MFDA publishes proposed amendment to By-law respecting "No Actions Against the Corporation"

On June 26, the Mutual Fund Dealers Association of Canada (MFDA) published MFDA Bulletin #0385-P, proposing amendments to section 35 (No Actions Against the Corporation) of its By-law No. 1. According to the MFDA, the proposed amendments are intended to (i) extend the existing protection found in section 35 of By-law No. 1 to the MFDA Investor Protection Corporation (MFDA IPC); and (ii) provide for, within MFDA By-laws, the "terms of the relationship between the MFDA and MFDA IPC and existing MFDA and Member obligations to the MFDA IPC."

The MFDA is accepting comments on the proposal until September 24, 2009.

CCGG releases draft corporate governance guidelines

The Canadian Coalition for Good Governance (CCGG) today released Building High Performance Boards, a draft set of twelve guidelines for public boards to follow. The guidelines are categorized under four general qualities of "high performance boards", being that they: represent their shareholders; have experienced, knowledgeable and effective directors and committees; have clear roles and responsibilities and engage their shareholders. The CCGG is accepting comments on the draft guidelines until July 31, 2009.

IIROC publishes notice regarding "fit and proper" test for Approved Persons

The Investment Industry Regulatory Organization of Canada (IIROC) today released a notice setting out IIROC Registration Staff's "approach when conducting suitability reviews for individuals seeking IIROC approval and/or registration". The notice describes the three fundamental criteria IIROC Registration Staff use to evaluate whether an individual is "fit and proper" for approval, being integrity, financial solvency and competence. The notice also discusses the additional filings for disclosures that may affect an individual's suitability as well as a number of best hiring practices for sponsoring firms.

IIROC provides guidance on registration transition to new categories

The Investment Industry Regulatory Organization of Canada (IIROC) today released a guidance note setting out how it would transition current Approved Persons from existing categories to the proposed new categories under the upcoming registration regime to be implemented under proposed National Instrument 31-103 Registration Requirements, expected to come into force on September 28, 2009. The notice supplements the information published in CSA Staff Notice 31-311 on June 12.

The current category structure, consisting of 46 categories will be replaced with a regime containing 11 categories that will focus solely on the function of the Approved Person. The type of customer, product and whether the individual engages in portfolio management will be tracked separately.

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SEC Chairman calls for OTC derivatives regulation

Chairman Schapiro
Photo Courtesy of
www.sec.gov
Securities and Exchange Commission (SEC) Chairman Mary Schapiro appeared before the U.S. Senate's Subcommittee on Securities, Insurance, and Investment yesterday to testify regarding the regulation of over-the-counter (OTC) derivatives. Her testimony provided an overview of OTC derivatives markets and made the case for bringing securities-related OTC derivatives under the purview of the SEC.

Chairman Schapiro noted that while transactions involving OTC derivatives can replicate the economics of securities transactions without involving the purchase or sale of actual securities, such transactions currently fall outside the umbrella of federal securities laws. As such, Chairman Schapiro discussed a "functional and sensible approach to regulation", in which the SEC would have primary responsibility for securities-related OTC derivatives, while the responsibility for all other derivatives, including those related to such things as commodities, energy and foreign exchange would rest with the Commodity Futures Trading Commission. Citing the close relationship between the securities markets and securities-related OTC derivatives, Chairman Schapiro emphasized the importance of ensuring that such OTC derivatives be "subject to the federal securities laws so that the risk of arbitrage and manipulation of interconnected markets is minimized." Subjecting securities-related OTC derivatives to federal securities laws would also provide a unified and consistent framework for securities regulation.

For the testimony of the other witnesses that appeared before the Subcommittee, click here.

IOSCO publishes report regarding regulation of hedge funds

The International Organization of Securities Commissions today released a report, entitled Hedge Funds Oversight: Final Report, containing "high level principles that will enable securities regulators to address, in a collective and effective way, the regulatory and systemic risks posed by hedge funds in their own jurisdictions while supporting a globally consistent approach."

