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

If you have visited this blog in the past, you’re probably noticing that things look a bit different today. We launched this blog in 2008 in order to cover the latest in securities regulation and developments. Today, we’re pleased to announce a new, contemporary design and expanded features that will improve the look and feel of the blog. Meanwhile, enriched content will ensure that the blog continues to be the go-to resource for those wanting to keep up-to-date on the latest developments in securities law.

Our new and improved features include:

• A new email notification service that will consolidate daily posts and deliver them by email at the end of the day in an easy-to-read format;
   
• A new “Resources” section provides links to background information on securities regulation, supplementing the content on new developments;
   
• More contextual information, including links to third-party coverage and analysis;
   
• Expanded use of new media technologies such as podcasts and webcasts; and 
   
• Development of a complementary securities law Twitter feed, available at @cdn_securities.

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On March 22, the Mutual Fund Dealers Association of Canada (MFDA) released a bulletin in which it discussed the "significant financial compliance deficiencies" identified during on-site examinations of its member firms. Specifically, the bulletin identified the following serious deficiencies: (i) incorrect margin rate applied to securities owned; (ii) securities not held at acceptable securities locations; (iii) incomplete reporting on Form 1; (iv) trust bank accounts not reconciled to back office system; and (v) nominee name client assets not reconciled to third party information on a monthly basis. According to the MFDA, such deficiencies are often "a result of a firm not adequately managing or considering the capital implications of significant changes in their business".

Meanwhile, an MFDA bulletin released on the same day reviewed common deficiencies identified during MFDA staff's review of auditor working paper files. Financial audits of MFDA members occur in accordance with Rule 3.5.1(b) and the MFDA intended the bulletin "to enhance awareness and understanding of the special audit requirements for external auditors".

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Earlier this month, U.S. Senator Chris Dodd, Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, unveiled the "Restoring American Financial Stability Act of 2010". According to Senator Dodd, the bill will (i) end "too big to fail" bailouts; (ii) create a strong and independent consumer protection watchdog; (iii) create an early warning system; and (iv) bring transparency and accountability to "exotic instruments" like hedge funds and derivatives. Of particular note, the bill also contains provisions regarding executive compensation (Subtitle E, beginning on page 868) and corporate governance (Subtitle G, beginning on page 895). A summary of the proposed legislation was also released.

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The European derivatives exchange Eurex recently announced that Quebec's Autorité des marchés financiers (AMF) has provided a regulatory exemption allowing Eurex to offer its products in Quebec. According to the Eurex release, Quebec customers will now have direct access to trading on its exchange. 

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The Autorité des marchés financiers (the "AMF", Quebec’s financial services regulator) announced today that the temporary exemption provided under its February 1, 2009 blanket decision from the derivatives dealer and adviser registration requirements under the Derivatives Act (Quebec) (the "Act") for specified derivatives activities carried out solely with “accredited investors” (as defined under National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106"), will remain available until September 28, 2010. Prior to this announcement, the temporary exemption had been set to expire on March 27, 2010. The exemption remains available subject to the following conditions:

1. the derivatives activities must be carried out solely with “accredited investors” in accordance with the conditions set forth in NI 45-106 (including the filing of a report under Part 6); and
    
2. the activities must relate only to certain specified categories of derivatives, including:
   
   
   1. an option or a negotiable futures contract pertaining to securities, or a Treasury bond futures contract;
   2. an option on a commodity futures contract or financial instrument futures contract; or
   3. commodities futures contracts, financial futures contracts, currencies futures contracts and stock indices futures contracts.

The AMF also announced that the corresponding exemption from the derivatives qualification rules under the Act will continue to remain available for the time being and that the AMF will advise market participants of any changes to this exemption.

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The Ontario Securities Commission (OSC) announced today that it has approved amendments to MFDA Rule 2.4.1 to allow Approved Persons of MFDA Member firms to have remuneration from the Member paid directly to an unregistered corporation, subject to certain conditions. The final version of the amendments include changes made since their initially publication for comment in June 2009.

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Earlier today, the Investment Industry Regulatory Organization of Canada (IIROC) released proposed amendments to its rules respecting business conduct and client accounts. Specifically, proposed Rule 3100 - Business Conduct would consolidate various current rules relating to business conduct and impose on Dealer Members a duty to use due diligence to ensure orders and recommendation are within the bounds of good business practice. Meanwhile, proposed Rule 3200 - Client Accounts would also consolidate various rules and impose responsibilities on Dealer Members with respect to, among other things, client identification, account information, discretionary trading and conflicts of interest. A table of concordance was also released by IIROC, which is accepting comments on the proposals for 90 days.

