Report of Exempt Distribution Certification and Information Requirements Revisited by the CSA

 Viviana Beltrametti Walker and Laura Levine - 

The recently harmonized Form 45-106F1 Report of Exempt Distribution (Report) is once again in the spotlight as the Canadian Securities Administrators, other than the British Columbia Securities Commission, have published for comment amendments to the certification and information requirements in the Report.  

What’s Being Proposed?

The bulk of the proposed amendments apply to Item 10 of the Report (the Certification) which requires that a director or officer of the issuer or underwriter filing the Report certify that he or she has read and understood the Report and that the information it contains is true. The proposed amendments to the Certification include: 

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TSX Intends to Digitize PIFs

The ability to electronically sign personal information forms (PIFs) and declarations required by the Toronto Stock Exchange is being considered pursuant to proposed amendments to the TSX Company Manual published for comment on June 1, 2017. The proposed amendments would also remove the requirement that a PIF, a declaration or a TSX listing application be notarized by a public notary in an effort to improve client experience and reduce regulatory burden on TSX-listed issuers. As indicated in the request for comments, the TSX intends to automate and make PIFs and declarations digitally available in the future. There are currently no similar plans to automate and digitize the listing application.

The proposed amendments are open for comment until July 4, 2017. For further information, please see Amendments to Toronto Stock Exchange Company Manual (June 1, 2017).

Canada Repeals Côte d'Ivoire and Liberia Sanctions while Extending Syria SEMA Prohibitions to More Individuals and Entities

Canadian regulations imposing limited trade sanctions against Côte d’Ivoire and Liberia were recently repealed following the termination of similar measures imposed on the two countries by U.N. Security Council Resolutions 2283 and 2288. The Canadian sanctions had focused primarily on the supply, sale, export or shipment of arms and related material to Côte d’Ivoire and Liberia.

In addition, the Government of Canada has also adopted amendments (here and here) that add a total of 44 individuals to part 2 of Schedule 1 of the Special Economic Measures (Syria) Regulations (the Syria SEMA Regulations). Five entities have also been added to part 1 of the same Schedule, while 2 individuals who were previously named are no longer included. The Syria SEMA Regulations prohibit persons in Canada and Canadians abroad from dealing in the property of the designated persons and have been in force since May 24, 2011.

IIROC and the Life Insurance Council of Saskatchewan Agree to Share Information

The Investment Industry Regulatory Organization of Canada (IIROC) and the Life Insurance Council of Saskatchewan (LICS) have entered into an information sharing agreement designed to provide stronger protection for investors and consumers. The June 2, 2017 agreement, which takes the form of a Memorandum of Understanding (MOU), aims to prevent rulebreakers from moving from IIROC’s jurisdiction to LICS’ jurisdiction (or vice versa) without close scrutiny and will result in IIROC and LICS sharing certain information about investigations and discipline. Joint investigations will also be enabled when both organizations are investigating the same individual.

The Saskatchewan MOU is similar to those entered into with insurance regulators in Alberta, British Columbia, Ontario and Quebec which are described in a fact sheet recently published by IIROC outlining its information sharing agreements generally.

TSXV codified past practice with amendments to change of business and reverse takeover policy

Effective December 15, 2016, the TSX Venture Exchange implemented amendments to its Policy 5.2 Changes of Business and Reverse Takeovers which, among other things, formalized existing working practices related to certain transactions and considerations that had not previously been included in the Policy, and corrected certain oversights related to procedural matters. The amendments also incorporated guidance related to discretionary waivers of shareholder approval requirements outlined by the TSXV in a March 30, 2015 bulletin.

