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

Subsequent to the recent implementation of the new registration regime, the Canadian Securities Administrators (CSA) today published notice of local prospectus and registration exemptions for each jurisdiction that are not included in NI 45-106 Prospectus and Registration Exemptions or NI 31-103 Registration Requirements and Exemptions. The exemptions, listed by jurisdiction, are up-to-date as of November 27, 2009 and the CSA state that they will update the list periodically.

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The Mutual Fund Dealers Association of Canada (MFDA) yesterday released a bulletin regarding the upcoming transition to IFRS. The bulletin follows up on an earlier request for comment published by the MFDA in June 2009 that considered whether to require all MFDA Members to submit financial reporting to the MFDA based on IFRS or whether to limit the requirement only to those Members that would likely be considered "publicly accountable enterprises".

Despite concern that a universal requirement would increase costs for those Members that would not otherwise be required to convert to IFRS, the MFDA has decided to adopt the new standard for all Members. According to the MFDA, this approach will not have a significant impact on Members and ensures "that consistent, fair and cost-effective regulatory oversight of the membership continues." Further, the MFDA intends to publish proposed changes to reporting requirements and appropriate departures from IFRS (such as where the regulatory benefit from requiring IFRS compliance would be minimal) sometime in the future.

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On November 20, RiskMetrics Group released its 2010 updates to its proxy voting guidelines. The publication of the guidelines follows a comment period on draft policies that ended on November 11. Notably, updates to its Canadian benchmark corporate governance policy were also released. Citing the recent attention in Canada on slate ballots and executive compensation, the updates focus particularly on these two issues.

With respect to slate ballots, RiskMetrics will now recommend a withold vote on directors with slate ballots where it has identified corporate governance practices falling short of best practice or where there exist concerns regarding compensation practices and the alignment of pay with performance. Such governance practices that, in addition to a slate ballot, could result in a withhold recommendation include: the participation of insiders on key committees, the lack of a separate nominating or compensation committee, a disconnect between pay and performance, disclosure concerns, or a board or key committee that has less than a majority of independent members. The policy, however, will not apply to contested director elections. Compelling reasons against the application of the policy are also provided, including a company's recent graduation to the TSX or a commitment to replace slate elections with individual director elections within a year. Meanwhile, RiskMetrics also stated that under "extraordinary circumstances", it may recommend a vote against or withhold in certain cases, including material failures of governance or certain egregious actions related to the director's service on other boards.

Respecting executive compensation, RiskMetrics will now recommend that management proposals for an advisory shareholder vote on compensation (say-on-pay) be considered on a case-by-case basis. RiskMetrics provides general principles regarding pay-for-performance and provides a list of factors to be considered in determining how to vote on managements' say-on-pay proposals. Such factors include: the evaluation of peer group benchmarking, an assessment of compensation components, the clarity of disclosure and the mix of fixed versus variable pay.

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The Canadian Securities Administrators (CSA) today published a staff notice regarding its review of executive compensation disclosure subsequent to the adoption of the revised Form 51-102F6. The revised Form applies to financial years ending on or after December 31, 2008 and the notice follows a series of targeted reviews to assess compliance with the required disclosure obligations undertaken by staff of the BCSC, ASC, OSC and AMF.

While 62 of the 70 companies reviewed were considered to have generally met the requirements of Form 51-102F6, a number of disclosure issues were identified. While the notice does not purport to set out an exhaustive list of all the issues identified, it provides a summary of those issues, which in the CSA’s view are more significant, including: (i) failing to properly disclose performance goals and how they are tied to the executive’s compensation; (ii) failing to disclose benchmarks and if disclosed, failing to properly explain the benchmark’s components; (iii)  a lack of explanation of how the trend in the performance graph compared to the trend in the issuer’s executive compensation over the prescribed period; (iv) improper disclosure under the summary compensation table; (v) failing to appropriately quantify the lifetime benefit under the pension plan benefit table; and (vi) failing to quantify termination and change in control benefits. Various other issues are also identified.

Further, the notice states that the CSA will continue to review executive compensation disclosure as part of their continuous review programs. In particular, the CSA state that they will focus in particular on disclosure relating to Compensation Discussion and Analysis, Summary Compensation Tables and termination and change in control benefits.

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The Investment Industry Regulatory Organization of Canada (IIROC) is hosting a compliance-focused conference on December 1 in Toronto. The conference, targeted to employees of compliance, legal and related departments of IIROC member firms, will be considering issues respecting best execution and trade through, the client relationship model and current legal trends. Online registration is available here.

