SEC proposes consolidated audit trail system

Citing the lack of a central database containing comprehensive and readily accessible data regarding orders and executions, the U.S. Securities and Exchange Commission proposed a new rule on May 26 that would require SROs to establish a consolidated audit trail system. Under the new system, exchanges and FINRA, as well as their members, would be required to provide certain information to the central repository regarding each quote and order in a National Market System (NMS) security.

Such a consolidated system would be intended to: (i) provide regulators direct and timely access to uniform consolidated order and execution information for all orders in NMS securities from all participants across all markets; (ii) enable SROs to better fulfill their regulatory responsibilities to oversee their markets and members; and (iii) enable the SEC to better carry out its oversight of the NMS for securities.

The SEC is accepting public comments on the proposal for 60 days after its publication in the Federal Register.

IIROC proposes rule on personal financial dealing with clients

The Investment Industry Regulatory Organization of Canada (IIROC) today proposed a new rule intended to "clearly articulate that any personal financial dealing with clients, subject to limited exemptions, is considered inappropriate conduct, a conflict of interest and a violation of the general business conduct standards." Prohibited conduct would include receiving direct or indirect benefits or other considerations from clients (other than through a Dealer Member), entering into private settlement agreements with clients, lending money or borrowing money from clients, and having any control or authority over the financial affairs of clients. Amendments to the current Rule 18.14 were also proposed in order to clarify that outside business activities require disclosure to, and approval by, Dealer Members.

Comments on the proposals are being accepted by IIROC for 90 days from today's publication.

CSA and IIROC provide update on dark pools

The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) today provided an update on their review of market structure issues such as dark pools. The update provides an overview of the views expressed at a consultation forum recently held by the two organizations to discuss Consultation Paper 23-404 Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada. Some of the themes that emerged during the forum included the practice of broker preferencing at the marketplace level and internalization of order flow, the practice of dark pools sending Indications of Interest to attract order flow and the use of market pegged orders. The notice also provides a summary of comments received with respect to the Consultation Paper and states that the CSA and IIROC continue to consider market structure issues and welcome further comments.

CESR increases coordination of members' market surveillance efforts

On May 25, the Committee of European Securities Regulators (CESR) released a statement describing the "intensifying close co-ordination of its members' market surveillance efforts" in light of recent market volatility in euro denominated debt instruments. The CESR also stated that it is of the view that structural reforms should be "rapidly introduced to enhance the transparency, organisation and functioning" of the bond and CDS markets, which are currently largely over-the-counter. According to the CESR, it is also working on measures to enhance the "organisation and integrity of OTC derivatives markets".

FINRA proposes enhanced oversight of firms' back offices

The U.S. Financial Industry Regulatory Authority (FINRA) released a Regulatory Notice on May 26 requesting comments on proposed rule amendments intended to enhance the oversight of broker-dealers' back office operations. The proposed amendments would create a registration category for operations professionals engaged in, or supervising, activities relating to sales and trading support and the handling of customer assets. A new qualification exam for operations professionals would be established as well as continuing education requirements. Comments on FINRA's proposal are being accepted until July 12, 2010.

Proposed federal Securities Act outlines framework for regulation of derivatives

Margaret Grottenthaler

The proposed federal Securities Act tabled by the federal government on May 26 establishes a framework for the regulation of exchange-traded and over-the-counter derivatives markets and their participants. Don’t expect to see a new regime too soon though. This legislation has not yet been introduced as a Bill but only laid before Parliament on a Ways and Means motion. The draft legislation has been referred to the Supreme Court of Canada to obtain a ruling as to whether it is within the legislative competence of the federal Parliament and will not be introduced until that question is resolved. Provinces are given the choice to opt into the federal scheme as well. Many provinces (not including Quebec and Alberta) have taken part in the process and would be expected to opt into the national scheme.

