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

In response to last summer's British Columbia Court of Appeal (BCCA) decision in Shapray v. British Columbia (Securities Commission), the British Columbia Securities Commission (BCSC) has announced the rescission of BC Instrument 15-501 Disclosure of Investigation Information and its related policy, while also deleting section 2.6(d) of BC Policy 15-601 Hearings. In its place, the BCSC has announced a new BC Instrument 15-501 Disclosure of Investigation Information, which provides consent to disclose "any information or evidence obtained or sought to be obtained or the name of any witness examined or sought to be examined under section 143, 144 or 145 of the Securities Act."

In Shapray, the petitioner commercial litigation lawyer argued that section 148(1) of the British Columbia Securities Act, which restricted disclosure of information and evidence obtained pursuant to an investigation by the BCSC, was unconstitutional. Mr. Shapray claimed that the provision made it impossible for him to adequately defend allegations of misconduct under the Securities Act or to properly prepare witnesses. Section 148(1) of the Act, which is similar to provisions found in the securities laws of other provinces, states:

Without the consent of the commission, a person must not disclose, except to the person's counsel, any information or evidence obtained or sought to be obtained or the name of any witness examined or sought to be examined...

Ultimately, the BCCA struck down s. 148 of the Act as unconstitutional, but delayed the order of invalidity for a year so as to allow the Legislature to consider alternatives. The instruments and policies recently revoked, meanwhile, provided the BCSC's consent for the disclosure of investigation information under prescribed circumstances. The new instrument provides for a broader consent, effective December 3, 2009, until the earlier of July 8, 2010 and the date the legislature repeals section 148.

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On Wednesday, the U.S. Securities and Exchange Commission (SEC) approved the issuance of interpretive guidance respecting existing SEC disclosure requirements that apply to business or legal developments relating to climate change. While the guidance has yet to be published by the SEC, a speech by SEC Commissioner Luis A. Aguilar suggests that the SEC's release will clarify the responsibility of companies to discuss (i) the direct effects of existing and pending environmental regulation, legislation and treaties on a company's business, operations, risk factors and in MD&A; (ii) the indirect effects of such regulation on a company's business; and (iii) the effect on a company's business and operations related to the "physical changes to our planet caused by climate change". Commissioner Aguilar also suggested that companies should know their emissions information in order to evaluate risks and focus on investors when considering the materiality of information.

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Stikeman Elliott lawyer Simon Romano recently discussed the anticipated conversions of income trusts due to the impending tax changes on the Business News Network program Market Call. Once effective, the tax changes will essentially eliminate the comparative advantage of the income trust structure but for a narrow exemption for certain "qualifying" REITs. According to Mr. Romano, as the date for the upcoming tax changes approaches, "I think the pressure will mount to either sell yourself, convert, or decide, for all the reasons that make sense to you, to stay where you are in the status quo."

For more information on the options for income trust conversions and the upcoming tax changes, effective on January 1, 2011, see our 2010 Income Trust Conversion Guide.

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Amendments to MFDA Policy No. 3 Complaint Handling, Supervisory Investigations and Internal Discipline and consequential amendments to related MFDA rules and policies are scheduled to come into effect on February 1, 2010. The amendments are intended to provide "additional guidance with respect to the standards that Members should have in place regarding complaint handling and supervisory investigations" as well as consistency with the new registration regime and IIROC complaint handling requirements. The amended Policy No. 3 considers such issues as the assessment and handling of complaints, settlement agreements, supervisory investigations, internal discipline and record retention.

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On January 7, the New Brunswick Securities Commission (NBSC) published NBSC Notice 91-701 to respond to certain frequently asked questions on NBSC Local Rule 91-501 Derivatives (the Rule).  As discussed in our previous update dated December 14, 2009, the Rule imposes registration and risk disclosure requirements in respect of trades in “derivatives” as defined in the Rule, other than trades among qualified parties.   

The notice clarifies that a qualified party that engages in a derivatives transaction is responsible for determining whether the other party is also a qualified party. To do so, it may rely on factual statements made by the other party provided that it does not have reasonable grounds to believe that the statements are false. The qualified party is also responsible for determining whether the exemptions under the Rule are applicable based on the facts supplied by the other party and should retain all documentation relating to its determination.

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The Canadian Securities Administrators (CSA) today announced the adoption of National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104), and the related companion policy, along with the repeal of, or amendments to, a number of related instruments and policies. Insider reporting requirements and exemptions have been harmonized under NI 55-104 across all Canadian jurisdictions, except in the case of Ontario, where equivalent requirements will remain in the Securities Act (Ontario). Despite the difference in approach, the substance of the new requirements will be the same across the CSA jurisdictions. An earlier form of NI 55-104 was published in December 2008 for comment. While some changes where made to NI 55-104 in response to comments received, according to the CSA the final form of the instrument is substantively similar to the earlier proposal.

