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Posted on February 3, 2012
The Toronto Stock Exchange announced today that it has adopted amendments to its Company Manual to introduce a Canadian Due Bill tracking system. As we discussed in an earlier post, the TSX proposed a Due Bill system, intended to "improve the accuracy and timeliness of the valuation reporting of client's (sic) holdings when securities undergo certain material corporate events", in December 2011. No changes were made to the proposed amendments, and the amendments have now been approved by the OSC.
Posted on February 2, 2012
The Investment Industry Regulatory Organization of Canada (IIROC) today announced the implementation of single-stock circuit breakers to facilitate a halt across all marketplaces in the trading of a security experiencing rapid price movement. The circuit breaker program is intended to address short term, unexplained price volatility in individual securities.
Specifically, securities that are part of the S&P/TSX Composite Index, as well as ETFs comprised principally of listed securities, will be subject to trading halts in the event of a price increase or decline of at least 10% in a five minute period. The circuit breaker will initially halt the particular security for five minutes, and this time may be extended for a further five minute period if a significant imbalance of buy and sell orders remain. Circuit breakers will not be active in the first 20 minutes following the regular market opening nor in the 30 minutes prior to the regular close of trading.
Should IIROC determine that a further halt is required such as, for example, to allow for the dissemination of material news, IIROC may replace the single-stock circuit breaker halt with a traditional "regulatory halt". Any trades executed after the triggering of the circuit breaker but prior to the halt at more than 5% beyond the trigger price would be cancelled.
Single-stock circuit breakers will be implemented as part of an implementation phase expected to last between six months and a year, during which time IIROC intends to monitor trading in all securities on Canadian marketplaces. Following the initial implementation phase, IIROC intends to review the single-stock circuit breaker program and publish the results of its review, at which point it will solicit comment on whether adjustments should be made to the terms of the program.
IIROC today also released the public comments received in response to its initial proposals, released in November 2010, as well as its responses. The circuit breaker program announced today will ultimately be more limited than IIROC's initial proposal, which would have applied to all securities listed on a Canadian exchange. For more information, see IIROC Notices 12-0040 and 12-0041.
Posted on January 30, 2012
On January 27, the Investment Industry Regulatory Organization of Canada (IIROC) issued guidance with respect to the process to be followed by dealers, users and subscribers seeking to obtain an interpretation of, or exemption from, a provision of UMIR. The notice states that interpretation and exemption requests may be sought by phone or email. In the case of the latter, IIROC staff will generally require certain contextual information, including the name of the security, the facts giving rise to the request and an explanation as to why the exemption is necessary or desirable. In cases where an exemption request has been allowed or denied, staff will follow up with a written ruling.
The notice also provides guidance with respect to requests that a dealer be able to act as principal or agent in respect of a trade to be completed "off-marketplace". According to IIROC, it will grant such exemptions if the execution of the trade on a marketplace would be disruptive of a fair and orderly market or impractical in order for the seller, purchaser or their agents to comply with applicable securities legislation. The notice also sets out the most common exemptions granted to dealers to permit involvement in such trades.
For more information, see IIROC Notice 12-0029.
Posted on January 20, 2012
The OSC has announced that it has approved amendments to TSX rules and policies to repeal rules relating to "anti-scooping" and those setting out minimum capital and stabilization requirements for market makers. The amendments also allow market makers to fill booked odd-lot orders at the order's limit price rather than the prevailing bid and ask, and codify TSX requirements for the minimum guaranteed fill and odd lot facilities. As we discussed in a post last year, the amendments were first published for comment in September 2011. No changes were made to the proposed rule.
Posted on January 13, 2012
Alix d’Anglejan-Chatillon
On November 30, 2011, the Quebec Government passed omnibus amendments to financial services legislation under Bill 7, An Act to amend various legislative provisions mainly concerning the financial sector. Bill 7 amends various Quebec statutes regulating the provision of financial services across a broad range of areas such as whistleblower immunity, electronic communications with regulatory authorities, the receivership process for regulated firms, insider trading rules, fraudulent trading and the disclosure of false information to the Autorité des marchés financiers (AMF), Quebec’s financial services regulator.
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Posted on January 13, 2012
Alix d’Anglejan-Chatillon
On December 16, 2011, Quebec’s financial services regulator, the Autorité des marchés financiers (AMF), tabled proposed amendments to the Derivatives Regulation (Quebec) (QDA) which are intended to implement the provisions of the Derivatives Act (Quebec) governing “qualified persons” (the Proposals) In addition to the derivatives dealer and adviser registration requirements applicable to dealers and advisers in derivatives (the “derivatives registration requirement”), the QDA requires that a person, other than a regulated entity1 who “creates or markets a derivative” must be qualified by the AMF, as prescribed by regulation, before the derivative is offered to the public (the "qualification requirement"). Under an amendment not yet in force, the qualified person must also have the marketing of the derivative authorized by the AMF, as prescribed by regulation (the “authorization requirement”).
As outlined below, the Proposals would, among other changes, significantly increase the disclosure, compliance and reporting requirements applicable to Canadian and foreign intermediaries offering listed derivatives products in the Quebec market to any person, or OTC derivatives to persons other than “accredited counterparties”, unless a discretionary exemption can be obtained. The Proposals are published for a period of 30 days after which the AMF may submit the Proposals to the Minister of Finance for approval, with or without amendments. The AMF is accepting written comments on the Proposals until February 1, 2012.
Market participants conducting derivatives-related activities in the Quebec market should carefully review their product lines, and seek detailed advice as to whether the new qualification/authorization requirements will impact this business and what actions should be taken in contemplation of these new rules.
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Posted on January 12, 2012
Earlier this week, IIROC released draft guidance regarding the language it considers acceptable for marketplace disclosure on trade confirmations. Currently, IIROC's Dealer Member Rules require that trade confirmations disclose the stock exchange or commodity futures exchange on which a trade takes place. In cases where an order is executed on more than one marketplace existing guidance permits dealers to disclose that the order has been executed on multiple marketplaces. The confirmation, however, must also disclose that details of each trade are available upon request.
In light of the move towards a multiple marketplace environment, IIROC's proposals would revise current guidance to allow for more generic disclosure on trade confirmations. Specifically, trade confirmations for securities subject to UMIR could include the following disclosure language: "Traded on one or more marketplaces or markets, details available upon request."
The proposed language would be acceptable in circumstances where an order was executed on a single marketplace in Canada, multiple marketplaces in Canada, a foreign organized regulated market or any combination of one or more marketplace and foreign organized regulated markets.
Comments on the proposals are being accepted until March 9, 2012.
Posted on January 11, 2012
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.
Posted on January 11, 2012
On January 3, the British Columbia Securities Commission published a revised version of BC Interpretation Note 33-705. The revised note, which describes how the BCSC interprets and applies its conditions of registration for investment dealers with a BC office that trade in the U.S. OTC markets, reflects the fact that the conditions have now been extended to December 31, 2014.
Posted on January 11, 2012
On January 9, the Investment Industry Regulatory Organization of Canada (IIROC) published guidance regarding the procedures to be followed by a Participant (dealer) wishing to guarantee a trade price for a client order that outperforms a benchmark price. As we discussed last year, IIROC released a draft version of the guidance on July 4 that would allow a certain amount of "outperformance" to be guaranteed under certain circumstances if a dealer agreed to take the trade as principal. Under the initial proposal, dealers would only be able to guarantee outperformance up to a maximum of the lesser of 50% of the Participant's historical realized outperformance of the same benchmark over the prior calendar quarter and 30 basis points.
The final version of the guidance released yesterday, however, has been revised to address public comments received. Of particular interest, the guidance now provides that a dealer may guarantee outperformance up to a maximum of the greater of 50% of the Participant's historical realized outperformance of the same benchmark over the prior calendar quarter and 25 basis points. Thus, dealers will be able to guarantee outperformance of 25 basis points, even in the absence of a demonstrated ability to outperform the benchmark.
For more information, see IIROC Notice 12-0010.
Posted on January 4, 2012
Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 12-0001 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets for the first quarter of 2012. In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for Q1 2012 are 1,200 points, 2,400 points and 3,600 points respectively.
It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,200 points; Level 2 (20%) - 2,350 points and Level 3 (30%) - 3,550 points, and result in trading halts ranging from 30 minutes to the balance of the trading session, depending on the time of day and magnitude of the market decline.
Posted on December 22, 2011
The Toronto Stock Exchange proposed amendments to its Company Manual today to implement a Due Bill tracking system for listed issuers. A Due Bill is defined by the proposal to mean "an instrument used to evidence the transfer of title to any dividend, distribution, interest, security or right to a listed security contracted for, or evidencing, the obligation of a seller to deliver such dividend, distribution, interest, security or right to a subsequent purchaser." Comments on the amendments, which must still be approved by the OSC, are being accepted until January 23, 2012.
Posted on December 16, 2011
The Ontario Securities Commission recently approved amendments to the TSX's rules to prioritize dark orders of a certain minimum quantity over other dark orders, as long as the dark orders are at the same price. The amendments were first proposed in July, and no comments were received in response to the original proposals. Dark orders were launched on the TSX and TSX-V in March and the amendments are intended to provide an incentive to encourage dark orders of a larger size.
The amendments are part of an ongoing effort to address issues surrounding dark pools and dark orders in Canada. Proposed amendments to the Universal Market Integrity Rules were proposed by IIROC in July to address dark liquidity. Among other things, IIROC's proposals would introduce or amend definitions related to dark liquidity, allow IIROC to designate a minimum size for orders that would not be displayed in a consolidated market display and permit IIROC to designate a minimum size of an "iceberg" order that must be displayed in a consolidated market display. Comments on IIROC's proposed amendments were due by October 27, 2011.
The CSA, meanwhile, has also been studying issues surrounding dark liquidity, as we discussed in our post of August 2.
Posted on December 9, 2011
The Ontario Securities Commission today issued a notice approving Alpha Group's application to become a recognized exchange. The recognition will be effective on February 1, 2012 or on the date that the operations of Alpha ATS are legally transferred to Alpha Exchange, whichever is later.
The new Alpha Exchange intends to operate two distinct listing markets referred to as Alpha Main and Alpha Venture Plus. According to Alpha, issuers on the latter market are intended to be similar to issuers within Tier 1 of the TSX-V. The notice of approval also includes copies of the listing handbooks for each market.
Posted on December 2, 2011
As we discussed in October, TSX Inc. and TMX Select Inc. recently proposed the implementation of cancel on disconnect functionality that would provide the automatic cancellation of orders in the event of involuntary loss of connectivity between TMX and a client site. The TSX and TMX Select received no comment letters on their proposal and have now stated that they will publish a notice setting out the implementation date of the functionality.
Posted on November 30, 2011
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.
Posted on November 25, 2011
The Canadian Securities Administrators released a consultation paper today addressing the regulation of OTC derivatives markets. Specifically, the paper makes various recommendations regarding surveillance and monitoring, market conduct and enforcement that are intended to strengthen financial markets and manage specific risks related to OTC derivatives. The paper is one of a series of eight papers building on the high-level proposals found in Consultation Paper 91-401 released in November 2010.
Surveillance and Monitoring
Citing the limited market information currently available to regulators relating to the trading of OTC derivatives, the paper recommends that further study and research be undertaken on the development of a comprehensive surveillance system for monitoring OTC derivatives markets to supplement current market surveillance. According to the report, a comprehensive approach to surveillance and monitoring would include enabling regulator access to trading data and monitoring participant positions.
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Posted on November 25, 2011
Mihkel E. Voore and Ramandeep Grewal -
The Canadian Securities Administrators (CSA) proposed amendments today intended to expand the scope of marketing activities that can be conducted in connection with prospectus offerings and to clarify other related restrictions applicable to bought deals.
The amendments proposed to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and National Instrument 44-101 Short Form Prospectus Distributions (NI 44-101) expressly codify permissible “pre-marketing” and “marketing” activities that can be conducted prior to and after the filing of a preliminary prospectus. These proposals should provide some much needed clarity and guidance in connection with marketing activities given the disconnect between what is currently permissible under securities legislation and the practical reality of how offerings are marketed. In addition to expanding the scope of marketing activities that are expressly permitted, the CSA also clarify when the size of a bought deal can be enlarged or the bought deal syndicate can be expanded.
While the CSA’s stated intention is to expand the range of permitted activities, their views on matters such as non-offering roadshows, the commencement of distributions, and the exclusion of “market out” clauses from bought deal bid letters, may be at odds with some of the practices currently pursued by certain market participants.
