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

The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) today announced the publication of Joint Consultation Paper 23-404, entitled "Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada". The paper discusses the evolution of the Canadian market and specifically considers the emergence of multiple marketplaces. The lack of transparency associated with some alternative trading systems is noted and specific questions are raised regarding dark pools, dark orders, market pegged orders and smart order routers.

Written submissions on the issues set out in the consultation paper are being accepted until December 29, 2009. The CSA and IIROC also stated that they intend to convene a roundtable to discuss the issues and the submissions received.

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Pursuant to amendments to the Bankruptcy and Insolvency Act and Companies' Creditors Arrangement Act that took effect on September 18, 2009, an automatic stay of proceedings initiated on the filing of a proposal or notice of intention does not apply to regulatory bodies acting strictly as regulators. As such, the Toronto Stock Exchange (TSX) announced yesterday that it intends to continue to investigate and take action against listed issuers that are insolvent or have made an assignment for the purposes of enforcing the continued listing requirements in section 708 of the TSX Company Manual. The TSX also confirmed that the temporary relief respecting the Remedial Review Process would expire as planned at the end of this month.

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Earlier this month, the Mutual Fund Dealers Association of Canada published a bulletin advising its Members of expected changes to its rules and Member practices due to the implementation of National Instrument 31-103 Registration Requirements and Exemptions. The bulletin specifically considers changes to proficiency requirements and categories of registration, new client mobility provisions, the harmonization of requirements for referral arrangements and changes to the frequency and content of account statements. A second bulletin, published a few days after the first, clarified record-keeping requirements for branch managers.

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The Canadian Securities Administrators (CSA) today published for comment proposed amendments to National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards  (NI 52-107) and its companion policy as well as related consequential amendments to National Instrument 14-101 Definitions. As previously discussed, International Financial Reporting Standards (IFRS) will apply to Canadian publicly accountable enterprises for financial years beginning on or after January 1, 2011. The amendments are intended to "provide an efficient transition mechanism for issuers and registrants to reflect the change to IFRS". 

The Canadian Accounting Standards Board (AcSB) has announced that it plans to incorporate IFRS into the Handbook of the Canadian Institute of Chartered Accountants (the CICA Handbook) as “Canadian GAAP for publicly accountable enterprises.” As a result, Part 1 of the CICA Handbook will contain a version of Canadian GAAP to be known as Canadian GAAP for publicly accountable enterprises that will apply for financial years beginning on or after January 1, 2011, and Part IV will contain a version known as Canadian GAAP for public enterprises that are the standards constituting Canadian GAAP before the mandatory effective date (current Canadian GAAP).

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The Toronto Stock Exchange (TSX) announced today that the Ontario Securities Commission has approved amendments to Part VI of the TSX Company Manual respecting the acquisition of public companies. While section 611(c) of the Manual currently requires shareholder approval for the issuance of securities as full or partial consideration for an acquisition where the securities to be issued exceed 25% of issued and outstanding securities, an exception exists where the acquiree has 50 or more beneficial shareholders, excluding insiders and employees (a public company).

The amendments announced today will remove the exception for public companies, thereby applying the dilution threshold of 25% to all acquisitions. These amendments follow two separate rounds of requests for comments published by the TSX in October 2007 and later in April 2009.   In the April 2009 Request for Comments, the TSX proposed to require shareholder approval at the dilution level of 50% but decided, consistent with the majority of those that commented on the proposals, that the threshold dilution level should be lower than that proposed. In its Notice of Approval, however, the TSX notes that while it strives “not to rely on discretion” to alter its rules other than in "extraordinary circumstances or where the rules do not apply to the circumstances”, the TSX Manual does provide discretion to impose or exempt issuers from requirements in the Manual in “appropriate circumstances.” It further notes that the “exercise of discretion by TSX is, and should be, limited, particularly where there is a bright line test that applies.” It will therefore continue to apply s. 611(c) (which requires securityholder approval for transactions above the 25% threshold) in this manner.

The amendments become effective on November 24, 2009 but will not have retroactive effect. Any transaction of which the TSX has been notified in writing prior to such date will not be subject to the new rules, regardless of whether or not TSX conditional approval has been granted.

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The Ontario Securities Commission (OSC) today released its 2009 Compliance Team Annual Report, which summarizes the team's activities for fiscal 2009. The report outlines: (i) the compliance team's role; (ii) the team's response to recent market turmoil; (iii) general compliance initiatives; (iv) deficiencies found in the team's review of portfolio managers and limited market dealers; (v) the outcome of the team's reviews; (vi) the recent registration reform project; and (vii) how the move to IFRS may affect market participants.

