CSA release 2014 Enforcement Report

The Canadian Securities Administrators recently released their 2014 Enforcement Report, which provides a summary of the enforcement actions undertaken by CSA members over the past year.

According to the report, CSA member staff initiated 105 proceedings in 2014, involving 189 individuals and 92 companies. The most common offences for which proceedings were commenced included charges of illegal distribution, fraud, market manipulation and misconduct by registrants.

CSA member staff also concluded 105 cases against 149 individuals and 106 companies in 2014. About $58.2 million in fines and administrative penalties were ordered, in addition to about $65.7 million in restitution. The report also provides highlights of specific cases.

Of particular interest, while the number of cases concluded in respect of illegal distributions dropped from 220 in 2013 to 122 in 2014, the fines and penalties imposed in those types of cases rose from just under $17 million to $17.6 million (although the amount of restitution and compensation dropped by about $7 million to about $12.7 million). Also notable was the fact that courts in Alberta, Ontario and Quebec imposed jail terms for five individuals last year for cases involving fraud and illegal distributions.

IIROC proposes adjusting margin requirements for agency lending agreements

The Investment Industry Regulatory Organization of Canada yesterday proposed amendments to Dealer Member Form 1 intended to address concerns that current rules do not set out specific margin requirements for agency cash and security borrowing and lending arrangements, as well as the fact that current rules do not have the same margin requirements for arrangements with acceptable counterparties versus regulated entity counterparties.

The concerns are especially relevant considering the recent trend involving dealers entering into borrowing and lending arrangements with custodians that act as agents for counterparties. According to IIROC, the risk of such agreements is equivalent to comparable "principal" arrangements. However, since Dealer Member Form 1 does not cover these types of agency agreements, dealers are currently required to provide additional margin in these cases. 

To address these concerns, the amendments are designed to ensure that agency arrangements are treated for margin purposes in the same way as equivalent principal arrangements between dealers and custodians. As such, the counterparty credit risk classification of the custodian would determine the level of margin required. Custodians that are active in the security borrowing and lending business are typically financial institutions that meet the definition of "acceptable institutions" and are considered low credit risk clients.

Proposals to amend the margin requirements were first published last year, and yesterday's release takes into account comments received from stakeholders. IIROC is accepting comments on its revised proposal until May 27, 2015. For more information, see IIROC Notice 15-0053.

OSC releases 2014 report for investment fund and structured product issuers

Darin Renton

The OSC last week released its annual Summary Report for Investment Fund and Structured Product Issuers, which reviewed the OSC's initiatives for 2014 that impact investment fund and structured product issuers (including in respect of research on mutual fund fees, the adoption of pre-sale delivery of Fund Facts and the accredited investor exemption), discussed emerging issues and trends (including the recent update on linked note offerings), and set out the results of continuous disclosure reviews and recent developments in staff practices.

Of particular interest, the report discusses some of staff's findings in respect of disclosure and compliance reviews, including in respect of IFRS adoption, investment funds with high management expense ratios, fixed income volatility (the report states a staff notice will soon be published outlining the findings of reviews of asset classes that may be susceptible to liquidity issues), senior loans, direct payment of ongoing dealer service fees and fee and expense disclosure

The report also provides an overview of recent regulatory developments impacting funds, including changes to the “accredited investor” exemption that will now allow fully-managed accounts to purchase securities of investment funds (something that was previously prohibited in Ontario). This amendment harmonizes the managed account category of the accredited investor exemption in all Canadian jurisdictions. The report also discusses the application of recent changes to the conflict of interest provisions under securities laws that historically applied only to mutual funds but now apply to investment funds in general.

Changes adopted to accredited investor and minimum amount investment prospectus exemptions

Timothy McCormick and Ramandeep K. Grewal

The CSA announced last week the adoption of amendments to the "accredited investor" and "minimum amount investment" prospectus exemptions that will, among other things, result in significant changes when selling securities to individual investors, including the requirement to obtain a written Risk Acknowledgment Form (RAF) from individual accredited investors (AIs) and the elimination of the $150,000 minimum investment amount (MI) exemption when selling to individuals.