The following are some highlights of these proposals, which will be discussed in detail in future updates:
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Posted on November 23, 2011
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.
Posted on November 18, 2011
Ramandeep Grewal -
The U.S. Securities and Exchange Commission recently imposed a $1 million administrative penalty against Pipeline Trading Systems LLC for misleading investors in connection with the operation of its dark pool. Pipeline was launched in 2004 as an alternative trading system operating as a “crossing network” to facilitate trades among institutional investors while minimizing market impact associated with information leakage about their large buy or sell orders. To that end, Pipeline advertised that to prevent pre-trade information leakage, it would not reveal the side or price of a customer order before a trade was completed. Pipeline also claimed that all users were treated equally.
According to the SEC, Pipeline’s claims were false and misleading because one of its affiliates (a trading entity owned by its parent company) filled the vast majority of customer orders on Pipeline’s system, by seeking to predict the trading intentions of Pipeline’s customers and trade elsewhere in the same direction as customers before filling their orders on Pipeline’s platform. Accordingly, the SEC found that Pipeline generally did not provide the “natural liquidity” it advertised. The SEC further found that the trading affiliate was given certain advantages not available to other users. These included providing the affiliate with a FIX connection to Pipeline's graphical user interface known as the "Block Board", soliciting and receiving input from the affiliate regarding the minimum order size for each stock, and providing the affiliate with information regarding ATS features designed to "predator proof" the system.
Ultimately, Pipeline was found to have violated the Securities Act prohibition against making false or misleading statements in the sale of securities, as well as Regulation ATS requirements regarding disclosure to be made to the SEC and the implementation of safeguards to protect confidential trading information.
The SEC release quotes Robert Khuzami, Director of the SEC’s Enforcement Division as saying that “[h]owever orders are placed and executed, be it on an exchange floor or in an automated venue, whether dark or displayed, one principle remains fundamental – investors are entitled to accurate information as to how their trades are executed.
Alternative trading systems compete with exchanges for trade execution by providing alternative operation models, trades types and fee structures to facilitate a wide range of execution strategies. Crossing systems or crossing networks generally do not offer price discovery but are intended to facilitate trades between buyers and sellers who quote their prices on other trading systems. Dark pools meanwhile, are trading systems that accept buy or sell orders without pre-trade transparency (disclosure of the details of the trade, specifically price and quantity).
ATSs are regulated in Canada under National Instrument 21-101 Marketplace Operation and National Instrument 23-101 Trading Rules. ATSs are also regulated by the Investment Industry Regulatory Organization of Canada (IIROC) through its UMIR and Dealer Member Rules.
Posted on November 11, 2011
Ramandeep Grewal -
The Canadian Securities Administrators (CSA) announced yesterday that they are undertaking a review of the “$150,000 minimum investment amount” and the “accredited investor” exemptions that are commonly used to raise financing on a prospectus exempt basis. The publication of CSA Staff Consultation Note 45-401 (Consultation Note) commenced a public consultation process intended to solicit feedback from investors, issuers and others on a number of possible changes to these exemptions.
The Consultation Note raises a number of questions, including whether these exemptions should be premised on financial resources (ability to withstand financial loss or obtain expert advice), access to financial and other key information about the issuer, educational background, work experience, investment experience, or some other criteria, and whether the involvement of a registrant (who has an obligation to recommend only suitable investments) addresses any concerns.
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Posted on November 4, 2011
On November 1, the Ontario Securities Commission hosted OSC Dialogue 2011, a conference featuring sessions with securities regulators and industry participants.
In his opening remarks, Ontario Securities Commission Chair Howard Wetston discussed the OSC's strategic direction and its role in policy development. Specifically, Mr. Wetston considered the changes in Canadian equity markets, including the move to multiple marketplaces, the recent proposals to strengthen enforcement and the need for investor protection.
Meanwhile, other sessions of interest to market participants included discussions of M&A trends, investor issues and regulatory developments. The OSC has now posted audio files of the various sessions on the conference webpage.
Posted on November 3, 2011
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.
Posted on October 28, 2011
The Ontario Securities Commission today published notice of OSC Rule 21-501, which is intended to extend the current exemption for government debt securities from the transparency requirements found in section 8.1 of NI 21-101 until December 31, 2014. The new rule is expected to come into force on December 31, 2011 and replace the current exemption found in section 8.6 of NI 21-101, which expires at the end of the year.
Posted on October 14, 2011
TSX Inc. and TMX Select Inc. published a notice today proposing the introduction of "Cancel on Disconnect" functionality that would provide the automated cancellation of orders in the event of involuntary loss of connectivity between TMX and a client site. According to the notice, the functionality would assist in mitigating the risks associated with having open orders during a loss of connectivity. Comments on the proposal are being accepted until November 14.
Posted on October 11, 2011
On October 7, the Autorité des marchés financiers (AMF) issued a notice of public consultation related to the application filed with the AMF on October 3 by Maple Group Inc. in connection with its proposed acquisition of TMX Group, and the subsequent proposed acquisitions of Alpha Trading Systems Limited Partnership, Alpha Trading Systems Inc. and the Canadian Depository for Securities Limited. The notice outlines the basis of Maple Group's application to the AMF, describes the proposed transactions, considers potential issues raised by the proposed transactions and requests comments on specific questions. Comments are being accepted until November 7. The AMF plans to hold public consultations in connection with the application at the end of November 2011.
Posted on October 7, 2011
The Ontario Securities Commission today issued a notice and request for comment related to the proposed acquisition by the Maple Group Inc. of TMX Group, Alpha Trading Systems Limited Partnership and Alpha Trading Systems Inc., the Canadian Depository for Securities Limited and, indirectly, CDS Clearing and Depository Services Inc. The OSC's notice summarizes the Maple Group's proposal, considers the potential issues raised and requests responses on specific questions. Comments are being accepted until November 7. The OSC also plans to hold policy hearings to consider the proposal in December 2011.
Posted on October 6, 2011
Ramandeep Grewal -
In Canada, prior to the proliferation of (Alternative Trading Systems (ATSs), a security was generally traded on a centralized exchange. As ATSs proliferate, buyers, sellers and their agents have a growing range of options when deciding where and how to execute a trade. ATSs compete with each other and with traditional exchanges by offering, among other things, different operating models, trade types and fee structures. The competition and innovation that are stimulated by the rise in multiple marketplaces also create complications. Regulators must grapple with how to regulate these electronic alternatives to traditional exchanges; registrants (brokers, dealers and advisers) must grapple with how to fulfill their duties to clients and other regulatory obligations in the face of multiple marketplaces; and investors need to be able to understand the available options and the opportunities or pitfalls that they represent.
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Posted on October 6, 2011
Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 11-0277 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets for the fourth quarter of 2011. 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 fourth quarter of 2011 are 1,100 points, 2,250 points and 3,350 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, 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 have decreased from those for the third quarter of 2011.
Posted on October 4, 2011
Last week, the BCSC published proposed amendments to the TSX-V Trading Rule Book to eliminate the "anti-scooping" rule. The changes have been proposed in order to level the playing field between professional traders and clients with sophisticated technologies. The amendments, intended to conform to the proposed change to the TSX Rules, will be open for comment until October 31.
Posted on September 30, 2011
The CSA published a staff notice today in response to inquiries about the financial information to be included in a prospectus during the time of an issuer's transition to IFRS. As we have previously discussed, Canadian reporting issuers have generally been required to transition to IFRS effective as of January 1, 2011.
Specifically, the notice highlights the difference between the information required when preparing an IPO prospectus (which must include Q1 IFRS transition information) as opposed to a short form or non-IPO long form prospectus (which need not). Q1 IFRS transition information refers to an opening statement of financial position as at the date of transition to IFRS and IFRS 1 reconciliations for the date of transition to the most recent annual period. The notice also discusses accounting principles for financial statements in prospectuses filed in the first year after transition.
For more information, see CSA Staff Notice 41-306.
Posted on September 29, 2011
Tim McCormick -
The Canadian Securities Administrators (CSA) have introduced a new mandatory regulatory regime for venture issuers intended to provide a more tailored approach to the regulation of the venture market. As discussed in an earlier blog post, on July 29, the CSA published for comment proposed rules and rule amendments in the form of Proposed National Instrument 51-103 Ongoing Governance and Disclosure Requirements for Venture Issuers (NI 51-103), which represents a comprehensive overhaul of the prospectus and private placement requirements, as well as continuous disclosure and governance obligations currently applicable to venture issuers.
The CSA’s proposals are ultimately intended to streamline venture issuer disclosure to reflect the needs of investors, while making disclosure requirements more suitable and manageable for issuers. The highlights of the proposals include replacing all current continuous disclosure and governance requirements (including audit committee and certification requirements) and modifying disclosure requirements in connection with long form prospectus offerings and rules for incorporation by reference in short form prospectuses and other documents. The proposals also introduce substantive corporate governance requirements relating to conflicts of interest, related party transactions and insider trading and propose to require delivery of disclosure documents on request only in lieu of mandatory delivery. Some of these changes are discussed in detail below.
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Posted on September 26, 2011
Last week, Alpha ATS LP announced plans to introduce two new order designations, intended to reduce instances of unintentional locked or crossed markets and trades at worse prices than available on other marketplaces by providing price protection for directed action orders.
Specifically, the "Protect Cancel" DAO designation would execute, to the extent possible, at the national best bid or offer before cancelling any residual volume that would cause a trade at a worse price than available on another marketplace, or unintentionally lock/cross the market. The "Protect Re-price" DAO designation, meanwhile, would execute, to the extent possible, at the national best bid or offer before adjusting the price of any residual volume that would cause a trade at a worse price than available on another marketplace or unintentionally lock/cross the market. Orders would be re-priced to one tick from the opposite of the national best bid or offer.
Other changes proposed by Alpha would eliminate "all or none" orders and improve the handling of mixed lot orders where a security has no odd lot dealer. Comments on the proposed changes are being accepted until October 24, 2011.
Posted on September 23, 2011
The OSC today released a report prepared by its Compliance and Registrant Regulation Branch that summarized the new and proposed rules impacting registrants, provided information intended to assist firms and individuals applying for registration, and identified deficiencies found in compliance reviews of registrants. The report primarily covered the OSC's 2011 fiscal year.
Of particular interest, the deficiencies highlighted by the report include: (i) inaccurate calculations by firms of excess working capital on Form 31-103F1; (ii) inadequate insurance coverage by registered portfolio managers and investment fund managers; (iii) a lack of disclosure by portfolio managers regarding the use of client brokerage commissions; (iv) a delegation of "know your client" and suitability obligations by portfolio managers; (v) EMDs selling exempt securities in reliance on the accredited investor exemption to investors who do not meet the definition; (vi) individuals trading on behalf of EMDs without being registered as a dealing representative with the EMD; and (vii) EMDs inappropriately using investor funds.
The report also provides a number of suggested practices to assist registrants in addressing the various identified deficiencies. Guidance was also included concerning such issues as the use of social media, marketing practices and the provision of online advisory services. For more information, see OSC Staff Notice 33-736.
Posted on September 21, 2011
The Investment Industry Regulatory Organization of Canada (IIROC) yesterday published proposed guidance related to marking orders entered on behalf of insiders and significant shareholders. Specifically, the proposal, intended to vary current guidance, would require all insider orders be marked with the Regulation ID Order Marker irrespective of whether any resulting trade would be subject to insider reporting requirements under applicable securities legislation.
Currently, the need to mark an order as "insider" is correlated to the requirements of NI 55-104 Insider Reporting Requirements and Exemptions in that the requirement generally only applies to orders of reporting insiders not otherwise exempted from reporting obligations in respect of a particular transaction. According to IIROC, the broader application of the marking requirements will improve IIROC's ability to assist in the detection of insider trading violations.
IIROC is accepting comments on the proposed guidance until November 21, 2011. For more information, see IIROC Notice 11-0269. For a background on last year's changes to Canada's insider reporting requirements, see our update of April 21, 2010.
Posted on September 19, 2011
Last week, the Toronto Stock Exchange announced that it had approved amendments to its rules to assist TSX market makers in light of the emergence of multiple marketplaces and an increasingly electronic trading environment.
Specifically, the proposed amendments, which still require the approval of regulators, would eliminate the rules relating to market maker capital requirements, stabilization and anti-scooping, and allow market makers to execute booked oddlots at their limit price. New requirements would also be introduced on the use of the Minimum Guaranteed Fill and oddlot facilities.
