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

Yesterday, the Canadian Securities Administrators (CSA), Investment Industry Regulatory Organization of Canada (IIROC) and Mutual Fund Dealers Association (MFDA) announced the launch of an expanded Canadian Disciplined Persons List. The expanded list will now include the names of persons disciplined by IIROC and the MFDA, dating back to 2004, in addition to records of disciplinary actions by provincial securities regulators.

Noting that sanctions imposed by securities regulators are a matter of public record, the announcement states that the combined list will now allow the public to search for those disciplined by securities regulators or the SROs in one place, regardless of how serious the matter.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

On March 23, Bill C-61, the Freezing Assets of Corrupt Foreign Officials Act, was given Royal Assent and came into effect. The Act allows the federal government to freeze the assets of "politically exposed foreign persons" in cases where the person has allegedly misappropriated the property of a foreign state or inappropriately acquired property by virtue of office or personal or business relationships. Orders and regulations may also be made to prohibit Canadians from dealing with any property of a politically exposed foreign person, facilitating financial transactions related to such property or providing financial or other related services in respect of such property.

Further, certain domestic entities are now under a duty to determine, on a continuing basis, whether they are "in possession or control of property that they have reason to believe is the property of a politically exposed foreign person" who is the subject of an order or regulation made under the Act.

Notably, this duty to determine is imposed on, among others,

• entities that engage in any activity described in paragraph 5(h) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (which includes those engaged in the business of foreign exchange dealing) if the activity involves the opening of an account for a client; and
   
• entities authorized under provincial legislation to engage in the business of dealing in securities or to provide portfolio management or investment counseling services.

Meanwhile, all Canadians have a duty to report to the RCMP the existence of property in their possession or control that they have reason to believe is the property of a politically exposed foreign person subject to a government order described above.

Wasting no time in making use of the new legislation, the government adopted the corresponding Freezing Assets of Corrupt Foreign Officials (Tunisia and Egypt) Regulations on March 23 in order to respond to requests by Tunisia and Egypt to freeze the property of certain of their nationals accused of misappropriating property.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Earlier today, the Ontario Securities Commission released the findings of its disclosure review related to National Instrument 81-107 Independent Review Committee for Investment Funds. NI 81-107 requires that an investment fund that is a reporting issuer have an independent review committee (IRC) to oversee decisions involving conflicts of interest faced by the fund manager in the operation of the fund. The OSC's review was primarily intended to assess the concerns expressed by the funds industry regarding the implementation of NI 81-107.

Ultimately, the OSC's review made three main findings: (i) IRC fees, which the OSC found range between 0.000033% and 0.27% of a fund's total net assets, represent a "minimal portion" of such assets; (ii) all funds reviewed were able to create and retain an IRC under the rule; and (iii) standing instructions on conflict of interest matters enable the fund manager to effectively manage fund operations. The OSC also identified one "recurring disclosure deficiency of significance", being that some funds failed to disclose IRC fees as a separate line item in financial statements as required by NI 81-106.

Going forward, OSC Staff expect to continue to inquire about the process and criteria used by IRCs to arrive at positive recommendations or approvals of conflict of interest matters. According to the OSC, in such cases, Staff may request the minutes of an IRC's discussion or ask to speak with the IRC or the IRC Chair to discuss a specific matter. OSC Staff will also continue to consider new applications for exemptive relief from the legislated conflict of interest prohibitions in cases where fund managers demonstrate a compelling need or market necessity for the relief. To that end, fund managers were encouraged in the OSC's notice to contact the OSC before proceeding with exemptive relief applications not previously granted and beyond the scope of exemptions codified under NI 81-107. For more information, see OSC Staff Notice 81-713.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

The Canadian Securities Administrators yesterday released an updated version of Staff Notice 81-320, first published on October 8, 2010, regarding the adoption of IFRS by investment funds (as defined in securities legislation and subject to National Instrument 81-106 Investment Fund Continuous Disclosure) in Canada. The revised version of the notice reflects the recent decision by the Canadian Accounting Standards Board to further defer the transition to IFRS for investment companies to January 1, 2013. In the meantime, investment funds are expected to continue to provide appropriate disclosure about the anticipated impact of the changeover to IFRS in accordance to the guidance provided in Staff Notice 52-320.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

The Canadian Securities Administrators (CSA) today published proposed amendments to NI 21-101 Marketplace Operations, NI 23-101 Trading Rules, their companion policies and related forms with the objective of updating and streamlining the instruments' regulatory and reporting requirements.