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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. On August 14, CDS proposed amendments that would 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. CDS has now published additional changes to the proposed amendments published on August 14.

The additional changes include: (i) the removal of U.S. dollar cash as an acceptable form of collateral for the participant funds for New York Link and DTC Direct Link; (ii) an adjustment of the collateral requirement deadlines for the National Securities Clearing Corporation (NSCC) participant fund for New York Link participants; (iii) the adjustment of the deadline for participants to request the withdrawal of excess cash collateral from the NSCC participant fund held by the NSCC for New York Link; (iv) changes to holiday processing for the NSCC participant fund for New York Link; (v) information on how participants can pledge collateral to the New York Link and DTC Direct Link participant funds managed by CDS; and (vi) service suspension.

Comments on the proposed amendments are being accepted by CDS for 30 days following the publication of the above notice in the OSC Bulletin.

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On September 18, the Ontario Securities Commission (OSC) announced that Ontario's Minister of Finance has approved National Instrument 31-103 Registration Requirements and Exemptions and related consequential amendments. The amendment and restatement of National Instrument 45-106 Prospectus and Registration Exemptions and related consequential amendments have also been approved.

For more comprehensive information regarding these instruments, see our earlier posts regarding NI 31-103 and NI 45-106. The amended instruments, forms and rules are scheduled to become effective on September 28, 2009.

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The Toronto Stock Exchange (TSX) announced today that it has adopted and the Ontario Securities Commission (OSC) has approved amendments to the TSX Company Manual respecting, among other things, shareholder approval of changes to security-based compensation plans. Proposed amendments were originally published for comment on January 26, 2007. Those proposed amendments have been approved and adopted as of September 18, 2009 with only non-material changes having been made (in response to comments provided by the public and the OSC) to the original proposals.

Specifically, with respect to security-based compensation arrangements (such as stock option plans), the amendments clarify the circumstances in which shareholder approval will be required when such arrangements are amended (notwithstanding that a plan may contain provisions allowing the board to make changes without approval). These circumstances include changes that: (i) reduce the exercise price or extend the term of options held by insiders; (ii) remove or exceed the insider participation limit; (iii) increase the fixed maximum number or percentage of securities issuable pursuant to a plan; or (iv) change the amendment provisions of a plan. The amendments also clarify that with respect to an amendment to reduce the price or extend the term of options held by insiders or to remove or exceed the insider participation limit, votes held directly or indirectly by insiders benefiting from the amendment must be excluded. With respect to the remaining prescribed types of amendments, votes held directly or indirectly by insiders entitled to receive a benefit under the plan must only be excluded if the plan is not subject to an insider participation limit. The term extension restrictions, in particular, could create issues for companies that, as part of a package, wish to allow a departing officer a longer period of time in which to exercise stock options than the often short standard period provided for in plans, and may suggest that plan amendments in this regard may be desirable.

Section 602(g) of the TSX Company Manual, meanwhile, was also amended to add "acquisitions" (under section 611) to those circumstances under which the TSX will not apply its standards where at least 75% of trading occurs on another exchange.

The amendments become effective today, September 18, 2009.

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The U.S. Securities and Exchange Commission (SEC) also voted yesterday to take a number of measures with the intent of increasing the oversight of credit ratings agencies. Among other things, the SEC decided to: (i) adopt rules to provide greater information respecting ratings histories; (ii) propose amendments to require annual compliance reports; and (iii) propose new rules that would require the disclosure of information respecting what a credit rating covered, any material limitations on the scope of the rating and whether "ratings shopping" had occurred. Public comments are being accepted by the SEC for 60 days from the publication of the amendments by the Federal Register.

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The U.S. Securities and Exchange Commission yesterday proposed a ban on flash trading, a practice that allows certain market participants to access information about the best available prices before the public is given an opportunity to trade. According to SEC Chairman Mary Schapiro, flash orders "provide a momentary head-start in the trading arena that can produce inequities in the markets and create disincentives to display quotes." Public comments on the amendments, which have yet to be published, are being accepted by the SEC until 60 days following their publication in the Federal Register.

Update: The proposed amendments have now been published.

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Chairman Schapiro Photo Courtesy of www.sec.gov

The U.S. Securities and Exchange Commission (SEC) and the U.K. Financial Services Authority (FSA) announced plans today "to explore common approaches to reporting and other regulatory requirements for key market participants such as hedge funds and their advisers." Specifically, the two regulators "agreed to identify a common, coherent set of data to collect from hedge fund advisers/managers" in order to help the regulators identify risks to their regulatory mandates and objectives. The announcement, subsequent to a meeting between the SEC and FSA, stated that discussions also included OTC markets and central clearing, accounting issues, regulatory reform, credit agency oversight, short selling and corporate governance and compensation practices. Today's release follows an announcement by the U.S. Commodity Futures Trading Commission (CFTC) yesterday that the CFTC had signed a memorandum of understanding with the FSA "to enhance cooperation and the exchange of information relating to the supervision of cross-border clearing organizations."