Ultimately, the proposed amendments are intended to support market making as a "viable business model" and continue to enhance liquidity on market makers' securities of responsibility. Comments on the amendments are being accepted until October 17, 2011.
Posted on September 19, 2011
As we discussed in a blog post of August 16, the British Columbia Securities Commission recently announced that, effective October 3, 2011, exempt distributions (private placements) in British Columbia will be subject to expanded post-trade disclosure requirements. These new rules are expected to have a chilling effect on private placements into British Columbia, particularly by foreign public companies and investment funds, and other issuers that are not “reporting issuers” (public companies) in Canada.
While issuers making an exempt distribution in B.C. will generally be required to file the new Form 45-106F6 (in addition to filing a Form 45-106F1 in other Canadian jurisdictions, as applicable), issuers that are not reporting issuers in any jurisdiction of Canada will have to comply with more onerous requirements. As we mentioned in our earlier blog post, however, an exempt distribution report on the new Form and on Form 45-106F1 will only be required for distributions effected pursuant to prescribed prospectus exemptions. The practical feasibility of collecting the required information and the fact that the additional information will be publicly accessible must be carefully considered by issuers before they decide to make a private placement in British Columbia.
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Posted on September 14, 2011
Staff of the Canadian Securities Administrators in Alberta, Ontario, Quebec, Nova Scotia, New Brunswick and the Northwest Territories published a notice yesterday setting out their concerns regarding the use of advertising that may attempt to promote an issuer's securities. While the notice applies to all types of media, CSA staff's concerns focus on the television ads used primarily by junior issuers that focus on the positive aspects of an issuer's business or its prospects. In the case of listed issuers, the stock symbol is prominently featured in the ads, whereas contact information is typically provided for investor inquiries for unlisted issuers.
According to CSA staff, such ads may fail to comply with disclosure requirements under securities legislation or may be misleading to investors. According to staff, such ads do not appear to be aimed at selling products or services or raising public awareness of the issuer but, rather, appear to try to promote interest in an issuer's securities. The notice, therefore, reminds issuers of the restrictions on advertising and marketing activities during a distribution or in furtherance of a distribution, as well as the additional disclosure restrictions and requirements applicable to mining and oil and gas projects.
Staff will continue to monitor advertisements by issuers going forward, and suggest that regulatory action could be taken should it appear that an advertisement is misleading to investors or contrary to the public interest.
For more information, see CSA Staff Notice 51-336 Issuers using Mass Advertising.
Posted on September 12, 2011
As we discussed in April, Alpha ATS announced earlier this year that it is seeking regulatory approval to become a recognized exchange. Alpha has since amended the market maker program portion of its application and regulators published the changes for comment last week. Comments are being accepted on the proposals until October 11.
Posted on September 2, 2011
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.
Posted on August 26, 2011
On June 4, 2010, the Investment Industry Regulatory Organization of Canada published proposed amendments to its Dealer Member Rules to address the fairness of pricing and transparency of OTC market transactions. The OSC and various other Canadian securities regulators have now approved the proposed amendments with minor modifications. The OSC's approval notice also contains a guidance note discussing the scope of the fair pricing rule.
Posted on August 26, 2011
As we discussed in April 2010, the Investment Industry Regulatory Organization of Canada proposed amendments to UMIR last year that would, among other things, replace the definition of "Market Maker Obligations" with a definition of "Marketplace Trading Obligations" and make various other changes to odd lot and marketplace trading obligations. The OSC and a number of other Canadian securities regulators have now approved the amendments, which become effective today. For more information, see IIROC Notice 11-0251.
Posted on August 26, 2011
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.
Posted on August 26, 2011
Staff of the Ontario Securities Commission today released a notice setting out their views on the application of prospectus requirements and product regulation in connection with cross-listings by foreign exchange-traded mutual funds.
According to OSC Staff, an ETF's exchange listing functions are "the primary distribution channel through which an ETF issues its securities to investors and increases its net assets". As such, OSC Staff do not consider a listing to merely provide a source of secondary market liquidity and a cross-listing would, thus, generally be considered a distribution in Ontario.
Foreign ETF providers must, therefore, file a prospectus and comply with investment fund product regulation before applying to cross-list on an exchange in Ontario. Foreign providers of comparable products that use a similar distribution structure would also fall under the same requirements.
OSC Staff indicated that they intend to monitor the issue and potentially consider whether a modified approach to cross-listing of foreign investment products is warranted. Staff also stated that they are open to considering exceptions to their approach. For more information, see OSC Staff Notice 81-715.
Posted on August 19, 2011
The Canadian Securities Administrators (other than the OSC) today released proposed amendments to Multilateral Instrument 11-102 Passport System in order to extend the passport system to appropriate provisions proposed for NI 21-101 Marketplace Operations and to certain new provisions of NI 23-103 Electronic Trading and Direct Electronic Access to Marketplaces. According to the CSA, the amendments are intended to "maintain the effectiveness of the passport system." Comments on the proposals are being accepted until October 20.
Posted on August 16, 2011
As has been widely reported, various European regulators have recently enacted temporary bans on short selling financial stocks in response to the market volatility of the past few weeks. Countries that have taken such steps include France, Italy and Spain. Meanwhile, it has been reported that Germany's Minister of Economics and Technology, Philipp Roesler has called for a similar short-selling ban across G-7 countries.
Whether such temporary bans will have the effect of calming markets remains to be seen. As we discussed in February 2009, an IIROC study that reviewed the impact of the Canadian restrictions on short sales in 2008 found that there appeared to be "no appreciable effect" on the price of the applicable securities.
Posted on August 15, 2011
On August 8, the Toronto Stock Exchange issued guidance stating that it considers any arrangement or agreement that decreases the effective conversion price of a previously issued convertible security to be subject to section 610(c) of the TSX Company Manual. Thus, any such agreement, including inducement payments in cash or securities to convert the securities, will be required to be submitted to the TSX for approval and will be reviewed as a new private placement.
The TSX also reminded listed issuers of their responsibility under section 602 of the Company Manual to promptly notify it of any changes to the material terms of a transaction whether or not such an amendment includes a further issuance of securities. The TSX thus stated that it must be promptly notified in advance of any transaction that may have the effect of decreasing the effective conversion price of previously issued convertible securities.
For more information, see TSX Staff Notice 2011-0003.
Posted on August 2, 2011
On July 29, the Investment Industry Regulatory Organization of Canada published proposed amendments to the Universal Market Integrity Rules that address the regulation of dark liquidity on Canadian markets.
The release of IIROC's proposals represents the next step in the effort by the Canadian Securities Administrators and IIROC to adopt regulations to address issues surrounding dark pools and dark orders. The proposed amendments released last week follow various previous steps taken by regulators to consider the issues, including a joint CSA/IIROC consultation paper released in 2009, a consultation forum held in March 2010 and a CSA/IIROC position paper published in November 2010.
Among other things, the proposed amendments would (i) introduce or amend, as the case may be, definitions of "better price", "dark order" and "last sale price"; (ii) allow IIROC to designate a minimum size for orders that are not displayed in a consolidated market display; (iii) allow IIROC to designate a minimum size of an "iceberg" order that must be displayed in a consolidated market display; (iv) provide that orders entered on a marketplace must trade with visible orders on that marketplace at the same price before trading with dark orders at the same price on that marketplace; and (v) require, subject to certain exceptions, an order entered on a marketplace that trades with an order that has not been displayed in a consolidated market display to either receive a better price or be for more than 50 standard trading units, or have a value of more than $100,000.
Comments on the proposals are being accepted until October 27, 2011. For more information, see IIROC Notice 11-0225.
For a discussion of the regulatory framework for dark liquidity, see IIROC Notice 11-0226 / Staff Notice 23-311, which was also published last week and contains a summary of public comments in response to the CSA/IIROC position paper of November 2010. Also see our post on the proposed amendments to NI 21-101 Marketplace Operations, which were published in March.
Posted on July 19, 2011
Earlier this month, the TSX released proposed amendments to its Rules that would allow dark orders with a minimum size condition to have trading priority over dark orders without such a condition, as long as the dark orders were at the same price. Dark orders were launched on the TSX and TSX-V in March and the proposed amendments are intended to provide an incentive to encourage dark orders of a larger size. Comments on the proposed amendments are being accepted until August 8.
Posted on July 15, 2011
The Canadian Securities Administrators today published proposed amendments to National Instrument 41-101 General Prospectus Requirements, NI 44-101 Short Form Prospectus Distributions, NI 44-102 Shelf Distributions, NI 81-101 Mutual Fund Prospectus Disclosure and related policies and consequential amendments. The stated purpose of the proposals are to "address user experience and the CSA's experience" with the prospectus rules since the implementation of NI 41-101 in March 2008. The proposed changes include those targeted at all issuers and others targeted only at investment funds.
Accordingly, the proposed amendments to the rules are intended to, among other things, clarify provisions of the prospectus rules, address gaps that have been identified, streamline certain requirements that have proven burdensome for issuers and codify prospectus relief that has been granted. Changes are proposed to, among other things, requirements for filing personal information forms (PIFs), guidance on when contractual rights of rescission may be required in respect of securities underlying convertible, exchangeable or exercisable securities and clarification regarding historical financial statements disclosure for primary businesses or predecessor entities.
Comments on the proposals are being accepted until October 14.
Posted on July 13, 2011
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.
Posted on July 6, 2011
The Canadian Securities Administrators released a staff notice yesterday summarizing findings from a focused compliance review of the marketing practices of firms registered as portfolio managers. The review, which looked at a representative sample of 56 portfolio managers, identified a number of deficiencies in the preparation, review and use of marketing materials, including with respect to the use of hypothetical performance data, exaggerated claims and the use of benchmarks. The notice also provides guidance with respect to suggested practices to address specific concerns.
Interestingly, the notice also includes a discussion of the use of social media for marketing purposes. While the CSA found that portfolio managers do not generally employ social media to currently market services, firms may be considering doing so. To that end, the CSA state that they expect firms and registered individuals to comply with regulatory requirements and legislation in using such websites. Thus, according to the notice, firms contemplating the use of social media should consider: (i) establishing policies and procedures for the review, supervision, retention and retrieval of materials on social media websites; (ii) designating an appropriate individual to be responsible for the supervision or approval of communications; and (iii) reviewing the adequacy of systems and programs to ensure compliant record retention and retrieval capability.
For more information, see CSA Staff Notice 31-325.
Posted on July 6, 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.
Posted on July 5, 2011
The Alberta and British Columbia Securities Commissions recently released a joint notice requesting comments on proposed amendments to the TSX Venture Exchange Rule Book that would allow the TSX-V to provide an automated market-on-close facility and a special trading session at the end of the day to enable traded and the submission of crosses at the last sale price.
The TSX-V's market on close facility would operate in materially the same way as the TSX facility, which is described as providing an efficient mechanism to establish the closing price, mitigating volatility around the close and encouraging increased liquidity for index related securities. The TSX-V's MOC facility would initially include all securities in the S&P/TSX Venture 30 Index and additional stocks could be added when new indexes are created or through customer requests.
Comments on the proposed amendments will be accepted until July 11.
Posted on June 23, 2011
The Canadian Securities Administrators today released a consultation paper that proposes a framework of rules for the reporting of OTC derivatives transactions and the operation of trade repositories. The paper builds on the high-level proposals released in CSA Consultation Paper 91-401, published in November 2010, and considers such issues as trade repository governance requirements, transaction reporting obligations and access to confidential trade repository information. The proposals, intended to provide consistency with international principles, are open for public comment until September 12, 2011. For more information, see CSA Consultation Paper 91-402 Derivatives: Trade Repositories.
Posted on June 17, 2011
The CSA today published for comment revised proposals to amend National Instrument 54-101 Communications with Beneficial Owners of Securities of a Reporting Issuer. The proposals, which were originally published in April 2010, are intended to provide reporting issuers with a "notice-and-access" model for sending proxy-related materials, simplify the process of appointing beneficial owners as proxy holders and requiring enhanced disclosure of the beneficial owner voting process. The CSA's revisions reflect changes made in response to public comments received on the original proposals.
For example, the current form of amendments would now permit reporting issuers to use notice-and-access for "special meetings". The revised proposals also include various new obligations, such as requiring reporting issuers to provide advance notice of their first use of notice-and-access and requiring the inclusion of a plain-language explanation of notice-and-access in the notice package sent to shareholders.
