ISS to host webinars on 2012 policy updates

Institutional Shareholder Services will be hosting webinars next week concerning its policy updates for the 2012 proxy voting season. As we discussed last week, ISS released updates to its proxy voting guidelines on November 17th. While next week's webinars focus on European and U.S. policy updates, the discussion on U.S. updates may be especially interesting to Canadian issuers.

U.S. "large trader" reporting system comes into effect

Earlier this year, the SEC adopted final rules establishing reporting requirements for market participants whose transactions in national market system securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. As we discussed last year, the SEC initially proposed such requirements in April 2010 to identify large market participants and collect information regarding their trades in order to be able to monitor the impact of large trader activity on the securities market.

The reporting requirements, effective as of October 3, 2011, are intended to provide the SEC with data to support its investigative and enforcement activities.

CSA seek to improve consistency of scholarship plan prospectus disclosure

Late last week, the Canadian Securities Administrators published an amended prospectus form for scholarship plans intended to better reflect the unique features of such plans. Scholarship plans are currently afforded the flexibility to modify Form 41-101F2 to reflect plans' specific features, which the CSA state leads to information being disclosed in an inconsistent manner. According to the CSA's notice, the new Form 41-101F3 would provide "more understandable and effective disclosure for investors".

The CSA published an earlier version of the amendments in March 2010 and the latest proposals reflect the CSA's responses to comments received. Comments on these recently released proposals are being accepted until January 24, 2012.

Globe and Mail publishes 2011 corporate governance rankings

The Globe and Mail has recently published its annual report on corporate governance for 2011. The Globe report includes an article on the shift towards more independent boards in Canada as well rankings of corporate governance practices for corporations and income trusts. In compiling its rankings, the Globe looked at various factors respecting board composition, shareholding and compensation, shareholder rights and disclosure. The methodology used for its scores can be found here.

Registration rule exemptions for SRO members adopted by CSA

The Canadian Securities Administrators today announced the adoption of amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and its Companion Policy related to exemptions for SRO members. A draft proposed version of the amendments was published in May and the final amendments are substantially similar to the earlier version. Assuming that ministerial approvals are received, the amendments will come into force on February 28, 2012.

CSA recommend extending securities regulations to OTC derivatives market

The Canadian Securities Administrators released a consultation paper today addressing the regulation of OTC derivatives markets. Specifically, the paper makes various recommendations regarding surveillance and monitoring, market conduct and enforcement that are intended to strengthen financial markets and manage specific risks related to OTC derivatives. The paper is one of a series of eight papers building on the high-level proposals found in Consultation Paper 91-401 released in November 2010.

Surveillance and Monitoring

Citing the limited market information currently available to regulators relating to the trading of OTC derivatives, the paper recommends that further study and research be undertaken on the development of a comprehensive surveillance system for monitoring OTC derivatives markets to supplement current market surveillance. According to the report, a comprehensive approach to surveillance and monitoring would include enabling regulator access to trading data and monitoring participant positions.

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CSA propose to ease restrictions on marketing rules in connection with prospectus offerings

Mihkel E. Voore and Ramandeep Grewal -

The Canadian Securities Administrators (CSA) proposed amendments today intended to expand the scope of marketing activities that can be conducted in connection with prospectus offerings and to clarify other related restrictions applicable to bought deals.

The amendments proposed to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and National Instrument 44-101 Short Form Prospectus Distributions (NI 44-101) expressly codify permissible “pre-marketing” and “marketing” activities that can be conducted prior to and after the filing of a preliminary prospectus. These proposals should provide some much needed clarity and guidance in connection with marketing activities given the disconnect between what is currently permissible under securities legislation and the practical reality of how offerings are marketed. In addition to expanding the scope of marketing activities that are expressly permitted, the CSA also clarify when the size of a bought deal can be enlarged or the bought deal syndicate can be expanded.

While the CSA’s stated intention is to expand the range of permitted activities, their views on matters such as non-offering roadshows, the commencement of distributions, and the exclusion of “market out” clauses from bought deal bid letters, may be at odds with some of the practices currently pursued by certain market participants.