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The Ontario Securities Commission (OSC) today published a revised Statement of Priorities for the financial year ending March 31, 2011. The OSC initially released a draft Statement of Priorities in December 2009, and the revised version includes changes made in consideration of public comments received. Specifically, the changes to the draft publication include (i) a reference to the creation of an independent panel focusing on investor issues; and (ii) a new initiative to signal the OSC's intention to direct more resources to the regulation of OTC derivatives.

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On March 12, the Investment Industry Regulatory Organization of Canada (IIROC) published a Rules Notice (the FAQ) addressing frequently asked questions regarding IIROC's registration reform related rule amendments, as well as the impact of National Instrument 31-103 Registration Requirements (NI 31-103) and related instruments on Dealer Members. IIROC's registration reform related rule amendments and NI 31-103 became effective September 28, 2009. The questions addressed in the FAQ were compiled from questions raised at various registration reform workshops hosted by IIROC in 2009. The FAQ covers issues such as NRD filing requirements, reinstatements, new NRD functionality, passport applications, category selection, proficiency requirements, termination notices and the business trigger.

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On March 10, 2010, the Investment Industry Regulatory Organization of Canada (IIROC) published a guidance note outlining its expectations with respect to Dealer Members reporting changes to their business models. According to IIROC, it is "essential" that it be made aware of "significant changes" to a member's business model as such reporting will enable more efficient and effective regulatory supervision. While a "significant change" depends on the circumstances of each case, the note provides some examples of changes that are expected to be reported. Further, IIROC expects the notifications to be thorough and detailed so as to allow it to "fully understand and assess" the changes to the business model.

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As we reported back in January, the New Brunswick Securities Commission published answers to frequently asked questions regarding Local Rule 91-501 Derivatives. Last week, the NBSC published a revised notice expanding on its answer regarding whether the rule applies to spot foreign exchange contracts. Specifically, the revised notice states that "LR 91-501 does not apply to spot foreign exchange transactions involving the purchase or sale of a currency (i.e. transactions such as changing money at a currency exchange or withdrawing cash at a foreign ATM)." Whether other spot foreign exchange transactions are subject to LR 91-501, however, remains unclear, as the NBSC's use of "i.e." raises questions as to whether the example provided was intended to be comprehensive.

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Earlier today, the Canadian Securities Administrators (CSA) published proposed amendments to National Instrument 41-101 General Prospectus Requirements intended to provide investors with "more meaningful and effective prospectus disclosure" with respect to scholarship plans. A new disclosure form tailored to scholarship plans was also proposed, which would organize the format and content of disclosure in order to make the disclosure "more understandable, accessible and readable." The proposals are open for a 90-day comment period.

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Earlier this month, the Committee of European Securities Regulators (CESR) released a report recommending a pan-European short selling disclosure regime. While acknowledging that legitimate short selling plays an important role in financial markets by contributing to efficient price discovery, increasing market liquidity and facilitating hedging and other risk management activities, the report also cites concerns that it can be used in an abusive fashion. Specifically, short selling can drive down the price of financial instruments to a distorted level, contribute to disorderly markets and, especially in extreme market conditions, otherwise have an adverse impact on financial stability. In the interests of enhanced transparency about short selling activity, the objective in developing the disclosure model proposed by the disclosure requirement is to reduce or mitigate the negative consequences and risks of short selling without having an undue adverse impact on the benefits which the practice brings to markets.

The report proposes a two tier disclosure system whereby a short position reaching a specified initial threshold (0.2% of a company's issued share capital) would need to be disclosed to the relevant regulator. Incremental changes of short position of 0.1% would require further notification  to the regulator, while a second threshold (0.5%) would also trigger a public disclosure requirement.

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The Securities Act (Ontario) is scheduled to be amended as of March 1, 2011, to include a new section 21.2(0.1), which will prohibit clearing agencies from carrying on business in Ontario unless they are recognized by the OSC or receive an exemption from the recognition requirement.  The term “clearing agency” is defined in the Act as a person or company that,

(a) acts as an intermediary in paying funds or delivering securities, or both, in connection with trades and other transactions in securities,

(b) provides centralized facilities for the clearing of trades and other transactions in securities, including facilities for comparing data respecting the terms of settlement of a trade or transaction, or

(c) provides centralized facilities as a depository of securities,

but does not include,

(d) the Canadian Payments Association or its successors,

(e) a stock exchange or a quotation and trade reporting system,

(f) a registered dealer, or

(g) a bank, trust company, loan corporation, insurance company, treasury branch, credit union or caisse populaire that, in the normal course of its authorized business in Canada, engages in an activity described in clause (a), but does not also engage in an activity described in clause (b) or (c).

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The Canadian National Stock Exchange (CNSX) announced yesterday that the U.S. Securities and Exchange Commission (SEC) has designated it a "Designated offshore securities market" under Regulation S of the Securities Act of 1933. The designation applies to CNSX and Pure Trading.

