MFDA publishes guidance on use of investor questionnaires

Earlier this week, the MFDA released a discussion paper intended to provide guidance on the use by mutual fund dealers of investor questionnaires to assist in the know-your-client process. Among other things, the paper discusses topics such as designing an investor questionnaire, implementation considerations and the benefits and limitations of employing a questionnaire.

For more information, see MFDA Bulletin #0611-C.

CSA intend to publish national rule for clearing agencies

Alix d'Anglejan-Chatillon -

The Canadian Securities Administrators yesterday released an update on the proposed local rules designed to set out certain requirements in relation to the application process for seeking recognition as a clearing agency (or an exemption from the recognition requirement), which were published in December 2013.

As we discussed late last year, the proposed rules were published in substantially the same form by the Ontario Securities Commission, Quebec's Autorité des marchés financiers and the Manitoba Securities Commission, while the securities regulators in British Columbia, Alberta, Saskatchewan, New Brunswick and Nova Scotia announced an intention to develop a materially similar multilateral rule in the future.

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CSA adopt changes to auditor oversight rules

The Canadian Securities Administrators yesterday released changes to auditor oversight rules designed to enhance the integrity of financial reporting by reporting issuers by repealing and replacing National Instrument 52-108 Auditor Oversight and making other amendments to NI 41-101, NI 51-102, NI 71-102 and their respective companion policies.

Among other things, the changes will (i) require a public accounting firm to deliver a notice to the applicable regulator when certain remedial actions have been imposed by the Canadian Public Accountability Board; (ii) require additional disclosure in an issuer's prospectus when financial statements included in the prospectus were audited by an auditor not subject to CPAB oversight; (iii) clarify the rule's application to foreign issuers; and (iv) reduce the timing for making, filing or sending various types of notices and other documents in connection with a change of auditors.

As we discussed last year, the CSA released proposed amendments to the rules in October 2013, and the final version takes into account comments received. Assuming all ministerial approvals are obtained, the new rules come into effect on September 30, 2014.

IIROC studying whether to change proficiency assurance model

IIROC yesterday released a notice intended to initiate a consultation process to consider whether the existing proficiency assurance model best serves the public interest and meets the needs of IIROC and the industry.

IIROC's current agreement with the Canadian Securities Institute, the exclusive provider of IIROC regulatory courses, is set to expire in January 2016. Going forward, IIROC may retain the current model, or adopt another model that includes multiple education or examination providers.

Comments, including responses to a number of consultation questions, are being accepted by IIROC until November 17, 2014. For more information, see IIROC Notice 14-0181.

CSA publish 2013-2014 continuous disclosure review

The Canadian Securities Administrators today published a notice summarizing the results of their continuous disclosure review program for fiscal 2014.

The continuous disclosure review program consisted of 221 full and 770 issue-oriented reviews of reporting issuers. Ultimately, 37% of the reviews resulted in issuers being required to make prospective changes by way of enhancements in future filings, 14% of the reviews resulted in issuers being required to amend or re-file certain disclosure documents, 16% of the reviews resulted in issuers being alerted to areas where disclosure enhancements should be considered, and 9% of issuers were either cease-traded, placed on a default list or referred to enforcement. Only 24% (as compared to 53% in 2013) of the reviews resulted in no changes or additional filings being required. In total, 76% of the review outcomes required issuers to take action to improve their disclosure or resulted in the issuer being referred to enforcement, cease traded or placed on the default list, compared to 46% in 2013.

The CSA report also provides a number of examples of deficient disclosure as well as  corresponding examples of more fulsome disclosure. Common financial statement deficiencies included those in respect of (i) interests in other entities; (ii) revenue recognition; and (iii) impairment of assets. Disclosure deficiencies in MD&A were noted with respect to (i) non-GAAP measures; (ii) forward looking information; and (iii) additional disclosure for venture issuers without significant revenue. Meanwhile, other disclosure deficiencies were identified in respect of mineral projects, executive compensation and filing of news releases and material change reports.

For more information, see CSA Staff Notice 51-341. While all jurisdictions participate in the review program, some local jurisdictions may also publish reports summarizing results in their jurisdiction which may be found on the individual regulator’s website.

AMF proposes amendments to derivatives trade reporting regulation

Alix d'Anglejan-Chatillon -

On July 3, Quebec’s Autorité des marchés financiers (AMF) published for comment the Draft Regulation to amend Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting (the “Draft Regulation”). Regulation 91-507, which requires that all over-the-counter (OTC) derivatives transactions involving a local counterparty be reported to a recognized trade repository, came into force in Quebec on December 31, 2013, with reporting obligations becoming effective for the various market participants over the course of 2014 and 2015. The AMF is proposing the Draft Regulation in furtherance of its previously stated intent to make consequential amendments to Regulation 91-507 “to maintain a harmonized national oversight and reporting regime for OTC derivatives markets”.