Specifically, NI 55-104 reduces the range of insiders required to file insider reports by introducing the concept of “reporting insider.” According to the CSA, this approach will focus the insider reporting requirement on a core group of insiders with the greatest access to material undisclosed information and the greatest influence over the reporting issuer. Interestingly, under NI 55-104, the concept of “reporting insider” includes a shareholder whose 10% beneficial ownership, control or direction is calculated based on post-conversion beneficial ownership of any convertible securities that are convertible within 60 days. 

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On January 12, 2010, the Minister of Finance approved amendments to National Instrument 21-101 Marketplace Operation and National Instrument 23-101 Trading Rules, which were originally published in November 2009 with technical corrections made in December 2009. The amendments not related to the "order protection rule" (i.e. changes other than to Part 6 of NI 23-101) are scheduled to come into force on January 28, 2010. Those related to the "order protection rule" will come into force on February 1, 2011. The Canadian Securities Administrators intend to publish a notice shortly that will outline the expected milestone dates regarding the implementation of the "order protection rule".

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The Ontario Securities Commission (OSC) has announced that it has made amendments to OSC Rule 13-502 Fees and OSC Rule 13-503 (Commodity Futures Act) as well as to their respective companion policies. Earlier versions of the rules were published in October 2009 and on receipt of Ministerial approval, the amendments are expected to come into force on April 5, 2010.

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Earlier this week, the Ontario Securities Commission (OSC) issued a report summarizing its compliance review of various types of investment funds. The review began in September 2008 in response to concerns respecting market turmoil and focused on assessing compliance by fund managers with Ontario securities laws. Funds were reviewed in three phases, beginning with money market funds, followed by non-conventional investment funds and finally focusing on hedge funds.

While the OSC noted "some instances of non-compliance" during site visits, the report states that no industry-wide compliance issues were observed. The report, however, makes a number of observations and includes suggested practices for fund managers.

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On January 11, ICE Futures Canada published a notice regarding amendments to its Rules in order to "more accurately define the information which should be contained" in the "FIX tags" used to identify traders and companies on trades submitted via ISV front-end trading systems.

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On January 11, Nunavut's Local Rule 31-503 came into effect, setting out a new schedule of costs and fees adopted under s. 169 of the Securities Act (Nunavut).

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A Harris/Decima survey of Canadian income trust executives was published today, revealing that 84% of trust executives expect that conversion to a corporation will trigger a reduction in distributions/dividends currently paid to investors. The survey, conducted on behalf of BarnesMcInerney Inc., Stikeman Elliott LLP and Computershare/Georgeson, surveyed 82 income fund executives during November/December 2009 in anticipation of legislation scheduled to come into effect on January 1, 2011 that will affect the tax advantage currently enjoyed by the approximately 165 income trusts currently operating in Canada. Andrew Willis discusses the survey and the hard decisions facing income trusts in today's Globe and Mail, stating that "[t]he overarching theme for trusts CEOs is that the coming year will mean walking a tightrope." According to Stikeman Elliott partner Simon Romano, quoted in Mr. Willis' article, "[i]n directing trust conversions, boards will have to select a dividend policy which will typically be based on a mix of factors, including expected free cash flow, tax pool availability, a balancing of where the company wants to fit on the growth vs. steady-state continuum, and the nature of the shareholder base."

For more information on conversions, see our Income Trust Conversion Guide, updated for 2010.

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The Ontario Securities Commission (OSC) has released the January 2010 edition of The Investment Funds Practitioner, a publication intended to assist those that regularly prepare public disclosure documents and applications for exemptive relief on behalf of investment funds. Authored by staff of the OSC's Investment Funds Branch, the Practitioner contains an overview of recent issues emerging from applications for discretionary relief, prospectuses and continuous disclosure documents. Specifically, the OSC provided a number of observations and practice points that may be of interest. Among other things, the publication considers the following: 

• Responding to "novel applications" for relief from the various conflict provisions under Ontario's Securities Act (Act) and National Instrument 81-102 Mutual Funds (NI 81-102) based on IRC approval. The OSC reminded filers that the Canadian Securities Administrators deliberately chose to maintain the various conflict provisions in local securities legislation and codify only limited exemptions in National Instrument 81-107 Independent Review Committee for Investment Funds.  The OSC stated that it intends to complete reviews to assess how the IRC approval system is working with existing codified exemptions.
   