Regulation S allows companies to bypass SEC registration requirements where offerings and sales of securities occur outside the U.S. The exemptions were created in order to encourage investments in U.S. companies by non-U.S. investors and provide safe harbours with respect to offers and sales by issuers, distributors and affiliates under Rule 903 and offshore resales under Rule 904. Regulation S, however, imposes a number of resale restrictions to ensure sales to a U.S. person do not occur.

The SEC designation, however, means that restricted securities may now generally be resold on CNSX or Pure Trading without the seller having to determine whether the buyer is in the U.S. or a U.S. person, as would otherwise have been the case.

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On February 26, 2010, members of the Canadian Securities Administrators (CSA) each issued omnibus/blanket orders in response to applications requesting exemptions from certain provisions of National Instrument 31-103 Registration Requirements and Exemptions (31-103).  31-103, together with amendments to related instruments and policies, came into effect on September 28, 2009 (the Effective Date). Notice of these orders was provided under CSA Staff Notice 31-315 Omnibus/Blanket Orders exempting registrants from certain provisions of National Instrument 31-103 Registration Requirements and Exemptions, which was also published on February 26, 2010. The orders are summarized below.

Continuation of transition/grandfathering provisions for registrants adding jurisdiction

Each regulator issued an order that provides a person or company adding a jurisdiction to his, her or its registration, with the benefit of certain grandfathering and transition provisions provided under Part 16 of 31-103 in that additional jurisdiction.  Specifically, those grandfathering and transition provisions that deal with proficiency, capital, insurance, relationship disclosure information, referral arrangements, dispute resolution service and client statement requirements were included in the order. To rely on the order, the registrant must: (i) have been continuously registered in a jurisdiction in Canada since the Effective Date; (ii) remain registered in that jurisdiction during its reliance on the order; (iii) be exempt under the relevant section of Part 16 in that jurisdiction; and (iv) register, after the Effective Date, in the same category of registration (and in the case of an individual, with the same sponsoring firm) in an additional jurisdiction.

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The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) are hosting a forum on March 23 at the Design Exchange in Toronto to discuss Consultation Paper 23-404, "Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada", published in September 2009. Interested parties can register on the IIROC website.

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The Canadian Coalition for Good Governance (CCGG) submitted a brief to the House of Commons' Standing Committee on Industry, Science and Technology in February regarding the Committee's five-year review of the Canada Business Corporations Act (CBCA). The brief follows the CCGG's appearance before the Committee in November 2009.

According to the CCGG's brief, governance requirements for public companies in Canada have not kept pace with best practices. As such, the CCGG recommends enshrining basic democratic and governance norms for public companies into the CBCA. Specifically, the CCGG recommends that the CBCA be amended to: (i) prohibit slate voting; (ii) require a majority voting standard for director elections; (iii) require annual director elections for all CBCA public companies; (iv) require public companies to disclose the detailed results of shareholder votes for matters on the ballot; (v) give significant shareholders access to the proxy circular; (vi) require all shareholders to be treated equally in the proxy process, irrespective of whether they want to protect the privacy of their information; (vii) facilitate "notice and access", whereby shareholders would be able to access documents from companies' websites; (viii) generally require the separation of the roles of CEO and Chair of the Board; (ix) require shareholder approval for significantly dilutive acquisitions; and (x) give shareholders more meaningful ways to resolve claims under the oppression remedy.

It is unclear what steps the Committee will take at this point, however, as Parliament has only just resumed after prorogation and no activities are yet listed on its schedule.

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The U.S. Securities and Exchange Commission (SEC) adopted a new short selling rule on February 24, 2010. The new rule is intended to promote market stability and preserve investor confidence during periods of stress and volatility by restricting short sellers from being able to drive the price of a stock further down when it is already experiencing downward pressure. Short selling involves the sale of stock that an investor does not own or has borrowed, where the investor intends to profit by buying the stock back at a price that is lower than the price of the short sale.  While acknowledging that short selling may be useful in that it can promote market liquidity and pricing efficiency, the SEC cautions that it may also be used to "improperly drive down the price of a security or to accelerate a declining market in a security."

The SEC considered various options over the course of the last year to address its concerns regarding short selling and has decided to implement an alternative uptick rule that would restrict short selling when the price of a security has fallen more than 10% in one day.  This restriction would remain in effect for the remainder of the day as well as the next day and under   such a scenario, short selling would only be permitted if the price of the security was above the current national best bid. The rule will apply to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market, and  requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale. The rule will become effective 60 days after its publication in the Federal Register, while market participants will have six months to comply with its requirements.

