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.

Ontario court interprets proviso in advance notice policy to permit late nominations

Sean Vanderpol and Ramandeep K. Grewal -

While advance notice policies have been utilized by issuers in the U.S. for quite some time, they are still relatively new to the Canadian market. As a result, the Canadian jurisprudence on their use and interpretation continues to develop.

The Ontario Superior Court of Justice may have recently added some uncertainty when it granted a declaration in favour of Orange Capital, finding that the investment firm had complied with Partners REIT’s advance notice policy in respect of the time frame for nominating trustees. In light of its finding that Orange Capital had complied with the policy, the Court declined to rule on the validity of the policy itself. Orange Capital had been seeking a declaration that the policy was of no force or effect, as the board had not submitted it for approval of unitholders.

As we discussed in an earlier post, Orange Capital launched a tender offer in May to purchase up to 10% of the outstanding units of Partners in an attempt to acquire enough proxy votes to get a new slate of independent trustees appointed to Partners’ board. Under the terms of the tender offer, tendering unitholders were also required to deposit proxies appointing Orange Capital as proxy holder, for all deposited units, regardless of the number of deposited units actually taken up and paid for by Orange Capital.

Subsequent to discussions with the OSC, Orange Capital clarified certain aspects of its tender offer. Specifically, the additional details and conditions set out in the subsequent release by Orange Capital suggest that the OSC sought to impose aspects of the take-over regime in the immediate situation.

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Adoption of new Alberta OTC derivatives order to reflect pending legislative changes

Keith Chatwin -

Earlier this week, Alberta Securities Commission staff proposed replacing ASC Blanket Order 91-505 Over-the-Counter Derivatives Transactions, with a new blanket order aimed at conforming the prospectus and dealer registration exemptions available under the existing order to pending amendments to the Securities Act.

The pending amendments will, among other things, exclude “futures contracts” from the definition of “security” while introducing the concept of “derivatives” (which will exclude any products that have attributes of a derivative but are also a security, referred to as “derivative-like securities”) and exclude derivatives from the prospectus requirement entirely. As a result, the new blanket order will no longer provide a prospectus exemption for derivatives.  

However, in order to maintain the scope of the current prospectus and registration exemptions of the existing Blanket Order, the new blanket order will ensure that a prospectus exemption will also be available for over-the-counter trades in derivative-like securities and that a dealer registration exemption will continue to be available for over-the-counter trades in derivatives and derivative-like securities, in each case if (i) at the time of the trade each counterparty was a qualified party; or (ii) the trade was in a physical commodity contract.  

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OSC proposes changes to participation fee calculations

The OSC yesterday published for comment proposed amendments to its rules that set out the fees to be paid by market participants. The proposed amendments involve changes to the calculation of participation fees, which apply to reporting issuers, registrants, certain unregistered capital market participants, specified regulated entities and designated rating organizations, and are meant to reflect a market participant’s use of the Ontario capital markets, as well as changes to certain activity fees, which are generally charged when a document of a designated class is filed, under OSC Rule 13-502 Fees and OSC Rule 13-503 (Commodity Futures Act) Fees.

Among other things, the amended rules would remove the use of reference fiscal years in the calculation of participation fees and require that market participants calculate their participation fee payable using information from their most recent financial year. According to the OSC, the change would achieve a "closer link" between a market participant's current financial performance and the level of participation fee payable. 

A number of new activity fees would also seek to improve fairness and consistency while better matching revenues to the OSC's costs. Proposed new activity fees would include $83,000 for an application for designation as a trade repository, $15,000 for an application for designation as a designated rating organization and an extension of the $4,500 take-over and issuer bid circular fee to information circulars filed in connection with such things as going private transactions, amalgamation and mergers. An additional fee of $2,500 would also apply for each technical report incorporated by reference in a prospectus. 

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OSC provides guidance on dealer registration exemptions under Commodity Futures Act

The OSC yesterday published a staff notice to provide guidance on the circumstances in which certain exemptions from the dealer registration requirement under the Commodity Futures Act are available to market participants.

Specifically, the notice provides OSC staff's view on when foreign dealers and other market participants may rely on certain exemptions under the CFA, such as the "unsolicited trade" exemption, including indicia of activities considered to be "carrying on business" in Ontario and activities considered to be "solicitation" in a jurisdiction. In this respect, staff identify the following factors as indicia of "carrying on business in Ontario: 

  • the establishment of an office or place of business in Ontario;
  • the establishment of a relationship with an affiliated entity or third party in Ontario to conduct marketing or other activities that are in furtherance of a trade with a customer in Ontario;
  • payment of commissions, fees or similar compensation to "introducing brokers", "finders", "referral agents" or other persons in connection with the trade with a customer in Ontario; and
  • trading with regularity with customers in Ontario, whether in reliance on the unsolicited trade exemption and/or in reliance on other exemptions, including exemptions contained in a discretionary exemptive relief order granted by the OSC under the CFA or the Securities Act (Ontario).
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Ministerial approval granted to Phase 2 of investment fund modernization

Ministerial approval has now been granted to amendments to implement certain aspects of Phase 2 of the Modernization of Investment Fund Product Regulation Project, which includes, among other things, amendments to National Instrument 81-102 Mutual Funds.

