Proposal for Canadian cooperative capital markets regulator: the Provincial Capital Markets Act

Ramandeep K. Grewal and Paul Burd

On October 9, 2015, the Canadian federal government’s latest initiative to develop a cooperative capital markets regulatory regime continued to progress with the addition of Prince Edward Island as the fifth province to join in on this proposal.

We have previously discussed the infrastructure and governance proposed for the “Capital Markets Regulatory Authority” (CMRA) that would be created under the proposed cooperative regime. As detailed in that post, the CMRA would administer the federal Capital Markets Stability Act (CMSA) as well as the uniform provincial/territorial Provincial Capital Markets Act (PCMA), which would be adopted by each participating province or territory. In this post we take a closer look at the proposed PCMA.

Under the proposal, the PCMA would be enacted by each participating province and territory and takes a platform approach to capital markets regulation. It sets out the fundamental provisions of capital markets law and leaves detailed requirements to be addressed in regulations.  Where the CMSA, aimed primarily at the regulation of systemic risk, introduces a number of new regulatory concepts, the PCMA in contrast has been drafted to closely follow existing provincial securities legislation. While it most closely resembles the current securities legislation of Ontario and British Columbia, elements from other provinces’ legislation are also incorporated throughout. Similar to current securities laws, the PCMA is comprised of different parts relating to different aspects of securities regulation, such as recognition or designation of self-regulatory organizations, registration, prospectus, take-over bid requirements, etc. 

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CSA members adopt disclosure requirements in respect of women on boards

Amanda Linett and Mike Devereux

Earlier this week, the CSA announced the upcoming implementation in Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Quebec and Saskatchewan of amendments to corporate disclosure obligations to require information in regards to the representation of women on boards of directors.

As we discussed last year, the OSC initiated a consultation process in July 2013 to consider the underrepresentation of women on corporate boards. In January 2014, meanwhile, the OSC published proposed amendments to Form 58-101F1 to require that reporting issuers annually disclose certain information in regards to the representation of women on boards and in respect of the director selection process. Other CSA jurisdictions published proposed amendments in July.

Having considered the responses submitted by stakeholders, the participating CSA jurisdictions have now released harmonized amendments in final form. Ultimately, the amendments published today, which are substantially similar to the earlier proposals, will require non-venture issuers to annually disclose:

  • director term limits and other mechanisms of board renewal;
  • policies regarding the representation of women on the board;
  • the board's or nominating committee's consideration of the representation of women in the director identification and selection process;
  • the issuer's consideration of the representation of women in executive officer positions when making executive officer appointments;
  • targets regarding the representation of women on the board and in executive officer positions; and
  • the number of women on the board and in executive officer positions.

The amendments apply to management information circulars and annual information forms that are filed following an issuer's financial year ending on or after December 31, 2014.

Proposal for Canadian cooperative capital markets regulator: Infrastructure and regulatory authority

Margaret GrottenthalerRamandeep K. Grewal and Alex Colangelo - 

As we recently discussed, the federal government, Ontario, B.C., Saskatchewan and New Brunswick have agreed to implement a cooperative capital markets regulatory system intended to foster more efficient Canadian capital markets, increase investor protection and manage systemic risk.

Under the proposed cooperative system, participating provincial and territorial jurisdictions would enact uniform legislation addressing all matters in respect of the regulation of capital markets within their jurisdictions. Federal legislation, meanwhile, would address criminal matters and systemic risk across the country in respect of national capital markets and data collection.

A common regulator, the Capital Markets Regulatory Authority (CMRA), would administer the provincial and federal legislation and regulations under authority delegated by the participating jurisdictions, while a Council of Ministers (CoM) would oversee the CMRA and be accountable to participating jurisdictions for the exercise of the CMRA’s regulatory powers.

Below, we take a closer look at the cooperative system’s structure and governance framework.

Cooperative Capital Markets Regulator chart

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CSA adopt changes to registrant regulatory framework

The CSA yesterday published a range of final changes to the registrant regulatory framework intended to codify exemptive relief and narrow the scope of activities that are conducted by certain registrants. The CSA proposed the amendments in December 2013, and the release published today includes minor drafting changes intended to provide further clarity.

As we discussed last year, these amendments to NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, NI 33-109 Registration Information, NI 52-107 Acceptable Accounting Principles and Auditing Standards, companion policies and OSC Rules 33-506 (Commodity Futures Act) Registration Information and 35-502 Non-Resident Advisers will, among other things, (i) restrict the activities that exempt market dealers may conduct; (ii) prohibit exempt market dealers from conducting brokerage activities; (iii) clarify the limited circumstances in which exempt market dealers are able to underwrite securities; and (iv) codify an exemption for sub-advisers and exempt registered sub-advisers from certain registrant obligations.

The changes are expected to come into force on January 11, 2015.

