Canada Repeals Côte d'Ivoire and Liberia Sanctions while Extending Syria SEMA Prohibitions to More Individuals and Entities

Canadian regulations imposing limited trade sanctions against Côte d’Ivoire and Liberia were recently repealed following the termination of similar measures imposed on the two countries by U.N. Security Council Resolutions 2283 and 2288. The Canadian sanctions had focused primarily on the supply, sale, export or shipment of arms and related material to Côte d’Ivoire and Liberia.

In addition, the Government of Canada has also adopted amendments (here and here) that add a total of 44 individuals to part 2 of Schedule 1 of the Special Economic Measures (Syria) Regulations (the Syria SEMA Regulations). Five entities have also been added to part 1 of the same Schedule, while 2 individuals who were previously named are no longer included. The Syria SEMA Regulations prohibit persons in Canada and Canadians abroad from dealing in the property of the designated persons and have been in force since May 24, 2011.

Foreign Auditors Could Face Oversight in Canada

Stakeholders have been invited to provide feedback on the desirability and feasibility of oversight requirements for work conducted by foreign audit firms for Canadian issuers, as described in a CSA Consultation Paper published on April 25, 2017. Responding to a proposal by the Canadian Public Accountability Board (CPAB), the CSA is exploring amendments to National Instrument 52-108 Auditor Oversight which would require foreign audit firms involved in the audit of a reporting issuer’s financial statements (Component Auditors) to register as a participating audit firm (a PAF).

The Need for Oversight

The Consultation Paper stems from CPAB’s request that the CSA amend NI 52-108 to require that Component Auditors register as PAFs providing CPAB with a legal basis to inspect their audit work in most foreign jurisdictions. Currently, a PAF who engages the work of a Component Auditor must comply with Canadian auditing standards which provide that the PAF is responsible for the direction, supervision and performance of the overall audit but a Component Auditor is not required to register as a PAF. As described in the Consultation Paper, CPAB has not always been granted access to audit evidence in instances where Component Auditors have performed a substantial portion of the audit work for a reporting issuer. According to CPAB, 597 reporting issuer audits in 95 foreign jurisdictions involved a Component Auditor in 2016.

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US District Court dismisses FATCA challenge

Roanne C. Bratz -

On April 25, 2016, the United States District Court for the Southern District of Ohio, Western Division, dismissed a challenge that had been brought  by United States Senator Rand Paul and several other plaintiffs in Crawford, No. 3:15-CV-00250 (S.D. Ohio 4/26/16) that had sought a declaratory and injunctive relief against enforcement of the US Foreign Account Tax Compliance Act (FATCA), the Canadian, Czech, Israeli, French, Danish, and Swiss intergovernmental agreements (IGAs) entered into under FATCA, and the Report of Foreign Bank and Financial Accounts (FBAR) administered by the US Treasury’s Financial Crimes Enforcement Network (FinCEN).  We previously reported on an earlier related development.

Judge Thomas M. Rose granted a motion to dismiss in favour of the United States Department of the Treasury, the United States Internal Revenue Service and FinCEN, (collectively, the Defendants)  on the basis that the plaintiffs lacked standing to  institute the proceedings, with the result that the Court did not address the merits of the lawsuit.

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Additional Canadian securities regulators enter into MOU with CFTC

The securities regulators in New Brunswick (FCNB), Nova Scotia (NSSC) and Saskatchewan (FCAA) have announced that that they have signed counterparts to a Memorandum of Understanding (MOU) with the U.S. CFTC in regards to cooperation related to the supervision and oversight of entities that operate on a cross-border basis. As previously discussed,  the securities regulators in Ontario (OSC), Quebec (AMF), British Columbia (BCSC) and Alberta (ASC) initially signed the MOU on March 25, 2014 and Manitoba (MSC) signed a counterpart in October 2014. The MOU is intended to enhance the consultation, cooperation and exchange of information between the parties. For further information please see, the CSA’s April 27, 2016 press release

Common reporting standard: considerations for managers and funds

Darin Renton and Junaid Subhan -

In this installment of our analysis of the OECD’s Common Reporting Standard (CRS), we address practical considerations for affected Canadian investment funds.  As we previously discussed, the CRS, also known as the Standard for Automatic Exchange of Financial Account Information in Tax Matters, is a coordinated set of global rules that facilitates the automatic exchange of financial account information (AEOI) of non-residents to assist governments in detecting and deterring tax evasion and other non-compliance. 

Under the CRS, a “reporting financial institution” (Reporting FI) must report prescribed information to the tax authority of the jurisdiction in which the Reporting FI is located.  Each year, there will be an AEOI between the tax authorities in other participating CRS jurisdictions. The CRS prescribes the types of reportable persons and financial accounts that are within its ambit, the information that must be disclosed and the due diligence procedures that Reporting FIs are required to follow.

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Canada eases economic sanctions against Iran

Alix d’Anglejan-Chatillon -

The Office of the Superintendent of Financial Institutions (OSFI) recently announced the easing of certain economic sanctions against Iran.  According to the Government of Canada, these actions have been taken in concert with international efforts to recognize the progress that Iran has made to scale down its nuclear program and to subject it to international monitoring under the Joint Comprehensive Plan of Action.

Effective February 5, 2016, amendments were made to the Special Economic Measures (Iran) Regulations (SEMA Iran Regulations), enacted pursuant to the Special Economic Measures Act, to remove broad prohibitions on providing or acquiring financial or other services to or from Iran.  The amendments also remove the prohibition on investing in Iranian entities.  Finally, the amendments modify the list of individuals and entities listed in Schedule 1 to the SEMA Iran Regulations that are subject to various sanctions, including an asset freeze and a prohibition on certain dealings.

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Country-by-country reporting for parent entities of large U.S.-based multinational groups proposed by the IRS

Roanne C. Bratz -

On December 21, 2015, the Internal Revenue Service (IRS) and the U.S. Treasury Department (Treasury) released proposed regulations (REG-109822-15) on country-by-country (CbC) reporting (the Proposed Regulations).

In general, the Proposed Regulations are modeled after, and are consistent with, the Organization for Economic Co-operation and Development (OECD) recommendations for CbC reporting, designed to combat base erosion and profit shifting.

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U.S. President vetoes H.R. 3762 which would have repealed certain tax provisions of Obamacare

Roanne C. Bratz -

On January 6, 2016, the House of Representatives, by a vote of 240 to 181, approved the Senate-passed legislation, Restoring American Healthcare Freedom Reconciliation Act of 2015 (H.R. 3762), that we previously reported about. The legislation would repeal the bulk of the tax provisions enacted in the Patient Protection and Affordable Care Act of 2010 (often referred to as “Obamacare”). In a January 8, 2016 press release, however, President Obama announced that he has vetoed H.R. 3762.

Of particular interest are provisions in H.R. 3762 which would have repealed:

  1. The 3.8 percent net investment income tax on certain unearned income of joint filers with adjusted gross income (AGI) over US$ 250,000 (or individual filers with AGI of over US$ 200,000);
  2. The additional 0.9 percent Medicare hospital insurance tax on wages over US$ 250,000 for joint filers (or over US$ 200,000 for individual filers); and
  3. The 10 percent of AGI floor for claiming the itemized deductions for medical expenses. The floor would revert to the prior level of 7.5 percent of AGI.

H.R. 3762 was presented to the President on January 7, 2016. Since H.R. 3762 was not passed by a two-thirds majority in either the Senate or the House of Representatives, H.R. 3762 is subject to veto by the President Obama. The Presidential veto is expected to stand leaving these tax provisions of Obamacare intact.

U.S. FIRPTA reform signed into law by President Obama

Roanne C. Bratz -

On December 18, 2015, the U.S. Congress passed and President Obama signed into law major reforms to the Foreign Investment in Real Property Tax Act contained in the Protecting Americans from Tax Hikes Act of 2015.  As we previously noted, amendments were proposed to the 35-year old law pertaining to the U.S. taxation of foreign investment in U.S. real property.

The amendments would essentially treat certain qualified foreign pension funds in the same manner as U.S. pension funds with respect to investments in U.S. real estate by waiving an additional tax imposed on foreign investors under FIRPTA.  The amendments would also allow foreign investors to purchase as much as ten percent of a U.S. publicly traded real estate investment trust (a REIT, which would be a U.S. Real Property Holding Corporation under FIRPTA) without FIRPTA taxation.  The previous threshold was five percent.

FIRPTA real property taxation relief proposed by U.S. legislators

Roanne C. Bratz -

In an attempt to arrive at an agreement before the Christmas break, negotiators from the U.S. House of Representatives and the U.S. Senate released on December 15, 2015 statutory language as well as a summary of so-called tax extenders, in a bill entitled “Protecting Americans from Tax Hikes Act of 2015” (the Tax Extender Bill).

Similar to the proposed amendments introduced on December 7, 2015 in H.R. 34, the Tax Extender Bill provides some relief from Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) taxation.  Section 322 of the Tax Extender Bill would increase the maximum stock ownership a shareholder may hold in  publicly traded  REIT to avoid being subject to the FIRPTA tax from the current  5 percent  threshold to 10 percent and section 323 of the Tax Extender Bill would also exempt foreign retirement and pension funds from FIRPTA taxation.

In addition, section 324 of the Tax Extender Bill provides that the rate of withholding on dispositions of United States real property interests will be increased from 10 percent to 15 percent.  The increased rate of withholding, however, would  not apply to the sale of a personal residence where the amount realized would be $1 million or less, and if enacted in its present form, would be  effective for dispositions occurring 60 days after the date of enactment.

Proposed changes to the U.S. taxation of foreign investment in U.S. real property

Roanne C. Bratz -

On December 7, 2015, the Chairman of the U.S. House Committee on Ways and Means, Representative Kevin Brady, proposed an amendment to H.R. 34, The Tax Increase Prevention and Real Estate Investment Act of 2015 (the Extenders Bill) that would retroactively extend, for two years (generally through the end of 2016), a number of tax relief provisions that had previously expired at the end of 2014.

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U.S. Senate repeals the net investment income tax

Roanne C. Bratz -

On December 3, 2015, the U.S. Senate, by a vote of 52 to 47, approved a  package, wrapped inside a budget reconciliation bill, that would repeal large portions of the Affordable Care Act  (ACA), also known as Obamacare, and would place a moratorium on federal Medicaid funding for Planned Parenthood.  Included in the Senate’s  version of its bill, and found in Section 220 thereof, is a repeal of chapter 2A of the Internal Revenue Code (the Code) applicable to taxable years beginning after December 31, 2015.

When ACA was enacted into law, it created a new Section 1411 under chapter 2A of the Code, which generally imposes a 3.8 percent tax on the lesser of "net investment income" or the excess of modified adjusted gross income over a "threshold amount".  This threshold amount is generally US$250,000 for taxpayers filing a joint return; US$125,000 for married taxpayers filing a separate return and US$200,000 in all other cases.  This additional tax, referred to as the net investment income tax or “NIIT”, applies to taxable years beginning after December 31, 2012.

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U.S. legislation permitting revocation or denial of U.S. passports passed

Roanne C. Bratz

As recently reported,  new U.S. legislation has been pending in Congress that would permit  the revocation or denial of U.S. passports in the case of unpaid taxes in excess of $50,000.  

On December 3rd, H.R. 22, Surface Transportation Reauthorization and Reform Act of 2015, a highway-funding bill in which the pertinent provisions are buried, was passed by the House of Representatives by a vote of 359 - 65, and then  by the Senate later that day by a vote of 83 – 16.

It has now been  presented to the President and he is expected to sign it into law. 

New U.S. legislation would permit revocation or denial of U.S. passports in the case of unpaid taxes in excess of $50,000

Roanne C. Bratz

Under a new provision of law that is expected to take effect  in 2016, the U.S. State Department will  be able to: (i) deny Americans with “seriously delinquent” tax debt from receiving new passports; and (ii) revoke existing passports of individuals who fall into this category.  The list of affected taxpayers is to be compiled by the Internal Revenue Service using a threshold of US$50,000 of unpaid federal taxes, including penalties and interest, which amount will be adjusted for inflation.

The rule has been passed in similar versions by both the House of Representatives and the Senate.

It is buried in H.R. 22, Surface Transportation Reauthorization and Reform Act of 2015, a highway-funding bill, in Section 32101 of Subtitle A of Title XXXII of the Bill,  that is now before the joint conference committee.

Congress is expected to pass this bill in early December and, if enacted in its current form, the law is to take effect on January 1st, 2016  and would apply to existing tax debts.

According to estimates by the Joint Committee on Taxation reported in JCX-106-15, the measure is expected to raise US$398 million over 10 years.

IRS upgrades and enhances FATCA Online Registration System

Roanne C. Bratz -

In a notice dated November 23, 2015, the Internal Revenue Service (IRS) announced that it had  upgraded the Foreign Account Tax Compliance Act (FATCA) Online Registration System to enable sponsoring entities to register their sponsored entities to obtain a global intermediary identification number (GIIN).

As we had recently reported, sponsored entities (including, for example, Canadian financial institutions covered by the Canada-US  Intergovernmental Agreement) had been granted a one-year extension until  December  31, 2016  to have their own GIINs for FATCA reporting and withholding purposes.

To facilitate this requirement, the FATCA Online Registration System has now been updated so as to enable and facilitate sponsoring entities to add their sponsored entities and, if applicable, sponsored subsidiary branches.

The FATCA Online Registration System User Guide and FAQs have also been updated to account for these enhancements. Additional information on this system can be found on the IRS website at For further information, please see IRS Notice IR-2015-131.

IRS Announces FATCA Registration System Updates

Roanne C. Bratz -

We recently reported that the U.S. Internal Revenue Service (IRS)had stated that it was in the process of updating  aspects of its Foreign Account Tax Compliance Act (FATCA) Foreign Financial Institution Registration system, and has now announced that as of November 16, 2015:

  1. new features have been added and are available on the IRS FATCA Online Registration System;
  2. revisions have been made to the FATCA Online Registration User Guide, the last publication of which was issued in October 2014; and
  3. a new revised IRS Form 8957 (Rev. October 2015),  FATCA Registration, has been released.

A summary of these  system updates can be found here.

Notice 2015-66 is received with welcome relief

Roanne C. Bratz -

On September 18, 2015, the Internal Revenue Service (IRS) released Notice 2015-66 announcing its intention to amend certain of the regulations under Chapter 4 of the Code (the “FATCA regulations”), to extend the period of time that certain of the Foreign Account Tax Compliance Act (FATCA) transitional rules will apply, including the deadline for a sponsoring entity to register its sponsored entities and re-document the entities with withholding agents.

Under the current provisions of the FATCA regulations, provided certain conditions are met, a sponsoring entity can agree to perform on behalf of one or more eligible sponsored entities all due diligence, withholding, reporting, and other requirements that such sponsored entities would have been required to perform as if  they were Participating Foreign Financial Institutions (also known as PFFIs).

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IRS reports on the success of its voluntary disclosure programs

Roanne C. Bratz -

Since the initiation of the U.S.Internal Revenue Service’s (IRS) Offshore Voluntary Disclosure Program (OVDP) which originally began in 2009 and the Streamlined Filing Compliance Procedures first offered on September 1, 2012, the IRS recently reported that more than 54,000 taxpayers have come forward  and the result is more than $8 billion in  tax collections. 

The Streamlined Filing Compliance Procedures are available to both U.S. individual taxpayers residing outside the U.S. and U.S. individual taxpayers residing in the U.S.and is premised upon the failure to report all income, pay all tax and submit all required information returns, including FBARs (FinCEN Form 114) being due to non-willful conduct.

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The U.S. has begun reciprocal automatic exchanges of information under various FATCA IGAs

Roanne C. Bratz -

On October 2, 2015, the U.S. Internal Revenue Service (IRS) announced the exchange of financial account information with certain foreign tax administrations in compliance with their obligations under various intergovernmental agreements (IGAs) put in place to implement the Foreign Account Tax Compliance Act (FATCA).

IRS Commissioner John Koskinen stated that “meeting the September 30 deadline is a major milestone in IRS efforts to combat offshore tax evasion through FATCA and the intergovernmental agreements … FATCA is an important tool against offshore tax evasion, and this is a significant step in the process. The IRS appreciates the assistance of our counterparts in other jurisdictions who have helped to make this possible."

Although the IRS news release does not reveal country names, it is assumed that one such country is Canada, following the Canada Revenue Agency’s confirmation that it had completed its first exchange with the IRS on September 30th relating to banking information for U.S. persons residing in Canada.

The CRA complied with the September 30 FATCA deadline after the IRS advised that Notice 2015-66 did not apply to Canada

Roanne C. Bratz -

In an affidavit that was filed with the Federal Court of Appeal on September 25, 2015 in support of the government’s response to block a motion for injunctive relief that had been brought by the plaintiffs, Sue Murray, Director of the Canada Revenue Agency’s Competent Authority Services Division,  International and Large Business Directorate, Compliance Programs Branch (the CPB), swore that the U.S. Internal Revenue Service (IRS) indicated to Canadian officials that Canada was not eligible, under IRS Notice 2015-66, for an extension of the September 30th deadline to comply with its intergovernmental agreement on the Foreign Account Tax Compliance Act.

The affidavit stated that in a conference call that took place on September 24, 2015, Douglas O'Donnell,  IRS Large Business and International Division Commissioner, told her and some of her colleagues, that the extension offered by the IRS to countries with Model 1 IGAs did not apply to Canada, and the IRS expected Canada to comply with the September 30th  deadline.

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More disappointing news for U.S. citizens residing in Canada

Roanne C. Bratz -

In addition to Justice Martineau’s  denial of injunctive relief and dismissal of the request for summary judgment in Hillis and Deegan v. The Attorney General of Canada,  as discussed in our previous post, U.S. citizens residing in Canada received more disappointing news on September 29, 2015, when Judge Thomas M. Rose of the U.S. District Court for the Southern District of Ohio denied a motion for a preliminary injunction, which in part, looked  to enjoin the U.S. Department of the Treasury and  the Internal Revenue Service from enforcement of various provisions contained under the FATCA legislation.

Senator Rand Paul  had joined six other plaintiffs in filing this lawsuit on July 14, 2015 , which, in part, challenged the validity of the FATCA related IGAs that the U.S. has signed with Canada, the Czech Republic, Israel and Switzerland.

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Collection and automatic disclosure of information from Canadian financial institutions is "legally authorized" and "not inconsistent" with Canada - US Tax Treaty

Roanne C. Bratz

On September 16, 2015, the Honorable Mr. Justice Martineau rendered summary judgment in the matter of Hillis and Deegan v. The Attorney General of Canada, docket T-1736-13 (2015 FC 1082).

As a matter of background (and as discussed in a previous post), on August 11, 2014, the plaintiffs, Hillis and Deegan, had filed a statement of claim in Federal Court seeking  a declaration that the Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act (the IGA) as well as Sections 263 to 269 of the Income Tax Act (Canada)  (the Act) unjustifiably  infringed the Canadian Charter of Rights and Freedoms and are therefore unconstitutional (the “constitutional issues”).  Thereafter, on October 9, 2014, the plaintiffs filed an amended statement of claim adding non-constitutional arguments, questioning the legality of the disclosure of personal information of US persons residing in Canada and collected in respect of the 2014 calendar year by Canadian financial institutions for the Canada Revenue Agency, which information is scheduled to be disclosed on or about September 30, 2015 by the Minister of National Revenue  (the Minister) to the US tax authorities (the non-constitutional issues).  Specifically, the plaintiff sought a general declaration and a permanent prohibitive injunction preventing the collection and disclosure of taxpayer information to the US tax authorities by the Minister on the basis that its disclosure is inconsistent with the Canada –United States Income Tax Treaty and in violation of section 241 of the Act which places limits on the ability of the Minster to disclosure confidential information.

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CFTC recognizes Montréal Exchange and Ice Futures Canada as Foreign Boards of Trade

Alix d’Anglejan-Chatillon

On August 28, Montréal Exchange Inc. (MX), the leading Canadian derivatives exchange, and ICE Futures Canada, Inc. (ICEFC), Canada’s largest agricultural derivatives platform, received Orders of Registration from the U.S. Commodity Futures Trading Commission (CFTC) as Foreign Boards of Trade (FBOTs).  The FBOT approvals permit MX and ICEFC to provide their identified members or other participants located in the U.S. with direct access to their electronic order entry and trade matching systems.

MX and ICEFC previously provided direct access on the basis of no-action letters issued by CFTC staff.  The no-action letters were automatically withdrawn upon the issuance by the CFTC of the FBOT orders.  MX will offer direct access for futures contracts on interest rates and certain broad-based security indices, as well as options on futures contracts based on the Canadian overnight repo rate average (CORRA) and ten-year Government of Canada bonds.  ICEFC will offer direct access for futures and options contracts on milling wheat, canola, durum wheat, and barley.

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OECD Common Reporting Standard to come into effect in Canada on July 1, 2017

Darin Renton and Junaid Subhan - 

Canadian financial institutions will be subject to the Organisation for Economic Co-operation and Development’s (OECD) Common Reporting Standard as of July 1, 2017 with the first exchanges of financial account information beginning in 2018.  The CRS, known formally as the Standard for Automatic Exchange of Financial Account Information in Tax Matters, was developed by the OECD and approved in July 2014 as a global standard for the automatic exchange of financial account information.  Over 90 jurisdictions have undertaken to join the CRS, which is intended to address tax evasion and to improve international tax compliance.

The CRS will require the Canada Revenue Agency (CRA) to provide information to foreign tax authorities about accounts held in Canada by residents of their jurisdictions.  Consequently, Canadian financial institutions will be required to identify accounts held by non-Canadian residents and report certain information pertaining to these accounts to the CRA.  The CRS is based on the US Foreign Account Tax Compliance Act (FATCA).  It would therefore allow Canadian financial institutions to base CRS compliance partially on existing FATCA compliance procedures.  However, it is expected that the volume of data that would be reported under CRS would be significantly greater than that reported under FATCA.

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SEC proposes expanding the corporate "clawback" rules

Katy M. Pitch - 

On July 1, 2015, following a 3-2 vote, the U.S. Securities and Exchange Commission (SEC) announced proposed rules that would implement the incentive-based compensation recovery (clawback) provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. With this announcement, the SEC has completed its task of producing proposals on all executive compensation rules required by Dodd-Frank. 

The proposals would significantly expand the range of situations in which such clawbacks would be required. Under existing rules, clawbacks are triggered only in a narrow set of circumstances involving misconduct that results in the restatement of a company’s financial statements. Under this proposal, clawbacks would apply to all manner of accounting restatements due to material non-compliance of the company, including non-compliance that is the result of erroneous data. 

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US Treasury accepts Canadian guidance of investment entities under FATCA

Roanne C. Bratz and Michel Legendre -

Last week, Brett York, an attorney adviser in the Treasury Office of International Tax Counsel confirmed that the U.S. Treasury is willing to accept Canada's recent guidance that only Canadian financial institutions that are “listed financial institutions” for the purposes of Part XVIII of the Income Tax Act would be considered investment entities under the IGA. As we discussed earlier this year, the Canada Revenue Agency's guidance for Canadian entities took effect on July 1.

Under the wording of the IGA, the definition of “investment entity” is to be interpreted in a manner consistent with the definition of “financial institution” in the recommendations of Canada's Financial Action Task Force, with the result that  most personal investment companies and trusts will not  be considered  to be financial institutions required to report U.S.-owned accounts to the Internal Revenue Service under FATCA.

New UK measures to counter avoidance schemes involving transfer of corporate profits

Jeffrey Keey

A new section 1305A of the UK Corporation Tax Act 2009 (CTA 2009) has been introduced by the UK Finance Act 2014 that applies to payments made from March 19, 2014 under avoidance schemes involving the transfer of corporate profits within a group.

This new measure applies if:

  • two companies (“A” and “B”) are members of the same “group”;
  • A and B are party to “arrangements” (whether or not at the same time);
  • the arrangements equate to, in essence, A (directly/indirectly) paying B “all or a significant part” of A’s profits (the “profit transfer”); and
  • one of the main purposes is to gain a “tax advantage”.

If applicable, the profits of A are reassessed for corporation tax on the basis that the profit transfer did not occur.

HM Revenue & Customs (HMRC) released amended guidance on the section on July 24. Groups should examine any arrangements with UK based members to ensure they are not caught by this new anti-avoidance measure.

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Constitutional challenge of FATCA agreement launched

Roanne C. Bratz, Vince Imerti and Jonathan Willson

On August 11, a constitutional challenge to the Agreement between the Government of the United States and the Government of Canada to Improve International Tax Compliance through Enhanced Exchanges of Information that was signed on February 5, 2014 (referred to as the “ US-Canada IGA”) and the new Foreign Account Tax Compliance Act (FATCA) provisions contained in Part XVIII of the Income Tax Act (Canada) was filed in Federal Court in Vancouver, British Columbia.

The plaintiffs instituted the lawsuit in the hopes of stopping the Government of Canada from turning over private bank account information from more than one million “United States persons” and their families living in Canada to the Internal Revenue Service. In doing so, the plaintiffs argue, in part, that portions of the US-Canada IGA violate provisions of the Canadian Charter of Rights and Freedoms by distinguishing and prejudicing citizens and residents of Canada who are “United States persons” from those who are not.

