On December 22, 2009, the Investment Industry Regulatory Organization of Canada (IIROC) published guidance for members on maintaining an adequate branch supervisory program. The notice follows a review by IIROC of the branch supervision processes of various IIROC members in early 2009. The published notice identifies common concerns with members' branch audit programs and outlines a number of best practices in response to each concern.
The Ontario Securities Commission, the Autorité des marchés financiers and the Investment Industry Regulatory Organization of Canada yesterday announced that they had reached settlements with various financial firms in connection with the regulators' investigations into the Canadian asset-backed commercial paper market. The settlements reportedly represent a total of $138.8 million in administrative penalties and investigation costs.
On August 19, the Investment Industry Regulatory Organization of Canada (IIROC) published a rules notice respecting the anticipated implementation of its client complaint handling rule proposals. On December 22, IIROC announced the approval of these rules by the applicable securities regulatory authorities, with minor changes. The amendments are intended to establish an effective framework for the client complaint process by setting out standards and timelines for firms to acknowledge, investigate and respond to client complaints regarding alleged misconduct relating to the handling of client accounts.
Specifically, firms have five business days under the new standards to acknowledge receipt of a complaint and must investigate and respond to the client within 90 days. Responses must be presented in a fair and clear manner, and the notice provides further details respecting the required contents of a firm's response. Where a firm is unable to meet the 90 day timeframe, it will be expected to explain the reason for the delay to the client and IIROC. Further a Designated Complaints Officer must be appointed to manage the complaint handling process and to act as a liaison with IIROC.
The new standards take effect on February 1, 2010.
On December 18, the Canadian Securities Administrators (CSA) published for comment proposed amendments to NI 51-101 Standards of Disclosure for Oil and Gas Activities, its companion policy and related forms. Among other things, the amendments would: (i) clarify the signing requirements of Form 51-101F3; (ii) amend the optional supplemental disclosure of reserves data in annual disclosure to provide for disclosure that is comparable to U.S. disclosure; (iii) add a requirement to discuss in annual disclosure the significant factors and uncertainties associated with properties for which no reserves have been developed; (iv) replace the requirement to announce the annual filings with a press release with the requirement to file on SEDAR a Form 51-101F4; and (v) limit the scope of NI 51-101 to evaluation and disclosure practices related to reserves and resources other than reserves. Comments on the proposed amendments are being accepted until March 19, 2010.
The Ontario Securities Commission (OSC) today released a notice regarding the disclosure of corporate governance and environmental matters by reporting issuers other than investment funds. Specifically, the OSC stated that it will conduct a review of issuers' compliance with NI 58-101 Disclosure of Corporate Governance Practices during 2010 in order to assess the adequacy of corporate governance disclosure in information circulars (and AIF and MD&A where applicable) filed in the spring of 2010.
With respect to environmental disclosure guidance, the OSC intends to issue guidance by December 2010 on compliance with environmental disclosure requirements under NI 51-102 Continuous Disclosure Obligations. For more information on issues surrounding environmental disclosure obligations, see Jeffrey Elliott's post of January 2009.
On December 11, the U.S. House of Representatives approved comprehensive legislation intended to "modernize America's financial rules" in response to last year's market meltdown. The Wall Street Reform and Consumer Protection Act of 2009, which passed by a vote of 223-202, combines a number of legislative initiatives announced in the past year into a single piece of legislation numbering almost 1300 pages in length.
The bill includes provisions respecting (i) shareholder approval of executive compensation and golden parachutes; (ii) enhanced compensation structure reporting; (iii) the regulation of OTC derivatives and specifically the requirement that all standardized swap transactions between dealers and "major swap participants" be cleared and traded on an exchange or electronic platform; and (iv) the registration and regulation of advisers to private pools of capital.
There is no guarantee, however, that the bill will become law, as it must now go to the Senate for consideration.
Citing investor need for "access to a straightforward, expeditious dispute resolution system", on Wednesday the Investment Industry Organization of Canada (IIROC) issued a request for comments regarding the review of its arbitration program. IIROC's program review began in the fall of 2008 and the immediate notice considers the results attained.