The mandate of Phase 2 involves generally addressing the regulatory gap between non-redeemable investment funds and mutual funds by focusing on imposing certain core operational requirements on publicly offered non-redeemable investment funds that are generally analogous to the requirements applicable to mutual funds.

As we've previously discussed, the final amendments come into effect on September 22, with implementation to occur over the next few years.

IIROC republishes proposed CRM changes

The Investment Industry Regulatory Organization of Canada today republished for further comment proposed amendments to its Dealer Member Rules to address specific objectives relating to its Client Relationship Model initiative.

Specifically, the proposed amendments include those in regards to (i) enhanced trade confirmation and account statement reporting; (ii) quarterly reporting on certain off-book client holdings; (iii) annual account performance reporting; and (iv) annual account fee/charge reporting. The proposed amendments were republished in order for IIROC to receive comment on revisions requested by CSA staff.

IIROC is accepting comments on the proposed amendments until November 17, 2014. For more information, see IIROC Notice #14-0214.

ASC to clarify how investment fund rules apply to MIE funds

In late August, the Alberta Securities Commission staff published a notice advising that they intend to ask the ASC to issue a designation order to clarify how rules applicable to investment funds apply to mortgage investment entities that are investment funds.

According to the staff notice:

Because an Operational MIE may be an investment fund under the Act but in circumstances, other than relating to the registration requirement, it is considered more appropriate that such MIEs be subject to the rules applicable to non-investment funds, ASC staff intend to request that the Commission issue a designation order designating Operational MIEs to not be non-redeemable investment funds.

The designation order is expected to provide that, except for the registration requirement, Operational MIEs are designated not to be a non-redeemable investment fund.

The designation order is expected to be published sometime next week. For more information, see ASC Staff Notice 81-701.

Russian sanctions expanded

The Canadian government announced expanded Russian sanctions yesterday, notably tightening the existing prohibition against providing loans to designated entities. The amendments to the sanctions also updated the schedules of designated persons and entities to whom the sanctions apply.

For an overview of Russia sanctions to date, see the website of Foreign Affairs, Trade and Development Canada.

Canadian regulators propose harmonized take-over bid approach

In a much anticipated development, the Canadian Securities Administrators today provided an update on the status of their proposals to regulate take-over bids and shareholder rights plans. While not publishing any detailed amendments at this time, all CSA members have joined together to announce that they are taking a harmonized approach that will ultimately result in amendments to take-over bid rules across Canada.

Mandatory “permitted bid” features

Specifically, the regulators propose to introduce amendments to the current take-over bid regime that would require all formal bids for Canadian public targets to contain the following mandatory features:

  • a minimum bid period of 120 days (60 days longer than the standard permitted bid period);
  • an irrevocable minimum tender condition requiring that more than 50% of the outstanding securities owned by persons other than the bidder and any joint actors be tendered and not withdrawn before the bidder can take up under the bid; and
  • a 10-day bid extension period after the minimum tender condition is achieved and the bidder announces its intention to take up and pay.

While CSA Notice 62-306 clarifies that the 120-day period could be waived (to a minimum of 35 days) by the target board, provided it is in a non-discriminatory manner in the face of multiple bids, if applicable, it is not clear whether the remaining two features could be subject to a board waiver.

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Proposal for Canadian cooperative capital markets regulator released

The federal Department of Finance yesterday announced that the federal government, Ontario, British Columbia, Saskatchewan and New Brunswick have signed a Memorandum of Agreement setting out the terms and conditions of a Cooperative Capital Markets Regulatory System. As we discussed in July, the Finance Minister had recently stated that the new regulator could be in operation by next year.

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. Complementary federal legislation would address criminal matters and systemic risk in national capital markets and data collection. Meanwhile, a common regulator, the Capital Markets Regulatory Authority, would administer the provincial and federal legislation and regulations under authority delegated by the participating jurisdictions. 

A backgrounder setting out the key features of the cooperative system was also released, as were consultation drafts of the proposed federal Capital Markets Stability Act and the proposed provincial Capital Markets Act, as well as commentary on the governance and legislative framework. Comments are being accepted until November 7, 2014.