TSX proposes additional listing exemptions for interlisted issuers

Jonah Mann - 

The Toronto Stock Exchange yesterday proposed amendments to its Company Manual that would adopt a broader deference model in respect of certain exchange requirements where an interlisted issuer is subject to the rules and regulation of another exchange or jurisdiction.

An "interlisted issuer" is an issuer listed on two or more exchanges or marketplaces. According to the TSX, as at November 30, 2014, there were 322 interlisted issuers on the TSX. Of these, 273 (82%) are Canadian-based issuers, while 59 (18%) are foreign incorporated. Currently, the TSX waives certain of its requirements applicable to a transaction where at least 75% of the issuer's trading volume and value over the six months preceding notification of the transaction occurs on another exchange and the other exchange is reviewing the transaction.

Under the proposed amendments, the scope of matters that could be deferred to the other exchange where the bulk of trading takes place would be expanded. Specifically, the proposed amendments would provide new exemptions in respect of, among other things, prospectus offerings, convertible securities and rights offerings. Certain qualifying interlisted issuers could also apply for exemptions from certain TSX corporate governance requirements. 

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Regulators adopt changes to CRM2 project

Earlier this week, the Investment Industry Regulatory Organization of Canada announced that Phase 2 of its Client Relationship Model amendments (CRM2) have been approved by the applicable securities regulatory authorities and will come into force over the course of the next two years.

Specifically, the amendments to IIROC's Dealer Member Rules, which were most recently published for comment in September 2014 introduce requirements with respect to (i) enhanced trade confirmation and account statement reporting; (ii) quarterly reporting on certain off-book client holdings; (iii) annual account performance reporting; and (iv) annual charge reporting. The changes come into force on July 15, 2015 and July 15, 2016. 

As we discussed in a post last year, components of CRM2 dealing with, among other things, pre-trade disclosure of charges came into force on July 15, 2014. 

For more information, see IIROC Notice 15-0013.

CSA issue guidance on structured notes filings

Darin Renton and Jeffrey Elliott

The Canadian Securities Administrators yesterday issued a notice setting out the views of CSA staff concerning the offering of structured notes under the shelf prospectus system.

Structured (or linked) notes are specified derivatives whose prices are determined by reference to the value of an underlying interest unrelated to the issuer of the structured note. The CSA regulates such notes through their review of prospectus supplements, and yesterday's notice provides issuers with a guide in respect of CSA staff's expectations while conducting the review process.

Specifically, the notice, which updates and supplements earlier guidance on the topic, sets out:

  1. the disclosure that issuers should consider when preparing prospectus supplements for structured notes, including in respect of the issuer's estimate of the note's fair value and valuation model, hypothetical or back-tested performance data (which CSA staff have generally requested be removed), and disclaimers of liability for third-party information (which CSA staff believe do not reflect liability for prospectus misrepresentation under securities law);
  2. disclosure that issuers should consider providing on their websites regarding their structured notes on an ongoing basis, including in respect of the composition of the underlying portfolio to which the note is linked and the initial price or level of the underlying interest; and
  3. the filing process to pre-clear novel supplements and for subsequent offerings of pre-cleared products as well as further guidance on undertakings to pre-clear a draft prospectus supplement for notes linked to equity securities that are not listed on a Canadian stock exchange.

CSA staff intend to continue to monitor filings to consider whether more formal regulatory action is required. For more information, see CSA Staff Notice 44-305.

Securities regulators propose derivatives reporting rules

Securities regulators in Alberta, British Columbia, New Brunswick, Nova Scotia and Saskatchewan today published for comment proposed rules intended to create a derivatives reporting regime in these provinces substantially harmonized with the rules recently adopted in Ontario, Manitoba and Quebec.

Specifically, proposed Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting sets out the requirements trade repositories would have to meet to be designated or recognized as entities to which market participants could report their trades. Proposed MI 96-101 also outlines the reporting obligations of derivatives market participants. Meanwhile, proposed  Multilateral Instrument 91-101 Derivatives: Product Determination would set out the products that would be treated as derivatives (and those to be excluded from the definition) for the purposes of MI 96-101. Notably, the hierarchy to determine the reporting counterparty under the proposed rules would follow that of Quebec and Manitoba.

As we've previously discussed, the OTC Derivatives Committee of the Canadian Securities Administrators published model provincial rules for comment in December 2012. The rules adopted by Ontario, Quebec and Manitoba, meanwhile, required reporting to begin on October 31, 2014, with staggered implementation over the current year.

Comments on the proposed instruments are being accepted until March 24, 2015.

A look ahead to the 2015 proxy season

Benoît Dubord and Stéphane Rousseau -

The 2015 Proxy Season is on the doorstep. A look back at the hot topics in shareholder meetings held in the U.S. in 2014 is useful for Canadian issuers to anticipate emerging trends.