The CSA are accepting comments on the proposed amendments until August 16.
Posted on June 16, 2011
Late last week, the Canadian Securities Administrators, other than the OSC, released for comment a proposed multilateral instrument that would essentially apply continuous disclosure requirements to OTC issuers that have a significant connection to a Canadian jurisdiction (including those that are already reporting issuers at the time the rule comes into force. An OTC issuer would be an issuer who has securities quoted on any U.S. OTC market, unless the issuer is also listed or quoted on another prescribed market. A significant connection would exist where (i) the OTC issuer's business was directed or administered in or from Canada; (ii) promotional activities were conducted from Canada; or (iii) if the issuer distributed securities in Canada prior to obtaining a ticker symbol for the purpose of having its securities quoted on an OTC market in the U.S. and those securities became the issuer's OTC-quoted securities.
The rule is aimed at curbing the manufacture and sale in Canada of U.S. OTC quoted shell companies that can be used for abusive purposes. The BCSC adopted a similar rule back in 2008 which, according to the CSA notice, led to the migration of some OTC reporting issuers to other Canadian jurisdictions. In this respect, the proposed rule would also impose certain prohibitions and restrictions, including denying the use of certain exemptions, requiring that certain sales be made through registrants and imposing legend requirements.
Issuers subject to the instrument would generally have to comply with the continuous disclosure regime to which venture issuers are subject and, additionally, also file annual information forms (which venture issuers may do voluntarily, but are not required to). Once an issuer triggered the requirements, the OTC Rule would continue to apply for at least one year, continuing to apply after that time only if the issuer was directed or administered or carried out promotional activities in or from a Canadian jurisdiction. The CSA is accepting comments on the proposed instrument until September 9, 2011. For more information, see Proposed Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets.
Posted on June 15, 2011
As we discussed on April 1, the CSA recently published proposals to establish a new framework for regulating securitized products. Today, the CSA announced that the comment period, originally scheduled to end on July 1, has been extended to August 31.
Posted on June 10, 2011
As we discussed in October, the TMX Group announced last year that it intended to begin operating a new alternative trading system (ATS) in 2011. It has now been announced that the new platform, TMX Select, will begin trading on July 11. A phased approach will be taken to the addition of securities to the platform, with eight available at launch and four the following week. According to TMX Select, the marketplace will offer extended trading hours and symmetrical pricing on both sides of a trade.
For more information, see the TMX's release 2011-034, which also includes a fee schedule, as well as IIROC Notice 11-0174.
Posted on May 27, 2011
On May 20, the OSC published a request for comment on proposed amendments to the CDS Rules that would require participants to withdraw securities from the CDSX system in uncertificated format where the issuer offers a direct registration system. The notice provides a description of how the paperless processing would work:
Under the amended Rules, when a participant withdraws a security from CDSX and the issuer uses DRS (direct registration system), CDSX will default the withdrawal request to DRS format instead of a physical certificate; the participant will not have the option to choose certificated format for the withdrawn securities. The transfer agent will not deliver a physical certificate evidencing the withdrawn security. Instead, the transfer agent will issue a statement to the new registered holder of the withdrawn security confirming that the security has been transferred and is now registered in the name of the new holder (generally the participant's customer).
The proposal is intended to progress the objective of paperless processing of securities transactions and holdings.
Meanwhile, another notice released the same day proposed allowing CDS to establish limited exemptions to the requirement that all entitlements on eligible securities be paid by an acceptable electronic means. While the requirement is scheduled to become effective on November 1, 2011, CDS determined that not all issuers and agents are yet able to comply with the requirements.
Both proposals are open for 30-day comment periods.
Posted on May 24, 2011
TSX Inc. recently approved amendments to its rules, which have now been submitted to the OSC for approval, that would facilitate the trading of securities that are not listed on the TSX but are listed on another exchange recognized by a Canadian securities regulator. The OSC has now published the proposal for a public comment period that runs until June 20.
Specifically, the proposed amendments would distinguish between securities that are listed and traded on the TSX and those that are not listed, but posted for trading. According to the TSX, all securities traded, whether listed or not, would trade in the same book and all trades would be subject to TSX rules. Furthermore, order entry would be identical for both types of securities.
The proposed amendments anticipate growing competition in the Canadian equity trading business, especially in light of Alpha Exchange Inc.'s application to operate as an exchange. According to the notice,
As the multi-marketplace environment in Canada continues to increase its breadth and depth, TSX is in a unique position to meet the needs of its Participating Organizations (POs) and investors. Clarifying the TSX Rules to permit trading in securities that are not listed by Toronto Stock Exchange allows TSX to leverage its trade execution strength in the event that it determines to trade securities that are listed on another Canadian exchange.
Posted on May 19, 2011
Later this afternoon, the Investment Industry Regulatory Organization of Canada (IIROC) will be posting on its website a recorded webcast considering the Canadian and U.S. perspectives on fiduciary standards and the differences between such a standard and the suitability standard. The webcast will be available for viewing as of 4:00 p.m. today.
As we wrote in March, SEC staff have recently recommended a uniform fiduciary standard for investment advisers and broker-dealers in the U.S. Our colleague Ed Waitzer also considered the standards to which financial advisers in the U.S. and Canada are subject in his post of February 17, 2011.
Posted on May 13, 2011
The OSC today released a staff notice expressing concern that issuers and dealers are relying on the accredited investor exemption to sell exempt securities to individual investors who do not meet the applicable requirements of the exemption. According to the OSC, many dealers are failing to collect adequate know-your-client (KYC) information to reasonably determine whether the investor is an accredited investor, and today's notice is intended to set out the OSC's expectations for issuers and dealers selling securities to accredited investors.
The notice focuses on the $1,000,000 financial asset and $5,000,000 net asset tests that apply to individual investors under the definition of "accredited investor" in National Instrument 45-106 Prospectus and Registration Exemptions. Staff have expressed concern that the two concepts are being confused. The higher threshold test based on "net assets" could include an investor's personal residence or other real estate (minus liabilities) whereas the lower test based on "financial assets" does not. According to staff, some dealers are not making it clear to clients that a personal residence or other real estate cannot be included for the purposes of determining financial assets.
The notice also provides a non-exhaustive list of steps that dealers should take when selling exempt securities, including:
- reading and understanding the definition of accredited investor;
- developing an accurate form for collecting KYC information;
- explaining the accredited investor definition to clients and ensuring that the KYC forms are properly completed;
- not selling an exempt security unless there is sufficient information to determine whether the client qualifies;
- ensuring the exempt security is suitable for the client;
- reviewing the KYC form;
- retaining applicable documentation;
- establishing appropriate policies and procedures; and
- reporting the sale of exempt securities.
Notably, with respect to the issue of sufficient information, the notice states that it is not sufficient for issuers and their dealers to simply rely on a client initialling or checking off a box on an accredited investor certificate and that the information contained in the client's completed KYC form or other documentation must also demonstrate that the investor meets the test. Verbal representations, according to OSC staff, are also not sufficient to support that an investor meets the definition.
For more information, see Staff Notice 33-735.
Posted on May 13, 2011
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.
Posted on May 6, 2011
The Canadian Securities Administrators today released a revised version of CSA Staff Notice 24-305, which sets out questions and answers regarding compliance with National Instrument 24-101 Institutional Trade Matching and Settlement. The original version of the notice, published in December 2007, was updated to reflect recent amendments to NI 24-101 that came into effect last year and to address inquiries received by the regulators.
As we discussed in April 2010, the institutional trade matching requirement of noon on T + 1 was phased in and has been the DAP/RAP requirement since July 1, 2010. These changes were part of a comprehensive overhaul of institutional trade matching requirements first introduced in 2007 and discussed in detail in our post of June 2007.
Posted on May 6, 2011
As we discussed in posts of February 25 and March 18, IIROC has requested comments on proposed amendments to the UMIR that would, among other things, repeal short sale price restrictions currently applicable on Canadian markets. The comment period for the proposed amendments is quickly drawing to a close and ends on May 26, 2011. IIROC's proposals would see the repeal of the tick test and introduce the requirement that all short sales be marked as such. However, orders from accounts meeting specific requirements (including certain arbitrage and institutional accounts) would qualify for a "short-marking exempt" designation.
Of particular interest in the notice are IIROC's comments regarding the disclosure of short sale activity. Specifically, in response to the IOSCO principle stating that short selling should be subject to a reporting regime that provides timely information to the market or market authorities, IIROC confirms that it recognizes the problems associated with current short position reporting. IIROC communicates its intention, therefore, to produce and publicly release, semi-monthly, short sale summaries based on aggregated trading data across all marketplaces regulated by IIROC for orders that are marked as short sales, to be implemented following the implementation of the proposed amendments. The nature and scope of this disclosure remains to be seen.
According to IIROC, the CSA and IIROC are proposing to publish a joint notice to solicit feedback on whether additional proposals to enhance disclosure of short sales and failed trades in Canada are required. For example, the joint notice may seek comment on whether "disclosure of short positions by institutional investors may be necessary, similar to 'buy-side' reporting requirements that have been or are being widely implemented in other jurisdictions" as well as the type, level and frequency of public disclosure of failed trades in equity securities traded on all Canadian marketplaces and cleared through CDS.
This subsequent notice on enhanced disclosure, however, has yet to be published. In the U.S., meanwhile, the SEC recently issued a request for comment on the feasibility of requiring real-time reporting of short sale positions of publicly listed securities, either publicly or only to the SEC and FINRA. In a sign of what may be to come in Canada, the SEC notice asks specific questions of market participants, including with respect to the benefits and costs of real time reporting of investors' short positions.
Posted on May 6, 2011
CDS Clearing and Depository Services Inc., the national securities depository, clearing and settlement hub, today released proposed amendments to replace the intraday continuous net settlement process (which currently runs four times a day) with a real-time continuous net settlement process. Proposed material amendments to CDS procedures to address the replacement of the process were also published. Both sets of proposals are open for comment for 30 calendar days.
Posted on May 3, 2011
Last month, the Ontario Securities Commission announced that it had secured the first finding of guilt for fraud in quasi-criminal proceedings it has brought before the Ontario Court of Justice. The accused pled guilty to fraud contrary to section 126.1 of the Securities Act (Ontario) in relation to his role with a company operating an unregistered securities sales office that offered trading units of limited partnerships fraudulently represented to constitute ownership interests in oil and gas leases. Sentencing is scheduled for November 24, 2011.
Posted on April 29, 2011
The Canadian Securities Administrators (CSA) today published for comment proposed amendments to National Policy 11-201 Delivery of Documents by Electronic Means. The proposals are intended to, among other things, simplify guidance on the form and substance of securityholder consents with respect to electronic delivery of documents and reduce technology-related language in the policy to avoid obsolescence. The CSA is accepting comments until June 29 and has formulated specific questions for the consideration of industry participants and investors.
Posted on April 25, 2011
Mark McElheran
The proposed exempt distribution rules published for comment by the CSA on April 1, 2011, if enacted as proposed, will have a very significant impact on the exempt market for securitization transactions and would effectively transform the exempt market for securitized products into a quasi-public market. In addition to narrowing the scope of eligible exempt investors (creating a special category of “eligible securitized product investors”, which has been discussed in a previous post), the proposed amendments to NI 45-106 would also impose significant disclosure obligations at the time of issuance and on a continuous basis and create certification requirements as part of a broader statutory civil liability regime. The proposed changes to the exempt market are a significant departure from traditional securities regulatory policy and its emphasis on the protection of unsophisticated investors.
Continue Reading...
Posted on April 11, 2011
On April 8, the Canadian Securities Administrators (CSA) published for comment proposed National Instrument 23-103 Electronic Trading and Direct Electronic Access to Marketplaces. As we discussed in our post of March 11, the CSA and IIROC have been examining issues relating to direct electronic access and risks associated with electronic trading for some time.
The proposals are intended to regulate electronic trading generally by
- imposing requirements on marketplace participants that electronically access marketplaces. Specifically, the proposal addresses issues regarding marketplace participant controls, policies and procedures and the use of automated order systems;
- imposing a framework around the provision of direct electronic access. For example, participant dealers would have to establish appropriate standards for their clients before providing clients with direct electronic access. Client minimum standards would include appropriate financial resources and a knowledge and ability to comply with applicable regulatory requirements; and
- imposing additional requirements on marketplaces related to electronic trading. For example, the proposal addresses issues regarding reasonable access to a participant's own order and trade information, marketplace thresholds, and clearly erroneous trades.