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ASC Exempt Market Dealer Sweep Prompts Best Practice Guidance

Darin Renton -

The Alberta Securities Commission (ASC) recently completed a compliance “sweep” of 66 Alberta-based exempt market dealers (EMDs). The results of the sweep, which involved EMDs of many stripes, were released on May 10, 2017 as ASC Notice 33-705 - Exempt Market Dealer Sweep (Report). Overall, the ASC found a spectrum of compliance levels.  Some firms achieved a high level of compliance or were found to be “at least generally compliant”. At the opposite end of the spectrum, compliance levels of certain firms necessitated regulatory action on the part of ASC staff.

The sweep focused on compliance systems, sales practices and marketing (including KYC, KYP and suitability) as well as conflicts, relationship disclosure and client reporting issues. The EMDs reviewed included some that offer third-party exempt market products, others that are primarily involved with oil and gas-related venture capital and private equity (or with hedge funds and other pooled investment funds investing in publicly traded securities) and a third group that focus on mortgage-based investments.

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Rights Offerings Increase in Popularity

The use of prospectus-exempt rights offerings has increased across Canada since the adoption of the new rights offering exemption in 2015, as reported in a Staff Notice published by the Canadian Securities Administrators (CSA) on April 20, 2017. The Staff Notice highlights a number of areas where compliance and disclosure related to rights offerings can be improved and provides guidance for reporting issuers relying on the exemption. 

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CSA Sweep Uncovers Small Firm Business Continuity Plan Deficiencies

Darin Renton -

The Canadian Securities Administrators (CSA) recently released the results of a compliance review focused on sole proprietorships and other firms with just one registered individual.  CSA Staff Notice 31-350 – Guidance on Small Firms Compliance and Regulatory Obligations is the product of a two-year “sweep” that concluded in mid-2016. The sweep examined the policies and practices of 65 small firms, including investment fund managers, portfolio managers and exempt market dealers.

Readers can also refer to our August 2016 post on Staff Notice 33-747Annual Summary Report for Dealers, Advisers and Investment Fund Managers, in which the OSC noted that this analysis was underway.

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CSA Reconsider as Industry Takes Aim at Targeted Reforms

Darin Renton

On May 11, 2017, the Canadian Securities Administrators (the CSA) published CSA Staff Notice 33-319 Status Report on CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (the Notice). The Notice provides a high level summary of the CSA’s consultation process to date and outlines next steps in respect of a proposed set of regulatory amendments to National Instrument 31-103 (the targeted reforms). The targeted reforms relate to know your client (KYC) and know your product (KYP) requirements, the suitability obligation, conflicts of interest and the use by registrants of business titles and proficiency (among other things).

In addition to the targeted reforms, which are discussed below, the Notice also states that only Ontario and New Brunswick have decided to continue to work toward articulating a regulatory best interest standard. The provinces of Quebec, Alberta, Manitoba and British Columbia have decided not to continue to work on the best interest standard.

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Dark Trading Functionality Enhancements Proposed by the TSX

Simon Romano

Enhancements to the Toronto Stock Exchange’s on-book dark trading functionality were proposed by the TSX on April 27, 2017 and are open for comment before May 29, 2017. Currently, the TSX’s on-book functionality consists of dark limit orders, dark mid-point orders and the option to include a “minimum quantity” condition. In a dark market, orders are not displayed unless and until an execution occurs. In a lit market, orders as well as executions are displayed. Lit markets may also include dark order types or partly dark order types (such as “iceberg orders” where only a small portion of a larger volume is displayed). Dark or partly dark order types are used by people who do not want their orders fully displayed. For example, a very large sell order could lead to price suppression, including due to its supply and demand impact.

