OSC releases 2012-2015 Strategic Plan

The Ontario Securities Commission today released its strategic plan for 2012-2015. Entitled The OSC: A 21st Century Securities Regulator, the plan is intended to guide the Commission as it seeks "to remain an effective, efficient, vigilant and modern organization."

Specifically, the plan sets out six key strategies that the OSC will pursue over the next few years, namely: (i) expanding the OSC's research and analytic capability to be able to respond to and keep pace with market developments and investor concerns and to support policy-making by creating a dedicated Research and Analysis Group; (ii) engaging investors more effectively by creating an Office of the Investor; (iii) establishing an internal Policy Coordination Committee to improve policy coordination and priority-setting; (iv) aligning all operations and programs with defined OSC goals and priorities and developing and reporting on key performance indicators; (v) establishing an Emerging Risk Committee to develop and implement a risk framework; and (vi) delivering excellence in the execution of operations by enhancing practices and processes.

The plan's release follows a review undertaken in 2011 of the OSC's priorities, objectives and outcomes, which included consulting with external stakeholders and engaging a consulting firm to benchmark the OSC against best practices at other regulatory agencies such as the U.S. SEC. Moving forward, the OSC intends to set out which initiatives will be address in the next fiscal year in its 2012-13 Statement of Priorities.  The OSC also states that it will report on the progress of its plan on an annual basis.

OSC identifies IFRS areas of interest

Last week, the OSC's Office of the Chief Accountant published a staff notice highlighting selected areas of interest with respect to financial reporting in the era of IFRS, and identifying areas for closer examination during 2012. Among other things, the notice considers: (i) the level of compliance with certain features of IFRS 3 Business Combinations; (ii) accounting for business combinations under common control; and (iii) the application of the requirements of IAS 36 Impairment of Assets. According to the OSC, the objective of the notice is to provide market participants with information that may assist in preparing financial reports during 2012.

Proposed amendments to prospectus marketing rules: pre-marketing of bought deals and other amendments

Ramandeep Grewal, Jay Kellerman, Raymond McDougall and Mihkel Voore -

This is the fourth in a series of posts in which we take a closer look at proposed amendments to NI 41-101, released by the Canadian Securities Administrators in November 2011. The proposed amendments are intended to expand the scope of marketing activities that can be conducted in connection with prospectus offerings. Our first post, published earlier this month, considered the new "testing the waters" exemption for IPOs. Our second looked at the use of term sheets during and after the waiting period. Last Thursday, we considered the proposed amendments' new exemption allowing for “road shows” to be conducted in connection with a prospectus offering. In this post, meanwhile, we consider the pre-marketing of bought deals and other amendments.

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Top ten energy M&A trends in Canada

Glenn Cameron, Susan Hutton and Lisa McDowell -

Despite uncertainty and slow growth in the US and Europe, Canada has continued, for the most part, to post impressive economic results. One reason for this has been the unceasing demand for Canadian natural resources including oil and gas. In addition, Canada’s stable majority government is a significant factor. In recognition of this economic strength, Forbes recently ranked Canada as the best country in the world in which to do business. It is the only country of the 134 surveyed that reached the top 20 in ten separate metrics. Consequently, we expect M&A activity in Canada will increase in 2012, particularly in the energy sector.

The following outlines ten trends that will impact M&A activity in the energy sector in the coming year.

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Court of Appeal makes it clear that plaintiffs must obtain leave for secondary market class action within 3 year limitation period

Alan D’Silva, Lesley Mercer and Ingrid Minott  -  

In Sharma v. Timminco Limited, a decision released on February 16, the Court of Appeal for Ontario determined that section 28 of the Class Proceedings Act, 1992 (CPA), which allows for the suspension of a limitation period applicable to a cause of action asserted in a class proceeding, is not triggered until after leave is granted under Part XXIII.1 of the Securities Act to commence a statutory cause of action for misrepresentation.1


The plaintiff commenced a putative class action for damages in excess of $500 million on behalf of a class of persons who acquired Timminco securities between March 17, 2008 and November 11, 2008.  The Statement of Claim asserts claims for negligence and negligent misrepresentation and simply “mentions” that the plaintiff intends to deliver a notice of motion seeking an Order permitting the plaintiff to “assert” secondary market claims pursuant to section 138.3 of Part XXIII.1 of the Ontario Securities Act.  Pursuant to section 138.8 of the Securities Act, “no action may be commenced under section 138.3 without leave of the court”. Section 138.14 of the Securities Act provides that an action under section 138.3 must be commenced within 3 years of the misrepresentation.

