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

On Tuesday, the U.S. Securities and Exchange Commission (SEC) published a request for public comment for a study to evaluate

the effectiveness of existing legal or regulatory standards of care for brokers, dealers, investment advisers, and persons associated with them when providing personalized investment advice and recommendations about securities to retail investors; and whether there are gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers relating to the standards of care for these intermediaries.

Such a study is required by s. 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama last week. In Canada, most provinces and territories adopted a fiduciary standard for registrants as part of the broad registration reforms implemented last September.

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The Canadian Securities Administrators today released CSA Staff Notice 31-317 (Revised) – Reporting Obligations Related to Terrorist Financing. The revised Notice is intended to make clear CSA staff's views that all dealers and advisers relying on exemptions from the registration requirements are subject to federal monthly reporting requirements, including newly exempted international dealers and international advisers. The Notice also sets out the view of CSA staff regarding the mechanics of complying with federal reporting requirements and includes a new consolidated CSA reporting form.

For more information on the initial publication of the Notice, see our post of April 29. For a brief description of the implementation of anti-terrorist financing legislation in Canada, see our update of March 19, 2008. Our insurance colleagues have also prepared a helpful overview of Canada's listings and sanctions laws that, while focused on insurers, also applies to entities engaged in the business of dealing in securities or providing portfolio management or investment counselling services.

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The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) released a report earlier this week that reviews "the conflicts of interest that arise when exchanges that are commercial businesses also act as regulators and supervisors of issuers." Specifically, the report contends that the TSX is the only major exchange reviewed that has failed to implement specific measures to manage its conflicts of interest in regulating listed companies. According to FAIR Canada, other major exchanges have addressed such conflicts through changes in corporate governance, organizational structure, corporate policies and internal procedures.

Ultimately, the report provides three regulatory alternatives for the TSX to consider, being: (i) transferring most listings regulation responsibilities to another regulator; (ii) establishing a regulation subsidiary company with independent governance to perform listing regulation; and (iii) establishing a listings regulation department that is separate from the business operations of the exchange to perform listings regulation. While an Ontario legislative committee recently recommended that the OSC review the potential for conflicts of interest between the regulatory and commercial functions of the TSX, it is not yet clear whether any regulatory changes will be made.

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On Monday, Her Majesty's Treasury launched a consultation to gather views on the British Government's proposals to reform the UK's financial regulatory framework. As discussed in our post of June 17, the proposals would: (i) give the Bank of England the authority over macro-prudential regulation; (ii) establish a new prudential regulator, operating as a subsidiary of the Bank of England, that would regulate financial firms; and (iii) establish a new Consumer Protection and Markets Authority to regulate the conduct of financial firms providing services to consumers. The just-released consultation document provides further details regarding the proposals and asks specific questions for public comment.

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As we previously discussed, the New Brunswick Securities Commission recently proposed an amendment to its Local Rule 91-501 Derivatives to modify the language respecting the exemption for "qualified parties".  Specifically, the amendment states that the registration requirement does not apply "where each party to the trade is a qualified party acting as principal". The NBSC has now set the date of implementation of the amendment as September 1, 2010.

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Last month, the House of Commons' Standing Committee on Industry, Science and Technology released a report based on its statutory review of the Canada Business Corporations Act. The report considered a number of issues and ultimately recommended that a broad public consultation be conducted by the government within two years regarding issues such as: (i) executive compensation, including whether shareholders should have an advisory vote on compensation packages; (ii) shareholder rights and governance, including the election of directors and shareholder approval for significantly dilutive acquisitions; and (iii) securities regulation.

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The Ontario Securities Commission (OSC) today published a revised version of OSC Staff Notice 21-703 - Transparency of the Operations of Stock Exchanges and Alternative Trading Systems. Staff Notice 21-703 sets out the process of OSC Staff for reviewing changes to certain operations of exchanges and alternative trading systems. The Notice has been revised in order to apply to the notice and filing process relating to the initial operations of an ATS seeking to carry on business in Ontario.

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The Canadian Securities Administrators (CSA) today released CSA Staff Notice 52-326 IFRS Transition Disclosure Review, which provides an assessment of IFRS transition disclosure made by issuers in 2009 annual MD&A. The review, which was completed in consideration of disclosure guidance provided in May 2008, ultimately found an improvement in the amount and quality of transition disclosure. Specifically, findings included:

• 95% of issuers reviewed disclosed their IFRS transition plans;
• 60% of issuers described milestones and anticipated timelines associated with key elements of their transition plans;
  82% of issuers identified significant accounting policy differences between Canadian GAAP and IFRS; and
• 80% of issuers provided an update of transition information from 2008 disclosure.