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On November 20, 2009, the Canadian Securities Administrators (CSA) published CSA Staff Notice 51-330 Guidance Regarding the Application of Forward-Looking Information Requirements under NI 51-102 (the Staff Notice). The purpose of the Staff Notice is to outline results of the CSA’s continuous disclosure reviews conducted on compliance with the forward-looking information (FLI) requirements in National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102). These FLI requirements under NI 51-102 came into effect on December 31, 2007, replacing the previous requirements under NP 48. A wide range of documents were reviewed for the purposes of the continuous disclosure review (including AIFs and MD&A), and while a number of improvements were requested by staff in future filings, the reviews did not result in any issuers having to re-file any documents in order to correct identified deficiencies.

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On November 16, the Government of Ontario introduced Bill 218, An Act to implement 2009 Budget measures and to enact, amend or repeal various Acts in the provincial Legislature. Of particular interest, Schedule S of the Bill clarifies that the deeming provisions found in sections 90 and 91 of the Securities Act apply to the “early warning” provisions under sections 102.1 and 102.2 of the Act. Essentially, the amendments clarify that the deeming provisions applicable to offerors in the takeover bid context also apply to aquirors with respect to early warning reporting requirements.

Meanwhile, changes to sections 138.8 and 138.9 of the Act would amend procedures under the secondary market civil liability provisions. Specifically, applicants and appellants would be required to provide notice to the Ontario Securities Commission of various court dates, each party would have to provide the OSC with copies of relevant facta and the OSC would gain the authority to intervene in appeals respecting leave or in an appeal of a decision respecting liability.

The Bill would also amend the situations in which a representative’s registration would be automatically suspended. Under the amendments, a representative would be automatically suspended at the time he or she ceased to have the authority to act on behalf of a registrant in a capacity that required registration by reason of one of the following: (i) the representative’s termination; (ii) the changing of employment functions; or (iii) the change or end of the partnership or agency relationship of the representative with the registrant. Meanwhile, the revocation of registration after an automatic suspension under the Act would be delayed until a proceeding was completed, while the right to a hearing would be extended to those whose registration was suspended automatically under the Act.

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On November 13, the TSX published for comment proposed changes to Part VI of its Company Manual proposing specific requirements and exemptions with respect to security holder approval in the case of investment fund acquisitions. These proposed amendments relate to the impact on investment fund acquisitions of recent changes to the TSX Company Manual requiring approval of security holders of an aquiror for the issuance of securities as consideration for an acquisition where the number of securities exceeds 25% of the issued and outstanding securities of the aquiror. The proposed amendments would exempt investment funds from this requirement provided certain conditions were satisfied. The proposed amendments would also require security holder approval by investment funds that are the subject of an acquisition unless certain conditions are satisfied.

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As described in our post of October 21, the U.S. Securities and Exchange Commission (SEC) recently voted to propose measures intended to increase the transparency of private automated trading systems known as "dark pools". On November 13, the SEC published its proposed rules and amendments to joint-industry plans. The proposals would: (i) amend the Exchange Act quoting requirements so as to apply expressly to actionable "Indications of Interest", which are similar to a typical buy or sell quote and permit others to trade; (ii) revise the order display requirements of Regulation ATS, including a substantial lowering of the trading volume threshold that triggers public display obligations for alternative trading systems; and (iii) amend the joint-industry plans for publicly disseminating consolidated trade data to require real-time disclosure of the identity of dark pools and other alternative trading systems on the reports of their executed trades.

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Stikeman Elliott has recently published the 2010 edition of the Income Trust Conversion Guide.  From taxation and securities law to employment and corporate governance matters, this concise publication identifies key legal issues that an income trust will need to consider as it embarks on the process of converting to corporate form.

Download a copy here.

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The Canadian Securities Administrators (CSA) published a notice today outlining amendments to National Instrument 21-101 Marketplace Operation, National Instrument 23-101 Trading Rules and their related companion policies. The amendments follow in the footsteps of earlier proposals, discussed in our post of October 2008. Meanwhile, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice today regarding proposed amendments to the Universal Market Integrity Rules that would complement the changes announced by the CSA.

Under the CSA amendments, an order protection rule would require marketplaces to establish and ensure compliance with policies and procedures designed to prevent trade-throughs on that marketplace. Such protection is intended to ensure that all immediately accessible, visible, better-priced limit orders are executed before inferior-priced limit orders and are not traded through. A number of exceptions to the prohibition, however, are included in the amendments, including directed-action orders, non-standard orders, closing-price orders and trade-throughs that occur when the best protected bid is higher than the best protected offer (crossed market). Amendments respecting fair access to marketplaces, trading fee limitations and locked and crossed markets were also included under the order protection rule. Additional changes are also being made to marketplace systems, transparency requirements and the technological requirements and obligations of an information processor.