SEC releases guidance in respect of proxy advisory firms

On June 30, the U.S. Securities and Exchange Commission released a staff legal bulletin intended to provide guidance for investment advisers that retain proxy advisory firms to assist with proxy voting duties.

According to the guidance, the SEC expects that investment advisers retaining a proxy advisory firm will adopt policies and procedures designed to provide sufficient ongoing oversight of the proxy advisory firm in order to ensure that proxies continue to be voted in the best interests of clients. Investment advisers should also establish and implement measures to identify and address a proxy advisory firm's conflicts that can arise on an ongoing basis.

As we discussed earlier this year, the Canadian Securities Administrators published a national policy in April setting out proposed recommendations for proxy advisory firms in relation to their activities and the services provided to their clients. The comment period on the proposal has been extended to July 23.

ACT issues a supplement to its borrowers' guide to LMA Loan Documentation

Jeffrey Keey 

The UK’s Association of Corporate Treasurers (ACT) recently issued a supplement to its guide for borrowers to the Loan Market Association (LMA) investment grade forms of facility agreement and key negotiating points for borrowers (the ACT Borrower Guide) which will be of interest to those looking to review and negotiate such a facility agreement.

The LMA forms of investment grade facility agreement have been changed a number of times since publication of the ACT Borrower Guide in 2013, in particularly in respect of:

  • amendments to the definitions of “LIBOR”, “Euribor” and related provisions arising from the reforms to their benchmark process and administration;
  • an optional adjustment to the borrower’s right to prepay a defaulting lender;
  • amending the tax clauses to permit affected parties to withhold pursuant to FATCA and imposing information- sharing obligations on all parties;
  • updates to the increased costs clause to highlight the possibility of amendment to reflect commercial deals with regard to the costs associated with Basel III;
  • amended provisions giving an agent protection against incurring liabilities in the discharge of its function;
  • additional matters requiring unanimous lender consent;
  • mandatory costs provisions becoming optional; and
  • amendments to reflect changes that borrowers often seek.

This new supplement considers the changes made and their implications for borrowers.

CRA publishes FATCA guidance for Canadian entities

Roanne C. Bratz and Judith Charbonneau Kaplan -

The Canada Revenue Agency (CRA) on June 23, 2014 posted much anticipated guidance for Canadian entities that could find themselves subject to the Foreign Account Tax Compliance Act (FATCA), which took effect on July 1, 2014.

Entitled Guidance on enhanced financial accounts information reporting - Part XVIII of the Income Tax Act, the document, which consists of 158 pages divided into 12 chapters, was prepared with the stated purpose of helping financial institutions, their advisers, and CRA officials with the due diligence and reporting obligations relating to the Canada-United States Enhanced Tax Information Exchange Agreement, which was signed on February 5, 2014 (the “Guidance”).

According to the Guidance, “[a] Canadian financial institution that is in compliance with Part XVIII will not be subject to any U.S. withholding tax on U.S. source income and gross proceeds (both on its own investments and those held on behalf of its customers) under section 1471 of the U.S. Internal Revenue Code (IRC). However, the Agreement requires that procedures be followed by Canadian financial institutions seeking to secure that outcome.”

Of particular interest, it is noted that an entity must meet two conditions before it is considered to be a  “Canadian financial institution.” The entity must be a Canadian financial institution as defined under the IGA and it must be a “listed financial institution” for the purposes of Part XVIII of the Income Tax ActSubsection 263(1) of the Act defines a “listed financial institution” for that purpose and limits its meaning to 13 categories of entities. The Guidance explains that certain investment vehicles which, for example, may not be promoted to the public if they do not seek external capital (to illustrate, a personal trust used as a means for an individual or a family to hold investable assets), are not intended to be included in the term “listed financial institution” and will be viewed as passive Non-Financial Foreign Entities (or NFFE) under Canadian law.

The CRA has indicated that it is open to further comments and that the Guidance will be updated to take into account any developments, as appropriate.

IRS publishes instructions for FATCA Form W-8BEN-E

Roanne C. Bratz and Judith Charbonneau Kaplan -

The long awaited instructions for Form W-8BEN-E, Certification of Foreign Status of Beneficial Owner for United States Tax Withholding (Entities), were finally posted on the IRS website on June 24, 2014.

Form W-8BEN-E will now be the most common form to be used by foreign entities to certify their status under both (i) Chapter 3 of the U.S. Internal Revenue Code (the Code) relating to the withholding of U.S. tax on U.S. source income of foreign entities, and (ii) Chapter 4 of the Code relating to the withholding of US tax to enforce reporting on certain foreign accounts pursuant to the Foreign Account Tax Compliance Act (FATCA). 

The revised Form W-8BEN, on the other hand, is now only to be used by individuals to certify their foreign status under Chapter 3 of the Code and to make a claim of treaty benefits for reduced withholding. 

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UK Court characterizes loan agreements as debentures - Implications under the Financial Services and Markets Act 2000

Jeffrey Keey 

The recent UK Court of Appeal decision in Fons Hf v Corporal Ltd and Pillar Securitisation - which found that a loan agreement even if undrawn, is an instrument which evidences or acknowledges debt and consequently a debenture - has created significant legal uncertainty as to whether certain UK loan transactions may be regulated under the Financial Services and Markets Act 2000 (FSMA). 

Pursuant to the FSMA, debentures are “specified investments” subject to the financial regulation regime arising from sections 19 and 21 of that statute. Breach of this regime is a criminal offence and renders any relevant agreement unenforceable by the party in breach. 

The established understanding prior to Fons was that, while loan agreements may create a contractual framework under which loans are advanced, they did not themselves constitute a debenture or other investment creating or acknowledging indebtedness and accordingly were outside the scope of the FSMA (other than in respect of certain consumer credit and mortgage contracts). 

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FATCA implementation receives Royal Assent

Roanne C. Bratz and Judith Charbonneau Kaplan -

FATCA became part of our  domestic tax law on June 19th, when Bill C-31, An Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures, received Royal Assent.

For more information on FATCA's implementation in Canada, see our previous posts on the subject.

UK Stamp Duty on the transfer of most AIM shares abolished

Jeffrey Keey and Kate DaSilva -

Stamp taxes on the purchase of most shares admitted to trading on “recognised growth markets” such as the London Stock Exchange’s AIM market have been abolished. UK Stamp duty and stamp duty reserve tax (SDRT) are normally chargeable at the rate of 0.5% of the purchase price of chargeable securities.

Finance Act 2014

The new stamp taxes exemption is set out in Clause 108 (Abolition of stamp duty and SDRT: securities on recognised growth markets) and Schedule 20 of the Finance Act 2014. The exemption took effect from 28 April 2014 and stamp taxes on the purchases of securities listed on “recognised growth markets”, which includes the London Stock Exchange’s AIM market, were abolished provided that those securities are not also listed on a “recognised stock exchange”.

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Non-Canadian business also impacted by new Canadian anti-spam rules in effect July 2014

As of July 1, 2014, businesses that engage in the sending of business messages to recipients in Canada will be subject to Canada’s Anti-Spam Law (CASL) which will generally prohibit the sending of a commercial electronic message without the prior explicit consent of the message recipient. CASL is expected to have a significant impact on the marketing practices of businesses operating in Canada and will apply equally to non-Canadian businesses, including dealers, advisers and fund managers that send commercial electronic messages into Canada. Penalties for non-compliance with CASL include fines of up to $1 million for individuals and up to $10 million for corporations and other business entities. A private civil right of action for damages is also available, although this right of action will not come into force until July 1, 2017.

CASL applies to a wide range of both electronic messages sent for a commercial purpose, including not only email messages, but also text messages, instant messaging and even some social media messages. More specifically, CASL applies to the sending of “commercial electronic messages” (CEMs) which are messages where it would be reasonable to conclude that one of the purposes of the message would be to encourage participation in a commercial activity, whether or not the activity is carried out in the expectation of profit. As a result, the law governs not only direct solicitations, but also a broad range of advertising, marketing and general promotional activity.

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SEC Chair outlines work undertaken to address market instability and high frequency trading

Chair White
Photo Courtesy:
In a speech yesterday given at a New York conference, U.S. SEC Chair Mary Jo White set out a number of initiatives being undertaken by the SEC to address five broad areas of concern, namely market instability, high frequency trading, fragmentation, broker conflicts and the quality of markets for smaller companies.

To that end, she stated that she has directed SEC staff to prepare a number of rules and recommendations to address the issues outlined above. This includes, among other things: (i) developing an anti-disruptive trading rule; (ii) clarifying the status of unregistered active proprietary traders; (iii) eliminating an exception from FINRA membership requirements for dealers that trade in off-exchange venues; (iv) improving firms' risk management of trading algorithms; (v) expanding the information about ATS operations submitted to the SEC and making the information available to the public; (vi) enhancing order routing disclosure; and (vii) eliminating potential sources of conflicts between brokers and customers.

ASX requirement for non-transferable exchangeable shares may disadvantage Australian corporations looking at a Canadian acquisition transaction

Quentin Markin -

On March 31, 2014, Mamba Minerals, together with its wholly-owned subsidiary, Champion Exchange (Canco), completed the acquisition of all of the common shares of Champion Iron Mines (Champion) by means of a court-approved plan of arrangement. The transaction was structured as an exchangeable share transaction under which certain eligible Canadian shareholders could elect to receive all or part of their consideration in the form of exchangeable shares of Canco instead of ordinary shares of Mamba. The purpose of the exchangeable shares was to offer a tax deferred rollover for eligible Canadian shareholders, rather than the immediate triggering of a taxable disposition under the Canadian Income Tax Act.

As part of the approval process, Mamba sought confirmation from the Australian Securities Exchange (ASX) on which it was and remains listed (under its new name Champion Iron Limited), that in the opinion of the ASX “the terms that apply to each class of equity securities … be appropriate and equitable” as required by ASX Listing Rule 6.1. The ASX subsequently granted that confirmation in respect of the exchangeable shares but subject to conditions, including that the exchangeable shares not be transferrable. As a result, the transaction terms were ultimately amended, and the exchangeable shares made non-transferrable save for certain transfers that are integral to the operation of the exchangeable share structure, and transfer where, in effect, no beneficial ownership change occurs. Champion issued a press release on March 10, 2014 announcing the transfer restriction applicable to the exchangeable shares.

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Canadian regulators enter into MOU with CFTC

The OSC, AMF, ASC and BCSC announced this week that they have recently entered into a Memorandum of Understanding with the U.S. CFTC in regards to cooperation related to the supervision and oversight of entities that operate on a cross-border basis. The MOU is intended to enhance the consultation, cooperation and exchange of information between the parties.

New York Attorney General combats alleged unfair advantages for high-frequency traders

Simon Romano and Laura Levine -

In an effort to eliminate alleged unfair advantages provided by trading venues to high-frequency traders, New York Attorney General, Eric Schneiderman, has called for tougher regulations and market reforms in a speech made on March 18, 2014 at a symposium hosted by New York Law School.  The Attorney General’s speech is only part of a wider initiative launched last year examining advantages provided to high-frequency traders.

The Attorney General cites a number of services offered to high-frequency traders, including allowing traders to locate their computer servers within trading venues, providing extra network bandwidth to high-frequency traders, and attaching ultrafast connection cables and special high-speed switches to their servers, as providing high-frequency traders with the ability to make rapid trades in advance of the rest of the market, and claims that this is damaging the market as a whole. While often only a timing advantage of milliseconds, due to these services, high-frequency traders are able to obtain data feeds with pricing, volume, trade and order information in advance of other market actors.

High-frequency trading involves a significant proportion of overall trading on most markets.

For further details, see the March 18, 2014 press release available on the Attorney General’s website.

SEC reaches settlement with Lions Gate relating to disclosure violations

Simon Romano and Colin Burn

On March 13, 2014, the U.S. Securities and Exchange Commission announced that it had reached a settlement agreement with Lions Gate Entertainment Corp. that will see Lions Gate admit wrongdoing in connection with the issuance of misleading disclosure in 2010, as well as pay a $7.5 million fine. The disclosure at issue was made in connection with Lions Gate’s defense against activist investor Carl Icahn’s 2010 hostile efforts to gain control of the company via a series of takeover bids and a proxy contest.


According to the SEC’s order instituting settled administrative proceedings, Lions Gate admitted to omitting material information in its public disclosure relating to an extraordinary set of transactions that resulted in Lions Gate issuing approximately 16 million Lions Gate shares to a management-friendly director. Lions Gate admitted that the transactions were designed and carried out by management to dilute entities controlled by Carl Icahn (Icahn Group), who had previously launched a campaign to gain control of Lions Gate via a series of tender offers and was expected to launch a proxy contest. The transactions diluted the Icahn Group’s interest in outstanding Lions Gate shares from 37.9% to 33.5% and increased the management-friendly director’s interest from 19.9% to 28.9%. Additionally, at the Lions Gate shareholders meeting, shareholders elected management’s slate of directors and rejected the Icahn Group’s slate. The margin of defeat for one of the five Icahn Group nominees was approximately 16 million Lions Gate shares.

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FINTRAC advises of prohibition against certain conduct with corrupt foreign officials from Ukraine

Last week, in connection with the bringing into force of the Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations on March 5, 2014 under the Freezing Assets of Corrupt Foreign Officials Act, FINTRAC issued an advisory note cautioning Canadians, both locally and abroad, of the prohibition against (i) dealing, directly or indirectly, in any property, wherever situated, of a listed politically exposed foreign person; (ii) entering into or facilitating, directly or indirectly, any financial transaction related to a dealing referred to in (i); and (iii) providing financial services or other related services in respect of any property of a listed politically exposed foreign person. A politically exposed foreign person is one that is named in the regulations under Schedule 1 and includes, among others, certain former Ukrainian officials.

Under the FACFOA generally, Canadians are required to advise the Commissioner of the RCMP if they are in possession or have control over property of any of the corrupt foreign officials listed in the regulation, as well as provide information in respect of any transaction or proposed transaction relating to such property.

For further details, see the March 7, 2014 FINTRAC Advisory.

FATCA regulations create deemed compliant FI category

Roanne C. BratzJudith Charbonneau Kaplan and Anne Ramsay -

The Internal Revenue Service and the U.S. Treasury Department recently released amendments to the final FATCA regulations, in part so as to provide better coordination with the intergovernmental agreements (IGAs). Under these amendments, which are expected to be effective as of March 6, 2014, financial institutions (FIs) which are FIs under FATCA solely by virtue of being “investment entities” but which do not maintain financial accounts are referred to as "certified deemed compliant FIs."

This new deemed compliance category essentially targets investment advisors and managers who do not maintain financial accounts for their clients.

Consequently, for the purposes of the FATCA legislation and under the Canada-US IGA, such "certified deemed compliant FIs" should not be required to register with the IRS for FATCA purposes.

While certified deemed compliant FIs are not required to register with the IRS, certain identification requirements would still apply to ensure no withholding is made on US-source payments that they will receive. We expect further clarification will be made by the IRS regarding such identification requirements.

Canada and the U.S. sign FATCA agreement

Roanne C. BratzJudith Charbonneau Kaplan and Anne Ramsay -

On February 5, 2014, the Department of Finance announced that Canada and the United States have reached an agreement to address the application of the U.S. Foreign Account Tax Compliance Act (FATCA) in Canada. As described in a previous newsletter, FATCA targets American offshore tax evasion by requiring foreign financial institutions to disclose and report information in respect of their U.S. account holders. FATCA creates significant compliance issues for Canadian financial institutions.

Under the Canada-U.S. agreement, financial institutions will be required to provide relevant information on accounts held by U.S. residents and citizens to the CRA rather than to the IRS. This information will then be exchanged on an automatic, reciprocal, annual basis with the United States. Financial institutions are still subject to FATCA registration requirements and must register with the IRS through an online portal to obtain a Global Intermediary Identification Number. Canadian financial institutions compliant with the agreement will not be subject to the 30% FATCA withholding tax. Relief from compliance obligations is provided in respect of a number of registered accounts, including RRSPs, RRIFs and TFSAs. 

The Department of Finance also released draft implementation legislation, including amendments to the Income Tax Act.

Delaware provides guidance on single-bidder process

Stéphane Rousseau and Benoît C. Dubord -

In Koehler v. NetSpend Holdings Inc., decided last year, the Delaware Chancery Court discussed the duties of directors in a change-of-control transaction executed with a single-bidder process.

NetSpend conducted an initial public offering in 2010 for a price of $11 per share. In the following year, the share price fell to less than $4. After two rounds of share repurchases in 2011 and 2012, the board of directors explored several possibilities for enhancing shareholder value, including additional stock repurchases, a self-tender offer or a possible sale of the company. At that time, the board concluded that it was in the shareholders’ best interest to maintain the company as an independent, publicly owned entity.

In the fall of 2012, NetSpend’s two dominant shareholders informed the board of their intention to sell all or a significant portion of their shares. The board assisted the shareholders in their selling efforts. While noting that the entire company was not for sale, the board authorized the disclosure of financial projections to two private equity firms. For this purpose, the company executed confidentiality agreements with standstill provisions containing “Don’t Ask Don’t Waive” (DADW) clauses. In a nutshell, the clauses prevented the private equity firms from asking NetSpend to amend or waive any provision of the standstill provisions. Further, the standstill agreements did not terminate upon the announcement of another transaction.

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European Commission proposes "Volcker Rule"-style regulation

Simon Romano and Laura Levine

Following the United States’ lead in implementing the Volcker Rule, on January 29, 2014, the European Commission proposed a Regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions.

Generally speaking, the proposed regulation aims at enhancing financial stability in the EU by means of structural reform of large banks. More specifically, and subject to certain thresholds and exceptions, the proposed regulation prohibits credit institutions and entities within the same group from (a) engaging in “proprietary trading” in financial instruments and commodities, or, (b) with their own capital or borrowed money and for the sole purpose of making a profit for their own account, (i) acquiring or retaining, directly or indirectly, units or shares of alternative investment funds (AIFs) or (ii) investing, directly or indirectly, in derivatives, certificates, indices or any other financial instrument the performance of which is linked to shares or units of AIFs. The proposed regulation would apply to EU credit institutions and their EU parents, their subsidiaries and branches, including those in non-EU countries, and to branches and subsidiaries in the EU of banks established in third countries; however, foreign subsidiaries of EU banks and EU branches of foreign banks could be exempted from the prohibition if they are subject to a legal framework deemed to be equivalent to the proposed regulation.

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Five developments to follow in 2014 - Shareholder proposals and director election

Stéphane Rousseau and Benoît C. Dubord -

Shareholder proposals are a staple of annual shareholders meetings. In the U.S. and Canada, proposals are mainly made by labour-affiliated investors, individual activists, and social-, policy- or religious- oriented investors. They cover a wide range of topics from corporate governance to corporate social responsibility.

In 2013, in the U.S., the most common topics dealt with political contributions and lobbying, board declassification and independent chairs. In Canada, compensation issues, such as say-on-pay or limiting CEO compensation, consisted of more than half the proposals in 2013.

According to U.S. and Canadian corporate law, the board of directors manages the business and affairs of a corporation. Shareholder proposals can only be presented as recommendations. Thus, a board of directors is not legally compelled to implement a proposal that is approved by a majority of shareholders.

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Time is of the essence in public disclosures by dual-listed AIM companies

Jeffrey Keey and Kate DaSilva -

A recent reprimand by the London Stock Exchange of an AIM/TSX dual-listed company for not releasing an announcement in the UK at the same time as the announcement was released in Canada highlights the importance of ensuring that dual-listed AIM companies comply with the AIM Rules for Companies at all times (the AIM Rules).

Pursuant to Rule 10 of the AIM Rules, “information which is required to be notified by the AIM Rules must be notified by the AIM company no later than it is published elsewhere”. In practice, this means that an announcement by a dual-listed AIM company cannot be released to a foreign market at a time the AIM market is closed. This includes situations where information is made public in Canada solely through publication on SEDAR. 

Thus, if such information is required to be disclosed pursuant to the AIM Rules, any filing on SEDAR must be announced in the UK at the same time. It is important to note that this rule, as reinforced by the recent warning issued by the AIM team, precludes the company from making an announcement when one market is open and the other is closed, regardless of whether the same announcement is made immediately upon the other market opening the following business day.

Ultimately, this rule is designed to prevent investors in one jurisdiction from gaining a competitive edge over others by virtue of that market having access to information at a time when the same is not available through approved channels to all markets. Practically speaking, companies should be mindful to keep their advisors in each of the jurisdictions where it is listed up to date and abreast of announcements or matters which the board anticipate being the subject of an announcement, particularly their AIM nominated advisor.

Surge of corporate interest in relocating to the UK as a result of UK Tax Reform

Jeffrey Keey and Stanley McKeen -

Recent amendments to the UK tax regime have resulted in as many as 60 multinational companies looking to complete global and regional headquarter relocations into the UK in the next 18 months, according to Ernst & Young (November 2013).

This increased interest in relocating to the UK has been primarily driven by: (i) reductions to the UK’s corporation tax rate, which is currently at 23% (to be reduced to 21% from April 2014 and to 20% from April 2015) and the benefits of the UK’s wide double taxation network, participation exemption, lack of withholding tax on dividends and non-taxation of disposals by non-residents; (ii) reforms to UK Controlled Foreign Companies (CFC) legislation and (iii) implementation of the new “Patent Box” regime. 

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U.S. Volcker Rule passed by regulators

Simon Romano and Laura Levine -

Yesterday, the U.S. SEC, CFTC, FDIC, Federal Reserve, and Office of the Comptroller of the Currency approved the final rules implementing the provision of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act commonly referred to as the Volcker Rule. The Volcker Rule is ultimately designed to restrict the finance industry in the wake of the 2008-09 financial crisis and generally limit risk-taking by banks with federally insured deposits.

Named after former Federal Reserve chairman Paul Volcker, the long awaited final rules generally prohibit banking entities (defined to include insured depository institutions, companies controlling insured depository institutions, companies treated as bank holding companies for the purpose of the U.S. International Banking Act of 1978, and their respective affiliates and subsidiaries) from (i) engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account; and (ii) owning, sponsoring or having certain relationships with hedge funds or private equity funds, referred to as “covered funds”.

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SEC proposes crowdfunding rules

The U.S. Securities and Exchange Commission yesterday released proposed rules that would allow companies to raise capital through crowdfunded offerings.

The proposed rules, which are part of the rulemaking required by the adoption of the JOBS Act, would allow companies to raise a maximum aggregate amount of $1 million annually through crowdfunding. Investors with an annual income and net worth of less than $100,000 would be able to annually invest up to $2,000 or 5% of their annual income or net worth (whichever was greater). Investors with either annual income or net worth of at least $100,000 would be able to annually invest 10% of the greater of their annual income and net worth, up to $100,000.

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Delaware case provides guidance to directors of overseas corporations

Stéphane Rousseau and Benoît C. Dubord -

The recent In re Puda Coal, Inc. Stockholders Litigation decision serves as a cautionary note to directors of corporations with significant activities overseas. Specifically, the decision provides guidance to directors as to what is expected from them in order to fulfill their duties.

Puda Coal concerned a Delaware corporation listed on the New York Stock Exchange following a reverse triangular merger. The operating subsidiary and assets of the parent corporation, Puda Coal, were based in China. According to the plaintiffs, the corporation’s Chairman and Chief executive officer illegally sold the shares of the subsidiary to a third party, effectively looting the corporation of its assets.

The independent directors of Puda Coal, however, took 18 months to realize that the assets had been looted, during which time they authorized the disclosure of documents referring to the corporation’s ownership of the assets. The shareholders plaintiffs sued the directors for breach of their duty of loyalty, more specifically breach of their duty to monitor the corporation’s affairs and officers.

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A look ahead to the 2014 proxy season

Stéphane Rousseau and Benoît C. Dubord -

Key Shareholder Proposals

The 2014 Proxy Season is quickly approaching. In 2013, U.S. trends have emerged with respect to the proposals filed by shareholders with S&P 500 and Russell 2000 corporations. Four main themes of interest stand out.

First, shareholder proposals have again been filed to implement proxy access. The proposals seek to allow a shareholder or a group of shareholders under certain conditions to have their own director candidates included in the proxy form. Such proxy access would be conditional on the shareholders holding a certain threshold of the corporation’s shares (e.g. 3%) for a certain period of time (e.g. 3 years).

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Delaware case provides guidance to directors in the context of a debt proxy put

Stéphane Rousseau and Benoît C. Dubord -

In Kallick v. Sandridge Energy, the Delaware Chancery Court addressed the duties of directors in the context of a proxy put contained in a notes indenture. A group of dissident shareholders of Sandridge had advised the board of directors of their willingness to launch a consent solicitation whereby shareholders would be asked to consent to de-stagger the board, and to support their slate of candidates to the board. The board argued that the proposed candidates were not as qualified as the incumbent directors to manage the company. The board also notified shareholders that following the proxy put, the election of the dissidents’ candidates would be a change of control triggering the obligation for the company to buyback the notes at 101% of par value. According to the board, the notes buyback would put financial stress on the company.  The proxy put provided that the buyback obligation was not triggered if the board approved the list of nominees. However, the board refused to take position.

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African M&A: Review of new merger control regulations for 19 African nations

Jeffrey Keey and Stanley McKeen -

On January 14, 2013 a new merger control regime created by the Common Market for Eastern and Southern Africa (COMESA) came into force. The regime requires notification of mergers where at least one of the parties operates in two or more of COMESA’s member states. Failure to notify may result in penalties and/or the merger being of no legal effect in the COMESA region.

