Posted on September 30, 2010
On September 28, the U.S. Financial Industry Regulatory Authority (FINRA) announced that it will file a rule proposal with the Securities and Exchange Commission next month that will allow investors to opt for all-public panels in arbitration claims. According to FINRA, "[g]iving each individual investor the option of an all-public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process".
In recent months, the Investment Industry Regulatory Organization of Canada (IIROC) has also been considering changes to its arbitration program. A review of the program was initiated in December 2009, while a request for comments on specific changes was released in August 2010.
Posted on September 30, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) announced the launch of a surveillance system yesterday that will allow it to conduct surveillance across all Canadian equity markets. According to IIROC, the Surveillance Technology Enhancement Platform (STEP) will allow it to "keep pace with the dramatic increase in the speed and volume of trading activity" in Canadian equity markets. Among other things, STEP provides IIROC with an increased monitoring capacity and the ability to more easily identify potential violations, such as with respect to best execution and trade-throughs.
Posted on September 30, 2010
The New York Stock Exchange's Commission on Corporate Governance released a report last week that identified core governance principles it believed could be widely accepted and supported by issuers, investors, directors and other market participants. The Commission, formed in response to the financial crisis of 2008 and 2009, considered numerous issues, including the proper role and scope of a director's authority, management's responsibility for governance and the relationship between a shareholder's trading activities, voting decisions and governance.
Ultimately, the Commission achieved a consensus on ten principles, namely:
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Posted on September 29, 2010
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Securities and Exchange Commission (SEC) today published a final rule amending Regulation FD to remove the exemption previously available in respect of disclosure made to credit rating agencies.
In order to prevent selective disclosure, Regulation FD requires public disclosure of any material nonpublic information that is provided by an issuer or those acting on its behalf to certain enumerated persons, including securities market professionals. In order to implement Section 939B of the Dodd-Frank Act, Regulation FD is being amended to remove Rule 100(b)(2)(iii) of Regulation FD, which generally exempts issuers from having to make such disclosure if the material nonpublic information is provided to a credit rating agency under certain circumstances. Given the Dodd-Frank Act imposes a 90-day deadline for this amendment, the amendment will be effective for disclosure made on or after its publication in the Federal Register.
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Posted on September 24, 2010
Alix d’Anglejan-Chatillon
AMF Staff issued a notice today further extending the term of the temporary exemption provided under its February 1, 2009 blanket decision No. 2009-PDG-0007 (the Blanket Order). The Blanket Order provides relief from the derivatives dealer and adviser registration requirements and the derivatives qualification rules under the Derivatives Act (Quebec) for specified derivatives activities carried out solely with “accredited investors” (as defined under National Instrument 45-106 Prospectus and Registration Exemptions). The original exemption had been extended to September 28, 2010 in a March 26, 2010 AMF Staff notice. Today's notice further extends the Blanket Order for an indefinite term and states Staff's intention to publish any amendments to the relief "at an appropriate time".
Posted on September 24, 2010
Ivan T. Grbešić and Alex Colangelo
The Canadian Securities Administrators (CSA) released Staff Notice 41-305 on September 24, which discusses the factors considered by regulators when assessing a proposed share structure in an IPO and, specifically, whether a proposed structure is contrary to the public interest. According to the notice, the CSA have encountered numerous IPOs recently where questions with respect to the proposed share structure led to a recommendation against the issuance of a prospectus receipt on such offerings. The CSA is particularly concerned with companies that have already issued an "unusually large" number of shares for nominal cash consideration, especially where the company has a limited history of operations and the IPO financing is relatively small.
