Regulation of fixed income market: the CSA issues an update

The Canadian Securities Administrators (CSA) recently published a staff notice describing the next steps in its plan to enhance the regulation of the fixed income market.  CSA Staff Notice 21-317 Next Steps in Implementation of a Plan to enhance Regulation of the Fixed Income Market (CSA Staff Notice 21-317) describes the CSA’s efforts in respect of: (i) increasing post-trade transparency for corporate debt securities; and (ii) evaluating access to the fixed income market.

The CSA provided stakeholders with an opportunity to comment on its plan to enhance the regulation of the fixed income market in September 2015 in CSA Staff Notice 21-315 Next Steps in Regulation and Transparency of the Fixed Income Market.The CSA received a number of comments on its plan and those comments and a summary of next steps are now provided in CSA Staff Notice 21-317.

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Additional Canadian securities regulators enter into MOU with CFTC

The securities regulators in New Brunswick (FCNB), Nova Scotia (NSSC) and Saskatchewan (FCAA) have announced that that they have signed counterparts to a Memorandum of Understanding (MOU) with the U.S. CFTC in regards to cooperation related to the supervision and oversight of entities that operate on a cross-border basis. As previously discussed,  the securities regulators in Ontario (OSC), Quebec (AMF), British Columbia (BCSC) and Alberta (ASC) initially signed the MOU on March 25, 2014 and Manitoba (MSC) signed a counterpart in October 2014. The MOU is intended to enhance the consultation, cooperation and exchange of information between the parties. For further information please see, the CSA’s April 27, 2016 press release

Progress made on the TSXV revitalization plan

Simon Romano and Tracy Chen -

In a recent progress report (the Report), the TSX Venture Exchange (TSXV) has provided an update to the initiatives outlined in its December 2015 white paper which detailed a revitalization plan for the exchange. The Report was released following a series of town hall meetings hosted by the TSXV.

In addressing the TSXV’s commitment to reducing clients’ administrative and compliance costs, the TSXV has, among other things, made automated online filings available for private placement transactions and it is expected that additional online filings and electronic payments will be developed. In addition, policy revisions with respect to the TSXV’s sponsorship and shareholder approval requirements are expected to be filed with the regulators for approval in the first half of 2016. Relatedly, one of the revisions that will be filed for approval, which was first announced in a TSXV Bulletin dated March 30, 2015, is the waiver in certain circumstances of the shareholder approval requirement for reverse takeovers and changes of business provided certain conditions are met.

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Enrollment opened under the Extractive Sector Transparency Measures Act

Keith Chatwin, Ivan Grbesic and Christopher Yung -

Natural Resources Canada (NRCAN) has opened the enrollment process for companies who meet the definition of a “Reporting Entity” under the Extractive Sector Transparency Measures Act (ESTMA). Reporting Entities can enrol by downloading a “reporting entity contact form” (available here) which must be completed and submitted prior to submitting an ESTMA report. Upon enrollment, Reporting Entities will receive an ID Number and notification of new information published on NRCAN’s website.

Enrollment is not required until the initial ESTMA reports are due; however, NRCAN is encouraging early enrolment. Annual reports under ESTMA are due 150 days after a Reporting Entity’s financial year end, beginning with financial years commencing after June 1, 2015. As an example, companies with a December 31 year-end will be required to submit their first annual report by May 30, 2017. Reporting of payments made to aboriginal governments or entities is deferred for a two-year period until June 1, 2017. 

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Statutory best interest standard: summer reading

Darin Renton -

In a manner often reserved for best-selling novels and blockbuster movies, the Canadian Securities Administrators (CSA) recently issued advance notice of the upcoming publication of CSA Consultation Paper 33-404 – Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (Consultation Paper) expected in late April 2016.  CSA Staff Notice 33-317 Next Steps in the CSA’s Work to Enhance the Obligations of Advisers, Dealers and Representatives Toward Their Clients states that regulatory action is required: the CSA will be seeking comment on specific proposals to enhance the obligations of registrants towards their clients.  The comment period will run for a period of 120 days, extending through the summer holiday season. 

This marks the reactivation of the comment process on the proposal for a statutory best interest standard that the CSA signalled in its December 17, 2013 status report following consultation on CSA Consultation Paper 33-403 (Prior Consultation Paper).   In the Prior Consultation Paper, the CSA proposed for comment the standard that every adviser and dealer (and each of their representatives) that provides advice to a retail client with respect to investing in, buying or selling securities or derivatives shall, when providing such advice,

(a) act in the best interests of the retail client, and

(b) exercise the degree of care, diligence and skill that a reasonably prudent person or company would exercise in the circumstances.

