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

The Investment Industry Regulatory Organization of Canada today released proposed amendments to the Universal Market Integrity Rules that would repeal the restrictions on the price at which a short sale may be made on Canadian markets. The proposals would also generally require that Participants and Access Persons make arrangements to borrow the securities necessary to settle any short sale prior to the entry of the order if: (i) the security has been designated as a "Pre-Borrow Security"; (ii) the account on whose behalf the order is being entered has previously executed a failed trade that was not rectified within the required time; or (iii) the Participant has executed as principle a failed trade that was not rectified within the required time.

For more information, see IIROC Notice 11-0075.

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The Canadian Securities Administrators yesterday published guidance regarding the use of a "Fund Facts" document to an satisfy current prospectus delivery requirements. While amendments to NI 81-101 Mutual Fund Prospectus Disclosure to finalize requirements to produce and file the Fund Facts document became effective on January 1, 2011, the use of the Fund Facts will not be mandatatory until later this year. Yesterday's notice, however, anticipates requests by investment funds for exemptive relief to use the Fund Facts before their mandatory use (April 8, 2011 to begin filing the Fund Facts documents with prospectuses, while funds will have until July 8, 2011 before the Fund Facts documents must be filed for each class or series of securities of the mutual fund).

As such, the guidance sets out a number of terms and conditions that the CSA anticipates requiring as part of such an exemption:

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The Canadian Securities Administrators today released guidance intended to clarify the registration requirements that apply to mortgage investment entities (MIEs). The guidance follows parallel orders for exemptive relief for MIEs from the investment fund manager registration requirement and the adviser registration requirement, which were issued in August 2010. The exemptive relief was extended in all jurisdictions except B.C. until March 31, 2011. In B.C., exemptive relief was extended until June 30, 2011.

This notice clarifies the circumstances in which the investment fund manager registration requirement would apply to an MIE. While the guidance is generally harmonized, it should be noted that Alberta has taken a different approach and set out its own circumstances under which such registration would apply to an MIE whose principal jurisdiction is Alberta. Similarly British Columbia is taking a different approach with respect to dealer registration in certain circumstances, although all CSA jurisdictions will impose adviser registration on any person or company that advises a Pooled MIE (as defined in the notice) that is an investment fund about investing in or buying or selling mortgages or other securities if it is in the business of advising in securities.

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Last week, FAIR Canada released a report entitled A Decade of Financial Scandals, which reviews various cases of financial fraud and presents a number of recommendations for the consideration of governments and regulators. Specifically, the report's recommendations deal with fraud prevention, the early detection of financial fraud, enforcement and better compensation for victims.

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According to an article in today's Globe and Mail, the OSC has been "widening the net" as it investigates potential cases of insider trading in advance of major corporate deals and announcements. OSC enforcement director Tom Atkinson is cited as stating that the sources of insider trading are rarely executives of a company but, rather, employees of the law, accounting, consulting and investment firms involved in deals.

The article also discusses the OSC's new Trade Nexus software, which "allows the OSC to search trading data and look for patterns using numerous variables. It can also be used to identify webs of connections as investigators check to see whether more than one person is involved in a case."

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The Ontario Securities Commission has now approved new MFDA Rule 2.4.4 and amendments to MFDA Rule 5.1. As we discussed in November, Rule 2.4.4 requires MFDA 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, amendments to Rule 5.1 require MFDA members to maintain evidence that clients were informed of such fees and charges.

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The Canadian Coalition for Good Governance recently released a a set of principles for director compensation "for boards to consider when structuring their own compensation plans to ensure that their interests are aligned with those of the equity owners of the company." According to the principles: (i) director compensation should not be so high as to potentially compromise the independence of directors; (ii) compensation should reflect expertise and a director's actual time commitment to the board; (iii) compensation should vary for different director roles; (iv) boards should consider requiring a minimum shareholding for directors and encourage investment beyond the minimum; (v) boards should minimize the complexity of director compensation structures; and (vi) directors should consider periodically seeking approval for directors' compensation from shareholders.

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As published in Tuesday's Financial Post

Edward Waitzer -

In January 2004, the Ontario Securities Commission released a concept paper advocating a "fair dealing model." The paper acknowledged that the regulatory regime -- regulating dealers and their representatives through the products they sell -- was based on the outdated assumption that transaction execution is the primary reason people seek financial services. Recognizing that most customers are seeking advice, the concept paper proposed changing the regulatory framework to focus on the advisory relationship.

Financial professionals and salespersons in Canada are allowed to call themselves advisors, irrespective of their professional designation. Few, however, are compensated directly for their advice. Instead, they are paid commissions to sell specific products. Addressing the conflicts of interest that result from commission-based compensation, the paper proposed that retail clients should be entitled to rely on objective advice that is in their best interest and, when there are conflicts of interest, they should be clearly disclosed so that the client can understand the conflicts and how they may affect the advice given.

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The OSC released a staff notice this week regarding business continuity planning and, specifically, the industry-wide test scheduled by IIROC for September 10, 2011. While the testing is voluntary, OSC staff

encourage all dealers, marketplaces and clearing agencies to participate in the September 2011 market-wide exercise organized by IIROC. Participation in this exercise may facilitate the discovery of any potential communication issues, points of failure between industry participants within and across different jurisdictions or other issues with services provided by third-party service providers.