Subject to Ministerial approvals, the changes other than those relating to the Order Protection Rule are scheduled to come into force on January 28, 2010, while the Order Protection Rule will become effective on February 1, 2011.

Under IIROC's proposed amendments, meanwhile, rules and policies respecting "best price" obligations, which currently address order protection in Canada, would be repealed and a number of consequential changes to UMIR would also be implemented. Comments on IIROC's proposed amendments are being accepted until January 12, 2010.

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Alix d'Anglejan-Chatillon 

Canadian, U.S. and other non-Canadian investment advisers which have entered into portfolio management agreements with permitted institutional clients in Quebec and, in particular, sub-advisory agreements with Quebec-registered dealers and advisers, on the basis of the existing adviser registration exemption under section 194.2 of the Regulation Respecting Securities (Quebec) (the 194.2 Exemption) should make sure that they consider the impact of the new Canadian registration regime on such arrangements.

In Quebec, the 194.2 Exemption has historically been relied on by non-Quebec advisers in connection with portfolio management arrangements entered into with permitted Quebec institutional investors.  The 194.2 Exemption has been used, in particular, to structure sub-advisory arrangements with Quebec registered dealers and advisers. As part of the registration reform transition rules, the 194.2 Exemption will remain in place until December 28, 2009 when the exemption will be repealed.

As previously noted, National Instrument 31-103 Registration Requirements and Exemptions (31-103) does not include the sub-adviser exemption which the Canadian Securities Administrators (CSA) had formulated under preceding proposals for the Instrument.  A sub-adviser exemption will remain available in Ontario under section 7.3 of OSC Rule 35-502 Non-Resident Advisers and the CSA have stated that discretionary relief on a similar basis will be granted in other jurisdictions.

For U.S. and other non-Canadian advisers, the 194.2 Exemption is effectively replaced by the more restricted international adviser exemption under section 8.26 of 31-103.  It will not be possible to continue sub-advisory arrangements under the international adviser exemption since a registered dealer or adviser is not a "permitted client" for purposes of this exemption.

Non-Quebec advisers which have not already done so should, thus, consider the upcoming repeal of the 194.2 Exemption on sub-advisory arrangements entered into with Quebec registered dealers and advisers.

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The Canadian Securities Administrators (CSA) published a status report today on the proposed changes to the corporate governance regime published in December 2008. Citing the numerous comments received questioning the timing of the proposed changes, the CSA have stated that it does not intend to implement the proposals as originally published and that it is reconsidering whether to recommend any changes to the corporate governance regime. Thus, any further proposals that the CSA may publish for comment would not be effective until the 2011 proxy season at the earliest.

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On November 10, the Investment Industry Regulatory Organization of Canada (IIROC) provided an update on its testing of Dealer Members' business continuity plans. While the tests are conducted on a voluntary basis, IIROC also stated that it "strongly urges" all members to participate in such tests as they "represent a valuable opportunity for Dealer Members to supplement their respective mandatory, in house annual tests which are required under IIROC regulation."

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Yesterday, Quebec's Autorité des marchés financiers (AMF) released its Continuous Disclosure Review Program Activity Report for the fiscal year ending March 31, 2009. The report presents the findings of the AMF's review of the continuous disclosure documents of Quebec-based companies and investment funds. The AMF stated in its release that it focused its reviews on financial services companies and those with high indebtedness given the credit and liquidity challenges experienced over the last year.

While the report found a high quality of disclosure records overall, the AMF noted that deficiencies were found in the application of accounting requirements, specifically with respect to financial instrument disclosure. Thus, the AMF encouraged issuers "to rigorously apply all GAAP and to pay special attention to new accounting requirements." The AMF also noted that for the 2009-2010 fiscal year, it will be particularly focused on disclosure relating to the upcoming changeover to IFRS and the recent amendments to the CICA Handbook regarding fair market measurements.

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On November 5, the International Accounting Standards Board (IASB) and the U.S.Financial Accounting Standards Board (FASB) released a statement reaffirming their commitment to improving IFRS and U.S. GAAP and to bring about their convergence. The joint statement also described the boards' plans and milestone targets for individual projects.