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Finance Minister Flaherty announces national securities regulator

As we mentioned a few weeks ago, federal Finance Minister Jim Flaherty recently stated that legislation to create a national securities regulator was imminent. Earlier today, Minister Flaherty unveiled a draft federal Securities Act, which would create such a regulator and allow provinces and territories to opt into the new regime voluntarily. According to the Minister, the proposed regime will provide: (i) better and more consistent protection for investors across Canada; (ii) improved regulatory and criminal enforcement to better fight securities-related crime; (iii) new tools to better support the stability of the Canadian financial system; (iv) faster policy responses to emerging market trends; (v) simpler processes for businesses, resulting in lower costs for investors; and (vi) more effective international representation and influence for Canada.

As there are impending legal challenges on the constitutionality of the plan, however, the proposed Act has been concurrently referred to the Supreme Court for its opinion on whether the proposed Act is within the federal government's legislative authority.

The Canadian Securities Transition Office has stated that it will release a technical commentary on the proposed legislation in the coming weeks and will also deliver a transition plan to the Minister and participating jurisdictions by July 12, 2010. Meanwhile, we expect to provide a more detailed review of the proposed legislation next week.

IOSCO publishes Principles Regarding Cross-Border Supervisory Cooperation

In light of concerns that national financial regulations may not sufficiently prevent future financial crises, the Technical Committee of the International Organization of Securities Commissions (IOSCO) yesterday published a report entitled "Principles Regarding Cross-Border Supervisory Cooperation". The report considers how regulators can enhance cross-border cooperation so as to "better supervise the entities that they regulate that have expanded their operations across borders." Specifically, the report provides a set of principles intended to guide cooperative supervisory arrangements among international regulators.

CDS proposes amendments regarding issue and entitlement procedures

CDS Clearing and Depository Services (CDS) has proposed amendments to its procedures to allow qualified CDS participants to issue and maintain security positions in CDSX in an uncertificated format. According to CDS, the amendments would provide "another option for issuers to issue their securities and is a further step supporting the Canadian capital markets' move towards a dematerialized environment." CDS is accepting comments on its proposed amendments for the next 30 calendar days.

Ontario reauthorizes publication of issuers in default of requirements

On May 18, Ontario's Bill 16, An Act to implement 2010 Budget measures and to enact or amend various Acts, received Royal Assent. Among other things, the Bill amends section 83 of the Securities Act to once again allow the Ontario Securities Commission (OSC) to publish a list of reporting issuers who are in default of any requirement of the Act or the regulations. Amendments to the Securities Act and the Commodity Futures Act also replace certain terms with comparable terms under International Financial Reporting Standards (IFRS).

Germany bans naked short selling

The Globe and Mail, among other media outlets, is reporting today that Germany has banned naked short selling of euro-denominated government bonds, credit default swaps based on the bonds and shares of the country's ten most important financial institutions. The ban, which apparently took effect at midnight, will run until March 31, 2011. According to Reuters, the move caught Germany's European Union colleagues off guard and elicited a particularly strong response from the French Finance Minister, who stated that France would not introduce a similar ban. Whether other EU countries follow suit, however, remains to be seen.

Code of Conduct for credit and debit card industry widely adopted

Minister of Finance Jim Flaherty announced yesterday the widespread adoption by major credit and debit card issuers, as well as payment processors, of the Code of Conduct for the Credit and Debit Card Industry in Canada. The Code is intended to increase transparency and disclosure by payment card networks and acquirers to merchants, provide merchants with the flexibility to encourage consumers to choose the lowest-cost payment option and allow merchants to choose which payment options they will accept. Much of the Code comes into effect as of August 16, 2010.

SEC announces circuit breaker rule proposals

As we discussed yesterday, recent media reports suggested that the U.S. Securities and Exchange Commission (SEC) was planning to announce proposals for new circuit breaker rules to address issues stemming from the market volatility of May 6. Such proposals were subsequently announced late yesterday afternoon.

Under the proposed rules, which reflect a consensus among the various U.S. stock exchanges and the Financial Industry Regulatory Authority (FINRA), trading in a stock would be paused for five minutes where the stock experienced a 10 percent change in price over a five minute period. The five minute pause would be intended to "give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price and resume trading in a fair and orderly fashion." If approved by the SEC after the comment period, the new rules would be in effect on a pilot basis through December 10, 2010, during which time SEC staff would study, among other things, the impact of other trading protocols.

