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

The Investment Industry Regulatory Organization of Canada announced on Tuesday that it had approved the addition of Rule 41 to its Dealer Member Rules. Rule 41 outlines the obligations of IIROC and its Dealer Members to the Canadian Investor Protection Fund (CIPF), including the payment of CIPF assessments and compliance with actions that the CIPF requests be taken. The CIPF, created in 1969, protects investors by ensuring the return of customers' securities, cash and other property in the case of the bankruptcy of an IIROC Dealer Member.

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The Investment Industry Regulatory Organization of Canada (IIROC) published a notice yesterday with respect to the best execution and best price obligations of Participants under the Universal Market Integrity Rules (UMIR). The notice is not intended to change previous guidance on "best execution" and "best price" obigations, but "simply reminds Participants of their obligations given that securities listed on the TSXV now trade on other marketplaces."

Rule 5.1 of UMIR states that Participants "shall diligently pursue the execution of each client order on the most advantageous terms for the client as expeditiously as practicable under prevailing market conditions" and the notice makes clear that, in doing so, Participants are expected to consider trade and order information from all marketplaces that trade the same securities. With respect to Rule 5.2, IIROC states that Participants must review its policies and procedures "on an ongoing basis to reflect changes to the trading environment and market structure (which would include the fact that securities listed on TSXV now trade on multiple marketplaces)."

The notice notes that while over 98% of trades and volume in TSXV-listed securities are made through the TSXV, an increase in trading activity on alternative trading systems "indicates that trading opportunities in TSXV-listed securities are increasingly available" on such alternate systems.

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On August 26, the Ontario Securities Commission released a decision refusing to intervene in a case where the TSX allowed a private placement of units of a real estate investment trust without unitholder approval. The application to review the TSX decision was brought by NorthWest Value Partners, which objected to, among other things, the placement proceeding without being put to a vote of unitholders. The placement represented approximately 49% of outstanding units of InterRent Real Estate Investment Trust.

The OSC noted that it was entitled to intervene in cases where (i) the TSX proceeded on an incorrect principle; (ii) the TSX erred in law; (iii) the TSX overlooked material evidence; and (iv) new and compelling evidence was presented to the OSC that was not presented to the TSX. It stated, however, that it would do so "only in the rare case" where an applicant met the "heavy burden of proving such intervention is justified" in accordance with the above principles or some other acceptable ground. In the immediate case, the OSC found that the TSX considered all the relevant information, assessed relevant considerations, followed the appropriate process and carefully articulated its reasons. As such, the application to review the decision was dismissed.

The OSC ruling was released on an expedited basis and full reasons are expected in the near future.

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On August 25, the Alberta Securities Commission (ASC) dismissed the application filed by TransAlta Corporation requesting that the ASC cease trade a shareholder rights plan implemented by Canadian Hydro Developers, Inc. TransAlta's application to the ASC stemmed from its unsolicited bid for the outstanding common shares of Canadian Hydro. 

Pursuant to its bid circular dated July 22, 2009, TransAlta offered to acquire all of the issued and outstanding common shares of Canadian Hydro (together with associated rights) at a price of $4.55 per common share. The bid is set to expire today, August 27, 2009, and is conditional upon the board of Canadian Hydro redeeming all outstanding rights, waiving application of the rights plan or the plan being cease traded or its application otherwise prohibited or prevented by a relevant governmental entity. The shareholder rights plan was approved by shareholders of Canadian Hydro on April 24, 2008 and allows for certain types of takeover bids that qualify as “permitted bids” under the terms of the plan. A "permitted bid" requires, among other things, that such a bid be made on certain prescribed terms and conditions.

As a result of the decision of the ASC, the plan remains in force. This decision represents the third of its kind to refuse to cease trade a shareholder rights plan in the face of an unsolicited bid and follows on similar decisions made by the ASC in Re Pulse Data Inc. (2007) and the Ontario Securities Commission in the matter of NEO Material Technologies and Pala Investment Holdings Limited (decision rendered on May 11, 2009 with full reasons to follow). While the ASC did not release reasons at the time of its decision, full reasons are expected in the near future.

