OSC Corporate Finance Branch clarifies prospectus financial disclosure issues in connection with IFRS transition

On August 18, the OSC's Corporate Finance Branch released clarification on issues relating to financial disclosure required in a prospectus arising out of the transition to International Financial Reporting Standards (IFRS). As we have previously discussed, Canadian reporting issuers have generally been required to transition to IFRS effective as of January 1, 2011.  Specifically, the Corporate Finance Branch release provides guidance on the presentation of IFRS transition information in prospectuses, as well as the use of GAAP for financial statement disclosure in prospectuses filed in and after the issuer’s transition year.

With respect to the presentation of transition information in prospectuses, the release outlines the difference in requirements between an IPO prospectus (which must include an opening statement of financial position at the date of transition to IFRS, as well as IFRS 1 reconciliations for the date of transition and the most recent annual period) and a short form prospectus or a non-IPO long form prospectus (which are not required to include the above information).

With respect to an IPO prospectus in the year of transition, the release clarifies that the annual financial statements required for the previous three years are not required to be converted into IFRS. However, the interim financial report for the most recent interim period, along with the comparative interim financial statements for the corresponding period in the previous year, would still have to be prepared in accordance with IFRS.

Finally, in cases where an IPO prospectus is filed in the first year after transition (2012), an issuer has three options with respect to the presentation of historical annual financial statements. Specifically, IFRS may be used for the three most recently completed years (2009, 2010 and 2011) or IFRS may be used for 2011 and 2010 and Canadian GAAP used for either 2009 and 2010, or 2008 and 2009. In either case, the issuer would be including financial disclosure above and beyond what would normally be required, in that financial statements for the 2010 financial year would be included twice or a fourth year back would have to be included.  

This release follows three prior releases published by OSC staff on issues relating to the transition to IFRS. For more information, see OSC Corporate Finance - IFRS Release No. 4.

Regulators approve OTC fair pricing rule

On June 4, 2010, the Investment Industry Regulatory Organization of Canada published proposed amendments to its Dealer Member Rules to address the fairness of pricing and transparency of OTC market transactions. The OSC and various other Canadian securities regulators have now approved the proposed amendments with minor modifications. The OSC's approval notice also contains a guidance note discussing the scope of the fair pricing rule.

Securities regulators approve changes to marketplace trading obligations

As we discussed in April 2010, the Investment Industry Regulatory Organization of Canada proposed amendments to UMIR last year that would, among other things, replace the definition of "Market Maker Obligations" with a definition of "Marketplace Trading Obligations" and make various other changes to odd lot and marketplace trading obligations. The OSC and a number of other Canadian securities regulators have now approved the amendments, which become effective today. For more information, see IIROC Notice 11-0251.

CPSS/IOSCO release report on OTC derivatives data reporting and aggregation

Earlier this week, the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions released a consultative report that makes various recommendations regarding OTC derivatives data reporting and aggregation requirements. As we discussed in October 2010, IOSCO formed a Task Force on OTC Derivatives Regulation last year with a mandate that included coordinating the efforts of international regulators with respect to OTC derivatives and producing a report on data reporting and aggregation requirements by July of this year.

Among other things, the report recommends that: (i) at a minimum, transaction level data be reported to trade repositories and that such data include at least transaction economics, counterparty information, underlier information, operational data and event data; (ii) trade repositories implement measures to provide effective and practical data access to authorities; (iii) a standard system of Legal Entity Identifiers be developed and implemented for the aggregation of OTC derivatives data; and (iv) a standard product classification system for OTC derivatives products be developed, led by industry and in consultation with authorities.

The CPSS and IOSCO are accepting comments on the consultative report until September 23, 2011.

Prospectus required for cross-listed ETFs: OSC Staff

Staff of the Ontario Securities Commission today released a notice setting out their views on the application of prospectus requirements and product regulation in connection with cross-listings by foreign exchange-traded mutual funds.

According to OSC Staff, an ETF's exchange listing functions are "the primary distribution channel through which an ETF issues its securities to investors and increases its net assets". As such, OSC Staff do not consider a listing to merely provide a source of secondary market liquidity and a cross-listing would, thus, generally be considered a distribution in Ontario.

Foreign ETF providers must, therefore, file a prospectus and comply with investment fund product regulation before applying to cross-list on an exchange in Ontario. Foreign providers of comparable products that use a similar distribution structure would also fall under the same requirements.

OSC Staff indicated that they intend to monitor the issue and potentially consider whether a modified approach to cross-listing of foreign investment products is warranted. Staff also stated that they are open to considering exceptions to their approach. For more information, see OSC Staff Notice 81-715.

