OSC announces compliance review of derivatives data reporting

On July 2, 2015, the Ontario Securities Commission (OSC) announced that it intends to initiate a compliance review of the reporting requirements of OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting in fiscal 2015/2016.

According to OSC Staff Notice 91-704 the initial focus of the compliance reviews will be on the most active derivatives dealers and their compliance with the duty to report derivatives data to a trade repository under Part 3 of OSC Rule 91-507.  The compliance review will be focused on determining, among other questions: (i) whether the correct transactions were accurately reported within required timelines; (ii) whether reporting counterparties were correctly determined; (iii) whether life cycle and valuation data was reported and updated in accordance with required timeframes; and (iv) whether a Legal Entity Identifier for each transaction counterparty was appropriately reported.  As part of the compliance reviews, OSC staff intend to review dealers’ books and records, including policies and procedures, and interview senior management and key employees.  OSC staff have advised that they may also attend derivatives dealers’ offices to review internal processes and compare internal trade records with reported derivatives data.

Derivatives trade reporting rules became effective in Ontario (as well as Manitoba and Quebec) on October 31, 2014 with the regulators in these provinces recently announcing relief for end users in connection with certain inter-affiliate trades.

ASC to automatically reciprocate other Canadian sanction orders

Effective July 1, 2015, orders issued by and settlement agreements entered into with a Canadian securities regulatory authority will automatically be effective in Alberta.

Pursuant to a new section 198.1 of the Alberta Securities Act, when a securities regulatory authority in Canada issues an order or enters into a settlement agreement that imposes sanctions, conditions, restrictions or requirements on a person or company, that order or settlement agreement will automatically apply in Alberta.  No further notice to the affected persons is provided and no hearing will be held.  Any changes to the original order or agreement also apply in Alberta.  Orders issued by and settlement agreements entered into by international securities regulators may still be recognized in Alberta only by an order of the ASC.

For further information, see ASC Notice 15-701 Automatic Reciprocation in Alberta of an Order Issued by, or Agreement with, a Securities Regulatory Authority in Canada.


CSA guidance on reports of exempt distribution revised

The Canadian Securities Administrators (CSA) recently revised CSA Staff Notice 45-308 – Guidance for Preparing and Filing Reports of Exempt Distribution under National Instrument 45-106 Prospectus Exemptions Revised to conform the staff notice to the amendments to National Instrument 45-106 Prospectus Exemptions which came into force on May 5, 2015.

CSA Staff Notice 45-308 provides issuers with guidance on, among other things, the form and content of reports of exempt distribution and reminds issuers of the correct forms that must be used and the required deadlines for filing such forms.


ASC provides guidance to clearing agencies seeking recognition in Alberta

The Alberta Securities Commission (ASC) recently published ASC Notice 24-701 - Regulation of Clearing Agencies Carrying on Business in Alberta.  The notice provides guidance for clearing agencies seeking to be recognized by the ASC pursuant to section 67 of the Alberta Securities Act.  Section 67 of the Alberta Securities Act prohibits a person or company from carrying on business as a clearing agency in Alberta unless recognized by the ASC or unless an exemption has been granted pursuant to section 213 of the Alberta Securities Act.  That provision came into force on October 31, 2014 but a subsequent blanket order granted a temporary exemption from the prohibition until October 31, 2015.  Clearing agencies seeking to be recognized in Alberta in advance of the October 2015 deadline should do well to familiarize themselves with the ASC guidance.

For further information, please consult ASC Notice 24-701.

OSC concludes continuous disclosure review of mutual fund practices relating to portfolio liquidity

Last week, OSC staff concluded a review focusing on mutual fund practices related to liquidity assessments of fund holdings, liquidity stress testing and liquidity valuation considerations.  OSC staff’s review disclosed its observations and recommendations for mutual funds as a result of the review. 

For example, OSC staff found that some investment fund managers have the view that equity investments are liquid so long as they are listed on an exchange without considering other factors such as market activity and conditions.  OSC staff recommend that the requirements of National Instrument 81-102 – Investment Funds should be considered – namely, the requirements that redemption requests be settled in 3 business days without a significant adverse impact to the portfolio.  In OSC staff’s view, a stock listing is not necessarily indicative that an equity investment can be readily disposed at a price that approximates the amount at which the portfolio asset is valued.

For further information, please consult OSC Staff Notice 81-727.

Marketplace operation and trading rules amended by the CSA

The Canadian Securities Administrators recently approved amendments to National Instrument 21-101 – Marketplace Operation and National Instrument 23-101 Trading Rules.  The amendments, which were first published for comment on April 24, 2014, are intended to reflect developments that have occurred since NI 21-101 and NI 23-101 were last updated. 

Significantly, NI 21-101 is amended by adding guidance on business continuity planning, including a requirement to participate in industry-wide business continuity tests.  Amendments have been made to enable the disclosure of order and trade information to third parties to facilitate capital markets research, subject to prescribed conditions.  Further,  a marketplace is now prohibited from making pre and post-trade information available to any person or company before it makes that information available to an information processor (or in its absence, an information vendor). Guidance in the Companion Policy to NI 21-101 has also been amended to clarify that the CSA expect marketplaces to release order and trade information simultaneously to both the information processor and to persons or companies that may receive order and trade information directly from the marketplace.

The amendments are expected to come into force on October 1, 2015.  For further information, please consult the CSA Notice of Approval.

OSC approves proposed MFDA Rule amendments related to CRM2

The OSC recently approved amendments to Mutual Fund Dealers Association of Canada (MFDA) Rule 5.3 – Client Reporting and MFDA Policy No. 7 – Performance Reporting.  The amendments codify the relief orders issued by the Canadian Securities Administrators on May 21, 2015 which included an extension of the transition period applicable to certain CRM2 obligations.

