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

The British Columbia Securities Commission (BCSC) issued an order today making certain limited trade-based registration exemptions to persons that would otherwise be required to register as exempt market dealers in BC. Meanwhile, the Manitoba Securities Commission issued a similar order. As previously discussed, with the implementation of the new registration regime and National Instrument 31-103 Registration Requirements and Exemptions, trade-based registration exemptions that parallel prospectus exemptions available under National Instrument 45-106 Prospectus and Registration Exemptions are to be repealed on March 27, 2010.

Pursuant to the orders, effective March 27, 2010, an exemption from the EMD registration requirement will be available in both B.C. and Manitoba for persons trading in securities in reliance on certain prospectus exemptions under NI 45-106, specifically, section 2.3 ("accredited investors"), section 2.5 ("family, friends and business associates"), section 2.9 ("offering memorandum") and section 2.10 ("minimum investment amount").

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The Canadian Securities Administrators (CSA) today published an omnibus set of blanket orders exempting registrants from certain provisions of National Instrument 31-103. The orders, which take effect on February 26, 2010, cover the following areas:

• The continuation of transition/grandfathering provisions for persons and companies adding a jurisdiction;
• Relief from for the chief compliance officer (CCO) proficiency requirements for portfolio managers adding a category;
• Relief from proficiency requirements for portfolio managers adding registration in the mutual fund dealer or exempt market dealer category;
• Relief from the time limits on examination requirements for dealing representatives of exempt market dealers  (in Ontario and Newfoundland and Labrador only) and scholarship plan dealers in all jurisdictions who were registered when NI 31-103 came into force;
• Relief from client notification requirements under section 14.5 of NI 31-103 for certain Canadian registrants with head offices outside of the local jurisdiction;
• Relief from requirements to establish whether a client is an insider under section 13.2(2)(b) of NI 31-103 for mutual fund dealers.

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The SEC issued a statement on Wednesday outlining its position with respect to global accounting standards. Specifically, the SEC stated that it supports "the objective of financial reporting in the global markets pursuant to a single set of high-quality globally accepted accounting standards." It recognizes, however, that incorporating IFRS into the U.S. financial reporting environment would be a large task and recognizes the need for deliberation as well as a sufficient transition time to prepare for such a change.

Thus, the SEC directed its staff to develop and execute a work plan to enhance the SEC's understanding and assist it in making a decision in 2011 regarding the incorporation of IFRS into the financial reporting system for U.S. issuers. Specifically, the work plan sets out the following areas of concern: (i) sufficient development and application of IFRS for the U.S. domestic reporting system; (ii) the independence of standard setting for the benefit of investors; (iii) investor understanding and education regarding IFRS; (iv) examination of the U.S. regulatory environment that would be affected by a change in accounting standards; (v) the impact on issuers; and (vi) human capital readiness.

Considering the time required to successfully implement a change in financial reporting, the SEC stated that should it make the decision in 2011 to incorporate IFRS, the earliest that U.S. companies would report under such a system would be approximately 2015 or 2016, although SEC staff have been asked to further evaluate this timeline as part of the work plan.

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On Monday, the International Organization of Securities Commissions (IOSCO) published a final report entitled "Principles for Periodic Disclosure by Listed Entities". The report is intended to provide securities regulators with a framework for establishing or reviewing their periodic disclosure regimes. According to the report, its principles-based format "allows for a wide range of application and adaptation by securities regulators." 

Specifically, the report identifies the following principles as being "essential" for periodic disclosure regimes: (i) periodic reports should contain relevant information; (ii) for those periodic reports in which financial statements are included, the persons responsible for the financial statements provided should be clearly identified and should state that the financial information provided is fairly presented; (iii) the issuer's internal control over financial reporting should be assessed or reviewed; (iv) information should be available to the public on a timely basis; (v) periodic reports should be filed with the relevant regulator; (vi) the information should be stored to facilitate public access; (vii) disclosure criteria; (viii) equal access to disclosure; and (ix) equivalence of disclosure.

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On February 12, Quebec's Autorité des marchés financiers (AMF) reported on its enforcement activities for 2009. In its release, the AMF highlighted its collaborative efforts with police forces and other partners in fraud prevention and response and provided enforcement figures for the preceding year. Specifically, the AMF cited a total of 855 charges laid for violations under Quebec's Securities Act and An Act respecting the distribution of financial products and services, which led to the sanctioning of 783 individuals. Further, over $81 million in fines and penalties were assessed which, according to the AMF, represented over half of such penalties imposed in Canada.

As we noted in an earlier post, the CSA also released its 2009 enforcement report earlier this month.