The notice acknowledges the declining use of the program (only eight cases have been initiated this year) and discusses improvements to the program as well as IIROC's proposal to increase the award limit. Specifically, IIROC has taken steps to consolidate the program's infrastructure, standardize reporting to IIROC and compile statistical information about the program. IIROC also seeks to increase the award limit under the arbitration program to $350,000 and seeks public comment on this proposal as well as suggestions to improve the effectiveness and utilization of the program.
Comments are being accepted until March 16, 2010.
The Canadian Securities Administrators (CSA) today published a staff notice setting out the view of CSA staff regarding the ability of an offeror in a formal take-over bid to make negative variations to a bid, variations the CSA staff characterize as those that vary a bid in a manner that is “less favourable” to target security holders. Such variations cited by the CSA include: (i) lowering the consideration offered; (ii) changing the form of consideration other than to add to the consideration already offered; (iii) lowering the proportion of outstanding securities subject to the bid; or (iv) adding new conditions.
In response to the question of whether an offeror can reduce the offer price or add new conditions for any reason, and at any time, prior to expiry of a bid, CSA staff state that the bid regime does not contemplate the unilateral “withdrawal” of a bid, or, if all the terms and conditions have been satisfied or waived, a reduction in the price or introduction of new conditions. In this respect, CSA staff note that language contained in offer documents and bid circulars that provides that the offeror may vary the bid at its sole discretion at any time, including by reducing the offered consideration, "may be inconsistent" with bid requirements.
Continue Reading...The Canadian Securities Administrators (CSA) today published a staff notice containing answers to frequently asked questions regarding National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103) and amendments to National Instrument 33-109 Registration Information (NI 33-109), both of which came into force on September 28, 2009. According to the notice, the list of frequently asked questions were compiled from public enquiries the CSA members have received concerning NI 31-103 and NI 33-109. Among other things, the staff notice deals with proficiency exemptions, exempt market dealer underwriting activities and investment fund manager registration.
The notice consists of a chart organized according to the different sections of NI 31-103 and NI 33-109. Applicable answers based on views of CSA staff have been provided on the questions posed. A more detailed overview of these frequently asked questions will follow.
The U.S. Securities and Exchange Commission (SEC) yesterday announced the adoption of rule amendments to "substantially increase the protections" for investors that trust their assets with SEC-registered investment advisers. Depending on the investment adviser's custody arrangement, the rules would require (i) advisers to engage independent public accountants to conduct annual surprise exams to verify that client assets exist; and (ii) a written custody control review that "describes the controls in place at the custodian, tests the operating effectiveness of those controls and provides the results of those tests" when the adviser or affiliate acts as custodian of client assets. The amended rules would also impose new controls on advisers to hedge funds and other private funds that comply with the custody rule. Such advisers would have to obtain an audit of the fund and deliver the fund's financial statements to fund investors, while the auditor would have to be registered with and subject to inspection by the Public Company Accounting Oversight Board.
According to SEC Chairman Mary Schapiro, "[t]hese new rules will apply additional safeguards where the safeguards are needed most - that is, where the risk of fraud is heightened by the degree of control the adviser has over the client’s assets."
On December 1, Susan Wolburgh Jenah, President and CEO of the Investment Industry Regulatory Organization of Canada (IIROC) spoke at the Compliance Legal Section's annual compliance conference in Toronto. Ms. Jenah discussed the initiatives undertaken by IIROC over the past year, including improving the quality and timeliness of IIROC guidance with a focus on new and complex products and also provided hints of things to expect over the course of the next year.
Specifically, Ms. Jenah discussed a number of initiatives currently being developed by IIROC, including:
The last three items were the subject of published proposals over the last year and, according to Ms. Jenah, are in various stages of development and consultation.
The U.S. Securities and Exchange Commission (SEC) announced on Monday that it is reopening the comment period for its proposals on shareholder director nominations. Originally published earlier this year, the proposal would change federal proxy rules to make it easier for shareholders to nominate and elect directors to company boards. The SEC decided to reopen the comment period to allow interested parties to comment on additional data and related analyses that were submitted during and after the initial comment period and included in the public comment file.
