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

On October 18, Institutional Shareholder Services (ISS) published for comment draft updates to its benchmark proxy voting policies for 2012 . The draft policies cover topics relating to board governance, director and executive compensation and environmental and social issues.

Of particular interest, one of the proposed changes published by ISS would introduce a new methodology to evaluate the alignment between a company's shareholder return and executive pay. While currently focused on U.S. issuers, the proposal states that the new methodology is also being considered for Canada.

Specifically, the new approach would seek to identify companies that have demonstrated "strong", "satisfactory" or "weak" alignment between total shareholder return and CEO pay over an extended period. A quantitative analysis would be performed to measure relative alignment and absolute alignment between pay and company performance, with companies showing a weak alignment receiving a further qualitative review. According to ISS, the proposed approach is designed "to better address market needs for robust pay-for-performance evaluations."

ISS is accepting comments on the draft policies until October 31 and expects to release final versions of its policies during the week of November 14. ISS released the results of its annual policy survey, which informed its policy-making process, in September.

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The Ontario Securities Commission today published notice of OSC Rule 21-501, which is intended to extend the current exemption for government debt securities from the transparency requirements found in section 8.1 of NI 21-101 until December 31, 2014. The new rule is expected to come into force on December 31, 2011 and replace the current exemption found in section 8.6 of NI 21-101, which expires at the end of the year.

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The Mutual Fund Dealers Association of Canada (MFDA) proposed amendments today intended to ensure consistency between its rules respecting the delivery of client account statements with those found in NI 31-103. As such, the proposal would eliminate the distinction between delivery requirements for accounts held in client and nominee name and adopt the requirement for registered dealers to deliver a statement to all clients at least once every three months.

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In a judgment released earlier this month, the United States Court of Appeals for the Second Circuit found that the Financial Industry Regulatory Authority, which regulates securities firms doing business in the U.S., lacks the authority to bring court actions to collect disciplinary fines. The case, Fiero v. FINRA, involved FINRA's pursuit of unpaid fines subsequent to disciplinary action against the plaintiffs.

Specifically, the Court of Appeals found that while Section 15A(b) of the Securities Exchange Act of 1934 (the Exchange Act) provides self-regulatory organizations with the authority to discipline members by various means, including suspension, fine and censure, the legislation provides no express statutory authority for such organizations to bring judicial actions to actually collect fines. The Court found the statutory omission to be significant and intentional, and compared the provision to section 21(d) of the Exchange Act, which provides the SEC with express authority to seek judicial enforcement of penalties. In addressing the apparent enforcement gap created by FINRA's ability to levy but not pursue fines, the Court noted that FINRA can already enforce fines by the "draconian sanction" of revocation of a firm's registration.

A 1990 rule change purporting to authorize FINRA's collection of fines, meanwhile, was found to have been mischaracterized as a "house-keeping" rule when, in fact, it was a substantive change requiring publication of a notice and comment period. As such, the purported rule change "was never properly promulgated and cannot authorize FINRA to judicially enforce the collection of its disciplinary fines."

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In a bid to resolve enforcement matters more quickly and effectively, the Ontario Securities Commission today announced a series of proposed enforcement initiatives that would include permitting market participants to enter into no-contest settlements.

According to the notice, the timeliness and effectiveness of OSC investigations are currently being affected by the concerns of those being investigated that actions taken in response to an investigation may prejudice concurrent or potential civil litigation. As such, the OSC has proposed the following measures:

1. No-enforcement action agreements - Such agreements would be explicit in circumstances where market participants self-report and immediately remediate, and would be available in a number of situations. OSC Staff could also consider an agreement where a self-reporting party also reports in respect of the conduct of other parties where the conduct in question was jointly carried out. While Staff have simply advised participants that no action will be taken under the current processes, the proposals would make their decisions explicit with the result of greater certainty for market participants.
    
2. No-contest settlement program - Although recent amendments to the OSC's Rules of Procedure (Rule 12) have eliminated the explicit requirement for admissions in settlement agreements to be presented to a Commission panel for approval, settlement agreements generally include an admission of facts and of non-compliance with Ontario securities law or conduct contrary to the public interest. The program will therefore allow cooperative respondents to resolve enforcement matters without admitting facts or to non-compliance with securities law. Such settlements would have to meet the public interest requirements set out in the Securities Act and would be limited to respondents not previously subject to enforcement or regulatory activity by the OSC or another agency.
    
3. Clarified process for self-reporting - This proposal would introduce a proffer process to provide greater transparency and certainty for self-reporters.
    
4. Enhanced public disclosure for credit granted for cooperation - The proposal would enhance disclosure regarding the credit granted for cooperation in respect of proceedings before hearing panels, settlements and matters relating to the proposed no-enforcement action agreement.

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Jonathan Willson

On August 19th, 2011, the Department of Finance released for public consultation a package of amendments to the foreign affiliate rules in the Income Tax Act (Canada) (the ITA) and related regulations. Included among these proposals are a series of new provisions (the "upstream loan rules") designed to restrict the use of loans as a mechanism to distribute funds from certain types of foreign affiliates to their Canadian shareholders to avoid the tax that would otherwise be paid on dividend distributions by such affiliates. Under the current rules, such loans can be used to distribute profits to a Canadian taxpayer, thereby enabling the taxpayer to avoid receiving a dividend from a foreign affiliate that would be, at least partially, subject to Canadian income tax.