Ultimately, the CSA provided a list of qualitative and quantitative factors used in evaluating the acceptability of IPO share structures. These include:
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Posted on September 23, 2010
Last week, the U.S. Securities and Exchange Commission (SEC) announced proposals intended to "shed a greater light" on the short-term borrowing practices of public companies. Specifically, the proposals would require all companies that provide MD&A disclosure to provide quantitative information regarding: (i) the amount of short-term borrowings outstanding at the end of the reporting period and the weighted average interest rate on those borrowings; (ii) the average amount outstanding during the period and the weighted average interest rate on those borrowings; and (iii) the maximum month-end amount of short term borrowings during the reporting period. With respect to the last requirement, financial companies would have to provide the maximum daily, rather than month-end, amount of short-term borrowings. Companies would also be required to provide quantitative information regarding the arrangements of their short-term borrowings.
Of particular note for Canadian companies, foreign private issuers, other than MJDS filers, would be subject to substantially similar requirements, but without the requirement for quarterly reporting. MJDS filers, however, would be unaffected by the proposals.
According to SEC Chairman Mary Schapiro, "[u]nder these proposed rules, investors would have better information about a company's financing activities during the course of a reporting period - not just a period-end snapshot." As such, investors "would be able to evaluate the company's ongoing liquidity and leverage risks." Comments on the proposals are being accepted by the SEC for 60 days after their publication in the Federal Register.
Posted on September 22, 2010
The Canadian Coalition for Good Governance recently released its 2009-2010 annual report, titled Improving Corporate Governance in Canada. Among other things, the report lists CCGG's accomplishments over the past year and sets out its operational plan for 2010-2011. According to the report, the CCGG intends to focus on such governance matters as expanding its engagement program, continuing to encourage boards to follow its Principles of Executive Compensation, encouraging issuers to adopt "say on pay", developing principles to assist boards in determining director compensation policies, releasing guidance to assist boards in applying its Building High Performance Boards to corporations controlled by a shareholder holding a majority or controlling equity stake in the company, updating its Statement of Principles Regarding Member Activism, urging the federal and provincial governments to create a national regulator with improved enforcement and eliminating barriers to shareholder democracy.
Posted on September 22, 2010
The Securities and Exchange Commission has published a timetable on its website outlining its schedule for implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The timetable, which extends to July 2011, suggests a busy year of rule-making at the SEC and would see, among other things, new rules regarding shareholder votes on executive compensation proposed by the end of the year.
Posted on September 21, 2010
Citing the need to increase transparency and reduce counterparty and operational risk, the European Commission recently released new proposals to regulate the OTC derivatives market. Among other things, the proposals would require trades in OTC derivatives in the EU to be reported to central data centres (trade repositories) accessible to regulators. A new European Securities and Markets Authority would be responsible for registering and monitoring trade repositories, while standard OTC derivatives would have to be cleared through central counterparties. The EC expects the proposals to be promulgated by the end of 2011.
For more information, see the EC Press Release and the accompanying Impact Assessment.
Posted on September 21, 2010
On September 10, the Securities and Exchange Commission (SEC) approved new rules to expand its circuit breaker pilot program, which currently applies to stocks listed in the S&P 500 Index, to all stocks in the Russell 1000 Index and certain exchange-traded funds. As we discussed in our post of May 19, the SEC's circuit breaker is tripped and stops trading in a security for a five-minute period if the security experiences a 10 percent price change over the preceding five minutes.
The SEC also approved rules clarifying the process for breaking erroneous trades. We discussed generally the nature of the SEC's original proposal in our post of June 18.
Posted on September 10, 2010
Pursuant to its announcement earlier this year that it would analyze the market volatility (flash crash) of May 6, the Investment Industry Regulatory Organization of Canada (IIROC) yesterday released the results of its regulatory review. IIROC's report identified a number of factors that contributed to the fateful day's trading patterns in the securities reviewed, notably, the existence of large sell imbalances, electronic trading activity in the securities, the fact that "traditional" market makers were generally not active in the securities reviewed and the triggering of stop loss orders.
IIROC ultimately made a number of recommendations to address the issues identified, including: (i) a review of the current market-wide circuit breaker to determine whether trigger levels are appropriate and whether an independent Canadian circuit breaker level should be employed; (ii) considering whether single stock circuit breakers should be implemented; (iii) the adoption of volatility controls; (iv) considering how to effectively manage stop loss orders in the current multi-market and high-speed environment; and (v) a review of the erroneous and unreasonable price policies and procedures.