The amendments will come into force on a date to be determined by the MFDA.  For further information, please consult the OSC Staff’s Notice of Approval and the MFDA notice.

"Insider" order marking alternative guidance published by IIROC

On June 24, 2015, IIROC published Notice 15-0135 – Alternative Guidance on “Insider” Order Marking on an alternate means of complying with rule 6.2 of the Universal Market Integrity Rules. 

Rule 6.2(1)(b)(xiv) requires that an order for the account of an insider of an issuer of the security which is the subject of the order be marked as “insider”.  IIROC has clarified in this Notice that an alternate means of complying with the insider marking obligation is by marking as “insider” all orders for the account of a person who is a statutory insider of the issuer of the security regardless of whether the trade would be subject to insider reporting requirements.

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Canadian regulators to streamline foreign private placements into Canada

The Canadian Securities Administrators (CSA), including the Ontario Securities Commission (OSC), recently announced significant changes to streamline the process for private placements by non-Canadian issuers to “permitted clients” by reducing the type of disclosure typically required in a Canadian “wrapper” to an offering document.

When securities are offered to Canadian investors in reliance upon certain prospectus exemptions and an offering memorandum is provided, prescribed Canadian disclosure is typically provided in the form of a Canadian wrapper.  The “wrapper relief amendments” announced yesterday provide relief from the disclosure requirements related to underwriter conflicts of interest and statutory rights of action, as well as prohibitions on making certain listing representations, where securities are sold to permitted clients provided certain conditions are satisfied.    

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Statement of Priorities for 2015-2016 published by the OSC

The Ontario Securities Commission (OSC) recently published its Statement of Priorities for the financial year to end March 31, 2016.  The Statement of Priorities follows the draft Statement of Priorities published on April 2, 2015.  The Statement of Priorities, published annually by the OSC, offers stakeholders a glimpse into the OSC’s goals for the forthcoming year. 

Importantly, the OSC intends make significant progress in the regulation of derivatives-related matters in 2015-2016.  For example, it intends to publish for comment a national instrument which would regulate the registration of derivatives dealers.  The OSC also intends to develop rules for the clearing of OTC derivatives and a notice that outlines recommendations for the implementation of segregation and portability (other than for OTC derivatives).

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MFDA proposes Rule amendments dealing with individual qualifications and account statements

The Mutual Fund Dealers Association of Canada (MFDA) has proposed two sets of amendments to its MFDA Rules dealing with MFDA Rule 1.2 (Individual Qualifications) and MFDA Rule 5.3.2 (Content of Account Statement).

The MFDA states that the proposed amendments to Rule 1.2 are intended to harmonize MFDA Rules with similar requirements under NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, particularly with respect to individual proficiency requirements and outside business activities.  Notably, an Approved Person would have an obligation to provide written disclosure of outside business activities to clients in situations where such activity could be confused with member business. According to the notice of amendment, the proposed amendments to MFDA Rule 5.3.2 would require disclosure that the Member is a member of and regulated by the MFDA in client account statements.

The comment period ends on September 16, 2015.

ETF Facts: new disclosure requirement proposed for Canadian ETFs

On June 18, 2015, the Canadian Securities Administrators (CSA) proposed amendments that would require ETFs, being exchange-traded mutual funds,  to furnish investors with a summary disclosure document called “ETF Facts”. 

ETF Facts must be made available to investors on the website of the ETF or the ETF manager.  In addition, a dealer acting as agent for an investor must deliver the most recently filed ETF Facts to the investor within two days of the purchase of securities of an ETF.  The ETF Facts must be filed at the same time as the ETF’s prospectus and the prospectus certificate applies to the ETF Facts.

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Order Protection Rule amendments proposed by CSA and IIROC

On June 12, 2015, the Canadian Securities Administrators (CSA) proposed amendments to the Companion Policy to NI 23-101 Trading Rules. The proposed amendments to the Companion Policy would reflect the CSA's view that where a marketplace has implemented systematic order processing delays (commonly referred to as "speed bumps"), none of the orders on that marketplace would be considered "protected orders". In cases where a marketplace operates more than one market or facility and imposes speed bumps on orders entered on some marketplaces, the proposed amendments would only apply to the market or facility on which the order processing delay is imposed.

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Cybersecurity issues: what directors need to consider

As we previously noted, many of our readers will be interested in following the new series of posts on directors’ duties on our Canadian M&A Law blog. The second installment in the series, by Tania Djerrahian and Vanessa Coiteux, discusses some of the key issues that directors need to focus on in the rapidly developing area of cybersecurity.  Among other things, the post considers cybersecurity concerns that have been expressed by securities regulators and proxy firms and provides some tips on how to respond to them with an effective cybersecurity strategy.

The first post in the series provided a refresher on six basic concepts that every board member should be aware of:  the duty to manage, the fiduciary duty, the duty of care, the business judgment rule, conflict of interest and oppression.  Future posts in the series, to be published over the coming months, will examine other specific issues of ongoing concern to members of Canadian corporate boards.

CSA publishes research report on mutual fund fees

Anne F. Ramsay -

The Canadian Securities Administrators (CSA) today published the Mutual Fund Fee Research report prepared by The Brondesbury Group (the Brondesbury Report). This research follows a December 2012 CSA Discussion Paper that identified potential investor protection issues arising from Canada's current mutual fund fee structure as well as extensive stakeholder consultations in 2013.

The Brondesbury Report, the forthcoming research by Professor Douglas J. Cumming at York University and the comments received during the stakeholder consultations will be considered in the CSA's determination of whether to effect certain policy changes.

The research report by Professor Cumming, who collected and is reviewing data to examine whether sales and trailing commissions influence mutual fund sales, is expected to be completed and made publicly available this summer.

For further information, please consult the CSA’s press release on the report.