Federal Government introduces legislation to mandate disclosure of payments by extractive industry participants

Keith Chatwin and Ivan T. Grbešić  - 

The Government of Canada yesterday introduced legislation to implement the Extractive Sector Transparency Measures Act, following through on the announcement by Prime Minister Stephen Harper in June 2013 that Canada would be establishing new mandatory reporting standards for extractive companies directed at payments made to foreign and domestic governments at all levels, including Aboriginal groups. The Government of Canada has stated that the legislation is intended to be similar to that being implemented in the European Union, and is anticipated to be similar to that expected to be proposed by the United States Securities and Exchange Commission by March 2015.

It is also intended that the Canadian legislation be implemented in a manner that allows for reporting requirements that are uniform across these jurisdictions so as to reduce associated administrative costs for affected companies.

Given that the United States has thus far not introduced comparable legislation, it will be interesting to monitor whether the ultimate orientation and implementation of the Canadian legislation is modified to align with the initiative south of the border. While the SEC introduced a rule under Section 1504 of the Dodd-Frank Act in 2012 to require disclosure of payments by resource extraction issuers, the U.S. District Court for the District of Columbia, in American Petroleum Institute v. SEC, concluded, among other things, that the SEC misinterpreted Dodd-Frank by forcing public disclosure of detailed data on payments, and failed to consider associated competitive effects. Following the ruling the SEC has taken no further regulatory action, although the SEC has indicated that it would issue a new proposal under Section 1504 by March 2015.

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ISS seeks feedback on its Canadian advance notice policy position

Sean Vanderpol and Ramandeep K. Grewal - 

As part of its annual policy consultation process in advance of proxy season, Institutional Shareholder Services (ISS) recently released for comment its draft governance policies for 2015. As per its usually practice, ISS has published proposed amendments to its prior policy provisions, this year seeking feedback on two specific aspects of its policy for TSX-listed Canadian issuers.

First, ISS has proposed to update its current policy on advance notice bylaws and policies in response to what it describes as "unreasonable" policies that could otherwise disqualify experienced shareholder nominees. According to ISS, it has opposed a "substantial majority" of advance notice policies in 2014 due to prohibitions on resetting of the notification period for adjourned or postponed meetings. As we discussed last month, ISS recently recommended a vote against the adoption of advance notice bylaws or policies that do not allow for the commencement of a new time period in the event of an adjournment or postponement.

ISS also specifically cited recent jurisprudence (see our recent post on Orange Capital vs. Partners REIT) as having substantiated its concern in this respect. As we discussed in connection with that case, a restriction on resetting the notice period is not novel and appears to be relatively common in advance notice bylaws and policies adopted by both U.S. and Canadian issuers. Given the purpose of an advance notice provision is to prevent a stealth proxy context, there may be some merit to ensuring that shareholders aren’t faced with having to deal with additional nominations where issuers may be forced to adjourn or postpone a meeting, even for a short time and for reasons unrelated to director nominations.

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Manitoba amends ISDA reporting methodology for derivatives reporting

Margaret Grottenthaler -

The Manitoba Securities Commission yesterday released changes to its derivatives trade reporting rule that will, among other things, address the issue of clearing agency reporting where the clearing agency is not recognized or exempt in Manitoba (by adding a concept similar to Quebec of a “reporting clearing agency”) and which will permit the reporting obligation to be assigned by written agreement (thereby allowing adoption of the ISDA reporting methodology and giving effect to other forms of delegation agreement). Also, similar to the Quebec rule, the Manitoba rule will require Canadian financial institutions (that are not otherwise caught as dealers) to report transactions with non-dealer local counterparties (as opposed to dual reporting in that situation).

Notably, however, the Manitoba amendments diverge from those in Ontario and Quebec insofar as the amended rule requires that, in certain circumstances involving two local non-dealers, each local counterparty submit to the MSC within 5 days of the trade a document identifying both the unique transaction identifier assigned to the transaction by the trade repository to which it reported the transaction, as well as the unique transaction identifier assigned to the transaction by the trade repository to which the other local counterparty reported the transaction. 

The amendments come into force on October 31, 2014. As the amendments are being adopted without a consultation period, the MSC is also accepting comments on whether to make the amendments permanent, until January 5, 2015. For more information, see MSC Rule 2014-19.

Canadian consultation on Capital Markets Acts important to derivatives markets

Margaret Grottenthaler -

As we posted earlier, the Department of Finance has published for consultation legislation to create a cooperative system under which participating provincial and territorial jurisdictions would enact uniform legislation to regulate capital markets within their jurisdictions (the Provincial Capital Markets Act (PCMA)) and the federal government would enact the Capital Markets Stability Act (CMSA) to address systemic risk in national capital markets, criminal matters and data collection across all jurisdictions. A common regulator, the Capital Markets Regulatory Authority (CMRA), would administer the provincial system (in participating jurisdictions) and the federal system.

This post provides further detail on those aspects of the proposed Acts that would regulate derivatives markets. 

