IIROC proposes uniform 6-year limitation period for enforcement proceedings

On November 26, the Investment Industry Regulatory Organization of Canada proposed amendments to its Dealer Member Rules that would provide a uniform six-year limitation period to all IIROC enforcement proceedings. While current rules allow IIROC to initiate proceedings against a former member or former approved person for five years after the cessation of IIROC membership, there is no limitation period on proceedings relating to current dealer members or approved persons. Specifically, the new rule, which would apply to current and former members and approved persons, would require IIROC to commence proceedings within six years of "the date of the occurrence of the last event on which the proceeding is based."

IIROC is accepting comments on the proposed amendments until January 25, 2011, and specifically requested comment on the concept of allowing for the extension of the limitation period where both IIROC and the Dealer Member or Approved Person agree to the extension.

For more information, see IIROC Notice 10-0310, the language of the proposed amendments and the blackline of the rules proposed to be amended.

MFDA provides further guidance to proposed rule regarding transaction fees

As we discussed in our post of June 25, the Mutual Fund Dealers Association of Canada proposed a new Rule 2.4.4 earlier this year that would require its members, prior to the acceptance of an order, to inform clients of sales and service charges, as well as any other fees to be deducted in respect of the proposed transaction. Meanwhile, proposed amendments to Rule 5.1 would require MFDA members to maintain evidence that clients were informed of such fees and charges.

The MFDA has now published a summary of comments received to its proposals, as well as MFDA staff responses. Further, the MFDA has released a companion regulation notice to provide further guidance with respect to the application of the proposed amendments.

For more information, see MFDA Bulletin #0455-P.

OSC Staff highlight deficiencies and express concerns regarding use of side letters by investment funds in Compliance and Registrant Regulation Branch Report

As we discussed in our post of October 22, the Compliance and Registrant Regulation Branch’s annual report for fiscal 2010 reviews deficiencies identified by staff of the Ontario Securities Commission (OSC) in its review of advisers, investment fund managers and dealers. The Report also highlights initiatives taken by the OSC relating to registrant regulation and provides staff guidance on dealing with identified deficiencies. In a departure from prior reports, the fiscal 2010 report also covers the introduction of the new registration regime, reorganization of the Compliance and Registrant Regulation Branch and common deficiencies found in reviews of registrant applications.

With respect to ongoing compliance requirements, the Report indicates that the percentage of registrants requiring "significantly enhanced compliance" increased from 32% in 2009 to 50% in 2010. Compliance reviews resulting in referral to the Enforcement Branch also increased from 4% in 2009 to 10% in 2010. In addition to general guidance applicable to all registrants, the Report also includes OSC staff views on specific issues relating to investment fund managers, portfolio managers and exempt market dealers, some of which are highlighted below.

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OSC publishes Top 10 Tips for IFRS filers

Earlier this week, the Ontario Securities Commission published an online guide to assist issuers in preparing their first IFRS interim financial report. The issues and tips reviewed in the guide include: (i) changes to acceptable accounting principles; (ii) discussion of a 30 day filing extension for an issuer's first IFRS interim report; (iii) the consequences of missing financial statement filing deadlines, which may include a cease trade order; (iv) suggested financial statement notes to include in the first IFRS interim financial report ; and (v) required reconciliations under IFRS 1, including an example of an equity reconciliation. According to the OSC, its goal in publishing the guide is "to help facilitate a smooth regulatory transition, which will benefit both issuers, their advisors and their investors".

As discussed in our post of October 1, the CSA have published final amendments to NI 52-107 Acceptable Accounting Principles and Auditing Standards and other related instruments and policies relating to the transition to IFRS for reporting issuers and registrants. These amendments take effect on January 1, 2011. The IFRS transition for investment funds, meanwhile, has been deferred for now, to January 1, 2012, as discussed in our post of October 8.

SEC proposes whistleblower program

On November 3, the U.S. Securities and Exchange Commission released a proposal to reward individuals that provide information that leads to successful SEC enforcement action in which monetary sanctions total more than $1 million. The proposal, emanating from Dodd-Frank, also includes provisions to discourage whistleblowers from bypassing a company's compliance program. For more information on the implementation of Dodd-Frank, see the SEC's intended schedule for planned rule proposals.