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The Investment Industry Regulatory Organization of Canada (IIROC) announced yesterday the approval of amendments to its Dealer Member Rules related to the implementation of registration reform. Proposed amendments were originally published for comment on September 26, 2008 and an amended proposal was published on July 17, 2009. The final version of the amendments, having incorporated the suggestions of the securities regulators, have now been approved by the regulators. The amendments will, among other things, reduce the number of approval categories from 46 to 11, merge supervisory categories and implement a principles-based approach to supervision. Most of the amendments will be effective on September 28, 2009 in conjunction with National Instrument 31-103 Registration Requirements and Exemptions.

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Yesterday, the U.S. Securities and Exchange Commission (SEC) announced the creation of its new Division of Risk, Strategy, and Financial Innovation, which combines the Office of Economic Analysis, the Office of Risk Assessment and certain other functions. According to the SEC, the new division will  "provide the Commission with sophisticated analysis that integrates economic, financial, and legal disciplines." The three broad areas that fall under the new division's responsibilities are risk and economic analysis, strategic research and financial innovation.

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Jonah Mann and David Weinberger | PDF Version |  Version française

On September 1, 2009, the Ontario Securities Commission (OSC) released the full Reasons for its decision to deny an application to cease trade a second shareholder rights plan (or tactical plan) implemented by Neo Materials Technologies Inc. (Neo) in the face of a hostile partial bid by Pala Investments Holdings Limited (Pala). Prior to the expiry of the Pala bid, the tactical plan was approved by 81.24% of shares voted (excluding shares held by Pala) at an annual and special meeting of Neo’s shareholders.

In its Reasons, the OSC reiterated that it has broad discretion to determine whether to exercise its public interest jurisdiction in a given matter and the scope of this jurisdiction must be interpreted in the context of the purposes of the Securities Act as a whole. While it will not hesitate to exercise its public interest jurisdiction in appropriate circumstances, it is also mindful that a degree of deference is owed to the decision of the board of directors. In determining whether to exercise its public interest jurisdiction, the OSC will examine all of the circumstances surrounding the establishment of a shareholder rights plan, including whether informed shareholder approval was given, and the context of that approval. While the Reasons put considerable emphasis on shareholder approval as a relevant consideration, the OSC was also careful to note that shareholder approval does not necessarily mean that a shareholder rights plan is protected from the OSC’s public interest jurisdiction.

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On September 14, the International Organization of Securities Commissions (IOSCO) released a report outlining proposed standards "aimed at addressing regulatory issues of investor protection which have arisen due to the increased involvement of retail investors in hedge funds through funds of hedge funds." The report's proposals focus on the two particular areas of concern identified in an earlier report of June 2008, being: (i) liquidity risk; and (ii) the due diligence process. As stated by the release, the standards "form part of a larger body of work that IOSCO has been engaged in with regards to addressing the regulatory issues presented by hedge funds."

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In July, the U.S. Financial Industry Regulatory Authority (FINRA), published a regulatory notice regarding the approval by the Securities and Exchange Commission of amendments to NASD Rules 1022 and 1032.  The amendments, effective November 2, 2009 and first described in our post of March 19, require individuals engaged in investment banking activities to register under a new limited representative registration category for investment banking professionals and take a corresponding qualification exam in lieu of the current General Securities Registered Representative (Series 7) exam. A transition period, however, will allow individuals holding the Series 7 registration to opt into the new category until May 3, 2010 without having to take the new exam.

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On September 15, 2009, the federal Department of Justice announced that the government of Canada intends to introduce legislation during the current session of Parliament to address white-collar crime. According to the Justice Department, the proposed amendments to the Criminal Code "will include creating a mandatory jail sentence for those who commit serious fraud and additional aggravating factors to justify longer sentences." While details are not yet available, the proposed legislation is also expected to include provisions respecting restitution to victims of white-collar crime.

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On September 2, the Mutual Fund Dealers Association of Canada (MFDA) announced the publication of a reference guide "to assist Members in the development of adequate written policies and procedures", as required by MFDA Rule 2.10. The MFDA states that the policies and procedures of Members should, at a minimum, include the topics described in the guide. The required topics are presented in the form of a reference chart, with references provided to specific rules, notices and policies.