• The OSC noted a number of "recurring issues" respecting the mergers and reorganizations of mutual funds, including applications missing required information and filers failing to properly factor in securities regulatory approval into the transaction planning process.
   
• The OSC also noted that it generally does not require a parallel application for relief from the conflicts of interest prohibitions under the Act where relief is sought under NI 81-102 to facilitate fund on fund arrangements that do not comply with all the conditions in section 2.5(2) of NI 81-102. The OSC indicated that it is of the view that the exemption codified under section 2.5(7) of NI 81-102 still applies even where the fund has obtained an exemption from some of the conditions in section 2.5(2).   
   
• Filers were also reminded by the OSC that those wishing to receive a receipt for a (preliminary) prospectus that the (preliminary) prospectus and accompanying material should be received by the OSC on or before noon on the day the receipt is required.
   
• The OSC noted that while it has granted relief to file a prospectus beyond the 90 day period, it encourages filers to make applications for this type of relief prior to the expiration of the 90 day period.  

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Back in December, the U.K. Financial Services Authority (FSA) announced the publication of proposals intended to "rebuild people's trust and confidence in the retail investment market by raising standards of professionalism." The FSA's proposals address issues respecting the governance of professional standards for retail investment advisers, the application of principles to the corporate pension market and advice on pure protection products (certain types of insurance). With respect to professional standards, the FSA proposes an internal FSA model to govern professional standards.

The FSA is accepting responses on its proposals until March 16, 2010.

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The Australian Government's Productivity Commission, an independent research and advisory body on economic, social and environmental issues, recently issued a report on the topic of executive compensation in Australia. The voluminous report considered such issues as the recent trends in Australia in executive pay, the effectiveness of existing regulatory oversight, the role of boards and the transparency of compensation disclosure. Ultimately, the report recommended reform in five areas: improving board capacities, reducing conflicts of interest, ensuring well-conceived compensation principles, improving relevant disclosure and facilitating shareholder engagement.

Specifically on the topic of shareholder engagement, the Commission recommended a "two strikes" mechanism to address an "unresponsive" board. Under the recommendation, where a company's compensation report received a "no" vote of 25% or more, the board would have to explain how shareholder concerns were addressed in the subsequent report. Where the subsequent report also received a "no" vote of 25% or more, a resolution would be put to shareholders that the elected directors who signed the directors' report for that meeting stand for re-election at an extraordinary general meeting. If this resolution was carried by more than 50% of the votes, the meeting would be held within 90 days.

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The British Columbia Securities Commission (BCSC) recently issued a Notice of Adoption regarding its adoption as an urgent rule of BC Instrument 81-513 Self Dealing and related consequential amendments. BCI 81-513 and related consequential amendments are in response to the repeal of the sections of the British Columbia Securities Act that had, until September 28, 2009, contained similar requirements.  Given that BCI 81-513 and related consequential amendments were adopted as an urgent rule, they can remain effective only for a maximum of 275 days. To remain effective, the BCSC must publish BCI 81-513 and related consequential amendments for comment and, as such, the Notice of Adoption is also a request for comment. The BCSC is accepting comments on the instrument and consequential amendments until February 21, 2010.

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The Investment Industry Regulatory Organization of Canada (IIROC) today announced that securities regulators have approved amendments to the Universal Market Integrity Rules (UMIR) respecting trading during certain securities transactions. Rule 7.7 of the UMIR governs the activities of dealers, issuers and others in connection with a distribution of securities, securities exchange take-over bid, issuer bid or amalgamation, arrangement, capital reorganization or similar transaction. Rule 7.7, paralleled OSC Rule 48-501 Trading During Distributions, Formal Bids and Share Exchange Transactions prior to approval of these amendments. While some provisions of Rule 7.7 will now differ from OSC Rule 48-501, both rules will remain substantively similar and it is intended they will be applied in a consistent manner.   Among other things, the amendments:

• modify the exemption governing bids or purchases of certain securities during restricted periods by permitting such bids at the best independent bid price at the time of order entry rather than at the last independent sale price;
   
• replace the requirement that a mutual fund be designated by the market regulator prior to qualifying as an exempt exchange-traded fund with a provision that any mutual fund with units that are listed or quoted security in continuous distribution in accordance with legislation would qualify unless the regulator has designated the mutual fund to be a security excluded from the definition of "Exempt Exchange-traded Fund";
   
• clarify the definition and interpretation of "restricted period";
   
• clarify the types of private placements that may become subject to restrictions under Rule 7.7 of UMIR;
   
• clarify that in determining the "best ask price" or "best bid price", reference is made only to orders contained in a consolidated market display for a marketplace that is then open for trading; and
   
• make further consequential and editorial amendments.