The SEC and Commodity Futures Trading Commission (CFTC) also released their preliminary findings yesterday regarding the "unusual market events" of May 6. While the events of that day continue to be reviewed, the report focuses on the following "hypotheses and findings": (i) the possible linkage between the decline in the prices of stock index products and the simultaneous and subsequent waves of selling in individual securities; (ii) a generalized severe mismatch in liquidity; (iii) the extent to which the liquidity mismatch may have been exacerbated by disparate trading conventions among various exchanges; (iv) the need to examine the use of "stub quotes"; (v) the use of market orders, stop loss market orders and stop loss limit orders that, coupled with sharp price declines, might have contributed to market instability; and (vi) the impact on Exchange Traded Funds.

Nova Scotia passes Securities Transfer Act

Nova Scotia's Bill 33, the Securities Transfer Act, received Royal Assent on May 11. According to Minister of Service Nova Scotia and Municipal Relations Ramona Jennex, the legislation "brings greater legal certainties around the holding, transferring and pledging of securities." Nova Scotia now joins most other provinces, which have previously adopted similar legislation.

US to announce new market circuit breakers

The Globe and Mail is reporting today that new circuit breaker rules will soon be introduced by the U.S. Securities and Exchange Commission in an attempt to prevent the type of market volatility seen on May 6th. According to the Globe, the circuit breakers may be operational as early as June 14.

CSA and IIROC analyzing recent market volatility

Last Friday, the Canadian Securities Administrators (CSA) announced that it was conducting, along with the Investment Industry Regulatory Organization of Canada (IIROC), a "comprehensive analysis" of the events of May 6th with respect to market volatility in the U.S. and Canada. Specifically, the CSA and IIROC state that they will engage in "active dialogue" with other regulators, marketplaces and market participants to consider market volatility issues. Further, they intend to examine electronic trading issues and the appropriateness of the existing circuit breaker policies. For more information on the response of regulators to the events of earlier this month, see our post of May 11.

OSC staff set out views regarding change of control of mutual fund manager

The Ontario Securities Commission (OSC) today released OSC Staff Notice 81-710, setting out the views of OSC Staff regarding the circumstances in which staff may view a change of control of the manager of a mutual fund to effectively be a change in the manager requring securityholder approval. According to the OSC, this issue will generally arise if the transaction is structured in one of the following ways: (i) the manager of a mutual fund amalgamates with another investment fund manager; (ii) if, immediately following a change in control of the manager of the mutual fund, a change of manager will occur where the new manager will be the entity that acquired control of the original manager or an affiliate of such entity; or (iii) when it is contemplated that within a foreseeable period of time following a change in control of the manager of the mutual fund, a change of manager of the mutual fund will occur where the new manager will be the entity that acquired control of the original manager or an affiliate of such entity.

CDS announces proposed changes to procedures and rules

CDS Clearing and Depository Services (CDS) announced the proposed termination of the Euroclear UK Direct Service last week to reduce operating costs and avoid the projected costs of an anti-money laundering compliance program. CDS also proposed making changes to the form used for participants applying to act as an ISIN activator, security validator or custodian of CDSX eligible securities. The form changes would limit the application to domestic custodians and remove the requirement for Board approval of such applications.

Comments on the proposed amendments are being accepted for 30 calendar days for today's publication in the OSC Bulletin.

IIROC announces online reporting of post licensing requirements

The Investment Industry Regulatory Organization of Canada (IIROC) has announced that effective June 14, its Dealer Members will be able to download an online report listing the post licensing requirements and corresponding due dates of its relevant employees. Post licensing requirements are set out in IIROC's Dealer Member Rules and include certain courses and examinations. With the creation of online reporting, IIROC will no longer be providing email notifications listing such requirements.