COMESA’s merger control regime affects 19 African nations and is enforced by the COMESA Competition Commission (CCC). Decisions made by the CCC are adjudicated by COMESA’s Board of Commissioners.

In November, proposals aimed at improving the merger control regime are expected to be reviewed by COMESA’s Council of Ministers. In the meantime, companies need to be aware of the current regulation and some of its peculiarities.

Response to the merger control regime has been mixed. Applause for its original aim of streamlining mergers in COMESA’s 19 member states has been silenced due to concerns over high filing fees, low thresholds for filings, long review periods and conflicting views regarding whether the CCC has exclusive jurisdiction to review transactions meeting COMESA’s filing thresholds. It is also unclear how the regime will operate in relation to mergers consummated outside the COMESA region that fall within the scope of the merger control regime.

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Alternative investment fund managers regulations 2013 - disclosure and reporting requirements for Canadian fund managers

Jeffrey Keey and Stanley McKeen -

As we initially discussed in an earlier post, Canadian managers of private equity, venture capital and other fund structures that are not regulated as “investment funds” under Canadian securities laws may, in the UK, be subject to marketing and related restrictions imposed by the Alternative Investment Fund Managers Regulations 2013 (the UK Regulations) when marketing alternative investment funds (AIFs) to professional investors in the UK pursuant to the UK’s national private placement regime. 

The UK Regulations, which implement the European Alternative Investment Fund Managers Directive (the Directive), came into force on 22 July 2013. As required by the Directive, the UK Regulations effectively regulate a much broader array of fund structures than conventional alternative investment funds. While EU member states were required to implement the Directive prior to July 22, 2013, only 12 of 31 EU member states had completed full legislative transposition within the deadline. Many of these 12 member states will provide transitional relief from the obligations imposed by the Directive for a one (and in some cases two) year period.

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UK Takeover Code expands jurisdiction

Jeffrey Keey and Stanley McKeen -

Effective September 30, 2013, the UK’s City Code on Takeovers and Mergers will be extended to apply to all Channel Islands, Isle of Man (British Crown Dependencies) and UK incorporated companies that have securities admitted to trading on the London Stock Exchange’s Alternative Investment Market or any other multilateral trading facility (MTF) in the UK, irrespective of whether their central management and control is in the UK, or the British Crown Dependencies (the residency test).  

In other words, the Code will remove the current residency test for such companies that have their registered office in the UK, Channel Islands or the Isle of Man. Thus, companies incorporated in those jurisdictions that may not have been subject to the Code due to their directors being located overseas will now be subject to the Code.

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Canadian regulators sign MOUs with European Regulators under AIFMD

Alix d'Anglejan-Chatillon -

Following our recent post, the Ontario Securities Commission, the Autorité des marchés financiers, the Alberta Securities Commission and British Columbia Securities Commission announced earlier today that they have entered into supervisory Memoranda of Understanding (MOUs) with financial regulators of a number of European Union (EU) and European Economic Area (EEA) member states for the supervision of alternative investment fund managers as required under the EU Alternative Investment Fund Managers Directive (AIFMD).  The AIFMD entered into force on July 22.

The AIFMD will directly impact both Canadian managers which manage funds in the EU and Canadian funds marketed in the EU by Canadian or EU-based fund managers.  Significantly, the AIFM Directive effectively regulates a much broader array of fund structures than conventional alternative investment funds and covers hedge funds, private equity funds, venture capital funds, real estate funds, commodity funds, investment trusts and other collective investment vehicles.   As a result, managers of funds that are not regulated as “investment funds” under Canadian securities laws may be subject to the application of AIFMD in connection with their European activities.

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SEC eliminates private placement solicitation and advertising prohibitions

The U.S. Securities and Exchange Commission (SEC) announced last week that it is eliminating the prohibition against general solicitation and advertising in respect of issuers taking advantage of the registration exemptions associated with offering securities to accredited investors and qualified institutional buyers. The amendments, first proposed in August 2012, are being implemented under the rulemaking required under the JOBS Act. The amendments will become effective 60 days after publication in the Federal Register.

OSC, ASC and BCSC ink supervisory MOU deals with Bank of England and FCA

The OSC today announced that it had, along with the ASC and BCSC, entered into Memoranda of Understanding with the Bank of England and the U.K. Financial Conduct Authority regarding mutual assistance in the supervision and oversight of regulated entities that operate in both the U.K. and the participating Canadian jurisdictions. The MOUs are subject to Ministerial approvals.

U.S. court vacates SEC Resource Extraction Issuer Disclosure Rules

Ivan T. Grbešić -

While it was recently announced that new Canadian transparency rules are expected for mining and oil and gas companies, on July 2, 2013, the U.S. District Court for the District of Columbia (the Court) vacated the resource extraction issuer disclosure rules (Rule 13q-1 under the Securities Exchange Act of 1934) adopted last year by the Securities and Exchange Commission (SEC) pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The disclosure rules adopted by the SEC in August 2012 required “resource extraction issuers” to file and publicly disclose annual reports with information relating to taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits paid by such issuer, a subsidiary of the issuer or another entity under the issuer’s control to certain governments in connection with the commercial development of oil, natural gas, or minerals, beginning with fiscal years ending after September 30, 2013.

The disclosure rules were challenged by way of a motion for summary judgment by the American Petroleum Institute, among other associations of oil, natural gas, and mining companies whose members were subject to the rules. The Court found that the SEC “misread the statute to mandate public disclosure” of the reports of each resource extraction issuer. The Court also determined that the SEC’s “decision to deny any exemption” under the disclosure rules “was, given the limited explanation provided, arbitrary and capricious”.

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Canadian and EU regulators negotiating to allow Canadian fund managers to continue to market in the EU

Jeffrey Keey -

Canadian managers of funds that are currently marketed into the European Union (EU) should be aware of the broad ambit of the Alternative Investment Fund Managers Directive (the AIFM Directive) and of the restrictions the AIFM Directive may impose as of July 22, 2013 on their activities in the EU.  Significantly, Canadian managers of private equity, venture capital and other fund structures that may not be regulated as “investment funds” under Canadian securities laws may be subject to marketing and related restrictions imposed by the AIFM Directive which effectively regulates a much broader array of fund structures than conventional alternative investment funds.

We understand from unofficial consultations with staff of the Ontario Securities Commission and the Quebec Autorité des marchés financiers that they are currently negotiating a supervisory cooperation Memorandum of Understanding (the MOU) with the European Securities and Markets Authority (ESMA) with the intention of having co-operation agreements in place with individual EU member states prior to the July 22,  2013 deadline for EU member states to implement the AIFM Directive.

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SEC comments on corporate disclosures on social media

Kaleb Honsberger -

Earlier this week, the U.S. Securities and Exchange Commission released a report of its investigation regarding whether Netflix and its CEO, Reed Hastings, violated certain securities regulations prohibiting the selective disclosure of corporate information when Hastings posted a comment on his personal Facebook page regarding the achievement of a corporate milestone.

In doing so, the SEC considered the disclosure of corporate information on social media generally, ultimately finding that its 2008 guidance, which discusses the distribution of information on corporate websites, also applies to corporate disclosures made through social media channels such as Facebook and Twitter. Specifically, the SEC stated that where it is reasonably foreseeable that the recipients (securities professionals and/or shareholders) of such information will trade on the basis of such information, it must be disseminated in a manner reasonably designed to provide broad non-exclusionary distribution to the public. To achieve this, issuers must take sufficient steps to alert investors, the market and the media as to the channels that will be used for the dissemination of material, nonpublic information. As an example, the 2008 guidance encourages periodic reports or press releases to include web site addresses or other information regarding steps investors or the public can take to be in a position to receive important disclosure.

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UK implements "twin peaks" model of financial regulation

On April 1, the U.K. moved to a "twin peaks" model of financial regulation that saw the Financial Services Authority cease to exist and its work split between two new regulatory authorities. Specifically, the Prudential Regulation Authority, part of the Bank of England, has been tasked with the prudential regulation of deposit-takers such as banks and credit unions, as well as insurers and major investment firms. Meanwhile, the Financial Conduct Authority will now regulate the conduct of financial services firms "to ensure that business across financial services and markets is conducted in a way that advances the interests of all users and participants."

As we've discussed previously, the implementation of the new regulatory regime follows a process initiated in 2010, when Lord Adair Turner, Chairman of the FSA , discussed a "major shift in philosophy" towards a "more pre-emptive and intrusive approach to supervision".

SEC considers uniform fiduciary standard for dealers and investment advisers

On March 1, the U.S. Securities and Exchange Commission released a request for comments as it considers potentially harmonizing the standards of conduct of broker-dealers and investment advisers. While investment advisers are currently fiduciaries to their clients, broker-dealers are not uniformly subject to fiduciary standards. The notice suggests that retail customers do not appreciate the difference in duties, and expresses concern that the applicable regulatory obligations depend on the statute under which a financial intermediary is registered rather than the services provided.

As such, the SEC is requesting data and other information to assist it in determining whether to adopt a uniform fiduciary duty. Specifically, the SEC is interested in receiving empirical and quantitative data from respondents, including surveys of retail customers, information describing the extent to which different rules apply to similar activities of broker-dealers and investment advisers, and data analyzing retail customer returns generated under the two existing regulatory regimes. Comments are being accepted for 120 days after publication of the notice in the Federal Register.

As we discussed in October, the CSA has also recently released a consultation paper considering the feasibility of imposing a fiduciary duty on advisers and dealers. Comments on the CSA's paper closed on February 22.

SEC proposes eliminating solicitation and advertising prohibitions in private placements

On August 29, the U.S. Securities and Exchange Commission (SEC) proposed amendments to current rules that would provide an exemption to the prohibitions on general solicitation and general advertising in cases of offerings on a registration exempt basis under Regulation D and Rule 144A.

Under current rules, companies looking to sell securities to raise capital must either register the offering or rely on an exemption. Most registration exemptions, however, prohibit companies from engaging in general solicitation or general advertising in connection with the offering.

The proposal, part of the rulemaking required under the JOBS Act enacted earlier this year, would amend Rule 506 of Regulation D, which governs private placements, to permit companies to use general solicitation and general advertising to offer securities provided that the purchasers are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors. Meanwhile, Rule 144A, which provides an exemption for resales of certain restricted securities to qualified institutional buyers, would be amended to provide that securities sold pursuant to the rule may be offered to persons other than QIBs, provided that the securities are sold only to persons that the seller and any person acting on the seller's behalf reasonably believe are QIBs.

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SEC prohibits listings of issuers not in compliance with compensation requirements

On June 20, the U.S. Securities and Exchange Commission announced the adoption of new rules and amendments to its proxy disclosure rules that would generally prohibit national securities exchanges from listing the equity securities of an issuer that is not in compliance with compensation committee independence requirements. Publication of the rule and amendments follow an initial proposal published in March 2011, and the final version addresses comments received by the SEC.

As we discussed in our earlier blog post, foreign private issuers that disclose in their annual report the reasons for not having an independent compensation committeee would be exempt from the relevant independence requirements. Those subject to U.S. proxy rules, however, would also be subject to certain disclosure related to compensation consultants.

IOSCO releases report on regulation of DMIs

Margaret Grottenthaler -

On June 6, the International Organization of Securities Commissions (IOSCO) published its Final Report on International Standards for Derivatives Market Intermediary Regulations. The report, which focuses on OTC derivative market intermediaries (DMIs) that deal with non-retail clients and counterparties, makes various recommendations with respect to: (i) the obligations of DMIs; (ii) requirements to manage counterparty risk; and (iii) protecting participants in the OTC derivatives market from unfair, improper or fraudulent practices.

The report sets out its recommendations in very general terms that are not likely to provide much in the way of specific guidance for local regulators. It recommends for example the establishment of minimum standards for the registration or licensing of DMIs. Relevant material information on licensed or registered DMIs should be publically available. According to the recommendations, market authorities should also consider imposing some form of capital or other financial resources requirements for DMIs that are not prudentially regulated.

The report also recommends that DMIs be subject to business conduct standards tailored to the OTC derivatives market. DMIs would also be required to have effective corporate governance frameworks in place, supervisory policies and procedures to manage their OTC derivatives operations, and risk management systems to manage OTC derivatives related business risks.

Ultimately, the report is intended to further G-20 Leaders' objective of reforming the OTC derivatives market to improve transparency, mitigate systemic risk and protect against market abuse.  Of more interest to Canadian market participants will be the CSA consultation paper on market intermediary regulations to be published later this summer. 

Proposed changes to the UK's Listing Rules - Key changes explained

Kate DaSilva and Stanley McKeen -

In January of this year the U.K. securities regulator, the Financial Services Authority (the FSA), issued Consultation Paper CP12/2 proposing amendments to rules applied by it as the UK Listing Authority to companies listed or seeking listings on the UK’s regulated stock market (the Listing Rules). As we discussed briefly earlier this week, the paper proposes a series of changes, primarily to the Listing Rules, but also to rules which apply to prospectuses being issued in the UK (the Prospectus Rules) and to the on-going share capital, financial and other disclosures required in respect of companies listed in the UK (the Disclosure and Transparency Rules). Key proposed amendments apply to transactions, reverse takeovers (RTOs), externally managed companies (also known as special purpose acquisition companies or "SPACs"), the sponsor regime and the ability to buyback more than 15% of a company’s own shares.   

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FSA proposes tightened regulation of reverse takeovers

Kate DaSilva and Stanley McKeen -

Earlier this year, the U.K. Financial Services Authority issued a consultation paper proposing amendments to the UK Listing Authority's Listing Rules that would, among other things, amend the regulations respecting reverse takeovers. According to the FSA, the proposed changes would ensure that reverse takeovers could not be employed as a "back-door" route to listing for otherwise ineligible companies.

Definition of "reverse takeover"

Under the amendments, a reverse takeover would be defined as

a transaction, whether effected by way of direct acquisition by the issuer or a subsidiary, an acquisition by a new holding company of the issuer or otherwise, of a business, a company or assets:

(1) where any percentage ratio is 100% or more; or

(2) which in substance results in a fundamental change in the business or in a change in the board or voting control of the issuer.

When calculating the percentage ratio, the issuer should apply the class tests [these consist of a gross assets test, a profits test, a consideration test and a gross capital test].

In considering whether a fundamental change in the business occurred, the FSA would consider the extent to which the transaction would change the strategic direction or nature of the business, the impact the transaction would have on the industry sector classification of the enlarged group and the impact on the end users and suppliers. According to the consultation paper, the proposed definition would remove "any uncertainty as to which structures result in a reverse takeover".

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SEC awarded stay in "no contest" settlement case

On March 15, the U.S. Court of Appeals for the Second Circuit issued a stay of proceedings in a case brought against Citigroup Global Markets Inc. by the Securities and Exchange Commission.  The SEC's complaint against Citigroup for negligent misrepresentation related to the company's marketing of collateralized debt obligations (CDOs) and followed an industry-wide investigation into the recent financial crisis.

The SEC had asked for the stay of proceedings after the district court refused to approve the proposed consent judgment that contained no admission of liability. The district court had rejected the settlement based in part on the rationale that a consent judgment without an admission of liability was bad policy and failed to serve the public interest.

In granting the stay, the Second Circuit found a strong likelihood that the district court's ruling would be overturned. The Second Circuit took particular issue with the district court's lack of deference towards the SEC's judgment on discretionary matters of policy.

The ruling may be of particular interest to Canadian regulation-watchers in light of the fact that the OSC is currently considering adopting new enforcement tools, including "no-contest" settlements.

IOSCO issues consultation report on ETFs

Last week, the International Organization of Securities Commissions (IOSCO) released a consultation report intended to provide industry and regulators with guidelines against which the quality of regulation and industry practices concerning exchange traded funds could be assessed. Specifically, the report outlines a number of proposed principles related to the structuring of ETFs, classification and disclosure, and marketing and sale of shares. IOSCO is accepting comments on its consultation paper until June 27, 2012. For more information, see Principles for the Regulation of Exchange Traded Funds

Canadian regulators sign MOU with ESMA regarding credit rating agencies

The Ontario Securities Commission, Quebec's Autorité des marchés financiers and the British Columbia Securities Commission today announced that they have entered into a Memorandum of Understanding with the European Security Market Authority with respect to the supervision and oversight of credit rating agencies. The MOU outlines terms and conditions, as well as a framework for consultation, cooperation and information-sharing between the organizations. Assuming Ministerial approval, the MOU will come into effect on April 20, 2012.

SEC issues guidance on amended accredited investor net worth standard

As we discussed in a post earlier this year, the U.S. SEC recently adopted an amended "accredited investor" net worth standard that excludes the value of an individual's primary residence. The SEC has now published a small entity compliance guide that summarizes the new standard and provides examples of net worth calculations.

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.

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.

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.

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.

NYSE disallows broker voting of uninstructed shares on corporate governance proposals

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.

Final CPSS/IOSCO report on OTC derivatives data reporting released

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.

SEC limits policy regarding non-public submissions from foreign private issuers

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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SEC excludes primary residence from "accredited investor" net worth standard

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.

Minister of Finance approves MOU between OSC and FINRA

The Ontario Securities Commission announced today that Ontario's Minister of Finance has approved its Memorandum of Understanding with the U.S. Financial Industry Regulatory Authority. The MOU, which we discussed in our post of November 18 and became effective as of December 13, is intended to facilitate the exchange of information between the two regulators.

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.

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.

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.

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.

Court finds FINRA lacks authority to sue for collection of fines

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

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

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

FINRA proposes requiring further disclosure of private placement proceeds

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

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

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

UK Takeover Code - Final changes support target boards

Sandra Bates

Further to our May 2011 post, the UK Takeover Panel has finalised significant amendments to the UK Takeover Code which, when implemented on September 19, 2011, will herald a substantial rebalancing of power in favour of target boards.

As expected, the principal amendments to the Code are substantially the same as originally proposed by the Panel. This draws a line under the Panel’s protracted consultation process triggered by the political furore arising from the successful takeover by Kraft of Cadbury in 2010.

From a strategic and commercial perspective, the most important changes are:

  • the banning of break fees and other common deal protection measures;
  • the public identification of all potential bidders at the start of a transaction via a “possible offer” announcement to be made by the target company;
  • the imposition of a fixed four week period between the “possible offer” announcement identifying a potential bidder and the announcement of a fully financed firm offer (or a statement that no offer will be made) by that bidder; and
  • the requirement for all bidders to disclose details of the financing of the offer (including the refinancing of any existing target company debt) and the fees and expenses associated with the financing in the offer document and to publicly disclose (via a website) the financing documents. 
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SEC requests comments on use of derivatives by investment companies

On August 31, the U.S. Securities and Exchange Commission issued a concept release on the use of derivatives by mutual funds and other investment companies registered under the Investment Company Act of 1940. In the release, the SEC noted the "dramatic growth" in the complexity and volume of derivatives investments in recent years and, specifically, funds' increased use of such investments.

The release is ultimately intended to assist the SEC in determining whether further regulation or guidance is needed to improve the regulatory regime with respect to funds' use of derivatives. To that end, the release considers, and requests comment on, such issues as: (i) the costs, benefits and risks of funds' use of derivatives; (ii) restrictions on leverage; (iii) portfolio diversification and concentration; (iv) exposure to securities-related issuers; and (v) the valuation of derivatives.

Comments are being accepted by the SEC for 60 days after the publication of the release in the Federal Register.

CSA Staff concerned with U.S. exempt market dealers carrying out brokerage activities

The Canadian Securities Administrators released a staff notice today communicating their concern regarding firms that carry out brokerage activities registering as exempt market dealers. The notice describes such firms as being primarily U.S.-based broker-dealers that are members of FINRA.

According to CSA staff, the EMD category of registration was not intended for firms that conduct brokerage activities (trading securities listed on an exchange in foreign or Canadian markets), and the notice states that permitting such activity would result in differing levels of regulatory oversight between EMDs and those firms subject to IIROC requirements and supervision.

In light of their concerns, the CSA will instead "consider" registering these broker-dealers in the restricted dealer category with terms and conditions, including a requirement that such broker-dealers only deal with permitted clients. Such registrations would also be temporary while the CSA engage in a consultation process to ensure that "appropriate regulatory requirements" apply to all firms undertaking brokerage activities. According to the notice, the consultations will "likely" result in changes to the registration rules.

For more information, see CSA Staff Notice 31-327.

CPSS/IOSCO release report on OTC derivatives data reporting and aggregation

Earlier this week, the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions released a consultative report that makes various recommendations regarding OTC derivatives data reporting and aggregation requirements. As we discussed in October 2010, IOSCO formed a Task Force on OTC Derivatives Regulation last year with a mandate that included coordinating the efforts of international regulators with respect to OTC derivatives and producing a report on data reporting and aggregation requirements by July of this year.

Among other things, the report recommends that: (i) at a minimum, transaction level data be reported to trade repositories and that such data include at least transaction economics, counterparty information, underlier information, operational data and event data; (ii) trade repositories implement measures to provide effective and practical data access to authorities; (iii) a standard system of Legal Entity Identifiers be developed and implemented for the aggregation of OTC derivatives data; and (iv) a standard product classification system for OTC derivatives products be developed, led by industry and in consultation with authorities.

The CPSS and IOSCO are accepting comments on the consultative report until September 23, 2011.

SEC eliminates credit ratings criteria for companies using short form registration

On July 26, the U.S. SEC adopted new rules intended to reduce the reliance on credit ratings for regulatory purposes by removing such ratings from the eligibility criteria for issuers seeking to register securities offerings using "short form" registration. Specifically, the new rules remove the condition that securities be rated investment grade by at least one credit rating agency that is a nationally recognized statistical rating organization and allow short form registration if the issuer satisfies one of four new conditions. The new rules also include a three-year grandfathering  provision.

The amendments were initially proposed in February in light of section 939A of Dodd-Frank, which calls for the review of references to credit ratings in regulations issued by federal agencies. Generally, the amendments will be effective as of September 2, 2011, except for provisions rescinding Form F-9, used by some Canadian registrants to register non-convertible investment grade debt, which will come into force on December 31, 2012.


U.S. FATCA creates potential compliance issues for Canadian financial institutions

Our insurance group colleague Stuart Carruthers recently authored an article regarding the potential compliance issues emanating from certain provisions of the U.S. Hiring Incentives to Restore Employment Act known as the Foreign Account Tax Compliance Act. Specifically, FATCA targets American offshore tax evasion by broadening required disclosure and reporting by foreign financial institutions in respect of U.S. accountholders. While focused on insurance companies, Stuart's article identifies important issues for the consideration of Canadian financial institutions generally.

Earlier this month, the IRS and Treasury Department released a notice announcing plans to phase in FATCA requirements over the next few years.


US Appeals Court vacates proxy access rule

As we described last August, the U.S. SEC adopted a new proxy rule last year to, under certain circumstances, require companies to include shareholder nominees for director in the company's proxy materials. In a decision released last week, however, the United States Court of Appeals for the District of Columbia vacated the rule.

Specifically, the petitioners argued that the SEC had enacted the rule

in violation of the Administrative Procedure Act ... because, among other reasons, the Commission failed adequately to consider the rule’s effect upon efficiency, competition, and capital formation, as required by Section 3(f) of the Exchange Act and Section 2(c) of the Investment Company Act of 1940.

Ultimately, the Court of Appeals agreed, finding that the SEC "acted arbitrarily and capriciously" in failing to adequately "assess the economic effects of a new rule."  

New SEC rules require hedge fund adviser registration

The U.S. Securities and Exchange Commission adopted rules last month that require advisers to private funds, including hedge funds, to register with the SEC. The initial proposals were first introduced in November 2010 (see our post of December 19) and the final rules incorporate changes in response to public comments. Ultimately, the rules give effect to provisions of the Dodd-Frank Act that increase the statutory threshold for registration by investment advisers with the SEC, require hedge fund and other private fund advisers to register with the SEC and require reporting by certain advisers that are exempt from the registration requirements. Advisers falling under the requirements will have to be registered with the SEC by March 30, 2012.

Meanwhile, the SEC also announced the adoption of rules to implement new registration exemptions for advisers with less than $150 million in private fund assets under management in the U.S. and those that qualify as "foreign private advisers". Under section 202(a)(30) of the Investment Company Act of 1940, foreign private advisers are provided an exemption from registration where the adviser (i) has no place of business in the U.S.; (ii) has fewer than 15 clients and investors in the U.S. in private funds advised by the investment adviser; (iii) has aggregate assets under management attributable to U.S. clients of less than $25 million; and (iv) does not hold itself out to the U.S. public as an investment adviser. The new rules define a number of terms contained in the legislation, such as "investor", "place of business" and "assets under management", in order to clarify the application of the exemption.

As we discussed in October, Canadian securities administrators have meanwhile been working on their own proposals relating to registration of foreign investment fund managers who manage Canadian funds or have fund investors in a Canadian province or territory. The comment period on these proposals closed on January 13, 2011 and pursuant to recent amendments to National Instrument 31-103 that just came into force on July 11, 2011, these fund managers have been given a further deferral from registration until September 2012.

UK moves to a new financial regulatory model

As we've discussed in the past, the UK financial regulatory universe is undergoing, in the words of Financial Services Authority Chairman Adair Turner, a "major shift in philosophy". Under the new system of regulation, the Financial Policy Committee of the Bank of England will be responsible for macro-prudential regulation, a new Prudential Regulation Authority is being created as a subsidiary of the Bank of England to supervise deposit takers, insurers and significant investment firms and a new Financial Conduct Authority will be responsible for regulating conduct in retail and wholesale markets.