IIROC is expecting to issue a request for comments on a single stock circuit breaker in the near future. IIROC also stated that a review of the current erroneous and unreasonable price policies and procedures is currently underway and a notice will be published for comment when completed. Guidance is expected to be issued respecting the use of stop loss orders, while news on the other recommendations will be provided as work is completed.
Posted on September 10, 2010
The Canadian Securities Administrators (CSA) released a Staff Notice today summarizing the recent parallel orders enacted by CSA members that provide relief for IIROC dealer members, MFDA dealer members and mutual fund dealers in Quebec from the requirement to provide the relationship disclosure information prescribed by section 14.2(1) of National Instrument 31-103 Registration Requirements and Exemptions. Specifically, regulators have issued an order that exempts IIROC dealer members from the application of the requirements until the earlier of September 28, 2011 or the coming into force of the IIROC Client Relationship Model proposal. Further, the regulators have issued an order that exempts MFDA dealer members (and in Quebec, mutual fund dealers) from the relevant requirements until the earlier of September 28, 2011 or the coming into force of the MFDA Client Relationship Model proposal (or, in the case of Quebec, the regulation of mutual fund dealers in that province).
CSA Staff Notice 31-319
Posted on September 10, 2010
The British Columbia Securities Commission (BCSC) yesterday published for comment a proposed new Form 45-106F6 British Columbia Report of Exempt Distribution that would require issuers to provide additional information for private placements taking place in British Columbia. Specifically, the new form would require additional information about purchasers, including identifying whether a purchaser is a promoter or an insider of the issuer. Non-reporting issuers would also be required to provide detailed information regarding their insiders and promoters. The BCSC also proposed making some of the information provided on the form publicly available. Characterizing the exempt market as "high-risk" for investors, the BCSC stated that the new disclosure requirements "should help BC investors make more informed investment decisions and improve transparency in the market."
The proposed new form would set British Columbia apart from other Canadian jurisdictions, which would continue to use Form 45-106F1 Report of Exempt Distribution, effectively requiring an issuer or underwriter to file a separate form in British Columbia for exempt distributions that take place in BC and one or more other jurisdictions of Canada. The BCSC is inviting comments on these proposed amendments until November 9, 2010.
Posted on September 9, 2010
As reported widely in the media and discussed here in a blog post back in July, U.S. President Barack Obama recently signed into law sweeping new legislation intended to overhaul the U.S. financial regulatory system. While the extent of the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act may not be known for years, a number of considerations for Canadian issuers are immediately evident. These include, but are not necessarily limited to, the following:
- Changes to disclosure requirements under the Securities Exchange Act of 1934 may impact MJDS filers by imposing additional disclosure obligations.
- Non-U.S advisers of private investment funds will, under certain circumstances, be required to register with the SEC, which will lead to new substantive requirements for such advisers.
- Further rule-making by U.S. regulators under the authority of Dodd-Frank will likely also affect Canadian issuers. For example, the SEC's new proxy rules will, under certain circumstances, apply to foreign issuers that are otherwise subject to U.S. proxy rules.
As can be seen, the long arm of financial regulatory reform in the U.S. may very well reach Canadian issuers. For that reason, issuers in this country should keep abreast of developments as they come to light.
Posted on September 8, 2010
The TMX Group Inc. issued a paper today providing its unique perspective on issues deriving from the financial crisis and discussing how the core competencies of a combined regulated exchange and clearing house are designed to meet G-20 objectives respecting improving over-the-counter (OTC) derivatives markets. The TMX Group has obviously given considerable thought on how Canada should respond to prevent similar crises from recurring, in particular with respect to the operation of less-regulated OTC derivatives markets.