CSA propose extension of passport system

The Canadian Securities Administrators (other than the OSC) today released proposed amendments to Multilateral Instrument 11-102 Passport System in order to extend the passport system to appropriate provisions proposed for NI 21-101 Marketplace Operations and to certain new provisions of NI 23-103 Electronic Trading and Direct Electronic Access to Marketplaces. According to the CSA, the amendments are intended to "maintain the effectiveness of the passport system." Comments on the proposals are being accepted until October 20.

IIROC releases 2011 annual report

The Investment Industry Regulatory Organization of Canada released its 2010-11 annual report today, entitled Building Confidence in Canada's Capital Markets. Among other things, the report provides a profile of the industry regulated by IIROC and describes the progress made by the organization towards achieving its strategic goals.

European regulators ban short sales of financial stocks

As has been widely reported, various European regulators have recently enacted temporary bans on short selling financial stocks in response to the market volatility of the past few weeks. Countries that have taken such steps include France, Italy and Spain. Meanwhile, it has been reported that Germany's Minister of Economics and Technology, Philipp Roesler has called for a similar short-selling ban across G-7 countries.

Whether such temporary bans will have the effect of calming markets remains to be seen. As we discussed in February 2009, an IIROC study that reviewed the impact of the Canadian restrictions on short sales in 2008 found that there appeared to be "no appreciable effect" on the price of the applicable securities.

British Columbia to require more disclosure on private placement purchasers

Kathleen G. Ward, Keith R. Chatwin, John F. Anderson and Ramandeep Grewal

On August 11, the British Columbia Securities Commission (BCSC) published advanced notice that effective October 3, 2011, it will require expanded disclosure about purchasers purchasing securities in the exempt market. Breaking with its counterparts in other Canadian jurisdictions, the BCSC has determined that the need for increased disclosure about the exempt market in British Columbia warrants a “local response.” The BCSC has therefore adopted a new Form 45-106F6 (BC Form) as its own form of report for certain prospectus exempt distributions (private placements) in British Columbia in lieu of the existing form used in all other Canadian jurisdictions (Form 45-106F1).

The BC Form expands the disclosure that is required under Form 45-106F1 in a number of ways.

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TSX issues guidance regarding when effective decrease in conversion price of convertible securities will be considered new private placement

On August 8, the Toronto Stock Exchange issued guidance stating that it considers any arrangement or agreement that decreases the effective conversion price of a previously issued convertible security to be subject to section 610(c) of the TSX Company Manual. Thus, any such agreement, including inducement payments in cash or securities to convert the securities, will be required to be submitted to the TSX for approval and will be reviewed as a new private placement.

The TSX also reminded listed issuers of their responsibility under section 602 of the Company Manual to promptly notify it of any changes to the material terms of a transaction whether or not such an amendment includes a further issuance of securities. The TSX thus stated that it must be promptly notified in advance of any transaction that may have the effect of decreasing the effective conversion price of previously issued convertible securities.

For more information, see TSX Staff Notice 2011-0003.

Proposed amendments for stage 2 of point of sale disclosure for mutual funds

On August 12, the Canadian Securities Administrators (CSA) published for comment amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), Form 81-101F3 Contents of Fund  Facts Document and Companion Policy 81-101CP Mutual Fund Prospectus Disclosure (the Proposed Amendments). The Proposed Amendments, together with consequential amendments, set out Stage 2 of the CSA’s implementation of the point of sale disclosure framework published in 2008. 

The Proposed Amendments will, among other things, require the delivery of the Fund Facts to investors within two days of their purchase of the fund, permit the delivery of the Fund Facts to satisfy the current prospectus delivery requirements under securities legislation and eliminate the current requirement to deliver the simplified prospectus (which will be required to be provided to investors upon request).

The Proposed Amendments are Stage 2 of a three-stage process. Stage 1 (completed on January 1, 2011 and discussed in our post October 28, 2010) required mutual funds subject to NI 81-101 to produce and file the Fund Facts and make it available on the mutual fund’s or mutual fund manager’s website. Stage 3 will consider point of sale delivery for other types of publicly offered investment funds. The comment period expires on November 10, 2011.