As part of the changes proposed in the Draft Regulation, section 25 of Regulation 91-507, which imposes the reporting requirement on the dealer, would be amended to explicitly add Canadian financial institutions to the determination of the reporting counterparty. The reason for the addition is that Canadian financial institutions engaging in derivatives trading on their own behalf might not need to be registered as derivatives dealers under the Quebec Derivatives Act. For purposes of transaction reporting under Regulation 91-507, a Canadian financial institution would be the most technologically sophisticated counterparty.

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IIROC expands implementation of single-stock circuit breakers

IIROC published guidance yesterday that will expand its implementation of single-stock circuit breakers.

As we discussed in February 2012, under IIROC's current guidance on single-stock circuit breakers, securities that are part of the S&P/TSX Composite Index, as well as ETFs comprised principally of listed securities, will be halted for trading where there has been a price increase or decline of at least 10% in a five minute period. The circuit breaker initially halts the particular security for five minutes, and this time may be extended for a further five minute period if a significant imbalance of buy and sell orders remain. The circuit breaker only applies between 9:50 a.m. and 3:30 p.m.

Under the new guidance, single-stock circuit breakers will also now apply to securities that are considered "actively-traded". Actively traded securities are those that are traded at least 500 times per trading day and have an average trading value of at least $1.2 million per trading day, in total across marketplaces, during the preceding three calendar months.

The trigger is also being modified so as to require price volatility of at least 10% and 20 trading increments in a five minute period to avoid inappropriately triggering a circuit breaker for lower-valued securities. Meanwhile, the post-open period (9:30 a.m. to 9:50 a.m.), which IIROC characterizes as a time of natural volatility, and the 30 minute period following the resumption of trading after a regulatory halt, will now be covered by a trigger that applies in the event of a price increase or decline of at least 20% and 40 trading increments in a five-minute period.

The new guidance will come into effect on February 2, 2015. For more information, see IIROC Notice 14-0170.

IIROC proposal would allow firms to provide unaudited summary statements of financial position

Late last month, IIROC proposed amendments to its Dealer Member Rules intended to allow dealers to satisfy a client's request for a copy of the dealer's summary statement of financial position without having to obtain an auditor's report for that statement.

IIROC is accepting comments on its proposed amendments until September 24. For more information, see IIROC Rules Notice 14-0157.

New Brunswick and Saskatchewan join cooperative securities regulator initiative

The federal government’s most recent initiative to create a cooperative capital markets regulatory system for Canada took another step forward today with the announcement that New Brunswick and Saskatchewan had signed on to the existing agreement to join the Cooperative Capital Markets Regulatory System.

New Brunswick and Saskatchewan join Ontario and British Columbia as parties to an agreement in principle (the “Agreement”) which calls for the development of, among other things:

  1. uniform legislation for each participating province or territory that would address all capital markets regulatory matters under provincial or territorial jurisdiction;
  2. complementary federal legislation to apply across Canada that would address criminal matters and those relating to systemic risk and national data collection; and
  3. a single capital markets regulator comprising of an expert board of directors, a regulatory division and an adjudicative tribunal.

Under this model, it is proposed that the new cooperative regulator would administer a single set of regulations under the authority delegated to it by the participating jurisdictions, while being responsible for regulatory enforcement and adjudicative functions, as well as identifying and managing systemic risk. The common regulator is also contemplated to have a regulatory office in each participating jurisdiction that would provide the same range of services that are currently provided by provincial and territorial securities regulators while maintaining a single fee structure. 

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SEC releases guidance in respect of proxy advisory firms

On June 30, the U.S. Securities and Exchange Commission released a staff legal bulletin intended to provide guidance for investment advisers that retain proxy advisory firms to assist with proxy voting duties.

According to the guidance, the SEC expects that investment advisers retaining a proxy advisory firm will adopt policies and procedures designed to provide sufficient ongoing oversight of the proxy advisory firm in order to ensure that proxies continue to be voted in the best interests of clients. Investment advisers should also establish and implement measures to identify and address a proxy advisory firm's conflicts that can arise on an ongoing basis.

As we discussed earlier this year, the Canadian Securities Administrators published a national policy in April setting out proposed recommendations for proxy advisory firms in relation to their activities and the services provided to their clients. The comment period on the proposal has been extended to July 23.

BCSC issues reasons after decision to cease-trade rights plan after 156 days

John Anderson

On June 27, 2014, the British Columbia Securities Commission published the reasons for its widely discussed decision to cease-trade Augusta Resource’s shareholder rights plan as of July 15, 2014 – an unprecedented 156 days after the commencement of HudBay Minerals’ hostile take-over bid.  Prior to the BCSC’s May 2, 2014 ruling, most securities lawyers would have considered it unlikely that a Canadian regulator would permit a rights plan to endure for even 90 days. Our prior comment on the hearing and result can be found here.