In preparation for the upcoming changes, the FSA recently published a document outlining how the FCA is expected to approach the delivery of its objectives. Specifically, the document sets out the objectives and powers of the FCA and the regulatory approach expected to be taken. The document also provides a summary of the FCA's plans to coordinate with regulatory authorities in the UK and internationally.

The FSA's paper follows publication of a consultation document by HM Treasury in February that provided further details on the UK Government's proposals for regulatory reform and the more recent White Paper, which takes into account public response to the consultation document.

IIROC publishes circuit breaker levels for Q3 2011

Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 11-0203 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for the third quarter of 2011 are 1,200 points, 2,400 points and 3,650 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%) - 1,300 points; Level 2 (20%) - 2,650 points and Level 3 (30%) - 3,950 points, and result in trading halts ranging from 30 minutes to the balance of the trading session, depending on the time of day and magnitude of the market decline. Triggering the Level 1 threshold between 2:00 and 2:30 p.m., for example, would result in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur. The threshold levels for the third quarter are slightly lower than those for the second quarter of 2011.

SEC concludes that Stanford Group investors entitled to SIPA protections

The U.S. SEC announced yesterday that it had concluded that investors with brokerage accounts at the Stanford Group Company who purchased certificates of deposit through the broker-dealer were entitled to protected "customer" status under the Securities Investor Protection Act of 1970. As such, the SEC referred the case to the Securities Investor Protection Corporation and asked the SIPA to initiate a court proceeding to liquidate the SGC. The broker-dealer, owned by Robert Allen Stanford, was charged in 2009 with perpetuating an $8 billion Ponzi scheme. For more information, see SEC release 2011-129 and SIPC's responding release.

SEC adopts whistleblower rules

The U.S. SEC has now adopted a revised final rule 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. The rules also seek to support internal compliance programs by making a whistleblower eligible for an award if the information is reported internally but results in the company informing the SEC about the violations. As we discussed in November 2010, the SEC released a draft proposal last year, and the final rule reflects changes made in response to public comments on the draft.

The provisions may be of particular interest to Canadian companies since, while foreign officials and employees of state-owned enterprises are excluded from the whistle-blower program, employees of foreign companies could be eligible for rewards.

U.S. exchanges propose replacement of circuit breaker pilot

Early last month, the U.S. SEC announced that national securities exchanges and the Financial Industry Regulatory Authority (FINRA) had filed a proposal to replace the circuit breakers for individual stocks, currently in place as part of a pilot project, with a "limit up-limit down" mechanism. Circuit breakers are trading pauses imposed in individual securities due to extraordinary market volatility. The proposed new mechanism, however, would prevent trades in a security from occurring outside of a specified price band. Stocks subject to the current circuit breaker (being those on the S&P 500 Index, the Russell 1000 Index and certain others) would generally be limited to a 5% trading price band, while other equities would be limited to 10% (as compared to prices of that security in the preceding five-minute period during a trading day).

For more information on the circuit breaker pilot project, see our posts of May 19, June 7 and September 21, 2010. Notably, the pilot project has been extended to the earlier of August 11, 2011 or the date on which the limit up-limit down mechanism is adopted.

Amendments to UK Takeover Code would restrict deal protection measures

As we discussed in this November blog post, the UK's Panel on Takeovers and Mergers made a number of recommendations last year regarding the amendment of the City Code on Takeovers and Mergers. Specifically, the Panel recommended, among other things, strengthening the position of offeree companies in a takeover bid by prohibiting deal protection measures and inducement fees other than in certain limited cases and requiring the disclosure of offer-related fees. The Panel has now released proposed amendments to the Code to implement its earlier recommendations. Comments on the proposals are being accepted until May 27. The Panel expects to release final text of the amendments once it has considered responses to its proposals.

FPIs not required to submit interactive data files until SEC specifies taxonomy

In response to a letter from the Center for Audit Quality, the U.S. Securities and Exchange Commission has stated that foreign private issuers that prepare financial statements in accordance with IFRS will not be required to submit, or post online, interactive data files (using XBRL), until the SEC specifies a taxonomy for use in preparing such interactive data files. For more on the SEC's requirements for Interactive Data Files, see our post of February 18, 2009.

IIROC publishes circuit breaker levels for Q2 2011

On April 1, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 11-0016 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for the second quarter of 2011 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%) - 1,400 points; Level 2 (20%) - 2,800 points and Level 3 (30%) - 4,200 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m., for example, would result in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

SEC proposes rules for listing standards regarding compensation committees

The U.S. SEC released a proposal this week directing national securities exchanges to require compliance with new independence requirements for compensation committees. The proposed requirements address matters such as independence of compensation consultants, the compensation committee's ability to retain independent advisers and the compensation committee's responsibility for appointing, compensating and supervising the work of such advisers.

While foreign private issuers (FPIs) would be exempt from the proposed requirements where they provide annual disclosures to shareholders of the reasons for not maintaining an independent compensation committee, those subject to U.S. proxy rules would be subject to similar requirements and the proposal further requests comments as to whether FPIs should have to provide such disclosure on Forms 20-F and 40-F. The SEC is accepting comments on its proposals until April 29, 2011.

CPSS and IOSCO release report on financial market infrastructures

On March 10, the Bank for International Settlements'  Committee on Payment and Settlement Systems and the International Organization of Securities Commissions released a consultative report containing a set of principles designed to apply to financial market infrastructures that record, clear and settle transactions in financial markets. The new principles, which consider such issues as credit and liquidity risk management, settlement, efficiency and transparency, are intended to replace the existing sets of CPSS and CPSS-IOSCO standards and provide greater consistency in the regulation and oversight of FMIs worldwide.

The OSC, AMF and Bank of Canada recently cited their participation in developing the report and encouraged Canadian stakeholders to provide comments to IOSCO and the BIS by the July 29, 2011 deadline.

For more information, see Principles for financial market infrastructures.

SEC proposes prohibition of risky incentive-based compensation arrangements

On March 2, the U.S. Securities and Exchange Commission proposed a rule that would prohibit certain institutions with consolidated assets of $1 billion or more from establishing or maintaining incentive-based compensation arrangements that encourage executive officers, employees, directors or principal shareholders to expose the institution to inappropriate risks by providing excessive compensation, or that encourage inappropriate risks that could lead to material financial loss. The proposals would apply to institutions with consolidated assets of $1 billion or more and include brokers and dealers registered under Section 15 of the Securities Exchange Act of 1934 and investment advisers as defined under section 202(a)(11) of the Investment Advisers Act of 1940.

The proposal, which responds to a requirement by Dodd-Frank to prohibit such compensation arrangements, would also require the covered institutions to disclose information about their incentive-based compensation arrangements. The proposal will be open for a 45-day comment period once it is published in the Federal Register.

SEC staff recommend uniform fiduciary duty for broker-dealers and investment advisers

In late January, the U.S. SEC submitted a staff study to Congress that recommended a uniform fiduciary standard for investment advisers and broker-dealers that provide securities investment advice to retail customers. The study, which noted that broker-dealers are generally not currently subject to a fiduciary standard under federal securities laws, recommended a fiduciary standard no less stringent than currently applied to investment advisers be extended to broker-dealers. The SEC was required to undertake the study to comply with Dodd-Frank, and the study also provided suggestions for further harmonization of the broker-dealer and investment adviser regulatory regimes. Whether the study's recommendations are followed through with, however, remains to be seen.  According to the SEC, the views expressed in the study are those of SEC staff and "do not necessarily reflect the views" of the SEC or individual commissioners.

In Canada, standards applicable to registrants such as dealers and advisers were somewhat harmonized in conjunction with the coming into force of the new registration regime for dealers, advisers and investment fund managers. Work also continues on IIROC's Client Relationship Model project, which attempts to address issues relating to such things as conflicts of interest management and suitability assessment. For a further discussion, see Ed Waitzer's post of February 17, entitled "Make advisors work for investors".

OSC to publish rule on electronic trading and direct electronic access to marketplaces

According to the Ontario Securities Commission's website, the OSC intends to publish a rule for comment next month to address electronic trading and direct electronic access to marketplaces. While the OSC's website doesn't provide specifics on the proposed rule, the OSC Market Regulation Branch provided some information in its Annual Report of October 2010. Specifically, the Annual Report stated that the CSA and IIROC were examining issues relating to direct market access (DMA) and developing a proposal to address risks associated with electronic trading (such as market risk, and credit risk), DMA and other issues associated with technology. Other issues cited in the report include high frequency trading, co-location and outsourcing.

Meanwhile, IIROC's Market Regulation Policy Quarterly Update of October 2010 also noted the work of the CSA and IIROC and added that the regulators were taking into account emerging issues relating to high frequency trading, co-location and outsourcing as well as regulatory initiatives in the US and elsewhere, including, modified NASDAQ Rule 4611 and the SEC’s Proposed Rule 15c3-5. According to the update, the principles contained in the Consultation Report on Direct Electronic Access, published by the Technical Committee of IOSCO in February 2009 and those contained in Principles for Direct Electronic Access to Markets, the Final Report of the Technical Committee of IOSCO, issued in August 2010 will also inform the policy development process.

SEC proposes changes to "accredited investor"

On January 25, the U.S. SEC proposed amendments to the definition of accredited investor in accordance with the Dodd-Frank Act. Specifically, under the SEC's proposal, while an individual would still need to have a net worth of at least $1 million, individually or jointly with a spouse, to meet the threshold, the amended requirements would now exclude the value of the individual's primary residence from the calculation. Comments on the proposal are being accepted until March 11, 2011.

In Canada, the definition of "accredited investor" in National Instrument 45-106 Prospectus and Registration Exemptions includes individuals with financial assets exceeding $1 million (excluding primary residence) and those with net assets of at least $5 million (including net value of primary residence).

IOSCO releases principles on point of sale disclosure

The Technical Committee of the International Organization of Securities Commissions (IOSCO) released a report last week setting out principles designed to assist market authorities when considering requirements regarding point of sale disclosure. Specifically, the principles articulated by the report for disclosure of key information are:

  1. Key information should include disclosures that inform the investor of the fundamental benefits, risks, terms and costs of the product and the remuneration and conflicts associated with the intermediary through which the product is sold. Such product disclosure could include the name of the investment and type of product, the risk and reward profile of the product and its fees and costs.
  2. Key information should be delivered, or made available, for free, to an investor before the point of sale, so that the investor has the opportunity to consider the information and make an informed decision about whether to invest.
  3. Key information should be delivered or made available that is appropriate for the target investor.
  4. Disclosure of key information should be in plain language and in a simple, accessible and comparable format to facilitate a meaningful comparison of information disclosed for competing collective investment scheme products.
  5. Key information disclosures should be clear, accurate and not misleading to the target investor. Disclosures should be updated on a regular basis.
  6. In deciding what key information disclosure to impose on intermediaries and product producers, regulators should consider who has control over the information that is to be disclosed.

Closer to home, as we discussed in December, the Ontario Minister of Finance has now approved amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure, (first published in October 2010 and approved with minor changes) to implement point of sale disclosure for mutual funds. These amendments became effective on January 1.

SEC adopts say-on-pay rules

Yesterday, the SEC announced that it was adopting rule amendments that would require issuers to conduct: (i) a shareholder advisory vote to approve the compensation of executives at least once every three calendar years beginning with the first annual shareholders' meeting taking place on or after January 21, 2011; (ii) a shareholder advisory vote on the frequency of executive compensation votes at least once every six calendar years; and (iii) a shareholder advisory vote on golden parachute arrangements in connection with merger transactions. The amendments to the Securities Exchange Act of 1934 would also impose various disclosure requirements. Smaller reporting companies, however, would not be subject to the first two requirements described above until their first annual or other meeting of shareholders occurring on or after January 21, 2013.

As we discussed in October of last year, the SEC released draft proposals in the fall and the final amendments take into account feedback received.

IIROC publishes circuit breaker levels for Q1 2011

The Investment Industry Regulatory Organization of Canada (IIROC) today published Notice 11-0001 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for the first quarter of 2011 are 1,150 points, 2,300 points and 3,450 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%) - 1,350 points; Level 2 (20%) - 2,700 points and Level 3 (30%) - 4,000 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. would result in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

SEC proposes disclosure rules for resource extraction issuers

The U.S. SEC proposed rules last week that would require domestic and foreign issuers that must file annual reports with the SEC and that engage in the commercial development of oil, natural gas, or minerals, to disclose certain payments made to the U.S. and foreign governments. The types of payments that would have to be disclosed include taxes, royalties, fees and bonuses. The proposed rules stem from Dodd-Frank amendments to the Securities Exchange Act of 1934. The SEC is accepting comments on the proposed rules until January 31, 2011.

SEC seeks to strengthen investment adviser oversight

On November 19, the SEC announced new rules to give effect to provisions of Dodd-Frank that amend the Investment Advisers Act of 1940. Specifically, the provisions include increasing the asset threshold for advisers to register with the SEC and repealing the private adviser registration exemption. Private advisers able to rely on one of the new exemptions from registration under Dodd-Frank, however, would still be required to satisfy certain reporting requirements.

The SEC also proposed rules to implement the new exemptions under Dodd-Frank, including one available to investment advisers that solely advise private funds if the adviser has assets under management in the United States of less than $150 million. A further exemption would be available to foreign private advisers that: (i) have no place of business the United States; (ii) have fewer than 15 U.S. clients and private fund investors; (iii) have less than $25 million in aggregate assets under management from U.S. clients and private fund investors; and (iv) do not hold themselves out generally to the public in the U.S. as an investment adviser. The SEC's proposals would also clarify the application of this exemption by defining a number of terms in the statutory definition of foreign private adviser.

SEC extends conflict of interest exemption for NRSROs

Our colleague Jason Kroft has published an article on our structured finance law blog regarding the recent SEC extension for nationally recognized statistical rating organizations from conflict of interest requirements in Rule 17g-5(a)(3) of the Securities Exchange Act of 1934. The post can be found here.

SEC proposes whistleblower program

On November 3, the U.S. Securities and Exchange Commission released a proposal to reward individuals that provide information that leads to successful SEC enforcement action in which monetary sanctions total more than $1 million. The proposal, emanating from Dodd-Frank, also includes provisions to discourage whistleblowers from bypassing a company's compliance program. For more information on the implementation of Dodd-Frank, see the SEC's intended schedule for planned rule proposals.

U.K. Takeover Panel proposes changes to Takeover Code

Earlier this year, the Code Committee of the U.K. Panel on Takeovers and Mergers released a Consultation Paper setting out suggestions for possible amendments to the Takeover Code and requesting public feedback. The Consultation Paper resulted in an unprecedented number of responses and on October 21, the Code Committee issued a report outlining its conclusions on the principal issues considered. Notably, the Code Committee focused on comments made to the effect that it has become to easy for “hostile” offerors to succeed and on the potential for the outcome of an offer to be unduly influenced by the actions of “short-term” investors, concluding that hostile offerors can obtain a tactical advantage over the target to the detriment of the target and its shareholders. In light of this conclusion, the Code Committee intends to move forward with proposals that are aimed at reducing this tactical advantage and improving the offer process to better consider the position of persons, in addition to target shareholders, who are affected by the takeover.

Specifically, the Code Committee recommended: 

  1. Increasing the protection for offeree companies against protracted "virtual bid" periods whereby a potential offeror announces that it is considering making an offer but doesn't commit to doing so.  The proposals would require that potential offerors be named in the announcement following an approach, which would initiate an offer period. Except with consent of the Takeover Panel, the potential offeror would then have four weeks to clarify its intentions;
  2. Strengthening the position of the offeree company by prohibiting deal protection measures and inducement fees other than in certain limited cases. According to the Code Committee, contractual protections (such as undertakings given by the target to the offeror to take or refrain from taking certain actions) have detrimental effects for offeree company shareholders. The proposals would also clarify that offeree company boards are not limited in the factors that they may take into account in providing their opinion and recommendation on the offer;
  3. Increasing transparency and improving the quality of disclosure by requiring the disclosure of offer-related fees and requiring further financial disclosure with respect to offerors and the financing offers; and
  4. Providing greater recognition of the interests of the offeree company employees by improving the quality of disclosure with respect to the offeror's intentions and improving the ability of employee representatives to make their views known. In this regard, the Committee recommended requiring that statements regarding the offeror’s intentions about the target and its employees, locations of business and fixed assets be expected to hold true for at least one year following the offer becoming or being declared wholly unconditional.

According to the report, the Code Committee will now publish further consultation papers setting out the proposed amendments in full.

SEC releases security-based swap proposals

On November 19, the U.S. Securities and Exchange Commission proposed new rules that would require security-based swap data repositories (SDRs) to register with, and provide swap data to, the SEC. The proposal would also require SDRs to accept transaction data and maintain it for at least five years after the expiration of the applicable swap. The SEC has also proposed rules requiring parties to security-based swap transactions to report information regarding each transaction to a registered SDR, which would then be required to publicly disseminate certain information regarding the transaction. The proposals are being made pursuant to Dodd Frank, which authorizes the SEC to regulate security-based swaps. According to the SEC, "[t]aken together, the rules ... seek to provide improved transparency to regulators and the markets through comprehensive regulations for [security-based swaps] transaction data and SDRs." Meanwhile, the Commodity Futures Trading Commission is planning on similar rules with respect to swaps falling under its jurisdiction.

See Release No. 45-63347 - Security-Based Swap Data Repository Registration, Duties, and Core Principles and No. 34-63556 - Regulation SBSR - Reporting and Dissemination of Security-Based Swap Information.

CSA members sign agreement with Chinese insurance regulator

The Canadian Securities Administrators announced last week that eight of its members (the provincial regulators but for Newfoundland and PEI) signed a regulatory cooperation agreement with the China Insurance Regulatory Commission. According to the CSA release, the agreement "paves the way for Chinese insurers to invest in financial products on Canadian markets regulated by CSA participating jurisdictions." The agreement is currently in effect in seven jurisdictions and, pending ministerial approval, will take effect in Ontario on January 12, 2011.

SEC extends date for compliance with new short sale rule

Last week, the U.S. SEC announced that it was extending the date for compliance with its new short sale rule. The change in date is intended to provide more time for exchanges to modify their procedures and market participants to program and test systems for implementation. The new rule, which will restrict the prices at which a stock can be sold short if the stock's price 10% or more in one day, will now take effect on February 28, 2011.

SEC proposals on ABS may dampen private placements into U.S.

Our colleague Mike Rumball has published a number of posts on our Structured Finance blog regarding the recent proposals by the U.S. Securities and Exchange Commission regarding asset-backed-securities. His latest considers the potential dampening effect on private placements into the U.S. that may result from the proposed requirement that issuers perform a review of the assets underlying an ABS and disclose the nature of the review.

IIROC publishes fourth quarter 2010 circuit breaker levels

Earlier this month, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 10-00259 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  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 have been announced for the fourth quarter of 2010 as 1,050 points, 2,100 points and 3,150 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,200 points; Level 2 (20%) - 2,450 points and Level 3 (30%) - 3,650 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

SEC releases executive compensation proposals

The U.S. Securities and Exchange Commission (SEC) last week released a proposal that, among other things, would require issuers that are subject to federal proxy rules to conduct: (i) a shareholder advisory vote to approve the compensation of executives at least once every three years; (ii) a shareholder advisory vote on the frequency of executive compensation votes at least once every six years; and (iii) a shareholder advisory vote on golden parachute arrangements in connection with merger transactions. The SEC's proposal, which result from an amendment to the Securities Exchange Act of 1934 emanating from the recent Dodd-Frank Act, would also impose various disclosure requirements.

Meanwhile, further proposals would require institutional investment managers that manage certain equity securities having an aggregate fair market value of at least $100 million to annually report to the SEC on how they voted proxies relating to the matters described above, namely, executive compensation, the frequency of say-on-pay votes and "golden parachute" arrangements.

The SEC is accepting public comments on the proposals until November 18.

IOSCO announces OTC derivative regulation task force

On October 15, the International Organization of Securities Commissions (IOSCO) announced the formation of a task force intended to coordinate the efforts of international regulators with respect to over-the-counter (OTC) derivatives markets. Specifically, the Task Force on OTC Derivatives Regulation will be charged with developing consistent international standards, coordinating other related international initiatives and serving as a centralized group within IOSCO for the consultation and coordination generally on related issues.

The Task Force's work, to follow a phased approach will include: (i) conducting a study by the end of January 2011 on exchange and electronic platform trading for derivatives; (ii) producing a report by July 2011 on data reporting and aggregation requirements; and (iii) setting out consistent international standards for OTC derivatives regulation in the certain areas.

SEC proposes rules for security-based swaps

On Wednesday, the U.S. Securities and Exchange Commission published proposed Regulation MC under the Securities Exchange Act of 1934, intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities and national securities exchanges that post or make available for trading security-based swaps. Under proposed Regulation MC, the agencies, facilities and exchanges noted above would be required to adopt ownership and voting limitations as well as certain governance requirements. Comments are being accepted by the SEC for 30 days after the date of the proposal's publication in the Federal Register.

The SEC also adopted an interim final rule requiring that security-based swap transactions that were entered into before the July 21, 2010  signing of the Dodd-Frank Act (and which had not expired as of that date) be reported to the SEC or a registered security-based swap data repository. According to SEC Chairman Mary Schapiro, "[t]his interim final rule provides a means for the Commission to gain a better understanding of the security-based swap markets, including their size and scope".

SEC proposes requiring issuers to review assets underlying ABS

The Securities and Exchange Commission (SEC) issued a proposal this week to require issuers of asset-backed securities to perform a review of the assets underlying the relevant securities and publicly disclose the review's findings and conclusions. While the proposal would not dictate the level or type of review to be performed, the SEC expects that the "issuer's level and type of review ... may vary depending on the circumstances." The SEC is accepting public comment on its release until November 15.

FSA proposes changes to complaints handling standards

On September 30, 2010, the U.K. Financial Services Authority (FSA) released a consultation paper proposing changes to its rules regarding how financial firms handle consumer complaints. Specifically, the FSA proposed: (i) abolishing the current two-stage complaints handling process; (ii) requiring firms to identify a senior individual responsible for complaints handling; (iii) setting out guidance regarding how firms can satisfy rules relating to root cause analysis of complaints received; (iv) providing guidance regarding the requirement that firms take into account decisions of the ombudsman service and other material when resolving complaints; and (v) increasing the ombudsman service's award limit from £100,000 to £150,000. The changes are proposed to be implemented between August 2011 and July 2012 and would, according to the FSA, "improve how customers are treated when they complain to firms, and ultimately lead to increased consumer confidence in financial services".

In Canada, changes to IIROC's Dealer Member Rules requiring its members to designate a complaints officer and establish complaint-handling procedures went into effect on February 1 of this year. Changes to the MFDA policy regarding complaint handling also took effect on February 1. The CSA have also proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions and the related companion policy with respect to client complaints and dispute resolution. While these provisions currently apply to all registrants, one of the proposed amendments would exempt IIROC and MFDA members from the relevant sections of NI 31-103CP now that MFDA and IIROC rules have come into effect.

Basel Committee releases corporate governance principles

The Basel Committee on Banking Supervision yesterday released guidance intended to assist banks in enhancing their corporate governance frameworks. Principles for enhancing corporate governance provides guidance with respect to such issues as the responsibilities of the board, board qualifications, risk management and internal controls and the board's oversight of a compensation system's design and operation. The document also provides guidance respecting the role of supervisors.

According to the Basel Committee, the principles "address fundamental deficiencies in bank corporate governance that became apparent during the financial crisis." A consultative version of the document was published in March 2010.

SEC and CFTC release joint report on May 6 market volatility

The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) released a joint report on Friday outlining their findings respecting the extreme market volatility of May 6, 2010. According to the report, the rapid execution of an automated sell program concerning a large number of futures contracts by a large fundamental trader during a time of high volatility and thinning liquidity was a main contributor to the day's events. The selling pressure from the automated sell program helped cause a liquidity crisis in the contracts and in individual securities.

Meanwhile, CFTC Chairman Gary Gensler stated yesterday that a joint committee of the CFTC and SEC has been asked to consider the report and make recommendations. Mr. Gensler specifically mentioned that he expects to hear recommendations with respect to: (i) requiring executing brokers to have an obligation to enter and exit in an orderly manner; (ii) increasing visibility into the full order book, either in aggregate or in detail; and (iii) potential revisions to market pauses, either for single exchanges or for cross-market circuit breakers.

The Investment Industry Regulatory Organization of Canada released its review of the day's market volatility last month.

EC releases short sales proposal

Last month, the European Commission unveiled a proposed regulation intended to address short selling and certain aspects of credit default swaps. According to the EC, its proposal would, among other things, improve transaction transparency, provide for a coordinated European framework and address specific risks of naked short selling. If adopted, the regulation is expected to take effect on July 1, 2012.

For more information, see the EC's press release, frequently asked questions, text of the EC proposal, the impact assessment and the summary of impact assessment.

FINRA proposes allowing all-public panel arbitrations

On September 28, the U.S. Financial Industry Regulatory Authority (FINRA) announced that it will file a rule proposal with the Securities and Exchange Commission next month that will allow investors to opt for all-public panels in arbitration claims. According to FINRA, "[g]iving each individual investor the option of an all-public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process".

