To pay or not to pay: whistleblower programs launch in Ontario and Quebec

Julien Robitaille-Rodriguez and Laura Levine -

Whistleblower programs aimed at encouraging individuals to report securities related misconduct that occurs in Ontario and Quebec have been launched by the Ontario Securities Commission (the OSC) and the Autorité des marchés financiers (AMF) on July 14, 2016 and June 20, 2016, respectively. While the underlying policy rationale of each of the OSC whistleblower program (the OSC Program) and the AMF whistleblower program (the AMF Program) is substantially similar, under the OSC Program whistleblowers who meet certain criteria will be eligible to receive a monetary award for their information whereas the AMF Program will not offer financial awards at all. Both programs provide anti-reprisal and confidentiality protections to whistleblowers. The OSC Program is accompanied by recently adopted amendments to the Securities Act (Ontario) (the OSA) which provide anti-retaliation protections for individuals reporting misconduct. 

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New exempt market disclosure obligations - impact on investment funds

Anne Ramsay and Laura Levine -

The new harmonized Form 45-106F1 Report of Exempt Distribution (the New Report) that came into effect on June 30, 2016 imposes new disclosure obligations, including specific requirements applicable only to investment funds. As previously discussed, on April 7, 2016, the Canadian Securities Administrators (the CSA) announced amendments to National Instrument 45-106 Prospectus Exemptions (NI 45-106) which introduce the New Report. As was the case for the prior form of report, the New Report applies to all types of public and private issuers in all Canadian jurisdictions and, as a new requirement, is to be filed electronically.

New disclosure requirements

Investment funds covered by the reporting obligation include both public and private non-redeemable funds and mutual funds, including non-Canadian funds that distribute securities to Canadian investors. Some of the enhanced disclosure requirements for investment funds in the New Report include:

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Custody requirements and EMD permitted activities targeted in proposed amendments to NI 31-103

The Canadian Securities Administrators (CSA) have proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) in respect of custody arrangements for certain registered firms and permitted activities of exempt market dealers relating to prospectus-qualified securities.  The proposed amendments also incorporate relief previously granted in respect of the CRM2 requirements and effect minor housekeeping changes to NI 31-103.

The proposed amendments will require that registered firms ensure that a “Canadian custodian” or a “foreign custodian” holds securities and cash of a client or an investment fund in certain circumstances.  The terms “Canadian custodian” and “foreign custodian” would be newly defined in NI 31-103.  Self-custody and the use of a custodian that is not functionally independent of a registered firm would be prohibited under the proposed amendments, subject to certain exceptions.  The proposed amendments also contemplate certain disclosure requirements with respect to where and how client assets are held and accessed.  Registered firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) would be exempted from these particular elements of the proposed amendments so long as they comply with the corresponding IIROC and MFDA rules, as applicable.

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NI 33-109 and Commodity Futures Act registration forms proposed to be amended

The Canadian Securities Administrators (CSA) have proposed amendments to certain forms under National Instrument 33-109 Registration Information.  Consequently, the Ontario Securities Commission (OSC) has proposed corresponding amendments to the equivalent forms under OSC Rule 33-506 (Commodity Futures Act) Registration Information Requirements.

Proposed amendments were published to Forms 33-109F4 Registration of Individuals and Review of Permitted Individuals and 33-506F4 Registration of Individuals and Review of Permitted Individuals; Forms 33-109F6 Firm Registration and 33-506F6 Firm Registration;and Forms 33-109F7 Reinstatement of Registered Individuals and Permitted Individuals and 33-506F7 Reinstatement of Registered Individuals and Permitted Individuals

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Looking back and moving forward: CSA announces past achievement highlights and future business plan

Laura Levine -

The Canadian Securities Administrators (the CSA) recently published the highlights of their achievements over the past three years (the Highlights), as well as their business plan for 2016 to 2019 (the Business Plan). Looking forward, the CSA’s priorities are:

  1. The protection of investors from unfair, improper and fraudulent practices
  2. The ongoing efficient functioning of capital markets
  3. The reduction of risks to market integrity and to investor confidence in the markets
  4. The enhancement of information technology 
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OSC releases 2016-2017 Statement of Priorities

The Ontario Securities Commission (OSC) has provided stakeholders with a glimpse into the OSC’s goals for the coming year as published in its Statement of Priorities on June 9, 2016. The Statement of Priorities follows the draft Statement of Priorities published on March 10, 2016. 

