IIROC publishes academic papers assessing impact of high frequency trading

The Investment Industry Regulatory Organization of Canada yesterday published three academic papers assessing the impact of high frequency trading on Canadian markets.

The impact analysis represents the thrdr phase of IIROC's study on high frequency trading. The first two phases of the study, which involved a statistical analysis of the trading activity of a study group of traders with relatively high order-to-trade ratios, were published in December 2012.

Two further papers are expected to be published by the summer of 2015.

IIROC intends to review the papers and determine whether any regulatory responses are required in light of their findings.

IIROC releases guidance regarding definition of foreign organized regulated market

The Investment Industry Regulatory Organization of Canada earlier this week published guidance reminding dealers that trades executed off-marketplace in reliance of the exemption to execute trades on a foreign organized regulated market (FORM) must meet the appropriate requirements. Specifically, the guidance states that U.S. broker-dealers that internalize orders by matching them with their own inventory do not satisfy the FORM definition as such dealers do not meet the relevant registration requirements. 

The guidance was released in response to concern that Canadian investment dealers have entered into, or are considering entering into, arrangements to route Canadian retail investor orders to U.S. dealers for execution. In a release supporting IIROC's guidance, the CSA stated that such off-marketplace orders are generally being executed without meeting the minimum price improvement requirement and, as such, may negatively impact the quality of the Canadian market.

For more information, see IIROC Notice 14-0293.

IIROC proposes transaction-based debt market regulation fee model

The Investment Industry Regulatory Organization of Canada yesterday proposed a new transaction-based debt market regulation fee model

While IIROC considered a number of options, it ultimately proposed a fee model based on primary and secondary transactions, with an adjustment to repos for the Bank of Canada fee, as it was found to most closely fit with IIROC's fee model guiding principles of fairness, industry competitiveness, transparency and cost recovery.

IIROC is accepting comments on its proposal until February 9, 2015.

CSA propose amendments to recognize Aequitas as senior exchange

The Canadian Securities Administrators today published proposed amendments to a number of national and multilateral instruments, including NI 41-101, NI 44-101 and MI 61-101, intended to ensure that the rules applicable to issuers listed on senior recognized exchanges in Canada (for example, the TSX) also apply to those listed on Aequitas Neo Exchange.

For example, under the proposed changes, the definition of "venture issuer" in various national instruments would be amended so as to exclude issuers listed on Aequitas, and the definition of "short form eligible exchange" under NI 44-101, the short form prospectus rule, would also include Aequitas.

Until the proposed amendments are effective and Aequitas Neo Exchange can be incorporated into the rules as a senior recognized exchange, certain interim measures will be taken, including the requirement that issuers intending to list on Aequitas provide an undertaking that they will comply with Canadian securities laws applicable to non-venture issuers.

As we recently noted, the OSC recognized Aequitas as an exchange last month pursuant to a recognition order that will take effect as of March 1, 2015.

Comments on the proposed amendments are being accepted until March 11, 2015.

CSA adopt Fund Facts pre-sale requirements for mutual funds

The Canadian Securities Administrators today announced amendments to mutual fund prospectus disclosure rules to implement the pre-sale delivery of Fund Facts. The amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure represent the third stage of the CSA's point of sale disclosure project for mutual funds.

Under the amendments, the most recently filed Fund Facts will have to be delivered to a purchaser before a dealer accepts an instruction for purchase. This delivery requirement will apply to all purchases, including both full service accounts and order execution-only accounts. There will be an exception, subject to certain conditions, where the purchaser instructs the dealer that the purchase must be completed immediately or by a specified time and it is not reasonably practicable to complete pre-sale delivery. In such a case, the Fund Facts will have to be delivered within two days of purchase. This exception will only be available on a purchase by purchase basis and dealers will not be permitted to rely on a blanket consent from the purchaser for post-sale delivery.

Pre-sale delivery requirements will also not apply to subsequent purchases of securities of a mutual fund pursuant to pre-authorized purchase plans where the purchase is not the first purchase under the plan and the dealer provides notice to the purchaser that includes information on how to access and request the Fund Facts. However, the purchaser will not have a right of withdrawal for subsequent purchases.

An initial proposal on pre-sale delivery was made in 2009 as part of the CSA's proposal of amendments related to point of sale disclosure. Amendments were republished earlier this year, and the final form of amendments take into account stakeholder comments.

According to the CSA, pre-sale deliver of Fund Facts will assist investors by making information available to them "at a time that is most relevant to their investment decision."

Subject to Ministerial approval, the amendments come into force March 11, 2015, with the pre-sale delivery requirement coming into effect on May 30, 2016.