The following are some highlights of these proposals, which will be discussed in detail in future updates:

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SEC releases 2011 report on whistleblower bounty program

The U.S. Securities and Exchange Commission recently released its 2011 annual report on the whistleblower bounty program adopted earlier this year. The program was designed to award whistleblowers who voluntarily provide original information to the SEC regarding violations of securities laws where the enforcement action leads to monetary sanctions totalling more than $1 million.

According to the report, 334 whistleblower tips were received between August 12, 2011, when the final rules became effective, and September 30. The most common complaint categories were market manipulation, corporate disclosures and financial statements, and offering frauds. The SEC has yet to pay any whistleblower awards.

SEC releases guidance for the disclosure of cybersecurity incidents

In the wake of a number of high-profile cybersecurity incidents, the SEC’s Division of Corporation Finance recently released disclosure guidance on the topic of cybersecurity. While the guidance creates no new legal obligations, it is intended to provide clarity regarding the forms of disclosure that registrants may have to make. In the release, the Division of Corporation Finance recognized that while no current disclosure requirements explicitly refer to cybersecurity, there are a number of existing disclosure obligations that may require registrants to disclose cybersecurity risks or incidents.

Such cyber incidents may be deliberate or unintentional, and include gaining unauthorized access to digital systems for the purpose of misappropriating assets or sensitive information, causing operational disruption or corrupting data. Meanwhile, the concept of a cyber attack also includes actions that don’t require unauthorized access to a computer system, such as denial-of-service attacks on websites. Cyber attacks may be carried out by insiders or third parties, and may use sophisticated technology to circumvent network security, or more traditional techniques like guessing or stealing a password to gain access to a computer network.

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New listing criteria for reverse merger companies approved for US markets

Earlier this month, the U.S. Securities and Exchange Commission announced the approval of additional listing criteria for companies that become public through a reverse merger.

Under the new requirements, a reverse merger company will be unable to list on the NYSE, NYSE Amex or Nasdaq until the completion of a one-year "seasoning period" following the merger. During this period, the company must trade in the U.S. over-the-counter market or another regulated U.S. or foreign exchange. The company must also file with the SEC all required reports since the merger and would have to maintain a minimum share price for a sustained period immediately prior to its listing application. Exemptions to the new requirements, however, would be available in certain circumstances.

Canadian regulators update policy on electronic delivery

The Canadian Securities Administrators today announced the adoption of changes to National Policy 11-201 Delivery of Documents by Electronic Means. The revised policy clarifies that, subject to electronic commerce and other legislation, delivery requirements of securities legislation can generally be satisfied through electronic delivery if:

  • the receipt of the document has notice of electronic delivery and easy access to the document being delivered;
  • the document received is the same as the document delivered; and
  • the deliverer has evidence of delivery.

The Policy provides further guidance on how each of these elements can be satisfied. While express consent is not required for effective delivery under the Policy, CSA staff clarify that express consent may assist in achieving the key components identified above and note that it may still be required under electronic commerce legislation.

The Policy has been amended to reflect various developments that have taken place since it was first implemented in 2000. These include changes to e-commerce and corporate legislation, the introduction of legislation governing electronic transactions and protection of personal information and the general proliferation of electronic communications. The amendments, published in draft form in April, are intended to simplify guidance on the form and substance of securityholder consents, reduce technology-related references that may become obsolete and alert stakeholders to other legislation addressing the electronic delivery of documents. As the CSA does not consider its revisions to the proposed amendments to be material, no comment period will be provided and the amendments come into effect today.

OSC and FINRA enter into information sharing arrangement

The Ontario Securities Commission announced today that it has entered into a Memorandum of Understanding with the U.S. Financial Industry Regulatory Authority intended to establish a formal basis for cooperation between the regulators and to facilitate the exchange of information . According to the OSC Chair Howard Wetston, "[c]ross-jurisdictional regulatory coordination is essential for protecting investors in today's global marketplace. This framework acknowledges the interconnectedness of our markets and represents our commitment to working collaboratively with our international regulatory partners to address threats to investors and markets." The MOU is subject to approval by Ontario's Minister of Finance.

ISS releases 2012 proxy voting policies

Institutional Shareholder Services yesterday released updates to its proxy voting guidelines for 2012. As we discussed in October, draft updates were published last month.