Specifically, TMX Group discussed how its core competencies respecting trading, clearing, data warehousing and regulatory services can be mapped onto G-20 requirements, which include strengthening prudential oversight, improving risk management, increasing transparency, promoting market integrity, protecting against market abuse, mitigating systemic risk and reinforcing international cooperation. TMX Group also stated that its core competencies achieve the business requirements of market participants. As such, the paper recommended that Canadian regulators utilize domestic facilities with international linkages to provide the regulatory oversight of OTC derivatives markets.
Posted on September 8, 2010
During a speech to the Economic Club of New York yesterday, U.S. Securities and Exchange Commission Chairman Mary Schapiro discussed the "flash crash" of May 6 and the steps taken by the SEC to strengthen equity market structure. Ms. Schapiro also outlined further steps that may be considered, including: (i) improving circuit breaker mechanisms; (ii) high frequency trading and whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways during "tough times"; (iii) order cancellations and whether large volumes of orders, subsequently cancelled, affect price discovery, capital formation and the capital markets generally; and (iv) market fragmentation and dark trading venues.
According to Ms. Schapiro,
The important questions are "to what extent is our structure meeting or failing to meet its goals of fair, efficient and transparent markets, and how can we modify the structure to preserve the advantages and eliminate the flaws?"
Posted on September 8, 2010
As we wrote on August 26, the U.S. Securities and Exchange Commission recently released a proxy rule that will require companies, under certain circumstances, to include shareholder nominees for director in the company's proxy materials. While SEC Chairman Mary Schapiro outlined the the rule's benefits, SEC Commissioner Troy A. Paredes provides an alternative viewpoint. Mr. Paredes argues that the rule is flawed in that it "imposes a minimum right of proxy access, even when shareholders may prefer a more limited right of access or no proxy access at all." Further comments by the commissioners can be found here.
Posted on September 8, 2010
As we discussed in our post of June 3, the British Columbia Securities Commission released summary Majority Reasons in May for its decision to cease trade the shareholder rights plan (poison pill) implemented by Lions Gate Entertainment Corp. in response to a hostile bid by equity funds controlled by Carl Icahn.
On July 26, the BCSC released the full reasons of the panel majority and last week it released the reasons of the minority. While our more in-depth summary is forthcoming, a copy of the full reasons of the majority and the minority reasons can now be accessed from the BCSC website.
Posted on September 7, 2010
In addition to its PPN review findings, the Investment Industry Regulatory Organization (IIROC) also released findings and recommendations last week concerning its regulatory review of new product due diligence. The review, conducted earlier this year at a sample of dealers that distribute structured products, tested for such things as adequate written policies, procedures and operational controls on new products. The review also assessed how dealers have incorporated IIROC's due diligence Guidance Note of March 2009 into their business practice.
Ultimately, IIROC found that many of the written policies and procedures reviewed were deficient in a material respect. Deficiencies indentified included the lack of the following: (i) a clear definition of "new product"; (ii) an appropriate level of internal review; (iii) an adequate analytical framework for the consideration of whether the new product should be offered; (iv) consideration of possible conflict of interest scenarios and how they should be addressed; (vi) consideration of proficiency, training and marketing issues; and (vii) a process to monitor and review customer complaints regarding new products and for monitoring compliance with any restrictions placed on the sale of the new product.
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Posted on September 7, 2010
On August 31, the Investment Industry Regulatory Organization of Canada (IIROC) released findings and recommendations deriving from its 2009 compliance review of principal protected notes (PPNs). The review, based on a representative sample of dealers, considered, among other things, the adequacy of the selling firm's knowledge of the product and the firm's training for sales personnel and whether appropriate point of sale disclosure was provided to investors.
Ultimately, IIROC made a number of findings and recommendations regarding the obligations of dealers to their clients with respect to PPNs, including the following:
- The dissemination of required disclosure to clients was inconsistent among members. On this point, IIROC reminded dealers that they are required to have a "new product due diligence" policy and are required to implement procedures to ensure that any clients purchasing a PPN receive the required appropriate disclosure.