U.K. Takeover Panel proposes changes to Takeover Code

Earlier this year, the Code Committee of the U.K. Panel on Takeovers and Mergers released a Consultation Paper setting out suggestions for possible amendments to the Takeover Code and requesting public feedback. The Consultation Paper resulted in an unprecedented number of responses and on October 21, the Code Committee issued a report outlining its conclusions on the principal issues considered. Notably, the Code Committee focused on comments made to the effect that it has become to easy for “hostile” offerors to succeed and on the potential for the outcome of an offer to be unduly influenced by the actions of “short-term” investors, concluding that hostile offerors can obtain a tactical advantage over the target to the detriment of the target and its shareholders. In light of this conclusion, the Code Committee intends to move forward with proposals that are aimed at reducing this tactical advantage and improving the offer process to better consider the position of persons, in addition to target shareholders, who are affected by the takeover.

Specifically, the Code Committee recommended: 

  1. Increasing the protection for offeree companies against protracted "virtual bid" periods whereby a potential offeror announces that it is considering making an offer but doesn't commit to doing so.  The proposals would require that potential offerors be named in the announcement following an approach, which would initiate an offer period. Except with consent of the Takeover Panel, the potential offeror would then have four weeks to clarify its intentions;
  2. Strengthening the position of the offeree company by prohibiting deal protection measures and inducement fees other than in certain limited cases. According to the Code Committee, contractual protections (such as undertakings given by the target to the offeror to take or refrain from taking certain actions) have detrimental effects for offeree company shareholders. The proposals would also clarify that offeree company boards are not limited in the factors that they may take into account in providing their opinion and recommendation on the offer;
  3. Increasing transparency and improving the quality of disclosure by requiring the disclosure of offer-related fees and requiring further financial disclosure with respect to offerors and the financing offers; and
  4. Providing greater recognition of the interests of the offeree company employees by improving the quality of disclosure with respect to the offeror's intentions and improving the ability of employee representatives to make their views known. In this regard, the Committee recommended requiring that statements regarding the offeror’s intentions about the target and its employees, locations of business and fixed assets be expected to hold true for at least one year following the offer becoming or being declared wholly unconditional.

According to the report, the Code Committee will now publish further consultation papers setting out the proposed amendments in full.

Tax withholding on stock option benefits: Will you be ready on January 1, 2011?

Andrea Boctor and Ramandeep Grewal    

Beginning January 1, 2011, virtually every stock option exercise by an employee or director will trigger employer tax withholding and remittance requirements. Stemming from the March 2010 Federal Budget, new rules were introduced into the Canadian Income Tax Act earlier this fall which "clarify" that, effective as of the new year, source deduction requirements apply to stock option benefits. These and other proposed amendments relating to taxation of stock options are summarized in detail in our related Tax Update. The change in policy in respect of withholding and remittance for stock options brings the Canadian tax regime essentially in line with the regimes of other countries, including the U.S. and U.K.

These developments impact both employers and those receiving stock options or similar compensation. Every corporation and every mutual fund trust that sponsors stock option plans to which these rules apply should review the existing terms of its plans, and related administrative procedures, to determine whether tax withholding and remittance can be accommodated in accordance with Canada Revenue Agency (CRA) rules. For public companies, existing stock option plans and agreements should also be carefully reviewed to determine whether shareholder approval is required for any necessary amendments.

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SEC releases security-based swap proposals

On November 19, the U.S. Securities and Exchange Commission proposed new rules that would require security-based swap data repositories (SDRs) to register with, and provide swap data to, the SEC. The proposal would also require SDRs to accept transaction data and maintain it for at least five years after the expiration of the applicable swap. The SEC has also proposed rules requiring parties to security-based swap transactions to report information regarding each transaction to a registered SDR, which would then be required to publicly disseminate certain information regarding the transaction. The proposals are being made pursuant to Dodd Frank, which authorizes the SEC to regulate security-based swaps. According to the SEC, "[t]aken together, the rules ... seek to provide improved transparency to regulators and the markets through comprehensive regulations for [security-based swaps] transaction data and SDRs." Meanwhile, the Commodity Futures Trading Commission is planning on similar rules with respect to swaps falling under its jurisdiction.

