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.

Globe and Mail publishes Board Games 2014

Earlier today, the Globe and Mail published Board Games 2014, its latest annual report on corporate governance among Canadian issuers.

The report includes articles on topics such as gender diversity on Canadian boards and includes a ranking of issuers on governance issues. The rankings are based on a methodology that takes into account board composition, shareholding and compensation, shareholder rights and disclosure.

Alberta issues broader exemption to OTC issuer rules

The Alberta Securities Commission yesterday published a blanket order to expand its exemption of certain issuers from the application of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets.

As we've previously discussed MI 51-105 can subject issuers who carry out private placements to Canadian public company obligations. Adopted by every province other than Ontario, the instrument is intended to discourage the manufacture and sale of OTC quoted shell companies that can be used to facilitate abusive market practices.

In response to the concern that the instrument would have the unintended effect of subjecting major well-established issuers that trade OTC in the U.S. to Canadian public company reporting obligations, regulators in almost all Canadian jurisdictions that adopted MI 51-105 have issued blanket orders to exempt certain issuers from the application of the instrument (links to the orders are available on our Resources page).

Alberta's Blanket Order 45-514, released yesterday, replaces an earlier order that exempted the application of the instrument to issuers with a primary listing on certain stock exchanges or those distributing only non-convertible debt securities.

While preserving the exemptions from the previous order, the new order, has also adopted an investor-based exemption that exempts issuers that limit their promotional activities to "permitted clients" under NI 31-103 (essentially, institutional accredited investors). In doing so, Alberta's exemption is now more closely in line with the one adopted in Quebec.

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OSC approves Aequitas Neo Exchange

On November 13, the OSC recognized each of Aequitas Innovations Inc. and Aequitas Neo Exchange Inc. as an exchange, effective March 1, 2015. In doing so, the OSC also approved the trading policies and listing manual of the exchange.

According to Aequitas, the exchange intends to limit high frequency trading by implementing speed bumps and higher fees to make the strategy uneconomical.

Amendments to registrant regulatory framework place restrictions on exempt market dealers, limit availability of registration exemptions and harmonize sub-adviser exemption

Jeffrey Elliott, Alix d’Anglejan-Chatillon, Kenneth G. Ottenbreit and Terence W. Doherty -

The Canadian Securities Administrators recently published final amendments to NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations which will have a significant impact on the registration requirements for dealers, advisers and investment fund managers (the Amendments) and include (i) restrictions on the activities that exempt market dealers may conduct, including a prohibition on brokerage activities; (ii) limits on the availability of certain registration exemptions for registrants; (iii) the addition of an adviser registration exemption for trades through a registered dealer; (iv) a harmonized adviser registration exemption for international sub-advisers; and (v) exemptions from certain registration requirements for registered sub-advisers.

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IIROC adopts amendments regarding order execution services

IIROC yesterday announced the adoption of amendments to UMIR and its Dealer Member Rules intended to achieve consistency in the oversight of similar activity occurring through different forms of third-party electronic access. 

Among other things, the amendments introduce a requirement that dealers providing order execution services include a client ID on each order entered on a marketplace for or on behalf of any client (i) whose trading activity on marketplaces exceeds a daily average of 500 orders per trading day in any calendar month; (ii) that is not an individual and is registered as a dealer or adviser in accordance with applicable securities legislation; or (iii) that is not an individual and is in the business of trading securities in a foreign jurisdiction in a manner analogous to a dealer or adviser.

Pursuant to the amendments, an OES dealer will be required to provide IIROC the identification of the client associated with the client ID and Participants providing execution services for OES dealers will also have to ensure that each order sent to a marketplace includes the client ID on each order.

IIROC first proposed the amendments in October 2013 and republished them in April 2014. The amendments come into effect on June 1, 2015.

For more information, see IIROC Notice 14-0263 and Notice 14-0264 for associated guidance.

IIROC revises requirement to disclose IIROC membership

The Investment Industry Regulatory Organization of Canada today republished for comment proposed changes to its Dealer Member Rules related to the requirement to disclose membership in IIROC as a Dealer Member.

IIROC initially proposed the changes in December 2011 to require that dealers display the IIROC decal at business locations to which clients have access and display the IIROC logo on client trade confirmations, account statements and on the dealer's website.

Among other things, the updated proposal removes the requirement that the IIROC logo be included on client account statements and trade confirmations.

IIROC is accepting comment on the updated proposal for 60 days. For more information, see IIROC Notice 14-0265.

OSC Staff take narrow view on application of "hedger" exemption under the CFA

Margaret Grottenthaler, Kenneth G. Ottenbreit and Terence W. Doherty

In a recently released staff notice, staff of the Ontario Securities Commission (OSC) have provided guidance on the availability of certain exemptions from the dealer registration requirement under the Commodity Futures Act (CFA) that we believe is contrary to the prevailing interpretation among market participants. As we reported in September, under OSC Staff Notice 33-744 – Availability of registration exemptions to foreign dealers in connection with trades in options and futures contracts under the Commodity Futures Act (Ontario) (the Notice), OSC staff take the view that an unregistered dealer may not rely on the “hedger” exemption and also take a very narrow view of the availability of the “unsolicited trade” exemption under the CFA.