- The majority of dealers appeared to rely on product issuers to distribute the monetization notices directly to unit holders without the benefit of a contractual agreement requiring issuers to distribute on the dealer's behalf. IIROC stated that all dealers should review their contractual agreements with issuers to ensure that responsibility for the distribution of notices is clearly delineated.
- Most dealer marketing material was inadequate and missed key information. On this point, IIROC reminded dealers of their obligations regarding sales literature under IIROC Rule 29.7(1) regarding the fair presentation of potential risks.
- IIROC found that some dealers' registered representatives did not understand all the features of the PPN products they were recommending to clients. In response, IIROC stated that dealers must take a proactive approach to reviewing and monitoring products, which should include a written policy for the due diligence of new products.
- IIROC found the PPN products to be suitable for the accounts tested.
- There was no uniformity in the level of training to registered representatives regarding PPNs. IIROC stated that dealers must ensure their registered representatives and sales staff are educated and understand the important features of products being marketed to clients.
- IIROC found deficiencies in the information included on monthly statements, which should be clear and informative.
See IIROC Notice 10-0233.
Posted on September 7, 2010
The Ontario Securities Commission (OSC) put out a call last week for new applications for membership on its Continuous Disclosure Advisory Committee (CDAC). The CDAC, which was established in 2002 and meets four to six times per year, advises OSC staff on such things as the planning, implementation and communication of its review program, as well as policy and rule-making initiatives. The OSC invites representatives of reporting issuers, industry associations, advisors, investing organizations and "any other interested persons" to apply by September 30, 2010.
Posted on September 3, 2010
On August 30, the U.S. Commodity Futures Trading Commission (CFTC) released final rules respecting off-exchange retail foreign currency transactions. The rules, which include requirements regarding registration, disclosure, recordkeeping, financial reporting, minimum capital and other operational standards, among other things, take effect on October 18.
Posted on September 2, 2010
Earlier this week, the U.S. Securities and Exchange Commission (SEC) released a report cautioning nationally recognized credit rating agencies about "deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings." The report stems from an investigation into whether Moody's Investor Service, Inc. violated federal registration or antifraud provisions. The SEC also stated in the report that it will utilize new provisions in the Dodd-Frank Act "for enforcement actions alleging otherwise extraterritorial fraudulent misconduct that involves significant steps or foreseeable effects within the United States."
Posted on September 2, 2010
The U.K. Financial Services Authority last week published a discussion paper focusing on the prudential requirements for banks and investment firms that engage in trading activities. The paper makes recommendations in three key areas:
- Valuation - the FSA recommends an increased regulatory focus on valuing traded positions as an input into capital resources.
- Coverage, coherence and the capital framework - a change in the structure of the capital framework is recommended in order to bring greater coherence and reduce the opportunities for structural arbitrage in the banking sector and wider financial system.
- Risk management and modelling - the FSA recommends measures intended to improve firms' risk management and modelling standards, and ensuring that they are aligned with regulatory objectives.
The FSA is accepting comments on the discussion paper until November 26 and is expecting to issue feedback in the first half of 2011.
Posted on September 2, 2010
On August 27, the Investment Industry Regulatory Organization of Canada (IIROC) published proposed amendments to Form 1, used to monitor the financial solvency of dealer members. The proposals would include amendments to the "market value" definition in Form 1 to adopt the mandated IFRS valuation approach, except where value cannot be reliably measured in which case IIROC has proposed an alternative approach. While IIROC's proposals are intended to harmonize the standards used in financial reporting with IFRS as much as possible, a number of departures from IFRS are proposed. These include reporting of client and broker trading balances on a net basis, treating preferred shares as regulatory capital and presenting the financial statements on non-consolidated basis. IIROC is accepting comments on its proposals for 60 days from the date of publication of the notice.
IIROC Notice 10-0230 - Amendments to Form 1 to adopt IFRS for regulatory reporting purposes
Attachment A - Amendments to Form 1
Attachment B - Black-line Form 1
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