondents involved in enforcement proceedings before the OSC. Under the pilot program, respondents will have the option of participating in a mediation with an independent third-party mediator pursuant to standard terms of a mediation agreement, including confidentiality terms. A settlement agreement arising from mediation would still have to be approved by the OSC at a settlement approval hearing. Further information on the program is available on the OSC website.

CSA eliminate certain disclosure requirements for venture issuers

Casey Howell and Junaid K. Subhan

The Canadian Securities Administrators announced yesterday that they are implementing amendments to the continuous disclosure and corporate governance obligations of venture issuers, which include increasing the BAR threshold to 100%, reducing historical financial statement disclosure in IPO prospectuses to 2 years and permitting for the use of quarterly “highlights” to replace interim MD&A.

The amendments were originally proposed in May of 2014, after the CSA abandoned an earlier attempt to completely overhaul the venture issuer disclosure regime in July of 2013. While primarily aimed at easing the disclosure burden for venture issuers, the amendments also include certain changes that will impact all issuers.

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CSA drill down on mining issuers' investor presentations

Kevin Smyth

The Canadian Securities Administrators yesterday released  a staff review of investor presentations on mining issuers' websites, providing valuable insights on how the regulators interpret and apply NI 43-101 and other disclosure requirements and ultimately finding that “there is room for improvement” in order to comply with applicable regulatory standards.

The review, which assessed compliance with NI 43-101 Standards of Disclosure for Mineral Projects and the forward-looking information (FLI) requirements of NI 51-102 Continuous Disclosure Obligations, found a number of deficiencies with disclosure in investor presentations posted on mining issuers' websites. Of the 130 investor presentations reviewed, only 18% were found to be in substantial compliance with disclosure requirements, while 57% suffered from minor non-compliance and 25% had major non-compliance issues. 

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The Investment Funds Practitioner published for April 2015

The Investment Funds and Structured Products Branch of the Ontario Securities Commission today released the April 2015 issue of The Investment Funds Practitioner, which provides an overview of recent issues arising from applications for discretionary relief, prospectuses and continuous disclosure documents filed by investment funds.

In respect of prospectuses, the Practitioner discusses concerns with respect to dual class structures of flow-through limited partnerships. The Practitioner also discloses OSC Staff's expectation that redemptions by ETFs that offer periodic redemptions of their securities at a price determined with reference to the closing market price of those securities be capped at NAV and that disclosure regarding market price redemptions include a statement to that effect. Dealing with mutual funds specifically, concerns include setting the payment of distributions in the form of reinvested units or shares as the default option if securityholders do not specifically request distributions in cash. Further, the Practitioner discusses when additional prospectus disclosure may be requested of the offering expenses of split share companies, and concerns with disclosure in closed-end fund prospectuses that suggest the closed-end fund would be permitted to do certain activities that are now contrary to the amended NI 81-102.

The Practitioner also discusses issues with past performance presentation in Fund Facts and public inquiries in regards to the rehypothecation of collateral for OTC derivatives.

CSA preparing for T+2 settlement of securities trades

The Canadian Securities Administrators today published a notice setting out staff's views with respect to the move to generally shorten the standard settlement cycle for securities trades from three days after the date of trade to two days (T+2).

The OSC conducted a series of interviews with industry stakeholders in the Fall of 2014 to ascertain the readiness of the Canadian industry to move to T+2 settlement and found a general desire to make such a move in coordination with U.S. markets. Industry stakeholders observed that a failure to adopt T+2 would be detrimental to Canadian capital markets because of the large volume and value of cross-border trading activity and the large number of inter-listed issuers in Canada and the U.S. In the U.S., the DTCC and SIFMA are expected to recommend a T+2 implementation sometime this month.

In light of the expected move to T+2 settlement, the CSA will consider whether to recommend changes to NI 24-101 Institutional Trade Matching and Settlement to revise the trade-matching threshold. One of the options for consideration may be whether to change the matching target from 90% at noon on T+1 to 95% at midnight on T+1 to provide a better proxy for T+2 settlement readiness. The CSA may also consider whether a de minimis provision in the exception reporting requirement is necessary.

For more information, see CSA Staff Notice 23-312.

OSC releases draft statement of priorities for 2015-2016

The Ontario Securities Commission today released a draft Statement of Priorities for the financial year ending March 31, 2016. 

The draft statement specifically identifies five regulatory goals for the following year, namely: (i) delivering strong investor protection, including by developing and evaluating regulatory provisions to create a best interest duty, developing targeted regulatory reforms under NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to improve the advisor/client relationship and implementing pre-sale delivery of Fund Facts for mutual funds; (ii) delivering responsive regulation, including by publishing the results of the disclosure review and continuing to promote transparency and representation of women on boards, and developing and publishing rules to implement new prospectus exemptions, such as the offering memorandum exemption, crowdfunding, rights offering and new reporting requirements regarding exempt market distributions; (iii) delivering effective compliance, supervision and enforcement, including by taking steps to improve the OSC's case management and adjudicative processes; (iv) promoting financial stability, including by implementing rules and a compliance program for OTC derivatives trade reporting and developing a registrant regulation framework for derivatives market participants; and (v) being an innovative, accountable and efficient organization.

The OSC is accepting comments on its draft statement of priorities until June 1, 2015. For more information, see OSC Notice 11-771.

Proposed changes to take-over rules aim to level playing field among boards and bidders

Yesterday, the Canadian Securities Administrators published their eagerly anticipated proposed amendments to the Canadian take-over bid regime (the Proposed Amendments). Specifically, the Proposed Amendments will result in changes to the current rules governing take-over bids by extending the mandatory minimum deposit period and adding mechanisms to address the perceived coercive features of the current rules. The rules surrounding issuer bids will remain unchanged.

The stated objectives of the Proposed Amendments include the facilitation of shareholders’ ability to make voluntary, informed, and coordinated tender decisions while providing target boards with additional time to respond and seek out value-maximizing alternatives. The Proposed Amendments aim to achieve these objectives primarily through the following changes:

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