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

Yesterday, the SEC announced that it was adopting rule amendments that would require issuers to conduct: (i) a shareholder advisory vote to approve the compensation of executives at least once every three calendar years beginning with the first annual shareholders' meeting taking place on or after January 21, 2011; (ii) a shareholder advisory vote on the frequency of executive compensation votes at least once every six calendar years; and (iii) a shareholder advisory vote on golden parachute arrangements in connection with merger transactions. The amendments to the Securities Exchange Act of 1934 would also impose various disclosure requirements. Smaller reporting companies, however, would not be subject to the first two requirements described above until their first annual or other meeting of shareholders occurring on or after January 21, 2013.

As we discussed in October of last year, the SEC released draft proposals in the fall and the final amendments take into account feedback received.

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The OSC should ease up on its application of the Defensive Tactics Policy

As published in Monday's Financial Post

Edward Waitzer and Sean Vanderpol

The current Baffinland Iron Mines Corp. control contest, in which the Ontario Securities Commission (OSC) has intervened several times, raises yet again questions about the fundamental differences between securities regulation and corporate law. It also casts more doubt on the utility of National Policy 62-202, known as the Defensive Tactics Policy, under which securities regulators deal with unsolicited corporate takeover bids and hostile control contests.

Criticisms of the Defensive Tactics Policy have been heard before. In June 2008, the report of the Competition Policy Review Panel, Compete to Win, said Canadian securities regulators should repeal the Defensive Tactics Policy and cease to regulate conduct by boards in relation to shareholder rights plans (poison pills). That conclusion was reached after broad consultations and input from the legal and investment banking community on both sides of the border. To replace the policy, the panel recommended that the regulation of substantive decision-making by directors in respect of change-of-control proposals should be left to the courts, as is the case in the U.S.

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As we discussed on our Structured Finance blog in December 2009, the Saskatchewan Financial Services Commission, Securities Division issued General Order 91-907 in November of that year exempting over-the-counter (OTC) derivatives trading among qualified parties from the registration and prospectus requirements under the Saskatchewan Securities Act, 1988.

The General Order and Companion Policy have now been amended to include an exemption where: (i)  the OTC derivative is a contract for the production of natural gas or the purchase and sale of natural gas; and (ii) each party to the contract is engaged in the production of natural gas or the purchase or sale of natural gas. 

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The Ontario Securities Commission (OSC) announced today that it has approved amendments to MFDA Rule 3.1.1, intended to harmonize the MFDA's minimum capital requirements with those under National Instrument 31-103 Registration Requirements and Exemptions, as well as amendments to Form 1 - Financial Questionnaire and Report. The amendments, which were also approved by various other jurisdictions, are conditional on the MFDA submitting proposed amendments to Form 1 to include a definition of "market value" of securities to regulators for review and approval by March 31, 2011.

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Kevin Lynch and Ed Waitzer

As published in Monday's Globe and Mail.

When Lehman Brothers failed, was it a failure of corporate risk management, or corporate crisis management, or both? Rigorous risk management is a crucial element of good governance, not a euphemism for guessing. As became painfully evident in the Lehman case and a slew of other recent crises, not having adequate risk-management systems and acting accordingly can lead to a downturn in public confidence, and can easily become viral.

Crises aren’t new. Why, then, has the management of risk attracted so much research and occupied so much time in corporate boardrooms? And why is it that, even as we’ve invested increasing resources in institutional risk management, we still too often encounter a profound lack of public trust?

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The Investment Industry Regulatory Organization of Canada (IIROC) announced last week that, following consultations undertaken last year, it has decided to increase the award limit under its arbitration program to $500,000. Further, IIROC is amending the program's rules of procedures to allow claimants to opt to eliminate an arbitrator's discretion to award costs in most circumstances. For more information on the amendments, which are effective as of today, see IIROC Notice 11-0016.

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On December 20, 2010, a provincial/territorial government working group released a consultation paper to elicit feedback on potential options respecting the incorporation of individual sales representatives of registered dealers and advisers. Specifically, the paper considers the benefits and regulatory concerns surrounding the issue of payments by dealers and advisers to non-traditional business structures, as well as the options being examined.

While National Instrument 31-103 Registration Requirements and Exemptions does not deal with the incorporation of individual sale representatives, MFDA Rule 2.4.1 permits individual sales representatives of a MFDA member to have his or her commissions paid directly to a non-registered corporation under certain conditions. IIROC rules, meanwhile, do not allow the relationship between a dealer and a person conducting securities-related business on behalf of the dealer to be that of an incorporated salesperson.

Ultimately, the paper invites feedback on a number of options under consideration, including legislative proposals and amendments to IIROC rules. Comments on the consultation paper are being accepted by the governments of Alberta and Quebec until February 25.

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In a speech yesterday at the National Centre for Business Law, Bryan Davies, Vice-Chair of the Canadian Securities Transition Office provided an update on the progress made towards the implementation of a federal securities regulator. Notably, Mr. Davies stated that the Transition Office is moving forward with the view that the implementation of a federal Securities Act would occur in July 2012. As we've discussed in the past, the federal government has referred the proposed Act to the Supreme Court of Canada in order to ascertain whether the Act falls within federal authority.