In developing its proposals, the CSA reviewed related initiatives in the U.S., Australia and the European Union and according to the CSA, its proposed requirements are in line with the principles found in the IOSCO report on direct electronic access. Comments are being accepted on the proposals until July 8, 2011
Posted on April 4, 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.
Posted on April 4, 2011
As we discussed on Friday, the Canadian Securities Administrators published for comment last week proposed new rules for regulating securitized products. Our colleagues in the Structured Finance group have published a more detailed review of these proposals, including some of the issues the proposals raise, on their blog.
Posted on April 1, 2011
The Canadian Securities Administrators (CSA) today published for comment proposals to establish a new framework for regulating securitized products. The proposals consist of a new instrument governing supplementary disclosure requirements for prospectus distributions of securitized products, as well as new disclosure and certification rules. According to the CSA, the proposals are intended to facilitate transparency in the securitization market, ensure that investors have access to adequate information, and be proportionate to the risks associated with the types of securitized products available in Canada. Comments are being accepted by the CSA until July 1, 2011.
Posted on April 1, 2011
The Ontario Securities Commission published a staff notice today to advise of procedural changes relating to the review of personal information forms (PIFs) in connection with prospectus offerings. The notice also gives guidance on dealing with common deficiencies found by OSC Staff in preliminary prospectus filings and on timing issues related to issuances of prospectus receipts. As part of the procedural changes relating to PIFs, the OSC is asking that prescribed information be set out in cover letters accompanying the materials filed with a preliminary prospectus in order to facilitate its review of PIFs. The notice also reminds issuers that where an issuer has reason to believe that information contained in a previously filed PIF has materially changed, the issuer should deliver a new PIF for that individual concurrent with filing its preliminary prospectus. For more information, see OSC Staff Notice 41-702.
Posted on April 1, 2011
In a decision released yesterday, the Quebec Court of Appeal found plans for a national securities regulator to be outside the jurisdiction of the federal government. As we recently discussed, an Alberta ruling of last month came to the same conclusion. The issue is set to be considered by the Supreme Court of Canada at hearings scheduled for April 13 and 14, 2011.
Posted on April 1, 2011
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.
Posted on April 1, 2011
The Investment Industry Regulatory Organization of Canada (IIROC) has issued revised guidance on best execution and management or orders, as well as with respect to the use of certain order types. IIROC originally published the guidance for comment in November 2010, and yesterday's notices include a summary of comments received and IIROC responses.
The revised notices provide guidance with respect to the management of order flows in the context of best execution obligations and the use of certain order types in the context of recent developments in Canadian market structure. For more information, see IIROC Notices 11-0112, 11-0113 and 11-0114.
Posted on March 18, 2011
The Canadian Securities Administrators (CSA) today published proposed amendments to NI 21-101 Marketplace Operations, NI 23-101 Trading Rules, their companion policies and related forms with the objective of updating and streamlining the instruments' regulatory and reporting requirements.
According to the CSA, the amendments are intended to: (i) increase consistency and streamline the regulatory and reporting requirements of marketplaces; (ii) revise transparency requirements respecting marketplaces dealing in exchange-traded securities; (iii) increase transparency of marketplaces operations; (iv) address other requirements applicable to marketplaces, such as with respect to conflicts of interest that may arise at a marketplace; (v) provide guidance regarding when a dealer would be considered to operate a marketplace; (vi) extend the current exemption from transparency requirements applicable to government debt securities until December 31, 2014; (vii) extend the obligation to not intentionally lock or cross the markets to marketplaces in certain circumstances; and (viii) revise the existing requirements applicable to the information processors.
The CSA is accepting comments until June 16.
Posted on March 18, 2011
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.
Posted on March 18, 2011
Raman Grewal
As we discussed in February, the Investment Industry Regulatory Organization of Canada released proposed amendments to the Universal Market Integrity Rules last month that would repeal the restrictions on the price at which a short sale may be made on Canadian markets.
As discussed in detail in our post of April 28, 2009, currently under UMIR, a short sale may not be made unless the price is at or above the last sale price for that security, subject to certain exceptions (referred to as the tick-test or the “uptick rule”) and there must be a “reasonable expectation” of settling the trade.
Under the proposed amendments, all price restrictions relating to short sales would be repealed and all short sales would be subject to the requirement to be “marked” as short sales, other than those exempt from marking as “short-marking exempt” orders. IIROC would have the ability to designate securities as being “short sale ineligible securities” and “pre-borrow” requirements would be imposed on certain securities (requiring that the person entering the order have made arrangement to borrow the securities that would be required to settle the trade prior to the entry of the order).
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Posted on March 14, 2011
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".
Posted on March 11, 2011
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.
Posted on March 11, 2011
On February 28, the Alberta Securities Commission proposed the repeal of Blanket Order 91-503, which currently exempts most over-the-counter derivatives from the definition of "futures contract" under the Alberta Securities Act and, thus, exempts such OTC derivatives from regulation as "securities".
The ASC would replace Blanket Order 91-503 with Rule 91-505 Over-the-Counter-Derivatives, which is intended to restore the ASC's authority to regulate OTC derivatives transactions as futures contract transactions under the Act. The proposed Rule 91-505, however, would recognize the fact that such transactions are generally confined to large institutional entities and exempt distributions of a futures contract from the prospectus requirement under the Act.
However, an exemption from the dealer registration requirement would only apply to OTC physical commodity contracts. The Rule defines OTC physical commodity contract to mean a futures contract that (i) is not an exchange contract; (ii) contains an obligation to make or take future delivery of a commodity other than cash or a currency; and (iii) does not allow for cash settlement in place of physical delivery.
Unless addressed in the context of further harmonization of dealer registration requirements or otherwise, as it currently stands, the proposal replaces the broader dealer registration exemption with a narrow exemption limited to OTC physical commodity contracts. As such, under the proposal, there would no longer be an exemption for qualified parties.
The ASC is accepting comments on its proposal until April 29, 2011. For more information, see ASC Staff Notice 91-703 Over-the-Counter Derivatives.
Posted on March 8, 2011
The Alberta Court of Appeal has just released its decision on the reference made by the Alberta government regarding the federal government's plan to implement the proposed federal Canadian Securities Act. According to the Alberta Court of Appeal, the proposed Act exceeds the constitutional authority of the Parliament of Canada as it encroaches on provincial jurisidiction.
The Alberta Court of Appeal's decision in one of among three references currently pending on the issue. The Department of Finance released the proposed Canadian Securities Act in May 2010 and the Canadian Securities Transition Office has since been working on a plan for transitioning securities regulation to a federal regulator. The Quebec Court of Appeal held hearings on the constitutionality of the federal Act in January, while the Supreme Court of Canada is scheduled to hold hearings on the issue on April 13 and 14, 2011.
Posted on March 7, 2011
As part of its plain language rules rewrite project, the Investment Industry Regulatory Organization of Canada (IIROC) recently released proposed Rules 2100 through Rules 2700 regarding dealer member organization and registration. Beyond rewriting the rules in plain language, the proposals make a number of substantive changes, including with respect to ownership of a dealer member's securities and dealer member structure, in order to, among other things, clarify IIROC's expectations and ensure that the rules reflect actual IIROC practices.
Comments on the proposals are being accepted for 90 days from publication. For more information, see IIROC Notice 11-0061.
Posted on March 1, 2011
On February 25, IIROC announced that the requirement to provide a report of a trade variation or cancellation will be in effect as of June 1, 2011. The requirement to provide a report of an extended failed trade will also be implemented on the same day. IIROC approved the reporting requirements in October 2008, but had deferred implementation.
For more information, see IIROC Notices 11-0079 and 11-0080.
Posted on February 25, 2011
The Investment Industry Regulatory Organization of Canada today released proposed amendments to the Universal Market Integrity Rules that would repeal the restrictions on the price at which a short sale may be made on Canadian markets. The proposals would also generally require that Participants and Access Persons make arrangements to borrow the securities necessary to settle any short sale prior to the entry of the order if: (i) the security has been designated as a "Pre-Borrow Security"; (ii) the account on whose behalf the order is being entered has previously executed a failed trade that was not rectified within the required time; or (iii) the Participant has executed as principle a failed trade that was not rectified within the required time.
For more information, see IIROC Notice 11-0075.
Posted on February 25, 2011
The Canadian Securities Administrators yesterday published guidance regarding the use of a "Fund Facts" document to an satisfy current prospectus delivery requirements. While amendments to NI 81-101 Mutual Fund Prospectus Disclosure to finalize requirements to produce and file the Fund Facts document became effective on January 1, 2011, the use of the Fund Facts will not be mandatatory until later this year. Yesterday's notice, however, anticipates requests by investment funds for exemptive relief to use the Fund Facts before their mandatory use (April 8, 2011 to begin filing the Fund Facts documents with prospectuses, while funds will have until July 8, 2011 before the Fund Facts documents must be filed for each class or series of securities of the mutual fund).
As such, the guidance sets out a number of terms and conditions that the CSA anticipates requiring as part of such an exemption:
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Posted on February 22, 2011
According to an article in today's Globe and Mail, the OSC has been "widening the net" as it investigates potential cases of insider trading in advance of major corporate deals and announcements. OSC enforcement director Tom Atkinson is cited as stating that the sources of insider trading are rarely executives of a company but, rather, employees of the law, accounting, consulting and investment firms involved in deals.
The article also discusses the OSC's new Trade Nexus software, which "allows the OSC to search trading data and look for patterns using numerous variables. It can also be used to identify webs of connections as investigators check to see whether more than one person is involved in a case."
Posted on February 18, 2011
The Ontario Securities Commission has now approved new MFDA Rule 2.4.4 and amendments to MFDA Rule 5.1. As we discussed in November, Rule 2.4.4 requires MFDA members, prior to the acceptance of an order, to inform clients of sales and service charges, as well as any other fees to be deducted in respect of the proposed transaction. Meanwhile, amendments to Rule 5.1 require MFDA members to maintain evidence that clients were informed of such fees and charges.
Posted on February 17, 2011
As published in Tuesday's Financial Post
Edward Waitzer -
In January 2004, the Ontario Securities Commission released a concept paper advocating a "fair dealing model." The paper acknowledged that the regulatory regime -- regulating dealers and their representatives through the products they sell -- was based on the outdated assumption that transaction execution is the primary reason people seek financial services. Recognizing that most customers are seeking advice, the concept paper proposed changing the regulatory framework to focus on the advisory relationship.
Financial professionals and salespersons in Canada are allowed to call themselves advisors, irrespective of their professional designation. Few, however, are compensated directly for their advice. Instead, they are paid commissions to sell specific products. Addressing the conflicts of interest that result from commission-based compensation, the paper proposed that retail clients should be entitled to rely on objective advice that is in their best interest and, when there are conflicts of interest, they should be clearly disclosed so that the client can understand the conflicts and how they may affect the advice given.
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Posted on February 11, 2011
The OSC released a staff notice this week regarding business continuity planning and, specifically, the industry-wide test scheduled by IIROC for September 10, 2011. While the testing is voluntary, OSC staff
encourage all dealers, marketplaces and clearing agencies to participate in the September 2011 market-wide exercise organized by IIROC. Participation in this exercise may facilitate the discovery of any potential communication issues, points of failure between industry participants within and across different jurisdictions or other issues with services provided by third-party service providers.
Notably, the notice states that the OSC is also considering whether to make such testing mandatory "through rule proposals or additional requirements in the recognition orders of various entities." For more information, see OSC Staff Notice 11-764.
Posted on February 9, 2011
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).
Posted on February 8, 2011
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:
- 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.
- 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.
- Key information should be delivered or made available that is appropriate for the target investor.
- 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.
- Key information disclosures should be clear, accurate and not misleading to the target investor. Disclosures should be updated on a regular basis.
- 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.
Posted on February 4, 2011
The Toronto Stock Exchange today released proposed changes to its Company Manual for public comment that would, among other things, create a new subcategory for oil and gas issuers in the development stage. Listing requirements under this subcategory would include contingent resources of $500 million and a minimum market value of the issued securities to be listed of $200 million.
The proposed changes to the Manual also include : (i) amendments intended to pre-empt avoidance of security holder approval requirements in the case of insider transactions regarding private placements; (ii) an exemption from security holder approval for employment inducements where the aggregate number of securities issued to officers under the exemption in the preceding year is no more than 2% of the outstanding securities; and (iii) removing the requirement that rights offerings must be unconditional.
