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

On January 25, NYSE Euronext announced that it would no longer permit broker voting of uninstructed shares in the case of certain corporate governance proposals previously categorized as "Broker May Vote". The change in policy follows the elimination of discretionary voting by brokers in director elections in 2010 and the prohibition introduced by the Dodd-Frank Act respecting discretionary voting by brokers on executive compensation.

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On January 27, the Investment Industry Regulatory Organization of Canada (IIROC) issued guidance with respect to the process to be followed by dealers, users and subscribers seeking to obtain an interpretation of, or exemption from, a provision of UMIR. The notice states that interpretation and exemption requests may be sought by phone or email. In the case of the latter, IIROC staff will generally require certain contextual information, including the name of the security, the facts giving rise to the request and an explanation as to why the exemption is necessary or desirable. In cases where an exemption request has been allowed or denied, staff will follow up with a written ruling.

The notice also provides guidance with respect to requests that a dealer be able to act as principal or agent in respect of a trade to be completed "off-marketplace". According to IIROC, it will grant such exemptions if the execution of the trade on a marketplace would be disruptive of a fair and orderly market or impractical in order for the seller, purchaser or their agents to comply with applicable securities legislation. The notice also sets out the most common exemptions granted to dealers to permit involvement in such trades.

For more information, see IIROC Notice 12-0029.

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Earlier today, the Canadian Securities Administrators announced the adoption of a new national instrument, related policies and consequential amendments to impose regulatory oversight for designated credit rating agencies and organizations. The new NI 25-101, first proposed in draft form in July 2010 and amended in March 2011 requires designated rating organizations to establish, maintain and comply with a code of conduct substantially based on the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies unless exemptive relief is obtained. The  instrument also sets out requirements with respect to compliance, filing, and the maintenance of books and records.

Meanwhile, all jurisdictions except Ontario are adopting 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. NP 11-205, which was also published and to which Ontario is a party, is 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.

While the draft instrument was amended in response to comments received during the consultation process, the changes are not considered material. As such, assuming Ministerial approvals are received, the new instrument and related policies and consequential amendments will come into force on April 20, 2012.

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Last week, the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions published a final report regarding OTC derivatives data reporting and aggregation requirements. Among other things, the report sets out recommendations with respect to such things as minimum data reporting requirements, access to data by authorities, and the development of an international product classification system for OTC derivatives. As we discussed in a post last year, the CPSS and IOSCO released a draft of the report in August 2011, and the final version reflects public comments received during the consultation process.

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Alix d’Anglejan-Chatillon

Québec’s financial services regulator, the Autorité des marchés financiers (AMF), has issued a reminder that firms registered or otherwise licensed by the AMF in Québec, including as securities dealers or advisers, must file their semi-annual report of client complaints on the AMF’s Complaint Reporting System (CRS) by January 30 covering the period of July 1 to December 31.  The next semi-annual filing must be completed no later than July 30 for the January 1-June 30 period.

These semi-annual filings must be completed electronically on the AMF’s CRS. For information on obtaining a CRS user code to access the system and other information on applicable requirements governing the fair and equitable handling of complaints under the Quebec rules, please refer to the CRS link above. 

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The OSC has announced that it has approved amendments to TSX rules and policies to repeal rules relating to "anti-scooping" and those setting out minimum capital and stabilization requirements for market makers. The amendments also allow market makers to fill booked odd-lot orders at the order's limit price rather than the prevailing bid and ask, and codify TSX requirements for the minimum guaranteed fill and odd lot facilities. As we discussed in a post last year, the amendments were first published for comment in September 2011. No changes were made to the proposed rule.

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Last week, the Alberta Securities Commission released a staff notice providing a summary of staff's initial compliance reviews of firms registered as exempt market dealers (EMDs). The notice highlights issues identified in staff's review and provides guidance with respect to suggested practices. Common issues identified include: (i) policies and procedures not reflecting EMDs' actual business practices; (ii) inconsistencies between clients' tolerance for risk and the types of securities that EMDs sell; (iii) an inability by some EMDs to demonstrate having conducted an appropriate level of due diligence to satisfy the suitability requirement; and (iv) EMDs not always adequately disclosing relationships to clients with respect to issuers, ownership of securities, outside business activities, and risks related to borrowing money for the purposes of making financial investments.