Regulations under proposed provincial Capital Markets Act to be published next spring

On December 5th, Canadian regulators participating in the Cooperative Capital Markets Regulatory System provided an update in respect of the preparation of initial regulations to be enacted under the proposed provincial Capital Markets Act (PCMA). Specifically, the participating regulators expect to published the draft regulations for comment in the early spring of 2015. Draft regulations had initially been expected this month.

According to the regulators, the proposed regulations will be based on existing provincial rules, including harmonized national instruments, and will include proposed changes to current rules only as needed to eliminate differences in requirements and fit them under the PCMA.

Proposed regulations to be adopted under the federal Capital Markets Stability Act will be published separately.

CSA adopt enhanced oil and gas disclosure rules

Keith Chatwin

The CSA today released amendments to NI 51-101 Standards of Disclosure for Oil and Gas Activities intended to promote the disclosure of resources other than reserves, while also improving flexibility for issuers. 

As we discussed when the changes were first proposed in October 2013, the amendments will, among other things, permit, in certain circumstances, disclosure prepared under an alternative resources evaluation standard such as the SEC's reserves disclosure regime, provide clearer guidance for the disclosure of contingent and prospective resources, introduce a principle-based approach to the disclosure of oil and gas metrics and clarify the concept of marketability in the reporting of oil and gas volumes.

Assuming Ministerial approvals, the amendments will come into force on July 1, 2015. Reporting issuers are nonetheless expected to immediately adhere to the latest requirements of the COGE Handbook pursuant to NI 51-101, including guidelines for the estimation and classification of resources (other than reserves), which became effective July 17, 2014 and guidelines for the estimation and classification of bitumen resources, which became effective April 1, 2014.

The CSA also released amended versions of CSA Staff Notice 51-324 to revise defined terms to conform to the amended COGE Handbook and CSA Staff Notice 51-327 in respect of disclosure guidance, in each case in order to provide consistency with the amendments to NI 51-101.

CSA release IIROC oversight review report

The Canadian Securities Administrators today released a report outlining the findings of an oversight review of IIROC's activities. The review specifically sought to assess whether IIROC was in compliance with the relevant terms and condition of its recognition orders, the effectiveness of regulatory processes and the extent to which key regulatory processes were consistent, efficient and fairly applied.

While the review ultimately concluded that IIROC has met the relevant terms and conditions of its recognition orders, the report set out a number of findings (prioritized by significance as high, medium and low) for which corrective action is expected. Findings categorized as high priority include the need for a comprehensive risk management policy and associated procedures, which IIROC has stated will be implemented by March 2015, as well as certain enforcement issues, including in respect of market conduct cases and investigations of unsuitable investments and unauthorized trading. 

OSC publishes The Investment Funds Practitioner for November 2014

Darin Renton

The Investment Funds and Structured Products Branch of the Ontario Securities Commission recently released the November 2014 issue of The Investment Funds Practitioner, which provides an overview of recent issues arising from applications for discretionary relief, prospectuses and continuous disclosure documents filed by investment funds. Below is a summary of a few issues identified.


Fee-Based Series with Dual Dealer Compensation

According to the Practitioner, Branch staff have recently become aware of certain investment fund series intended for fee-based accounts with a trailing commission embedded in the fund series' ongoing cost. According to staff, embedding a trailing commission in a fee-based series is potentially misleading for investors and this practice may raise the issue of double charging by dealers, contrary to a dealer's general duty to deal fairly, honestly and in good faith with its clients. Staff will require managers of existing funds to transition out of this commission model in a reasonable time period.

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Disclosure of Auditor Review of Interim Financial Report: OSC Finds Deficiencies

Darin Renton - 

Last week, the OSC's Investment Funds and Structured Products Branch released a notice reminding investment fund issuers that, where an auditor has not performed a review of an investment fund's interim financial report, s. 2.12 of NI 81-106 requires the report to be accompanied by a notice indicating that fact.

In the course of its IFRS review, Branch staff identified non-compliance with this notice requirement. While the instrument does not specify the form of notice, the Companion Policy states that the notice should be on a separate page appearing immediately before the interim financial report. According to Branch staff, a lack of the required notice implies that a review was conducted and that the auditor did not express a reservation. Marking interim financial reports as "unaudited" does not fulfill this requirement.

In cases where the reports appeared to have been reviewed by the auditor, the Branch found a lack of clarity in respect of whether the reviews were in accordance with section 7060 Auditor Review of Interim Financial Statements of the CPA Canada Handbook.

As such, Branch staff have requested that investment fund issuers refile their interim financial reports for the period ending June 30, 2014 with the required notice and accompanied by a news release explaining the information being filed. Branch staff also reminded investment fund managers that a deficiency in the required disclosure could ultimately result with the issuer being placed on the default list.

This is the second notice released by the Branch in connection with its review the first IFRS interim financial reports for the period ended June 30, 2014. The first notice was released in October. The OSC is continuing to monitor compliance with requirements regarding the disclosures respecting auditor review and may release further notices as necessary.