In recent months, the Investment Industry Regulatory Organization of Canada (IIROC) has also been considering changes to its arbitration program. A review of the program was initiated in December 2009, while a request for comments on specific changes was released in August 2010.

NYSE Commission outlines corporate governance principles

The New York Stock Exchange's Commission on Corporate Governance released a report last week that identified core governance principles it believed could be widely accepted and supported by issuers, investors, directors and other market participants. The Commission, formed in response to the financial crisis of 2008 and 2009, considered numerous issues, including the proper role and scope of a director's authority, management's responsibility for governance and the relationship between a shareholder's trading activities, voting decisions and governance.

Ultimately, the Commission achieved a consensus on ten principles, namely:

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SEC amends selective disclosure rules by removing credit rating agency exemption from Regulation FD

In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Securities and Exchange Commission (SEC) today published a final rule amending Regulation FD to remove the exemption previously available in respect of disclosure made to credit rating agencies.

In order to prevent selective disclosure, Regulation FD requires public disclosure of any material nonpublic information that is provided by an issuer or those acting on its behalf to certain enumerated persons, including securities market professionals. In order to implement Section 939B of the Dodd-Frank Act, Regulation FD is being amended to remove Rule 100(b)(2)(iii) of Regulation FD, which generally exempts issuers from having to make such disclosure if the material nonpublic information is provided to a credit rating agency under certain circumstances. Given the Dodd-Frank Act imposes a 90-day deadline for this amendment, the amendment will be effective for disclosure made on or after its publication in the Federal Register.

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SEC proposes enhanced disclosure of short-term borrowings

Last week, the U.S. Securities and Exchange Commission (SEC) announced proposals intended to "shed a greater light" on the short-term borrowing practices of public companies. Specifically, the proposals would require all companies that provide MD&A disclosure to provide quantitative information regarding: (i) the amount of short-term borrowings outstanding at the end of the reporting period and the weighted average interest rate on those borrowings; (ii) the average amount outstanding during the period and the weighted average interest rate on those borrowings; and (iii) the maximum month-end amount of short term borrowings during the reporting period. With respect to the last requirement, financial companies would have to provide the maximum daily, rather than month-end, amount of short-term borrowings. Companies would also be required to provide quantitative information regarding the arrangements of their short-term borrowings.

Of particular note for Canadian companies, foreign private issuers, other than MJDS filers, would be subject to substantially similar requirements, but without the requirement for quarterly reporting. MJDS filers, however, would be unaffected by the proposals.

According to SEC Chairman Mary Schapiro, "[u]nder these proposed rules, investors would have better information about a company's financing activities during the course of a reporting period - not just a period-end snapshot." As such, investors "would be able to evaluate the company's ongoing liquidity and leverage risks." Comments on the proposals are being accepted by the SEC for 60 days after their publication in the Federal Register.

SEC timing on Dodd-Frank implementation

The Securities and Exchange Commission has published a timetable on its website outlining its schedule for implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The timetable, which extends to July 2011, suggests a busy year of rule-making at the SEC and would see, among other things, new rules regarding shareholder votes on executive compensation proposed by the end of the year.

European Commission proposes OTC derivatives regulation

Citing the need to increase transparency and reduce counterparty and operational risk, the European Commission recently released new proposals to regulate the OTC derivatives market. Among other things, the proposals would require trades in OTC derivatives in the EU to be reported to central data centres (trade repositories) accessible to regulators. A new European Securities and Markets Authority would be responsible for registering and monitoring trade repositories, while standard OTC derivatives would have to be cleared through central counterparties. The EC expects the proposals to be promulgated by the end of 2011.

For more information, see the EC Press Release and the accompanying Impact Assessment.

SEC expands new circuit breaker rules and approves erroneous trades procedure

On September 10, the Securities and Exchange Commission (SEC) approved new rules to expand its circuit breaker pilot program, which currently applies to stocks listed in the S&P 500 Index, to all stocks in the Russell 1000 Index and certain exchange-traded funds. As we discussed in our post of May 19, the SEC's circuit breaker is tripped and stops trading in a security for a five-minute period if the security experiences a 10 percent price change over the preceding five minutes.

The SEC also approved rules clarifying the process for breaking erroneous trades. We discussed generally the nature of the SEC's original proposal in our post of June 18.

IIROC releases results of flash crash review

Pursuant to its announcement earlier this year that it would analyze the market volatility (flash crash) of May 6, the Investment Industry Regulatory Organization of Canada (IIROC) yesterday released the results of its regulatory review. IIROC's report identified a number of factors that contributed to the fateful day's trading patterns in the securities reviewed, notably, the existence of large sell imbalances, electronic trading activity in the securities, the fact that "traditional" market makers were generally not active in the securities reviewed and the triggering of stop loss orders. 

IIROC ultimately made a number of recommendations to address the issues identified, including: (i) a review of the current market-wide circuit breaker to determine whether trigger levels are appropriate and whether an independent Canadian circuit breaker level should be employed; (ii) considering whether single stock circuit breakers should be implemented; (iii) the adoption of volatility controls; (iv) considering how to effectively manage stop loss orders in the current multi-market and high-speed environment; and (v) a review of the erroneous and unreasonable price policies and procedures.

IIROC is expecting to issue a request for comments on a single stock circuit breaker in the near future. IIROC also stated that a review of the current erroneous and unreasonable price policies and procedures is currently underway and a notice will be published for comment when completed. Guidance is expected to be issued respecting the use of stop loss orders, while news on the other recommendations will be provided as work is completed.

U.S. financial regulatory reform affects Canadian issuers

As reported widely in the media and discussed here in a blog post back in July, U.S. President Barack Obama recently signed into law sweeping new legislation intended to overhaul the U.S. financial regulatory system. While the extent of the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act may not be known for years, a number of considerations for Canadian issuers are immediately evident. These include, but are not necessarily limited to, the following:

  • Changes to disclosure requirements under the Securities Exchange Act of 1934 may impact MJDS filers by imposing additional disclosure obligations. 
  • Non-U.S advisers of private investment funds will, under certain circumstances, be required to register with the SEC, which will lead to new substantive requirements for such advisers. 
  • Further rule-making by U.S. regulators under the authority of Dodd-Frank will likely also affect Canadian issuers. For example, the SEC's new proxy rules will, under certain circumstances, apply to foreign issuers that are otherwise subject to U.S. proxy rules.

As can be seen, the long arm of financial regulatory reform in the U.S. may very well reach Canadian issuers. For that reason, issuers in this country should keep abreast of developments as they come to light.

SEC considering further improvements to market structure

During a speech to the Economic Club of New York yesterday, U.S. Securities and Exchange Commission Chairman Mary Schapiro discussed the "flash crash" of May 6 and the steps taken by the SEC to strengthen equity market structure. Ms. Schapiro also outlined further steps that may be considered, including: (i)  improving circuit breaker mechanisms; (ii) high frequency trading and whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways during "tough times"; (iii) order cancellations and whether large volumes of orders, subsequently cancelled, affect price discovery, capital formation and the capital markets generally; and (iv) market fragmentation and dark trading venues.

According to Ms. Schapiro,

The important questions are "to what extent is our structure meeting or failing to meet its goals of fair, efficient and transparent markets, and how can we modify the structure to preserve the advantages and eliminate the flaws?"

SEC commissioner dissents on proxy rule

As we wrote on August 26, the U.S. Securities and Exchange Commission recently released a proxy rule that will require companies, under certain circumstances, to include shareholder nominees for director in the company's proxy materials. While SEC Chairman Mary Schapiro outlined the the rule's benefits, SEC Commissioner Troy A. Paredes provides an alternative viewpoint. Mr. Paredes argues that the rule is flawed in that it "imposes a minimum right of proxy access, even when shareholders may prefer a more limited right of access or no proxy access at all." Further comments by the commissioners can be found here.

US CFTC releases final retail forex rules

On August 30, the U.S. Commodity Futures Trading Commission (CFTC) released final rules respecting off-exchange retail foreign currency transactions. The rules, which include requirements regarding registration, disclosure, recordkeeping, financial reporting, minimum capital and other operational standards, among other things, take effect on October 18.

SEC issues report regarding credit rating methodologies

Earlier this week, the U.S. Securities and Exchange Commission (SEC) released a report cautioning nationally recognized credit rating agencies about "deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings." The report stems from an investigation into whether Moody's Investor Service, Inc. violated federal registration or antifraud provisions. The SEC also stated in the report that it will utilize new provisions in the Dodd-Frank Act "for enforcement actions alleging otherwise extraterritorial fraudulent misconduct that involves significant steps or foreseeable effects within the United States."

FSA proposes changes to regulation of trading activity

The U.K. Financial Services Authority last week published a discussion paper focusing on the prudential requirements for banks and investment firms that engage in trading activities. The paper makes recommendations in three key areas:

  1. Valuation - the FSA recommends an increased regulatory focus on valuing traded positions as an input into capital resources.
  2. Coverage, coherence and the capital framework - a change in the structure of the capital framework is recommended in order to bring greater coherence and reduce the opportunities for structural arbitrage in the banking sector and wider financial system.
  3. Risk management and modelling - the FSA recommends measures intended to improve firms' risk management and modelling standards, and ensuring that they are aligned with regulatory objectives.

The FSA is accepting comments on the discussion paper until November 26 and is expecting to issue feedback in the first half of 2011.

SEC releases final rule regarding shareholder director nominations

The U.S. Securities and Exchange Commission (SEC) yesterday announced that it is amending federal proxy rules in order to "facilitate the effective exercise of shareholders' traditional state law rights to nominate and elect directors to company boards of directors." Specifically, a new proxy rule (Rule 14a-11 under the Securities Exchange Act of 1934) will, under certain circumstances, require companies to include shareholder nominees for director in the company's proxy materials.  An ownership threshold of 3% of the voting power based on securities that are entitled to be voted, held for at least three years, will be required for a nominating shareholder or group to rely on Rule 14a-11. Further, amendments to Rule 14a-8 will narrow an exception that currently permits companies to exclude shareholder proposals that relate to elections. The final rules take into account public response to the draft proposals released by the SEC in July 2009 and will generally be effective 60 days after their publication in the Federal Register.

In describing the need for the new rules, SEC Chairman Mary Schapiro stated that

[a]s a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own...Nominating a director candidate is not the same as electing a candidate to the board. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. The critical point is that shareholders have the ability to make this choice.

Notable to Canadian companies, the amended rules will apply to foreign issuers that are otherwise subject to U.S. proxy rules unless the applicable foreign law prohibits shareholders from nominating director candidates.

Minister approves regulatory cooperation MOU

As we discussed in our post of June 16, the Ontario Securities Commission, Quebec's Autorité des marchés financiers and the U.S. Securities and Exchange Commission (SEC) recently signed a Memorandum of Understanding to facilitate the supervision of regulated entities that operate on a cross-border basis. The Minister of Finance has now approved the MOU.

IOSCO publishes report on direct market access

The Technical Committee of the International Organization of Securities Commissions (IOSCO) published its final report on for direct electronic access to markets on August 13, 2010. The report sets out principles designed to guide intermediaries, markets and regulators on pre-conditions for direct electronic access (DEA), information flow and adequate systems and controls.  The principles identified in the report include minimum customer standards, legally binding agreements between intermediaries and customers, ultimate responsibility of intermediaries for trades, disclosure of  customer identity to market authorities on request, pre and post-trade transparency and adequate systems and controls. 

CESR publishes proposals following review of MiFID

On July 29, the Committee of European Securities Regulators published a set of recommendations, pursuant to a review of the Markets in Financial Instruments Directive, intended to improve the functioning and transparency of securities markets. The recommendations include advice on equity markets, non-equity markets transparency, transaction reporting and investor protection and intermediaries.

SEC requests public comment on obligations of investment advisers

On Tuesday, the U.S. Securities and Exchange Commission (SEC) published a request for public comment for a study to evaluate

the effectiveness of existing legal or regulatory standards of care for brokers, dealers, investment advisers, and persons associated with them when providing personalized investment advice and recommendations about securities to retail investors; and whether there are gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers relating to the standards of care for these intermediaries.

Such a study is required by s. 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama last week. In Canada, most provinces and territories adopted a fiduciary standard for registrants as part of the broad registration reforms implemented last September.

UK Treasury launches financial regulation consultation

On Monday, Her Majesty's Treasury launched a consultation to gather views on the British Government's proposals to reform the UK's financial regulatory framework. As discussed in our post of June 17, the proposals would: (i) give the Bank of England the authority over macro-prudential regulation; (ii) establish a new prudential regulator, operating as a subsidiary of the Bank of England, that would regulate financial firms; and (iii) establish a new Consumer Protection and Markets Authority to regulate the conduct of financial firms providing services to consumers. The just-released consultation document provides further details regarding the proposals and asks specific questions for public comment.

SEC approves changes to adviser principal disclosure brochure

Yesterday, the Securities and Exchange Commission (SEC) approved changes to Form ADV, the principal disclosure document that registered investment advisers are required to provide to clients. According to SEC Chairman Mary Schapiro, the current form's check-the-box formal "frequently does not correspond well to an adviser's business." As such, the changes are intended to improve the information available to clients regarding those providing them with investment advice. To that end, the format of the brochure will be updated to including narrative in plain English, the content will be expanded to include topics such as fees and compensation, an adviser's disciplinary information and brokerage practices and advisers will be required to deliver brochure supplements that contain "résumé-like disclosure" regarding such things as educational background and business experience. Advisers will also be required to electronically file brochures, which will be available to the public on the SEC's website.

The amendments will be effective 60 days after publication in the Federal Register and the SEC expects that investment advisers will begin distributing and posting new brochures in the first quarter of 2011.

SEC proposes mutual fund distribution fee regulations

The Securities and Exchange Commission (SEC) yesterday announced proposals intended to improve the regulation of mutual fund distribution fees and provide enhanced disclosure for investors. Distribution fees, also known as 12b-1 fees, are fees paid by the fund out of its assets to cover distribution costs and shareholder service expenses. The proposals would limit fund sales charges, improve the transparency of fees by requiring funds to identify and more clearly disclose distribution fees, encourage retail price competition and revise fund director oversight duties. The proposals will be open to a 90-day comment period after publication in the Federal Register.

Goldman Sachs settles complaint with SEC

The U.S. Securities and Exchange Commission (SEC) announced last week that Goldman, Sachs & Co. had agreed to pay $550 million to settle charges that the company had misled investors respecting a subprime mortgage product. The settlement also requires remedial action by Goldman Sachs with respect to the company's review and approval of certain mortgage securities offerings and additional education and training of employees in this area of the company's business. For more on the case and settlement, see this article from the New York Times.

Financial regulatory reform approved by US Congress

On July 15, the U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act by a vote of 60-39. The legislation is intended to overhaul the financial regulatory system in the U.S. by improving the supervision and regulation of federal depository institutions, providing transparency to derivatives markets and setting out obligations regarding corporate governance and executive compensation.

The legislation, which was passed by House of Representatives on June 30, is now awaiting the President's signature. A brief summary of the legislation is provided by the House Financial Services Committee, while Steven M. Davidoff provides some thoughts in the New York Times' DealBook.

FSA Chairman discusses UK regulatory changes

In a speech Tuesday to the British Bankers' Association, Lord Adair Turner, Chairman of the Financial Services Authority (FSA) discussed a new approach to regulation in the U.K. Specifically, Lord Turner discussed a "major shift in philosophy" towards a "more pre-emptive and intrusive approach to supervision". This would involve analyzing trends in the economic and market environment to identify potential risks to consumers, examining firms' business models to understand the drivers of profitability, reviewing whether firms have product development and approval processes that weed out innappropriately marketed or harmful products and taking action to ensure customers are protected where incentives, structures or products are found that would likely lead to poor customer outcomes.

SEC issues concept release on proxy system

The Securities and Exchange Commission yesterday announced that it was issuing a concept release to seek public comment on the U.S. proxy system. Specifically, the comprehensive review focuses on the accuracy, transparency and efficiency of the voting process, communications and shareholder participation and the relationship between voting power and economic interest. The SEC is accepting public comment for a 90-day period.

FINRA to increase amount of broker information available to public

The U.S. Financial Industry Regulatory Authority (FINRA) yesterday announced an expansion in the amount of information that will be available to the public regarding current and former security brokers through its online BrokerCheck service. Specifically, the changes will increase the number of customer complaints that are reported publicly by disclosing historic complaints back to 1999, expand the disclosure period for former brokers from two years to ten years, make certain information regarding former brokers permanently available and formalize the process for brokers to dispute the accuracy of the information. The expansion of BrokerCheck is expected to be complete by the end of the year.

SEC reopens comment period on flash order proposal

As we discussed in our post of September 18, 2009, the U.S. Securities and Exchange Commission published a proposal last year to eliminate the exception under Rule 602 of Regulation NMS under the Securities Exchange Act of 1934 for the use of flash orders by equity and options exchanges.

On July 2, the SEC reopened the comment period on the proposal for 30 additional days.

IIROC publishes third quarter 2010 circuit breaker levels

On July 2, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 10-0191 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  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 have been announced for the third quarter of 2010 as 1,000 points, 2,050 points and 3,050 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%) - 1,150 points; Level 2 (20%) - 2,350 points and Level 3 (30%) - 3,500 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

G-20 Toronto Summit declaration speaks of financial reform

On June 27, the G-20 Toronto Summit concluded with the release of a Declaration by members outlining next steps "to ensure a full return to growth with quality jobs, to reform and strengthen financial systems, and to create strong, sustainable and balanced growth." With respect to financial sector reform, the Declaration speaks of four pillars: (i) a strong regulatory framework, including improved transparency and regulatory oversight of hedge funds, credit rating agencies and OTC derivatives; (ii) effective supervision; (iii) the resolution and addressing of systemic institutions; and (iv) transparent international assessment and peer review. 

The next G-20 Summit is scheduled for November 11-12 in Seoul.

CFTC and ASC sign cooperation agreement

On June 16, the Alberta Securities Commission and the U.S. Commodity Futures Trading Commission (CFTC) announced the signing of a Memorandum of Understanding intended to enhance the cooperation between the two regulators in connection with their functions relating to the supervision of covered clearing organizations. The MOU was executed on June 10.

CFTC proposes rule regarding proximity based advantages

On June 11, the U.S. Commodity Futures Trading Commission (CFTC) announced that it was proposing a rule that would require that co-location and proximity hosting services be available to all qualified market participants willing to pay for the services. Comments on the proposals are being accepted until July 12, 2010.

European Parliament calls for stricter derivatives rules

The European Parliament adopted a resolution last week calling for more transparency and stricter rules respecting derivative trading. The resolution was passed in anticipation of legislative proposals expected in September from the European Commission on the subject.

US federal banking regulators issue final guidance on compensation

The U.S. Federal Reserve, along with other banking regulators, issued final guidance yesterday "to ensure that incentive compensation arrangements at financial organizations take into account risk and are consistent with safe and sound practices." The guidance adopts three main principles, being that: (i) incentive compensation arrangements at a banking organization should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk; (ii) these arrangements should be compatible with effective controls and risk-management; and (iii) these arrangements should be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.

SEC announces proposed amendments to rules for clearly erroneous trades

The U.S. Securities and Exchange Commission (SEC) announced yesterday proposed amendments to the Financial Industry Regulatory Authority rules respecting clearly erroneous transactions in exchange-listed securities. Under the current rules, a trade may be found to be clearly erroneous where the price of a transaction deviates from the consolidated last sale price for the security beyond a specified amount. These thresholds depend on the consolidated last sale price of the security and whether trading occurs during or outside normal market hours. For example, where the price of a security is up to $25, a deviation of 10% or more during normal market hours would be considered clearly erroneous.

The amendments would, among other things, establish different thresholds and standards to handle large-scale market events and would remove FINRA's flexibility to use different thresholds in unusual circumstances. In circumstances of a multi-stock event involving 20 or more securities, FINRA may use a reference price other than the consolidated last sale and will nullify transactions at prices equal to, or greater than, 30% of the reference price.

The amendments are a further response to the market volatility that occurred on May 6 and follow the recent approval of stock-by-stock circuit breakers in the U.S. We originally discussed the circuit breaker proposals in our post of May 19.

UK to overhaul financial regulation

In a June 16 speech at the Lord Mayor's Dinner for Bankers & Merchants of the City of London, the Chancellor of the Exchequer outlined a plan to reform financial regulation in Britain. Specifically, the Chancellor announced a plan to abolish the current tripartite system of regulation, which consists of the Financial Services Authority (FSA), the Bank of England and the Treasury, and wind down the FSA.

In place of the current system, an independent Financial Policy Committee at the Bank of England would be tasked with macro-prudential regulation.  According to the Secretary to the Treasury, Mark Hoban, "[o]nly central banks have the broad macroeconomic and markets understanding, the authority and the knowledge required to make macro-prudential judgments." Meanwhile, a new prudential regulator, operating as a subsidiary of the Bank of England would regulate financial firms, including banks, investment banks and insurance companies. Finally, a new Consumer Protection and Markets Authority would be established to regulate the conduct of financial firms providing services to consumers.

According to the Chancellor, the transition to the new regulatory system is intended to be completed in 2012.

SIFMA releases systemic risk oversight study

The U.S. Securities Industry and Financial Markets Association (SIFMA) recently released the results of a study intended to "assist regulators and policymakers in preparing for expanded systemic risk oversight" and enhance the ability of regulators to respond to future systemic risk events. The study was based on interviews with a number of organizations, including regulators, securities broker-dealers, insurers and hedge funds.

SEC, AMF and OSC sign regulatory cooperation arrangement

On Monday, the U.S. Securities and Exchange Commission (SEC), Quebec's Autorité des marchés financiers and the Ontario Securities Commission (OSC) announced the signing of a memorandum of understanding to facilitate the supervision of regulated entities that operate on a cross-border basis. The parties intend to consult, cooperate and exchange information related to the supervision and oversight of such regulated entities and the MOU is intended to support and facilitate such cooperation.

IOSCO publishes revised objectives and principles for global regulators

The International Organization of Securities Commissions (IOSCO) yesterday published a revised Objectives and Principles of Securities Regulation to incorporate principles based on "lessons learned from the recent financial crisis". Eight new principles were added to the document, including principles related to hedge funds, credit rating agencies and auditor independence. According to IOSCO the principles "outline the basis of an appropriate, effective and robust securities regulatory system".

Six securities authorities join IOSCO consultation and cooperation MOU

The International Organization of Securities Commissions (IOSCO) announced today that securities regulatory authorities from South Korea, Uruguay, Iceland, the Maldives, Saudi Arabia and Syria have been invited (the latter four states pending membership approval) of the IOSCO Multilateral Memorandum of Understanding concerning Consultation, Cooperation and the Exchange of Information (MMoU). The MMoU provides a mechanism through which securities regulators may exchange information and assist one another in enforcing compliance with their respective securities laws and regulations.

SEC releases update on circuit breaker proposals

In our post of May 19, we discussed the recent SEC proposals that would see a five minute pause to trading in individual stocks that experienced a 10 percent change in price over a five minute period. On June 4, the SEC issued a statement stating that staff is reviewing comments received and that staff expects to present proposals this week.

SEC proposes consolidated audit trail system

Citing the lack of a central database containing comprehensive and readily accessible data regarding orders and executions, the U.S. Securities and Exchange Commission proposed a new rule on May 26 that would require SROs to establish a consolidated audit trail system. Under the new system, exchanges and FINRA, as well as their members, would be required to provide certain information to the central repository regarding each quote and order in a National Market System (NMS) security.

Such a consolidated system would be intended to: (i) provide regulators direct and timely access to uniform consolidated order and execution information for all orders in NMS securities from all participants across all markets; (ii) enable SROs to better fulfill their regulatory responsibilities to oversee their markets and members; and (iii) enable the SEC to better carry out its oversight of the NMS for securities.

The SEC is accepting public comments on the proposal for 60 days after its publication in the Federal Register.

CESR increases coordination of members' market surveillance efforts

On May 25, the Committee of European Securities Regulators (CESR) released a statement describing the "intensifying close co-ordination of its members' market surveillance efforts" in light of recent market volatility in euro denominated debt instruments. The CESR also stated that it is of the view that structural reforms should be "rapidly introduced to enhance the transparency, organisation and functioning" of the bond and CDS markets, which are currently largely over-the-counter. According to the CESR, it is also working on measures to enhance the "organisation and integrity of OTC derivatives markets".

FINRA proposes enhanced oversight of firms' back offices

The U.S. Financial Industry Regulatory Authority (FINRA) released a Regulatory Notice on May 26 requesting comments on proposed rule amendments intended to enhance the oversight of broker-dealers' back office operations. The proposed amendments would create a registration category for operations professionals engaged in, or supervising, activities relating to sales and trading support and the handling of customer assets. A new qualification exam for operations professionals would be established as well as continuing education requirements. Comments on FINRA's proposal are being accepted until July 12, 2010.

IOSCO publishes Principles Regarding Cross-Border Supervisory Cooperation

In light of concerns that national financial regulations may not sufficiently prevent future financial crises, the Technical Committee of the International Organization of Securities Commissions (IOSCO) yesterday published a report entitled "Principles Regarding Cross-Border Supervisory Cooperation". The report considers how regulators can enhance cross-border cooperation so as to "better supervise the entities that they regulate that have expanded their operations across borders." Specifically, the report provides a set of principles intended to guide cooperative supervisory arrangements among international regulators.