Key Shareholder Proposals

When looking at the shareholder proposals voted on at S&P 1500 companies that held their annual meetings in the first half of 2014, three themes of interest stand out.

First, corporate governance issues continue to form the bulk of shareholder proposals. Among those issues, the most common proposal involves the separation of the roles of CEO and chair. Although such resolutions gather about a third of shareholder support on average, the proposal is seldom adopted. Investors appear therefore to be satisfied with the role of the lead independent director as an alternative to an independent board chair. The U.S. position contrasts with the Canadian position where the independent chair is an accepted governance practice for the vast majority of Canadian public corporations.

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TSX proposes new listing regime for closed-end funds and exchange traded and structure products

Philip Henderson and Darin Renton

The regulatory landscape for structured products in Canada continues to evolve with the Toronto Stock Exchange proposing new and tailored listing requirements yesterday for various types of structured entities and products.

Specifically, the amendments to the TSX Company Manual would facilitate the listing of three distinct new categories of issuers or products referred to in the proposal as "closed-end funds", "exchange traded products" and "structured products". The requirements would include tailored minimum listing requirements as well as requirements associated with the general issuance of securities, supplemental listings, management fees, security holder approvals, terminations and voluntary delistings, and continued listing requirements.

Citing the fundamental differences in the trading, liquidity and ability to raise additional funds among the three different product categories, the TSX is proposing certain differing standards for each, such as a minimum market capitalization or IPO raise of $1 million for exchange traded and structured products, and $20 million for closed-end funds.

Comments on the proposals are being accepted until March 16, 2015.

IIAC requests delayed implementation of CRM amendments

Darin Renton

Last month, the Investment Industry Association of Canada released a letter requesting that the CSA delay implementation of Client Relationship Management (CRM) Project Phase 2 amendments.

As we've previously discussed on this blog, amendments under Phase 2 of the CRM project, initially published for comment in June 2011 and republished in June 2012,were adopted in 2013. The amendments, which set out requirements for, among other things, client reporting with respect to cost disclosure, investment performance reporting and client statements come into force over the next few years. 

Earlier in December, the Ontario Securities Commission's Investor Advisory Panel stated that the implementation schedule for the CRM project should not be delayed. 

IIROC finalizes guidance on underwriting due diligence

D'Arcy Nordick and Jeffrey M. Singer -

The Investment Industry Regulatory Organization of Canada recently published its final guidance on underwriting due diligence (the “Guidance”). Being IIROC’s first ever codification of this nature, the publication of the Guidance represents an opportunity for underwriters to review internal practices in light of IIROC’s expectations. As we discussed when IIROC’s draft guidance were published for comment, while the intention is to codify common practices, the guidance may represent a departure from what some may consider to be the market standard. This is an issue that may be of particular relevance given the role of due diligence in demonstrating that an underwriter has fulfilled its statutory obligations in respect of prospectus offerings.

A draft version of the guidance was originally published for comment in March of 2014, following which IIROC engaged in further industry consultations and consideration of comments. Similar to the draft version, the Guidance is organized into nine key areas spanning the entire underwriting due diligence process. However, it appears that IIROC has made some key adjustments in response to comments received, mainly affording a greater degree of flexibility to underwriters on certain significant matters. Of these, the most notable changes or clarifications are highlighted below, and otherwise discussed in context in our review of the nine principles that follows.

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2015 Oil and gas M&A trends in Canada

Glenn Cameron - 

There was a significant increase in oil and gas M&A and related financing activity in 2014 compared to 2013. By the end of November the value of M&A transactions was over $46 billion, more than three times the aggregate value for the same period in the previous year. 

Reasons for this increase in activity included:

  • The extremely cold winter in North America increased natural gas prices and raised the values of natural gas producers.
  • Several large US producers, including Devon, Apache and EOG Resources, consolidated their Canadian operations, disposing of non core properties.  Devon’s sale of its Canadian conventional assets to Canadian Natural Resources for C$3.13 billion was the largest asset deal of the year.
  • The shale plays in the Montney, Duvernay and other areas of Alberta and BC continued to attract investors looking for significant reserves in close proximity to proposed LNG projects on the West Coast of British Columbia.  Kuwait Petroleum Corporation’s US$1.5 billion purchase of 30% of Chevron’s Duvernay assets and Apollo’s purchase of Encana’s Bighorn assets for C$1.9 billion were examples of these kinds of transactions.
  • Access to capital markets provided the financing required for energy M&A transactions.

This increased activity occurred despite growing concerns that proposed pipeline projects to key export markets may be further delayed or even prevented by increased opposition to those projects, and notwithstanding a lack of significant participation in M&A from Asian acquirors, including state owned enterprises (SOEs). However, the rapidly declining oil prices rapidly declined in Q3 and Q4 of 2014 slowed the M&A activity by year end and the capital markets window for energy issuers closed.