The six principles outlined are:

  1. Hedge funds and/or hedge fund managers/advisers should be subject to mandatory registration;
     
  2. Hedge fund managers/advisers that are required to register should also be subject to appropriate ongoing regulatory requirements relating to organizational and operational standards, conflicts of interest and other business conduct rules, investor disclosure and prudential regulation;
     
  3. Prime brokers and banks that provide funding to hedge funds should be subject to mandatory registration, regulation and supervision and should have risk management systems and controls in place to monitor their counterparty credit risk exposures;
     
  4. Hedge fund managers/advisers and prime brokers should provide information for systemic risk purposes to the relevant regulator;
     
  5. Regulators should encourage and take account of the development, implementation and convergence of industry good practices, where appropriate; and
     
  6. Regulators should have the authority to cooperate and share information with each other where appropriate so as to facilitate efficient and effective oversight of globally active managers/advisers and/or funds.

The report, which was prepared by the IOSCO Task Force on Unregulated Entities established in November 2008 to support the G-20 in restoring global growth and reforming the world’s financial systems, recommends that all securities regulators apply these principles in their regulatory approaches.

Minister of Finance announces securities regulator transition office

The Minister of Finance today announced the launch of a Transition Office to "lead Canada's effort to establish the Canadian securities regulator." Doug Hyndman, Chair of the British Columbia Securities Commission has been tapped to lead the Transition Office as its Chair and CEO.

CSA publish proposals respecting mutual fund disclosure at point of sale

On June 19, 2009, the Canadian Securities Administrators (the CSA) published for comment proposed amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure and its related forms.   

The proposed amendments represent the culmination of many years of review and research undertaken by securities and insurance regulators under their Joint Forum initiative to develop a better approach to providing meaningful and effective disclosure to mutual fund investors. As such, the proposed amendments announced in this notice form the first phase of this joint approach. The second phase involves a review of the overall disclosure regime for mutual funds with a view to reducing duplication.

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IOSCO publishes report on regulation of short selling

On June 19, the International Organization of Securities Commissions announced the publication of Regulation of Short Selling, a report containing "high level principles for the effective regulation of short selling." The four principles recommended by the report are as follows:

  1. Short selling should be subject to appropriate controls to reduce or minimise the potential risks that could affect the orderly and efficient functioning and stability of financial markets.
     
  2. Short selling should be subject to a reporting regime that provides timely information to the market or to market authorities.
     
  3. Short selling should be subject to an effective compliance and enforcement system.
     
  4. Short selling regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development.

Germany restricts executive compensation

The Bundestag, Germany's lower house of parliament, has passed a law restricting executive compensation.  According to Bloomberg, the measures go beyond U.S. and British proposals on the subject.

SEC to target "dark pools"

In a speech to New York financial writers yesterday, Securities and Exchange Commission Chairman Mary Schapiro discussed the SEC's concerns with private automated trading systems known as "dark pools". Such private systems do not display quotes in the public quote stream and according to Ms. Schapiro, the "lack of transparency has the potential to undermine public confidence in the equity markets, particularly if the volume of trading activity in dark pools increases substantially." As such, the SEC intends to take a "serious look" at potential regulatory actions to protect investors and market integrity.

Treasury Department proposals include regulation of private fund advisors

As described yesterday, the U.S. Treasury Department's "Financial Regulatory Reform: A New Foundation" includes numerous proposals to address perceived inadequacies in U.S. financial regulation. Of particular note, the report proposes requiring that investment advisers to hedge funds and other private pools of capital (including private equity and venture capital funds) whose assets under management exceed "some modest threshold" be registered with the Securities and Exchange Commission under the Investment Advisers Act. Registration of such investment advisers would make them subject to recordkeeping and disclosure requirements, including requirements to report to investors, creditors and counterparties, as well as regulators. While the reporting may vary across the different types of private pools of capital, the report proposed confidential reporting to regulators of the amount of assets under management, borrowings, off-balance sheet exposures and other “necessary” information. As stated in the report, "[r]equiring the SEC registration of investment advisers to hedge funds and other private pools of capital would allow data to be collected that would permit an informed assessment of how such funds are changing over time and whether any such funds have become so large, leveraged, or interconnected that they require regulation for financial stability purposes."