IIROC releases FAQ regarding Client Relationship Model

IIROC yesterday released a set of responses to frequently asked questions in regards to implementation of its Client Relationship Model.

As we've previously discussed, IIROC has adopted a number of rule amendments over the last few years in respect of certain CRM regulatory objectives, such as enhanced client reporting requirements, account suitability, and enhanced standards regarding conflicts of interest management and disclosure.

Ultimately, the FAQ provides guidance in respect of such issues as pre-trade disclosure of charges and the content required in account statements and trade confirmations.

For more information, see IIROC Notice 14-0233.

US Treasury accepts Canadian guidance of investment entities under FATCA

Roanne C. Bratz and Michel Legendre -

Last week, Brett York, an attorney adviser in the Treasury Office of International Tax Counsel confirmed that the U.S. Treasury is willing to accept Canada's recent guidance that only Canadian financial institutions that are “listed financial institutions” for the purposes of Part XVIII of the Income Tax Act would be considered investment entities under the IGA. As we discussed earlier this year, the Canada Revenue Agency's guidance for Canadian entities took effect on July 1.

Under the wording of the IGA, the definition of “investment entity” is to be interpreted in a manner consistent with the definition of “financial institution” in the recommendations of Canada's Financial Action Task Force, with the result that  most personal investment companies and trusts will not  be considered  to be financial institutions required to report U.S.-owned accounts to the Internal Revenue Service under FATCA.

CSA decide not to reduce early warning threshold to 5%

The Canadian Securities Administrators today announced that they will not be moving forward with plans to reduce the early warning reporting threshold from 10% to 5% as previously proposed.

As we discussed in March 2013, the CSA last year proposed amendments to the reporting threshold, triggers and related disclosure requirements under Canada’s early warning reporting regime intended to “provide greater transparency about significant holdings of issuers’ securities”. While the most significant change under the 2013 proposal would have been to decrease the reporting threshold from 10% to 5%, the CSA also proposed a number of other significant reforms, including greater transparency through reporting of “equity equivalent derivatives” in order to address issues such as “hidden ownership” and “empty voting”.

In today's release, the CSA note that a majority of the over 70 comment letters received in response to the 2013 proposals expressed concern with the potential unintended consequences resulting from some of the proposed amendments to the early warning regime. In what is sure to be a welcome development for most market participants, the CSA have decided against moving forward with the proposed reduction of the reporting threshold to 5% or the proposed inclusion of equity equivalent derivatives in the determination of the early warning threshold. An equity equivalent derivative would have been defined as a derivative that was referenced to or derived from a voting or equity security of an issuer and that provided the holder, directly or indirectly, with an economic interest that was substantially equivalent to the economic interest associated with beneficial ownership of the security (the examples provided included cash-settled total return swaps and contracts for difference).

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PEI joins cooperative capital markets regulatory system

The Canadian Department of Finance announced today that Prince Edward Island has become the fifth province to join the cooperative capital markets regulatory system now under development.

As we discussed last month, the federal government, Ontario, British Columbia, Saskatchewan and New Brunswick recently signed a Memorandum of Agreement setting out the terms and conditions of a cooperative regulatory system that the Finance Minister hopes to have operating by next year.

Under the proposed system, a common regulator referred to as the “Capital Markets Regulatory Authority” would administer uniform provincial legislation (that would be adopted in each participating provinces) as well as complimentary federal legislation focused on systemic risk. Drafts of both pieces of legislation were also published on September 8 with comments being accepted until November 7, 2014.

OSC sets out IFRS disclosure deficiencies for investment funds

Last week, the OSC's Investment Funds and Structured Products Branch released a notice setting out deficiencies identified by branch staff in their preliminary review of IFRS interim financial reports for the period ending June 30, 2014.

According to staff, recurring deficiencies in IFRS filings include (i) missing IFRS 1 reconciliations; (ii) missing opening IFRS statements of financial position; and (iii) missing management report of fund performance (MRFP) disclosure.

According to the branch, these deficiencies will be addressed in comment letters to investment fund managers. The notice also reminds investment fund issuers that non-compliance could result in the issuer being added to the default list.

Corporate disclosure on social media: don't get poked by regulators

Jonah Mann and Frank Selke -

Social media can provide reporting issuers with a fast and efficient means for communicating with shareholders and is an increasingly popular means of disseminating information. Such channels are, of course, subject to the same rules as other corporate disclosure, although applying those rules to social media requires some careful consideration given the limited “sound bite” nature of a post and potential for increased risk of selective disclosure.

While Canadian regulators have not expressly addressed potential issues relating to disclosure through social media, general principles governing disclosure are set out in National Policy 51-201 Disclosure Standards. For TSX-listed companies, meanwhile, the TSX has published its own Electronic Communications Disclosure Guidelines, which cover online communications, generally. Staff of the Canadian securities administrators have also provided guidance on the use of social media by portfolio managers, while National Policy 47-201 Trading Securities Using the Internet and Other Electronic Means provides guidance on using the Internet to communicate in connection with trades and distributions of securities.