As we discussed last year, the CSA first proposed the amendments in February 2014. These included proposals to require the RAF for certain investors purchasing as AIs as well as significant changes to the form of exempt trade report that is filed with the regulators. The final version of the amendments announced last week retain the RAF requirement but have deferred changes to the report of trade to a future point in time. They also make other revisions, including those made to reflect comments received from stakeholders on the initial proposal published in March of 2014.

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CSA adopt amendments to short-term debt and short-term securitized products prospectus exemptions

Last week, the Canadian Securities Administrators released amendments to prospectus exemption rules relating to the short-term debt and short-term securitized products prospectus exemptions.

Ultimately the changes will, among other things, (i) change the requirements that short-term debt securities must satisfy in order to be distributed under the short-term debt prospectus exemption; (ii) make the short-term debt prospectus exemption unavailable for securitized products such as asset-backed commercial paper; and (iii) introduce a new short-term securitized products prospectus exemption. The new requirements for reliance on the amended short-term debt exemption include the imposition of a new “modified split rating condition”, which will require that, in addition to satisfying the rating threshold condition (that the short-term debt has at least one credit rating at or above the prescribed threshold), the short-term debt not have any rating that is below those prescribed.

As we've previously discussed, these focused changes in respect of short-term securitized products are a retreat from the more comprehensive proposals to establish a new framework for the regulation of securitized products proposed in 2011.

Assuming Ministerial approvals, the changes will come into force on May 5, 2015. Notably, the CSA has also announced changes to the accredited investor and minimum amount investment prospectus exemptions. 

OSC introduces harmonized family, friends and business associates prospectus exemption

On February 19, the Ontario Securities Commission announced that it is introducing a family, friends and business associates prospectus exemption intended to be substantially harmonized with the exemption available in other Canadian jurisdictions.

The exemption will allow issuers other than investment funds, subject to certain conditions, to distribute securities to the issuer's directors, executive officers, control persons and founders, as well as certain family members, close personal friends and close business associates of such persons. Much like in the case of the CSA's recently-announced amendments to the accredited investor and minimum amount investment prospectus exemptions, Ontario's new exemption will require that purchasers sign a risk acknowledgement form in order for issuers to rely on the exemption.

Assuming Ministerial approval, the new exemption will come into force on May 5, 2015, at which time, the existing "Founder, Control Person and Family Exemption" under National Instrument 45-106 Prospectus and Registration Exemptions (which was only available in Ontario) will be repealed. The introduction of the new exemption also corresponds with the adoption of the CSA's changes to accredited investor and minimum amount investment prospectus exemptions in NI 45-106, which will also come into force on the same date along with various other consequential amendments.

Existing Canadian trade reporting rules add EU to substituted compliance provision

The securities regulators in Ontario, Manitoba and Quebec recently released changes to their respective rules regulating trade repositories and derivatives data reporting to extend their substituted compliance provisions to reporting counterparties that report pursuant to European Union derivatives reporting rules.

As you may recall, the substituted compliance provisions effectively exempt certain entities from data reporting requirements under the Canadian rules where they comply with the equivalent trade reporting laws of certain specified foreign jurisdictions. The European Union derivatives reporting rules now join the reporting rules of the CFTC as “equivalent reporting obligations” for the purposes of the exemption. Under these “limited” substituted compliance provisions, the exemption is only available where local counterparty is a registered derivatives dealer or a guaranteed affiliate of a local counterparty.

The amendments will also delay the requirement that designated trade repositories publicly disseminate transaction-level data to July 29, 2016. Transaction-level data reporting had been scheduled to come into force on April 30, 2015.

These amendments were made to the local rule 91-507 in each of Ontario, Manitoba and Quebec, with consequential amendments to Companion Policy 91-506. For more information on Canadian rules on trade repositories and data reporting, see our previous post on the subject.

CSA report on medical marijuana issuer finds disappointing disclosure deficiencies

The Canadian Securities Administrators today released the results of CSA staff’s review of continuous disclosure by reporting issuers announcing their intention to enter Canada's medical marijuana industry. Generally, CSA staff found that the reviewed issuers had unbalanced and promotional disclosure, and requested that 92% of the issuers reviewed file clarifying disclosure.

