IIROC publishes proposed rules relating to debt markets and inter-dealer bond brokers

As we've discussed in the past, the Investment Industry Regulatory Organization of Canada is currently undertaking a project to rewrite its rules in plain language. To that end, today IIROC published for comment proposed Dealer Member Rules 7200 through 7300, relating to debt markets and inter-dealer bond brokers. According to IIROC, the proposed rules are intended to consolidate and clarify existing rules and do not contain any substantive amendments. For more information, see IIROC Notice 11-0164.

CSA provide update on modernization of publicly offered investment funds regulation

The Canadian Securities Administrators published a notice yesterday providing an update on the project to modernize investment fund product regulation. As we discussed in June 2010, the first phase of the project involves amending NI 81-102 Mutual Funds and NI 81-106 Investment Fund Continuous Disclosure to codify exemptive relief that is frequently granted to mutual funds and other investment funds and replace the patchwork orders with uniform requirements. Amendments to that end were proposed last year and, according to yesterday's notice, the CSA intend to publish the amendments in final form by the end of the summer.

Meanwhile, Phase 2 of the modernization project involves identifying and addressing issues concerning market efficiency, investor protection and fairness that arise out of the differing regulatory regimes that apply to different types of publicly offered investment funds. A stated aim of this phase, which is to be implemented in two stages, is reducing the potential for regulatory arbitrage. The first stage would include adopting proposals for restrictions and operational requirements for non-redeemable investment funds analogous to those in NI 81-102 in order to address investor protection and fairness concerns. The CSA plan to publish such proposals for comment in early 2012. During the second stage of this phase of the project, the CSA intend to consider whether certain investment restrictions in NI 81-102 should be loosened in recognition of product and market developments.

Public comments on the proposals are being accepted until July 25, 2011.

CDS proposes amendments to require uncertificated withdrawal of securities

On May 20, the OSC published a request for comment on proposed amendments to the CDS Rules that would require participants to withdraw securities from the CDSX system in uncertificated format where the issuer offers a direct registration system. The notice provides a description of how the paperless processing would work:

Under the amended Rules, when a participant withdraws a security from CDSX and the issuer uses DRS (direct registration system), CDSX will default the withdrawal request to DRS format instead of a physical certificate; the participant will not have the option to choose certificated format for the withdrawn securities. The transfer agent will not deliver a physical certificate evidencing the withdrawn security. Instead, the transfer agent will issue a statement to the new registered holder of the withdrawn security confirming that the security has been transferred and is now registered in the name of the new holder (generally the participant's customer).

The proposal is intended to progress the objective of paperless processing of securities transactions and holdings.

Meanwhile, another notice released the same day proposed allowing CDS to establish limited exemptions to the requirement that all entitlements on eligible securities be paid by an acceptable electronic means. While the requirement is scheduled to become effective on November 1, 2011, CDS determined that not all issuers and agents are yet able to comply with the requirements.

Both proposals are open for 30-day comment periods.

TSX proposes rules to facilitate trading of securities listed on other recognized exchanges

TSX Inc. recently approved amendments to its rules, which have now been submitted to the OSC for approval, that would facilitate the trading of securities that are not listed on the TSX but are listed on another exchange recognized by a Canadian securities regulator. The OSC has now published the proposal for a public comment period that runs until June 20. 

Specifically, the proposed amendments would distinguish between securities that are listed and traded on the TSX and those that are not listed, but posted for trading.  According to the TSX, all securities traded, whether listed or not, would trade in the same book and all trades would be subject to TSX rules. Furthermore, order entry would be identical for both types of securities.

The proposed amendments anticipate growing competition in the Canadian equity trading business, especially in light of Alpha Exchange Inc.'s application to operate as an exchange. According to the notice,

As the multi-marketplace environment in Canada continues to increase its breadth and depth, TSX is in a unique position to meet the needs of its Participating Organizations (POs) and investors. Clarifying the TSX Rules to permit trading in securities that are not listed by Toronto Stock Exchange allows TSX to leverage its trade execution strength in the event that it determines to trade securities that are listed on another Canadian exchange.

OSC to publish Director's decisions on registration matters

The OSC announced today that it will expand on the types of Director decisions that it publishes online and in the OSC Bulletin to include uncontested cases of regulatory action with regards to the registration status of a registrant. Currently, the OSC only publishes decisions where a registrant exercises the right to be heard in an administrative proceeding known as an "opportunity to be heard". According to the OSC, "the increased transparency resulting from the publication of decisions of the Director ... will provide enhanced investor protection since important information regarding registrant conduct will be communicated to the public in a timely manner." For more information, see OSC Staff Notice 34-701.