Margaret Grottenthaler | 
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The Saskatchewan Securities Act, 1988 (the Saskatchewan Act) includes within its definition of “security” a futures contract or option that is not an exchange contract. Given the wording of the definition, there has been uncertainty as to whether OTC forwards and other OTC derivatives transactions would fall within this category and consequently be subject to the registration and prospectus requirements of the Saskatchewan Act. The issue has now been addressed by the Saskatchewan Financial Services Commission, Securities Division. On November 26, 2009, it issued General Order 91-907 exempting over-the-counter (OTC) derivatives trading among qualified parties from the registration and prospectus requirements under the Saskatchewan Act. The Companion Policy to the General Order states that the Act's definition of "security" includes futures contracts and options that are not exchange contracts and, thus, parties that currently enter into futures contracts or options are subject to the registration and prospectus requirements of the Saskatchewan Act.
Continue Reading...The Ontario Securities Commission today published a request for comments regarding the draft Statement of Priorities for its fiscal year ending March 31, 2011. The document sets out the OSC's goals for the year and identifies key regulatory priorities. Specifically, the Commission has identified the following goals: (i) identifying the important issues and dealing with them in a timely way; (ii) delivering fair, vigorous and timely enforcement and compliance programs; (iii) championing investor protection, especially for retail investors; and (iv) supporting and promoting a more flexible, efficient and accountable organization.
Further, the OSC's key regulatory priorities for 2010-11 include: (i) deepening its focus on investor protection; (ii) responding to market developments (iii) addressing the adequacy of regulatory coverage; (iv) maintaining a strong and visible enforcement presence; and (v) improving the way the Commission works. Of particular interest may be the OSC's comments regarding the adequacy of regulatory coverage. On this point, the OSC identified its intention to address:
The OSC is accepting written submissions until February 15, 2010.
On December 7, the TSX published a staff notice providing guidance on: (i) acceptable standards for anti-dilution provisions for convertible securities; (ii) recent amendments to the TSX Manual respecting security-based compensation arrangements that provide for cashless exercises; and (iii) the application of the uptick prohibition for purchases made pursuant to normal course issuer bids (NCIBs).
Anti-dilution provisions for convertible securities
Convertible securities, such as warrants, options, debentures and preferred shares typically contain anti-dilution provisions designed to compensate holders of convertible securities for changes in a listed issuer's capital. The notice clarifies the standards that the TSX applies in considering such changes. Specifically, the notice states that the TSX generally does not accept downward adjustments to the exercise or conversion price of a convertible security when a listed issuer completes a subsequent issuance of securities at a lower subscription price unless:
Where an adjustment results in the issuance of additional securities rather than a change to the subscription or conversion price, the TSX will consider the effect on the effective subscription or conversion price in order to apply the above rules. If the above pricing conditions are not satisfied, disinterested security holder approval will be required.
Continue Reading...On September 23, 2009, United States Senator Richard Lugar introduced a Bill entitled the Energy Security Through Transparency Act of 2009 (ESTA), which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs for further consideration.
The progress of ESTA is of interest to Canadian oil and gas issuers with annual reporting obligations under the U.S. Securities Exchange Act of 1934. Among other things, ESTA proposes to require the U.S. Securities and Exchange Commission to issue rules requiring "resource extraction issuers" (defined as an issuer that engages in the commercial development of oil, natural gas, or minerals) to include in their annual reports information relating to any payments made by the issuer, a subsidiary or partner of the issuer, or an entity under the control of the issuer to a foreign government for the purpose of the commercial development of oil, natural gas, or minerals.
ESTA provides that the required disclosure shall include the type and total of all such payments (i) for all projects, and (ii) to each foreign government, and the term "payment" is defined to include taxes, royalties, fees, licenses, production entitlements, bonuses and other material benefits.
The British Columbia Securities Commission today published a Companion Policy to Blanket Order 91-502 Short Term Foreign Exchange Transactions to clarify when a foreign exchange contract may be considered a "security" for the purposes of the British Columbia Securities Act.
The Companion Policy states that under s. 1(1) of the Securities Act, the following three components of the definition of “security” could describe a forex contract:
(a) a document, instrument or writing commonly known as a security;
...
(l) an investment contract;
...
(n) an instrument that is a futures contract or an option but is not an exchange contract.