Notably, the notice states that the OSC is also considering whether to make such testing mandatory "through rule proposals or additional requirements in the recognition orders of various entities." For more information, see OSC Staff Notice 11-764.

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On January 25, the U.S. SEC proposed amendments to the definition of accredited investor in accordance with the Dodd-Frank Act. Specifically, under the SEC's proposal, while an individual would still need to have a net worth of at least $1 million, individually or jointly with a spouse, to meet the threshold, the amended requirements would now exclude the value of the individual's primary residence from the calculation. Comments on the proposal are being accepted until March 11, 2011.

In Canada, the definition of "accredited investor" in National Instrument 45-106 Prospectus and Registration Exemptions includes individuals with financial assets exceeding $1 million (excluding primary residence) and those with net assets of at least $5 million (including net value of primary residence).

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The Technical Committee of the International Organization of Securities Commissions (IOSCO) released a report last week setting out principles designed to assist market authorities when considering requirements regarding point of sale disclosure. Specifically, the principles articulated by the report for disclosure of key information are:

1. Key information should include disclosures that inform the investor of the fundamental benefits, risks, terms and costs of the product and the remuneration and conflicts associated with the intermediary through which the product is sold. Such product disclosure could include the name of the investment and type of product, the risk and reward profile of the product and its fees and costs.
    
2. Key information should be delivered, or made available, for free, to an investor before the point of sale, so that the investor has the opportunity to consider the information and make an informed decision about whether to invest.
    
3. Key information should be delivered or made available that is appropriate for the target investor.
    
4. Disclosure of key information should be in plain language and in a simple, accessible and comparable format to facilitate a meaningful comparison of information disclosed for competing collective investment scheme products.
    
5. Key information disclosures should be clear, accurate and not misleading to the target investor. Disclosures should be updated on a regular basis.
    
6. In deciding what key information disclosure to impose on intermediaries and product producers, regulators should consider who has control over the information that is to be disclosed.

Closer to home, as we discussed in December, the Ontario Minister of Finance has now approved amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure, (first published in October 2010 and approved with minor changes) to implement point of sale disclosure for mutual funds. These amendments became effective on January 1.

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The influence of social media has spurred the Investment Industry Regulatory Organization of Canada to release draft guidance to address issues respecting its members' communications with clients through websites such as Facebook, Twitter and blogs. The guidance, which would replace the IDA's MR0281 from 2004, is intended to assist members in satisfying their obligations under Rule 29.7 of IIROC's Dealer Member Rules and clarifies that "electronic communication, including social media web sites, may constitute advertising, sales literature or correspondence depending upon their content and purpose."

The note further clarifies that the requirement under NI 31-103 Registration Requirements and Exemptions for firms to retain records of business activities, financial affairs, client transactions and communication, requires firms to "design systems and programs with compliant record retention and retrieval functionalities for all methods of communication." Such requirements apply to content posted on Twitter, Facebook, blogs and chat rooms, as well as content transmitted by email. The notice also considers supervisory obligations in light of dealers' use of social media websites.

IIROC is accepting comments on the draft guidance for 60 days from the publication date of the notice. For more information, see IIROC Notice 11-0051.

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The Toronto Stock Exchange today released proposed changes to its Company Manual for public comment that would, among other things, create a new subcategory for oil and gas issuers in the development stage. Listing requirements under this subcategory would include contingent resources of $500 million and a minimum market value of the issued securities to be listed of $200 million.

The proposed changes to the Manual also include : (i) amendments intended to pre-empt avoidance of security holder approval requirements in the case of insider transactions regarding private placements; (ii) an exemption from security holder approval for employment inducements where the aggregate number of securities issued to officers under the exemption in the preceding year is no more than 2% of the outstanding securities; and (iii) removing the requirement that rights offerings must be unconditional.

Comments on the proposals are being accepted until March 7, 2011.

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IIROC published guidance on February 1 on specific questions respecting “locked” and “crossed” markets in the context of NI 23-101 Trading Rules and its companion policy. The guidance reflects the repeal of the "best price" obligation and the other consequential amendments to UMIR discussed in our post of earlier today. IIROC published a proposed version of the guidance in April 2010 and yesterday's notice also provides responses to comments it received on its original proposals.

For more information, see IIROC Notice 11-0042 and IIROC Notice 11-0043.

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The Ontario Securities Commission announced last week that it has approved amendments to IIROC's Universal Market Integrity Rules, proposed in November 2009, that are consequential to the CSA's implementation of changes to National Instrument 23-101 Trading Rules regarding trade-through protection.

Among other things, the amendments, effective February 1, 2011, will repeal the rule and policies respecting the "best price" obligation of participants, provide that the order protection rule cannot be avoided when a participant is considering a trade on a foreign organized regulated market and require participants and access persons to have adequate policies and procedures for handling orders that do not rely on a marketplace to ensure compliance with the order protection rule. For more information, see IIROC Notice 11-0036.

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NERA Economic Consulting yesterday released an update on the number and value of securities class action claims in Canada. Specifically, Trends in Canadian Securities Class Actions: 2010 Update notes that there are now a record 28 active Canadian securities class actions representing almost $16 billion in outstanding claims. The study considers trends in filings and resolutions and notes that the most common claims continue to relate to allegations of operational misrepresentations and accounting misrepresentations for cases filed in 2010. Readers may also be interested in the publication's consideration of US securities class actions against Canadian companies.

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