Canadian Securities Law : Canadian Securities Lawyer & Attorney : Stikeman Elliott Law Firm : Montreal, Ottawa, Calgary, Vancouver, Montreal, Toronto

Simon Romano, Alex Colangelo and Ramandeep Grewal |  PDF Version | Version française

The recent volatility in equity markets led to a variety of responses by regulators. A particularly popular response internationally was the introduction of limits to short sales of securities, a tool used in an attempt to ease the downward pressure on the value of certain companies. In the United States, for example, the Securities and Exchange Commission (SEC) prohibited short selling in the shares of financial companies in the fall of 2008, a move followed by the Ontario Securities Commission (OSC) restriction on short sales of securities of companies that were inter-listed on a US exchange and on the SEC’s restricted list. While these particular restrictions soon lapsed, the general rules respecting short sales in Canada have been under consideration by regulators for some time. Further, the Investment Industry Regulatory Organization of Canada (IIROC) recently released two studies related to short sales, one of which considered the effects of the recently imposed restrictions. This update, meanwhile, seeks to review the current rules respecting short sales in Canada, recent amendments and the proposals for change.

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The Toronto Stock Exchange (TSX) recently issued a staff notice providing listed issuers with guidance on submissions in connection with the use of the financial hardship exemption under subsection 604(e) of the TSX Company Manual.  Subsection 604(e) provides an exemption from securityholder approval for certain transactions and was adopted to provide listed issuers with the opportunity to improve their financial situation in a timely manner when in serious financial difficulty.

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IIROC has recently published a notice proposing rules and amendments in order to address various regulatory objectives under the Client Relationship Model Project, specifically: relationship disclosure, management and disclosure of conflicts of interest, account suitability and account performance reporting. Proposed rule changes were initially published in February 2008 by the IDA and the current proposals incorporate feedback received through the comment process as well as through subsequent consultations held with industry associations, the MFDA and provincial securities regulators. Comments are invited for a period of 90 days from the date of publication of the notice.

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On April 24, 2009, the Investment Industry Regulatory Organization of Canada released a notice of proposed amendments that would revise the definition of “securities related activities” in the Dealer Member Rules to refer to all investment products and also repeal the definition of “securities related business”. The primary objective of the changes is to “clearly articulate that IIROC registered representative recommended transactions for any investment product…must be conducted within and recorded on the books of an IIROC Dealer Member.” Further, the changes are intended to "harmonize the requirements for agent and employee salespersons to conduct certain activities within an IIROC Dealer Member and to record such activities on the books of the IIROC Dealer Member." Comments on the proposed amendments will be accepted by IIROC until June 23, 2009.

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On April 20, 2009, the TSX published a notice providing guidance on amendments to securityholder rights plans after a take-over bid has been announced or initiated. The notice reminds issuers that they must obtain written consent of the TSX prior to adopting amendments to a plan. In cases where a plan amendment is reasonably perceived to have been proposed in response to a take-over bid, the TSX will treat the amendment as a new plan and will normally defer its decision to consent until the relevant securities administrator has decided whether or not to intervene. If the regulator does not intervene, the TSX will generally not object subject to securityholder approval. The notice also reminds issuers that any plan filed for acceptance must be accompanied by a letter that states, among other things, whether the plan treats any existing securityholder differently from other securityholders. The notice reminds issuers that the TSX will require securityholder approval as set out in s. 636(b) of the TSX Company Manual notwithstanding such provisions. Any such provisions that purport to exclude votes of certain securityholders must be specifically identified in the issuer's application to the TSX for approval of the plan amendments.

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IIROC has published notice that regulatory authorities have approved amendments to the Universal Market Integrity Rules respecting the "best price" obligation. Among other things, the amendments, which became effective on May 16, 2008 when they were published, set out certain order handling methods, the use of which will satisfy the "reasonable efforts" requirements of the "best price" obligation. IIROC also published a notice providing guidance on specific questions related to compliance with the "best price" obligation.

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The Investment Industry Regulatory Organization of Canada today published proposed amendments to the Dealer Member Rules with respect to fair and reasonable pricing of over-the-counter traded securities (including fixed income securities) and trade confirmation disclosure requirements. The fair pricing proposal would cover OTC transactions for retail and institutional clients and require that Dealer Members “make a reasonable effort to obtain a price for the customer that is fair and reasonable in relation to prevailing market conditions.” The proposed rule also considers issues respecting mark-ups and mark-downs in the case of principal transactions and commissions or service charges in the case of agency transactions. A draft Guidance Note on the OTC proposal was also published.

The proposed amendments would also require disclosure of the yield to maturity for fixed income securities on trade confirmations as well as a remuneration statement on all OTC transactions for retail clients “where the amount of the mark-up or mark-down, commissions and other service charges” has not been disclosed.

IIROC is accepting comments on the proposals until July 16, 2009.

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As recently announced, the SEC has been considering imposing restrictions on short sales and has now published its proposals on the subject. The options being considered include a short sale price test and a "circuit breaker" approach. The SEC is accepting comments on the proposals until June 19, 2009.