Comments on the proposals are being accepted until March 7, 2011.
Posted on February 3, 2011
IIROC published guidance on February 1 on specific questions respecting “locked” and “crossed” markets in the context of NI 23-101 Trading Rules and its companion policy. The guidance reflects the repeal of the "best price" obligation and the other consequential amendments to UMIR discussed in our post of earlier today. IIROC published a proposed version of the guidance in April 2010 and yesterday's notice also provides responses to comments it received on its original proposals.
For more information, see IIROC Notice 11-0042 and IIROC Notice 11-0043.
Posted on February 3, 2011
The Ontario Securities Commission announced last week that it has approved amendments to IIROC's Universal Market Integrity Rules, proposed in November 2009, that are consequential to the CSA's implementation of changes to National Instrument 23-101 Trading Rules regarding trade-through protection.
Among other things, the amendments, effective February 1, 2011, will repeal the rule and policies respecting the "best price" obligation of participants, provide that the order protection rule cannot be avoided when a participant is considering a trade on a foreign organized regulated market and require participants and access persons to have adequate policies and procedures for handling orders that do not rely on a marketplace to ensure compliance with the order protection rule. For more information, see IIROC Notice 11-0036.
Posted on January 21, 2011
As we discussed on our Structured Finance blog in December 2009, the Saskatchewan Financial Services Commission, Securities Division issued General Order 91-907 in November of that year exempting over-the-counter (OTC) derivatives trading among qualified parties from the registration and prospectus requirements under the Saskatchewan Securities Act, 1988.
The General Order and Companion Policy have now been amended to include an exemption where: (i) the OTC derivative is a contract for the production of natural gas or the purchase and sale of natural gas; and (ii) each party to the contract is engaged in the production of natural gas or the purchase or sale of natural gas.
Posted on January 13, 2011
On December 20, 2010, a provincial/territorial government working group released a consultation paper to elicit feedback on potential options respecting the incorporation of individual sales representatives of registered dealers and advisers. Specifically, the paper considers the benefits and regulatory concerns surrounding the issue of payments by dealers and advisers to non-traditional business structures, as well as the options being examined.
While National Instrument 31-103 Registration Requirements and Exemptions does not deal with the incorporation of individual sale representatives, MFDA Rule 2.4.1 permits individual sales representatives of a MFDA member to have his or her commissions paid directly to a non-registered corporation under certain conditions. IIROC rules, meanwhile, do not allow the relationship between a dealer and a person conducting securities-related business on behalf of the dealer to be that of an incorporated salesperson.
Ultimately, the paper invites feedback on a number of options under consideration, including legislative proposals and amendments to IIROC rules. Comments on the consultation paper are being accepted by the governments of Alberta and Quebec until February 25.
Posted on January 12, 2011
In a speech yesterday at the National Centre for Business Law, Bryan Davies, Vice-Chair of the Canadian Securities Transition Office provided an update on the progress made towards the implementation of a federal securities regulator. Notably, Mr. Davies stated that the Transition Office is moving forward with the view that the implementation of a federal Securities Act would occur in July 2012. As we've discussed in the past, the federal government has referred the proposed Act to the Supreme Court of Canada in order to ascertain whether the Act falls within federal authority.
Posted on January 7, 2011
The Investment Industry Regulatory Organization of Canada today republished a proposal to implement core aspects of its Client Relationship Model Project. IIROC's proposal would address issues relating to relationship disclosure, conflicts of interest management and disclosure, suitability assessment and account performance reporting. Proposed transition periods would range from the immediate implementation for certain provisions relating to conflict identification to three years for certain disclosure to existing clients.
IIROC also stated that the CSA are expected to publish proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions to introduce cost disclosure and performace reporting requirements for all registered dealers and advisers.
Proposals to address CRM issues were originally published in February 2008 and revised rules were subsequently released in April 2009. IIROC's proposal also includes responses to comments received to its April 2009 proposals. Comments on today's proposals are being accepted for 60 days.
Posted on January 4, 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.
Posted on December 21, 2010
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.
Posted on December 17, 2010
On Wednesday, the Investment Industry Regulatory Organization of Canada released proposed guidance intended to make transparent the criteria it would use to determine whether to vary or cancel a trade under the authority of the Universal Market Integrity Rules.
Under Rule 10.9 of UMIR, IIROC may vary or cancel a trade that is "unreasonable" or not in compliance with UMIR or any policy. IIROC's regulatory intervention powers are currently exercised under its broad discretion. The proposed guidance is intended to elaborate upon and set out more transparent standards in regard to the exercise of these powers, particularly with respect to its power under 10.9(1)(d) respecting "unreasonable" trades.
In addition to the factors provided by Rule 10.9(2) for determining whether a trade is unreasonable, the proposed guidance also sets out a number of additional factors IIROC will consider, such as whether the volume or number of trades is unusual in the context of the market and whether the trade was made in error or as the result of a deliberate trade. The notice also includes information regarding halts with respect to situations where there has been "asymmetric" dissemination of material information. In this regard, IIROC acknowledges that intervention in trading related to asymmetric dissemination of material information is fairly unique to Canada, but maintains it has intrinsic value in protecting market integrity and providing a clear and transparent remedy to parties harmed by such activity. The relative certainty and immediacy of this remedy being distinguished from the remedy under the statutory regime for civil liability in secondary markets.
With respect to trades that are not in compliance with UMIR, IIROC stated that it may intervene in cases of rule violations that are self-evident at the time of execution, including violations of the client-principal trading requirement under Rule 8.1 of UMIR, the market stabilization price restrictions under Rule 7.7, the requirement not to "abuse" a person with Market Maker Obligations under Part 1 of Policy 2.1 or the requirement to move the market in an orderly manner over a period of time when executing a pre-arranged trade or intentional cross under Part 2 of Policy 2.1.
IIROC is accepting comments on the proposed guidance until February 14, 2011. For more information, see IIROC Notice 10-0331.
Posted on December 15, 2010
Yesterday, the Canadian Securities Transition Office released an update on its activities for the last few months. Notably, the CSTO stated that it has now begun to develop regulations to accompany the proposed federal Securities Act released by the Department of Finance earlier this year. The CSTO intends to seek comments on proposed regulations as work progresses.
Posted on December 10, 2010
On December 8, Ontario's Bill 135, the Helping Ontario Families and Managing Responsibility Act 2010, received Royal Asset. The Act amends the Ontario Securities Act and, among other things, (i) establishes a regulatory framework for trading in derivatives in Ontario; (ii) allows the Ontario Securities Commission to regulate credit rating organizations; (iii) provides the OSC authority to recognize and make decisions related to alternative trading systems and (iv) extends current prohibitions on insider trading and tipping to issuers that have a "real and substantial connection" to Ontario and whose securities are listed and posted on the TSX-V. Most of the amendments came into force on the day of Royal Assent, while certain provisions principally relating to the regulation of derivatives will not come into force until a date still to be proclaimed.
Posted on December 6, 2010
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.
Posted on December 3, 2010
As we discussed in a post of April 30, IIROC proposed a new dealer regulation fee model earlier this year that would incorporate a "rate by revenue tier" approach to dealer regulation. IIROC has now developed such a market regulation fee model, which it published for comment on November 30. The proposed model would see each marketplace charged a fee based on the marketplace's share of the total number of messages processed by IIROC's surveillance system (in order to recover the IT costs of surveillance), as well as a fee based on the marketplace's share of the total number of trades (in order to recover all other regulation costs). IIROC would continue to collect the market regulation fee from dealer members (the minimum monthly fee would be $4,800 per member), but marketplace-specific costs would be recovered directly from the marketplace that incurred such costs. IIROC is accepting comments on the proposed new fee model until January 29, 2011. For more information, see IIROC Notice 10-0316.
Posted on December 3, 2010
On November 30, the Investment Industry Regulatory Organization of Canada proposed draft guidance regarding the management of order flows with respect to best execution obligations under UMIR. The guidance, released in the context of "a more complex trading environment", sets out a list of frequently asked questions relating to order types in the context of achieving best execution. Namely, the guidance considers issues such as: (i) order routing decisions; (ii) how to manage orders when not all marketplaces are open; (iii) considerations for deciding where to "book" an order; and (iv) obligations when using a third-party vendor for order routing.
Meanwhile, guidance was also proposed regarding the use of certain order types. According to IIROC, "a particular order type may function as designed but the execution outcome may result in an unanticipated price." IIROC stated that it has particular concern with order types without specific execution price limits. Guidance on the subject was also structured as an FAQ, and considered such issues as (i) whether market orders or limit orders should be used "in today's more complex markets"; (ii) whether "stop loss" orders prevent losses in fast moving markets; and (iii) whether "All or None" orders can be used to guarantee a fill of an order at a specific price in volatile markets.
IIROC is accepting comments on the proposed guidance until January 31, 2011. For more information, see IIROC Notice 10-0317.
Posted on December 2, 2010
The TMX Group yesterday published its new TSX Listing Fee Schedule effective as of January 1, 2011. While original listing and sustaining fees remain unchanged, the minimum base fee for additional listings for corporate issuers is increasing by $3,000 across all capitalization levels. By way of example, this increase raises the minimum base fee for additional listings from $2,000 to $5,000.
Posted on November 29, 2010
As we discussed in our post of June 25, the Mutual Fund Dealers Association of Canada proposed a new Rule 2.4.4 earlier this year that would require its members, prior to the acceptance of an order, to inform clients of sales and service charges, as well as any other fees to be deducted in respect of the proposed transaction. Meanwhile, proposed amendments to Rule 5.1 would require MFDA members to maintain evidence that clients were informed of such fees and charges.
The MFDA has now published a summary of comments received to its proposals, as well as MFDA staff responses. Further, the MFDA has released a companion regulation notice to provide further guidance with respect to the application of the proposed amendments.
For more information, see MFDA Bulletin #0455-P.
Posted on November 26, 2010
As we discussed in our post of October 22, the Compliance and Registrant Regulation Branch’s annual report for fiscal 2010 reviews deficiencies identified by staff of the Ontario Securities Commission (OSC) in its review of advisers, investment fund managers and dealers. The Report also highlights initiatives taken by the OSC relating to registrant regulation and provides staff guidance on dealing with identified deficiencies. In a departure from prior reports, the fiscal 2010 report also covers the introduction of the new registration regime, reorganization of the Compliance and Registrant Regulation Branch and common deficiencies found in reviews of registrant applications.
With respect to ongoing compliance requirements, the Report indicates that the percentage of registrants requiring "significantly enhanced compliance" increased from 32% in 2009 to 50% in 2010. Compliance reviews resulting in referral to the Enforcement Branch also increased from 4% in 2009 to 10% in 2010. In addition to general guidance applicable to all registrants, the Report also includes OSC staff views on specific issues relating to investment fund managers, portfolio managers and exempt market dealers, some of which are highlighted below.
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Posted on November 23, 2010
Andrea Boctor and Ramandeep Grewal
Beginning January 1, 2011, virtually every stock option exercise by an employee or director will trigger employer tax withholding and remittance requirements. Stemming from the March 2010 Federal Budget, new rules were introduced into the Canadian Income Tax Act earlier this fall which "clarify" that, effective as of the new year, source deduction requirements apply to stock option benefits. These and other proposed amendments relating to taxation of stock options are summarized in detail in our related Tax Update. The change in policy in respect of withholding and remittance for stock options brings the Canadian tax regime essentially in line with the regimes of other countries, including the U.S. and U.K.
These developments impact both employers and those receiving stock options or similar compensation. Every corporation and every mutual fund trust that sponsors stock option plans to which these rules apply should review the existing terms of its plans, and related administrative procedures, to determine whether tax withholding and remittance can be accommodated in accordance with Canada Revenue Agency (CRA) rules. For public companies, existing stock option plans and agreements should also be carefully reviewed to determine whether shareholder approval is required for any necessary amendments.
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Posted on November 23, 2010
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.
Posted on November 22, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) released a proposal for single-stock circuit breakers last week that would halt trading of a security experiencing "rapid, significant and unexpected price movement." The proposal would apply to all securities listed on a Canadian exchange, including inter-listed securities, and would provide tiers of trigger levels in order to "preserve a fair and orderly market" in times of extreme volatility.