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CSA release 2011 enforcement report

Earlier this week, the Canadian Securities Administrators released their 2011 Enforcement Report, which sets out the results of regulators' enforcement activities over the last year. According to the report, CSA members commenced a total of 126 proceedings in 2011, down from 178 the year before, and concluded a total of 124 cases, down from 174. Of particular interest is the breakdown of concluded cases by category. Specifically, the majority of cases concluded last year (66) involved illegal distributions, while cases of registrant misconduct and insider trading were second and third, respectively. Meanwhile, total fines and administrative penalties ordered amounted to over $52 million, while restitution, compensation and disgorgement amounted to over $49 million.

EU adopts new regulation on short selling and credit default swaps

On February 21, the European Union adopted a regulation on short selling and certain aspects of credit default swaps. The regulations are intended to introduce common EU transparency requirements and harmonize the powers that regulators can use in exceptional situations where there is a serious threat to financial stability. As we discussed in an October 2010 post, the regulation was initially proposed by the European Commission in a few years ago.

Proposed amendments to prospectus marketing rules: road shows

Ramandeep Grewal, Jay Kellerman, Raymond McDougall and Mihkel Voore -

This is our third in a series of posts on the proposed amendments to NI 41-101 to expand the scope of marketing activities that can be conducted in connection with prospectus offerings. Our first considered the new "testing the waters" exemption for IPOs, while our second looked at the use of term sheets during and after the waiting period. In this post, we consider the proposed amendments' new exemption expressly allowing for “road shows” to be conducted in connection with a prospectus offering.

A “road show” is proposed to be defined as a presentation to potential investors regarding a distribution of securities under a prospectus that is conducted by an investment dealer on behalf of an issuer in which one or more executive officers of the issuer participate. These rules apply in respect of road shows conducting during or after the waiting period, with applicable modifications in the case of base shelf prospectus offerings.

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IIROC republishes proposals to permit partial swap offset strategies

On February 17, the Investment Industry Regulatory Organization of Canada (IIROC) republished proposed amendments to its Dealer Member Rules that would extend the current margin treatment on swap offsets to partial swap offsets. The proposals are intended to ensure that the capital requirements reflect the reduced position risk of partial swap offsets on interest rate and total performance swaps. The proposals, initially published in February 2009, now include housekeeping amendments to clarify the minimum margin requirements for unhedged interest rate and total performance swap positions.

Comments are being accepted on the proposed amendments until March 19, 2012. For more information, see IIROC Notice 12-0057.

Canadian regulators sign MOU with Australian regulator

Earlier this month, the Ontario Securities Commission, Quebec's Autorité des marchés financiers, the Alberta Securities Commission and the British Columbia Securities Commission announced the signing of a memorandum of understanding with the Australia Securities and Investments Commission. The MOU is intended to facilitate the supervision of regulated entities operating in both Canada and Australia by providing a mechanism for consultation, cooperation and exchange of information among the regulators.

Proposed amendments to prospectus marketing rules: use of term sheets during and after the waiting period

Ramandeep Grewal, Jay Kellerman, Raymond McDougall and Mihkel Voore -

As we discussed in a post last year, the Canadian Securities Administrators (CSA) proposed amendments on November 25, 2011 intended to expand the scope of marketing activities that can be conducted in connection with prospectus offerings. This is our second in a series of posts on the subject. Our first considered the new "testing the waters" exemption for IPOs.