Update: The reasons have now been released.

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Stikeman Elliott's second seminar on registration reform is now also available online. The webcast provides further details regarding the recently-published National Instrument 31-103 Registration Requirements, including a discussion of who needs to be registered and how to do so, as well as an overview of new capital, insurance and compliance requirements. A PDF of the seminar booklet accompanying the audio presentation is also available.

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Secretary Geithner Photo Courtesy of www.treasury.gov

On August 11, the U.S. Department of the Treasury announced that it had delivered to Congress proposed legislation respecting the regulation of over-the-counter (OTC) derivatives. Treasury Secretary Timothy Geithner spoke of the need for such regulation during testimony to Congress in July. According to the Department's press release, the proposed legislation "will provide for regulation and transparency for all OTC derivative transactions; strong prudential and business conduct regulation of all OTC derivative dealers and other major participants in the OTC derivative markets; and improved regulator and enforcement tools."

Specifically, the draft legislation requires that standardized OTC derivatives be centrally cleared by a securities or derivatives clearing organization, while encouraging the use of such standardized derivatives through higher capital and margin requirements for non-standardized derivatives. Financial regulatory agencies will have access on a confidential basis to OTC derivative transactions, while aggregated data on open positions and trading volumes will be available to the public. Meanwhile, federal banking agencies, the Commodity Futures Trading Commission and Securities and Exchange Commission will supervise and regulate OTC derivative dealers and major market participants. The Treasury Department hopes to have the reforms passed by the end of the year.

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Chairman Schapiro Photo Courtesy of www.sec.gov

On August 17, 2009, the U.S. Securities and Exchange Commission re-opened the comment period on its proposals respecting short sales first published in April. The comment period was extended to allow for supplemental comments on an alternative uptick rule that was not previously specifically subject to the request for comments. In April, the SEC sought comments on proposals that represented two approaches to imposing restrictions on short selling; the first to apply on a market-wide and permanent basis and the second during severe market declines only. With respect to the proposed market-wide and permanent rules, two alternative short sale price tests were proposed. The first was based on the current national best bid (proposed modified uptick rule) and the second based on the last sale price (proposed uptick rule). While the April proposals did not specifically seek comments on the alternative uptick rule, which would permit short selling only at a price at or higher than the current national best bid, it did enquire whether it would be preferable to the proposed modified uptick rule and the proposed uptick rule.

Under the alternative uptick rule, in an advancing or declining market, short selling would generally only be permitted at an increment above the current national best bid. The alternative uptick rule proposal is slightly different from April's proposed modified uptick rule (and the proposed uptick rule), in that only allowing short selling at an increment above the national best bid would not allow short sale to get immediate execution and would, therefore, restrict short selling to a greater extent than the other two proposed rules. It would not, however, require monitoring the sequence of bids or last sale prices. According to the SEC’s press release, this alternative uptick rule would, as a result, be easier to monitor. The comment period for the proposal will extend for 30 days from the date of publication of the proposal in the Federal Register.

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On Wednesday, the Investment Industry Regulatory Organization of Canada released a rules notice respecting the anticipated implementation of its client complaint handling rule proposals. IIROC first proposed amendments to its Dealer Member Rules to establish a framework for complaint handling in February 2009, and the proposals just released incorporate what IIROC has described as "minor" changes in response to public comments received. The complaint handling process requires Dealer Members to appoint a designated complaints officer and establish written complaint-handling procedures, while also setting out the general process and timelines for responding to complaints.

IIROC has submitted its proposals to the Canadian Securities Administrators (CSA) for final approval and the proposals will become effective 30 days after CSA approval and the issuance of an IIROC rules notice. Thus, IIROC advises Dealer Members to start preparing for implementation. A black-line copy reflecting changes to its earlier proposal was also provided.

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A webcast of Stikeman Elliott's recently-held seminar on registration reform is now available online. The webcast provides an overview of recently-published National Instrument 31-103 Registration Requirements, describes the new regime's impact on various market participants and provides tips for effective transition and implementation. A PDF of the seminar booklet accompanying the audio presentation is also available.