The notice also provides information regarding the compliance activities to be performed by ASC staff in the future. For more information, see ASC Staff Notice 33-704 Review of Exempt Market Dealers.

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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 amendments to executive compensation disclosure. Meanwhile, groups such as the Canadian Coalition for Good Governance and ISS have also released model policies and guidance on such topics as proxy circular disclosure and majority voting. We have created this 2012 Canadian Public Company Disclosure Reference Guide to assist you in preparing your 2011 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.

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Alix d’Anglejan-Chatillon

On November 30, 2011, the Quebec Government passed omnibus amendments to financial services legislation under Bill 7, An Act to amend various legislative provisions mainly concerning the financial sector. Bill 7 amends various Quebec statutes regulating the provision of financial services across a broad range of areas such as whistleblower immunity, electronic communications with regulatory authorities, the receivership process for regulated firms, insider trading rules, fraudulent trading and the disclosure of false information to the Autorité des marchés financiers (AMF), Quebec’s financial services regulator. 

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Alix d’Anglejan-Chatillon

On December 16, 2011, Quebec’s financial services regulator, the Autorité des marchés financiers (AMF), tabled proposed amendments to the Derivatives Regulation (Quebec) (QDA) which are intended to implement the provisions of the Derivatives Act (Quebec) governing “qualified persons” (the Proposals) In addition to the derivatives dealer and adviser registration requirements applicable to dealers and advisers in derivatives (the “derivatives registration requirement”), the QDA requires that a person, other than a regulated entity¹ who “creates or markets a derivative” must be qualified by the AMF, as prescribed by regulation, before the derivative is offered to the public (the "qualification requirement"). Under an amendment not yet in force, the qualified person must also have the marketing of the derivative authorized by the AMF, as prescribed by regulation (the “authorization requirement”). 

As outlined below, the Proposals would, among other changes, significantly increase the disclosure, compliance and reporting requirements applicable to Canadian and foreign intermediaries offering listed derivatives products in the Quebec market to any person, or OTC derivatives to persons other than “accredited counterparties”, unless a discretionary exemption can be obtained. The Proposals are published for a period of 30 days after which the AMF may submit the Proposals to the Minister of Finance for approval, with or without amendments. The AMF is accepting written comments on the Proposals until February 1, 2012.

Market participants conducting derivatives-related activities in the Quebec market should carefully review their product lines, and seek detailed advice as to whether the new qualification/authorization requirements will impact this business and what actions should be taken in contemplation of these new rules.

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On December 15, the Investment Industry Regulatory Organization of Canada (IIROC) released a draft guidance note regarding the role of compliance and supervision at member firms. The draft guidance is intended to update IDA Member Regulation Notice MR-0435, released in 2006, in light of recent amendments to registration requirements contained in NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations in order to ensure consistency between the registration reform related amendments and IIROC's guidance. The draft guidance considers such issues as the responsibility for compliance, the distinction between supervisory and compliance roles, and the role of dealers, board of directors, management and the compliance officer. The notice also includes guidance on creating an effective compliance program, and provides information on the circumstances under which IIROC may initiate enforcement proceedings relating to compliance or supervisory matters.

Comments on the draft guidance are being accepted for 60 days from the date of the notice. For more information, see IIROC Notice 11-0361.

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Many features of the Canadian regulatory framework are friendly to shareholders and make it easier for activist investors to take action against management. Specifically, it is easier in Canada for shareholders to requisition meetings and nominate directors, the threshold for share disclosure is 10% in Canada as opposed to 5% in the U.S., and it is easier to dismiss directors with a single resolution. Watch Stikeman Elliott partner Mihkel Voore discuss the Canadian regulatory regime generally, and specifically with respect to the recently announced plans by a stakeholder in Canadian Pacific Railway to propose a minority slate of alternative directors, in this interview on BNN.