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CDS rule amendments would provide clearing agency with emergency authority

The OSC yesterday released proposed amendments to CDS rules that would allow CDS to take immediate action in an "emergency situation" to ensure the safe, fair and efficient operation of its operations.

Authority in such a situation would include, but not be limited to: (i) declining to enter into any transaction; (ii) causing a market participant's suspension; (iii) terminating access to CDXS for all participants; (iv) effecting close-out; and (v) effecting liquidation processes; (vi) taking reasonable action to preserve the integrity of capital markets or the public interest; and/or (vii) taking any other reasonable actions to preserve the integrity and security of CDS.

The proposals are open for a 30-day comment period.

Exemption to transparency requirements extended for trading in government debt securities

The Canadian Securities Administrators today announced that the exemption from transparency requirements for government debt securities will be extended until January 1, 2018. The exemption had been set to expire at the end of this year.

As we discussed earlier this year, the CSA proposed amending NI 21-101 to extend the exemption, along with a number of other proposed changes to marketplace operations and trading rules, in April. The CSA intend to review and proceed with the other proposed amendments on a separate timetable.

Proposal for Canadian cooperative capital markets regulator: the Provincial Capital Markets Act

Ramandeep K. Grewal and Paul Burd

On October 9, 2015, the Canadian federal government’s latest initiative to develop a cooperative capital markets regulatory regime continued to progress with the addition of Prince Edward Island as the fifth province to join in on this proposal.

We have previously discussed the infrastructure and governance proposed for the “Capital Markets Regulatory Authority” (CMRA) that would be created under the proposed cooperative regime. As detailed in that post, the CMRA would administer the federal Capital Markets Stability Act (CMSA) as well as the uniform provincial/territorial Provincial Capital Markets Act (PCMA), which would be adopted by each participating province or territory. In this post we take a closer look at the proposed PCMA.

Under the proposal, the PCMA would be enacted by each participating province and territory and takes a platform approach to capital markets regulation. It sets out the fundamental provisions of capital markets law and leaves detailed requirements to be addressed in regulations.  Where the CMSA, aimed primarily at the regulation of systemic risk, introduces a number of new regulatory concepts, the PCMA in contrast has been drafted to closely follow existing provincial securities legislation. While it most closely resembles the current securities legislation of Ontario and British Columbia, elements from other provinces’ legislation are also incorporated throughout. Similar to current securities laws, the PCMA is comprised of different parts relating to different aspects of securities regulation, such as recognition or designation of self-regulatory organizations, registration, prospectus, take-over bid requirements, etc. 

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CSA members adopt disclosure requirements in respect of women on boards

Amanda Linett and Mike Devereux

Earlier this week, the CSA announced the upcoming implementation in Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Quebec and Saskatchewan of amendments to corporate disclosure obligations to require information in regards to the representation of women on boards of directors.

As we discussed last year, the OSC initiated a consultation process in July 2013 to consider the underrepresentation of women on corporate boards. In January 2014, meanwhile, the OSC published proposed amendments to Form 58-101F1 to require that reporting issuers annually disclose certain information in regards to the representation of women on boards and in respect of the director selection process. Other CSA jurisdictions published proposed amendments in July.

Having considered the responses submitted by stakeholders, the participating CSA jurisdictions have now released harmonized amendments in final form. Ultimately, the amendments published today, which are substantially similar to the earlier proposals, will require non-venture issuers to annually disclose:

  • director term limits and other mechanisms of board renewal;
  • policies regarding the representation of women on the board;
  • the board's or nominating committee's consideration of the representation of women in the director identification and selection process;
  • the issuer's consideration of the representation of women in executive officer positions when making executive officer appointments;
  • targets regarding the representation of women on the board and in executive officer positions; and
  • the number of women on the board and in executive officer positions.

The amendments apply to management information circulars and annual information forms that are filed following an issuer's financial year ending on or after December 31, 2014.

Proposal for Canadian cooperative capital markets regulator: Infrastructure and regulatory authority

Margaret GrottenthalerRamandeep K. Grewal and Alex Colangelo - 

As we recently discussed, the federal government, Ontario, B.C., Saskatchewan and New Brunswick have agreed to implement a cooperative capital markets regulatory system intended to foster more efficient Canadian capital markets, increase investor protection and manage systemic risk.

Under the proposed cooperative system, participating provincial and territorial jurisdictions would enact uniform legislation addressing all matters in respect of the regulation of capital markets within their jurisdictions. Federal legislation, meanwhile, would address criminal matters and systemic risk across the country in respect of national capital markets and data collection.

A common regulator, the Capital Markets Regulatory Authority (CMRA), would administer the provincial and federal legislation and regulations under authority delegated by the participating jurisdictions, while a Council of Ministers (CoM) would oversee the CMRA and be accountable to participating jurisdictions for the exercise of the CMRA’s regulatory powers.

Below, we take a closer look at the cooperative system’s structure and governance framework.

