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

Darin Renton -

The Investment Funds Branch of the Ontario Securities Commission recently published the April 2012 issue of its Investment Funds Practitioner. The publication provides an overview of issues identified by the Branch arising from exemptive relief applications, prospectus filings and continuous disclosure documents filed by investment funds with the OSC.

Prospectus Issues

The Practioner highlights a number of issues that have come to light in the course of prospectus reviews, including amending a final prospectus to fix incorrect fee disclosure, and fund names that are inconsistent with the fund's investment objectives or strategies. On the latter issue, Branch Staff state that fund managers should select names that "closely reflect the fund's investment objectives" and that distinguish the funds from others. Branch Staff will consider whether additional guidance or rule-making is needed on this point.

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The Investment Industry Regulatory Organization of Canada (IIROC) recently published proposed amendments to the Universal Market Integrity Rules (UMIR) regarding the execution and reporting of certain off-marketplace trades. While the UMIR generally require orders to be entered and executed on a marketplace, they also contain a number of exceptions from this requirement and give IIROC the authority to grant exemptions form this requirement on application. The proposed amendments would provide an automatic exception for four of the most commonly sought exemptions, namely, to complete an “off-marketplace” trade in connection with:

• an exempt distribution from control pursuant to section 2.8 of National Instrument 45-102 – Resale of Securities;
   
• an exempt take-over bid;
   
• a purchase from a shareholder in a control position under a normal course issuer bid; and
   
• the sale of securities which are subject to resale restrictions.

A blanket exemption would also be provided for an off-marketplace trade if the Participant was involved as principal or agent and applicable legislation required the trade to be completed in a private or "non-public" transaction. Such trades would have to be reported to IIROC.

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Staff of the Canadian Securities Administrators published a staff notice yesterday to highlight issues identified in reports of exempt distributions (private placements) filed under Form 45-106F1, and providing guidance relevant to the preparation of the form.

Issues identified by CSA Staff include: filing of the BC Form 45-106F6 outside of BC, failing to file on time or pay the required filing fee, failing to include a complete list of purchasers and to reconcile information in the form with what is reported in the schedule to the form, failing to disclose compensation that should be considered a "commission" or "finder's fee" and failing to certify the form. As we discussed in December, British Columbia recently adopted its own form of exempt trade report under Form 45-106F6, which requires more information than what is required in the F1 in certain circumstances.

Meanwhile, members of the CSA except Ontario also released a staff notice yesterday identifying deficiencies in offering memoranda prepared in accordance with Form 45-106F2 when relying on the "offering memorandum" exemption under section 2.9 of NI 45-106. Common deficiencies included failing to include sufficient information to allow a prospective purchaser to make an informed investment decision, inadequately disclosing available funds and use of available funds and omitting to include, among other things, key terms of material agreements. The notice also provides guidance for those intending to rely on the OM exemption of NI 45-106.

For more information, see CSA Staff Notice 45-308 and Multilateral CSA Staff Notice 45-309.

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The Canadian government announced earlier this week that it is easing some of the sanctions against Burma (found in the 2007 Special Economic Measures (Burma) Regulations) in response to reforms occurring within the country. Components of the sanctions regime that were repealed include provisions prohibiting importing from and exporting into the country, as well as the prohibitions against investing in property situated in Burma. The sanctions still preclude, however, business dealings with prohibited persons and transactions involving arms and related material. Burma has also been removed from the Area Control List, which will permit the export of goods and technology found in the Export Control List without an export permit.

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Jeffrey Keey -

The recent First Tier Tribunal decision in HSBC Holdings Plc and The Bank of New York Mellon Corporation v The Commissioners for Her Majesty’s Revenue & Customs brings positive news for UK companies aiming to undertake a fundraise or listing outside the EU involving the use of overseas depositary or clearance systems.

Subject to an appeal by Her Majesty’s Revenue & Customs (HMRC), the current 1.5% stamp duty reserve tax (SDRT) charge on fundraisings by UK companies involving the use of non-EU depositary or clearance systems will no longer apply making non-EU fundraising and listings more attractive and increasing the fungibility of the shares of UK companies with non-EU dual listings, including those listed in London and Toronto.

Pending any HMRC appeal, companies may choose not to pay the applicable duty although they could be faced with a claim for its payment (together with penalties and interest) if HMRC are successful on any appeal ultimately brought.