In the Notice, OSC staff state their view that the hedger exemption is not available to an unregistered non-Canadian dealer that wishes to trade with a hedger. In our view, the longstanding and accepted interpretation of the hedger exemption has been that the exemption may be relied on by an unregistered non-Canadian dealer. The Notice represents a surprising and very restrictive interpretation of the availability of the “hedger” exemption commonly relied on by unregistered non-Canadian dealers when trading futures with Ontario resident “hedgers”, and runs counter to over thirty years of accepted legal interpretation and industry practice.

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Glass Lewis, ISS update proxy guidelines for 2015 season

On November 5, Glass Lewis released updates to its Canadian voting guidelines for the upcoming 2015 proxy season.

Notable updates to the guidelines include those in respect of shareholder rights and defences, including (i) recommending that shareholders withhold votes from all members of an uncontrolled TSX-listed company’s governance committee where such company has not adopted a majority voting policy, in light of changes to TSX rules; (ii) amending the circumstances in which Glass Lewis will consider support for shareholder rights plans to require that the plan not allow the board the discretion to amend the material provisions without shareholder approval in addition to Glass Lewis’ previously considered attributes; and (iii) amending its position with regard to advance notice policies such that Glass Lewis may now consider recommending a vote against a policy that does not allow for the commencement of a new time period where an annual meeting is adjourned or postponed (an issue we discussed in our recent post).

Additional updates include the increase in guidance with regard to directors who have served on boards or as executives of companies with poor performance records, the additional recommendation that routine director evaluation be performed by an independent external firm and new guidance about “one-off awards” with Glass Lewis stating the companies should redesign their compensation programs where such programs fail to provide adequate incentives to executives, rather than make additional grants.

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AMF issues exemptions from trade reporting rule

On October 31, 2014, the Autorité des marchés financiers du Québec (the AMF) exempted the Fédération des caisses Desjardins du Québec (the Quebec Federation), all the Quebec Federation’s Caisse Desjardins members, the Quebec Federation’s subsidiaries, Caisse centrale Desjardins du Québec (Caisse centrale), the Fédération des caisses populaires de l’Ontario inc. (the Ontario Federation) and all of the Ontario Federation’s caisse populaire members (together, the Desjardins Group) from their obligations under section 26 of Regulation 91-507 to report derivatives trade data to a recognized central repository in respect of trades among the entities of the Desjardins Group.

The AMF highlighted the following facts in support of the exemption demand:

  • the AMF exercises prudential supervision over the Desjardins Group, including over the Ontario Federation and its members;
     
  • the Deposit Insurance Corporation of Ontario exercises prudential supervision over the Ontario Federation’s caisse populaire members; and
     
  • Caisse centrale acts as treasurer and financial agent within the Desjardins Group and as a counterparty both within the Group and externally.

IIROC adopts debt transaction reporting rule

Last week, the Investment Industry Regulatory Organization of Canada (IIROC) adopted a new rule requiring dealers to report debt securities transactions.

Under this new Dealer Member Rule 2800C, and subject to certain exceptions, debt market transactions executed by a dealer member must be reported to IIROC on a post-trade basis (on T+1), including those executed on an Alternative Trading System or through an Inter-Dealer Bond Broker. Transaction information will have to include certain specified data elements, and the Customer Legal Entity Identifier and Customer Account Identifier will remain optional fields for the time being, although the requirement will be reassessed by the Bank of Canada and IIROC within the next few years. IIROC advises that dealer members who choose to report the Customer LEI should ensure that their customer has authorized such disclosure to IIROC. Similar reporting requirements for transactions of dealer members’ affiliates who are Government Securities Distributors (GSD) are also being implemented.

The first phase of reporting responsibilities will be implemented beginning on November 1, 2015 for dealer members who are GSDs (or have affiliates who are GSDs) and are participants in the Market Trading Reporting System, with a second phase taking effect on November 1, 2016 for all other debt securities transaction reporting by GSD and non-GSD dealer members. The new rule is intended to enable IIROC to carry out its responsibilities with respect to surveillance and oversight of over-the-counter (OTC) debt market trading.

As we previously discussed, IIROC released a proposed version of the rule for comment early last year and republished the proposed rule in January 2014. The final version of the rule takes into account public comments received in response to the previous proposals and includes minor revisions intended to enhance the clarity and consistency of the earlier drafts. For more information, see IIROC Notice 14-0250.

Participation fees due December 31

The OSC is reminding firms registered in Ontario that, except in the case of unregistered Investment Fund Managers, participation fee forms are due to the OSC on December 1, while participation fees are due December 31.

To assist registered firms in satisfying their obligations, the OSC is hosting a seminar on November 6 to discuss the calculation of participation fees, key issues and common errors.