Once a preliminary prospectus has been filed and receipted (starting the “waiting period”), Canadian securities laws currently expressly permit only for the distribution of the preliminary prospectus or the solicitation of expressions of interest from prospective purchasers provided that, prior to making the solicitation or forthwith after the purchaser indicates an interest in purchasing, a copy of the preliminary prospectus is provided. The distribution of communications such as notices, circulars, advertisements or letters is also permitted. However, in addition to identifying the person from whom a copy of a preliminary prospectus may be obtained, such communications may only identify the security proposed to be issued, its price (if then determined), and the name and address of the person from whom the securities may be purchased.

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CSA provide further guidance on disclosure of additional GAAP measures

The CSA announced today that it has updated Staff Notice 52-306 (Revised) to provide further guidance on the disclosure of additional GAAP measures presented under IFRS. Among other things, the revised notice provides a list of suggested practices to help issuers and certifying officers address obligations in relation to additional GAAP measures. The notice was last updated in November 2010.

Reminder: Ontario capital markets participation fees for unregistered IFMs due within 90 days of their year end

A reminder to unregistered investment fund managers (UIFMs) that the annual capital markets participation fee (CM participation fee) applicable only in Ontario is due within 90 days of a UIFM’s year end. For UIFMs with a December 31 year end, the due date is Friday, March 30, 2012. Late fees apply and accrue.

The amount of the CM participation fee is determined on a sliding scale based on the amount of the UIFM's "specified Ontario revenues" for its previous financial year attributable to capital markets activities in Ontario. UIFMs must complete and deliver to the OSC (along with the fee payment) a Form 13-502F4 Capital Markets Participation Fee Calculation setting out the basis on which the CM participation fee paid by the UIFM was computed.

Proposed amendments to prospectus marketing rules: new "testing of the waters" exemption for IPOs

Ramandeep Grewal, Jay Kellerman, Raymond McDougall and Mihkel Voore -

As we discussed in a post last year, the Canadian Securities Administrators (CSA) proposed amendments on November 25, 2011 intended to expand the scope of marketing activities that can be conducted in connection with prospectus offerings.

With respect to pre-marketing in connection with a prospectus offering, the proposals include a new exemption from the prospectus requirement to permit the solicitation of expressions of interest where the issuer has a reasonable expectation of filing a preliminary long form prospectus in respect of an initial public offering (IPO). Pursuant to this exemption, an investment dealer that is authorized in writing to do so by the issuer would be permitted to make solicitations to “permitted institutional investors” (defined below). 

When relying on this exemption, both the issuer and the investment dealer must keep information about the proposed offering confidential, written materials provided to potential investors must be marked confidential and contain a legend to the effect that the material is not subject to liability under securities legislation and, prior to providing any information about the proposed offering, the investment dealer must obtain a written confidentiality confirmation from the investor. Guidance in the proposed Companion Policy to NI 41-101 advises that this confirmation may be obtained through email.

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Minister of Finance approves registration amendments

On February 10, the OSC announced that the Minister of Finance (Ontario) has approved amendments to NI 31-103, previously published in November 2011, related to exemptions for SRO members. The amendments go into effect on February 28, 2012.

CSA adopt amendments to mutual fund and investment fund regulatory framework

The CSA announced last week that it is adopting amendments to complete the first phase of its project to modernize the product regulation of publicly offered investment funds. The amendments, initially published as a proposal in June 2010, seek to codify exemptive relief frequently granted to address market and product developments over the years in the investment fund industry. According to the CSA, these amendments to NI 81-102 Mutual Funds and related consequential amendments help to modernize the investment fund rules by making requirements "more effective and relevant in today's more diverse and increasingly innovative retail fund marketplace."

Specifically, among other things, the amendments will: (i) eliminate the need for ETFs to seek exemptive relief from certain operational requirements designed primarily for open-end conventional mutual funds; (ii) allow mutual funds to short sell securities subject to a cap of 20% of their net asset value; and (iii) introduce new investment restrictions for money market funds.