See Release No. 45-63347 - Security-Based Swap Data Repository Registration, Duties, and Core Principles and No. 34-63556 - Regulation SBSR - Reporting and Dissemination of Security-Based Swap Information.

IIROC proposes single stock circuit breakers

The Investment Industry Regulatory Organization of Canada (IIROC) released a proposal for single-stock circuit breakers last week that would halt trading of a security experiencing "rapid, significant and unexpected price movement." The proposal would apply to all securities listed on a Canadian exchange, including inter-listed securities, and would provide tiers of trigger levels in order to "preserve a fair and orderly market" in times of extreme volatility.

Specifically, under the proposed mechanism, trading in a security listed on either the TSX-V or CNSX would be halted for ten minutes if the security experienced a price swing of the greater of 20% and 20 trading increments in a five minute period. TSX-listed securities that experienced a price swing of at least the greater of 10% and 10 trading increments in a five minute period would be halted for five minutes, with a five-minute extension possible. In either case, IIROC could replace the single-stock circuit breaker halt with a traditional "regulatory halt" where so required. There would be circumstances, however, where a single-stock circuit breaker would not trigger a halt in trading, such as after the imposition of a "regulatory halt" in the trading of that security.

IIROC is accepting comments on its proposals until January 17, 2011. Once it has reviewed the comments received and established the final parameters of its proposal, IIROC intends to develop an alert as part of the "STEP" surveillance platform. While the implementation of single-stock circuit breakers would begin as a manual system similar to the current imposition of trading halts, IIROC intends to ultimately automate the process. According to IIROC, however, automation would not commence earlier than April 1, 2011.

As we've discussed in the past, the U.S. SEC is currently piloting single-stock circuit breakers until December 10, 2010. For more information on the U.S. project, see our posts of May 19 and September 21.

Globe and Mail publishes review of corporate governance practices

The Globe and Mail today published Board Games 2010, its 9th annual review of corporate governance practices in Canada. Among other things, the section includes a story that considers the influence of proxy advisory firms as well as rankings of the governance practices of Canadian corporations and income trusts. The rankings are based on board composition, shareholding and compensation, shareholder rights and disclosure.

ISS publishes 2011 updates to corporate governance policy

Institutional Shareholder Services Inc. today published the annual updates to its Canadian Corporate Governance Policy. The policy provides proxy voting recommendations, based on corporate governance factors, for securityholder meetings occurring on or after February 1, 2011. Changes to its policy for 2011 include: (i) extending to all TSX companies its recommendation to vote withhold from any insider or affiliated outside director where the board is less than majority independent or the board lacks a separate compensation or nominating committee; (ii) clarifying the circumstances that may lead to an against recommendation with respect to proposals to amend or replace articles/bylaws; and (iii) adding reference to two new unacceptable features in shareholder rights plans that would result in an against vote recommendation.

CSA/IIROC publish position paper on dark liquidity

The Canadian Securities Administrators (CSA) and Investment Industry Regulatory Organization of Canada (IIROC) published a joint position paper today that considers, and provides the regulators' views on, the issues associated with dark pools and dark orders. According to IIROC and the CSA, their views are intended to provide "more clarity" around how dark orders should be treated and facilitate "investor understanding and choice" regarding the execution of orders.

The paper follows a year of consultations on the subject and sets out the position of the regulators on a number of issues, namely: 

  • that only orders meeting a minimum size threshold be exempt from pre-trade transparency requirements;
  • that, while, two dark orders meeting the minimum size exemption should be able to execute at the national best bid or best offer, meaningful price improvements should be required in all other circumstances; 
  • that visible (lit) orders should execute before dark orders at the same price on the same marketplace, except where two dark orders meeting the minimum size exemption can be executed at that price; and
  • that meaningful price improvement should be considered as one trading increment as defined under UMIR. For securities with a difference between the best bid price and the best ask price of one trading increment, one-half increment will be considered to be meaningful price improvement.

Comments are being accepted on the position paper until January 10, 2011. Once comments have been considered, the CSA and IIROC intend to propose rule changes as required.