The Statement of Priorities enumerates five overarching regulatory goals for 2016-2017:

  • Deliver strong investor protection
  • Deliver responsive regulation
  • Deliver effective compliance, supervision and enforcement
  • Promote financial stability through effective oversight
  • Be an innovative, accountable and efficient organization
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Insider trading restrictions now extended to "recommending" in Ontario

 The new offence of “recommending” has been added to the Securities Act (Ontario) (the OSA). Effective July 1, 2016, the OSA includes a prohibition on recommending or encouraging the purchase or sale of securities of an issuer where the person or company making the recommendation is in a “special relationship” with the issuer and has knowledge of a material fact or material change with respect to such issuer that has not been generally disclosed. As previously discussed, this amendment broadens the insider trading provisions of the OSA and is in line with the securities legislation in most other Canadian jurisdictions.

The new provision was adopted as part of the Ontario Budget Measures Bill 173, which received royal assent on April 19, 2016. The section implementing the recommending prohibition was proclaimed into force effective July 1, 2016.

Foreign issuers now exempt from certain new post-trade reporting disclosure obligations

Ralph Hipsher and Laura Levine

Responding to concerns raised by non-Canadian international market participants, the Canadian Securities Administrators (the CSA) have granted relief for certain foreign issuers from the requirement to report whether a purchaser under an exempt distribution in Canada is a “registrant” and/or an “insider” of the issuer (the Foreign Issuer Relief) in Schedule 1 to the new Form 45-106F1 – Report of Exempt Distribution (the New Form) that came into effect June 30, 2016.

As previously discussed, the New Form requires issuers and underwriters, as applicable, to complete a confidential schedule disclosing, among other things, whether or not each purchaser in Canada is a “registrant” and/or an “insider” of the issuer. Since publication of the New Report, non-Canadian international market participants have expressed concerns about the compliance challenges associated with determining such information within the meaning of the terms as defined in Canadian securities laws, given the different standards and meanings applied to such terms in other foreign jurisdictions and in light of the New Form’s certification requirements. 

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CSA consult on regulatory best interest standard and targeted reforms to the client-registrant relationship

Alix d’Anglejan-Chatillon, Nicholas Badeen and Junaid Subhan -

The Canadian Securities Administrators (CSA) have published for comment a much-anticipated consultation on the client-registrant relationship and the appropriateness of introducing a regulatory best interest standard.  CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (CSA Consultation Paper 33-404) describes proposed targeted amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (31-103) and its Companion Policy.  In addition, CSA Consultation Paper 33-404 describes a framework for a regulatory best interest standard on which all CSA jurisdictions, except British Columbia, are consulting.  Comments on CSA Consultation Paper 33-404 will be accepted until August 26, 2016.

Proposed Targeted Reforms

The proposed targeted reforms to 31-103 are comprehensive and range from enhanced conflict of interest disclosure and know your client and know your product requirements to increased proficiency requirements.  The Companion Policy to 31-103 would also be amended to include detailed guidance relating to these requirements. In the CSA’s view, the proposed targeted reforms are merely explicit statements of existing registrant obligations that are necessary to meet the CSA’s current expectations for regulatory compliance in the following areas:

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Amendments to start-up crowdfunding blanket orders adopted

The securities regulators of British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia have made amendments to the previously adopted start-up crowdfunding exemption blanket orders and corresponding start-up forms and guides (the Amendments). The Amendments, effective June 30, 2016, reflect  the new SEDAR filing requirements for exempt market filings that came into force earlier this year, as well as other changes of a housekeeping nature.

For further information, please see Multilateral CSA Notice 45-319 Amendments to Start-up Crowdfunding Registration and Prospectus Exemptions

IIROC to act as information processor for corporate debt securities

Effective July 4, 2016, the Investment Industry Regulatory Organization of Canada (IIROC) will act as an information processor for corporate debt securities under National Instrument 21-101 Marketplace Operation.  Can PX Inc. is the existing information processor and its term ended on June 30, 2016.