The final rules reflect changes made in response to comments to the 2010 proposal. As these changes are not considered material, the amendments will, assuming Ministerial approvals, come into effect on April 30, 2012.

CSA release consultation paper on segregation and portability in OTC derivatives clearing

The Canadian Securities Administrators released a consultation paper today intended to build on earlier proposals to construct a framework for the treatment of market participant collateral in centrally cleared OTC derivatives transactions. Specifically, the paper addresses the segregation of assets put forward as collateral for OTC derivatives transactions cleared through a central counterparty by customers that access the CCP indirectly through clearing members. The paper also addresses the transfer of customer collateral and customer positions upon the default or insolvency of the clearing member of a CCP.

According to the CSA, the paper's recommendations are intended to ensure that "CCPs clearing OTC derivatives possess adequate rules and infrastructure to facilitate the segregation and portability of collateral in a manner that provides market participants with appropriate protections". To that end, the paper recommends, among other things: (i) that clearing members be required to segregate customer collateral from their own proprietary assets and that the Complete Legal Segregation Model (whereby all customers' collateral is permitted to be held on an omnibus basis, but is recorded and attributed by both the CCP and clearing member to each customer based on their collateral advanced) be employed; (ii) that if CCPs or clearing members are permitted to reinvest posted customer collateral, investments should be restricted to instruments with minimal credit, market and liquidity risk; (iii) that CCPs should hold customer collateral at one or more supervised and regulated entities that have robust accounting practices, safekeeping procedures and internal controls; (iv) requiring CCPs to make the segregation and portability arrangements contained in their rules and policies available to the public in a clear and accessible manner; (v)  that provincial market regulators enact rules requiring that every OTC derivatives CCP be structured to facilitate the portability of customer positions and collateral; and (vi) that parties to an uncleared OTC derivatives transaction be free to negotiate the level of segregation required for collateral.

The CSA is accepting public comment on the consultation paper, including with respect to the specific questions posed regarding its recommendations, until April 10, 2012.

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. For more information, see CSA Consultation Paper 91-404 Derivatives: Segregation and Portability in OTC Derivatives Clearing.

Regulators propose registration exemptions for non-resident IFMs

Regulators from Ontario, Quebec, New Brunswick and Newfoundland and Labrador today published a proposed multilateral instrument that would exempt non-resident investment fund managers from the requirement to register in circumstances where there are no security holders of the investment fund, or active solicitation of residents, in the local jurisdiction. The instrument, which would apply in the participating jurisdictions, would apply to investment fund managers that do not have their head office or principal place of business in a jurisdiction of Canada and that do not have a place of business in the local jurisdiction. An exemption would also exist from the registration requirement in cases of distributions only to permitted clients.

Ultimately, the exemption from registration would extend the current temporary exemptions found in NI 31-103 and require affected investment fund managers to apply for registration by December 31, 2012. The participating regulators are accepting comments on the proposal until April 10, 2012. For more information, see proposed MI 32-102.

Meanwhile, securities regulators in the remaining provinces and territories have published a separate multilateral instrument that would allow the applicable exemptions found in NI 31-103 to expire on September 28, 2012 as planned, but would subsequently interpret the registration requirements to only require any entity to register as an investment fund manager in a jurisdiction if it directs or manages the business, operations or affairs of an investment in that jurisdiction. In determining whether registration is required, the proposed instrument would look at the functions and activities of the entity, and the presence of security holders and the solicitation of investors in a jurisdiction would not automatically require an investment fund manager to register. Affected investment fund managers in these jurisdictions would be required to apply for registration by September 28, 2012. Like the proposed instrument described above, comments are being accepted until April 10, 2012. For more information, see proposed MI 31-202.

In both cases, the proposals are intended to replace the CSA proposal published in October 2010, with which the CSA are not proceeding.