In its reasons, the BCSC panel confirmed that it was not following the approach in proposed NI 62-105 or Quebec’s proposed alternative, but rather following established policy and precedent in analyzing, not whether Augusta’s rights plan should be terminated, but when.  In setting this background, the panel took the opportunity to reconcile the BCSC’s prior decision in Icahn – Lion’s Gate with the decisions of the ASC in Pulse Data and the OSC in Neo Materials, stating that none of those cases stood for the proposition that shareholders could enshrine a rights plan and “just say no” to a hostile bid as contemplated by the proposed NI 62-105.  Rather, in each of these cases, the regulator was essentially answering the “when” question, i.e. whether the time to cease-trade the rights plan had occurred.

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Oil and Gas Trends in Q1 and Q2 2014

Glenn Cameron -

The short take on energy trends in the last two quarters is “what a difference a Polar Vortex can make”. That weather phenomenon is partly responsible for a change in the current and the predicted future prices of natural gas. The winter heating season ended with significantly lower quantities of gas in storage than usual. As well, the demand for gas continues to escalate with gas continuing to replace coal as a power generation fuel. 

That and other factors contributed to a strong revival of M&A and financings in the sector. Much of that activity was focused on natural gas properties. The dollar value of deals done to date has already passed last year’s record low levels of activity.

Q1 saw the CNRL purchase of Devon’s Canadian conventional properties (C$3.13B), Baytex’s purchase of Aurora (C$2.6B), Whitecap’s purchase of properties from Imperial Oil (C$855M), Tourmaline’s purchase of Santonia (formerly Fairbourne) (C$189M), IOC’s purchase of 10% of Petronas’ BC gas reserves, and other transactions.

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CSA members propose requiring disclosure of board gender diversity

Certain members of the CSA, namely Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Northwest Territories and Nunavut, today published for comment proposed amendments to corporate governance disclosure obligations that would require non-venture issuers to provide disclosure in respect of gender diversity on issuers' boards and senior management teams. As we've previously discussed, the OSC published similar proposed amendments earlier this year.

The participating CSA members are accepting comments on the proposal for 60 days.

ACT issues a supplement to its borrowers' guide to LMA Loan Documentation

Jeffrey Keey 

The UK’s Association of Corporate Treasurers (ACT) recently issued a supplement to its guide for borrowers to the Loan Market Association (LMA) investment grade forms of facility agreement and key negotiating points for borrowers (the ACT Borrower Guide) which will be of interest to those looking to review and negotiate such a facility agreement.

The LMA forms of investment grade facility agreement have been changed a number of times since publication of the ACT Borrower Guide in 2013, in particularly in respect of:

  • amendments to the definitions of “LIBOR”, “Euribor” and related provisions arising from the reforms to their benchmark process and administration;
  • an optional adjustment to the borrower’s right to prepay a defaulting lender;
  • amending the tax clauses to permit affected parties to withhold pursuant to FATCA and imposing information- sharing obligations on all parties;
  • updates to the increased costs clause to highlight the possibility of amendment to reflect commercial deals with regard to the costs associated with Basel III;
  • amended provisions giving an agent protection against incurring liabilities in the discharge of its function;
  • additional matters requiring unanimous lender consent;
  • mandatory costs provisions becoming optional; and
  • amendments to reflect changes that borrowers often seek.

This new supplement considers the changes made and their implications for borrowers.

CRA publishes FATCA guidance for Canadian entities

Roanne C. Bratz and Judith Charbonneau Kaplan -

The Canada Revenue Agency (CRA) on June 23, 2014 posted much anticipated guidance for Canadian entities that could find themselves subject to the Foreign Account Tax Compliance Act (FATCA), which took effect on July 1, 2014.

Entitled Guidance on enhanced financial accounts information reporting - Part XVIII of the Income Tax Act, the document, which consists of 158 pages divided into 12 chapters, was prepared with the stated purpose of helping financial institutions, their advisers, and CRA officials with the due diligence and reporting obligations relating to the Canada-United States Enhanced Tax Information Exchange Agreement, which was signed on February 5, 2014 (the “Guidance”).

According to the Guidance, “[a] Canadian financial institution that is in compliance with Part XVIII will not be subject to any U.S. withholding tax on U.S. source income and gross proceeds (both on its own investments and those held on behalf of its customers) under section 1471 of the U.S. Internal Revenue Code (IRC). However, the Agreement requires that procedures be followed by Canadian financial institutions seeking to secure that outcome.”

Of particular interest, it is noted that an entity must meet two conditions before it is considered to be a  “Canadian financial institution.” The entity must be a Canadian financial institution as defined under the IGA and it must be a “listed financial institution” for the purposes of Part XVIII of the Income Tax ActSubsection 263(1) of the Act defines a “listed financial institution” for that purpose and limits its meaning to 13 categories of entities. The Guidance explains that certain investment vehicles which, for example, may not be promoted to the public if they do not seek external capital (to illustrate, a personal trust used as a means for an individual or a family to hold investable assets), are not intended to be included in the term “listed financial institution” and will be viewed as passive Non-Financial Foreign Entities (or NFFE) under Canadian law.

The CRA has indicated that it is open to further comments and that the Guidance will be updated to take into account any developments, as appropriate.