Germany bans naked short selling

The Globe and Mail, among other media outlets, is reporting today that Germany has banned naked short selling of euro-denominated government bonds, credit default swaps based on the bonds and shares of the country's ten most important financial institutions. The ban, which apparently took effect at midnight, will run until March 31, 2011. According to Reuters, the move caught Germany's European Union colleagues off guard and elicited a particularly strong response from the French Finance Minister, who stated that France would not introduce a similar ban. Whether other EU countries follow suit, however, remains to be seen.

SEC announces circuit breaker rule proposals

As we discussed yesterday, recent media reports suggested that the U.S. Securities and Exchange Commission (SEC) was planning to announce proposals for new circuit breaker rules to address issues stemming from the market volatility of May 6. Such proposals were subsequently announced late yesterday afternoon.

Under the proposed rules, which reflect a consensus among the various U.S. stock exchanges and the Financial Industry Regulatory Authority (FINRA), trading in a stock would be paused for five minutes where the stock experienced a 10 percent change in price over a five minute period. The five minute pause would be intended to "give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price and resume trading in a fair and orderly fashion." If approved by the SEC after the comment period, the new rules would be in effect on a pilot basis through December 10, 2010, during which time SEC staff would study, among other things, the impact of other trading protocols.

The SEC and Commodity Futures Trading Commission (CFTC) also released their preliminary findings yesterday regarding the "unusual market events" of May 6. While the events of that day continue to be reviewed, the report focuses on the following "hypotheses and findings": (i) the possible linkage between the decline in the prices of stock index products and the simultaneous and subsequent waves of selling in individual securities; (ii) a generalized severe mismatch in liquidity; (iii) the extent to which the liquidity mismatch may have been exacerbated by disparate trading conventions among various exchanges; (iv) the need to examine the use of "stub quotes"; (v) the use of market orders, stop loss market orders and stop loss limit orders that, coupled with sharp price declines, might have contributed to market instability; and (vi) the impact on Exchange Traded Funds.

US to announce new market circuit breakers

The Globe and Mail is reporting today that new circuit breaker rules will soon be introduced by the U.S. Securities and Exchange Commission in an attempt to prevent the type of market volatility seen on May 6th. According to the Globe, the circuit breakers may be operational as early as June 14.

CPSS and IOSCO release two reports regarding OTC derivatives

The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) released two reports yesterday regarding OTC derivatives. The first, Guidance on the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties to OTC derivatives CCPs, provides guidance to central counterparties clearing OTC derivatives in applying the Technical Committee's 2004 recommendations. Considerations for trade repositories in OTC derivatives markets, meanwhile, provides a set of considerations for trade repositories in OTC derivatives markets and relevant authorities.

IOSCO releases consultation paper regarding credit rating agencies

The Technical Committee of the International Organization of Securities Commissions (IOSCO) recently released a consultation report addressing recent regulatory initiatives that impact credit rating agencies. Specifically, the report is intended to evaluate whether, and if so how, international initiatives implement the four IOSCO principles regarding credit rating agencies, being: (i) quality and integrity in the rating process; (ii) independence and conflicts of interest; (iii) transparency and timeliness of ratings disclosure; and (iv) confidential information.

IOSCO is accepting public comments on the report until August 6, 2010.

Regulators respond to market volatility

As regulators continue to investigate last Thursday's extreme market volatility, the Investment Industry Regulatory Organization of Canada (IIROC) has announced that it has re-priced or cancelled various trades occurring during the market slide. Various U.S. markets have also announced that they would cancel trades (see for example announcements from NYSE Arca and NASDAQ). Meanwhile, the Securities and Exchange Commission (SEC) announced yesterday that it has met with the leaders of the Financial Industry Regulatory AuthorityNASDAQ, BATS, Direct Edge, ISE and the CBOE, and that all parties have agreed on a structural framework for strengthening circuit breakers and handling erroneous trades.

Today, the SEC and Commodity Futures Trading Commission announced the formation of a joint committee to address "emerging regulatory issues", with the first item on the committee's agenda being a review of last Thursday's market events. Meanwhile, SEC Chairman Mary Schapiro testified before the Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises this afternoon to summarize the events of May 6, provide an overview of the current market structure and discuss various regulatory tools to be considered "in determining how best to maintain fair and orderly financial markets and to prevent severe market disruptions in the future."

CFTC issues advisory regarding speculative position limits

On May 7, the U.S. Commodity Futures Trading Commission (CFTC) issued an Advisory to alert market participants regarding their "ongoing legal obligations to comply with speculative position limits." Specifically, the CFTC reaffirmed that such limits apply on an intraday as well as an end-of-day basis and that traders whose positions exceed the applicable speculative position limit "at any time during the day" (emphasis in text) are in violation of the pertinent regulations even if their positions are reduced below the limit by the end of the day.

TMX outlines objection to US-style short sale regulation

On May 3, TMX Group Inc., released a letter written to the Canadian Securities Administrators (CSA) outlining its position on the regulation of short sales in Canada in light of recent U.S. amendments on the subject.

Specifically, TMX recommended against adopting SEC-style amendments incorporating a price test trigger and stated that the "additional regulation of short sales in Canada is not warranted." In support of its views, TMX outlined findings from an analysis it performed on securities inter-listed on the TSX and a U.S. exchange. TMX found that on average, at least one inter-listed security would have triggered the SEC-style short sale circuit breaker every day. According to TMX, however, "it is highly unlikely that manipulative shorting occurs every day in one of the inter-listed securities." Thus, TMX urged the CSA "to take a decision on short sales that is contrary to the SEC's politically driven amendment to Reg SHO". Citing UMIR amendments to address failed trades and the strong real-time surveillance and enforcement capabilities of IIROC, TMX further outlined its support for "the removal of the short sale price test for all exchange-listed securities in order for Canadian participants to operate under one rule."

FINRA to perform market oversight functions of NYSE Regulation

It was announced on May 4 that the U.S. Financial Industry Regulatory Authority (FINRA) would be assuming the market surveillance and enforcement functions currently conducted by NYSE Regulation. Under the agreement, which is subject to review by the Securities and Exchange Commission, FINRA would assume the regulatory functions for NYSE Euronext's U.S. equities and options markets, being the NYSE, NYSE Arca and NYSE Amex.

Eight Canadian securities commissions sign arrangement with Chinese regulator

On April 23, the Canadian Securities Administrators (CSA) announced the recent signing by eight members of the CSA of a Supervisory Cooperation Arrangement with the China Banking Regulatory Commission with respect to a program that allows Chinese institutional investors to invest pooled funds in approved overseas financial markets. According to Jean St-Gelais, Chair of the CSA, the arrangement "paves the way for Chinese commercial banks to conduct investments on behalf of their clients with Canadian-based financial institutions" in participating jurisdictions. The arrangement is currently in effect in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Quebec and Saskatchewan and, pending ministerial approval, is scheduled to take effect in Ontario on June 22, 2010.

FINRA releases guidance for investigating private placements

The U.S. Financial Industry Regulatory Authority (FINRA) yesterday published guidance regarding the suitability, disclosure and other obligations of broker-dealers recommending securities in offerings made under the SEC's Regulation D (private placements). While Regulation D provides exemptions from the registration requirements of the Securities Act of 1933, FINRA's notice stresses that broker-dealers must still conduct a reasonable investigation of the issuer and the securities being recommended and comply with other applicable requirements, including suitability and advertising and supervisory rules. Specifically, the notice provides a list of best practices that have been adopted by other firms.

Senate Committee introduces OTC derivatives proposal

The U.S. Senate Committee on Agriculture, Nutrition and Forestry introduced a draft bill today intended to "bring 100% transparency" to financial markets. According to the news release of Committee Chair Blanche Lincoln, D-Ark, the bill includes mandatory clearing and trading requirements, requires real-time reporting of derivatives trades and would prohibit federal assistance to banks that "engage in risky derivative deals".  Thus, the proposed legislation appears to take a tougher stance in its attempts to regulate financial institutions than the legislative proposals emanating from the Senate Committee on Banking, Housing, and Urban Affairs.

The U.S. House of Representatives passed comprehensive financial reform legislation in December 2009, which addressed OTC derivatives trading, but the Senate has yet to pass the House Bill or agree to a different proposal. The latest indications, however, are that the Senate is preparing for a vote in the upcoming weeks. What the final regulations will look like, however, remains unclear.

SEC releases proposals relating to options markets and large trader reporting

The U.S. Securities and Exchange Commission (SEC) yesterday proposed creating a "large trader" reporting system that would identify large market participants, collect information regarding their trades and analyze their trading activity. Traders would generally be considered to fit the "large trader" categorization where their transactions in exchange-listed securities equalled or exceeded two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. The proposals would require such traders to identify themselves to the SEC and impose recordkeeping and reporting obligations on the part of broker-dealers.

Meanwhile, the SEC also proposed extending two investor protection measures, currently existing in stock markets, to options markets. Specifically, the SEC proposed prohibiting an option exchange from unfairly impeding access to displayed quotes and limiting the fees that an options exchange can charge those wishing to access a quote.

Comments on the proposals are being accepted for 60 days after their publication in the Federal Register.

IMF releases chapter on reducing risk respecting OTC derivatives

The International Monetary Fund (IMF) recently released a chapter of its semiannual Global Financial Stability Report dealing with over-the-counter derivatives. Specifically, the chapter considers the role of central counterparties in making OTC derivatives markets "safer and sounder" and reducing counterparty risk.

US Supreme Court rules on fiduciary duty of investment advisers

On March 30, the Supreme Court of the United States released its decision in the case of Jones v. Harris. The case considered the fiduciary duty imposed on mutual fund advisers by section 36 of the Investment Company Act of 1940 (ICA) with respect to the receipt of compensation for services. This particular issue has been the topic of recent judicial attention.

Ultimately, the Supreme Court accepted the basic formulation of the Gartenberg test, stating that "to face liability under §36(b), an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining." While the basic formulation of the test appeared to be relatively uncontroversial in this case, the parties disagreed on a number of points concerning its application. Thus, the Supreme Court provided guidance on a number of issues. Specifically, the Supreme Court stated that: 

  1. since the ICA requires consideration of all relevant factors concerning the fees charged, there is no categorical rule prohibiting comparisons between the fees charged by advisers to different types of clients. The weight to be allocated to such comparisons, however, depends on the circumstances and the ICA does not ensure fee parity between mutual funds and institutional clients;
  2. Courts should not rely too heavily on the fees charged by other advisers; and
  3. A court's evaluation of an investment adviser's fiduciary duty must take into account both procedure and substance. "Where a board's process for negotiating and reviewing investment-adviser compensation is robust, a reviewing court should afford commensurate deference to the outcome of the bargaining process." Where the board's process was deficient or the adviser withheld important information, however, a court may take a more rigorous look at the outcome.

Finding that the Seventh Circuit panel focused almost entirely on disclosure, the Supreme Court vacated the Circuit Court's decision and remanded the case.

The immediate decision's effect on mutual fund fees remains to be seen, and will ultimately depend on the interpretation given to the Supreme Court's findings by lower courts. Thus, the mutual fund industry will undoubtedly watch with interest as this case, and those like it, proceed through the lower courts.

SEC and IOSCO release proposals regarding asset backed securities

On April 7, the U.S. Securities and Exchange Commission (SEC) announced proposals to revise the rules respecting asset-backed securities in order to "better protect investors in the securitization market." Specifically, the proposals would make changes to the offering process, disclosure and reporting for asset-backed securities (ABS). The changes are described by the SEC as being comprehensive and imposing new burdens in order to "provide investors with timely and sufficient information...reduce the likelihood of undue reliance on credit ratings, and help restore investor confidence in the representations and warranties regarding the assets." Comments on the proposals are being accepted by the SEC for 90 days after publication of the proposals in the Federal Register.

Meanwhile, the International Organization of Securities Commissions (IOSCO) released a report yesterday entitled "Disclosure Principles for Public Offerings and Listings of Asset Backed Securities". The report is intended to "provide guidance to securities regulators who are developing or reviewing their regulatory disclosure regimes for public offerings and listings of asset-backed securities (ABS)." Specifically, the report outlines the information that should be included in any offer or listing document for a publicly offered or listed ABS.

SEC publishes FINRA proposals regarding IPO share allocations

On February 17, the U.S. Financial Industry Regulatory Authority (FINRA) filed proposed changes to its Rules with the SEC intended to prohibit abuses in the allocation and distribution of shares in IPOs. The release amends earlier FINRA proposals by addressing issues raised by comments to its earlier proposed changes. The SEC published the proposed amendments for comment on March 11.

SEC announces review of use of derivatives by funds

The U.S. SEC announced on March 25 that its staff is conducting a review of the use of derivatives by mutual funds, exchange-traded funds (ETFs) and other investment companies to determine whether additional protections for those funds are required under the Investment Company Act of 1940  (the Act) . Staff of the SEC also intend to identify if any changes to the SEC's rules or guidance may be warranted. Pending the completion of the review, SEC staff will be deferring consideration of exemptive requests under the Act to permit ETFs that would make significant investments in derivatives. 

IIROC publishes second quarter 2010 circuit breaker levels

On April 1, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  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 have been announced for the second quarter of 2010 as 1,050 points, 2,150 points and 3,200 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%) - 2,400 points and Level 3 (30%) - 3,600 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

Earn-out providing for return of assets if targets not met, rather than expressly requiring purchaser "effort", will not be rewritten just because the weak economy and other factors have made an asset return unpalatable to the seller

Airborne Health, Inc. v. Squid Soap, LP, C.A. No. 4410 VCL
Delaware Court of Chancery | Vice Chancellor Laster | November 23, 2009

Andrew S. Cunningham

This ruling by Vice Chancellor Laster of the Delaware Court of Chancery reminds us that in a commercial relationship, the contract reigns supreme. Even though it had a sympathetic story to tell, and despite some creative appeals to tort and equitable doctrines, Squid Soap couldn't get around the fact that the Asset Purchase Agreement (APA) it had negotiated with acquiror Airborne Health - with payment heavily weighted toward the earn-out - had not adequately protected it against certain unanticipated post-closing events that occurred, most notably the economic downturn.


Squid Soap had developed a child-friendly hand washing product. A hit with U.S. TV morning shows and major magazines, "Squid Soap" was soon picked up by Wal-Mart and other mass retailers. As the brainchild of a single entrepreneur, the Squid Soap business was ripe for a buyout. Despite interest from Procter & Gamble and a major hedge fund, Squid Soap selected Airborne Health, Inc., a larger entrepreneurial company, as its acquiror. Airborne had made its name with a highly successful vitamin and herb supplement that was marketed as effective against coughs and colds.

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SEC publishes staff views on no-action requests by issuers to suspend reporting obligations

The U.S. Securities and Exchange Commission published a staff legal bulletin on March 15 providing the views of its Division of Corporation Finance respecting the circumstances under which issuers may suspend their reporting obligations under section 15(d) of the Securities Exchange Act of 1934 by relying on Rule 12h-3. Citing the routine nature of no-action requests by issuers, the large body of no-action precedent and the guidance in the bulletin, the Division is of the view that, on a going-forward basis, issuers that fit within the situations identified by the bulletin and that satisfy the relevant conditions do not need a no-action response before filing the applicable form to suspend its section 15(d) reporting obligations.

FSA announces new rules on adviser commissions

The U.K. Financial Services Authority (FSA) announced new rules last week intended to improve the clarity respecting the costs charged by investment advisers. Specifically, as of 2011, firms will need to be upfront with respect to the costs of their services and will no longer be able to embed the cost of their advice in the cost of a product. Further, firms will not be permitted to accept commissions for recommending specific products. According to FSA director Sheila Nicoll, “[t]here is a need to reconnect the adviser and client, where one pays for the services of another, and without the distraction of commission. Only then can consumers have real confidence and trust in the advice they are receiving.”

U.S. Senate committee introduces financial stability bill

Earlier this month, U.S. Senator Chris Dodd, Chairman of the Senate Committee on Banking, Housing, and Urban Affairsunveiled the "Restoring American Financial Stability Act of 2010". According to Senator Dodd, the bill will (i) end "too big to fail" bailouts; (ii) create a strong and independent consumer protection watchdog; (iii) create an early warning system; and (iv) bring transparency and accountability to "exotic instruments" like hedge funds and derivatives. Of particular note, the bill also contains provisions regarding executive compensation (Subtitle E, beginning on page 868) and corporate governance (Subtitle G, beginning on page 895). A summary of the proposed legislation was also released.

Eurex receives regulatory exemption from AMF

The European derivatives exchange Eurex recently announced that Quebec's Autorité des marchés financiers (AMF) has provided a regulatory exemption allowing Eurex to offer its products in Quebec. According to the Eurex release, Quebec customers will now have direct access to trading on its exchange. 

European securities committee recommends short selling disclosure regime

Earlier this month, the Committee of European Securities Regulators (CESR) released a report recommending a pan-European short selling disclosure regime. While acknowledging that legitimate short selling plays an important role in financial markets by contributing to efficient price discovery, increasing market liquidity and facilitating hedging and other risk management activities, the report also cites concerns that it can be used in an abusive fashion. Specifically, short selling can drive down the price of financial instruments to a distorted level, contribute to disorderly markets and, especially in extreme market conditions, otherwise have an adverse impact on financial stability. In the interests of enhanced transparency about short selling activity, the objective in developing the disclosure model proposed by the disclosure requirement is to reduce or mitigate the negative consequences and risks of short selling without having an undue adverse impact on the benefits which the practice brings to markets.

The report proposes a two tier disclosure system whereby a short position reaching a specified initial threshold (0.2% of a company's issued share capital) would need to be disclosed to the relevant regulator. Incremental changes of short position of 0.1% would require further notification  to the regulator, while a second threshold (0.5%) would also trigger a public disclosure requirement.

CNSX receives offshore securities market status from SEC

The Canadian National Stock Exchange (CNSX) announced yesterday that the U.S. Securities and Exchange Commission (SEC) has designated it a "Designated offshore securities market" under Regulation S of the Securities Act of 1933. The designation applies to CNSX and Pure Trading.

Regulation S allows companies to bypass SEC registration requirements where offerings and sales of securities occur outside the U.S. The exemptions were created in order to encourage investments in U.S. companies by non-U.S. investors and provide safe harbours with respect to offers and sales by issuers, distributors and affiliates under Rule 903 and offshore resales under Rule 904. Regulation S, however, imposes a number of resale restrictions to ensure sales to a U.S. person do not occur.

The SEC designation, however, means that restricted securities may now generally be resold on CNSX or Pure Trading without the seller having to determine whether the buyer is in the U.S. or a U.S. person, as would otherwise have been the case.

SEC approves new short selling rule

The U.S. Securities and Exchange Commission (SEC) adopted a new short selling rule on February 24, 2010. The new rule is intended to promote market stability and preserve investor confidence during periods of stress and volatility by restricting short sellers from being able to drive the price of a stock further down when it is already experiencing downward pressure. Short selling involves the sale of stock that an investor does not own or has borrowed, where the investor intends to profit by buying the stock back at a price that is lower than the price of the short sale.  While acknowledging that short selling may be useful in that it can promote market liquidity and pricing efficiency, the SEC cautions that it may also be used to "improperly drive down the price of a security or to accelerate a declining market in a security."

The SEC considered various options over the course of the last year to address its concerns regarding short selling and has decided to implement an alternative uptick rule that would restrict short selling when the price of a security has fallen more than 10% in one day.  This restriction would remain in effect for the remainder of the day as well as the next day and under   such a scenario, short selling would only be permitted if the price of the security was above the current national best bid. The rule will apply to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market, and  requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale. The rule will become effective 60 days after its publication in the Federal Register, while market participants will have six months to comply with its requirements.

SEC amends proxy rules to allow e-proxy flexibility

On February 22, the U.S. Securities and Exchange Commission (SEC) announced that it was amending its proxy rules to improve the "notice and access" model for furnishing proxy materials to shareholders. Under the model, issuers are permitted to post their proxy materials on the internet and send shareholders a "Notice of Internet Availability of Proxy Materials" (a Notice), directing shareholders to the website where the proxy materials may be found, in lieu of delivering a full set of proxy materials in paper accompanied by the above Notice. While the notice and access model, adopted in 2007, was intended to promote the use of the internet as a cost-efficient and reliable means of making proxy materials available to shareholders, the SEC has found lower shareholder response rates to proxy solicitations when the notice-only option is employed.

The SEC attributes the lower response rate in cases where the notice-only option is used to confusion among investors regarding the operation of the notice and access model. Thus, issuers and other soliciting persons will be provided additional flexibility under the amendments with respect to the format and content of the Notice, including being able to provide additional materials explaining the e-proxy rules, rather than being restricted to inclusion of the boilerplate-type language currently set out by the rules. Changes are also being made with respect to the time by which a soliciting person other than an issuer must send its Notice to shareholders. The effective date of the amendments, first proposed in October 2009, is March 29, 2010.

In addition to the introducing the above amendments, the SEC also published an Alert describing changes that went into effect in January 2010 eliminating discretionary voting by brokers in the election of directors and the effects of these changes on proxy voting. The SEC also launched a new website providing investors with general information respecting, among other things, proxy voting and e-proxy rules.

FINRA's TRACE now includes government agency debt and primary bond market

As of March 1, the U.S. Financial Industry Regulatory Authority (FINRA) Trade Reporting and Compliance Engine (TRACE) will now include debt issued by federal government agencies, government corporations and government-sponsored enterprises as well as primary market transactions in new corporate debt issues. The expansion of TRACE represents a 50% increase in the number of debt securities subject to its reporting requirements.

SEC approves statement on global accounting standards and IFRS convergence

The SEC issued a statement on Wednesday outlining its position with respect to global accounting standards. Specifically, the SEC stated that it supports "the objective of financial reporting in the global markets pursuant to a single set of high-quality globally accepted accounting standards." It recognizes, however, that incorporating IFRS into the U.S. financial reporting environment would be a large task and recognizes the need for deliberation as well as a sufficient transition time to prepare for such a change.

Thus, the SEC directed its staff to develop and execute a work plan to enhance the SEC's understanding and assist it in making a decision in 2011 regarding the incorporation of IFRS into the financial reporting system for U.S. issuers. Specifically, the work plan sets out the following areas of concern: (i) sufficient development and application of IFRS for the U.S. domestic reporting system; (ii) the independence of standard setting for the benefit of investors; (iii) investor understanding and education regarding IFRS; (iv) examination of the U.S. regulatory environment that would be affected by a change in accounting standards; (v) the impact on issuers; and (vi) human capital readiness.

Considering the time required to successfully implement a change in financial reporting, the SEC stated that should it make the decision in 2011 to incorporate IFRS, the earliest that U.S. companies would report under such a system would be approximately 2015 or 2016, although SEC staff have been asked to further evaluate this timeline as part of the work plan.

IOSCO publishes periodic disclosure principles

On Monday, the International Organization of Securities Commissions (IOSCO) published a final report entitled "Principles for Periodic Disclosure by Listed Entities". The report is intended to provide securities regulators with a framework for establishing or reviewing their periodic disclosure regimes. According to the report, its principles-based format "allows for a wide range of application and adaptation by securities regulators." 

Specifically, the report identifies the following principles as being "essential" for periodic disclosure regimes: (i) periodic reports should contain relevant information; (ii) for those periodic reports in which financial statements are included, the persons responsible for the financial statements provided should be clearly identified and should state that the financial information provided is fairly presented; (iii) the issuer's internal control over financial reporting should be assessed or reviewed; (iv) information should be available to the public on a timely basis; (v) periodic reports should be filed with the relevant regulator; (vi) the information should be stored to facilitate public access; (vii) disclosure criteria; (viii) equal access to disclosure; and (ix) equivalence of disclosure.

SEC proxy disclosure enhancements to soon take effect

In December 2009, the U.S. Securities and Exchange Commission (SEC) published final amendments to its rules to enhance proxy disclosure. Proposed amendments were first released in July 2009 and the final rules reflect changes made in response to many of the comments received by the SEC in response to the proposed amendments.

Specifically, the final rules intend to improve the information that companies provide to shareholders regarding: (i) risk, by requiring disclosure respecting the board's role in risk oversight and, where relevant, disclosure respecting compensation policies and practices that are likely to expose the company to material risk; (ii) governance and director qualifications, by requiring expanded disclosure of the background and qualifications of directors and nominees, as well as disclosure concerning a company's board leadership structure; and (iii) compensation, by amending the reporting of stock and option awards and requiring, in certain circumstances, the disclosure of compensation consultants' potential conflicts of interest.

The amendments are effective as of February 28, 2010.

SEC publishes concept release respecting structure of equity markets

The U.S. Securities and Exchange Commission (SEC) announced in January that it was seeking public comment on issues respecting the current equity market structure. In publishing the concept release, the SEC specifically cited the dramatic change in the secondary market for equities in recent years and the trend towards a market structure with primarily automated trading. Thus, the SEC intends to assess "whether market structure rules have kept pace with, among other things, changes in trading technology and practices". The release seeks specific comment on issues such as market quality metrics, the fairness of market structure, high frequency trading, co-location services and dark liquidity. The SEC will use the comments received to help determine whether additional regulatory measures are needed to improve the current equity market structure. Further, the SEC also proposed for public comment a new market structure initiative that is intended to strengthen the risk management control of broker-dealers that provide market access.