The amendments are effective as of today, January 8, 2010.

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Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) announced changes to the Complaints and Settlement Reporting System (ComSet) in order to ensure "more accurate tracking and management of client complaints." Specifically, IIROC is making changes to the details of client information reported by its members on the ComSet system in order to enhance the accuracy of information reported.

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On December 23, the Mutual Fund Dealers Association of Canada (MFDA) published proposed consequential amendments to its rules intended to ensure consistency with the new registration regime under National Instrument 31-103 Registration Requirements and Exemptions. Specifically, the amendments would impact the rules respecting proficiency requirements, referral arrangements, standards of supervision, client reporting and record retention. Meanwhile, MDFA Policy No. 6 Information Reporting Requirements would also be amended.

Comments on the proposals are being accepted until March 23, 2010.

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Last month, the Canadian Coalition for Good Governance (CCGG) released the 2009 edition of its "Best Practices in Disclosure of Executive Compensation Related Information". The guide is intended to "improve the overall quality of executive compensation disclosure in annual proxy circulars" by reviewing best practices and providing examples of disclosure meeting the criteria set out in its guidelines. According to the CCGG, truly effective disclosure is easy to find, easy to understand, accurate and complete and given in context so that the information has meaning. Specifically, the CCGG considered executive compensation disclosure in five areas, discussed below.

1. Build an independent compensation committee

While the CCGG observed that many issuers have appointed a compensation committee of solely independent directors comprising of members with diverse backgrounds, opportunities for improvement were identified. Specifically, the CCGG suggests identifying the compensation expertise of the committee members and establishing and disclosing the committee's work plan.

2. Develop an independent point of view

On this point, the CCGG states that most issuers have retained the services of a compensation consultant, with some companies reporting the fees paid. Despite a CSA requirement to name the consultant, however, the CCGG notes that not all issuers did so and recommends disclosing the fees paid to the consultant for work performed on behalf of the compensation committee and management, as well as a breakdown of such fees.

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Historically, foreign advisers relied on the registration exemption in section 194.2 of the Regulation Respecting Securities (Quebec) (the 194.2 Exemption) to enter into sub-advisory arrangements with Quebec registered dealers and advisers. As previously noted, in connection with the coming into force of National Instrument 31-103 Registration Requirements and Exemptions (31-103) the 194.2 Exemption was repealed effective December 28, 2009. 31-103 does not provide for a sub-adviser exemption from the adviser registration requirement, although, it was included in previous proposals for 31-103. The CSA have indicated that they plan to consider further a sub-adviser exemption for inclusion in 31-103. To accommodate this regulatory gap, the Autorité des marchés financiers (AMF) issued a decision, effective December 28, 2009, which exempts foreign sub-advisers from the requirement to register, provided certain conditions are met.

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On December 18, 2009, staff of the Canadian Securities Administrators (CSA) published a staff notice (the FAQ) setting out their answers to frequently asked questions regarding National Instrument 31-103 Registration Requirements and Exemptions (31-103) and amendments to National Instrument 33-109 Registration Information (NI 33-109). 31-103 and the amendments to NI 33-109 came into effect on September 28, 2009 (the Effective Date). The questions were compiled from informal public enquiries received by CSA members and the responses are based on views of CSA staff. Summarized below are responses to some of the more substantive issues.

Chief compliance officer proficiency requirements and exemptions

Under Part 3 of 31-103, an individual who satisfies the proficiency requirements for a chief compliance officer (CCO) of a portfolio manager (PM), also satisfies the proficiency requirements for a CCO of a mutual fund dealer (MFD), exempt market dealer (EMD) and investment fund manager (IFM). There is, however, no provision to accommodate for MFD, EMD and IFM registrations a CCO of a PM whose proficiency is grandfathered for the PM registration under subsection 16.9(2) of 31-103. The FAQ indicates that the CSA plan to issue an order providing a CCO of a PM whose proficiency is grandfathered under subsection 16.9(2) with an exemption from the proficiency requirements applicable to a CCO of an MFD, EMD or IFM where the firm was registered as a PM on the Effective Date and the individual was designated as the firm’s CCO on the Effective Date and remains so registered.

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Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the first quarter of 2010 as 1,050 points, 2,100 points and 3,150 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,150 points; Level 2 (20%) - 2,300 points and Level 3 (30%) - 3,450 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

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