According to the CSA, the amendments are intended to: (i) increase consistency and streamline the regulatory and reporting requirements of marketplaces; (ii) revise transparency requirements respecting marketplaces dealing in exchange-traded securities; (iii) increase transparency of marketplaces operations; (iv) address other requirements applicable to marketplaces, such as with respect to conflicts of interest that may arise at a marketplace; (v) provide guidance regarding when a dealer would be considered to operate a marketplace; (vi) extend the current exemption from transparency requirements applicable to government debt securities until December 31, 2014; (vii) extend the obligation to not intentionally lock or cross the markets to marketplaces in certain circumstances; and (viii) revise the existing requirements applicable to the information processors.

The CSA is accepting comments until June 16.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

The Canadian Securities Administrators (CSA) today released revised proposals to impose regulatory oversight for designated credit rating agencies and organizations. As we discussed in our post of July 16, 2010, the CSA released its original proposals last July.

The revised proposals include a number of key changes to the CSA's July proposals, namely: (i)  designated rating organizations would no longer be permitted to deviate from the included code of conduct based substantially on the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies unless exemptive relief was obtained; (ii) additional provisions beyond those mandated in the IOSCO Code, regarding such issues as governance and ratings reports, would be required of credit rating organizations; (iii) compliance officers would now be prohibited from participating in the development of credit ratings, methodologies and models and the establishment of compensation for most employees of designated rating organizations; and (iv) the requirement that directors and officers of a designated rating organization or a credit rating organization applying to be designated submit personal information forms has been eliminated.

Further, all jurisdictions except Ontario published for comment proposed amendments to Multilateral Instrument 11-102 Passport System to permit the passport system to be used for applications for designations by credit rating organizations and exemptive relief applications by designated rating organizations. Proposed NP 11-205, to which Ontario is a party, would be the equivalent policy that sets out how the process would work for filing and the review of an application to become a designated rating organization in Ontario and the passport jurisdictions. The revised proposals also note the trend in other jurisdictions towards the imposition of civil liability on credit rating organizations and state that, while the CSA has not included similar proposals at this time, the CSA will continue to monitor such developments.

Various Canadian jurisdictions have also proposed or implemented amendments in their securities legislation to give effect to recognition of credit rating organizations. In Ontario, a new Part IX was added to the Securities Act under Bill 135. The applicable provisions came into force on December 8, 2010.

The CSA will be accepting comments on the revised proposals until May 17, 2011. For more information, see proposed National Instrument 25-101 Designated Rating Organizations.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

On March 10, the Bank for International Settlements'  Committee on Payment and Settlement Systems and the International Organization of Securities Commissions released a consultative report containing a set of principles designed to apply to financial market infrastructures that record, clear and settle transactions in financial markets. The new principles, which consider such issues as credit and liquidity risk management, settlement, efficiency and transparency, are intended to replace the existing sets of CPSS and CPSS-IOSCO standards and provide greater consistency in the regulation and oversight of FMIs worldwide.

The OSC, AMF and Bank of Canada recently cited their participation in developing the report and encouraged Canadian stakeholders to provide comments to IOSCO and the BIS by the July 29, 2011 deadline.

For more information, see Principles for financial market infrastructures.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Raman Grewal

As we discussed in February, the Investment Industry Regulatory Organization of Canada released proposed amendments to the Universal Market Integrity Rules last month that would repeal the restrictions on the price at which a short sale may be made on Canadian markets. 

As discussed in detail in our post of April 28, 2009, currently under UMIR, a short sale may not be made unless the price is at or above the last sale price for that security, subject to certain exceptions (referred to as the tick-test or the “uptick rule”) and there must be a “reasonable expectation” of settling the trade.