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Canada expands Russia sanctions

Shawn Neylan and Alan Kenigsberg -

On December 19, the Canadian government announced expanded economic sanctions against Russia, primarily directed at the Russian energy industry (the "Expanded Russia Sanctions").

As we recently discussed, the Expanded Russia Sanctions were imposed by way of an amendment to the pre-existing sanctions under the Special Economic Measures (Russia) Regulations.  In addition to adding new designated persons to the existing Regulations against Russia (and also adding new designated persons to the Special Economic Measures (Ukraine) Regulations) the Expanded Russia Sanctions now prohibit any person in Canada and any Canadian outside Canada from exporting, selling, supplying or shipping any specified good, wherever situated, to Russia or to any person in Russia for use in any of (i) offshore oil exploration or production at a depth greater than 500 meters, (ii) oil exploration or production in the Arctic or (iii) shale oil exploration or production (the "Specified Activities").   Activities relating to gas exploration are not specifically covered in the Expanded Russia Sanctions.

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Russia sanctions expanded

The Canadian government today announced it is expanding sanctions that target certain individuals and activities associated with Russia and Ukraine.

While a number of designated individuals were added to the Ukraine sanctions, the Russia sanctions were expanded to include prohibitions against supplying certain goods, financial services or technical services in respect of certain types of oil exploration and production.

Existing prohibitions concerning equity and debt financings were also clarified.

IIROC releases final guidance on underwriting due diligence

On December 18, the Investment Industry Regulatory Organization of Canada released final guidance in respect of underwriting due diligence.

Ultimately, the document sets out a number of key principles respecting underwriting due diligence, as well as associated guidance respecting each principle, including in regards to: (i) policies and procedures for underwriting due diligence; (ii) due diligence plans; (iii) due diligence Q&A sessions; (iv) business due diligence; (v) legal due diligence; (vi) reliance on experts and other third parties; (vii) reliance on lead underwriter; (viii) due diligence record-keeping; and (ix) the role of supervision and compliance.

As we stated in March when a draft version of the guidance was released, while IIROC's intention was to codify common practices and suggestions, the proposed guidance could have represented a departure from what some dealers consider to be the current market standard. In response to this concern, IIROC specifically states that only appropriate matters are identified as being mandatory, and that many of the statements concerning dealers' policies and procedures provide "ample room" for dealers to reflect the contexts of their businesses.

As previously discussed, proposed amendments were published in March of this year, and the final version published yesterday takes into account stakeholder comments submitted to IIROC. The guidance takes effect immediately.

For more information, see IIROC Notice 14-0299.

Ontario issues comfort letter to address effects of provincial surtax on mutual fund trusts

Katy Pitch and Darin Renton

On December 11, Ontario’s Ministry of Finance issued a comfort letter to address the unintended effects of the new provincial surtax which have caused a mismatch of a mutual fund trust’s capital gains refund and the Ontario surtax payable on capital gains retained in the trust.

Mutual fund trusts retaining dividends have historically taken advantage of a dividend tax credit and capital gains tax refund to reduce both the basic personal tax payable by individual investors as well as the surtax for a trust on retained taxable dividends and realized capital gains. Under the relevant changes to Ontario’s Taxation Act, 2007 (the “Ontario Act”), however, the dividend tax credit would not have applied to the new surtax, resulting in mutual fund trusts having to pay the surtax on retained dividends.

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OSC provides update on IFRS disclosure deficiencies for investment funds

Darin Renton

The Investment Funds and Structured Products Branch of the OSC today published its third release in respect of IFRS disclosure deficiencies for investment funds. The release, which provides information regarding the resolution of issues identified in the Branch's first two releases cover such topics as (i) opening IFRS statement of financial position; (ii) IFRS 1 reconciliations; (iii) MRFP disclosure; (iv) auditor involvement with interim financial reports; and (v) regulatory consequences and remedies.

Of particular interest, the release stated that funds that omitted a discussion of the transition to IFRS in their interim MRFP were required to restate and refile the interim MRFP (accompanied by a press release explaining the information being refiled) and were placed on the Refilings and Errors List on the OSC website. Funds that filed an interim financial report that did not include a notice in the absence of an auditor review were placed on the Refilings and Errors List (even in cases where a review was subsequently performed).

As we previously discussed, the Branch published IFRS Release No. 2 last month. According to today's notice, the fourth release in the series, which will take the form of a tip sheet to assist investment funds, will be published in early 2015.

MFDA adopts enhanced client reporting requirements

The Mutual Fund Dealers Association of Canada (MFDA) yesterday announced a new policy and amendments to its rules to harmonize requirements for its members with client reporting requirements adopted by the CSA last year

As we discussed earlier this year, the amendments were first proposed in June. While some of the amendments are already in effect, the remainder will come into effect on July 15, 2015, and July 15, 2016.

For more information, see MFDA Bulletin #0623 – P.