Specifically, under the proposed mechanism, trading in a security listed on either the TSX-V or CNSX would be halted for ten minutes if the security experienced a price swing of the greater of 20% and 20 trading increments in a five minute period. TSX-listed securities that experienced a price swing of at least the greater of 10% and 10 trading increments in a five minute period would be halted for five minutes, with a five-minute extension possible. In either case, IIROC could replace the single-stock circuit breaker halt with a traditional "regulatory halt" where so required. There would be circumstances, however, where a single-stock circuit breaker would not trigger a halt in trading, such as after the imposition of a "regulatory halt" in the trading of that security.
IIROC is accepting comments on its proposals until January 17, 2011. Once it has reviewed the comments received and established the final parameters of its proposal, IIROC intends to develop an alert as part of the "STEP" surveillance platform. While the implementation of single-stock circuit breakers would begin as a manual system similar to the current imposition of trading halts, IIROC intends to ultimately automate the process. According to IIROC, however, automation would not commence earlier than April 1, 2011.
As we've discussed in the past, the U.S. SEC is currently piloting single-stock circuit breakers until December 10, 2010. For more information on the U.S. project, see our posts of May 19 and September 21.
Posted on November 19, 2010
The Canadian Securities Administrators (CSA) and Investment Industry Regulatory Organization of Canada (IIROC) published a joint position paper today that considers, and provides the regulators' views on, the issues associated with dark pools and dark orders. According to IIROC and the CSA, their views are intended to provide "more clarity" around how dark orders should be treated and facilitate "investor understanding and choice" regarding the execution of orders.
The paper follows a year of consultations on the subject and sets out the position of the position of the regulators on a number of issues, namely:
- that only orders meeting a minimum size threshold be exempt from pre-trade transparency requirements;
- that, while, two dark orders meeting the minimum size exemption should be able to execute at the national best bid or best offer, meaningful price improvements should be required in all other circumstances;
- that visible (lit) orders should execute before dark orders at the same price on the same marketplace, except where two dark orders meeting the minimum size exemption can be executed at that price; and
- that meaningful price improvement should be considered as one trading increment as defined under UMIR. For securities with a difference between the best bid price and the best ask price of one trading increment, one-half increment will be considered to be meaningful price improvement.
Comments are being accepted on the position paper until January 10, 2011. Once comments have been considered, the CSA and IIROC intend to propose rule changes as required.
Posted on November 18, 2010
As expected, the government of Ontario has now introduced proposed amendments to the Securities Act (text not yet available) that would allow the Ontario Securities Commission to develop a regulatory framework to govern over-the-counter (OTC) derivatives. According to the government's economic update released this afternoon, the proposed framework would be consistent with the federal government's plan to implement a national securities regulator.
In addition to tackling OTC derivatives regulation, the proposed amendments would also "provide for regulatory oversight of credit rating agencies and strengthen the oversight of alternative trading systems".
Posted on November 18, 2010
According to various media outlets, including the Globe and Mail and the Financial Post, the Ontario government is expected to introduce proposals later today relating to the regulation of derivatives. The expected move may raise the question of how Ontario's proposals will fit with those of other jurisdictions. Watch for more details once the proposals are released this afternoon.
Posted on November 12, 2010
Alix d’Anglejan-Chatillon and Jason Streicher
Omnibus financial legislation introduced by the Quebec government on November 10, 2010 includes technical amendments to Quebec's derivatives legislation, as well as provisions intended to improve the oversight of persons authorized to market a derivative and to strengthen the process of authorization of the marketing of the product.
The technical amendments would include expanding the list of instruments included in the definition of "derivative" under the Derivatives Act (Quebec) (the QDA) to cover contracts for differences (CFDs) specifically.
Bill 128 would also incorporate more detailed requirements to provisions under the QDA that are not yet in force governing persons qualified under the QDA to create or market a derivative. These new provisions include requirements that a qualified person maintain a corporate and organizational structure and adequate human, financial and technological resources to enable it to operate effectively and ensure the security and reliability of its transactions and activities. A qualified person would also be required to have adequate business policies and procedures and appropriate governance practices, including, in particular, with respect to the independence of its directors and the auditing of its financial statements. The amendments also clarify that a qualified person would be required to register as a dealer or offer derivatives to the public through a dealer.
Posted on November 11, 2010
The federal government has just published legislative proposals that would relax one of the conditions for tax-exempt pension fund investment corporation status under the Income Tax Act. That is, under the proposals, there would no longer be a prohibition against such a corporation issuing "debt obligations" and the prohibition would be narrowed to cover issuing "bonds, notes, debentures or similar obligations". The change would be retroactive to 1994.
We believe that these amendments, if adopted, should eliminate concerns that, for example, the assignment to a third party of a right to receive an investor's capital contribution to a limited partnership would be treated as an impermissible debt obligation, where that investor was a pension fund investment corporation.
Interested parties are invited by the Department of Finance to provide comments on the proposals by December 5.
Posted on November 11, 2010
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.
Posted on November 5, 2010
CNSX Markets Inc., the operator of the Canadian National Stock Exchange and Pure Trading has proposed amendments to its Policy 2 that would extend listing eligibility to certain prospectus-exempt debt securities. The amendments to Policy 2 would mirror language contained in its Restated Order. Comments are being accepted on the amendments for 30 days from today.
Posted on November 5, 2010
CDS Clearing and Depository Services Inc. today released proposed amdendments to implement the Canadian Derivatives Clearing Corporation's fixed income clearing facility. According to CDS, the proposals would: (i) create a new mode of settlement indicator enabling participants to instruct CDS to report trades so-identified to a Third Party Clearing System (TPCS); (ii) permit CDS to report trades to CDSS as a TPCS; (iii) limit CDS liability in respect of trades or trade information received from a TPCS; (iv) specify the settlement process by which trades reported to CDS by a TPCS are settled; and (v) permit partial settlement of trades from CDCC as a TPCS. Comments are being accepted on the proposed amendments for 30 days from today.
Posted on November 4, 2010
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.
Posted on November 3, 2010
The Canadian Securities Administrators yesterday published a consultation paper on over-the-counter derivatives regulation in Canada intended to address "some of the deficiencies that have become apparent in the OTC derivatives market". Specifically, the consultation paper provides background on the need for regulation and provides a number of specific proposals. Among other things, the report recommends:
- central clearing of OTC derivatives that are determined to be appropriate for clearing and capable of being cleared, such as standardized derivatives;
- reporting of all derivatives trades by Canadian counterparties to a trade repository;
- electronic trading of OTC derivative products; and
- in accordance with the recommendations of the Basel II Accord, imposing capital requirements proportionate to the risks that an entity assumes.
The focal point of the proposal, being the central clearing of OTC derivatives, reflects the approach taken by the Dodd-Frank Act. With respect to trade reporting to a trade repository, while the report makes no recommendation regarding a specific time requirement for reporting it does state that real-time reporting will ultimately be required. The report further recommends that provincial regulators obtain authority to conduct surveillance on OTC derivatives markets, develop robust market conduct standards and obtain authority to investigate and enforce against abusive practices.
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Posted on October 29, 2010
As discussed last week, the OSC recently released the annual reports of its Compliance and Registrant Regulation Branch and Investment Funds Branch. OSC-watchers can now feast on two more annuals, the fiscal 2010 versions of the Corporate Finance Branch Report and Market Regulation Branch Annual Report. Specifically, the Corporate Finance Branch Report provides issuers with details on its disclosure review programs while the Market Regulation Branch Annual Report provides a summary of key policy activities and initiatives relating to market structure and clearing and settlement.
For more information, see OSC Staff Notice 51-706 and Staff Notice 21-704.
Posted on October 29, 2010
Non-Canadian fund managers urged to thoroughly review implications
As we recently discussed, on October 15, 2010, the Canadian Securities Administrators (CSA) published proposed amendments to National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103) related to the registration of (i) investment fund managers who carry out investment fund management activities from a location outside of Canada (International IFMs), and (ii) domestic Canadian investment fund managers with a head office in one Canadian province or territory and who carry out investment fund management activities in other provinces or territories (Domestic IFMs). While NI 31-103 currently provides temporary exemptions from registration for such investment fund managers, the proposed amendments are intended to be adopted prior to the expiration of the temporary exemptions on September 28, 2011, meaning that investment fund managers required to be registered must be registered by that date. The CSA are accepting comments on these proposals until January 13, 2011 and specifically invited comments from investment fund managers.
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Posted on October 28, 2010
On October 8, the Canadian Securities Administrators (CSA) published amendments to National 81-101 Mutual Fund Prospectus Disclosure, its companion policy and related forms in furtherance of their project to implement point of sale disclosure for mutual funds. As we discussed in earlier posts of June 2009 and June 2010, the CSA intend to proceed with a staged implementation of the project, with the first stage being the finalization of requirements respecting the preparation and filing of a "fund facts" document.
To that end, the amendments released this month, which take into account feedback received on the CSA's 2009 proposals, set out the content and filing requirements of the fund facts document. To be filed concurrently with a mutual fund's simplified prospectus and annual information form, the document will "highlight key information that is important to investors" in plain language. The document will also have to be made available on a mutual fund's or manager's website.
The CSA expect that the amendments will come into force on January 1, 2011. Mutual funds will be given until April 8, 2011 to begin filing fund facts documents with prospectuses, while funds will have until July 8, 2011 before fund facts documents must be filed for each class or series of securities of the mutual fund. Later stages of the CSA's project will consider point of sale delivery for other types of publicly offered investment funds.
Posted on October 28, 2010
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.
Posted on October 19, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) yesterday released a new Anti-Money Laundering Compliance Guide to replace the IDA's 2002 "Deterring Money Laundering Activity". The new document is intended to provide dealers with guidance on complying with anti-money laundering and anti-terrorist financing requirements in light of the legislative and regulatory changes of recent years.
According to IIROC, since no standard program will be appropriate for all firms, the guidance has been prepared to assist dealers in adapting their compliance program "specifically to their firm's business, ensuring that it covers the scope of their customer base, the types of accounts, the types of transactions, the extent of the firm's international activities and all the risks and other relevant factors within the firm."
See IIROC Notice 10-0273
Posted on October 19, 2010
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.
Posted on October 15, 2010
The Canadian Securities Administrators (CSA) today proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions (31-103) relating to the registration of international investment fund managers and registration of domestic investment fund managers in additional provinces and territories. While 31-103 currently provides temporary exemptions from registration for such investment fund managers, the proposed amendments are intended to be enacted prior to the expiration of the temporary exemptions on September 28, 2011.
Generally, the CSA proposals would require an international investment fund manager to register in a province or territory if the investment fund it manages has local securityholders and the manager, or the fund, has actively solicited local residents to purchase securities of the fund. Domestic investment fund managers would be required to register in another province or territory (in addition to the Canadian jurisdiction in which its head office is located) if the securityholders are local residents of the province or territory and the manager or the fund has actively solicited local residents to purchase securities of the funds.
Meanwhile, the CSA proposed an exemption from the registration requirement for international investment fund managers where the fund it manages is only distributed to permitted clients, subject to certain conditions and thresholds. For the benefit of non-resident investment fund managers, a grandfathering exemption would be available where neither the investment fund manager nor the investment fund has actively solicited local residents after September 28, 2011.
Further, a new notice requirement that would require all investment fund managers to provide a notice to investors regarding non-resident status and the associated risk to investors was also proposed. The Companion Policy to NI 31-103 would also be amended under the proposals to provide guidance on the CSA's interpretation of the registration requirement as well as the term "actively solicited".
The CSA is accepting comments on its proposals until January 13, 2011.
Posted on October 15, 2010
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".
Posted on October 15, 2010
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.
Posted on October 13, 2010
The Canadian Securities Transition Office released an update last week outlining the activities it has undertaken since the delivery of its Transition Plan this past summer. According to the CSTO, it has "begun to identify the specific skills required to carry out the activities and tasks required to execute the Transition Plan" and has received regulatory staff seconded by participating jurisdictions. Discussions continue regarding the allocation of further staff.
The CSTO's annual report for 2009-2010 was also recently tabled in Parliament. The report describes the transition office's activities for the past fiscal year, including its consultations with stakeholders and the development of national securities legislation and the Transition Plan.