OSC finds non-compliance with interim financial statement disclosure requirements

The Ontario Securities Commission released a staff notice last week discussing its recent review of issuer compliance with section 4.3(3) of NI 51-102 Continuous Disclosure Obligations. The applicable provision requires that issuers disclose if an auditor has not reviewed an interim financial report. According to the staff notice, the OSC found a "significant level" of non-compliance with the disclosure requirement, in that many issuers failed to disclose that interim statements had not been reviewed, which has led to requests for refilling of interim financial disclosure. While interim financial reports are not required to be reviewed by an auditor, the OSC reiterated that the required disclosure is "critical" as it "alerts investors...that the issuer's auditor did not complete a review of the interim financial report." According to the OSC, it will continue to monitor issuer compliance with this requirement. For more information, see OSC Staff Notice 51-718.

IIROC reminder of implementation date for trade variation reporting

As we discussed in our post of March 1, IIROC has set June 1st as the date on which requirements to report trade variations and cancellations, as well as extended failed trades, will take effect. Yesterday, IIROC published reminders (notice on trade variations and cancellations and notice on extended failed trades ) of the requirements' impending implementation. The relevant notices also provide answers to a number of questions respecting the new obligations.

For more information, see IIROC Notice 11-0160 and Notice 11-0161.

IIROC to post webcast on fiduciary standards

Later this afternoon, the Investment Industry Regulatory Organization of Canada (IIROC) will be posting on its website a recorded webcast considering the Canadian and U.S. perspectives on fiduciary standards and the differences between such a standard and the suitability standard. The webcast will be available for viewing as of 4:00 p.m. today.

As we wrote in March, SEC staff have recently recommended a uniform fiduciary standard for investment advisers and broker-dealers in the U.S. Our colleague Ed Waitzer also considered the standards to which financial advisers in the U.S. and Canada are subject in his post of February 17, 2011.

OSC's Investment Funds Practioner discusses issues in exemptive relief applications and public disclosure filings

The Ontario Securities Commission recently released the May 2011 issue of its Investment Funds Practitioner. The publication discusses various issues arising out of the OSC's review of the public disclosure documents and applications for exemptive relief filed by investment funds and provides the OSC's responses to the various matters.

Specifically, the OSC provides its views on, among other things, applications for exemptive relief from the requirement to calculate daily net asset value of an investment fund that uses specified derivatives (generally, the OSC believes that calculating NAV on a daily basis doesn't create a significant burden); whether the chief compliance officer of the manager is an "executive officer" for the purposes of requiring a PIF (the OSC answered this in the affirmative); and whether an issuer can make use of a short form prospectus for a subsequent offering within a year of filing a long form prospectus in connection with its IPO (the OSC provides that in such a case, a new fund's continuous disclosure record is not comprehensive enough).

Notably, the Practitioner also provides a number of frequently asked questions (and the OSC's response) regarding the newly-introduced requirements to produce and file Fund Facts documents. The FAQs review such issues as the transition period, filing fees, frequency of filing, the format of Fund Facts and disclosure of past performance.

CSA release proposed amendments to registration rule exemptions for SRO members

The Canadian Securities Administrators released proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions and its companion policy today that would add (and clarify), as a condition to the exemptions for SRO members/approved persons provided in sections 3.16, 9.3 and 9.4 of the Instrument, that the registered individual or investment dealer comply with the specified corresponding provision of IIROC or, in the case of a mutual fund dealer firm, the MFDA. The proposed amendments, which follow proposals published on April 15, are open to comment until July 18.

OSC expresses concern regarding improper reliance on the accredited investor exemption

The OSC today released a staff notice expressing concern that issuers and dealers are relying on the accredited investor exemption to sell exempt securities to individual investors who do not meet the applicable requirements of the exemption. According to the OSC, many dealers are failing to collect adequate know-your-client (KYC) information to reasonably determine whether the investor is an accredited investor, and today's notice is intended to set out the OSC's expectations for issuers and dealers selling securities to accredited investors.