CFTC Chairman discusses OTC derivatives regulation

Chairman Gensler
Photo Courtesy of
In early January, Chairman Gary Gensler of the U.S. Commodity Futures Trading Commission, gave a speech to the Council on Foreign Relations in New York regarding the reform of over-the-counter derivatives markets. Chairman Gensler discussed the three key components to reform, being the explicit regulation of derivatives dealers, the increase in transparency of OTC derivatives markets and a move of standard OTC derivative transactions to regulated clearinghouses. Chairman Gensler gave a speech on the same topic on January 12 to the Atlantic Council. Legislation intended to regulate OTC derivatives passed the U.S. House of Representatives in December 2009.

SEC releases final rule regarding shareholder approval of executive comp of TARP recipients

In January, the U.S. Securities and Exchange Commission (SEC) announced amendments to the proxy rules under the Securities Exchange Act of 1934 to require companies that have received TARP money to permit a shareholder advisory vote on executive compensation. The rules are effective February 18, 2010.

IOSCO and CPSS to review standards for financial market structures

Yesterday, the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) announced the launch of a comprehensive review of financial market infrastructure standards, including payment systems, securities settlement systems and central counterparties. The review, which will be led by CPSS members (consisting of central banks, including the Bank of Canada), members of the IOSCO Technical Committee (which includes the OSC and AMF), the IMF and World Bank, is part of an initiative "to reduce the risks that arise from interconnectedness in the financial system."

SEC to issue guidance on climate change disclosure

On Wednesday, the U.S. Securities and Exchange Commission (SEC) approved the issuance of interpretive guidance respecting existing SEC disclosure requirements that apply to business or legal developments relating to climate change. While the guidance has yet to be published by the SEC, a speech by SEC Commissioner Luis A. Aguilar suggests that the SEC's release will clarify the responsibility of companies to discuss (i) the direct effects of existing and pending environmental regulation, legislation and treaties on a company's business, operations, risk factors and in MD&A; (ii) the indirect effects of such regulation on a company's business; and (iii) the effect on a company's business and operations related to the "physical changes to our planet caused by climate change". Commissioner Aguilar also suggested that companies should know their emissions information in order to evaluate risks and focus on investors when considering the materiality of information.

FSA proposes enhancing standards for investment advisers

Back in December, the U.K. Financial Services Authority (FSA) announced the publication of proposals intended to "rebuild people's trust and confidence in the retail investment market by raising standards of professionalism." The FSA's proposals address issues respecting the governance of professional standards for retail investment advisers, the application of principles to the corporate pension market and advice on pure protection products (certain types of insurance). With respect to professional standards, the FSA proposes an internal FSA model to govern professional standards.

The FSA is accepting responses on its proposals until March 16, 2010.

Australian commission makes recommendation for "two strikes" approach to executive compensation

The Australian Government's Productivity Commission, an independent research and advisory body on economic, social and environmental issues, recently issued a report on the topic of executive compensation in Australia. The voluminous report considered such issues as the recent trends in Australia in executive pay, the effectiveness of existing regulatory oversight, the role of boards and the transparency of compensation disclosure. Ultimately, the report recommended reform in five areas: improving board capacities, reducing conflicts of interest, ensuring well-conceived compensation principles, improving relevant disclosure and facilitating shareholder engagement.

Specifically on the topic of shareholder engagement, the Commission recommended a "two strikes" mechanism to address an "unresponsive" board. Under the recommendation, where a company's compensation report received a "no" vote of 25% or more, the board would have to explain how shareholder concerns were addressed in the subsequent report. Where the subsequent report also received a "no" vote of 25% or more, a resolution would be put to shareholders that the elected directors who signed the directors' report for that meeting stand for re-election at an extraordinary general meeting. If this resolution was carried by more than 50% of the votes, the meeting would be held within 90 days.

IIROC publishes first quarter 2010 circuit breaker levels

Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  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 have been announced for the first quarter of 2010 as 1,050 points, 2,100 points and 3,150 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%) - 1,150 points; Level 2 (20%) - 2,300 points and Level 3 (30%) - 3,450 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

U.S. House passes comprehensive financial reform bill

On December 11, the U.S. House of Representatives approved comprehensive legislation intended to "modernize America's financial rules" in response to last year's market meltdown. The Wall Street Reform and Consumer Protection Act of 2009, which passed by a vote of 223-202, combines a number of legislative initiatives announced in the past year into a single piece of legislation numbering almost 1300 pages in length.

The bill includes provisions respecting (i) shareholder approval of executive compensation and golden parachutes; (ii) enhanced compensation structure reporting; (iii) the regulation of OTC derivatives and specifically the requirement that all standardized swap transactions between dealers and "major swap participants" be cleared and traded on an exchange or electronic platform; and (iv) the registration and regulation of advisers to private pools of capital. 

There is no guarantee, however, that the bill will become law, as it must now go to the Senate for consideration.

SEC adopts rule amendments to strengthen protections for investment adviser custodial arrangements

The U.S. Securities and Exchange Commission (SEC) yesterday announced the adoption of rule amendments to "substantially increase the protections" for investors that trust their assets with SEC-registered investment advisers. Depending on the investment adviser's custody arrangement, the rules would require (i) advisers to engage independent public accountants to conduct annual surprise exams to verify that client assets exist; and (ii) a written custody control review that "describes the controls in place at the custodian, tests the operating effectiveness of those controls and provides the results of those tests" when the adviser or affiliate acts as custodian of client assets. The amended rules would also impose new controls on advisers to hedge funds and other private funds that comply with the custody rule. Such advisers would have to obtain an audit of the fund and deliver the fund's financial statements to fund investors, while the auditor would have to be registered with and subject to inspection by the Public Company Accounting Oversight Board.

According to SEC Chairman Mary Schapiro, "[t]hese new rules will apply additional safeguards where the safeguards are needed most - that is, where the risk of fraud is heightened by the degree of control the adviser has over the client’s assets."

SEC reopens comment period on shareholder director nomination proposal

The U.S. Securities and Exchange Commission (SEC) announced on Monday that it is reopening the comment period for its proposals on shareholder director nominations. Originally published earlier this year, the proposal would change federal proxy rules to make it easier for shareholders to nominate and elect directors to company boards. The SEC decided to reopen the comment period to allow interested parties to comment on additional data and related analyses that were submitted during and after the initial comment period and included in the public comment file.

U.S. Senator introduces Energy Security Through Transparency Act of 2009

Charles R. Kraus

On September 23, 2009, United States Senator Richard Lugar introduced a Bill entitled the Energy Security Through Transparency Act of 2009 (ESTA), which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs for further consideration.

The progress of ESTA is of interest to Canadian oil and gas issuers with annual reporting obligations under the U.S. Securities Exchange Act of 1934. Among other things, ESTA proposes to require the U.S. Securities and Exchange Commission to issue rules requiring "resource extraction issuers" (defined as an issuer that engages in the commercial development of oil, natural gas, or minerals) to include in their annual reports information relating to any payments made by the issuer, a subsidiary or partner of the issuer, or an entity under the control of the issuer to a foreign government for the purpose of the commercial development of oil, natural gas, or minerals.

ESTA provides that the required disclosure shall include the type and total of all such payments (i) for all projects, and (ii) to each foreign government, and the term "payment" is defined to include taxes, royalties, fees, licenses, production entitlements, bonuses and other material benefits.

SEC publishes proposals regarding dark pools

As described in our post of October 21, the U.S. Securities and Exchange Commission (SEC) recently voted to propose measures intended to increase the transparency of private automated trading systems known as "dark pools". On November 13, the SEC published its proposed rules and amendments to joint-industry plans. The proposals would: (i) amend the Exchange Act quoting requirements so as to apply expressly to actionable "Indications of Interest", which are similar to a typical buy or sell quote and permit others to trade; (ii) revise the order display requirements of Regulation ATS, including a substantial lowering of the trading volume threshold that triggers public display obligations for alternative trading systems; and (iii) amend the joint-industry plans for publicly disseminating consolidated trade data to require real-time disclosure of the identity of dark pools and other alternative trading systems on the reports of their executed trades.

IASB and FASB reaffirm commitment to improve IFRS

On November 5, the International Accounting Standards Board (IASB) and the U.S.Financial Accounting Standards Board (FASB) released a statement reaffirming their commitment to improving IFRS and U.S. GAAP and to bring about their convergence. The joint statement also described the boards' plans and milestone targets for individual projects.

SEC Chairman discusses proxy voting

On November 4, Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission (SEC), gave a speech in New York in which she described the SEC's recent initiatives related to proxy voting. Specifically, Ms. Schapiro discussed proposals respecting shareholder director nominations, proxy enhancements and e-proxy revisions. She also stated that SEC staff is currently conducting a comprehensive review of the mechanics of proxy voting with a view to ensuring that the proxy voting system "operates with the degree of reliability, accuracy, transparency and integrity that shareholders and companies have the right to expect."

IOSCO publishes report on private equity conflicts of interest

On November 3rd, the International Organization of Securities Commissions (IOSCO) announced the publication of a consultation report regarding conflicts of interest within private equity firms. An IOSCO report on private equity risks of May 2008 recommended further work on the subject, leading to the immediate report.

Specifically, the report examines the potential conflicts of interest that may exist within a private equity firm or fund and proposes a number of principles to mitigate such risks. The principles discussed include establishing written policies to identify and mitigate conflicts of interest, the need to implement a process for investor consultation relating to such conflicts and ensuring the clarity of investor disclosure. IOSCO is accepting public comment on the report until February 1, 2010.

SEC releases staff accounting bulletin regarding oil and gas reporting

Charles Kraus

On October 30, the U.S. Securities and Exchange Commission (SEC) announced the release of a staff accounting bulletin to update guidance "on how the agency's staff interprets accounting rules related to the oil and gas industry." The guidance is intended to correspond with rulemaking that the SEC approved in December 2008 to modernize its oil and gas company reporting requirements. The principal revisions of the guidance include:

  • changing the price used in determining quantities of oil and gas reserves to use an average price based upon the prior 12-month period rather than year-end prices;
  • eliminating the option to use post-quarter-end prices to evaluate write-offs of excess capitalized costs under the full cost method of accounting; 
  • removing the exclusion of unconventional methods used in extracting oil and gas from oil sands or shale as an oil and gas producing activity; and
  • removing certain questions and interpretative guidance which are no longer necessary.

The guidance updates Topic 12 of the codification of staff accounting bulletins in order to make it consistent with the Commission’s Final Rule Release, Modernization of Oil and Gas Reporting, issued December 31, 2008. 

Financial Services Committee approves credit rating agencies bill

It's been a busy week for the U.S. House Financial Services Committee. Following its approval of a private adviser registration bill and the introduction of draft legislation to address systemic financial risk, the Committee has also approved a bill respecting credit rating agencies. The proposed legislation is intended to "take strong steps to reduce conflicts of interest, stem market reliance on credit rating agencies, and impose a liability standard on the agencies." According to the Committee's press release, the proposed legislation expands on the Treasury proposal of July 2009. Specifically, the proposed legislation clarifies the ability of individuals to sue rating agencies, adds a duty to supervise an agency's employees, requires that agencies have a board with at least one-third independent directors, provides for greater public disclosure and includes provisions regarding former employees of rating agencies that go to work for an issuer.

U.S. House Financial Services Committee introduces bill to address systemic financial risk

Secretary Geithner
Secretary Geithner
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On October 27, the U.S. House Committee on Financial Services announced the introduction, in conjunction with the Treasury Department, of draft legislation intended "to address the issue of systemic risk and 'too big to fail' financial institutions." Specifically, the legislation would establish a "Financial Services Oversight Council" to identify financial companies and financial activities that should be subject to "heightened prudential standards in order to promote financial stability and mitigate systemic risk". A variety of options would be available to regulators in response to identified risks and according to the release, the proposed legislation would provide "for the orderly wind-down of failing firms" to ensure that "industry and shareholders absorb the risks and costs of failure, not taxpayers."

Secretary of the Treasury Timothy Geithner, meanwhile, testified yesterday before the House Committee on Financial Services regarding the draft legislation. Secretary Geithner cited the five key elements necessary for reform, being: (i) the orderly resolution of failing financial institutions; (ii)  no open-bank assistance to failing financial institutions; (iii) protecting taxpayers from losses; (iv) limiting the Federal Reserve's and the FDIC's emergency authorities; and (v) stronger constraints on size and leverage. According to Secretary Geithner, "the test for any effective set of reforms" is whether the above elements are included. According to the Secretary, the draft legislation "meets that test."

U.S. Financial Services Committee approves private adviser registration bill

The U.S. House Committee on Financial Services announced yesterday that it had passed draft legislation (available here in its initial form as introduced in the House of Representatives) that would require the registration of advisers to private pools of capital. The draft legislation would also introduce new recordkeeping and disclosure requirements for private advisers and increase the regulation of advisers to hedge funds, private equity firms and other private pools of capital.

FSA releases discussion paper respecting global banking crisis

The U.K. Financial Services Authority (FSA) released a discussion paper today titled "A regulatory response to the global banking crisis: systemically important banks and assessing the cumulative impact". The paper focuses on two major issues: (i) the "dangers" posed by systemically important banks that are considered too big or interconnected to fail, or too big to rescue; and (ii) how the cumulative impact of various capital and liquidity regime changes should be assessed. U.K. and international policy developments are considered and of particular note, the migration of OTC derivatives to central counterparty clearing is cited as a risk-reducing policy initiative.

Responses to the discussion paper are being accepted until February 1, 2010.

SEC votes to propose measures regarding dark pools

Chairman Schapiro
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The U.S. Securities and Exchange Commission (SEC) today voted to propose measures to increase transparency of private automated trading systems known as "dark pools". Such private systems do not display quotes in the public quote stream and, according to the SEC, the lack of transparency associated with dark pools could create a "two-tiered market that deprives the public of information about stock prices and liquidity." As such, the SEC's proposals include requiring the public disclosure of information regarding "Indications of Interest" (IOIs), which are similar to a typical buy or sell quote and permit others to trade. As described in our post of June 19, SEC Chairman Mary Schapiro has discussed the need to regulate dark pools in the past, while in Canada, regulators recently published a consultation paper on the subject.

The SEC is inviting public comments on the proposals, which have yet to be published on the SEC website, for 90 days after their publication in the Federal Register. For more information, see the text of Ms. Schapiro's speech before the SEC's open meeting as well as the SEC fact sheet on the subject.

Senior Supervisors Group issues report on risk management and internal controls

The Senior Supervisors Group, consisting of financial supervisors from nine different countries, including the U.S. Securities and Exchange Commission and the Office of the Superintendent of Financial Institutions (Canada), issued a report today (October 21) titled "Risk Management Lessons from the Global Banking Crisis of 2008". The report identifies deficiencies in the "governance, firm management, risk management, and internal control programs that contributed to, or were revealed by, the financial and banking crisis of 2008." The weaknesses identified in the report include the failure of some boards and managers to establish and adhere to acceptable levels of risk, as well as compensation programs that "conflicted with the control objectives of the firm". Despite recent progress in improving risk management practices at financial firms, the report concludes that weaknesses remain that still need to be addressed.

RiskMetrics publishes 2009 postseason report

RiskMetrics Group has published its 2009 Postseason Report, which reviews the issues and trends of the 2009 proxy season, including proxy access, broker voting and executive compensation. While the report focuses more on the U.S. environment, Canadian issues are considered.

U.S. House Committee approves OTC derivative regulation

The U.S. House Committee on Financial Services yesterday approved draft legislation to regulate over-the-counter derivatives. Among other things, the legislation requires that: (i) standardized swap transactions be executed on a national securities exchange, board of trade or swap execution facility; (ii) swap dealers and major participants register with the appropriate commission; and (iii) reporting and recordkeeping obligations are met. The U.S. Treasury Department first proposed such legislation in mid August.

SEC and CFTC issue joint report on regulatory harmonization

Earlier today, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a joint report on the issue of regulatory harmonization. The report follows joint meetings held in early September and makes a series of recommendations on such issues as oversight and enforcement, investor and customer protection, compliance and the improvement of coordination and cooperation between the agencies.

Of particular note, the report recommends that the SEC "review its approach to cross-border access to determine whether greater efficiencies could be achieved with respect to cross-border transactions in securities..." Specifically, the report states that the SEC may consider amendments to Rule 15a-6 of the Securities Exchange Act of 1934 regarding the interaction of U.S. investors with foreign broker-dealers.

US House Committee releases draft legislation on financial reform

On October 1, the U.S. House Committee on Financial Services released, among other bills, a discussion draft of the Investor Protection Act. The IPA is intended to strengthen the powers of the Securities and Exchange Commission, while enhancing the SEC's enforcement powers and funding. Further, under the draft bill, all financial intermediaries that provide advice would have a fiduciary duty toward their customers and the SEC would also be granted the authority to prohibit or impose limitations on arbitration clauses respecting customer contracts.

On October 2, meanwhile, the Committee circulated a discussion draft of legislation intended to regulate over-the-counter derivatives. According to a committee member, the OTC bill "moves us in the right direction by reducing risk to the economy with robust and dynamic oversight of major market participants, while preserving appropriate risk-management tools for end users." The Committee is began meeting yesterday to discuss the OTC bill.

SEC publishes draft strategic plan for 2010-2015

The U.S. Securities and Exchange Commission (SEC) yesterday released for public comment a draft Strategic Plan outlining its mission, values and strategic goals for fiscal years 2010 to 2015. The identified goals include fostering and enforcing compliance with federal securities laws, establishing an effective regulatory environment, facilitating access to information that investors need to make informed investment decisions and enhancing the SEC's performance. Desired outcomes are discussed and the SEC also identified performance metrics by which to measure its progress.

SEC announces expiration of exemption to SOX provision

On October 2, the U.S. Securities and Exchange Commission (SEC) announced the upcoming expiration of the exemption from section 404 of the Sarbanes-Oxley Act currently enjoyed by public companies with a public float below $75 million. Section 404 of SOX requires public companies and their independent auditors to report on the effectiveness of internal controls. The extension for small public companies is scheduled to expire beginning with the annual reports of companies with fiscal years ending on or after June 15, 2010. The exemption had been set to expire for fiscal years ending on or after December 15, 2009, but was extended due to the recent publication of a study by the SEC's Office of Economic Analysis regarding whether post-2007 reforms were having the intended effect of "facilitating more cost-effective internal controls evaluations and audits." The study found a "significant reduction" in compliance costs following the 2007 reforms.

Certification of effectiveness of internal control over financial reporting is also required in Canada under NI 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings.  In contrast to the U.S., however, NI 52-109 does not require auditor attestation and permits "venture issuers" to omit certain certifications relating to internal controls over financial reporting and disclosure controls and procedures.

SEC approves rules for breaking clearly erroneous trades

The Securities and Exchange Commission (SEC) today announced its approval of new exchange rules (see, for example, filings respecting NYSE Arca, NASDAQ and the Chicago Board Options Exchange) for "breaking stock trades that deviate so substantially from current market prices that they are considered 'clearly erroneous.'" Specifically, the rules seek to provide consistent standards across equity markets.

Generally, the rules provide that a trade may be found to be clearly erroneous only if the price of a transaction occurring during regular trading hours exceeds the consolidated last sale price by more than 10% for stocks priced under $25, 5% for stocks priced between $25 and $50 and 3% for stocks priced over $50. The thresholds are set at 20%, 10% and 6%, respectively, for transactions occurring outside of regular trading hours. A filing involving five or more securities will be aggregated into a single filing, to which a 10% threshold will apply. Further, the erroneous trade review process must generally begin within 30 minutes of the trade.

Compare these quite specific rules to the more general discretion that applies on Canadian marketplaces by virtue of UMIR Rule 10.9, which has resulted in cancellations being quite rare events in Canada.

FSA releases summary of responses to its discussion paper on short selling

The U.K. Financial Services Authority (FSA) released a Feedback Statement yesterday summarizing and responding to comments it received in response to its proposals on regulating short selling as published in a discussion paper of February 2009. While the discussion paper concluded that direct constraints on short selling, such as a 'tick' rule, were not justified, it proposed enhancing the transparency of short selling. In considering the feedback received, the FSA reiterated its position that direct constraints on short selling are not justified at this point, while also stating that no major aspects of the proposals for a disclosure regime should change.

Recently released reports consider structured finance products and special purpose entities

The International Organization of Securities Commissions (IOSCO) recently released a consultation report respecting the transparency of structured finance products. The report sets out the factors to be considered by market authorities when considering the enhancement of post-trade transparency of structured finance products. Meanwhile, the Joint Forum, established under the auspices of the Basel Committee on Banking Supervision, IOSCO and the International Association of Insurance Supervisors recently released a report considering the issues surrounding special purpose entities.

G-20 Leaders' Statement speaks of executive compensation reform

At the recent Pittsburgh summit, leaders of the G-20 met to, according to the leaders' statement, "turn the page on an era of irresponsibility and to adopt a set of policies, regulations and reforms to meet the needs of the 21st century global economy." The leaders' statement released on September 25 specifically discussed strengthening the international financial regulatory system by reforming compensation policies and practices and improving over-the-counter derivatives markets.

With respect to executive compensation, the G-20 endorsed the implementation standards of the newly-created Financial Stability Board respecting compensation, including: (i) avoiding multi-year guaranteed bonuses; (ii) requiring a significant portion of variable compensation be deferred, tied to performance and tied to appropriate clawbacks; (iii) ensuring that compensation for those having a material impact on the firm's risk exposure align with performance and risk; (iv) making compensation policies and structures transparent through disclosure requirements; (v) limiting variable compensation as a percentage of total net revenue when it is inconsistent with the maintenance of a sound capital base; and (vi) ensuring that compensation committees overseeing compensation policies are able to act independently. The Financial Stability Board is expected to complete a review of actions taken by national authorities to implement its compensation principles by March 2010. A progress report discussing actions taken and to be taken in the future was also released.

SEC proposes flash order ban

The U.S. Securities and Exchange Commission yesterday proposed a ban on flash trading, a practice that allows certain market participants to access information about the best available prices before the public is given an opportunity to trade. According to SEC Chairman Mary Schapiro, flash orders "provide a momentary head-start in the trading arena that can produce inequities in the markets and create disincentives to display quotes." Public comments on the amendments, which have yet to be published, are being accepted by the SEC until 60 days following their publication in the Federal Register.

Update: The proposed amendments have now been published.

SEC and FSA discuss common approaches to regulatory issues

Chairman Schapiro
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The U.S. Securities and Exchange Commission (SEC) and the U.K. Financial Services Authority (FSA) announced plans today "to explore common approaches to reporting and other regulatory requirements for key market participants such as hedge funds and their advisers." Specifically, the two regulators "agreed to identify a common, coherent set of data to collect from hedge fund advisers/managers" in order to help the regulators identify risks to their regulatory mandates and objectives. The announcement, subsequent to a meeting between the SEC and FSA, stated that discussions also included OTC markets and central clearing, accounting issues, regulatory reform, credit agency oversight, short selling and corporate governance and compensation practices. Today's release follows an announcement by the U.S. Commodity Futures Trading Commission (CFTC) yesterday that the CFTC had signed a memorandum of understanding with the FSA "to enhance cooperation and the exchange of information relating to the supervision of cross-border clearing organizations."

SEC announces new Division of Risk, Strategy, and Financial Innovation

Yesterday, the U.S. Securities and Exchange Commission (SEC) announced the creation of its new Division of Risk, Strategy, and Financial Innovation, which combines the Office of Economic Analysis, the Office of Risk Assessment and certain other functions. According to the SEC, the new division will  "provide the Commission with sophisticated analysis that integrates economic, financial, and legal disciplines." The three broad areas that fall under the new division's responsibilities are risk and economic analysis, strategic research and financial innovation.

IOSCO publishes regulatory standards respecting funds of hedge funds

On September 14, the International Organization of Securities Commissions (IOSCO) released a report outlining proposed standards "aimed at addressing regulatory issues of investor protection which have arisen due to the increased involvement of retail investors in hedge funds through funds of hedge funds." The report's proposals focus on the two particular areas of concern identified in an earlier report of June 2008, being: (i) liquidity risk; and (ii) the due diligence process. As stated by the release, the standards "form part of a larger body of work that IOSCO has been engaged in with regards to addressing the regulatory issues presented by hedge funds."

FINRA announces NASD rule changes regarding new investment banker registration category

In July, the U.S. Financial Industry Regulatory Authority (FINRA), published a regulatory notice regarding the approval by the Securities and Exchange Commission of amendments to NASD Rules 1022 and 1032.  The amendments, effective November 2, 2009 and first described in our post of March 19, require individuals engaged in investment banking activities to register under a new limited representative registration category for investment banking professionals and take a corresponding qualification exam in lieu of the current General Securities Registered Representative (Series 7) exam. A transition period, however, will allow individuals holding the Series 7 registration to opt into the new category until May 3, 2010 without having to take the new exam.

NYSE forms "Commission on Corporate Governance"

The New York Stock Exchange announced earlier this month that it is forming an independent advisory commission to "take a comprehensive look at strengthening U.S. best practices for corporate governance and the proxy process." While committee members have yet to be announced, the NYSE stated in its release that the commission will work with policymakers and interested constituents "to foster a comprehensive and constructive approach" to corporate governance and proxy reform.