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The U.S. Court of Appeals for the Eighth Circuit recently released its opinion in Gallus v. Ameriprise, a case considering the scope of a mutual fund adviser’s fiduciary duties under section 36 of the Investment Company Act of 1940 (ICA). The Circuit Court found that while the Gartenberg v. Merrill Lynch case provided a “useful framework for resolving claims of excessive fees”, the size of the fee was not the only factor in considering an alleged violation of the ICA and that the adviser’s conduct during negotiation should also be considered. “[W]e read the plain language of § 36(b) to impose on advisers a duty to be honest and transparent throughout the negotiation process.”

In reversing the Minnesota District Court's decision, the Eighth Circuit found that the lower court should have compared the fees charged to institutional and mutual fund clients. “Indeed, the argument for comparing mutual fund advisory fees with the fees charged to institutional accounts is particularly strong in this case because the investment advice may have been essentially the same for both accounts.” Further, the District Court should have considered the defendants’ conduct “independent of the result of the negotiation” and specifically whether the defendants misled the plaintiffs with respect to the discrepancy in fees.

As such, the Eighth Circuit reversed the decision of the District Court granting the defendants summary judgment and remanded the case for further consideration.

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On April 9, 2008, the Investment Industry Regulatory Organization of Canada published a notice regarding "locked" and "crossed" markets in the context of a dealer's obligations under the Universal Market Integrity Rules (UMIR). The guidance is intended to reflect the amendments to UMIR with respect to "best execution" and "best price" obligations, supplement and reaffirm certain guidance provided in Market Integrity Notice 2008-010 Complying with "Best Price" Obligations and provide guidance "with respect to the inappropriateness of certain recent practices associated with 'rebate arbitrage'."

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On April 8, 2009, the U.S. Securities and Exchange Commission voted to seek public comment on proposals to impose short sale price restrictions or circuit breaker restrictions and “whether such measures would help promote market stability and restore investor confidence.” The introduction of an uptick rule would be permanent and market-wide, while a "circuit breaker" would limit short selling for particular securities for the remainder of the day in the case of a severe decline in the security’s price. The SEC plans to publish the full text of the full proposals as soon as possible.

The proposals are now available here.

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The CSA have recently released a Staff Notice indicating that they expect to publish National Instrument 31-103 Registration Requirements (NI 31-103) in July 2009. If approved by the appropriate government authorities in each jurisdiction, the CSA expect NI 31-103 to come into force at the end of September 2009.

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On April 3, 2009, the TSX released proposed amendments to its Company Manual with respect to requiring security holder approval "in those instances where the number of securities issued or issuable in payment of the purchase price for an acquisition exceeds ... 50% of the number of securities of the listed issuer which are outstanding, on a non-diluted basis, for an acquisition of a reporting issuer (or equivalent status) having 50 or more beneficial security holders, excluding insiders and employees."

The TSX is accepting comments on the amendments until May 4, 2009.

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We are pleased to announce that Canadian Securities Law Online was selected as the best online firm marketing tool by the Legal Marketing Association at the 2009 Your Honor Awards Ceremony, held yesterday in National Harbor, Maryland. Specifically, the judges cited our firm's "high-level work" in awarding the honour.

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On January 23, 2009, the Mutual Fund Dealers Association of Canada published Bulletin #0354-P with respect to proposed amendments to MFDA Rules relating to the sale of all principal protected notes (PPNs) aimed at ensuring that PPNs are subject to due diligence, KYC and suitability obligations. The CSA previously published a number of notices on the issue and, as set out in the MFDA's Bulletin, has requested that the MFDA take appropriate action. As such, the MFDA has stated that it intends to develop a discussion paper for consideration by the MFDA Policy Advisory Committee and had invited comments on the impact of potential amendments in order to assist MFDA staff in developing a proposal. 

For more information, see also: 

CSA Notice 46-303 - Principal Protected Notes (July 7, 2006)
CSA Notice 46-304 - Update on Principal Protected Notes (July 27, 2007)
CSA Notice 46-305 - Second Update on Principal Protected Notes (August 29, 2008)

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On March 25, 2009, the Supreme Court of Delaware released its decision in Lyondell Chemical Company v. Ryan, a case where the defendant directors of Lyondell were accused of breaching their fiduciary duties in conducting the sale of the company in July 2007. The plaintiffs claimed, among other things, that the directors did virtually nothing to develop a strategy for maximizing shareholder value once they became aware of the buyer’s filing of a Schedule 13D with the SEC in May 2007, which indicated that the company was “in play”. Since the company charter provided directors protection for breaches of their duty of care, this case turned on whether the directors breached their duty of loyalty by failing to act in good faith. The opinion of the Delaware Supreme Court was issued with respect to the defendants’ appeal of the decision of the Court of Chancery (memorandum opinion of July 29, 2008 and letter opinion of August 29, 2008) denying them summary judgment.

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