Under the proposed amendments, all price restrictions relating to short sales would be repealed and all short sales would be subject to the requirement to be “marked” as short sales, other than those exempt from marking as “short-marking exempt” orders. IIROC would have the ability to designate securities as being “short sale ineligible securities” and “pre-borrow” requirements would be imposed on certain securities (requiring that the person entering the order have made arrangement to borrow the securities that would be required to settle the trade prior to the entry of the order).

• Comments
• Trackbacks
• Email This
• Print
• Share Link

As we discussed in a post last year, IIROC proposed amendments to its Form 1 in August 2010 to harmonize the standards used to comply with the financial reporting requirements of Form 1 with IFRS as much as possible. The OSC has now approved the amendments, with revisions. The amendments came into effect as of February 28, 2011 and are for the period beginning January 1, 2011. While the approved amendments do not include the changes initially proposed to the definition of "market value of securities", IIROC has indicated that a change in definition is forthcoming in the months ahead.

A number of departures from IFRS, however, have been made, including (i) reporting of client and broker trading balances on a net basis or gross basis; (ii) treating preferred shares as regulatory capital; and (iii) presenting the financial statements on a non-consolidated basis. Meanwhile, Dealer Members that meet certain criteria will be able to request a deferral for one year on the implementation of IFRS, except for certain specified departures. For more information, see IIROC Notice 11-0082.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

On March 2, the U.S. Securities and Exchange Commission proposed a rule that would prohibit certain institutions with consolidated assets of $1 billion or more from establishing or maintaining incentive-based compensation arrangements that encourage executive officers, employees, directors or principal shareholders to expose the institution to inappropriate risks by providing excessive compensation, or that encourage inappropriate risks that could lead to material financial loss. The proposals would apply to institutions with consolidated assets of $1 billion or more and include brokers and dealers registered under Section 15 of the Securities Exchange Act of 1934 and investment advisers as defined under section 202(a)(11) of the Investment Advisers Act of 1940.

The proposal, which responds to a requirement by Dodd-Frank to prohibit such compensation arrangements, would also require the covered institutions to disclose information about their incentive-based compensation arrangements. The proposal will be open for a 45-day comment period once it is published in the Federal Register.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

In late January, the U.S. SEC submitted a staff study to Congress that recommended a uniform fiduciary standard for investment advisers and broker-dealers that provide securities investment advice to retail customers. The study, which noted that broker-dealers are generally not currently subject to a fiduciary standard under federal securities laws, recommended a fiduciary standard no less stringent than currently applied to investment advisers be extended to broker-dealers. The SEC was required to undertake the study to comply with Dodd-Frank, and the study also provided suggestions for further harmonization of the broker-dealer and investment adviser regulatory regimes. Whether the study's recommendations are followed through with, however, remains to be seen.  According to the SEC, the views expressed in the study are those of SEC staff and "do not necessarily reflect the views" of the SEC or individual commissioners.

In Canada, standards applicable to registrants such as dealers and advisers were somewhat harmonized in conjunction with the coming into force of the new registration regime for dealers, advisers and investment fund managers. Work also continues on IIROC's Client Relationship Model project, which attempts to address issues relating to such things as conflicts of interest management and suitability assessment. For a further discussion, see Ed Waitzer's post of February 17, entitled "Make advisors work for investors".

• Comments
• Trackbacks
• Email This
• Print
• Share Link

According to the Ontario Securities Commission's website, the OSC intends to publish a rule for comment next month to address electronic trading and direct electronic access to marketplaces. While the OSC's website doesn't provide specifics on the proposed rule, the OSC Market Regulation Branch provided some information in its Annual Report of October 2010. Specifically, the Annual Report stated that the CSA and IIROC were examining issues relating to direct market access (DMA) and developing a proposal to address risks associated with electronic trading (such as market risk, and credit risk), DMA and other issues associated with technology. Other issues cited in the report include high frequency trading, co-location and outsourcing.