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In an open letter to TSX-listed companies released in July, RiskMetrics Group criticizes the slate ballot system for director elections and warns listed companies that beginning in 2010, "a vote recommendation to withhold from the entire slate of directors may be issued solely on the basis of the bundled election format." According to the letter, "[s]late ballots tend to insulate specific director nominees from focused shareholder action and work against director accountability." Further, RiskMetrics states that such elections "prevent institutional shareholders from effectively implementing corporate governance policies" through proxy votes.

While it does not appear from the letter that RiskMetrics has officially formalized a policy recommending that votes for slates be withheld as a general rule, it has made it clear that it is taking a definite step in that direction. The letter, thus, recommends that companies review their proxy for 2010 shareholder meetings and urges that they "present director election resolutions individually".

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Kenneth G. Ottenbreit and Terry Doherty |  PDF Version 

Recent rulemaking across Canada and proposed rules in Quebec (if adopted) will have a significant impact on the cross-border trading activities of non-Canadian dealers, advisers, futures commission merchants (FCMs) and commodity-trading advisers (CTAs) with respect to commodity futures contracts and commodity futures options (futures) as well as security options.

On July 17, 2009, the Canadian Securities Administrators (CSA) published their final proposal for National Instrument 31-103 - Registration Requirements and Exemptions (31-103). Subject to governmental and other local approval requirements, 31-103 will come into force on September 28, 2009 (the Implementation Date). While the regulation of futures activities was not the focus of 31-103, the new securities registration rules will have some impact on the regulation of futures activities in Canada. For further information and a complete breakdown of the new regime, please refer to Stikeman Elliott’s Registration Reform in Canada: The Finish Line is Here.

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As previously announced by CDS Clearing and Depository Services (CDS) effective November 1, 2009, CDS sponsored participants of the New York Link Service will be subject to expanded collateral requirements. CDS is proposing amendments that will require New York Link service participants to pledge additional collateral to CDS and require both New York Link and DTC Direct Link participants to post collateral to support newly created participant funds for each of these services. The amendments also clarify the process by which New York Link and  DTC Direct Link participants can comply with the new collateral and funding requirements.  

As CDS is subject to DTC's firm deadline of November 1, 2009, the proposed amendments have been published for a 30-day comment period. 

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The Ontario Securities Commission has approved amendments to TSX Rule 4-403 of the Toronto Stock Exchange Rule Book and Policies. The amendments, originally published for comment on March 27, 2009, update the order marking requirements of the rule and introduce a requirement for participating organizations to mark orders entered for the account of an issuer pursuant to a normal course issuer bid.  

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The Canadian Coalition for Good Governance (CCGG) recently published new policies relating to Shareholder Engagement and "Say on Pay" and Board Engagement.

The Shareholder Engagement and Say on Pay Policy is meant to provide guidance on the say on pay advisory vote process. The policy states that the CCGG regards the say on pay shareholder advisory resolution as an important part of an ongoing integrated engagement process between shareholders and boards that gives shareholders an opportunity to directly express their satisfaction with the prior year's compensation plans and actual awards. The CCGG therefore recommends that boards follow the "best practice" of voluntarily adopting an advisory (i.e. non-binding) say on pay shareholder resolution.  

The Board Engagement Policy states that the CCGG, on behalf of its members, will be meeting with chairs of boards and of compensation committees of a number of Canadian public companies each year to foster discussion on a number of issues, including compensation practices and board performance.  These meeting are also intended to create a forum for discussion between boards and their shareholders with a view to better understanding compensation strategy and to provide CCGG members with information to assist them in making investment decisions and in voting at the company's next annual meeting.  In 2009-10 the CCGG intends to meet with approximately 25 companies to be chosen based on criteria set out in the Board Engagement Policy. Those chosen will be notified by a letter from the CCGG requesting a meeting.  Following each meeting, CCGG staff will prepare a written summary of the results of the meeting for the benefit of CCGG members.

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Staff of the Canadian Securities Administrators (CSA Staff) today published CSA Staff Notice 31-312 (the Staff Notice), which summarizes the key requirements and transition process for the new exempt market dealer (EMD) registration category under National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103).  NI 31-103 was published by the Canadian Securities Administrators (CSA) on July 17, 2009 and subject to governmental and other local approval requirements, is scheduled to come into force September 28, 2009 (the Implementation Date). 