CFTC and SEC release joint report on international swap regulation

On January 31, the U.S. Commodity Futures Trading Commission and the Securities Exchange Commission released a joint report on how swaps and security-based swaps are regulated internationally. Specifically, the report describes the regulatory framework for OTC derivatives in the Americas, EU and Asia, analyzes the similaries and differences across jurisdictions, considers issues regarding harmonization and makes a number of regulatory recommendations.

ISS publishes FAQ regarding pay-for-performance

Jonathan Moncrieff -

As discussed in a post of December 21, 2011, Institutional Shareholder Services (ISS) released a white paper last year entitled “Evaluating Pay-for-Performance Alignment: ISS’ Quantitative and Qualitative Approach”. The Paper introduced ISS’ new approach to evaluating pay-for-performance and represents the most current and thorough description of the approach ISS utilizes to evaluate pay-for-performance. A subsequent post of January 10, 2012 provided a summary of the paper.

More recently, ISS has added a Frequently Asked Questions (FAQ) section to their website on the issue. Specifically, the FAQ is intended to provide high-level guidance regarding the way in which ISS will generally analyze certain issues in the context of preparing proxy analysis and vote recommendations for U.S. companies. ISS does, however, indicate that the responses should not be construed as a guarantee as to how it will apply its benchmark policy in any particular situation.

By way of example, answers to the following questions are provided in the FAQ:

  1. “For pay-for-performance alignment, how will ISS treat CEOs who have not been in the position for three years?”
  2. “For companies with meetings early in 2012, whose peer CEO 2011 pay has not yet been released, what pay data does ISS use?”

As indicated in our post of January 10th, while the paper is primarily focused 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 that ISS can have on Canadian capital market participants, the content of the paper and the FAQ may be of interest to Canadian readers.

IIROC integrated fee model approved

Last week, IIROC announced that regulators have approved its proposed integrated fee model. As we've discussed in previous posts, IIROC proposed a new dealer regulation fee model in April 2010 and a new market regulation fee model in November of that year (which it republished in 2011).

The integrated fee model works on the basic principle of allocating IIROC's annual operating cost to two pools of costs, comprising of dealer and market regulation, and recovering from dealers and marketplaces on the basis of each function's cost drivers. Under the dealer regulation fee model, rates will be determined by a dealer's revenue tier, while the fees for each marketplace will be based on a marketplace's share of the total number of messages processed by IIROC's surveillance system (in order to recover the IT costs of surveillance), as well as a fee based on the marketplace's share of the total number of trades (in order to recover all other regulation costs).

The new fee model will be implemented by IIROC on April 1, 2012. IIROC expects to publish further information, including guidelines prior to that date. For more information, see IIROC Notice 12-0043.

IIROC publishes proposed dealer margin rules

On February 3, IIROC, as part of its plain language rule re-write project, published a proposed series of rules respecting margin requirements. The proposed rules are intended to, among other things, clarify IIROC expectations respecting certain rules, ensure that the rules reflect current industry practice, ensure consistency with other dealer member rules and streamline the decision making and rule interpretation process.

A number of substantive revisions to current rules are also proposed. These include new provisions setting out the steps a dealer must take in deciding whether to allow a client to trade on margin, requiring that dealers obtain a margin ruling from IIROC staff when the margin treatment for a particular investment product is not specified within IIROC rules, and setting out the margin requirements for government and other non-commercial debt called for redemption.

IIROC is accepting comments on its proposals for 90 days from the publication of its notice. For more information, see IIROC Notice 12-0042.

TSX adopts Due Bill initiative

The Toronto Stock Exchange announced today that it has adopted amendments to its Company Manual to introduce a Canadian Due Bill tracking system. As we discussed in an earlier post, the TSX proposed a Due Bill system, intended to "improve the accuracy and timeliness of the valuation reporting of client's (sic) holdings when securities undergo certain material corporate events", in December 2011. No changes were made to the proposed amendments, and the amendments have now been approved by the OSC.

Coventree sanctions decision raises interesting points

Simon Romano -

On December 23, the Ontario Securities Commission released its reasons for imposing sanctions in its case against Coventree Inc. and two of Coventree's directors. As we discussed in an earlier post, the Commission recently ordered Coventree to pay an administrative penalty of $1 million and costs of $250,000, while the defendant directors were each ordered to pay a penalty of $500,000.