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The CSA and IIROC last week announced that changes to the Universal Market Integrity Rules to address dark liquidity on Canadian equity marketplaces will be effective October 10, 2012. The amendments take into account comments received by the regulators in response to proposed amendments published in July 2011.

Ultimately, the amendments provide that (i) visible orders will have execution priority over dark orders on the same marketplace at the same price; (ii) in order to trade with a dark order, smaller orders must receive a minimum level of price improvement; and (iii) IIROC will have the ability to designate a minimum size for dark orders.

Publication of the notice represents the culmination of a process that began with the release of Joint CSA/IIROC Consultation Paper 23-404 in 2009. That paper considered a number of issues surrounding dark pools and orders, and was followed by a consultation forum and a position paper on dark liquidity published in November 2010. IIROC published proposed amendments to UMIR to address the regulation of dark liquidity in July 2011.

As we've previously discussed, the CSA adopted amendments to NI 21-101 and NI 23-101 last month. In doing so, the CSA noted the importance of establishing a framework that permitted the CSA and IIROC to introduce a size threshold for exemption from the transparency requirements in NI 21-101. While IIROC will now have the authority to designate a minimum size for dark orders, no such threshold has yet been set.

For more information on the recent UMIR changes, see IIROC Notice 12-0130.

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Ramandeep Grewal -

On March 9, the Canadian Securities Administrators (CSA) published a notice of the adoption of National Instrument 25-101 Designated Rating Organizations along with related consequential amendments.

The Instrument sets out relevant filing, disclosure, governance and other requirements applicable to a “designated rating organizations”. The “designation” requirement or trigger is set out (or will be set out) in securities legislation. The result is that a credit rating organization (CRO) will be required to apply to be a “designated rating organization” (DRO) in order for its credit ratings to be used to satisfy securities law requirements that require a credit rating to be given by a “designated rating organization.”

NI 25-101 provides the governance framework for DROs but there is, at the current time, no requirement to for credit ratings to be given by DROs – this is something the regulators will implement in the future. There will also be no change to the Canadian framework that exempts CROs from the civil liability provisions of securities legislation. The consequential amendments do, however, impact the disclosure required in a short or long form prospectus (including investment fund prospectus) as well as annual information forms (AIFs). 

The Instrument and all consequential amendments come into force April 20, 2012. In the case of the prospectus disclosure (long form, investment fund and short form) the changes apply where the preliminary prospectus is filed on or after April 20, 2012. The changes to the disclosure required in an AIF apply for disclosure in respect of financial years ending on or after April 20, 2012.

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The Ontario Securities Commission recently announced that Ministerial approval has been granted in respect of the previously-announced: (i) amendments to NI 25-101 Designated Rating Organizations; (ii) Supervisory MOU between the OSC, EMSA, AMF and BCSC; (iii) changes to NI 81-102 Mutual Funds; and (iv) MOU with the ASIC.

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The Canadian Securities Administrators (CSA) last week released Consultation Paper 91-405 Derivatives: End-User Exemption, the latest in a series of eight papers intended to build on the high-level proposals found in Consultation Paper 91-401 released in November 2010.

As is suggested by its title, the paper considers an end-user exemption to OTC derivatives regulation. Ultimately, an end-user exemption is intended to avoid discouraging the use of OTC derivatives by market participants that are not in the business of derivatives trading but that trade in OTC derivatives to mitigate commercial risks related to their business. As such, according to the CSA, an end-user exemption must address this specific segment of the market without undermining the broad objective of increased regulation of OTC derivatives contracts.

Thus the paper, among other things, sets out the CSA Derivatives Committee's position on the application of an end-user exemption, the criteria for determining eligibility, and what an eligible end-user would need to do in order to rely on the exemption.

The consultation paper, which includes specific questions for the consideration of commentators, is open for public comment until June 15.

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Earlier this month, Omega ATS announced the proposed introduction of "iceberg" orders to its trading platform. The new functionality would allow subscribers to enter the full quantity of a limit order, but only expose a fraction of the full order to the market book. Iceberg orders would refresh the fractional quantity selected to be made public until the full quantity of the order was completed. According to Omega, iceberg orders have become standard trading tools over the last decade. Comments on the proposed changes are being accepted until May 7.