The notice focuses on the $1,000,000 financial asset and $5,000,000 net asset tests that apply to individual investors under the definition of "accredited investor" in National Instrument 45-106 Prospectus and Registration Exemptions. Staff have expressed concern that the two concepts are being confused. The higher threshold test based on "net assets" could include an investor's personal residence or other real estate (minus liabilities) whereas the lower test based on "financial assets" does not. According to staff, some dealers are not making it clear to clients that a personal residence or other real estate cannot be included for the purposes of determining financial assets.

The notice also provides a non-exhaustive list of steps that dealers should take when selling exempt securities, including:

  • reading and understanding the definition of accredited investor;
  • developing an accurate form for collecting KYC information;
  • explaining the accredited investor definition to clients and ensuring that the KYC forms are properly completed;
  • not selling an exempt security unless there is sufficient information to determine whether the client qualifies;
  • ensuring the exempt security is suitable for the client;
  • reviewing the KYC form;
  • retaining applicable documentation;
  • establishing appropriate policies and procedures; and
  • reporting the sale of exempt securities.

Notably, with respect to the issue of sufficient information, the notice states that it is not sufficient for issuers and their dealers to simply rely on a client initialling or checking off a box on an accredited investor certificate and that the information contained in the client's completed KYC form or other documentation must also demonstrate that the investor meets the test. Verbal representations, according to OSC staff, are also not sufficient to support that an investor meets the definition.

For more information, see Staff Notice 33-735.

U.S. exchanges propose replacement of circuit breaker pilot

Early last month, the U.S. SEC announced that national securities exchanges and the Financial Industry Regulatory Authority (FINRA) had filed a proposal to replace the circuit breakers for individual stocks, currently in place as part of a pilot project, with a "limit up-limit down" mechanism. Circuit breakers are trading pauses imposed in individual securities due to extraordinary market volatility. The proposed new mechanism, however, would prevent trades in a security from occurring outside of a specified price band. Stocks subject to the current circuit breaker (being those on the S&P 500 Index, the Russell 1000 Index and certain others) would generally be limited to a 5% trading price band, while other equities would be limited to 10% (as compared to prices of that security in the preceding five-minute period during a trading day).

For more information on the circuit breaker pilot project, see our posts of May 19, June 7 and September 21, 2010. Notably, the pilot project has been extended to the earlier of August 11, 2011 or the date on which the limit up-limit down mechanism is adopted.

IIROC releases draft guidance on outside business activities

Yesterday, the Investment Industry Regulatory Organization of Canada issued updated guidance on outside business activities. The proposed guidance follows last year's proposed rule on Dealer Members' personal financial dealings with clients and outside business activities, and is intended to replace current guidance once the proposed rule is finalized.

Outside business activities include activities that could give rise to a potential conflict of interest or client confusion, including specifically activities conducted outside of the Dealer Member by an approved person where direct or indirect payment is received or expected. IIROC cites membership on a board of any organization as an example of an activity that may give rise to potential conflicts. The IIROC notice also reminds registrants that Form 33-109F4 Registration of Individuals and Review of Permitted Individuals requires approved person to disclose their outside business activities to IIROC.

The proposed guidance sets out a non-exhaustive list of considerations for dealer members relating to outside business activities, including that such activities:

  • should not materially impair a dealer member's duty of care to clients;
  • should not involve the use of client information;
  • must be clearly seen to be outside the dealer member;
  • include robust and impartial approval and control processes; and
  • should be in keeping with both the letter and spirit of Dealer Member Rules 18.14(1)(e) and 29.1.

The proposed guidance also considers the supervision of outside business activities and filing requirements via NRD. For more information, see IIROC Notice 11-0150.

Amendments to UK Takeover Code would restrict deal protection measures

As we discussed in this November blog post, the UK's Panel on Takeovers and Mergers made a number of recommendations last year regarding the amendment of the City Code on Takeovers and Mergers. Specifically, the Panel recommended, among other things, strengthening the position of offeree companies in a takeover bid by prohibiting deal protection measures and inducement fees other than in certain limited cases and requiring the disclosure of offer-related fees. The Panel has now released proposed amendments to the Code to implement its earlier recommendations. Comments on the proposals are being accepted until May 27. The Panel expects to release final text of the amendments once it has considered responses to its proposals.

CSA release updated FAQs regarding institutional trade matching and settlement

The Canadian Securities Administrators today released a revised version of CSA Staff Notice 24-305, which sets out questions and answers regarding compliance with National Instrument 24-101 Institutional Trade Matching and Settlement. The original version of the notice, published in December 2007, was updated to reflect recent amendments to NI 24-101 that came into effect last year and to address inquiries received by the regulators.