The Blanket Order states that a contract or other obligation to purchase or sell the currency of any jurisdiction, where the terms of the transaction require settlement not later than three business days after the entering into of the transaction, is not a futures contract, provided that the contract or obligation is not otherwise a security under the Securities Act. The purpose of the Companion Policy is to clarify that the Blanket Order is limited to determining when a foreign exchange contract is not a futures contract. A forex contract may still be a “security” if it falls under any of the other relevant branches of the definition.
Continue Reading...The OSC has just released its 2009 Corporate Finance Branch Report, summarizing the operational activities of the Branch for fiscal 2009, which ended on March 31, 2009. The report highlights the Branch’s activities in the area of mergers and acquisitions, specifically relating to OSC staff views on negative bid variations and bid withdrawals, significant M&A related decisions and use of the financial hardship exemption under Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101). The report also summarizes the Branch’s activities relating prospectus and rights offerings as well as continuous disclosure reviews and continuous disclosure issues relating to market conditions and transition to international financial reporting standards (IFRS).
Mergers and Acquisitions
According to OSC staff, actions such as a bidder amending a bid in its discretion to make it less favourable or unilaterally withdrawing a bid prior to its expiry may be regarded as “inconsistent with the take-over bid regime” and its “underlying purpose to provide a transparent and predictable framework for take-over bids.” As such, staff intend to monitor such actions by bidders to determine whether the bidder has failed to comply with securities legislation or otherwise acted in a manner contrary to the public interest. Such reviews will focus, in particular, on whether the bidder's actions were based on a reasonable interpretation of bona fide conditions in its offer.
Continue Reading...Pursuant to section 3.7(1) of the Ontario Securities Act, the OSC and Minister of Finance must enter into a Memorandum of Understanding (MOU) every five years, setting out, among other things, each party's respective roles and responsibilities and their accountability relationship. The most recent MOU, executed on November 5, 2009, was published today by the OSC.
Effective November 27, 2009, the Toronto Stock Exchange has adopted amendments to Form 11 - Notice of Private Placement pursuant to which additional details are required concerning broker warrants and anti-dilution provisions as well as identification of any newly created insiders. The form also requires certification by a director or senior officer of the issuer.
Specifically, Form 11 has been amended to add a new section 3(j), which requires a description of any broker warrants (or options), including the number, exercise price, term to expiry and other significant terms. A new section 3(k) now requires a description of any anti-dilution provisions that provide an adjustment for events for which not all securities holders are compensated. With respect to insiders, the form now requires that any new insiders created as a result of the private placement be identified and specifically notes that the TSX may require the new insiders to complete and clear a Personal Information Form prior to the closing of the private placement. A director or officer of the issuer will also have to certify that the notice is complete and accurate and that it does not contain any misrepresentations.
The Canadian Coalition for Good Governance (CCGG) recently published its 2009 edition of Best Practices in Disclosure of Director Related Information, a guide intended to "improve disclosure about directors." According to the CCGG, the purpose of the document is to "recommend disclosure practices that exceed the minimum requirements set out in the regulations." The guide also states that the most effective disclosure is easy to find and understand, accurate and complete and given in a context that gives the information meaning. Specifically, the guide deals with disclosure of director-related information in five separate sections, as outlined below.
Section A – Shareholder voting
This section discusses the methods of voting for directors preferred by the CCGG. An example of a form of proxy considered to be a "best practice" is included as well a list of issuers who have adopted a majority voting policy for their director elections. As the CCGG has previously stated, it recommends individual director voting using a checkbox to indicate voting preference (vote “for” or “withhold”) along with adoption of a majority voting policy. The CCGG also recommends that a report of voting results should be posted on SEDAR within 10 business days of an AGM and should include the results based on the number of proxy votes cast for or withhold from the election of directors and auditors, along with those cast for or against any company or shareholder sponsored resolutions. There is also a discussion on the results from the CCGG’s annual study on voting methods. Among other results highlighted from the study, the guide notes that 74% of companies in the S&P/TSX Composite Index now allow their shareholders to vote with respect to individual directors (contrasted with the 26% that still employ slate voting).
Section B – Director information
Section B provides guidance for companies that want to adopt “exemplary” disclosure practices and provides examples of how certain issuers have chosen to communicate information on matters such as director selection and orientation, background, share ownership, compensation and performance assessment. The CCGG encourages issuers to either adopt or adapt these disclosure practices.
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