Canada's Corruption of Foreign Public Officials Act shows its teeth

Susan Hutton and Paul Beaudry -

On June 24, 2011, Niko Resources Ltd., a Calgary-based oil and gas exploration and production company, entered a guilty plea under Canada’s Corruption of Foreign Public Officials Act (CFPOA) with respect to charges of bribing a public official in Bangladesh. Niko, which operates in a number of countries around the world, had been notified by Canadian authorities in January 2009 that it was being investigated over allegations that it had provided the Energy Minister of Bangladesh with a $190,000 vehicle for personal use as well as with trips to Calgary and New York. These gifts had been made at the time when the Minister was assessing how much compensation was owed to Bangladeshi villagers for water contamination and other environmental concerns caused by explosions at a Niko operation.

Niko’s sentence included a $9.5 million fine and a three-year probation order that requires the company to implement a detailed compliance program subject to review by an independent auditor. Prior to Niko’s conviction, only one Canadian company had been convicted of foreign bribery under the CFPOA in the past decade. The $25,000 fine issued by the court in that case, known as R. v. Hydro Kleen Services Inc., was less than the bribe involved.

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SEC eliminates credit ratings criteria for companies using short form registration

On July 26, the U.S. SEC adopted new rules intended to reduce the reliance on credit ratings for regulatory purposes by removing such ratings from the eligibility criteria for issuers seeking to register securities offerings using "short form" registration. Specifically, the new rules remove the condition that securities be rated investment grade by at least one credit rating agency that is a nationally recognized statistical rating organization and allow short form registration if the issuer satisfies one of four new conditions. The new rules also include a three-year grandfathering  provision.

The amendments were initially proposed in February in light of section 939A of Dodd-Frank, which calls for the review of references to credit ratings in regulations issued by federal agencies. Generally, the amendments will be effective as of September 2, 2011, except for provisions rescinding Form F-9, used by some Canadian registrants to register non-convertible investment grade debt, which will come into force on December 31, 2012.


Journal article suggests repeal of defensive tactics policy

Stikeman Elliott partners Sean Vanderpol and Ed Waitzer recently published an article in the Osgoode Hall Law Journal that questions the current emphasis on the primacy of shareholder choice in the case of take-over transactions under Canadian securities regulations. Entitled Mediating Rights and Responsibilities in Control Transactions, the paper states that such a shareholder-centric approach is difficult to reconcile with the powers and responsibilities allocated to boards under Canadian corporate law and ultimately suggests that regulators repeal National Policy 62-202 Take-over Bids - Defensive Tactics. The paper follows a post from January of this year, in which the authors cast doubt on the utility of the National Policy.

IIROC proposes UMIR amendments to address dark liquidity

On July 29, the Investment Industry Regulatory Organization of Canada published proposed amendments to the Universal Market Integrity Rules that address the regulation of dark liquidity on Canadian markets.

The release of IIROC's proposals represents the next step in the effort by the Canadian Securities Administrators and IIROC to adopt regulations to address issues surrounding dark pools and dark orders. The proposed amendments released last week follow various previous steps taken by regulators to consider the issues, including a joint CSA/IIROC consultation paper released in 2009, a consultation forum held in March 2010 and a CSA/IIROC position paper published in November 2010.

Among other things, the proposed amendments would (i) introduce or amend, as the case may be, definitions of "better price", "dark order" and "last sale price"; (ii) allow IIROC to designate a minimum size for orders that are not displayed in a consolidated market display; (iii) allow IIROC to designate a minimum size of an "iceberg" order that must be displayed in a consolidated market display; (iv) provide that orders entered on a marketplace must trade with visible orders on that marketplace at the same price before trading with dark orders at the same price on that marketplace; and (v) require, subject to certain exceptions, an order entered on a marketplace that trades with an order that has not been displayed in a consolidated market display to either receive a better price or be for more than 50 standard trading units, or have a value of more than $100,000.

Comments on the proposals are being accepted until October 27, 2011. For more information, see IIROC Notice 11-0225.

For a discussion of the regulatory framework for dark liquidity, see IIROC Notice 11-0226 / Staff Notice 23-311, which was also published last week and contains a summary of public comments in response to the CSA/IIROC position paper of November 2010. Also see our post on the proposed amendments to NI 21-101 Marketplace Operations, which were published in March.

U.S. FATCA creates potential compliance issues for Canadian financial institutions

Our insurance group colleague Stuart Carruthers recently authored an article regarding the potential compliance issues emanating from certain provisions of the U.S. Hiring Incentives to Restore Employment Act known as the Foreign Account Tax Compliance Act. Specifically, FATCA targets American offshore tax evasion by broadening required disclosure and reporting by foreign financial institutions in respect of U.S. accountholders. While focused on insurance companies, Stuart's article identifies important issues for the consideration of Canadian financial institutions generally.

Earlier this month, the IRS and Treasury Department released a notice announcing plans to phase in FATCA requirements over the next few years.

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