This review follows significant interest by reporting issuers and investors in the medial marijuana industry, with the CSA noting that a substantial number of issuers (a majority being in the junior mining industry) announced their intention to explore opportunities in the industry after the introduction of federal regulations effective April 1, 2014, to govern the production, distribution and use of medical marijuana in Canada.

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Canada adds to list of prohibited entities and individuals under Russia and Ukraine sanctions

Earlier this week, the Canadian government announced it is updating the schedules of designated persons and entities to whom sanctions apply in respect of Russia and Ukraine.

As we've previously stated, the sanctions generally prohibit Canadians and any person in Canada from, among other things (i) dealing in any property, wherever situated, held by or on behalf of a designated person; (ii) entering into or facilitating, directly or indirectly, any transaction related to a dealing referred to in paragraph (i); (iii) providing any financial or other related service in respect of a dealing referred to in paragraph (i); (iv) making any goods, wherever situated, available to a designated person; or (v) providing any financial or related service to or for the benefit of a designated person. The sanctions also require that various financial entities, including securities dealers and advisers, determine on a continuous basis whether they are in possession or control of property owned or controlled by or on behalf of a designated person.

For details on the Russia and Ukraine sanctions to date, see the website of Foreign Affairs, Trade and Development Canada.

CSA propose rules for mandatory derivatives clearing

Margaret Grottenthaler, Alix d’Anglejan-Chatillon and Keith Chatwin -

The Canadian Securities Administrators yesterday released proposed rules setting out mandatory requirements for central counterparty clearing of certain standardized over-the-counter derivatives transactions. The rule is in the form of a National Instrument, so harmonization across Canadian jurisdictions should be better than it is under the trade reporting rules. In addition to setting out clearing requirements, proposed National Instrument 94-101 also contains rules related to how regulators will determine which derivatives are subject to mandatory clearing. Ultimately, the proposal is intended to enhance market transparency and mitigate systemic risk.

As we previously discussed, the CSA previously proposed model rules in regards to central counterparty clearing in December 2013. We took a closer look at those rules in January 2014. The proposed NI 94-101 is based on the draft model provincial rule, with revisions based on comments received from stakeholders.

The CSA are accepting comments on the proposal until May 13, 2015.

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Investment fund modernization project: CSA update on alternative funds framework

Alix d'Anglejan-Chatillon and Darin Renton

The Canadian Securities Administrators yesterday released an update on their planned alternative funds framework for investment funds

As we previously discussed, the CSA announced the implementation of certain aspects of Phase 2 of the Modernization of Investment Fund Product Regulation Project last June. At the time, the CSA stated that an alternative funds proposal would be considered at a later date in conjunction with certain restrictions for non-redeemable investment funds proposed in 2013.

According to the CSA, the previous discussions regarding an alternative funds framework generated a significant response from stakeholders, including in regards to topics such as (i) the attributes of alternative investment funds, including the criteria to be used to differentiate mutual funds and non-redeemable investment funds from alternative investment funds; (ii) naming conventions; (iii) whether alternative investment funds should be permitted to borrow cash and what limits on borrowing should be set; (iv) the use and measurement of leverage; (v) whether short selling should be allowed beyond the limits currently permitted in respect of mutual funds including in respect of cash cover requirements; (vi) other investment restrictions, including in respect of fund-on-fund investing and concentration requirements; and (vii) proficiency standards for representatives selling alternative funds.

In light of the feedback received, the CSA expect to continue consulting with stakeholders until mid-2015, with an expectation of publishing proposed rules towards the end of this year.

For more information, see CSA Staff Notice 81-326.

New existing security holder prospectus exemption comes into force in Ontario

Jonah Mann and Duncan Snyder - 

Of the four new prospectus exemptions proposed by the Ontario Securities Commission in March 2014, the “existing security holder” exemption, an exemption that permits certain reporting issuers to issue new securities to their existing security holders without having to file a prospectus (the “Ontario Exemption”), has been adopted by the OSC and comes into force today. As announced on November 27, 2014, the Ontario Exemption is being adopted through amendments to OSC Rule 45-501 and varies somewhat from the exemption as originally proposed and published for comment on March 20, 2014 (the “Proposal”).