U.S. Treasury Department announces OTC derivatives legislation

Secretary Geithner
Secretary Geithner
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On August 11, the U.S. Department of the Treasury announced that it had delivered to Congress proposed legislation respecting the regulation of over-the-counter (OTC) derivatives. Treasury Secretary Timothy Geithner spoke of the need for such regulation during testimony to Congress in July. According to the Department's press release, the proposed legislation "will provide for regulation and transparency for all OTC derivative transactions; strong prudential and business conduct regulation of all OTC derivative dealers and other major participants in the OTC derivative markets; and improved regulator and enforcement tools."

Specifically, the draft legislation requires that standardized OTC derivatives be centrally cleared by a securities or derivatives clearing organization, while encouraging the use of such standardized derivatives through higher capital and margin requirements for non-standardized derivatives. Financial regulatory agencies will have access on a confidential basis to OTC derivative transactions, while aggregated data on open positions and trading volumes will be available to the public. Meanwhile, federal banking agencies, the Commodity Futures Trading Commission and Securities and Exchange Commission will supervise and regulate OTC derivative dealers and major market participants. The Treasury Department hopes to have the reforms passed by the end of the year.

SEC publishes alternative uptick rule proposal

Chairman Schapiro
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On August 17, 2009, the U.S. Securities and Exchange Commission re-opened the comment period on its proposals respecting short sales first published in April. The comment period was extended to allow for supplemental comments on an alternative uptick rule that was not previously specifically subject to the request for comments. In April, the SEC sought comments on proposals that represented two approaches to imposing restrictions on short selling; the first to apply on a market-wide and permanent basis and the second during severe market declines only. With respect to the proposed market-wide and permanent rules, two alternative short sale price tests were proposed. The first was based on the current national best bid (proposed modified uptick rule) and the second based on the last sale price (proposed uptick rule). While the April proposals did not specifically seek comments on the alternative uptick rule, which would permit short selling only at a price at or higher than the current national best bid, it did enquire whether it would be preferable to the proposed modified uptick rule and the proposed uptick rule.

Under the alternative uptick rule, in an advancing or declining market, short selling would generally only be permitted at an increment above the current national best bid. The alternative uptick rule proposal is slightly different from April's proposed modified uptick rule (and the proposed uptick rule), in that only allowing short selling at an increment above the national best bid would not allow short sale to get immediate execution and would, therefore, restrict short selling to a greater extent than the other two proposed rules. It would not, however, require monitoring the sequence of bids or last sale prices. According to the SEC’s press release, this alternative uptick rule would, as a result, be easier to monitor. The comment period for the proposal will extend for 30 days from the date of publication of the proposal in the Federal Register.

CDS' New York Link may be severed

Earlier this month, CDS Clearing and Depository Services (CDS), announced that participants of the New York Link service, which allows CDS participants to clear and settle exchange and over-the-counter trades with U.S. broker-dealers via the National Securities Clearing Corporation (NSCC), will have to satisfy additional collateral requirements as of November 1, 2009. As of that date, CDS will "no longer have access to the collateral needed to protect the remaining New York Link participants from the default of a single sponsored participant." As such, CDS will require participants of the New York Link to provide additional collateral and may also require participants to pre-fund their NSCC payment obligations "from time to time". Participants have until September 30 to advise CDS whether they will remain a CDS-sponsored participant or become direct members of the NSCC and Depository Trust Company (DTC). According to CDS, "[b]ased on the number of participants who would be interested in continuing under the new requirements, CDS Clearing will evaluate the economic and risk containment impacts on operating these services." The Depository Trust & Clearing Corporation (the parent company of the NSCC and DTC), meanwhile, is prepared to "immediately begin processing membership applications of Canadian firms who wish to become members of its NSCC and DTC subsidiaries and who meet the membership criteria."

Continued listing requirements for NYSE modified

Earlier this year, the New York Stock Exchange  (NYSE) adopted a temporary policy wherein the market capitalization continued listing standard would be reduced from $25 million to $15 million. The changes have now been made permanent as of July 2, 2009.

U.S. House of Representatives approves "say on pay" bill

On July 31, the U.S. House of Representatives approved the "Corporate and Financial Institution Compensation Fairness Act of 2009", which deals with say-on-pay and compensation committee independence. The final version of the bill incorporates amendments subsequent to its approval by the House Financial Services Committee, with the final version clarifying that the section regarding enhanced compensation structure reporting to reduce "perverse incentives" shall not apply to covered financial institutions with assets of less than $1 billion. Whether the proposed legislation makes it through the Senate remains to be seen.

U.S. House Committee on Financial Services passes executive compensation reform bill

The U.S. House Financial Services Committee announced yesterday that it has approved legislation dealing with say-on-pay and compensation committee independence. While the legislation is similar to the proposals released earlier this month by the Department of the Treasury, the House legislation also includes a provision that would allow regulators to prescribe regulations that prohibit compensation structures that regulators determine encourage "inappropriate risks" by financial institutions that "could threaten the safety and soundness of covered financial institutions" or have "serious adverse effects on economic conditions or financial stability." It is expected that the House of Representatives will consider the bill on Friday.

SEC Investor Advisory Committee agrees on wide-ranging agenda

The Securities and Exchange Commission's Investor Advisory Committee, having held its first meeting on Monday, announced today that it has agreed on a broad agenda. Identified topics for discussion moving forward include: the fiduciary duties of financial intermediaries, disclosures to investors, whether majority voting for directors should be mandatory for all U.S. companies and whether investors have the information necessary to make informed proxy voting decisions.

SEC takes further action on short sales

The U.S. Securities and Exchange Commission yesterday announced that it is taking further steps in an attempt to curtail abusive "naked" short selling in equity securities and improve transparency respecting short sales generally. To that end, the SEC is making permanent, with some limited modifications, its interim final rule of October 2008 requiring broker-dealers to promptly purchase or borrow securities to deliver on a short sale. Further, the SEC stated that it is working with self-regulatory organizations to make short sale volume and transaction data available on SRO websites. The SEC's consideration of proposals on short sale price tests and circuit breaker restrictions also continues.

IIROC and FINRA announce formal cooperation agreement

The Investment Industry Regulatory Organization of Canada (IIROC) and the U.S. Financial Industry Regulatory Authority (FINRA) today announced a cooperation agreement whose objective is to "enhance the effectiveness of both organizations through the exchange of information and other cross-border assistance." The news release describing the arrangement further stated that "[i]n addition to information sharing on compliance and enforcement related matters, IIROC and FINRA plan to work together on issues related to firm oversight and examinations."

U.S. Treasury Department introduces credit rating agency reform

Secretary Geithner
Secretary Geithner
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The U.S. Department of the Treasury announced on Monday that it was delivering to Congress proposed legislation intended to address the situation of recent years where "investors were overly reliant on credit rating agencies that often failed to accurately describe the risk of rated products." Under the proposed legislation and rules to be adopted by the Securities and Exchange Commission, credit rating agencies would, among other things, have to register with the SEC and be subject to a higher degree of oversight, they would be prohibited from providing consulting services to companies that contract for ratings, agencies would be required to manage and disclose conflicts of interest and preliminary ratings would have to be publicly disclosed to reduce "ratings shopping". According to the Treasury Department's fact sheet, the proposals will "increase transparency, tighten oversight, and reduce reliance on credit rating agencies."

U.S. Treasury Department proposes hedge fund registration requirements

As described in our post of June 18, the U.S. Treasury Department's financial reform plan included a proposal requiring that investment advisers to hedge funds and other private pools of capital whose assets under management exceed "some modest threshold" be registered with the Securities and Exchange Commission under the Investment Advisers Act. On July 15, the Treasury Department delivered such proposed legislation to Congress.

While some hedge fund managers are currently subject to regulation as “investment advisers” by the SEC under the Investment Company Act of 1940, the majority operate outside the ambit of the SEC as they are organized to qualify for exemptions from registration requirements that generally apply to managers of similar types of investment vehicles, such as mutual funds. The proposed legislation, however, would impose registration requirements on advisers to private investment funds with more than $30 million of assets under management. Funds would be subject to various obligations with respect to financial reporting, conflict of interest prohibitions and increased disclosure requirements. According to the Treasury Department's press release, the new legislation "would help protect investors from fraud and abuse, provide increased transparency, and provide the information necessary to assess whether risks in the aggregate or risks in any particular fund pose a threat to our overall financial stability.

U.S. Treasury Department releases proposed legislation dealing with say-on-pay and compensation committee independence

Ramandeep Grewal

On July 16, 2009, the U.S. Department of the Treasury released draft legislation that includes proposed amendments relating to "say-on-pay" in the form of a required non-binding shareholder vote on compensation as well as proposals relating to the authority and composition of an issuer’s compensation committee.

With respect to “say-on-pay”, the draft legislation would require any proxy, consent or authorization for an annual meeting of shareholders (or special meeting in lieu thereof) to provide for a separate non-binding shareholder vote to approve the compensation of executives. In addition to including such a non-binding shareholder vote relating to annual compensation disclosure, the draft legislation would also require that a similar vote be provided to shareholders in any proxy or consent solicitation material for a meeting or special meeting of shareholders that concerns an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all of the assets of an issuer. In such circumstances, the person making the solicitation would be required to disclose any agreements or understanding that such person has with executive officers concerning any type of compensation that is based on, or otherwise relates to, the proposed transaction as well as the aggregate total of all such compensation that may be paid or become payable to, or on behalf of, such executive officer. The disclosure is to be set out in further regulations to be promulgated by the Securities and Exchange Commission and the SEC has been given one year to issue such further regulations or other rules that may be required. 

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SEC publishes proposed amendments regarding proxy disclosure and solicitation

The U.S. Securities and Exchange Commission has now published proposed amendments to its rules in order to "improve the disclosure shareholders of public companies receive regarding compensation and corporate governance, and facilitate communications relating to voting decisions." The proposals, announced earlier this month, would expand the scope of compensation disclosure and analysis to require disclosure of a company's overall compensation program as it related to risk management. Disclosure requirements regarding the qualifications of directors and nominees would also be extended and certain issues relating to the solicitation of proxies and the granting of proxy authority would be clarified. Comments on the proposals are being accepted by the SEC until September 15, 2009.

SEC Chairman testifies in Congress on SEC oversight

Chairman Schapiro
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Chairman Mary Schapiro of the Securities and Exchange Commission (SEC) testified before the House Committee on Financial Services' Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises yesterday respecting the SEC's "role in helping to address the financial crisis" as well as the actions being taken "to improve investor protection and restore confidence" in financial markets. In her testimony, Ms. Schapiro provided an overview of the SEC's recent work and its accomplishments during her tenure at the Commission and outlined the steps the SEC is taking to address ongoing issues, including strengthening examination and oversight, improving transparency and investor protection, combating abusive short selling, enhancing the regulation of credit rating agencies and strengthening shareholder rights. Of interest, Ms. Schapiro noted that the SEC's most recent proposals regarding the regulation of short sales resulted in over 3,700 comment letters, which are currently being reviewed by SEC staff.

Secretary Geithner testifies regarding regulation of OTC derivatives

Secretary Geithner speaking in February
Citing the "enormous scale" and "critical role" of over-the-counter (OTC) derivatives in the financial markets, U.S. Treasury Secretary Timothy Geithner outlined the steps the Obama Administration intends to take to regulate OTC derivatives in testimony to Congress on July 10. The steps include: (i) requiring that all standardized derivative contracts be cleared through well-regulated central counterparties and executed either on regulated exchanges or regulated electronic trade execution systems; (ii) encouraging greater use of standardized OTC derivatives through capital requirements and other measures to facilitate migration of such derivatives onto central clearinghouses and exchanges; (iii) requiring all OTC derivative dealers and other major market participants to be subject to supervision and registration; (iv) making OTC derivative markets fully transparent by the imposition of recordkeeping and reporting requirements; (v) providing the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) with authority to enforce the regulation of OTC derivative markets; (vi) working with the SEC and CFTC to improve standards governing who can participate in OTC derivative markets and (vii) working with international counterparts to ensure that the U.S. regulatory regime is matched by effective regimes internationally. The testimony follows on recent testimony by SEC Chairman Mary Schapiro on the same subject.

FSA announces proposals requiring financial firms to publish complaint data

The U.K. Financial Services Authority (FSA) released proposals on July 9 that would require financial firms to publish their complaints data every six months. The required information would include the number of complaints opened and closed, the percentage of claims closed within eight weeks and the percentage upheld. The FSA would also publish results from the whole sector twice a year. The FSA is accepting comments on the proposals until October 30, 2009.

IASB publishes IFRS for small and medium-sized entities

The International Accounting Standards Board (IASB) yesterday announced that it has issued a final version of its International Financial Reporting Standard (IFRS) for small and medium-sized entities (SMEs). SMEs are described as entities that publish general purpose financial statements for external users such as owners that are not involved in managing the business, creditors and credit rating agencies, but that do not have public accountability. According to the IASB, the IFRS for SMEs will "provide improved comparability for users of accounts; enhance the overall confidence in the accounts of SMEs; and reduce the significant costs of maintaining standards on a national basis." The IFRS for SMEs simplifies many of the principles of full standards and is a result of a number of years of working group development, round-table meetings and field-tests of a draft IFRS.

While the Canadian Accounting Standards Board (AcSB) has stated that the standard for SMEs will not be adopted in 2011 along with IFRS for publicly accountable companies, it is conceivable that the new standard will become a requirement at some point in the future.

Obama administration introduces bill to create Consumer Financial Protection Agency

On June 30, the Obama Administration delivered to Congress a bill that would create the Consumer Financial Protection Agency. The agency's mission would be to regulate the provision of consumer financial products and services by promoting "transparency, simplicity, fairness, accountability, and access in the market". More specifically, the agency would ensure that: 

  1. consumers have, understand, and can use the information they need to make responsible decisions about consumer financial products or services;
  2. consumers are protected from abuse, unfairness, deception, and discrimination;
  3. markets for consumer financial products or services operate fairly and efficiently with ample room for sustainable growth and innovation; and
  4. traditionally underserved consumers and communities have access to financial services.

The agency would also be provided with the power to investigate practices, issue cease and desist orders and commence civil actions against those that violate provisions of the statute. According to the Treasury Department's press release, "[f]or the first time, a single agency will have authority to examine and enforce compliance against any institution, bank or non-bank, that provides consumer financial products or services." 

SEC proposes enhanced disclosure requirements respecting proxy statements

On July 1, the U.S. Securities and Exchange Commission (SEC) proposed rule revisions "intended to improve the disclosure provided to shareholders of public companies" with respect to executive compensation and corporate governance matters in proxy and information statements. The proposals would require information regarding: the relationship of a company's overall compensation policies to risk; the qualifications of executive officers, directors and nominees; company leadership structure; and potential conflicts of interest of compensation consultants. Amendments to proxy rules intended to clarify how they operate were also proposed. The proposals follow a speech by SEC Chairman Mary Schapiro on the subject on June 10. Comments on the amendments, yet to be published on the SEC website, are being accepted until 60 days after their publication in the Federal Register.

The SEC also approved a proposal of the New York Stock Exchange (NYSE) to eliminate discretionary voting by brokers in the election of directors. Currently, NYSE Rule 452 permits voting by brokers without instructions in certain situations. The changes will apply to shareholder meetings held on or after January 1, 2010.

SEC Chairman calls for OTC derivatives regulation

Chairman Schapiro
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Securities and Exchange Commission (SEC) Chairman Mary Schapiro appeared before the U.S. Senate's Subcommittee on Securities, Insurance, and Investment yesterday to testify regarding the regulation of over-the-counter (OTC) derivatives. Her testimony provided an overview of OTC derivatives markets and made the case for bringing securities-related OTC derivatives under the purview of the SEC.

Chairman Schapiro noted that while transactions involving OTC derivatives can replicate the economics of securities transactions without involving the purchase or sale of actual securities, such transactions currently fall outside the umbrella of federal securities laws. As such, Chairman Schapiro discussed a "functional and sensible approach to regulation", in which the SEC would have primary responsibility for securities-related OTC derivatives, while the responsibility for all other derivatives, including those related to such things as commodities, energy and foreign exchange would rest with the Commodity Futures Trading Commission. Citing the close relationship between the securities markets and securities-related OTC derivatives, Chairman Schapiro emphasized the importance of ensuring that such OTC derivatives be "subject to the federal securities laws so that the risk of arbitrage and manipulation of interconnected markets is minimized." Subjecting securities-related OTC derivatives to federal securities laws would also provide a unified and consistent framework for securities regulation.

For the testimony of the other witnesses that appeared before the Subcommittee, click here.

IOSCO publishes report regarding regulation of hedge funds

The International Organization of Securities Commissions today released a report, entitled Hedge Funds Oversight: Final Report, containing "high level principles that will enable securities regulators to address, in a collective and effective way, the regulatory and systemic risks posed by hedge funds in their own jurisdictions while supporting a globally consistent approach."

The six principles outlined are:

  1. Hedge funds and/or hedge fund managers/advisers should be subject to mandatory registration;
  2. Hedge fund managers/advisers that are required to register should also be subject to appropriate ongoing regulatory requirements relating to organizational and operational standards, conflicts of interest and other business conduct rules, investor disclosure and prudential regulation;
  3. Prime brokers and banks that provide funding to hedge funds should be subject to mandatory registration, regulation and supervision and should have risk management systems and controls in place to monitor their counterparty credit risk exposures;
  4. Hedge fund managers/advisers and prime brokers should provide information for systemic risk purposes to the relevant regulator;
  5. Regulators should encourage and take account of the development, implementation and convergence of industry good practices, where appropriate; and
  6. Regulators should have the authority to cooperate and share information with each other where appropriate so as to facilitate efficient and effective oversight of globally active managers/advisers and/or funds.

The report, which was prepared by the IOSCO Task Force on Unregulated Entities established in November 2008 to support the G-20 in restoring global growth and reforming the world’s financial systems, recommends that all securities regulators apply these principles in their regulatory approaches.

IOSCO publishes report on regulation of short selling

On June 19, the International Organization of Securities Commissions announced the publication of Regulation of Short Selling, a report containing "high level principles for the effective regulation of short selling." The four principles recommended by the report are as follows:

  1. Short selling should be subject to appropriate controls to reduce or minimise the potential risks that could affect the orderly and efficient functioning and stability of financial markets.
  2. Short selling should be subject to a reporting regime that provides timely information to the market or to market authorities.
  3. Short selling should be subject to an effective compliance and enforcement system.
  4. Short selling regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development.

Germany restricts executive compensation

The Bundestag, Germany's lower house of parliament, has passed a law restricting executive compensation.  According to Bloomberg, the measures go beyond U.S. and British proposals on the subject.

SEC to target "dark pools"

In a speech to New York financial writers yesterday, Securities and Exchange Commission Chairman Mary Schapiro discussed the SEC's concerns with private automated trading systems known as "dark pools". Such private systems do not display quotes in the public quote stream and according to Ms. Schapiro, the "lack of transparency has the potential to undermine public confidence in the equity markets, particularly if the volume of trading activity in dark pools increases substantially." As such, the SEC intends to take a "serious look" at potential regulatory actions to protect investors and market integrity.

Treasury Department proposals include regulation of private fund advisors

As described yesterday, the U.S. Treasury Department's "Financial Regulatory Reform: A New Foundation" includes numerous proposals to address perceived inadequacies in U.S. financial regulation. Of particular note, the report proposes requiring that investment advisers to hedge funds and other private pools of capital (including private equity and venture capital funds) whose assets under management exceed "some modest threshold" be registered with the Securities and Exchange Commission under the Investment Advisers Act. Registration of such investment advisers would make them subject to recordkeeping and disclosure requirements, including requirements to report to investors, creditors and counterparties, as well as regulators. While the reporting may vary across the different types of private pools of capital, the report proposed confidential reporting to regulators of the amount of assets under management, borrowings, off-balance sheet exposures and other “necessary” information. As stated in the report, "[r]equiring the SEC registration of investment advisers to hedge funds and other private pools of capital would allow data to be collected that would permit an informed assessment of how such funds are changing over time and whether any such funds have become so large, leveraged, or interconnected that they require regulation for financial stability purposes."

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U.S. Treasury Department releases proposed financial regulatory reforms

On June 17, U.S. President Barack Obama announced a series of proposed financial regulatory reforms, found in the Treasury Department's "Financial Regulatory Reform: A New Foundation". The recommendations include proposals to create comprehensive regulation of all OTC derivatives, harmonize futures and securities regulation and strengthen oversight of systemically important payment, clearing and settlement systems. An executive summary of the proposals was also released, as were related fact sheets.

Further U.S. regulation of executive compensation expected

Secretary Geithner
Secretary Geithner
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The U.S. Securities and Exchange Commission released a statement Wednesday by Chairman Mary Schapiro regarding executive compensation. While recognizing that the SEC's role is not to set pay scales or cap compensation, Ms. Schapiro stated that the SEC will actively consider "a package of new proxy disclosure rules that will provide further sunshine on compensation decisions." A number of disclosure requirements that will be considered by the SEC were listed in the statement, including information regarding a company's overall compensation approach, potential conflicts of interest by compensation consultants and the experience and qualifications of director nominees.

On a similar note, Treasury Secretary Timothy Geithner released a statement after meeting with Ms. Schapiro, stating that legislation will be pursued in two specific areas respecting compensation practices. The first, "say on pay" legislation, would provide the SEC with authority to require that companies allow non-binding shareholder votes on executive compensation. The second proposed piece of legislation would provide the SEC with "the power to ensure that compensation committees are more independent, adhereing to standards similar to those in place for audit committees as part of the Sarbanes-Oxley Act."

SEC approves listing threshold for certain NYSE companies

Citing the "dramatic decline in stock prices and market capitalizations of many listed companies", the U.S. Securities and Exchange Commission recently published temporary changes filed by the New York Stock Exchange (NYSE) in its listing thresholds for certain listed companies. These changes went into effect on May 12, 2009, the date of filing by the NYSE, and will remain in force until October 31, 2009. Prior to these temporary amendments, the rules considered companies that qualified to list under the Earnings Test, Assets and Equity Test or the "Initial Listing Standard for Companies Transferring from NYSE Arca" standard of the NYSE's Listed Company Manual to be below compliance standards if their average global market cap over a consecutive 30 trading-day period was less than $75 million and, at the same time, total stockholders' equity was less than $75 million. These temporary changes have lowered the thresholds for these companies to $50 million. Although the changes are in effect, the SEC is inviting comments until June 25, 2009 as it has 60 days from the date of filing to abrogate the rule change.

U.S. GAO report recommends further industry guidance respecting short sales

The U.S. Government Accountability Office recently released a report with respect to its review of SEC rules and actions respecting naked short selling and failures to deliver. The report recommends that the SEC expedite the finalization of the temporary rule implemented in 2008 and develop a process that allows the SEC to "raise and resolve implementation issues that arise from SEC regulations".

For information on short sales in Canada, see our recent update of April 28, 2009.

SEC announces Investor Advisory Committee

On June 3, the U.S. Securities and Exchange Commission announced the creation of an Investor Advisory Committee. The Committee's scope includes advising the SEC on investors' concerns, providing perspectives on regulatory issues and serving as a source of information and recommendations with respect to the SEC's regulatory programs. The Committee is expected to begin its work in the next few weeks.

SEC proposes amendments to facilitate rights of shareholders to nominate directors

On May 20, the Securities and Exchange Commission proposed rule amendments "that would provide shareholders with a meaningful ability to...nominate the directors of the companies that they own." Under the proposals, shareholders that meet certain thresholds (including holding between 1% and 5% of the voting securities, depending on the circumstances) would be eligible to have their nominee included in proxy materials. The proposed amendments would also allow for shareholder proposals in proxy materials regarding a company's nomination procedures under certain circumstances.

Public comment on the proposed amendments will be accepted for 60 days after their publication.

SEC publishes uptick rule proposals

As recently announced, the SEC has been considering imposing restrictions on short sales and has now published its proposals on the subject. The options being considered include a short sale price test and a "circuit breaker" approach. The SEC is accepting comments on the proposals until June 19, 2009.

U.S. Eighth Circuit considers mutual fund adviser's fiduciary duties with respect to fees

The U.S. Court of Appeals for the Eighth Circuit recently released its opinion in Gallus v. Ameriprise, a case considering the scope of a mutual fund adviser’s fiduciary duties under section 36 of the Investment Company Act of 1940 (ICA). The Circuit Court found that while the Gartenberg v. Merrill Lynch case provided a “useful framework for resolving claims of excessive fees”, the size of the fee was not the only factor in considering an alleged violation of the ICA and that the adviser’s conduct during negotiation should also be considered. “[W]e read the plain language of § 36(b) to impose on advisers a duty to be honest and transparent throughout the negotiation process.”

In reversing the Minnesota District Court's decision, the Eighth Circuit found that the lower court should have compared the fees charged to institutional and mutual fund clients. “Indeed, the argument for comparing mutual fund advisory fees with the fees charged to institutional accounts is particularly strong in this case because the investment advice may have been essentially the same for both accounts.” Further, the District Court should have considered the defendants’ conduct “independent of the result of the negotiation” and specifically whether the defendants misled the plaintiffs with respect to the discrepancy in fees.

As such, the Eighth Circuit reversed the decision of the District Court granting the defendants summary judgment and remanded the case for further consideration.