IIROC releases guidance for part-time CFOs

The Investment Industry Regulatory Organization of Canada yesterday released a notice respecting its expectations in regards to part-time chief financial officers.

Specifically, the guidance confirms that the obligations of part-time CFOs are the same as those of full-time CFOs and outlines dealers' responsibilities of supervision. Proposed guidance on the subject was initially published in April of this year.

For more information, see IIROC Notice 14-0280.

OSC adopts new prospectus exemption to permit issuance of securities to existing securityholders

The Ontario Securities Commission yesterday announced the adoption of a new prospectus exemption that will allow companies listed on the TSX, TSX-V, Canadian Securities Exchange or Aequitas NEO Exchange to raise capital from existing security holders based on the issuer's existing continuous disclosure.

Offerings under this exemption would be limited to 100% of the issuer’s outstanding securities of the same class and investors would be limited to investments of no more than $15,000 every 12 months unless they obtain suitability advice in respect of the investment (from a registered investment dealer in the case of Canadian securityholders). The exemption will not, however, be available to investment funds. As we've previously discussed, the OSC first proposed such an exemption in March 2014, while the other CSA jurisdictions (other than Newfoundland and Labrador) adopted a similar exemption in final form earlier this year.

A number of changes to the proposed amendments have been made in responses to comments received and aimed at harmonization with the similar exemption newly adopted in other Canadian jurisdictions, including removal of the seasoning requirement for issuers and of the requirement that issuers allocate a pro rata portion of the offering to existing security holders. However, additional guidance has been added to the Companion Policy to 45-501 regarding the fair and equal treatment of existing security holders intended to clarify that a issuer should fairly allocate investment opportunities among all of its security holders.

While no specific form of offering document is prescribed, any offering materials used must be filed on SEDAR on the same day they are provided to purchasers. Further, the rule also prescribes that secondary market disclosure liability applies to securities purchased under the exemption providing purchasers with rights of action for damages under the Securities Act (Ontario) relating to misrepresentations, both oral and written, and timely disclosure failures.

The changes to the original proposal are not considered material and, assuming Ministerial approval, the exemption will come into effect on February 11, 2015. The OSC also stated that the remaining prospectus exemptions proposed earlier this year, namely in respect of (i) crowdfunding; (ii) family, friends and business associates; and (iii) offering memoranda, remain under consideration.

Canadian regulators propose new rules for clearing agencies

On November 27, the CSA published for comment proposed harmonized rules respecting clearing agencies that would set out certain requirements in relation to the application process for seeking recognition as a clearing agency (or an exemption from the recognition requirement), as well as the ongoing requirements for recognized clearing agencies that act as central counterparties, central securities depositories or securities settlement systems.

The requirements under proposed National Instrument 24-102 Clearing Agency Requirements and its Companion Policy are generally based on the Principles for Financial Market Infrastructures (PFMI) developed by the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements and the Board of the International Organization of Securities Commissions (IOSCO). The PFMI set out in the April 2012 CPSS/IOSCO consultative report are considered to be minimum international standards for payment, clearing and settlement systems which must be implemented globally to strengthen core financial infrastructures and markets (including derivatives markets) and critical market infrastructures, and to limit systemic risks.

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CSA propose rights offering prospectus exemption

The Canadian Securities Administrators yesterday published for comment proposed amendments to existing rules intended to create a streamlined prospectus exemption for rights offerings.

The new amendments are intended to ease some of the current requirements found in National Instrument 45-101 Rights Offerings (NI 45-101). For example, issuers seeking to rely on the current rights offering prospectus exemption must have their offering circular reviewed and accepted by CSA staff. Under the proposed exemption, a circular would still be prepared; however, prior regulatory acceptance of the circular would not be required. Rather, issuers would send security holders a short notice prior to using the exemption setting out basic disclosure about the offering and informing security holders how to access the rights offering circular electronically. A circular would be filed concurrently with the notice but would not need to be sent to security holders.

The new proposed form of rights offering circular would be in question and answer format with disclosure focused on information about the offering, use of funds and the financial condition of the issuer, and would not require inclusion of information about the business. In streamlining the information required in the circular, the CSA recognize that most investors exercising rights would be existing security holders and, thus, familiar with the issuer's disclosure record. This will further streamline the process, for example, by eliminating the need for technical reports in connection with disclosure in the circular.

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OSC and Competition Bureau sign MOU

The OSC and the Competition Bureau announced today the signing of a Memorandum of Understanding intended to promote cooperation between the two agencies.

Specifically, the MOU deals with such issues as the exchange of information and intelligence, cooperative enforcement and joint education and advocacy.

The MOU, which is now in effect, may be amended with mutual consent of the two agencies.