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On December 29, 2011, the Canadian Securities Administrators published a revised version of CSA Staff Notice 51-327, which provides guidance on compliance with oil and gas disclosure requirements. The recent revisions to the notice include: (i) new guidance on the general responsibilities regarding the formulation of oil and gas disclosure information; (ii) new guidance regarding the disclosure of after-tax net present value of future net revenue, well-flow test results, and the use of Barrels of Oil Equivalents; and (iii) expanded guidance on the evaluation, classification and disclosure of unconventional hydrocarbons. The revisions were made in light of recent amendments to NI 51-101 Standards of Disclosure for Oil and Gas Activities and are intended to re-emphasize or expand guidance on some of the issues discussed in previous versions of the notice.

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On December 8, the U.S. SEC released a statement regarding non-public submissions of initial registration statements by foreign private issuers. Historically, the SEC has allowed foreign private issuers (FPIs) to submit initial registration statements on a non-public basis for staff review prior to a public filing since the majority of FPIs were traded on foreign exchanges where there were no requirements to publicly disclose such statements before the completion of a regulatory review.

According to the SEC, however, most FPIs now making use of the non-public review process do not have securities listed outside the U.S. Consequently, the SEC has decided to generally limit its policy respecting the non-public submission of such initial registration statements to circumstances where the registrant is: (i) a foreign government registering its debt securities; (ii) a foreign private issuer that is listed or is concurrently listing its securities on a non-U.S. securities exchange; (iii) an FPI that is being privatized by a foreign government; or (iv) an FPI that can demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction. The change in policy took effect on December 8.

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Earlier this week, IIROC released draft guidance regarding the language it considers acceptable for marketplace disclosure on trade confirmations. Currently, IIROC's Dealer Member Rules require that trade confirmations disclose the stock exchange or commodity futures exchange on which a trade takes place. In cases where an order is executed on more than one marketplace existing guidance permits dealers to disclose that the order has been executed on multiple marketplaces. The confirmation, however, must also disclose that details of each trade are available upon request.

In light of the move towards a multiple marketplace environment, IIROC's proposals would revise current guidance to allow for more generic disclosure on trade confirmations. Specifically, trade confirmations for securities subject to UMIR could include the following disclosure language: "Traded on one or more marketplaces or markets, details available upon request."

The proposed language would be acceptable in circumstances where an order was executed on a single marketplace in Canada, multiple marketplaces in Canada, a foreign organized regulated market or any combination of one or more marketplace and foreign organized regulated markets.

Comments on the proposals are being accepted until March 9, 2012.

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The U.S. Securities and Exchange Commission has adopted an amended "accredited investor" net worth standard that, in accordance with the Dodd-Frank Act, excludes the value of an individual's primary residence. The definition of accredited investor, used to determine the availability of certain exemptions from the Securities Act of 1933 for private and other limited offerings, currently includes individuals exceeding $1 million in net worth. The recently-adopted changes would maintain the $1 million threshold, but no longer allow for a primary residence to be included in calculating net worth. As we described in a blog post last year, the SEC first proposed the change in January 2011. The amended standard will become effective on February 27, 2012.

The accredited investor exemption has also garnered attention north of the border. Specifically, the OSC expressed concern last year that issuers and dealers were improperly relying on the accredited investor exemption to ineligible investors. As we discussed in a November 2011 post, Canadian regulators have now also launched a review of the domestic accredited investor and minimum investment amount exemptions. Under Canadian rules, the accredited investor standard for individual investors includes both a $1,000,000 financial asset test and a $5,000,000 net asset test, with only the latter including an investor’s personal residence (minus liabilities). Depending on the feedback (the consultation period ends on February 29th), possible options include keeping the status quo, retaining the exemptions with adjusted thresholds, limiting the use to certain investors (such as institutional investors), using alternative qualification criteria or imposing other investment limitations.

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On January 3, the British Columbia Securities Commission published a revised version of BC Interpretation Note 33-705. The revised note, which describes how the BCSC interprets and applies its conditions of registration for investment dealers with a BC office that trade in the U.S. OTC markets, reflects the fact that the conditions have now been extended to December 31, 2014.