Cooperative Capital Markets Regulator chart

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CSA adopt changes to registrant regulatory framework

The CSA yesterday published a range of final changes to the registrant regulatory framework intended to codify exemptive relief and narrow the scope of activities that are conducted by certain registrants. The CSA proposed the amendments in December 2013, and the release published today includes minor drafting changes intended to provide further clarity.

As we discussed last year, these amendments to NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, NI 33-109 Registration Information, NI 52-107 Acceptable Accounting Principles and Auditing Standards, companion policies and OSC Rules 33-506 (Commodity Futures Act) Registration Information and 35-502 Non-Resident Advisers will, among other things, (i) restrict the activities that exempt market dealers may conduct; (ii) prohibit exempt market dealers from conducting brokerage activities; (iii) clarify the limited circumstances in which exempt market dealers are able to underwrite securities; and (iv) codify an exemption for sub-advisers and exempt registered sub-advisers from certain registrant obligations.

The changes are expected to come into force on January 11, 2015.

IIROC releases FAQ regarding Client Relationship Model

IIROC yesterday released a set of responses to frequently asked questions in regards to implementation of its Client Relationship Model.

As we've previously discussed, IIROC has adopted a number of rule amendments over the last few years in respect of certain CRM regulatory objectives, such as enhanced client reporting requirements, account suitability, and enhanced standards regarding conflicts of interest management and disclosure.

Ultimately, the FAQ provides guidance in respect of such issues as pre-trade disclosure of charges and the content required in account statements and trade confirmations.

For more information, see IIROC Notice 14-0233.

US Treasury accepts Canadian guidance of investment entities under FATCA

Roanne C. Bratz and Michel Legendre -

Last week, Brett York, an attorney adviser in the Treasury Office of International Tax Counsel confirmed that the U.S. Treasury is willing to accept Canada's recent guidance that only Canadian financial institutions that are “listed financial institutions” for the purposes of Part XVIII of the Income Tax Act would be considered investment entities under the IGA. As we discussed earlier this year, the Canada Revenue Agency's guidance for Canadian entities took effect on July 1.

Under the wording of the IGA, the definition of “investment entity” is to be interpreted in a manner consistent with the definition of “financial institution” in the recommendations of Canada's Financial Action Task Force, with the result that  most personal investment companies and trusts will not  be considered  to be financial institutions required to report U.S.-owned accounts to the Internal Revenue Service under FATCA.

CSA decide not to reduce early warning threshold to 5%

The Canadian Securities Administrators today announced that they will not be moving forward with plans to reduce the early warning reporting threshold from 10% to 5% as previously proposed.

As we discussed in March 2013, the CSA last year proposed amendments to the reporting threshold, triggers and related disclosure requirements under Canada’s early warning reporting regime intended to “provide greater transparency about significant holdings of issuers’ securities”. While the most significant change under the 2013 proposal would have been to decrease the reporting threshold from 10% to 5%, the CSA also proposed a number of other significant reforms, including greater transparency through reporting of “equity equivalent derivatives” in order to address issues such as “hidden ownership” and “empty voting”.

In today's release, the CSA note that a majority of the over 70 comment letters received in response to the 2013 proposals expressed concern with the potential unintended consequences resulting from some of the proposed amendments to the early warning regime. In what is sure to be a welcome development for most market participants, the CSA have decided against moving forward with the proposed reduction of the reporting threshold to 5% or the proposed inclusion of equity equivalent derivatives in the determination of the early warning threshold. An equity equivalent derivative would have been defined as a derivative that was referenced to or derived from a voting or equity security of an issuer and that provided the holder, directly or indirectly, with an economic interest that was substantially equivalent to the economic interest associated with beneficial ownership of the security (the examples provided included cash-settled total return swaps and contracts for difference).

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PEI joins cooperative capital markets regulatory system

The Canadian Department of Finance announced today that Prince Edward Island has become the fifth province to join the cooperative capital markets regulatory system now under development.

As we discussed last month, the federal government, Ontario, British Columbia, Saskatchewan and New Brunswick recently signed a Memorandum of Agreement setting out the terms and conditions of a cooperative regulatory system that the Finance Minister hopes to have operating by next year.

Under the proposed system, a common regulator referred to as the “Capital Markets Regulatory Authority” would administer uniform provincial legislation (that would be adopted in each participating provinces) as well as complimentary federal legislation focused on systemic risk. Drafts of both pieces of legislation were also published on September 8 with comments being accepted until November 7, 2014.

OSC sets out IFRS disclosure deficiencies for investment funds

Last week, the OSC's Investment Funds and Structured Products Branch released a notice setting out deficiencies identified by branch staff in their preliminary review of IFRS interim financial reports for the period ending June 30, 2014.

According to staff, recurring deficiencies in IFRS filings include (i) missing IFRS 1 reconciliations; (ii) missing opening IFRS statements of financial position; and (iii) missing management report of fund performance (MRFP) disclosure.

According to the branch, these deficiencies will be addressed in comment letters to investment fund managers. The notice also reminds investment fund issuers that non-compliance could result in the issuer being added to the default list.