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On November 4, Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission (SEC), gave a speech in New York in which she described the SEC's recent initiatives related to proxy voting. Specifically, Ms. Schapiro discussed proposals respecting shareholder director nominations, proxy enhancements and e-proxy revisions. She also stated that SEC staff is currently conducting a comprehensive review of the mechanics of proxy voting with a view to ensuring that the proxy voting system "operates with the degree of reliability, accuracy, transparency and integrity that shareholders and companies have the right to expect."

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On October 30, the British Columbia Securities Commission (BCSC) announced amended conditions of registration for investment dealers that maintain an office in British Columbia and trade in U.S. OTC markets, and who have not filed a prescribed form of undertaking. Specifically, the BCSC has clarifed certain aspects of the previous obligations, amended Form B (reporting of OTC trading commissions) and revised language to reflect National Instrument 31-103 Registration Requirements. Of particular note, the conditions now specify who can act as a designated individual, as IIROC has removed that definition from its Dealer Member Rules. Like their previous incarnation, the conditions of registration include the effective management of risks and monitoring, recordingkeeping and reporting requirements. An interpretation note was also published to explain how the BCSC interprets the conditions. The amended obligations are effective immediately and are set to expire on December 31, 2011.

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As described in our earlier post, on October 9, the Ontario Securities Commission (OSC) introduced a new process for reviewing changes to certain operations of exchanges and ATSs. According to the notice, OSC Staff believe that proposals to operational changes to exchanges and ATSs should be subject to an appropriate degree of transparency. Thus, the OSC intends to apply new publication requirements in the case of proposed changes to order types or features/characteristics of orders, procedures regarding order entry, display and execution, and changes to procedures relating to special facilities or marketplace sessions. The OSC may also request that other changes be published if regulatory concerns are raised.

Generally, under the new procedures, exchanges and ATs must file with the OSC and publish a notice in the OSC Bulletin describing, among other things, the proposals, rationale and expected impact of the proposed changes. The OSC will review the proposals and market participants will be afforded 30 days to provide feedback. Absent any regulatory concerns, the proposed changes would become effective 45 days after publication of the notice. In the case of regulatory concerns, the OSC would work with the exchange or ATS to resolve the issues, but implementation may be delayed in such a case.

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On November 3rd, the International Organization of Securities Commissions (IOSCO) announced the publication of a consultation report regarding conflicts of interest within private equity firms. An IOSCO report on private equity risks of May 2008 recommended further work on the subject, leading to the immediate report.

Specifically, the report examines the potential conflicts of interest that may exist within a private equity firm or fund and proposes a number of principles to mitigate such risks. The principles discussed include establishing written policies to identify and mitigate conflicts of interest, the need to implement a process for investor consultation relating to such conflicts and ensuring the clarity of investor disclosure. IOSCO is accepting public comment on the report until February 1, 2010.

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You can now follow Canadian Securities Law Online on Twitter. Posts from this blog are now featured on Stikeman Elliott's Twitter page, which can be found at www.twitter.com/StikemanElliott.

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Charles Kraus

On October 30, the U.S. Securities and Exchange Commission (SEC) announced the release of a staff accounting bulletin to update guidance "on how the agency's staff interprets accounting rules related to the oil and gas industry." The guidance is intended to correspond with rulemaking that the SEC approved in December 2008 to modernize its oil and gas company reporting requirements. The principal revisions of the guidance include:

• changing the price used in determining quantities of oil and gas reserves to use an average price based upon the prior 12-month period rather than year-end prices;
   
• eliminating the option to use post-quarter-end prices to evaluate write-offs of excess capitalized costs under the full cost method of accounting; 
   
• removing the exclusion of unconventional methods used in extracting oil and gas from oil sands or shale as an oil and gas producing activity; and
   
• removing certain questions and interpretative guidance which are no longer necessary.

The guidance updates Topic 12 of the codification of staff accounting bulletins in order to make it consistent with the Commission’s Final Rule Release, Modernization of Oil and Gas Reporting, issued December 31, 2008. 

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The Investment Industry Regulatory Organization of Canada (IIROC) will be hosting a compliance seminar in Montreal on November 18 from 4:30 to 6:00 p.m. The event will be presented in English but provide attendees the opportunity to ask questions in both English and French. The topics to be covered include trading conduct compliance, best execution obligations and short sales. An on-demand webcast of the event, meanwhile, will be available on the IIROC website in January 2010. IIROC will also be releasing the French version of its annual webcast highlighting enforcement issues and concerns on November 10 at 4:00 p.m. IIROC's catalogue of English and French webcasts are available here.

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