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On January 9, the Investment Industry Regulatory Organization of Canada (IIROC) published guidance regarding the procedures to be followed by a Participant (dealer) wishing to guarantee a trade price for a client order that outperforms a benchmark price. As we discussed last year, IIROC released a draft version of the guidance on July 4 that would allow a certain amount of "outperformance" to be guaranteed under certain circumstances if a dealer agreed to take the trade as principal. Under the initial proposal, dealers would only be able to guarantee outperformance up to a maximum of the lesser of 50% of the Participant's historical realized outperformance of the same benchmark over the prior calendar quarter and 30 basis points.

The final version of the guidance released yesterday, however, has been revised to address public comments received. Of particular interest, the guidance now provides that a dealer may guarantee outperformance up to a maximum of the greater of 50% of the Participant's historical realized outperformance of the same benchmark over the prior calendar quarter and 25 basis points. Thus, dealers will be able to guarantee outperformance of 25 basis points, even in the absence of a demonstrated ability to outperform the benchmark.

For more information, see IIROC Notice 12-0010.

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Jonathan Moncrieff -

On December 20, 2011, Institutional Shareholder Services (ISS) released a white paper entitled “Evaluating Pay-for-Performance Alignment: ISS’ Quantitative and Qualitative Approach”. As we discussed in a post of December 21, the Paper introduces ISS’ new approach to evaluating pay-for-performance and is thus the most current and thorough description of the approach ISS’ will now use to evaluate pay-for-performance.

The new approach comprises an initial quantitative assessment and, as appropriate, an in-depth qualitative review to determine either the likely cause of a perceived long-term disconnect between pay and performance or factors that mitigate the initial quantitative assessment. ISS has introduced this new approach because investor feedback received regarding pay-for-performance indicated a preference for a focus on long-term alignment, board decision-making, and pay relative both to market peers and to absolute shareholder returns.

While the Paper is primarily focussed on pay practices of companies in the United States, ISS has indicated that the new methodology is being considered for Canada. Further, given the influence ISS can have on Canadian capital market participants, the content of the Paper may be of interest to Canadian readers.

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Richard E. Clark and Curtis A. Cusinato -

Is the glass half full or half empty? We are decidedly in favour of the glass being half full, and getting fuller, for Canadian M&A markets in 2012. While uncertainty and slow growth in the U.S. and Europe have affected the Canadian economy, the country has continued, for the most part, to post impressive economic results, thanks not only to unceasing demand for its natural resources but also to its strong regulatory system and stable majority government. Thus – as noted by Canadian Prime Minister Stephen Harper in his year-end address for 2011 – Forbes recently ranked Canada as the best country in the world in which to do business, the only country of the 134 surveyed that reached the top 20 in ten separate metrics. All things considered, therefore, we expect favourable growth in M&A activity in Canada in 2012.

The following are some of the top “trending topics” for the coming year:

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The Investment Industry Regulatory Organization of Canada (IIROC) today released proposed amendments to its rules regarding interpretation and standards. The amendments, released as part of IIROC's plain language rule rewrite project, are intended to remove unnecessary rule provisions, clarify IIROC's expectations with respect to certain rules, ensure that the rules reflect actual IIROC practices and ensure consistency with other IIROC rules and applicable securities legislation. The proposed amendments are open to a 90-day comment period. For more information, see IIROC Notice 12-0005.

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Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 12-0001 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets for the first quarter of 2012.  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 Q1 2012 are 1,200 points, 2,400 points and 3,600 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%) - 2,350 points and Level 3 (30%) - 3,550 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.

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Alex Colangelo -

As some of you may have heard, the 2011 Canadian Law Blog Awards (the CLawBies) were announced on December 31st and we are honoured to have been recognized with this year's Practice Group Blog award. Thank you to Steve Matthews, Simon Fodden and Jordan Furlong for working to promote Canadian legal blogs over the past few years and for recognizing us with this award.

And, a special thank you to our readers for your support and feedback over the past three years. We look forward to another year of bringing you the latest news and analysis regarding developments in securities regulation and corporate finance laws.

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