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The TSX announced last week that the temporary relief granted with respect to the Remedial Review Process will not be extended beyond the end of this month. As described in our post of March 26, the relief was initially granted on November 3, 2008 and, after providing for an extension, is set to expire on September 30, 2009. The relief, initiated in response to the "extraordinary market conditions" prevalent late last year, extends from 120 to 210 days the maximum time period that an issuer has to remedy deficiencies that triggered a delisting review.

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The New York Stock Exchange announced earlier this month that it is forming an independent advisory commission to "take a comprehensive look at strengthening U.S. best practices for corporate governance and the proxy process." While committee members have yet to be announced, the NYSE stated in its release that the commission will work with policymakers and interested constituents "to foster a comprehensive and constructive approach" to corporate governance and proxy reform.

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On September 8, 2009, the Investment Industry Regulatory Organization of Canada announced that an overview of registration reform would be available on its website as of 4:00 p.m. on September 15, 2009. Topics to be covered include: changes to approval categories, the "Passport" registration system, the virtual elimination of transfer/approval delays and plans for implementing new requirements and standards. Registration is required to view the webcasts, which will be available in English and French.

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The Canadian Securities Administrators today released a staff notice outlining the results of their recently conducted review regarding compliance with provisions of National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings. CSA staff notes that 38% of reporting issuers reviewed substantively complied with NI 52-109. Some level of non-compliance was identified in the remaining 62%, however, with 30% of reporting issuers being required to refile their annual MD&A and/or certificates.

A majority of refilings that were required were on account of (i) issuers not fully disclosing their conclusions about the effectiveness of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR) in their MD&A, and (ii) issuers making significant amendments to the wording of the certificates.

In connection with the deficiencies that were observed, the CSA staff made the following comments:

• Issuers may not qualify their conclusions about the effectives of DC&P and ICFR unless the qualifications are explicitly permitted by NI 52-109.
   
• If issuers choose to discuss a limitation in their MD&A (such as lack of segregation of duties or a lack of knowledgeable accounting staff in technically complex areas), the MD&A should also clearly disclose if the limitation is a material weakness relating to ICFR or a weakness in DC&P that is significant.
   
• Issuers should be careful not to confuse the concepts of "mitigating procedures" and "compensating controls". A mitigating procedure may help to reduce, but does not eliminate the financial reporting risk that the deficient ICFR component failed to address, whereas a compensating control fully addresses a material weakness and allows certifying officers to conclude that ICFR and DC&P are effective.
   
• With respect to the lack of segregation of duties, the threshold for the additional involvement of the audit committee or board of directors constituting a compensating control, rather than a mitigating procedure, is high. If the issuer has implemented only a mitigating procedure, it should identify the lack of segregation of duties as a material weakness and conclude that ICFR is not effective. In this respect, CSA Staff note that section 10.3 of the Companion Policy to NI 52-109 also states that if the certifying officers identify a material weakness in the issuer's ICFR, this will almost always represent a weakness that is significant in the issuer's DC&P.

The total sample size reviewed consisted of 198 non-venture issuers and 53 venture issuers.

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The Canadian Securities Administrators have published a staff notice reminding registrants of their "suitabilty" and "know your product" obligations to clients. The CSA expect firms to have a process in place for reviewing and approving new products, as well as existing products whose structure or features have significantly changed. The notice provides specific factors that firms should consider in assessing investment products and reminds firms that the approval of an investment product does not mean that the product is suitable to any specific client.

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On August 28, the Ontario Court of Appeal released its decision in Taub v. Investment Dealers Association of Canada, a case respecting the jurisdiction of the Investment Dealers Association, (now merged with Regulation Services to form the Investment Industry Regulatory Organization of Canada (IIROC)), to discipline former members. The IDA's rules and bylaws, by which members agreed to be governed, specified that the IDA had jurisdiction over former members for the purposes of discipline for five years after one's membership ended. In this case, the IDA brought disciplinary procedures against Taub a year after he ceased being a member of the association. Taub challenged the IDA's jurisdiction over former members, but was unsuccessful before the association's hearing panel in this regard. On review, the Ontario Securities Commission agreed that the IDA had jurisdiction over Taub. The Divisional Court, however, overturned the findings of the IDA panel and the OSC. In doing so, the Divisional Court found that section 21.1(3) of Ontario's Securities Act made no provision for the regulation of former members which, therefore, limited the reach of the IDA's jurisdiction to current members.

In the immediate appeal, the Ontario Court of Appeal found that the OSC's reasons were clear and understandable and that they justified the result reached by the Commission. The Court of Appeal disagreed that the language of s. 21.1(3) limited the jurisdiction of the IDA and ultimately set aside the decision of the Divisional Court.

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