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Effective September 28, 2009, all provinces and territories adopted National Instrument 45-106 Prospectus Requirements and Exemptions containing nationally harmonized prospectus exemptions. In addition to NI 45-106, some jurisdictions may continue to provide local prospectus exemptions through their local legislation, rules or otherwise. On February 12, the Alberta Securities Commission (ASC) published a notice requesting comments on a proposed local rule that would consolidate the remaining local prospectus exemptions available in Alberta along with related requirements contained in the Alberta Securities Commission Rules. Comments are being accepted until March 12, 2010. 

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The Canadian Securities Administrators (CSA) published implementation milestones today for the order protection rule contained in recent amendments to National Instrument 23-101 Trading Rules. The order protection rule, which comes into effect on February 1, 2011, requires marketplaces to establish and ensure compliance with policies and procedures designed to prevent trade-throughs on that marketplace. The CSA notice, meanwhile, aims to facilitate implementation of the order protection rule by establishing various technical milestones for marketplaces to meet. According to the notice, marketplaces will be expected to provide the CSA with information regarding their progress on each milestone date. The CSA are also encouraging marketplaces to consider whether to publicly disclose progress-related information. A notice providing details about an industry-wide test is expected to be published by the CSA in the coming months.

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RiskMetrics Group recently announced the introduction of a successor tool to the Corporate Governance Quotient (CGQ), known as Governance Risk Indicators (GRId). GRId is intended "to help investors better assess the level of governance-related risk at portfolio companies."

The GRId methodology is based on 60 to 80 questions for each market pertaining to four governance categories: (i) board; (ii) audit; (iii) compensation/remuneration; and (iv) shareholder rights. The evaluations of risk will be derived from "the specific company answers, weighted according to each question's significance in the company's market and prevailing best practices in that market." The results will be used to create summary assessments, identifying the level of concern across the four categories of corporate governance described above.

Governance Risk Indicators will be published on proxy research reports beginning in March, with CGQ to be retired at the end of June 2010.

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On February 12, the Alberta Securities Commission issued a blanket order making available certain limited trade-based registration exemptions to persons who would otherwise be required to register as exempt market dealers in Alberta. As previously discussed, with the implementation of the new registration regime and National Instrument 31-103 Registration Requirements and Exemptions, trade-based registration exemptions that parallel prospectus exemptions available under National Instrument 45-106 Prospectus and Registration Exemptions are to be repealed on March 27, 2010.

Pursuant to the blanket order, effective March 27, 2010, an exemption from the EMD registration requirement will be available for persons trading in securities in reliance on certain prospectus exemptions under NI 45-106, specifically, section 2.3 ("accredited investor"), section 2.5 ("family, friends and business associates"), section 2.9 ("offering memorandum") and section 2.10 ("minimum investment amount").

The blanket order, however, applies only where certain conditions are met. Specifically, the person or company seeking to rely on the exemption: (i) must not be registered or required to be registered in any jurisdiction, including a foreign jurisdiction; (ii) must not have provided advice to the purchaser with respect to suitability; (iii) must obtain from the purchaser a signed risk acknowledgement in the form prescribed by the blanket order; (iv) must not have provided financial services to the purchaser at any time (other than in connection with a prospectus-exempt distribution under sections 2.3, 2.5, 2.9 or 2.10 of NI 45-106); (v) must not hold or have access to the purchaser's assets; and (vi) must electronically file with the ASC a current or updated information report in the prescribed form within ten days of relying on the exemption. A notice issued along with the blanket order provides additional guidance with respect to the applicable requirements.

Alberta, which is the first of the "North West" jurisdictions to issue such a blanket order, is expected to be joined by British Columbia, Saskatchewan, Manitoba, Northwest Territories, Nunavut and the Yukon Territory, whose regulators have announced their intention to issue similar orders.

For more information on the impact of the new registration regime on dealers trading in the exempt market, see our July 2009 publication: "Impact on Limited Market Dealers and Unregistered Dealers Trading in the Exempt Market".

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In December 2009, the U.S. Securities and Exchange Commission (SEC) published final amendments to its rules to enhance proxy disclosure. Proposed amendments were first released in July 2009 and the final rules reflect changes made in response to many of the comments received by the SEC in response to the proposed amendments.

Specifically, the final rules intend to improve the information that companies provide to shareholders regarding: (i) risk, by requiring disclosure respecting the board's role in risk oversight and, where relevant, disclosure respecting compensation policies and practices that are likely to expose the company to material risk; (ii) governance and director qualifications, by requiring expanded disclosure of the background and qualifications of directors and nominees, as well as disclosure concerning a company's board leadership structure; and (iii) compensation, by amending the reporting of stock and option awards and requiring, in certain circumstances, the disclosure of compensation consultants' potential conflicts of interest.

The amendments are effective as of February 28, 2010.