Increasing post-trade transparency of corporate debt securities has been a key area of focus for the Canadian Securities Administrators (CSA) recently.  Some of the CSA’s objectives include facilitating more informed decision-making, improving market integrity and evaluating whether access to the fixed income market is fair and equitable for all investors.  According to CSA Staff Notice 21-318 Information Processor for Corporate Debt Securities (CSA Staff Notice 21-318), moving from an industry-based information processor to a regulatory approach led by IIROC will facilitate its objectives in this regard.

For further information, please see CSA Staff Notice 21-318 and IIROC Notice 16-0117.

CSA publishes list of unprotected marketplaces

The Canadian Securities Administrators (CSA) published CSA Staff Notice 23-316 Order Protection Rule: Implementation of the Market Share Threshold and Amendments to Companion Policy 23-101 Trading Rules to provide the list of unprotected marketplaces for the purposes of the order protection rule (i.e. marketplaces that display orders that will not be protected).  It provides a list of unprotected marketplaces as of July 6, 2016 because they do not provide automated trading functionality as they have an intentional order processing delay and as of October 1, 2016 because they do not meet the market share threshold (2.5% of total value and volume traded).

For further information, including a list of protected and unprotected marketplaces and the reasons for such status, please see CSA Staff Notice 23-316

IIROC proposes amendments to margin requirements for futures contracts

The Board of Directors of the Investment Industry Regulatory Organization of Canada (IIROC) recently approved the republication for comment of amendments to the Notes and Instructions to Schedule 12 of Form 1 – Margin on Futures Concentrations and Deposits.  According to IIROC Rules Notice 16-0141, the proposed amendments are intended to reflect the change in the futures markets over the past several years to more timely publication of margin requirements for futures contracts.  Specifically, IIROC is proposing that the 15% margin provision be excluded where a futures exchange calculates and publishes maintenance margin every day.

 

Comments on the proposed amendments will be accepted until August 22, 2016.  

Marketplaces' compliance with electronic trading rules the subject of OSC compliance review

The Ontario Securities Commission (OSC) recently completed a compliance review of marketplaces and found that marketplaces were generally compliant with their obligations under National Instrument 23-103 Electronic Trading and Direct Access to Marketplaces (NI 23-103).  The results of that compliance review are published in OSC Staff Notice 23-704 Compliance with National Instrument 23-103 Electronic Trading and Direct Access to Marketplaces (OSC Staff Notice 23-704).

The objectives of the compliance review were two-fold.  First, the OSC sought to assess compliance with NI 23-103.   Second, the OSC sought to determine marketplaces’ readiness for compliance with price thresholds as set out in IIROC Notice 15-0186 Guidance on Marketplace Thresholds, which is also a requirement under NI 23-103.  The OSC found that marketplaces were generally compliant with most of the requirements of NI 23-103.  Notably, marketplaces had the ability and authority to provide their marketplace participants with access to their order and trade information and to cancel, vary or correct trades.  Marketplaces were also generally able to terminate marketplace participant access.  The OSC noted, however, that not all marketplaces could prove that they conducted regular assessments of whether they need risk management and supervisory controls, policies and procedures in addition to what is normally required.  OSC Staff Notice 23-704 did not address readiness for compliance with price thresholds.

OSC Staff Notice 23-704 does not specify which marketplaces were the subject to the compliance review.  However, National Instrument 21-101 Marketplace Operation (and in Ontario, the Securities Act) define a “marketplace” as including an exchange and a quotation and trade reporting system.

The OSC noted that they will conduct compliance reviews of marketplaces on a regular basis to assess compliance with NI 23-103.

ASC finalizes new fee rule

Significant changes to the rules and procedures relating to fees charged by the Alberta Securities Commission (ASC) will be effective as of December 1, 2016.  The new fee rule, ASC Rule 13-501 Fees, introduces some new concepts related to fees, including participation fees for reporting issuers and fees for exempt international firms.

Perhaps the most significant change is that reporting issuers are subject to a participation fee similar to what is currently employed by the Ontario Securities Commission.  Specifically, fees for reporting issuers will be based on the firm’s capitalization and certain other characteristics of the firm, such as whether its securities are listed and the place of incorporation of the firm.  Recognized exchanges and recognized quotation and trade reporting systems, will also be subject to a participation fee model.  Fees payable by such entities are based on their Canadian trading share during the specified period.

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