Conceptually, these proposed amendments will operate in a manner similar to the existing rules in subsection 15(2) that apply to shareholder loans, in that they will require, subject to certain exceptions, all or a portion of an upstream loan that is received by a Canadian taxpayer (or certain other persons) to be included in the taxpayer's income.

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TSX Inc. and TMX Select Inc. published a notice today proposing the introduction of "Cancel on Disconnect" functionality that would provide the automated cancellation of orders in the event of involuntary loss of connectivity between TMX and a client site. According to the notice, the functionality would assist in mitigating the risks associated with having open orders during a loss of connectivity. Comments on the proposal are being accepted until November 14.

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Last week, the U.S. Financial Industry Regulatory Authority published proposed amendments to its rules that would require its members and associated persons that offer or sell private placements, as well as those that participate in the preparation of private placement memoranda, term sheets or other related disclosure documents in connection with a private placement, to provide disclosure to investors regarding the anticipated use of the offering proceeds prior to sale. The disclosure to investors would also have to include information regarding the amount and type of offering expenses, as well as the amount and type of compensation provided to sponsors, consultants and members in connection with the offering.

The disclosure documentation would have to be filed with FINRA within 15 days of the first sale. Certain offerings, however, would be exempted from the new requirements, including those sold solely to qualified purchasers, qualified institutional buyers and investment companies, meeting the applicable statutory definitions. According to FINRA, its proposals will "provide important investor protections in connection with private placements without unduly restricting capital formation through the private placement offering process" while also assisting in efforts to "identify problematic terms and conditions in private placements, thereby helping to detect and prevent fraud in connection with private placements."

Comments on the proposals are being accepted for 21 days from the date of publication in the Federal Register.

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Earlier this week, the Canadian Coalition for Good Governance released new guidelines regarding the governance of equity controlled corporations. The guidelines, which apply only to corporations controlled through the ownership of common shares, are intended to supplement the CCGG's 2010 Building High Performance Boards to take into account the governance differences of equity controlled corporations.

Ultimately, the guidelines consider issues respecting (i) shareholder democracy; (ii) board composition; (iii) the independence of board Chair; (iv) related directors on board committees; (v) CEO assessment and plans for succession; (vi) shareholder engagement; and (vii) say on pay.

A draft version of the guidelines was initially published in April 2011.

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John G. Lorito and Jill Winton -

A flow-through share is a share which allows the issuing corporation to renounce resource deductions to shareholders who can use such deductions to offset their income.  Under the Income Tax Act (Canada) (the Tax Act), the cost of a flow-through share to the shareholder is deemed to be nil.  When the shareholder disposes of a flow-through share, the portion of any capital gain that is attributable to the proceeds of disposition up to the shareholder’s original cost amount represents a partial recovery by the government of the tax benefit realized by the taxpayer in connection with the renunciation and deduction of the resource expenses.

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On October 7, the Autorité des marchés financiers (AMF) issued a notice of public consultation related to the application filed with the AMF on October 3 by Maple Group Inc. in connection with its proposed acquisition of TMX Group, and the subsequent proposed acquisitions of Alpha Trading Systems Limited Partnership, Alpha Trading Systems Inc. and the Canadian Depository for Securities Limited. The notice outlines the basis of Maple Group's application to the AMF, describes the proposed transactions, considers potential issues raised by the proposed transactions and requests comments on specific questions. Comments are being accepted until November 7. The AMF plans to hold public consultations in connection with the application at the end of November 2011.

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The Ontario Securities Commission today issued a notice and request for comment related to the proposed acquisition by the Maple Group Inc. of TMX Group, Alpha Trading Systems Limited Partnership and Alpha Trading Systems Inc., the Canadian Depository for Securities Limited and, indirectly, CDS Clearing and Depository Services Inc. The OSC's notice summarizes the Maple Group's proposal, considers the potential issues raised and requests responses on specific questions. Comments are being accepted until November 7. The OSC also plans to hold policy hearings to consider the proposal in December 2011.

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Ramandeep Grewal -

In Canada, prior to the proliferation of (Alternative Trading Systems (ATSs), a security was generally traded on a centralized exchange. As ATSs proliferate, buyers, sellers and their agents have a growing range of options when deciding where and how to execute a trade. ATSs compete with each other and with traditional exchanges by offering, among other things, different operating models, trade types and fee structures. The competition and innovation that are stimulated by the rise in multiple marketplaces also create complications. Regulators must grapple with how to regulate these electronic alternatives to traditional exchanges; registrants (brokers, dealers and advisers) must grapple with how to fulfill their duties to clients and other regulatory obligations in the face of multiple marketplaces; and investors need to be able to understand the available options and the opportunities or pitfalls that they represent.

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Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 11-0277 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets for the fourth quarter of 2011.  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 fourth quarter of 2011 are 1,100 points, 2,250 points and 3,350 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%) - 1,200 points; Level 2 (20%) - 2,450 points and Level 3 (30%) - 3,650 points, and result in trading halts ranging from 30 minutes to the balance of the trading session, depending on the time of day and magnitude of the market decline. Triggering the Level 1 threshold between 2:00 and 2:30 p.m., for example, 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. The threshold levels for the third quarter have decreased from those for the third quarter of 2011.

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Last week, the BCSC published proposed amendments to the TSX-V Trading Rule Book to eliminate the "anti-scooping" rule. The changes have been proposed in order to level the playing field between professional traders and clients with sophisticated technologies. The amendments, intended to conform to the proposed change to the TSX Rules, will be open for comment until October 31.

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