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Individuals with criminal records that are filing Form 4 - Personal Information Form will now have to be fingerprinted due to new procedures being implemented by the Ontario Provincial Police (OPP). According to a TSX notice released today, effective immediately, the OPP will no longer provide the TSX with information regarding the positive results of criminal record checks without fingerprint verification from the individual. An RCMP Records Release Form, which will be provided by the TSX on an as-needed basis, will have to be signed and submitted at the time of fingerprinting to give the OPP permission to release the information to the TSX.

Thus, the TSX is recommending that individuals that have pled, or have been found guilty of an offence as defined by the Form, be digitally fingerprinted at an RCMP-accredited agency providing such services. The TSX has also advised that the OPP will only accept criminal consent forms submitted within 90 days from the date the consent was signed.

Similar consideration to the new procedures should be given by those filing Form 2A respecting TSX-Venture companies.

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The U.S. Securities and Exchange Commission (SEC) announced in January that it was seeking public comment on issues respecting the current equity market structure. In publishing the concept release, the SEC specifically cited the dramatic change in the secondary market for equities in recent years and the trend towards a market structure with primarily automated trading. Thus, the SEC intends to assess "whether market structure rules have kept pace with, among other things, changes in trading technology and practices". The release seeks specific comment on issues such as market quality metrics, the fairness of market structure, high frequency trading, co-location services and dark liquidity. The SEC will use the comments received to help determine whether additional regulatory measures are needed to improve the current equity market structure. Further, the SEC also proposed for public comment a new market structure initiative that is intended to strengthen the risk management control of broker-dealers that provide market access.

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On February 12, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice correcting an oversight that left certain proficiency requirements out of the final rule amendments to IIROC's Dealer Member Rules, which related to the implementation of the new registration regime. The final rule amendments inadvertently omitted proficiency requirements for institutional supervisors of futures contracts, futures contract options and options trading. The changes announced last week correct this mistake and are intended to preserve the proficiency requirements existing before registration reform. As the applicable regulators have approved these changes, they are now effective.

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Chairman Gensler Photo Courtesy of www.cftc.gov

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On February 5, 2010, staff of the Canadian Securities Administrators (CSA) published a staff notice (the February FAQ) addressing frequently asked questions regarding compliance with the financial reporting requirements under National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103). NI 31-103 came into effect on September 28, 2009 and was the subject of an earlier FAQ published on December 18, 2009. The questions in the February FAQ were compiled from informal public enquiries received by CSA members and the responses are based on views of CSA staff.

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In January, the U.S. Securities and Exchange Commission (SEC) announced amendments to the proxy rules under the Securities Exchange Act of 1934 to require companies that have received TARP money to permit a shareholder advisory vote on executive compensation. The rules are effective February 18, 2010.

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On January 14, the Saskatchewan Financial Services Commission, the securities regulator for the province of Saskatchewan, announced that it will participate along with other "North Western" jurisdictions in making available certain trade-based registration exemptions to persons who would otherwise be required to register as exempt market dealers. As a result of the implementation of the new registration regime and National Instrument 31-103 Registration Requirements and Exemptions, trade-based registration exemptions that parallel prospectus exemptions available under National Instrument 45-106 Prospectus and Registration Exemptions are to be repealed on March 27, 2010.

Pursuant to a blanket order to be issued by the SFSC, an exemption from the EMD registration requirement will be made available for persons trading in securities in reliance on certain prospectus exemptions, including the "accredited investor" and the "minimum investment amount" exemptions under section 2.3 and section 2.10 of NI 45-106, provided the conditions set out in the blanket order are satisfied. Saskatchewan will be joining Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut and the Yukon Territory, whose regulators had previously announced their intention to issues similar blanket orders. The orders granting the exemption are anticipated to be issued on March 27, 2010.

For more information on the impact of the new registration regime on dealers trading in the exempt market, see our July 2009 publication: "Impact on Limited Market Dealers and Unregistered Dealers Trading in the Exempt Market".

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IIROC yesterday repealed an earlier notice that provided guidance on "locked" and "crossed" markets in the context of a dealer's obligations under the Universal Market Integrity Rules (UMIR). The repeal of the guidance results from recent amendments to NI 23-101 Trading Rules and its Companion Policy, which contain provisions regarding locked and crossed markets.

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The Canadian Coalition for Good Governance (CCGG) recently published a model shareholder engagement and "say on pay" policy for boards of directors. The policy is intended to provide guidance on engagement with shareholders and on expected disclosure related to executive compensation. It also includes a recommended form of advisory “say on pay” resolution and addresses how the board should respond to such an advisory vote on compensation. While the CCGG stated that it recognizes that companies will want to customize a policy to address their specific circumstances, companies are urged to use the recommended form of resolution as closely as possible to ensure consistency among issuers.