The final version of the guidelines for TSX-listed companies includes updates on ISS' policies with respect to voting on director nominees in uncontested elections to add an explicit reference to risk oversight in the rationale for the voting recommendation. According to ISS, the intention is not to penalize boards for taking prudent business risks or for exhibiting reasonable risk appetite but, rather, to address situations where there has been a material failure in a board's role in overseeing the company's risk management practices.

Further, its policy on employee stock purchase plans has also been updated by increasing the acceptable allowable employer matching contribution to 25% of the employee contribution, deleting the offering period requirement and adding key factors to be considered, such as other compensation plans (including pension plans) and eligibility and administration, in determining whether to vote for or against the purchase plan.

Meanwhile, the U.S. policies have been updated by, among other things, refining the methodology of evaluating executive pay-for-performance. As we discussed in our blog post October 28, ISS has stated that the new methodology is being considered for Canada.

The new guidelines are effective for meetings on or after February 1, 2012.

SEC fines dark pool $1 million for misleading customers

Ramandeep Grewal -

The U.S. Securities and Exchange Commission recently imposed a $1 million administrative penalty against Pipeline Trading Systems LLC for misleading investors in connection with the operation of its dark pool.  Pipeline was launched in 2004 as an alternative trading system operating as a “crossing network” to facilitate trades among institutional investors while minimizing market impact associated with information leakage about their large buy or sell orders. To that end, Pipeline advertised that to prevent pre-trade information leakage, it would not reveal the side or price of a customer order before a trade was completed. Pipeline also claimed that all users were treated equally.

According to the SEC, Pipeline’s claims were false and misleading because one of its affiliates (a trading entity owned by its parent company) filled the vast majority of customer orders on Pipeline’s system, by seeking to predict the trading intentions of Pipeline’s customers and trade elsewhere in the same direction as customers before filling their orders on Pipeline’s platform. Accordingly, the SEC found that Pipeline generally did not provide the “natural liquidity” it advertised. The SEC further found that the trading affiliate was given certain advantages not available to other users. These included providing the affiliate with a FIX connection to Pipeline's graphical user interface known as the "Block Board", soliciting and receiving input from the affiliate regarding the minimum order size for each stock, and providing the affiliate with information regarding ATS features designed to "predator proof" the system.

Ultimately, Pipeline was found to have violated the Securities Act prohibition against making false or misleading statements in the sale of securities, as well as Regulation ATS requirements regarding disclosure to be made to the SEC and the implementation of safeguards to protect confidential trading information.

The SEC release quotes Robert Khuzami, Director of the SEC’s Enforcement Division as saying that “[h]owever orders are placed and executed, be it on an exchange floor or in an automated venue, whether dark or displayed, one principle remains fundamental – investors are entitled to accurate information as to how their trades are executed.

Alternative trading systems compete with exchanges for trade execution by providing alternative operation models, trades types and fee structures to facilitate a wide range of execution strategies. Crossing systems or crossing networks generally do not offer price discovery but are intended to facilitate trades between buyers and sellers who quote their prices on other trading systems. Dark pools meanwhile, are trading systems that accept buy or sell orders without pre-trade transparency (disclosure of the details of the trade, specifically price and quantity).

ATSs are regulated in Canada under National Instrument 21-101 Marketplace Operation and National Instrument 23-101 Trading Rules. ATSs are also regulated by the Investment Industry Regulatory Organization of Canada (IIROC) through its UMIR and Dealer Member Rules.

Bottom lines benefit when social reporting is embraced

Edward Waitzer -

Canadian companies must embrace social reporting to remain competitive.

Analysts are giving more positive recommendations to firms that score higher and report on environmental, social and governance measures, recent research from the London Business School and Harvard Business School shows. And those that adopt mandatory sustainability reporting requirements have seen positive effects on corporate performance.

This makes sense: Disclosure of that kind of information creates incentives for companies to manage such issues more effectively, even if only to avoid having to disclose bad performance to their stakeholders.

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CCGG publishes 2011 Best Practices for proxy disclosure and governance awards winners

Earlier this week, the Canadian Coalition for Good Governance published its annual review of best practices for proxy circular disclosure, which includes its list of this year's "Governance Gavel Awards" winners. According to the CCGG, its annual review ultimately aims to demonstrate what shareholders expect from issuer disclosure. Award winners are highlighted as issuers whose practices substantially meet all of the CCGG's Building High Performance Boards and Executive Compensation Principles guidelines, and this year include CN Rail and the TD Bank Financial Group, as well as Manitoba Telecom Services in the small or mid-size issuer category.