Requirements of the Ontario Exemption

Under the Ontario Exemption, existing security holders of an issuer are permitted to purchase equity securities of the issuer on a prospectus exempt or "private placement" basis provided the securities are listed on the TSX, TSXV, CSE or the Aequitas NEO Exchange (each a “listed security”). The Ontario Exemption also extends to units comprised of a listed security and a warrant entitling the holder to acquire a listed security and applies where the person is purchasing as principal only. In order to rely on the Ontario Exemption, the issuer must be a reporting issuer in a Canadian jurisdiction, other than an investment fund, and be current in its continuous disclosure filings. An announcement of the offering must be made in a news release containing a reasonably detailed description of the offering, including the number of securities proposed to be distributed and how they will be distributed, the aggregate proceeds of the distribution and the proposed use of the proceeds.

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Selected Public M&A Deal Points: A Cross-Border Comparison

Tania Djerrahian and Hadrien Montagne -

The Market Trends Subcommittee of the Mergers and Acquisitions Committee (the ABA Subcommittee) of the Business Law Section of the American Bar Association released in late December 2014 its latest edition of the Strategic Buyer/Public Target M&A Deal Points Study (the US Study) which analyses acquisitions of US publicly-traded targets announced in 2013. This article highlights some of the findings reported by the US Study and compares them to those reported by the most recent Canadian Public Target M&A Deal Points Study prepared by the ABA Subcommittee which analyses acquisitions of Canadian publicly-traded targets announced in 2011 and 2012 (the Canadian Study).

The Study Sample and Type of Consideration

The US and Canadian Studies are similar in terms of the number of deals reviewed, the transaction value range and consideration. However, the US Study specifically excludes acquisition by private equity buyers which may influence some of the deal points it reports.


US Study

Canadian Study

Range of Transaction Values

and over

and over

Number of deals



All Cash Consideration



All Stock Consideration



Mixed Consideration



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OSC releases report on related party transaction disclosure

Christen Daniels and Alex Colangelo

Last week, the Ontario Securities Commission released a report based on a review of related party transaction disclosure in which it identified disclosure issues and provided guidance to issuers preparing required related party disclosure.

Generally, a related party transaction is a transaction between an issuer and a person that is a related party of the issuer at the time the transaction is agreed to, as a consequence of which the issuer directly or indirectly enters into certain specified transactions. Such transactions include where the issuer purchases an asset from or sells an asset to the related party, assumes or becomes subject to a liability of the related party, or issues securities to the related party. Related parties of an issuer include shareholders holding more than 10% of voting securities, directors, senior officers and each of their affiliates.

In Canada, related party transaction disclosure is required pursuant to financial statement disclosure requirements under IFRS (IAS 24), Form 51-102F1 Management's Discussion & Analysis and MI 61-101 Protection of Minority Security Holders in Special Transactions.

Specifically, OSC staff reviewed 100 issuers to assess compliance with disclosure requirements with a view to understanding the range of practice in respect of issuers' approval and disclosure of related party transactions. Ultimately, the report found that while financial and MD&A disclosure met most key disclosure requirements, a number of deficiencies were identified.

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OSC adopts changes to fee calculations

The Ontario Securities Commission has announced that it is adopting changes to its rules setting out the fees to be paid by market participants.

Notably, the amendments to current rules will remove the use of a reference fiscal year in the calculation of participation fees and require that market participants calculate their participation fee payable using information from their most recent financial year. According to the OSC, this change will "more closely track current market conditions" to the benefit of participants. Changes to activity fees are also intended to improve fairness and compliance or reduce regulatory burdens.

As we discussed last year, the OSC first published proposed rules for comment in September and the final versions of the rules take into account comments made by stakeholders. Assuming Ministerial approval, the changes come into force on April 6, 2015.