As we discussed in April 2010, the institutional trade matching requirement of noon on T + 1 was phased in and has been the DAP/RAP requirement since July 1, 2010. These changes were part of a comprehensive overhaul of institutional trade matching requirements first introduced in 2007 and discussed in detail in our post of June 2007.

Comment period on IIROC short sale proposals coming to an end

As we discussed in posts of February 25 and March 18, IIROC has requested comments on proposed amendments to the UMIR that would, among other things, repeal short sale price restrictions currently applicable on Canadian markets. The comment period for the proposed amendments is quickly drawing to a close and ends on May 26, 2011. IIROC's proposals would see the repeal of the tick test and introduce the requirement that all short sales be marked as such. However, orders from accounts meeting specific requirements (including certain arbitrage and institutional accounts) would qualify for a "short-marking exempt" designation.

Of particular interest in the notice are IIROC's comments regarding the disclosure of short sale activity. Specifically, in response to the IOSCO principle stating that short selling should be subject to a reporting regime that provides timely information to the market or market authorities, IIROC confirms that it recognizes the problems associated with current short position reporting. IIROC communicates its intention, therefore, to produce and publicly release, semi-monthly, short sale summaries based on aggregated trading data across all marketplaces regulated by IIROC for orders that are marked as short sales, to be implemented following the implementation of the proposed amendments. The nature and scope of this disclosure remains to be seen.

According to IIROC, the CSA and IIROC are proposing to publish a joint notice to solicit feedback on whether additional proposals to enhance disclosure of short sales and failed trades in Canada are required. For example, the joint notice may seek comment on whether "disclosure of short positions by institutional investors may be necessary, similar to 'buy-side' reporting requirements that have been or are being widely implemented in other jurisdictions" as well as the type, level and frequency of public disclosure of failed trades in equity securities traded on all Canadian marketplaces and cleared through CDS.

This subsequent notice on enhanced disclosure, however, has yet to be published. In the U.S., meanwhile, the SEC recently issued a request for comment on the feasibility of requiring real-time reporting of short sale positions of publicly listed securities, either publicly or only to the SEC and FINRA. In a sign of what may be to come in Canada, the SEC notice asks specific questions of market participants, including with respect to the benefits and costs of real time reporting of investors' short positions.

CDS proposes amendments to real time continuous net settlement process

CDS Clearing and Depository Services Inc., the national securities depository, clearing and settlement hub, today released proposed amendments to replace the intraday continuous net settlement process (which currently runs four times a day) with a real-time continuous net settlement process. Proposed material amendments to CDS procedures to address the replacement of the process were also published. Both sets of proposals are open for comment for 30 calendar days.

MFDA provides guidance regarding electronic account statements

In response to the required frequency of account statement delivery under NI 31-103 Registration Requirements and Exemptions, the Mutual Fund Dealers Association of Canada (MFDA) has released guidance to assist its members in assessing the issues respecting sending account statements by electronic means. The bulletin cites privacy issues for specific attention and recommends that members and/or members' back-office service providers meet with MFDA staff before sending documents electronically. According to the MFDA, the following issues will be considered in assessing member compliance with regulatory requirements:

  • the confidentiality, security and integrity of client information sent electronically;
  • the procedures to obtain consent to receive documents electronically and the form of consent;
  • record retention and audit trails; and
  • the form and content of the electronic document and the length of time for which the document will be made available to clients.

For more information, see MFDA Bulletin #0474-P.

OSC secures finding of guilt against operator of unregistered securities sales office

Last month, the Ontario Securities Commission announced that it had secured the first finding of guilt for fraud in quasi-criminal proceedings it has brought before the Ontario Court of Justice. The accused pled guilty to fraud contrary to section 126.1 of the Securities Act (Ontario) in relation to his role with a company operating an unregistered securities sales office that offered trading units of limited partnerships fraudulently represented to constitute ownership interests in oil and gas leases. Sentencing is scheduled for November 24, 2011.

IIROC announces changes to ComSet reporting requirements

On May 2, the Investment Industry Regulatory Organization of Canada (IIROC) announced that it was making changes to Complaints and Settlement Reporting (ComSet) reporting requirements. Specifically, IIROC will require members, as of June 1, to attach relevant supporting documentation at the time of entering a ComSet event. According to IIROC, the additional documentation will allow it to "conduct more timely and efficient initial reviews of ComSet filings" and result in fewer subsequent information requests. For more information, see IIROC Notice 11-0142.

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