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Securities regulators release draft vote reconciliation protocols

The Canadian Securities Administrators (CSA) have released for comment proposed protocols that contain CSA staff guidance on operational processes to tabulate proxy votes for shares held through intermediaries. The protocols have been developed following the CSA’s review of the proxy voting infrastructure, which began in August 2013, and a detailed review of six shareholder meetings, as reported by the CSA in its January 2015 progress report.

The draft protocols lay out the CSA’s expectations for the roles and responsibilities of the key entities that operate the infrastructure (for example, intermediaries and CDS) and include guidance on the kinds of operational processes that would support accurate, reliable and accountable meeting vote reconciliation. As for next steps, the CSA plan to establish a technical committee to support the implementation of improvements to the infrastructure, hold one or more additional roundtables, publish the final protocols at the end of 2016 and monitor voluntary implementation thereof. While not the usual practice for staff guidance, the CSA are seeking comment on the protocols by July 15, 2016. For further information, please see CSA Multilateral Staff Notice 54-304 Final Report on Review of the Proxy Voting Infrastructure and Request for Comments on Proposed Meeting Vote Reconciliation Protocols

The Liberal budget: no changes to the taxation of stock options

 Katy Pitch

On March 22, 2016, the Liberal Government delivered its first budget which focuses on the growth of the middle class.  As outlined in a previous post on Canadian M&A Law, the Liberals, as part of their election platform, promised to change the taxation of stock options.

Currently, if the required conditions are met, when an executive exercises a stock option, a one-half deduction is available to allow for capital gains-like tax treatment on exercise. The Liberal platform promised to introduce a cap of $100,000 on the amount that can be claimed through this stock option deduction. The Liberals also stated that stock options are a useful tool for start-up companies. Finance Minister Bill Morneau offered some reassurance when he stated in November 2015 that stock options issued under the old regime would continue to be taxed under the old tax regime.

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Cyber-attacks: why any business may be at risk and five possible ways to address the risks

Our readers may be interested in a recent post by our colleague, Vanessa Coiteux, on the Canadian M&A Law blog reminding us that the risk of cyber-attacks is by no means confined to businesses in certain industries.  She identifies five cybersecurity risk factors that apply to most or all businesses and discusses how to address them. These observations will be of particular interest to corporate directors who, as the article notes, increasingly have to take the risk of cyber-attacks into account – including in situations where the acquisition or sale of a business is being contemplated. 

IIROC Dealer Member Plain Language Rule Book published for comments

The Investment Industry Regulatory Organization of Canada published for a 120-day comment period its proposed plain language rule book for IIROC dealer members on March 10, 2016.

The plain language rule book is intended to be a clearer, more streamlined version of its existing Dealer Member Rules.  In addition ,while substantive comments are not within the scope of the revisions, several existing Dealer Member Rules were identified as requiring substantive revisions to improve regulatory policy and to render the Dealer Member Rules consistent with National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).  According to IIROC, it is intended that the Plain Language Rule Book will be combined with the Universal Market Integrity Rules to create a consolidated IIROC Rule Book.

Comments on the proposed Plain Language Rule Book are due on July 8, 2016.  For further information, please see IIROC Notice 16-0052.

ICD director-shareholder engagement guidance released

On March 8, 2016, the Institute of Corporate Directors (ICD) released its guidance on director-shareholder engagement in response to demands from investors, including activist shareholders, for increased and better dialogue with their corporate boards. While traditionally management has been primarily responsible for interacting with shareholders, ICD now believes that directors can play a meaningful role in shareholder engagement and may serve to mitigate tensions related to board and corporate governance. In the words of its President and CEO, Stan Magidson, the approach of the ICD is to see this as an opportunity to “build bridges, enhance mutual understanding and provide valuable insights.” The ICD guidance is framed around six core recommendations: knowing your investors, recognizing the benefits of engagement, adopting a strategic and tailored process, framing your discussion appropriately, addressing the real decision-makers and making the most of what comes out of the discussion. Its ultimate aim, as noted, is to encourage a productive climate of mutual trust between Canadian corporations and their shareholders.