IIROC releases updated annotated UMIR

The Investment Industry Regulatory Organization of Canada (IIROC) released an update to the annotated Universal Market Integrity Rules (UMIR) yesterday that incorporates changes to the rules, guidance issued and disciplinary decisions made since June 1, 2008. The annotated rules are current as of April 1, 2010.

CPSS and IOSCO release two reports regarding OTC derivatives

The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) released two reports yesterday regarding OTC derivatives. The first, Guidance on the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties to OTC derivatives CCPs, provides guidance to central counterparties clearing OTC derivatives in applying the Technical Committee's 2004 recommendations. Considerations for trade repositories in OTC derivatives markets, meanwhile, provides a set of considerations for trade repositories in OTC derivatives markets and relevant authorities.

IOSCO releases consultation paper regarding credit rating agencies

The Technical Committee of the International Organization of Securities Commissions (IOSCO) recently released a consultation report addressing recent regulatory initiatives that impact credit rating agencies. Specifically, the report is intended to evaluate whether, and if so how, international initiatives implement the four IOSCO principles regarding credit rating agencies, being: (i) quality and integrity in the rating process; (ii) independence and conflicts of interest; (iii) transparency and timeliness of ratings disclosure; and (iv) confidential information.

IOSCO is accepting public comments on the report until August 6, 2010.

Regulators respond to market volatility

As regulators continue to investigate last Thursday's extreme market volatility, the Investment Industry Regulatory Organization of Canada (IIROC) has announced that it has re-priced or cancelled various trades occurring during the market slide. Various U.S. markets have also announced that they would cancel trades (see for example announcements from NYSE Arca and NASDAQ). Meanwhile, the Securities and Exchange Commission (SEC) announced yesterday that it has met with the leaders of the Financial Industry Regulatory AuthorityNASDAQ, BATS, Direct Edge, ISE and the CBOE, and that all parties have agreed on a structural framework for strengthening circuit breakers and handling erroneous trades.

Today, the SEC and Commodity Futures Trading Commission announced the formation of a joint committee to address "emerging regulatory issues", with the first item on the committee's agenda being a review of last Thursday's market events. Meanwhile, SEC Chairman Mary Schapiro testified before the Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises this afternoon to summarize the events of May 6, provide an overview of the current market structure and discuss various regulatory tools to be considered "in determining how best to maintain fair and orderly financial markets and to prevent severe market disruptions in the future."

CFTC issues advisory regarding speculative position limits

On May 7, the U.S. Commodity Futures Trading Commission (CFTC) issued an Advisory to alert market participants regarding their "ongoing legal obligations to comply with speculative position limits." Specifically, the CFTC reaffirmed that such limits apply on an intraday as well as an end-of-day basis and that traders whose positions exceed the applicable speculative position limit "at any time during the day" (emphasis in text) are in violation of the pertinent regulations even if their positions are reduced below the limit by the end of the day.

TMX outlines objection to US-style short sale regulation

On May 3, TMX Group Inc., released a letter written to the Canadian Securities Administrators (CSA) outlining its position on the regulation of short sales in Canada in light of recent U.S. amendments on the subject.

Specifically, TMX recommended against adopting SEC-style amendments incorporating a price test trigger and stated that the "additional regulation of short sales in Canada is not warranted." In support of its views, TMX outlined findings from an analysis it performed on securities inter-listed on the TSX and a U.S. exchange. TMX found that on average, at least one inter-listed security would have triggered the SEC-style short sale circuit breaker every day. According to TMX, however, "it is highly unlikely that manipulative shorting occurs every day in one of the inter-listed securities." Thus, TMX urged the CSA "to take a decision on short sales that is contrary to the SEC's politically driven amendment to Reg SHO". Citing UMIR amendments to address failed trades and the strong real-time surveillance and enforcement capabilities of IIROC, TMX further outlined its support for "the removal of the short sale price test for all exchange-listed securities in order for Canadian participants to operate under one rule."

Finance Minister to soon send securities regulator bill to Supreme Court

Finance Minister Jim Flaherty is reportedly days away from seeing the completion of draft legislation to create a national securities regulator. According to press reports, Ottawa is planning to send the draft bill to lawmakers and the Supreme Court for a reference on its constitutionality within a few weeks.