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U.S. Treasury Department releases proposed financial regulatory reforms

On June 17, U.S. President Barack Obama announced a series of proposed financial regulatory reforms, found in the Treasury Department's "Financial Regulatory Reform: A New Foundation". The recommendations include proposals to create comprehensive regulation of all OTC derivatives, harmonize futures and securities regulation and strengthen oversight of systemically important payment, clearing and settlement systems. An executive summary of the proposals was also released, as were related fact sheets.

TSX amends fees for ETFs

The TSX has released its fee schedule as of July 1, 2009, amending the fees associated with exchange traded funds.

CSA staff publish notice regarding transition to new registration regime

Daniella Laise, Kathleen Ward and Alix d'Anglejan-Chatillon |  PDF Version  | Version française

Staff of the Canadian Securities Administrators (CSA Staff) published CSA Staff Notice 31-311 (the Staff Notice), which outlines the CSA Staff's detailed recommendations to the relevant securities regulatory authorities and ministries regarding the transition of firms and individuals from the existing registration regime to the new one under proposed National Instrument 31-103 Registration Requirements (NI 31-103). The recommendations apply to both Canadian and non-resident registrants, and to firms that are not currently subject to registration but will be required to register under NI 31-103. These procedural recommendations do not address any of the substantive requirements of NI 31-103. The CSA Staff will seek final approval to publish the final version of NI 31-103 on or about July 17, 2009 intending for it to come into force on or about September 28, 2009 (the effective date).

The notice discusses a number of issues, including the conversion of existing registrants to new categories of registration, timelines for transition and compliance under the new registration regime, as well as the proposed “freeze period” of the National Registration Database (NRD) to allow staff to transition registrants and activate the new forms under proposed revised National Instrument 33-109 Registration Information (NI 33-109). While the Staff Notice contains detailed and helpful information on key transition issues, CSA Staff caution that it reflects only what CSA Staff are recommending.

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IIROC publishes notice regarding sales practices relating to leveraged and inverse ETFs

On June 11, IIROC published a notice concerning the sales practice obligations of Dealer Members with respect to leveraged and inverse exchange traded funds (ETFs). The notice discusses the application of various Dealer Member Rules, such as those respecting suitability, communications with the public, supervision and training, to the sales of leveraged and inverse ETFs. The U.S. Financial Industry Regulatory Authority, meanwhile, published a similar notice on the same topic.

IIROC publishes guidance for dealer members respecting credit risk policies and procedures

On June 11, the Investment Industry Regulatory Organization of Canada published a guidance notice for dealer members with respect to the "importance of being diligent in assessing and maintaining adequate credit risk policies and procedures" in light of recent financial market challenges. The notice discusses the nature of credit risk and the importance of managing exposure to such risk through a formal process that is independent of sales office functions.

IIROC states that credit risk practice should at a mimumum include active oversight of the board or owner/manager, credit policies established by management, review procedures for retail accounts and institutional credit worthiness reviews. With respect to specific best practices, the notice includes guidance with respect to margin, cash and international accounts and security concentrations in customer accounts.

Further U.S. regulation of executive compensation expected

Secretary Geithner
Secretary Geithner
Photo Courtesy of
www.treasury.gov

The U.S. Securities and Exchange Commission released a statement Wednesday by Chairman Mary Schapiro regarding executive compensation. While recognizing that the SEC's role is not to set pay scales or cap compensation, Ms. Schapiro stated that the SEC will actively consider "a package of new proxy disclosure rules that will provide further sunshine on compensation decisions." A number of disclosure requirements that will be considered by the SEC were listed in the statement, including information regarding a company's overall compensation approach, potential conflicts of interest by compensation consultants and the experience and qualifications of director nominees.

On a similar note, Treasury Secretary Timothy Geithner released a statement after meeting with Ms. Schapiro, stating that legislation will be pursued in two specific areas respecting compensation practices. The first, "say on pay" legislation, would provide the SEC with authority to require that companies allow non-binding shareholder votes on executive compensation. The second proposed piece of legislation would provide the SEC with "the power to ensure that compensation committees are more independent, adhereing to standards similar to those in place for audit committees as part of the Sarbanes-Oxley Act."