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On February 5, the Investment Industry Regulatory Organization of Canada (IIROC) published for comment its draft rules notice, "Requirements and Best Practices for distribution of non-arm's length investment products", which addresses the regulatory concerns raised by the distribution by a Dealer Member to its clients of investment products issued by the Member itself, an issuer, or a selling securityholder with which a Member does not deal at arm's length or is otherwise connected. The draft notice sets out IIROC staff's expectations regarding distributions by Dealer Members of non-arms length investment products and provides guidance to assist Dealer Members in meeting their regulatory obligations to their clients. The draft notice also includes a new requirement that Dealer Members must notify IIROC in advance of the initial distribution of non-arms length investment products. In publishing the draft requirements, IIROC cited concerns regarding potential conflicts of interest, product due diligence and client suitability.

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On February 5, the Ontario Securities Commission published OSC Staff Notice 52-718 IFRS Transition Disclosure Review (the Notice), which summarizes the results of a review conducted by the OSC of the "extent and quality of International Financial Reporting Standards (IFRS) transition disclosures made by issuers" in light of guidance previously provided by the CSA. The review focused on IFRS transition disclosure provided in 2008 annual, and 2009 interim, MD&A. Staff of the OSC provide additional guidance under the Notice regarding expectations for future MD&A filings.

In summarizing the results of the OSC's review, the Notice states that 40% of reporting issuers reviewed did not provide IFRS transition disclosure. Of the 60% of issuers that did discuss an IFRS changeover plan in MD&A disclosure, half provided a generic description without direct application to the issuer's own circumstances. Ultimately, the OSC found that "reporting issuers are not adequately discussing, in MD&A, the key elements of their IFRS changeover plan or their progress towards achieving this plan."

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The Canadian Securities Administrators (CSA) have published a staff notice this morning addressing frequently asked questions as of February 5, 2010 relating to financial reporting requirements under the new NI 31-103 Registration Requirements and Exemptions. The notice supplements an earlier FAQ published on December 18, 2009.

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Silver v. IMAX Corporation et al. [2009] O.J. Nos. 5573 and 5585 (S.C.J.)

Simon Bieber and Jennifer Imrie

On December 14, 2009, Justice van Rensburg of the Ontario Superior Court of Justice handed down two related rulings in the Silver v. IMAX Corporation litigation. The first (the “Leave Decision”) granted the plaintiffs leave to proceed with their class action against IMAX Corporation and certain individual respondents (collectively, the “IMAX Defendants”) under section 138.8 of Ontario’s Securities Act (“OSA”), while the second (the “Certification Decision”) certified the action, including both statutory and common law claims, as a class proceeding.

The Leave Decision is the first to consider the leave requirements for a statutory misrepresentation claim under the secondary market liability provisions in Part XXIII.1 of the OSA, while the Certification Decision appears to accept the “efficient market” (or “fraud on the market”) theory for common law misrepresentation claims. Justice van Rensburg permitted certification despite the defendant’s argument that the claim as pleaded is deficient for not alleging individual reliance by each member of the proposed class and accepted the plaintiffs’ argument that certification should extend to a global class of plaintiffs consisting of all persons who acquired securities of IMAX Corporation (“IMAX”) during the defined “Class Period” of February 17, 2006 to August 9, 2006 and who continued to hold some or all of those securities at the close of trading on August 9, 2006.

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On February 1, the Canadian Securities Administrators (CSA) released its 2009 Enforcement Report. According to the report, 141 enforcement cases were concluded in 2009, resulting in over $153 million in fines and administrative penalties ordered and over $92 million in restitution, compensation and disgorgement. The fines and penalties assessed in 2009 represented a large increase from the $12 million ordered in 2008. The report also discusses the preventative measures employed by the CSA as well as the sharp increase in the use of reciprocal orders since 2008. Meanwhile, a number of case summaries are presented in the report to describe the main categories of violations and to illustrate the type of activity that constitutes each type of violation.

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Yesterday, the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) announced the launch of a comprehensive review of financial market infrastructure standards, including payment systems, securities settlement systems and central counterparties. The review, which will be led by CPSS members (consisting of central banks, including the Bank of Canada), members of the IOSCO Technical Committee (which includes the OSC and AMF), the IMF and World Bank, is part of an initiative "to reduce the risks that arise from interconnectedness in the financial system."

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CDS Clearing and Depository Services Inc. (CDS) recently published proposed amendments to its rules regarding the processes for issuing, transferring and maintaining custody of money market securities in CDSX. Specifically, the amendments (i) clarify the process by which securities become eligible for CDSX; (ii) provide for an exception allowing CDS to release confidential information concerning a participant where the information concerns material risk events;  (iii) create a single, uniform qualification for all participants acting as issuer agents; and (iv) create new internal control standards for participant issuer agents.

CDS is accepting comments on the proposed amendments for 30 calendar days following the January 29th publication of the proposals.

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