The review analyzes a number of real-world examples of corporate governance disclosure provisions that the CCGG considers to be "excellent", including with respect to such topics as majority voting, director nominee profiles, director independence, say on pay, and oversight of strategic planning and risk management. Examples of "excellent" executive compensation disclosure is also provided, including with respect to the linkages between executive compensation and shareholder promise, the effectiveness of the compensation program over time, the use and limits of retirement benefits and perks and the use, policies and limits for discretion.

Controlled auctions in Canada: Tactical and strategic legal considerations

Richard Clark and Curtis Cusinato -

Despite the uncertainty and volatility continuing to affect both the global economy and North American capital markets, controlled auction transactions in the Canadian marketplace remain remarkably active, especially in the mid-market. Before venturing into these tempting waters, sellers and buyers alike should take note of some key Canadian legal considerations.

Pre-Auction Considerations

  1. Controlled Auctions vs. Negotiated Sale Transactions. Under Canadian law, a formal Revlon-style auction is not always necessary for a target board to satisfy its fiduciary duties in a change of control context. In many circumstances, a privately-negotiated sale, combined with a less formal canvass of the market, may be sufficient.1 At the same time, sellers must be cautious about any public statements which create a reasonable expectation among shareholders (among others) that an auction will be conducted or that it will be held on an unconditional or unrestricted basis. Under most Canadian company law regimes, these types of statements can potentially give rise to an "oppression" action should the auction turn out to be either highly conditional or not held at all.2
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OSC finds Coventree ABCP disclosure deficient

Sean Vanderpol and Alex Colangelo -

On September 28, the Ontario Securities Commission (OSC) released its decision in the case against Coventree Inc. Coventree, an investment bank specializing in structured finance, was the largest third-party sponsor of asset-backed commercial paper (ABCP) in Canada. OSC staff had alleged, among other things, that Coventree failed to disclose material facts in its prospectus of November 2006, and also failed to disclose material changes regarding subsequent developments in the subprime market.

Ultimately, the OSC found that while Coventree did not breach disclosure requirements with respect to its prospectus, the company did fail to disclose material changes to its business that occurred in early 2007 and during the August 2007 disruption in the ABCP market. Particular points of interest in the decision include the OSC’s discussion of materiality, the use of prospectus disclosure as a baseline for assessing the materiality of future events and the distinction made between a change in the price of a security and a change in the value of a security.

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Securities regulators launch consultation on changes to $150,000 and accredited investor exemptions

Ramandeep Grewal -

The Canadian Securities Administrators (CSA) announced yesterday that they are undertaking a review of the “$150,000 minimum investment amount” and the “accredited investor” exemptions that are commonly used to raise financing on a prospectus exempt basis.   The publication of CSA Staff Consultation Note 45-401 (Consultation Note) commenced a public consultation process intended to solicit feedback from investors, issuers and others on a number of possible changes to these exemptions.

The Consultation Note raises a number of questions, including whether these exemptions should be premised on financial resources (ability to withstand financial loss or obtain expert advice), access to financial and other key information about the issuer, educational background, work experience, investment experience, or some other criteria, and whether the involvement of a registrant (who has an obligation to recommend only suitable investments) addresses any concerns.

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OSC registrant compliance report flags deficiencies and provides guidance

Alix d'Anglejan-Chatillon and Alex Colangelo

On September 23, the Ontario Securities Commission released OSC Notice 33-736 – 2011 Annual Summary Report for Dealers, Advisers and Investment Fund Managers. While the report was prepared by the OSC’s Compliance and Registrant Regulation Branch (the Branch) to assist dealers, advisers and investment fund managers in complying with Ontario securities laws, it provides useful guidance for registrants and applicants for registration in all Canadian jurisdictions. The report primarily covers the OSC’s 2011 fiscal year and (i) reviews recent developments in light of the new registration regime; (ii) considers Canada’s response to global financial developments, including with respect to OTC derivatives regulation and the potential systemic risks posed by hedge funds; (iii) discusses the OSC’s recent focus on registrant misconduct; (iv) provides information for firms and individuals applying for registration by, among other things, identifying common deficiencies in registration applications and providing corresponding guidance; and (v) identifies trends in deficiencies and suggested practices for registrants, advisers, investment fund managers and dealers based on ongoing compliance reviews.