If adopted, the proposed enhancements and amendments to the TSX Rule Book would include:

  • If adopted, the proposed enhancements and amendments to the TSX Rule Book would include: The addition of certain dark pegged order types (primary peg, market peg, minimum price improvement peg);
  • The addition of a “Seek Dark Liquidity” feature for use only with orders marked Immediate or Cancel (IOC) or Fill or Kill (FOK);
  • Modification of the current Minimum Quantity functionality to be more consistent with other markets and the addition of a new feature called Minimum Interaction Size intended to address participant concerns around potential information leakage when executing against small orders on a dark basis; and
  • The addition of an option to randomize the refresh size for the displayed quantity within a specified range for iceberg users to obscure the presence of their iceberg order.
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TSX Proposes Enhancement to Opening Auction

Simon Romano - 

The TSX Rule Book will be required to allow for the cancellation of LOO orders at the end of the opening allocation. The LOO order type is intended to provide additional options for participants to manage their opening orders by specifying that the order is to participate only in the opening auction, subject to its indicated limit price. Aequitas and U.S. equity marketplaces have similar features.

The proposal has been published for comment by May 29, 2017. The TSX expects the amendments to become effective in Q3 2017. For further information, please see TSX Equities Trading Notice 2017-012 - TSX Equities Proposes Changes to Dark Trading and Opening Auction Functionality(April 27, 2017) and TSX Inc. Notice of Proposed Amendment and Request for Comments Enhancement to the Opening Auction Functionality (April 27, 2017).

OSC Amends Director Designation

Pursuant to the Securities Act (Ontario), the Ontario Securities Commission is permitted to assign certain of its powers and duties under the Act to a “Director” which includes, among others, the Executive Director of the OSC and persons employed by the OSC in a designated position. Effective April 18, 2017, the Executive Director of the OSC has amended and restated its March 2010 Designation and Determination (of Positions for the Purpose of the Definition of Director) to reflect the following changes: (i) the change in name of a branch of the OSC; (ii) the elimination of a position in the Compliance and Registrant Regulation Branch; and (iii) the change in responsibilities of staff of the Corporate Finance Branch for purposes of granting exemptions from fees for the late filing of insider reports on Form 55-102F2 under OSC Rule 13-502 Fees. For further information, please see the new Executive Director’s Designation and Determination, dated April 18, 2017.

Mutual Funds to Settle T+2

 Darin Renton

The Canadian Securities Administrators, other than the British Columbia Securities Commission, have published for comment very minor proposed amendments to National Instrument 81-102 Investment Funds which would shorten the standard settlement cycle for conventional mutual funds from three days after the date of a trade (T+3) to two days after the date of a trade (T+2) (the Proposed Amendments), codifying the expectation that conventional mutual funds will settle on T+2 to remove any possibility of confusion. 

Three Key Amendments

The Proposed Amendments will:

•   Shorten the time for payment of the issue price of securities and redemption proceeds from a T+3 settlement cycle and to a T+2 settlement cycle;

•   Require a mutual fund, in the case where payment of the issue price of the securities has not been received, to redeem the securities on the third business day after the pricing date, rather than on the fourth; and

•   Harmonize the payment of redemption proceeds under National Instrument 81-104 Commodity Pools on a T+2 settlement cycle.

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T+2 Settlement Comes to Canada

 Transition to a shorter settlement cycle for equity and long-term debt market trades is expected to occur in Canada on September 5, 2017. The standard settlement cycle for such trades will be shortened from three days after the date of a trade (T+3) to two days after the date of a trade (T+2) pursuant to amendments to National Instrument 24-101 Institutional Trade Matching and Settlement adopted by the Canadian Securities Administrators on April 27, 2017. The timing of the transition will coincide with the date markets in the United States are expected to move to a T+2 settlement cycle. 

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Red Tape Reduction for Funds and Managers among OSC's Priorities

Darin Renton -

Initiatives of interest to funds and managers feature prominently in the Ontario Securities Commission’s 2017-2018 Draft Statement of Priorities (OSC Notice 11-777). These include new initiatives, such as a welcome proposal to reduce redundant and ineffective disclosure and reporting requirements for investment funds, as well as ongoing initiatives such as the development of a “best interest standard”.

The Draft Statement, which we previously discussed in a more general context, sets out the priority actions that the OSC will take in 2017-2018 to address each of its regulatory goals. It was published on March 23, 2017, with a 60 day comment period as noted below.

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