The Staff Notice discusses a number of issues, including the planned local dealer registration exemptions in Alberta, British Columbia, Manitoba, the Northwest Territories, Nunavut and the Yukon Territory (the Northwestern jurisdictions), the transition for limited market dealers (LMDs) in Ontario and Newfoundland and Labrador, and the transition for firms acting in the exempt market in Canadian jurisdictions outside Ontario and Newfoundland and Labrador.

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Comment period open until August 31, 2009

Alix d'Anglejan-Chatillon |  PDF Version 

On July 17, 2009, the Canadian Securities Administrators (the CSA) published their final proposal for National Instrument 31-103 - Registration Requirements and Exemptions (31-103). Subject to governmental and other local approval requirements, 31-103 will come into force on September 28, 2009 (the Implementation Date). The adoption of 31-103 in Quebec can be expected to accelerate the further implementation of the Quebec Derivatives Act (QDA) which came into force in Quebec on February 1, 2009 and governs trading and advisory activities relating to all forms of derivatives.

On July 31, 2009, as part of this implementation process, the Autorité des marchés financiers (AMF), Quebec’s financial services regulator, published a proposed Regulation to amend the Derivatives Regulation  (the Proposed Regulation). The Proposed Regulation incorporates by reference various registration-related instruments and material provisions of 31-103 and sets out an important registration exemption for non-Quebec dealers and advisers in exchange-traded derivatives offered primarily outside Quebec provided they limit their activities to “accredited counterparties”. 

The draft instrument is open for comment until August 31, 2009 and is scheduled to come into force on the Implementation Date, subject to ministerial approval following the end of the 30-day comment period.

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Earlier this month, CDS Clearing and Depository Services (CDS), announced that participants of the New York Link service, which allows CDS participants to clear and settle exchange and over-the-counter trades with U.S. broker-dealers via the National Securities Clearing Corporation (NSCC), will have to satisfy additional collateral requirements as of November 1, 2009. As of that date, CDS will "no longer have access to the collateral needed to protect the remaining New York Link participants from the default of a single sponsored participant." As such, CDS will require participants of the New York Link to provide additional collateral and may also require participants to pre-fund their NSCC payment obligations "from time to time". Participants have until September 30 to advise CDS whether they will remain a CDS-sponsored participant or become direct members of the NSCC and Depository Trust Company (DTC). According to CDS, "[b]ased on the number of participants who would be interested in continuing under the new requirements, CDS Clearing will evaluate the economic and risk containment impacts on operating these services." The Depository Trust & Clearing Corporation (the parent company of the NSCC and DTC), meanwhile, is prepared to "immediately begin processing membership applications of Canadian firms who wish to become members of its NSCC and DTC subsidiaries and who meet the membership criteria."

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Earlier this year, the New York Stock Exchange  (NYSE) adopted a temporary policy wherein the market capitalization continued listing standard would be reduced from $25 million to $15 million. The changes have now been made permanent as of July 2, 2009.

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On July 31, the U.S. House of Representatives approved the "Corporate and Financial Institution Compensation Fairness Act of 2009", which deals with say-on-pay and compensation committee independence. The final version of the bill incorporates amendments subsequent to its approval by the House Financial Services Committee, with the final version clarifying that the section regarding enhanced compensation structure reporting to reduce "perverse incentives" shall not apply to covered financial institutions with assets of less than $1 billion. Whether the proposed legislation makes it through the Senate remains to be seen.

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On August 4, the Investment Industry Regulatory Organization of Canada published a notice providing additional guidance regarding amendments to its Dealer Member Rules related to the implementation of the registration reform project. The notice covers: (i) the approval of Ultimate Designated Persons and Chief Compliance Officers; (ii) the approval category of "Supervisor" and timelines for meeting the new approval requirements; (iii) new record-keeping requirements for Dealer Members; (iv) changes to business types; (v) automatic transfers; and (vi) approval notices. The amendments to IIROC's Dealer Member Rules were published on July 17.

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