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OSC publish annual compliance report for dealers, advisers and IFMs

The Ontario Securities Commission yesterday published an annual report for dealers, advisers and investment fund managers that, among other things (i) sets out key policy initiatives impacting registrants; (ii) provides an overview of the OSC's registrant outreach program; (iii) discusses current trends in registration; and (iv) outlines the key findings and outcomes emerging from ongoing compliance reviews. The report also provides guidance to assist registrants in satisfying their obligations.

In respect of compliance reviews, the report found that 53% of registered firms reviewed in fiscal 2014 required enhanced compliance (as compared to 38% in 2013), while only 28% required "significantly enhanced" compliance (as opposed to 52% in 2013). Notably, 9% of reviewed registrants had their registration suspended.

General concerns identified by staff pursuant to compliance reviews included (i) non-compliance with know-your-client, know-your-product, suitability and accredited investor requirements; (ii) written policies and procedures not being tailored to a registrant's operations; and (iii) inadequate insurance coverage. The report also noted that some registrants are failing to provide notice of proposed ownership changes in, or asset acquisitions of, registered firms. Specific concerns in respect of dealers, advisers and investment fund managers, along with associated guidance to address these concerns, were also included in the report.

For more information, see OSC Staff Notice 33-745.

CSA undertake research on mutual fund fees

On September 19, the Canadian Securities Administrators announced two research initiatives to review Canada's mutual fund fee structure. The first will involve collecting and reviewing data on whether sales and trailing commissions influence sales, while the second will include a literature review to consider whether the use of fee-based as opposed to commission-based compensation changes the nature of advice and investment over the long term.

As we've previously discussed, the CSA released a discussion paper in December 2012 to solicit feedback on the structure of mutual fund fees in Canada, while a December 2013 status report identified a number of key themes emerging from the consultation process. 

Results of the research are expected to be publicly released in the first quarter of 2015. 

AMF issues its 2014 report for the Continuous Disclosure Review Program

The Autorité des marchés financiers (AMF) recently released an Activity Report setting out the results of its latest review of the compliance and general quality of continuous disclosure. The AMF’s report highlights the most common deficiencies found in continuous disclosure documents such as financial statements, management’s discussion and analysis (MD&As), annual information forms (AIFs), information circulars, technical reports, and press releases and material change reports.

The AMF’s review covered continuous disclosure filings made by reporting issuers for whom the AMF is the principal regulator during the April 1, 2013 to March 31, 2014 period. The review was undertaken within the scope of the Continuous Disclosure Review Program established by the Canadian Securities Administrators (CSA) and the report should be read in conjunction with the CSA Staff Notice 51-341, which presents the activities of the pan-Canadian review program.

The AMF’s review ultimately resulted in 81% of the companies reviewed being required to make improvements owing to the deficiencies identified, with only 12 of those being required to refile documents. None were subject to a cease trade order on the basis of the deficiencies (17 cease trade orders were issued, however, for failure to comply with filing deadlines).

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First trade repository designations granted

Earlier this week, the Ontario Securities Commission (OSC) and Quebec's Autorité des marchés financiers (AMF) issued parallel orders designating the Chicago Mercantile Exchange Inc., DTCC Data Repository (U.S.) LLC and ICE Trade Vault, LLC as trade repositories in each province. The Manitoba Securities Commission also confirmed today that it had received corresponding applications for designation as trade repository from those three entities and that it would coordinate with the OSC and the AMF in reviewing and finalizing the designations. The orders are expected to be similar in nature to those issued by the OSC and the AMF.

As we've previously discussed, under each province's respective Rule 91-507, over-the-counter derivatives transactions involving counterparties in the province must be reported to a designated trade repository. Each of the three trade repositories applied for designation this past summer. The first phase of reporting obligations becomes effective on October 31.

TSX extends exemption from security holder approval for security based compensation agreements for acquisitions

Amendments to the TSX Company Manual have been adopted to extend the current exemption from security holder approval in cases where listed issuers adopt security based compensation arrangements for employees of a target issuer in the context of an acquisition, to new security based compensation arrangements created to retain employees of the target.

As we discussed last year, under the amended section 611, the number of securities issuable under the security based compensation arrangement may not exceed 2% of issued and outstanding securities of the issuer and no more than 25% of the issued and outstanding securities of the issuer may be issued as consideration for the acquisition (including those issuable under the security based compensation agreement). Ultimately, the amendments formalize an exemption currently granted by the TSX on a discretionary basis.

The amendments to the Manual also clarify the definition of a "backdoor listing" and the discretion of the TSX to consider various factors when determining whether a transaction constitutes a backdoor listing.

The amendments are effective for listed issuers on October 1, 2014.