The CSA did, however, identify various areas for improvement. For example, despite the fact that the vast majority of issuers disclosed their transition plans in their MD&A, many failed to discuss key elements of their plans. According to the CSA, "[f]or each key element of an IFRS changeover plan discussed in MD&A, issuers should have described the significant milestones and anticipated timelines." The CSA also stated that issuers should consider whether they can communicate quantified information in 2010 interim and annual MD&A prior to final approval of IFRS balances.

It is expected that the CSA will continue to review IFRS transition disclosure as part of their overall continuous disclosure review program and that issuers should expect requests to refile MD&A if disclosure obligations are not met. Thus, the movement towards the implementation of IFRS continues. As 2011 approaches, it is clear that, while issuers are making definite improvements in disclosing their IFRS transition plans, care must be taken to ensure that regulatory expectations are met.

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Daniella Laise

As we discussed in our post of June 25, the Canadian Securities Administrators (CSA) recently published for comment proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions (31-103), National Instrument 33-109 Registration Information  (33-109), and Ontario Securities Commission Rule 33-506 (Commodity Futures Act) Registration Information and related policies and forms (the First Year Amendments). The First Year Amendments range from technical adjustments to more substantive matters and, according to the CSA, will serve to “enhance investor protection and improve the day-to-day operation” of the registration regime for both industry and regulators. Summarized below are some of the more substantive proposals under the First Year Amendments.

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On July 15, 2010, Quebec's financial services regulator, the Autorité des marchés financiers (the AMF), published two guidelines with respect to the investment management practices of financial institutions, including insurers, portfolio management companies controlled by an insurer, mutual insurance associations, financial services cooperatives and trust and savings companies governed by any of the following Quebec acts: An Act respecting insurance, An Act respecting financial services cooperatives and An Act respecting trust companies and savings companies.

Respectively, the "Investment Management Guideline" (at page 132) and the "Derivatives Risk Management Guideline" (at page 168) set out, in a principles-based approach, AMF guidelines with respect to the sound and prudent investment management practices that financial institutions are required to apply. A draft "Investment Management Guideline" (at page 137) had previously been circulated for public consultation by the AMF in November 2009, and the two recently circulated guidelines are a result of the consultation process. The AMF has stated that due to the complexity and risk-potential of derivatives, it has been decided to establish a separate guideline devoted specifically to derivatives risk management. The AMF has noted that its guidelines are based on core principles and guidance issued by international organizations, including the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors.

The guidelines come into effect on August 1, 2010 and the AMF expects each financial institution to develop strategies, policies and procedures based on its nature, size, complexity and risk profile, to ensure the adoption of the principles underlying the guidelines by August 1, 2012. The AMF has also stated that where a financial institution has already implemented such a framework, the AMF may verify whether it enables the institution to satisfy the requirements of sound and prudent investment management practices prescribed by law.

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Yesterday, the Securities and Exchange Commission (SEC) approved changes to Form ADV, the principal disclosure document that registered investment advisers are required to provide to clients. According to SEC Chairman Mary Schapiro, the current form's check-the-box formal "frequently does not correspond well to an adviser's business." As such, the changes are intended to improve the information available to clients regarding those providing them with investment advice. To that end, the format of the brochure will be updated to including narrative in plain English, the content will be expanded to include topics such as fees and compensation, an adviser's disciplinary information and brokerage practices and advisers will be required to deliver brochure supplements that contain "résumé-like disclosure" regarding such things as educational background and business experience. Advisers will also be required to electronically file brochures, which will be available to the public on the SEC's website.

The amendments will be effective 60 days after publication in the Federal Register and the SEC expects that investment advisers will begin distributing and posting new brochures in the first quarter of 2011.

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On July 20, the Ontario Securities Commission (OSC) announced that it had approved the adoption of a new rule Rule 12 to its Rules of Procedure in order to enhance the approval process with respect to settlement agreements. Specifically, the new rule would provide for a settlement conference to be held in camera, before a public settlement hearing, for the purpose of providing the parties the opportunity "to make confidential submissions on a proposed settlement to a Panel in order to obtain guidance on whether the terms of the proposed settlement would, in the view of the Panel, be in the public interest." 

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The Securities and Exchange Commission (SEC) yesterday announced proposals intended to improve the regulation of mutual fund distribution fees and provide enhanced disclosure for investors. Distribution fees, also known as 12b-1 fees, are fees paid by the fund out of its assets to cover distribution costs and shareholder service expenses. The proposals would limit fund sales charges, improve the transparency of fees by requiring funds to identify and more clearly disclose distribution fees, encourage retail price competition and revise fund director oversight duties. The proposals will be open to a 90-day comment period after publication in the Federal Register.