ICD recognizes that to a certain extent this type of engagement is already taking place, whether directly, through ad hoc meetings with institutional investors, or indirectly, through the efforts of such organizations as the Canadian Coalition for Good Governance. The change that the guidance recommends is essentially to formalize the director-shareholder engagement process and make it more board-driven. While the U.S. Shareholder-Director Exchange Protocol (“SDX Protocol”), in place since 2014, was a useful reference for the ICD as it developed its guidance, differences in the U.S. marketplace and in the legal understanding of directors’ duties in Canada necessitated a unique “made-in-Canada” approach.

For further information, please see ICD Guidance for Director-Shareholder Engagement.

Mutual Fund Dealers Association propose amendments to power of attorney rules

The Mutual Fund Dealers Association of Canada (MFDA) has proposed amendments to its rules dealing with general powers of attorney from a family member of a Member or an Approved Person.

MFDA Rule 2.3.1 provides that no Member or Approved Person may accept or act upon a general power of attorney or other similar authorization from a client.  There is an exception to this rule for spouses, parents and children of Approved Persons.  In order to rely on the exemption certain conditions have to be met including that the account be transferred to another Approved Person.  According to the MFDA, it is often suggested that these power of attorney requirements are onerous and difficult to justify in light of the attendant risks.  Accordingly, among other less significant changes, the requirement to transfer accounts is proposed to be eliminated.

For further information, please consult the MFDA notice setting out the proposed amendment.  Comments on the proposal are due by June 10, 2016.

Canadian mandatory central counterparty clearing proposal limited to significant market participants

Margaret Grottenthaler -

The Canadian Securities Administrators (CSA) second version of proposed National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives (the Clearing Rule) and proposed Companion Policy 94-101 (the Clearing CP) limit their application to direct clearing participants (and their affiliates) and major swap market participants.   For a rule directed primarily at reducing systemic risk, this is a sensible and welcome approach, and one that recognizes that the Canadian market comprises a relatively small part of the global market. Initially, the products mandated to clear will be certain interest rate derivatives. In this post we review the main features of the Clearing Rule.

The Clearing Rule will require a “local counterparty” to clear a “mandatory clearable derivative” if both counterparties meet certain criteria, and it sets out the process for determining which derivatives will be mandated for clearing.  

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Common reporting standard: considerations for managers and funds

Darin Renton and Junaid Subhan -

In this installment of our analysis of the OECD’s Common Reporting Standard (CRS), we address practical considerations for affected Canadian investment funds.  As we previously discussed, the CRS, also known as the Standard for Automatic Exchange of Financial Account Information in Tax Matters, is a coordinated set of global rules that facilitates the automatic exchange of financial account information (AEOI) of non-residents to assist governments in detecting and deterring tax evasion and other non-compliance. 

Under the CRS, a “reporting financial institution” (Reporting FI) must report prescribed information to the tax authority of the jurisdiction in which the Reporting FI is located.  Each year, there will be an AEOI between the tax authorities in other participating CRS jurisdictions. The CRS prescribes the types of reportable persons and financial accounts that are within its ambit, the information that must be disclosed and the due diligence procedures that Reporting FIs are required to follow.

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Early warning changes in Canada to impact securities lending arrangements and provide for enhanced disclosure

The Canadian Securities Administrators (CSA) today released final amendments to the early warning requirements (Early Warning Amendments) in National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI 62-103), Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids (MI 62-104) and National Policy 62-203 Take-Over Bids and Issuer Bids (NP 62-203). The Early Warning Amendments are generally consistent with the CSA's 2014 status update which announced that the CSA would not be moving forward with plans to reduce the early warning reporting threshold from 10% to 5%, as previously proposed. The Early Warning Amendments do however incorporate a number of other previously proposed reforms, including requiring disclosure of 2% decreases in ownership as well as mandated "exit" reports when ownership falls below the reporting threshold, with a view to providing greater transparency about significant holdings of reporting issuers' securities and enhance the quality and integrity of the early warning system.

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Final take-over bid rules announced with a 105-day minimum deposit period

Effective May 9, 2016, take-over bids for Canadian issuers will be subject to a minimum 105-day deposit period. Attempting to strike a balance between their original proposal and comments received, the Canadian Securities Administrators (CSA) have published final amendments to the Canadian take-over bid regime (Take-Over Bid Amendments) which, in addition to the longer 105-day bid period, will impose a minimum tender condition and a mandatory 10-day extension to the bid period after the tender condition is satisfied. Other than the change to the minimum bid period, the final Take-Over Bid Amendments generally reflect the CSA's original proposal. 

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