The sanctions decision raises a couple of points of particular interest. First, the decision considers the principle enunciated in Kienapple that an accused cannot be punished for more than one offence arising out of the same set of facts. While the principle has been applied in an administrative context in the past, the Commission in the immediate case raised doubt as to whether the principle would apply to an OSC proceeding. Regardless, the Commission found that the failure to issue and file a news release  in respect of a material change in this case was a distinct offence from the failure to file a material change report in respect of the same material change. As such, the Commission's opinion on the applicability of Kienapple was not determinative.

Further, the decision discusses Staff's request that the Commission issue an order preventing the director defendants from seeking or accepting indemnification from Coventree for any penalty imposed. The Commission ultimately found that it lacked the authority to make such an order. In the Commission's view, however, there would be nothing preventing Staff from negotiating a provision in a settlement agreement limiting a director or officer from seeking such indemnification.

IIROC implements single-stock circuit breakers

The Investment Industry Regulatory Organization of Canada (IIROC) today announced the implementation of single-stock circuit breakers to facilitate a halt across all marketplaces in the trading of a security experiencing rapid price movement. The circuit breaker program is intended to address short term, unexplained price volatility in individual securities.

Specifically, securities that are part of the S&P/TSX Composite Index, as well as ETFs comprised principally of listed securities, will be subject to trading halts in the event of a price increase or decline of at least 10% in a five minute period. The circuit breaker will initially halt the particular security for five minutes, and this time may be extended for a further five minute period if a significant imbalance of buy and sell orders remain. Circuit breakers will not be active in the first 20 minutes following the regular market opening nor in the 30 minutes prior to the regular close of trading.

Should IIROC determine that a further halt is required such as, for example, to allow for the dissemination of material news, IIROC may replace the single-stock circuit breaker halt with a traditional "regulatory halt". Any trades executed after the triggering of the circuit breaker but prior to the halt at more than 5% beyond the trigger price would be cancelled.

Single-stock circuit breakers will be implemented as part of an implementation phase expected to last between six months and a year, during which time IIROC intends to monitor trading in all securities on Canadian marketplaces. Following the initial implementation phase, IIROC intends to review the single-stock circuit breaker program and publish the results of its review, at which point it will solicit comment on whether adjustments should be made to the terms of the program.

IIROC today also released the public comments received in response to its initial proposals, released in November 2010, as well as its responses. The circuit breaker program announced today will ultimately be more limited than IIROC's initial proposal, which would have applied to all securities listed on a Canadian exchange. For more information, see IIROC Notices 12-0040 and 12-0041.

FSB releases Canada peer review report

On January 30, the international Financial Stability Board released its Peer Review of Canada report. The peer review, undertaken in 2011, was intended to assess Canada's progress in addressing issues identified during this country's Financial Sector Assessment Program (FSAP) review in 2007-2008. FSAP assessments of member countries occur every five years, with peer reviews typically following two or three years later.

Ultimately, the report concluded that Canadian authorities have made good progress in addressing FSAP recommendations on banking supervision, stress testing and the early intervention regime. According to the report, authorities have also taken steps to address issues with respect to ABCP and structured finance markets and have also made progress on recommendations in the securities sector.

The report's conclusions on the last point may be of particular interest. Specifically, the FSB notes the improvements made on such issues as coordination among provincial regulators, registration reform and enforcement actions. According to the report, however, additional steps are still needed.

Notably, the report cites the fact that the passport system does not address policy development or enforcement matters. Further, while the passport system is intended to sustain coordination, the report notes that the CSA is not a legal entity and relies on the goodwill and consensus of its members. According to the report, a single national securities regulator is preferable. The FSB also highlights issues with respect to, among other things, the oversight reviews of SROs, the effectiveness of enforcement actions, the oversight of derivative products and the differences in regulation of market intermediaries.

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