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On July 16, Alpha ATS announced plans to offer new order types through its Alpha IntraSpread facility, specifically dark orders and "seek dark liquidity" (SDL) orders. Dark orders are fully hidden and provide no pre-trade transparency, while SDL orders are used to interact with the dark liquidity of the same subscriber. Alpha ATS is accepting comments on its proposals until August 16, 2010 and it stated that if no regulatory concerns are raised, it may implement the changes by August 30, 2010.

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The U.S. Securities and Exchange Commission (SEC) announced last week that Goldman, Sachs & Co. had agreed to pay $550 million to settle charges that the company had misled investors respecting a subprime mortgage product. The settlement also requires remedial action by Goldman Sachs with respect to the company's review and approval of certain mortgage securities offerings and additional education and training of employees in this area of the company's business. For more on the case and settlement, see this article from the New York Times.

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Earlier this month, the Canadian Securities Administrators released its Oversight Review Report of the Mutual Fund Dealers Association of Canada. The report followed an oversight review of the MFDA's regulatory functions by staff at various provincial securities regulators to (i) assess whether the MFDA is in compliance with the relevant terms and conditions of its recognition orders; (ii) determine whether the MFDA's regulatory processes are efficient, effective, consistent and fair; and (iii) evaluate whether the MFDA has adequate staffing, resources and training to perform its regulatory functions effectively and efficiently.

Ultimately, while the review found that the MFDA was generally compliant with the relevant terms and conditions of its recognition orders, it did include a number of recommendations, including with respect to the Financial Compliance group at head office. Recommendations concerned internal benchmarks used by the Financial Compliance group, the review of financial questionnaire and reports and the financial compliance examination process. The report includes the MFDA's responses to the report's concerns and the expected follow-up where appropriate.

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On July 15, the U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act by a vote of 60-39. The legislation is intended to overhaul the financial regulatory system in the U.S. by improving the supervision and regulation of federal depository institutions, providing transparency to derivatives markets and setting out obligations regarding corporate governance and executive compensation.

The legislation, which was passed by House of Representatives on June 30, is now awaiting the President's signature. A brief summary of the legislation is provided by the House Financial Services Committee, while Steven M. Davidoff provides some thoughts in the New York Times' DealBook.

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The OSC has approved amendments to MFDA rules respecting client accounts, client communications and client reporting. The original proposals, which we noted in our post of May 2009 and will, among other things, require that investors are provided with certain information at the time of account opening, clarify the duty of MFDA Members and approved persons to assess the suitability of investments in client accounts when various triggering events occur and clarify Members' supervisory requirements regarding client communications that disclose a rate of return.

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The Canadian Securities Administrators today published for comment a proposed rule, policies and related consequential amendments that would impose regulatory oversight for designated credit rating agencies and organizations. Under the proposals, credit rating organizations wishing to become designated for the purposes of having their credit ratings eligible for use where credit ratings are referred to in securities legislation would have to apply and, once designated, maintain and ensure compliance with a code of conduct that complies with the provisions of the IOSCO Code of Conduct Fundamentals for Credit Ratings Agencies of the International Organization of Securities Commissions. The IOSCO Code addresses such issues as: (i) the quality and integrity of the rating process; (ii) credit rating agency independence and the avoidance of conflicts of interest; (iii) credit rating agency responsibilities to the investing public and issuers; and (iv) disclosure of the code of conduct and communication with market participants. Deviations, however, from the provisions of the IOSCO Code would be permitted under certain circumstances.

Comments are being accepted by the CSA until October 25, 2010.

Notice and Request for Comment - Proposed National Instrument 25-101 Designated Rating Organizations, Related Policies and Consequential Amendments.

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As discussed in our post of November 18, 2009, the Toronto Stock Exchange proposed changes last year with respect to security holder approval in the case of investment fund acquisitions. The proposals followed changes to the TSX Company Manual requiring approval of security holders of an aquiror for the issuance of securities as consideration for an acquisition where the number of securities exceeds 25% of the issued and outstanding securities of the aquiror. The proposed amendments were intended to exempt investment funds from this requirement provided certain conditions were satisfied and would also require security holder approval by investment funds that are the subject of an acquisition unless certain conditions are satisfied.

Today, the TSX announced the adoption of the amendments with certain changes made in response to comments from the public and the OSC. Specifically, the final amendments clarify that the requirement for security holder approval of an investment fund which is the subject of an acquisition (unless certain conditions are met) applies to acquisitions of funds or assets. Other changes to the original proposal were made, including requiring the fund manager to make certain determinations rather than the Independent Review Committee.