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Ramandeep Grewal and Alex Colangelo

The Ontario Securities Commission yesterday published a staff notice advising on its review of issues relating to shareholder democracy. According to the notice, the OSC is considering the development of regulatory proposals relating to director elections, say-on-pay and the effectiveness of the proxy voting system. The purpose of the notice is to provide an update on its work in this area given the OSC’s stated commitment to reviewing protections for shareholders’ rights and corporate governance as stated in its 2010-2011 Statement of Priorities and in its submissions to the Standing Committee on Government Agencies.

With respect to slate voting and majority voting, the OSC is considering whether securities laws should be amended to facilitate individual director voting (as opposed to slate voting) and majority voting (as opposed to requiring a simple plurality) for director elections of reporting issuers. These issues have received increased attention in the last few years, with the Canadian Coalition for Good Governance recommending a majority voting standard and a prohibition on slate voting.

In the area of executive compensation, the OSC is considering whether to introduce mandatory shareholder advisory votes on executive compensation or “say-on-pay”. On this point, the OSC specifically cited the movement towards mandatory say-on-pay in Australia, the U.K. and parts of Europe and the expected implementation of say-on-pay in the U.S. as a result of Dodd-Frank. As we've discussed in the past, Canada's largest financial services companies have already begun allowing shareholders to vote on executive compensation resolutions.

Finally, the OSC will also look at the need for general reforms to the proxy voting system. Specifically, the OSC recognizes "the need for an effective proxy voting system that allows shareholders to make informed voting decisions and ensures that their votes are counted at shareholder meetings." This review will be in addition to proposals published earlier to amend National Instrument 54-101 Communication with Beneficial Owners. In the U.S., the SEC also initiated a comprehensive review of the proxy system in July 2010.

The OSC intends to coordinate its review with other CSA members and is accepting comments until March 31 on whether proposals on these issues should be developed and if so, the appropriate scope of such proposals. For more information, see OSC Staff Notice 54-701 Regulatory Developments Regarding Shareholder Democracy Issues.

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The Globe and Mail published an interesting article last week discussing the "jurisdiction-shopping" occurring among issuers looking to avoid director residency requirements. The article specifically considered the case of a mining company looking to reincorporate in Yukon so as to avoid the CBCA's requirement that at least 25% of the directors of a corporation be resident Canadians. According to Stikeman Elliott partner Jay Kellerman, who was quoted in the article, such jurisdiction-shopping is increasingly prevalent among mining companies.

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The Investment Industry Regulatory Organization of Canada today republished a proposal to implement core aspects of its Client Relationship Model Project. IIROC's proposal would address issues relating to relationship disclosure, conflicts of interest management and disclosure, suitability assessment and account performance reporting. Proposed transition periods would range from the immediate implementation for certain provisions relating to conflict identification to three years for certain disclosure to existing clients.  

IIROC also stated that the CSA are expected to publish proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions to introduce cost disclosure and performace reporting requirements for all registered dealers and advisers.

Proposals to address CRM issues were originally published in February 2008 and revised rules were subsequently released in April 2009. IIROC's proposal also includes responses to comments received to its April 2009 proposals. Comments on today's proposals are being accepted for 60 days.

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On December 24, 2010, the CSA published a revised version of CSA Staff Notice 51-327 Oil and Gas Disclosure: Resources other than Reserves Data, which provides guidance on the recurring issues identified in reporting issuers' disclosure of resources other than reserves data. A revised version of Staff Notice 51-324 Glossary to NI 51-101 Standards of Disclosure for Oil and Gas Activities, was also released.

For more information on oil and gas disclosure issues, see our post of October 22, 2010 discussing recent revisions to NI 51-101 and this post of March 26, 2009 discussing previous changes to Staff Notice 51-327.

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On November 22, John Ruggie, the United Nations Secretary-General's Special Representative for Business and Human Rights, published draft guiding principles for the implementation of the U.N.'s "Protect, Respect and Remedy" Framework. The draft principles are intended to clarify how companies and states can operationalize the U.N. "Protect, Respect and Remedy" Framework "by taking practical steps to address business impacts on the human rights of individuals." Public comments are being accepted by way of an online consultation forum until January 31.

Stikeman Elliott provided pro bono assistance to the Special Representative in the development of the draft guiding principles. Stikeman Elliott partner Ed Waitzer recently considered the draft principles in an op-ed published in the Globe and Mail. According to Mr. Waitzer, the draft

brings together social ideals and operational practicalities. It helps to frame, and make operational, an emerging international consensus, starting with the need for states to adopt a more comprehensive approach to address business-related human rights impacts, and to encourage business enterprises to respect human rights.

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The Investment Industry Regulatory Organization of Canada (IIROC) today published Notice 11-0001 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 for the first quarter of 2011 are 1,150 points, 2,300 points and 3,450 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%) - 1,350 points; Level 2 (20%) - 2,700 points and Level 3 (30%) - 4,000 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. would result 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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