CSA propose amendments to executive compensation disclosure

The Canadian Securities Administrators (CSA) today published proposed amendments to Form 51-102F6 Statement of Executive Compensation  as well as related consequential amendments to NI 51-102 Continuous Disclosure Obligations and Forms 58-101F1 and 58-101F2 of National Instrument 58-101 Disclosure of Corporate Governance Practices. The proposed amendments will impact primarily upon the “compensation disclosure and analysis” or “CD&A” disclosure that was first introduced by the CSA effective December 31, 2008. The proposals stem from a combination of information gathered by the CSA through its targeted compliance review of executive compensation disclosure (as reported in CSA Staff Notice 51-331) and recent international developments, including new rules adopted by the Securities and Exchange Commission effective for the 2010 proxy season and those resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act that are expected to affect 2011 proxy disclosure. Some of the substantive changes proposed by the CSA include:

  1. where a company is relying on the exemption allowing it to withhold specific performance goals or similar conditions on the basis that disclosure would seriously prejudice its interests, requiring the company to explicitly state that it is relying on the exemption and explain why disclosure would so prejudice the company;
  2. requiring companies to disclose whether the board of directors considered the implications of the risks associated with the company's compensation policies and practices;
  3. requiring companies to disclose whether any named executive officer or director is permitted to purchase financial instruments designed to hedge their position in equities granted as compensation; and
  4. expanding current requirements to disclose fees paid to compensation advisors;

The CSA is accepting comments on the proposed amendments until February 17, 2011. If the proposed amendments are approved they are expected to be in effect for the 2012 proxy season, requiring companies to comply for financial years ending on or after October 31, 2011.

Ontario government announces changes to derivatives regulation

As expected, the government of Ontario has now introduced proposed amendments to the Securities Act (text not yet available) that would allow the Ontario Securities Commission to develop a regulatory framework to govern over-the-counter (OTC) derivatives. According to the government's economic update released this afternoon, the proposed framework would be consistent with the federal government's plan to implement a national securities regulator

In addition to tackling OTC derivatives regulation, the proposed amendments would also "provide for regulatory oversight of credit rating agencies and strengthen the oversight of alternative trading systems".

CSA members sign agreement with Chinese insurance regulator

The Canadian Securities Administrators announced last week that eight of its members (the provincial regulators but for Newfoundland and PEI) signed a regulatory cooperation agreement with the China Insurance Regulatory Commission. According to the CSA release, the agreement "paves the way for Chinese insurers to invest in financial products on Canadian markets regulated by CSA participating jurisdictions." The agreement is currently in effect in seven jurisdictions and, pending ministerial approval, will take effect in Ontario on January 12, 2011.

Ontario government expected to introduce derivatives markets regulation

According to various media outlets, including the Globe and Mail and the Financial Post, the Ontario government is expected to introduce proposals later today relating to the regulation of derivatives. The expected move may raise the question of how Ontario's proposals will fit with those of other jurisdictions. Watch for more details once the proposals are released this afternoon.

Corporate governance concerns considered in Globe article

David Milstead of the Globe and Mail discusses the corporate governance concerns surrounding mergers and acquisitions in an article published in today's Globe. According to Stikeman Elliott partner Edward Waitzer, quoted in the article, "[t]akeovers, in a sense, are the ultimate discipline on management".

Bill 128 introduces technical amendments to Quebec's Derivatives Act

Alix d’Anglejan-Chatillon and Jason Streicher

Omnibus financial legislation introduced by the Quebec government on November 10, 2010 includes technical amendments to Quebec's derivatives legislation, as well as provisions intended to improve the oversight of persons authorized to market a derivative and to strengthen the process of authorization of the marketing of the product.

The technical amendments would include expanding the list of instruments included in the definition of "derivative" under the Derivatives Act (Quebec) (the QDA) to cover contracts for differences (CFDs) specifically. 

Bill 128 would also incorporate more detailed requirements to provisions under the QDA that are not yet in force governing persons qualified under the QDA to create or market a derivative.  These new provisions include requirements that a qualified person maintain a corporate and organizational structure and adequate human, financial and technological resources to enable it to operate effectively and ensure the security and reliability of its transactions and activities.  A qualified person would also be required to have adequate business policies and procedures and appropriate governance practices, including, in particular, with respect to the independence of its directors and the auditing of its financial statements. The amendments also clarify that a qualified person would be required to register as a dealer or offer derivatives to the public through a dealer.