The amendments will become effective on August 16, 2010. While not retroactive, the TSX stated that it will consider applications by investment funds made prior to the effective date for discretionary exemptions.

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In a speech Tuesday to the British Bankers' Association, Lord Adair Turner, Chairman of the Financial Services Authority (FSA) discussed a new approach to regulation in the U.K. Specifically, Lord Turner discussed a "major shift in philosophy" towards a "more pre-emptive and instrusive approach to supervision". This would involve analyzing trends in the economic and market environment to identify potential risks to consumers, examining firms' business models to understand the drivers of profitability, reviewing whether firms have product development and approval processes that weed out innappropriately marketed or harmful products and taking action to ensure customers are protected where incentives, structures or products are found that would likely lead to poor customer outcomes.

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The Securities and Exchange Commission yesterday announced that it was issuing a concept release to seek public comment on the U.S. proxy system. Specifically, the comprehensive review focuses on the accuracy, transparency and efficiency of the voting process, communications and shareholder participation and the relationship between voting power and economic interest. The SEC is accepting public comment for a 90-day period.

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The U.S. Financial Industry Regulatory Authority (FINRA) yesterday announced an expansion in the amount of information that will be available to the public regarding current and former security brokers through its online BrokerCheck service. Specifically, the changes will increase the number of customer complaints that are reported publicly by disclosing historic complaints back to 1999, expand the disclosure period for former brokers from two years to ten years, make certain information regarding former brokers permanently available and formalize the process for brokers to dispute the accuracy of the information. The expansion of BrokerCheck is expected to be complete by the end of the year.

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The Canadian Securities Transition Office today announced the release of its Transition Plan for the Canadian Securities Regulatory Authority. The Transition Plan provides a roadmap for establishing the CSRA and sets out a vision for the Authority's regulatory approach. Issues considered by the Transition Plan include governance, organization design, business processes and implementation planning.

According to the Transition Office, the next step in the transition will involve the signing of development agreements between the participating provinces and territories and the federal government by September 2010. Under the development agreements, the provinces and territories would assign regulatory and ministry staff to share expertise in establishing the CSRA. Work under the development agreements would be followed by memoranda of understanding between the participating provinces and territories and the federal government to address various matters of interest. These MOUs would be concluded by July 1, 2011. A launch date for the CSRA, meanwhile, has been established as July 1, 2012.

For more information on the move towards a national securities regulator, see our post of June 8, 2010.

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On June 30, an amendment to Quebec's Derivatives Regulation came into force, which states that Regulation 23-102, which adopts National Instrument 23-102 Use of Client Brokerage Commissions in the province, applies to dealers and advisers governed by the Derivatives Act.

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The Canadian Securities Administrators today released Staff Notice 51-332 - Continuous Disclosure Review Program Activities for the Fiscal Year Ended March 31, 2010. As the title of the notice implies, the report summarizes the results of the CSA's continuous disclosure review program of issuers (other than investment funds) for fiscal 2010.

During fiscal 2010, the CSA completed 527 full reviews and 824 issue-oriented reviews of issuers, selected generally from those at a higher risk of non-compliance. Ultimately, the CSA required 72% of issuers reviewed to take action to improve disclosure. Common deficiencies identified in the full reviews related to the disclosure of accounting policies and measurement issues, the generic nature of disclosure in the MD&A and the improper use of oil and gas terminology. Review outcomes included (i) requiring an issuer to make certain changes or enhancements in the next filing; (ii) educating the issuer with respect to disclosure enhancements; (iii) requiring the issuer to refile certain documents; and (iv) adding the issuer to the CSA's default lists, issuing a cease trade order or referring the issuer to enforcement.

For fiscal 2011, the CSA stated that issue-oriented reviews will focus on IFRS transition disclosure, material contracts, corporate governance and follow-up review of certification.

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Mihkel E. Voore and Ramandeep Grewal

As we discussed in our post of April 9, the Canadian Securities Administrators (CSA) have recently published much-anticipated proposals to amend National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101), which would give issuers the option to post proxy-related materials on a non-SEDAR website under a “notice-and-access” model. The proposed amendments aim not only to facilitate communication with shareholders, but also include amendments intended to increase the overall efficiency and equity among key players involved in the securityholder communication process.

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As we discussed in our post of September 18, 2009, the U.S. Securities and Exchange Commission published a proposal last year to eliminate the exception under Rule 602 of Regulation NMS under the Securities Exchange Act of 1934 for the use of flash orders by equity and options exchanges.

On July 2, the SEC reopened the comment period on the proposal for 30 additional days.

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On July 2, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 10-0191 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 third quarter of 2010 as 1,000 points, 2,050 points and 3,050 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%) - 2,350 points and Level 3 (30%) - 3,500 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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