CDS proposes various amendments to rules

CDS Clearing and Depository Services announced proposed amendments to its rules this week to enable the implementation of TRAX, a web application to facilitate communications between transfer agents and participants, as well as to introduce a soft cap and related monitoring mechanism for the net payment obligations of the New York Link service. Both sets of proposals are open for public comment for 30 calendar days from their publication in the OSC Bulletin today.

FINRA to perform market oversight functions of NYSE Regulation

It was announced on May 4 that the U.S. Financial Industry Regulatory Authority (FINRA) would be assuming the market surveillance and enforcement functions currently conducted by NYSE Regulation. Under the agreement, which is subject to review by the Securities and Exchange Commission, FINRA would assume the regulatory functions for NYSE Euronext's U.S. equities and options markets, being the NYSE, NYSE Arca and NYSE Amex.

Rocks don't change but rules do

Proposed amendments to NI 43-101 Standards of Disclosure for Mineral Projects

Raymond McDougall

Following a substantive review of National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101), the Canadian Securities Administrators (the CSA) have issued for comment an amended draft of NI 43-101 (Amended NI 43-101). Amended NI 43-101 does not alter any of the fundamental principles of NI 43-101, but it does contain a significant number of changes and many improvements.


In the spring of 2009, securities commissions in British Columbia, Ontario and Quebec conducted consultations with mining-industry participants, including issuers, advisors and professionals, as part of an ongoing review to improve and update NI 43-101. Through this process, and with additional input obtained by the commissions in Alberta and Saskatchewan, the CSA collected and considered various feedback and suggestions. Amended NI 43-101 represents the outcome of this process, together with the views and experiences of the CSA since the adoption of NI 43-101. The result includes many improvements that streamline and reduce certain specific regulatory burdens under NI 43-101 in a variety of contexts, including corporate finance and M&A transactions, particularly those involving parties from international jurisdictions. At the same time, Amended NI 43-101 introduces some new requirements, particularly by making changes to the technical report requirements.

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CSTO releases report on investor panel roundtable

On April 30, the Canadian Securities Transition Office (CSTO) released a report summarizing the views of investor stakeholders on the topic of establishing an independent investor panel as part of a new national securities regulator. Issues for discussion as part of the roundtable included the potential mandate of the panel, the composition and appointment of panel members and how the panel should be funded.

While a "wide range of views" were shared during the discussions, the report identified a number of common themes that emerged. Such themes included an emphasis on clarity in defining the panel's mandate and the desire that there be transparency in the process of establishing an investor panel and its operation. The report did not, however, come to any conclusions and the CSTO stated that it will continue to consult on the issue with a view to ultimately providing recommendations to the Minister of Finance.

CCGG releases report on building high performance boards

In March, the Canadian Coalition for Good Governance (CCGG) released the 2010 version of Building High Performance Boards, which provides governance guidelines for boards of public issuers. The guidelines were developed by the CCGG following industry consultation. The CCGG suggests reporting issuers "adopt these governance policies and procedures...over and above the minimum standards required by CSA regulations and corporate law."

Specifically, according to the CCGG, issuers should: (i) facilitate shareholder democracy; (ii) ensure that at least two-thirds of directors are independent of management; (iii) separate the roles of Chair and CEO; (iv) ensure that directors are competent and knowledgeable; (v) ensure that the goal of every director is to make integrity the hallmark of the company; (vi) establish mandates for board committees and ensure committee independence; (vii) establish reasonable compensation and share ownership guidelines for directors; (viii) evaluate board, committee and individual director performance; (ix) oversee strategic planning, risk management and the hiring and evaluation of management; (x) assess the CEO and plan for succession; (xi) develop and oversee executive compensation plans; (xii) report governance policies and initiatives to shareholders; and (xiii) engage with shareholders within and outside the annual meeting. Each guideline is accompanied by expected best practices.

The CCGG states that it expects that companies will develop and adopt new best practices over time and the document will be periodically revised to ensure it stays relevant.

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