Quebec introduces money services business licensing legislation

Currency exchange and funds transfer businesses not otherwise regulated would be covered.

Alix d’Anglejan-Chatillon and Jason Streicher

On November 10, 2010, there was a first reading by Quebec's National Assembly of Bill 128, An Act to enact the Money-Services Businesses Act and to amend various legislative provisions mainly concerning special funds and the financial sector (Bill 128).

If adopted, Bill 128 would result in the enactment of the Money-Services Businesses Act (the MSB Act). The Québec government has stated that the oversight of money-services businesses is part of a broad offensive against tax evasion and money laundering. The MSB Act would require that persons operating a "money-services business" for compensation obtain a license from Quebec’s financial markets authority, the Autorité des marchés financiers (the AMF), and disclose information about their directors, officers, partners, shareholders, branch managers, employees working in Quebec and certain types of lenders they deal with. The term "money-services business" is not defined but the MSB Act would define "money services" to include currency exchange, funds transfer, the issue or redemption of travelers’ cheques, money orders or bank drafts, cheque cashing, or operating automated teller machines. If the lessor of a commercial space is responsible for keeping an automated teller machine supplied with cash, the lessor would also be subject to the licensing provisions of the MSB Act. 

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Proposals introduced to relax prohibition against issuance of debt by certain pension fund corporations

The federal government has just published legislative proposals that would relax one of the conditions for tax-exempt pension fund investment corporation status under the Income Tax Act. That is, under the proposals, there would no longer be a prohibition against such a corporation issuing "debt obligations" and the prohibition would be narrowed to cover issuing "bonds, notes, debentures or similar obligations". The change would be retroactive to 1994.

We believe that these amendments, if adopted, should eliminate concerns that, for example, the assignment to a third party of a right to receive an investor's capital contribution to a limited partnership would be treated as an impermissible debt obligation, where that investor was a pension fund investment corporation.

Interested parties are invited by the Department of Finance to provide comments on the proposals by December 5.

SEC extends date for compliance with new short sale rule

Last week, the U.S. SEC announced that it was extending the date for compliance with its new short sale rule. The change in date is intended to provide more time for exchanges to modify their procedures and market participants to program and test systems for implementation. The new rule, which will restrict the prices at which a stock can be sold short if the stock's price 10% or more in one day, will now take effect on February 28, 2011.

CSA provide update on IFRS and application to income trusts

The Canadian Securities Administrators today published an update to CSA Staff Notice 52-306 Non-GAAP Financial Measures and Additional GAAP Measures in light of the upcoming changeover to IFRS. Specifically, the notice has been amended to include, among other things, specific guidance to issuers regarding additional GAAP measures required by IFRS. The CSA also published IFRS-related amendments today to National Policy 41-201 Income Trusts and Other Indirect Offerings. NP 41-201 provides guidance on measures of cash available for distribution and is being updated to reflect changes to NP 52-306.

CSA publish further blanket orders for registration exemptions

As you may recall from earlier posts on the subject, the Canadian Securities Administrators have issued a number of blanket orders in response to requests for exemptive relief since the release of NI 31-103 Registration Requirements and Exemptions. The CSA has now issued two more, effective today.

First, the order published in February exempting mutual fund dealers from section 13.2(2)(b) of NI 31-103 (which requires registrants to establish whether a client is an insider of a reporting issuer or any other issuer whose securities are publicly traded) is being replaced by an order that exempts all registrants from that requirement. Specifically, s. 13.2(2)(b) will no longer apply to a registrant in respect of a client where the registrant only trades securities for that client that are listed in sections 7.1(2)(b) and (c) of NI 31-103. The securities listed in s. 7.1(2)(b) and (c) consist of: (i) mutual funds; (ii) except in Quebec, investment funds that are labour-sponsored investment fund corporations or labour-sponsored venture capital corporations under legislation of a jurisdiction of Canada; and (iii) securities of a scholarship plan, an educational plan or an educational trust. The effect of the new order is that the exemption, previously only available to mutual funds, now applies to all registrants trading in the applicable securities.