SEC approves listing threshold for certain NYSE companies

Citing the "dramatic decline in stock prices and market capitalizations of many listed companies", the U.S. Securities and Exchange Commission recently published temporary changes filed by the New York Stock Exchange (NYSE) in its listing thresholds for certain listed companies. These changes went into effect on May 12, 2009, the date of filing by the NYSE, and will remain in force until October 31, 2009. Prior to these temporary amendments, the rules considered companies that qualified to list under the Earnings Test, Assets and Equity Test or the "Initial Listing Standard for Companies Transferring from NYSE Arca" standard of the NYSE's Listed Company Manual to be below compliance standards if their average global market cap over a consecutive 30 trading-day period was less than $75 million and, at the same time, total stockholders' equity was less than $75 million. These temporary changes have lowered the thresholds for these companies to $50 million. Although the changes are in effect, the SEC is inviting comments until June 25, 2009 as it has 60 days from the date of filing to abrogate the rule change.

U.S. GAO report recommends further industry guidance respecting short sales

The U.S. Government Accountability Office recently released a report with respect to its review of SEC rules and actions respecting naked short selling and failures to deliver. The report recommends that the SEC expedite the finalization of the temporary rule implemented in 2008 and develop a process that allows the SEC to "raise and resolve implementation issues that arise from SEC regulations".

For information on short sales in Canada, see our recent update of April 28, 2009.

BCSC provides advance notice of BCI 13-502 respecting electronic filing of exempt distribution reports

On June 5, 2009, the British Columbia Securities Commission published BC Notice 2009/07 Advance Notice of BCI 13-502 Electronic filing of reports of exempt distribution and Related Documents. This notice announced the expected implementation, effective July 30, 2009, of BC Instrument 13-502 and its related companion policy. BCI 13-502 requires issuers who file a report of exempt distribution and pay fees in connection with that report to do so electronically through BCSC e-services.

TSX Inc. to act as an information processor for exchange-traded securities other than options

On June 5, the CSA announced that, commencing July 1, 2009 and continuing for a period of five years, TSX Inc. (TSX) will act as an information processor for exchange-traded securities other than options under NI 21-101 Marketplace Operation. As described by the CSA, an information processor "provides consolidated data to investors and market participants, facilitating compliance with regulatory requirements." The CSA also published a "Questions and Answers" supplement to their notice respecting the role of the TSX.

CCGG releases 2009 principles of executive compensation

The Canadian Coalition for Good Governance recently released its 2009 Executive Compensation Principles, representing the CCGG's "most recent thinking" on the topic of compensation. The document considers specific principles, which are intended to "guide boards and help encourage compensation decisions that are aligned with long-term company and shareholder success".

SEC announces Investor Advisory Committee

On June 3, the U.S. Securities and Exchange Commission announced the creation of an Investor Advisory Committee. The Committee's scope includes advising the SEC on investors' concerns, providing perspectives on regulatory issues and serving as a source of information and recommendations with respect to the SEC's regulatory programs. The Committee is expected to begin its work in the next few weeks.

OSC refuses to cease trade shareholder rights plans

On May 11, 2009, the Ontario Securities Commission (OSC) decided to deny an application requesting that the OSC cease trade two shareholder rights plans implemented by NEO Material Technologies. The first plan was a strategic plan that had previously been approved by shareholders of Neo and the second was a tactical plan that had been adopted by NEO in the face of a partial bid launched by Pala Investments. Pala’s bid was structured to comply with the “permitted bid” definition contained in the first plan in that it was open for at least 60 days, subject to an additional 10-day extension in the event that the irrevocable minimum tender condition, requiring that at least 50% of the independently held common shares of Neo be tendered, was satisfied. In response to Pala’s partial bid, the board of directors of Neo implemented the second shareholder rights plan to prohibit such a partial bid and recommended against tendering to the bid. Pala applied to the OSC under s. 127(1) of the Securities Act to have both plans cease traded but the OSC deferred making a decision on the application until after Neo held its previously scheduled shareholder meeting (which was scheduled to be held prior to the expiry of the Pala bid). Approval of the second plan was put before the shareholders at the meeting and was passed, following which the OSC denied the requested relief. 

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