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On February 22, the U.S. Securities and Exchange Commission (SEC) announced that it was amending its proxy rules to improve the "notice and access" model for furnishing proxy materials to shareholders. Under the model, issuers are permitted to post their proxy materials on the internet and send shareholders a "Notice of Internet Availability of Proxy Materials" (a Notice), directing shareholders to the website where the proxy materials may be found, in lieu of delivering a full set of proxy materials in paper accompanied by the above Notice. While the notice and access model, adopted in 2007, was intended to promote the use of the internet as a cost-efficient and reliable means of making proxy materials available to shareholders, the SEC has found lower shareholder response rates to proxy solicitations when the notice-only option is employed.

The SEC attributes the lower response rate in cases where the notice-only option is used to confusion among investors regarding the operation of the notice and access model. Thus, issuers and other soliciting persons will be provided additional flexibility under the amendments with respect to the format and content of the Notice, including being able to provide additional materials explaining the e-proxy rules, rather than being restricted to inclusion of the boilerplate-type language currently set out by the rules. Changes are also being made with respect to the time by which a soliciting person other than an issuer must send its Notice to shareholders. The effective date of the amendments, first proposed in October 2009, is March 29, 2010.

In addition to the introducing the above amendments, the SEC also published an Alert describing changes that went into effect in January 2010 eliminating discretionary voting by brokers in the election of directors and the effects of these changes on proxy voting. The SEC also launched a new website providing investors with general information respecting, among other things, proxy voting and e-proxy rules.

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Budget 2010, delivered this afternoon by Finance Minister Jim Flaherty, contains an update of the Canadian government's intention with respect to the establishment of a federal securities regulator and implementation of a federal securities act. Specifically, the budget sets a three-year target for the establishment of a federal securities regulator and identifies key next steps. These steps include: (i) the release of a draft Canadian securities bill this Spring; (ii) referral of the draft bill to the Supreme Court for an opinion as to Parliament's authority under the Constitution with respect to federal regulation of the securities sector; (iii) delivery of an organizational and administrative transition plan by the Canadian Securities Transition Office this Summer; and (iv) ongoing work on rules and regulations that will complement the federal securities act. While inviting and encouraging all jurisdictions to join the federal effort, Budget 2010 states that the government will move forward with a majority of provinces and territories through voluntary participation.

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As of March 1, the U.S. Financial Industry Regulatory Authority (FINRA) Trade Reporting and Compliance Engine (TRACE) will now include debt issued by federal government agencies, government corporations and government-sponsored enterprises as well as primary market transactions in new corporate debt issues. The expansion of TRACE represents a 50% increase in the number of debt securities subject to its reporting requirements.

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On February 25, Saskatchewan joined Alberta, British Columbia and Manitoba in issuing an order making available certain limited trade-based registration exemptions to persons that would otherwise be required to register as exempt market dealers in the province. The order is most similar to that of Alberta, as it includes a condition that the person relying on the exemption must not have provided financial services to the purchaser at any time other than in connection with a prospectus-exempt distribution under the relevant sections, while also including language that the person relying on the exemption must not be registered or required to be registered. A companion policy providing guidance was also released.

The Northwest Territories, Nunavut and the Yukon Territory are expected to issue similar orders.

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The Provincial/Territorial Council of Ministers of Securities Regulation (Council) issued its 2009 Progress Report yesterday outlining the various regulatory activities undertaken last year across Canadian jurisdictions. The issues considered in the Council's Progress Report include the federal transition to a single securities regulator, the upcoming changeover to IFRS and the introduction in various jurisdictions of harmonized securities transfer legislation.

The Progress Report also provides a preview of initiatives that the Council anticipates the CSA will undertake during the next year, namely, a new rule dealing with oversight of credit rating organizations, the development of a harmonized regulatory framework for derivatives, including OTC derivatives, hedge fund regulation and executive compensation requirements.

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On February 26, the Ontario Securities Commission (OSC) announced the creation of an Investor Advisory Panel in order to afford investors better representation in the OSC's consideration of various issues. Specifically, the panel will provide input on such things as OSC proposals, concept papers and the annual statement of priorities. The panel will consist of seven members representing a broad range of investors and according to the OSC, applications for membership will be solicited within a few weeks. The Canadian Foundation for Advancement of Investor Rights (FAIR Canada), meanwhile, welcomed the OSC's announcement and provided a number of recommendations to the OSC in its formulation of the panel.

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On February 25, CIBC shareholders voted in favour of executive pay in what is believed to be the first "say on pay" vote at a Canadian financial services company. As we wrote in October 2009, Canada's largest financial services companies agreed last year to allow shareholders to vote on the same executive compensation resolution across all participating firms. Similar shareholder votes are expected over the coming weeks at the other major financial services institutions.

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