Meanwhile, IIROC's Market Regulation Policy Quarterly Update of October 2010 also noted the work of the CSA and IIROC and added that the regulators were taking into account emerging issues relating to high frequency trading, co-location and outsourcing as well as regulatory initiatives in the US and elsewhere, including, modified NASDAQ Rule 4611 and the SEC’s Proposed Rule 15c3-5. According to the update, the principles contained in the Consultation Report on Direct Electronic Access, published by the Technical Committee of IOSCO in February 2009 and those contained in Principles for Direct Electronic Access to Markets, the Final Report of the Technical Committee of IOSCO, issued in August 2010 will also inform the policy development process.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

On February 28, the Alberta Securities Commission proposed the repeal of Blanket Order 91-503, which currently exempts most over-the-counter derivatives from the definition of "futures contract" under the Alberta Securities Act and, thus, exempts such OTC derivatives from regulation as "securities".

The ASC would replace Blanket Order 91-503 with Rule 91-505 Over-the-Counter-Derivatives, which is intended to restore the ASC's authority to regulate OTC derivatives transactions as futures contract transactions under the Act. The proposed Rule 91-505, however, would recognize the fact that such transactions are generally confined to large institutional entities and exempt distributions of a futures contract from the prospectus requirement under the Act.

However, an exemption from the dealer registration requirement would only apply to OTC physical commodity contracts. The Rule defines OTC physical commodity contract to mean a futures contract that (i) is not an exchange contract; (ii) contains an obligation to make or take future delivery of a commodity other than cash or a currency; and (iii) does not allow for cash settlement in place of physical delivery.

Unless addressed in the context of further harmonization of dealer registration requirements or otherwise, as it currently stands, the proposal replaces the broader dealer registration exemption with a narrow exemption limited to OTC physical commodity contracts. As such, under the proposal, there would no longer be an exemption for qualified parties.

The ASC is accepting comments on its proposal until April 29, 2011. For more information, see ASC Staff Notice 91-703 Over-the-Counter Derivatives.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

The Canadian Securities Administrators recently released their 2010 Enforcement Report, which summarizes the steps taken by regulators over the past year "to detect and disrupt misconduct in Canada's capital markets." The report notes that 178 proceedings were commenced in 2010 against 301 individuals and 183 companies, while 174 cases were concluded. Notably, of the cases concluded, 64 were concluded by court proceeding, representing a marked increase from the 35 in 2009. Illegal distributions were the most frequent type of securities law violation, and represented two-thirds of concluded cases. The report also provides a number of case summaries to illustrate the type of activity that constitutes the various categories of violations.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

The Alberta Court of Appeal has just released its decision on the reference made by the Alberta government regarding the federal government's plan to implement the proposed federal Canadian Securities Act. According to the Alberta Court of Appeal, the proposed Act exceeds the constitutional authority of the Parliament of Canada as it encroaches on provincial jurisidiction.

The Alberta Court of Appeal's decision in one of among three references currently pending on the issue. The Department of Finance released the proposed Canadian Securities Act in May 2010 and the Canadian Securities Transition Office has since been working on a plan for transitioning securities regulation to a federal regulator. The Quebec Court of Appeal held hearings on the constitutionality of the federal Act in January, while the Supreme Court of Canada is scheduled to hold hearings on the issue on April 13 and 14, 2011.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

As part of its plain language rules rewrite project, the Investment Industry Regulatory Organization of Canada (IIROC) recently released proposed Rules 2100 through Rules 2700 regarding dealer member organization and registration. Beyond rewriting the rules in plain language, the proposals make a number of substantive changes, including with respect to ownership of a dealer member's securities and dealer member structure, in order to, among other things, clarify IIROC's expectations and ensure that the rules reflect actual IIROC practices.

Comments on the proposals are being accepted for 90 days from publication. For more information, see IIROC Notice 11-0061.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

The OSC released a notice today setting out the views of OSC Staff on the disclosure required by investment funds that use Form 41-101F2 (pre-IFRS version, IFRS version) when filing prospectuses. The notice addresses Staff's concerns regarding investment funds departing from the form's general requirements relating to the use of plain language, brevity and the ordering of information and use of headings.

First, in Staff's view, cover page and prospectus summary disclosure tends to be overly detailed, in contrast to Staff's expectations that it include a brief description of the investment fund and the securities to be distributed. As such, Staff specifically request that cover page disclosure be limited to the disclosure specifically mandated by the form, while prospectus summary disclosure generally only provide a brief summary of information that appears elsewhere in the prospectus.