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Earlier this month, IIROC released a webcast intended to provide information regarding issues related to "accredited investors". Specifically, the webcast discusses adviser obligations and provides information regarding the risks of buying securities without a prospectus.

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On March 30, IIROC released a set of proposed amendments intended to account for rule provisions that have not otherwise been accounted for in its proposed plain language rewrite project. The "clean-up" amendments result from a review by IIROC staff that determined, among other things, that definitions originally included the "Interpretation and principles" section of the rules were better suited in other places and that some provisions had been inadvertently missed.

While most are not considered substantive, some of the amendments have been characterized as such, namely those that would (i) repeal the provision that allows a dealer to distribute its securities through a transaction such as a take-over bid or amalgamation that will create a trading market in the securities under certain circumstances; (ii) repeal the provision requiring dealers to fulfill their contractual obligations and report other dealers who do not fulfill their contractual obligations; and (iii) repeal the rule relating to the amount of commission that may be charged by a dealer in connection with the exercise of rights to subscribe for shares.

IIROC is accepting comments for 90 days from the publication of the notice. For more information, see IIROC Notice 12-0111.

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Doug Richardson

The public offerings of two foreign asset income trusts (FAITs) have revived interest regarding income trusts in Canada, bringing to light a relatively untapped market. The key factor driving this renewed attention is that FAITs are not subject to traditional Specified Investment Flow-Through (SIFT) rules, as a result of their ownership of assets outside of Canada.

The royalty trust and income trust markets trace their origins to 1986 and 1995, respectively. As interest rates declined during the period and beyond these trusts became popular, since they provided lofty yields well in excess of the prevailing interest rate payable by corporations with similar credit ratings. The reason for the discrepancy was primarily due to the fact that royalty trusts and income trusts were flow-through vehicles that avoided the payment of corporate level tax. The yields payable by these trusts varied, but were typically in the 8 – 10% range.

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Ivan Grbešić and Tim McCormick

A great deal of attention has been focused recently on challenges faced by issuers in the resource sector, particularly in connection with short form prospectus distributions and the ability to respond to comments on technical disclosure within the timeframes of the deal.

In December of 2011, we saw the first of a series of short form prospectus offerings being withdrawn.  Karnalyte Resources filed a preliminary short form prospectus on December 5 for its $115 million offering of common shares, with an expected closing date of December 19, 2011. On December 13, the company issued a press release indicating it was no longer proceeding with the offering as the final short form prospectus could not be filed within the required timeframe “as a result of the delay” caused by comments raised by regulators on its technical report. (The Company subsequently filed an amended and restated technical report effective March 30, 2012, announcing via press release on the same day that it had responded to the regulators’ comments over the past few months and, as a result, was filing the amended and restated report.)

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Last week, IIROC released proposed guidance regarding the circumstances in which it may engage in regulatory intervention in order to vary or cancel trades. As we discussed in December 2010, IIROC released an earlier version of the guidance just over a year ago with the intention of providing transparency and certainty with respect to intervention criteria. Ultimately, the proposal, which takes into account comments received in response to the earlier version, would, among other things: 

1. restrict intervention when the price difference between an erroneous trade and the current fair value of the security does not exceed the greater of 10% of the price of the security or 10 trading increments;
    
2. allow for a higher price threshold depending on market conditions when a trade has been executed during a period of significant market volatility, outside normal trading hours or in a security of a very limited liquidity;
    
3. limit intervention to circumstances of extreme price dislocation where there is no reasonable expectation of execution, or a trading error that does not impact market price but which places the issuer at risk;
    
4. clarify the erroneous trade review process.

Ultimately, according to IIROC, regulatory intervention is intended to be engaged only when market integrity is at risk and necessary to maintain fair and orderly markets, and trades will not necessarily be varied or cancelled to remedy client error. Until such time that final guidance is issued, regulatory intervention will be undertaken in accordance to the revised proposal. Comments on the proposal is being accepted until May 29, 2012. For more information, see IIROC Notice 12-0112.

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The Investment Industry Regulatory Organization of Canada (IIROC) today published Notice 12-0122 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets for the second 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 Q2 2012 are 1,300 points, 2,600 points and 3,900 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%) - 1,250 points; Level 2 (20%) - 2,500 points and Level 3 (30%) - 3,750 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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