The second blanket order exempts mutual fund dealers from the requirement to establish the identify of an individual who owns or exercises control or direction over more than 10% of the voting rights attached to the outstanding voting securities of a corporation that is a client (as per section 13.2(3)(b)(i) of NI 31-103,) under two conditions. First, the mutual fund dealer must not be registered other than as a mutual fund dealer or as both a mutual fund dealer and an investment fund manager. Second, the mutual fund dealer must comply with the provisions of the federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act requiring the identification of any person who owns or controls 25% or more of the shares of a corporation that is a client. According to the CSA, the cost of compliance with this provision exceeded the benefit, since mutual fund dealers primarily trade in securities of mutual funds that are bound by investment restrictions and already comply with certain requirements under the Act.

According to the CSA, it is currently considering amendments to NI 31-103 and these particular provisions will be reconsidered in the course of the amendments process. For more information, see National Instrument 31-321.

CNSX Board approves policy amendments

CNSX Markets Inc., the operator of the Canadian National Stock Exchange and Pure Trading has proposed amendments to its Policy 2 that would extend listing eligibility to certain prospectus-exempt debt securities. The amendments to Policy 2 would mirror language contained in its Restated Order. Comments are being accepted on the amendments for 30 days from today.

CDS releases proposals to implement CDCC fixed income clearing facility

CDS Clearing and Depository Services Inc. today released proposed amdendments to implement the Canadian Derivatives Clearing Corporation's fixed income clearing facility. According to CDS, the proposals would: (i) create a new mode of settlement indicator enabling participants to instruct CDS to report trades so-identified to a Third Party Clearing System (TPCS); (ii) permit CDS to report trades to CDSS as a TPCS; (iii) limit CDS liability in respect of trades or trade information received from a TPCS; (iv) specify the settlement process by which trades reported to CDS by a TPCS are settled; and (v) permit partial settlement of trades from CDCC as a TPCS. Comments are being accepted on the proposed amendments for 30 days from today.

Changes contemplated to MFDA Investor Protection Corp fund

As we discussed in our post of June 24, the MFDA requested comments this past summer on a proposal to increase the size of the MFDA Investor Protection Corporation (IPC) fund to $50 million. The MFDA, which accepted comments on the proposal until September 1, has now agreed to increase the size of the fund. The time frame for raising the additional $20 million, however, will be extended to seven years rather than the originally-contemplated five years.

For more information, and for a description of next steps, see MFDA Bulletin #0452-M.

MFDA publishes proposed amendments to rules related to registration

Earlier this week, the Mutual Fund Dealers Association of Canada published proposed amendments to its Rules and Policy No. 6 to conform with the requirements of National Instrument 31-103 Registration Requirements and Exemptions. The proposals, which, among other things, deal with proficiency, minimum standards of supervision and record retention, have either been approved, or not objected to, by the securities regulatory authorities of various jurisdictions and are now subject to MFDA Member ratification.

SEC proposals on ABS may dampen private placements into U.S.

Our colleague Mike Rumball has published a number of posts on our Structured Finance blog regarding the recent proposals by the U.S. Securities and Exchange Commission regarding asset-backed-securities. His latest considers the potential dampening effect on private placements into the U.S. that may result from the proposed requirement that issuers perform a review of the assets underlying an ABS and disclose the nature of the review.

CSA publish consultation paper on OTC derivatives regulation

The Canadian Securities Administrators yesterday published a consultation paper on over-the-counter derivatives regulation in Canada intended to address "some of the deficiencies that have become apparent in the OTC derivatives market". Specifically, the consultation paper provides background on the need for regulation and provides a number of specific proposals. Among other things, the report recommends:

  • central clearing of OTC derivatives that are determined to be appropriate for clearing and capable of being cleared, such as standardized derivatives;
  • reporting of all derivatives trades by Canadian counterparties to a trade repository;
  • electronic trading of OTC derivative products;  and
  • in accordance with the recommendations of the Basel II Accord, imposing capital requirements proportionate to the risks that an entity assumes.

The focal point of the proposal, being the central clearing of OTC derivatives, reflects the approach taken by the Dodd-Frank Act. With respect to trade reporting to a trade repository, while the report makes no recommendation regarding a specific time requirement for reporting it does state that real-time reporting will ultimately be required. The report further recommends that provincial regulators obtain authority to conduct surveillance on OTC derivatives markets, develop robust market conduct standards and obtain authority to investigate and enforce against abusive practices.

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