On the other hand, with respect to disclosure about investment objectives, OSC Staff expressed concern regarding the limited nature of disclosure regarding the nature of the returns that the investment fund seeks to provide to investors. The notice specifically reminds filers to comply with all aspects of Item 5 of the form.

Finally, the notice describes the recent filing of prospectuses that combine disclosure for multiple ETFs in the same document. In response to this development, the notice states that the number of investment funds offered in a prospectus should be limited to investment funds with "substantially similar investment objectives, strategies and features." According to Staff, where the number of investment funds incorporated into one prospectus interferes with the presentation of key information in a clear, concise and comparable format, filers will be requested to separate the investment funds into different prospectus documents.

For more information, see OSC Staff Notice 81-714.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

On February 25, the OSC released for comment a draft of its 2011-2012 Statement of Priorities. According to the OSC, its planning for the year was influenced by developments in the overall investment marketplace, the regulatory arena domestically and internationally and stakeholder perceptions of regulatory effectiveness. Ultimately, the OSC identified five broad priorities, namely to:

1. better demonstrate its commitment to investor protection by undertaking policy and rule development as well as compliance and enforcement programs;
    
2. intensify operational, compliance and enforcement efforts;
    
3. modernize its regulatory systems and approaches, including by focusing on risk oriented regulatory responses and implementing a robust framework for OTC derivatives;
    
4. pursue a coordinated approach to securities regulation by supporting the development of a federal securities regulator and working to harmonize and modernize regulation through the CSA; and
    
5. demonstrate accountability for its performance as a leading securities regulator in Canada.

Comments on the are being accepted by the OSC until April 27, 2011. For more information, see OSC Notice 11-765.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

D’Arcy Nordick and Ruth Elnekave

Canadian companies issuing high yield debt have historically had little choice but to tap the high yield market south of the border. In recent years, however, an increasing number have been opting to issue Canadian-dollar denominated high yield bonds to investors in Canada. 2010 saw 14 Canadian deals worth more than $3.4 billion, up from $1.2 billion in 2009 – a burgeoning market that has even begun to draw U.S. dealers north to lead domestic offerings. Investors’ appetite for Canadian-dollar denominated high yield debt is strong and growing, as evidenced not only by the foregoing statistics but by the frequency of over-subscribed deals and the emergence of an increasing number of high yield mutual funds and exchange traded funds. Having been involved in nearly half of the Canadian deals in 2010, our group at Stikeman Elliott is anticipating another busy year in 2011 as a rising economic tide buoys weaker companies that are motivated to complete corporate borrowing and refinancings while interest rates are low.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

A memorandum of understanding between the OSC, certain other provincial securities regulators and Investment Industry Regulatory Organization of Canada (IIROC) entered into with the Mutual Fund Dealers Association of Canada (MFDA) is set to come into effect on March 23, 2011.

The MOU is intended to facilitate the sharing of information regarding compliance and enforcement matters by establishing a framework for the MFDA's use, under certain circumstances, of the National Registry Database system.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Over the past year, regulators have issued a number of notices providing guidance and suggested best practices relevant to continuous disclosure, most notably relating to the transition to IFRS effective January 1, 2011. Meanwhile, groups such as the Canadian Coalition for Good Governance and ISS have also released model policies and guidance on such topics as executive and director compensation, proxy disclosure, "say on pay" and majority voting. We have created this 2011 Canadian Public Company Disclosure Reference Guide to assist you in preparing your 2010 annual disclosure, including financial statements, MD&A, AIFs and information circulars. This guide sets out the main sources of the disclosure requirements along with relevant guidance, best practices and policies, as applicable.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

On February 25, IIROC announced that the requirement to provide a report of a trade variation or cancellation will be in effect as of June 1, 2011. The requirement to provide a report of an extended failed trade will also be implemented on the same day. IIROC approved the reporting requirements in October 2008, but had deferred implementation.

For more information, see IIROC Notices 11-0079 and 11-0080.

• Comments
• Trackbacks
• Email This
• Print
• Share Link