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OSC hosts Dialogue 2011

On November 1, the Ontario Securities Commission hosted OSC Dialogue 2011, a conference featuring sessions with securities regulators and industry participants.

In his opening remarks, Ontario Securities Commission Chair Howard Wetston discussed the OSC's strategic direction and its role in policy development. Specifically, Mr. Wetston considered the changes in Canadian equity markets, including the move to multiple marketplaces, the recent proposals to strengthen enforcement and the need for investor protection.

Meanwhile, other sessions of interest to market participants included discussions of M&A trends, investor issues and regulatory developments. The OSC has now posted audio files of the various sessions on the conference webpage.

OSC releases investment fund issuers report

The OSC released a report today providing an overview of initiatives impacting investment fund issuers. Specifically, the report reviews the status of the OSC's key policy initiatives, including the CSA's project to modernize investment fund product regulation, the Point of Sale disclosure project, and proposed amendments to prospectus requirements.

The report also discusses observations and findings emanating from OSC Staff's prospectus reviews of non-redeemable investment funds and ETFs, prospectus reviews of hypothetical pro-forma performance data, continuous disclosure reviews of money market funds, ETFs and investment portfolio holdings, and disclosure reviews of Independent Review Committees.

The OSC's outreach and consultation practices are also discussed, including its publication of the Investment Funds Practitioner and the creation of the new Investment Funds Product Advisory Committee. For more information, see OSC Notice 81-716.

IIROC releases compliance report for 2011

The Investment Industry Regulatory Organization of Canada (IIROC) yesterday released its Annual Consolidated Compliance Report for 2011. The report outlines matters that require firm attention, identifies deficiencies identified by IIROC's compliance examination teams over the last year and sets out IIROC's focus for the 2011-2012 examination cycle.

The report begins by identifying a number of matters requiring firm attention, including with respect to notification to IIROC of material changes. Specifically, the report notes that in some instances dealers having made significant changes to business models without informing IIROC prior to implementation.

Meanwhile, common examination deficiencies respecting financial and operations compliance include missing written services agreements in related party transactions and cases in which inaccurate or inappropriate margin rates have been applied. In the case of business conduct compliance, the report identifies a number of deficiencies, including: (i) situations where members with order-execution only services provide clients with "planning tools" that result in recommendations; (ii) policies and procedures that have not been appropriately customized to a firm's business and risks; (iii) inadequate identification of conflicts of interest; (iv) inadequate controls respecting the sale of private placements to accredited investors; and (v) inadequate controls respecting employee accounts.

The report also discusses the focus for the 2011-2012 examination cycle, including client complaints handling, the use of titles and designations, and trading conduct compliance. With respect to the latter, IIROC states, among other things, that it will be conducting reviews of compliance with best execution obligations and dealers' OTC supervision procedures. 

For more information, see IIROC Notice 11-0306.

SEC adopts confidential private fund risk reporting

Late last month, the U.S. SEC adopted a new rule to require registered investment advisers with at least $150 million in private fund assets under management to periodically file the new Form PF. The amount of information to be reported will depend on whether an adviser belongs to the "large adviser" or "small adviser" cateogry. The latter group, under which the SEC anticipates most advisers will fall, will have to file Form PF once per year. Only basic information regarding such things as size, leverage, investor types and concentration will be required. Large advisers will potentially report on a more frequent basis depending on whether they are a hedge fund, private equity fund or liquidity fund adviser, and will have to include more detailed information.

Meanwhile, commodity pool operators and commodity trading advisers that are dually registered with the CFTC will be able to satisfy certain CFTC filing requirements with respect to private funds, should the CFTC adopt such requirements, by filing the new reporting form with the SEC.

The new requirements represent another step in the implementation of Dodd-Frank.  Most private fund advisers will be required to begin reporting following the end of their first fiscal year or quarter to end on or after December 15, 2012. However, certain advisers with at least $5 billion of assets under management will have to begin reporting following the end of their first fiscal year or quarter ending on or after June 15, 2012. Rules requiring the registration of private fund advisers were adopted by the SEC this past June.

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