Posted on October 8, 2010
As part of its ongoing project to rewrite its Dealer Member Rules in plain language, the Investment Industry Regulatory Organization of Canada (IIROC) today published a set of proposed new provisions respecting its members' dealings with clients. The proposals cover such issues as suitability, sales practices, communicating with the public, supervision and complaint handling. According to IIROC, the rewrite is intended to eliminate unnecessary rule provisions, clarify IIROC's expectations with respect to certain rules, ensure that the Rules reflect IIROC's practices and ensure consistency with other rules and applicable securities legislation. Draft guidance was also published by IIROC.
Beyond consolidating existing rules, the proposals also contain substantive changes to current obligations. For example, proposed Rule 3400 states that in order to comply with suitability requirements, members must consider the suitability of the client's account type, trading strategy, order type and the method of financing the trade. Proposed Rule 3500, meanwhile, would require members to provide clients with a commission fee schedule on account opening. Further substantive changes can be found throughout the proposals.
IIROC is accepting public comment on its proposals for 90 days from today.
See: IIROC Notice 10-0266
Posted on October 5, 2010
The TMX Group announced yesterday that it intends to begin operating a new alternative trading system (ATS) in 2011. The new platform, known as TMX Select, is expected to feature expanded trading hours, continuous trading of board lots only and strict price-time priority for visible orders. According to today's Globe and Mail, the TMX Group expects that the new ATS will attract orders from competing platforms, which reportedly now handle an estimated 30 to 35 per cent of trading volume in Canada.
Posted on October 5, 2010
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.
Posted on October 1, 2010
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.
Posted on September 30, 2010
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.
Posted on September 30, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) announced the launch of a surveillance system yesterday that will allow it to conduct surveillance across all Canadian equity markets. According to IIROC, the Surveillance Technology Enhancement Platform (STEP) will allow it to "keep pace with the dramatic increase in the speed and volume of trading activity" in Canadian equity markets. Among other things, STEP provides IIROC with an increased monitoring capacity and the ability to more easily identify potential violations, such as with respect to best execution and trade-throughs.
Posted on September 24, 2010
Ivan T. Grbešić and Alex Colangelo
The Canadian Securities Administrators (CSA) released Staff Notice 41-305 on September 24, which discusses the factors considered by regulators when assessing a proposed share structure in an IPO and, specifically, whether a proposed structure is contrary to the public interest. According to the notice, the CSA have encountered numerous IPOs recently where questions with respect to the proposed share structure led to a recommendation against the issuance of a prospectus receipt on such offerings. The CSA is particularly concerned with companies that have already issued an "unusually large" number of shares for nominal cash consideration, especially where the company has a limited history of operations and the IPO financing is relatively small.
Ultimately, the CSA provided a list of qualitative and quantitative factors used in evaluating the acceptability of IPO share structures. These include:
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Posted on September 22, 2010
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.
Posted on September 21, 2010
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.
Posted on September 21, 2010
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.
Posted on September 10, 2010
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.
Posted on September 10, 2010
The British Columbia Securities Commission (BCSC) yesterday published for comment a proposed new Form 45-106F6 British Columbia Report of Exempt Distribution that would require issuers to provide additional information for private placements taking place in British Columbia. Specifically, the new form would require additional information about purchasers, including identifying whether a purchaser is a promoter or an insider of the issuer. Non-reporting issuers would also be required to provide detailed information regarding their insiders and promoters. The BCSC also proposed making some of the information provided on the form publicly available. Characterizing the exempt market as "high-risk" for investors, the BCSC stated that the new disclosure requirements "should help BC investors make more informed investment decisions and improve transparency in the market."
The proposed new form would set British Columbia apart from other Canadian jurisdictions, which would continue to use Form 45-106F1 Report of Exempt Distribution, effectively requiring an issuer or underwriter to file a separate form in British Columbia for exempt distributions that take place in BC and one or more other jurisdictions of Canada. The BCSC is inviting comments on these proposed amendments until November 9, 2010.
Posted on September 8, 2010
The TMX Group Inc. issued a paper today providing its unique perspective on issues deriving from the financial crisis and discussing how the core competencies of a combined regulated exchange and clearing house are designed to meet G-20 objectives respecting improving over-the-counter (OTC) derivatives markets. The TMX Group has obviously given considerable thought on how Canada should respond to prevent similar crises from recurring, in particular with respect to the operation of less-regulated OTC derivatives markets.
Specifically, TMX Group discussed how its core competencies respecting trading, clearing, data warehousing and regulatory services can be mapped onto G-20 requirements, which include strengthening prudential oversight, improving risk management, increasing transparency, promoting market integrity, protecting against market abuse, mitigating systemic risk and reinforcing international cooperation. TMX Group also stated that its core competencies achieve the business requirements of market participants. As such, the paper recommended that Canadian regulators utilize domestic facilities with international linkages to provide the regulatory oversight of OTC derivatives markets.
Posted on September 8, 2010
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?"
Posted on September 7, 2010
In addition to its PPN review findings, the Investment Industry Regulatory Organization (IIROC) also released findings and recommendations last week concerning its regulatory review of new product due diligence. The review, conducted earlier this year at a sample of dealers that distribute structured products, tested for such things as adequate written policies, procedures and operational controls on new products. The review also assessed how dealers have incorporated IIROC's due diligence Guidance Note of March 2009 into their business practice.
Ultimately, IIROC found that many of the written policies and procedures reviewed were deficient in a material respect. Deficiencies indentified included the lack of the following: (i) a clear definition of "new product"; (ii) an appropriate level of internal review; (iii) an adequate analytical framework for the consideration of whether the new product should be offered; (iv) consideration of possible conflict of interest scenarios and how they should be addressed; (vi) consideration of proficiency, training and marketing issues; and (vii) a process to monitor and review customer complaints regarding new products and for monitoring compliance with any restrictions placed on the sale of the new product.
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Posted on September 7, 2010
On August 31, the Investment Industry Regulatory Organization of Canada (IIROC) released findings and recommendations deriving from its 2009 compliance review of principal protected notes (PPNs). The review, based on a representative sample of dealers, considered, among other things, the adequacy of the selling firm's knowledge of the product and the firm's training for sales personnel and whether appropriate point of sale disclosure was provided to investors.
Ultimately, IIROC made a number of findings and recommendations regarding the obligations of dealers to their clients with respect to PPNs, including the following:
- The dissemination of required disclosure to clients was inconsistent among members. On this point, IIROC reminded dealers that they are required to have a "new product due diligence" policy and are required to implement procedures to ensure that any clients purchasing a PPN receive the required appropriate disclosure.
- The majority of dealers appeared to rely on product issuers to distribute the monetization notices directly to unit holders without the benefit of a contractual agreement requiring issuers to distribute on the dealer's behalf. IIROC stated that all dealers should review their contractual agreements with issuers to ensure that responsibility for the distribution of notices is clearly delineated.
- Most dealer marketing material was inadequate and missed key information. On this point, IIROC reminded dealers of their obligations regarding sales literature under IIROC Rule 29.7(1) regarding the fair presentation of potential risks.
- IIROC found that some dealers' registered representatives did not understand all the features of the PPN products they were recommending to clients. In response, IIROC stated that dealers must take a proactive approach to reviewing and monitoring products, which should include a written policy for the due diligence of new products.
- IIROC found the PPN products to be suitable for the accounts tested.
- There was no uniformity in the level of training to registered representatives regarding PPNs. IIROC stated that dealers must ensure their registered representatives and sales staff are educated and understand the important features of products being marketed to clients.
- IIROC found deficiencies in the information included on monthly statements, which should be clear and informative.
See IIROC Notice 10-0233.
Posted on September 3, 2010
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.
Posted on September 2, 2010
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."
Posted on September 2, 2010
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:
- Valuation - the FSA recommends an increased regulatory focus on valuing traded positions as an input into capital resources.
- 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.
- 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.
Posted on August 6, 2010
Alix d'Anglejan-Chatillon and Jason Streicher
Under Quebec’s derivatives legislation, the Chief Compliance Officer (CCO) of a derivatives portfolio manager is required to have at least three years of relevant derivatives experience and to have passed all required IIROC exams with respect to derivatives for an officer of a derivatives dealer (the Derivatives Proficiency Requirements) in addition to satisfying the proficiency requirements of National Instrument 31-103 Registration Requirements and Exemptions.
On July 27, 2010, the Autorité des marchés financiers, Quebec's financial services regulator, issued a blanket decision which exempts the CCO of a derivatives portfolio manager from the Derivatives Proficiency Requirements provided the firm has designated an Officer Responsible for Derivatives Operations who meets prescribed proficiency requirements that are detailed in the blanket decision with respect to options, futures and swap-related products.
The decision is in effect as of July 30, 2010.
Posted on August 5, 2010
Alpha ATS has announced proposed changes designed to suppress trades from the public feed in cases of unintentional self-trading. Such self-trades, where the orders on both sides of the trade are from the same subscriber, will not update the last sale price of the stock or other trading statistics. The proposed change is intended to address issues regarding potential "wash trades". The OSC and Alpha ATS are accepting comments on the changes until August 30 and, barring any regulatory concerns, the changes may be implemented by September 13, 2010.
Posted on July 30, 2010
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.
Posted on July 30, 2010
The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) released a report earlier this week that reviews "the conflicts of interest that arise when exchanges that are commercial businesses also act as regulators and supervisors of issuers." Specifically, the report contends that the TSX is the only major exchange reviewed that has failed to implement specific measures to manage its conflicts of interest in regulating listed companies. According to FAIR Canada, other major exchanges have addressed such conflicts through changes in corporate governance, organizational structure, corporate policies and internal procedures.
Ultimately, the report provides three regulatory alternatives for the TSX to consider, being: (i) transferring most listings regulation responsibilities to another regulator; (ii) establishing a regulation subsidiary company with independent governance to perform listing regulation; and (iii) establishing a listings regulation department that is separate from the business operations of the exchange to perform listings regulation. While an Ontario legislative committee recently recommended that the OSC review the potential for conflicts of interest between the regulatory and commercial functions of the TSX, it is not yet clear whether any regulatory changes will be made.
Posted on July 30, 2010
As we previously discussed, the New Brunswick Securities Commission recently proposed an amendment to its Local Rule 91-501 Derivatives to modify the language respecting the exemption for "qualified parties". Specifically, the amendment states that the registration requirement does not apply "where each party to the trade is a qualified party acting as principal". The NBSC has now set the date of implementation of the amendment as September 1, 2010.
Posted on July 23, 2010
The Ontario Securities Commission (OSC) today published a revised version of OSC Staff Notice 21-703 - Transparency of the Operations of Stock Exchanges and Alternative Trading Systems. Staff Notice 21-703 sets out the process of OSC Staff for reviewing changes to certain operations of exchanges and alternative trading systems. The Notice has been revised in order to apply to the notice and filing process relating to the initial operations of an ATS seeking to carry on business in Ontario.
Posted on July 22, 2010
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.
Posted on July 22, 2010
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.
Posted on July 20, 2010
On July 16, Alpha ATS announced plans to offer new order types through its Alpha IntraSpread facility, specifically dark orders and "seek dark liquidity" (SDL) orders. Dark orders are fully hidden and provide no pre-trade transparency, while SDL orders are used to interact with the dark liquidity of the same subscriber. Alpha ATS is accepting comments on its proposals until August 16, 2010 and it stated that if no regulatory concerns are raised, it may implement the changes by August 30, 2010.
Posted on July 16, 2010
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.
Posted on July 16, 2010
The Canadian Securities Administrators today published for comment a proposed rule, policies and related consequential amendments that would impose regulatory oversight for designated credit rating agencies and organizations. Under the proposals, credit rating organizations wishing to become designated for the purposes of having their credit ratings eligible for use where credit ratings are referred to in securities legislation would have to apply and, once designated, maintain and ensure compliance with a code of conduct that complies with the provisions of the IOSCO Code of Conduct Fundamentals for Credit Ratings Agencies of the International Organization of Securities Commissions. The IOSCO Code addresses such issues as: (i) the quality and integrity of the rating process; (ii) credit rating agency independence and the avoidance of conflicts of interest; (iii) credit rating agency responsibilities to the investing public and issuers; and (iv) disclosure of the code of conduct and communication with market participants. Deviations, however, from the provisions of the IOSCO Code would be permitted under certain circumstances.
Comments are being accepted by the CSA until October 25, 2010.
Notice and Request for Comment - Proposed National Instrument 25-101 Designated Rating Organizations, Related Policies and Consequential Amendments.
Posted on July 15, 2010
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.
Posted on July 14, 2010
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.
Posted on July 13, 2010
The Canadian Securities Transition Office today announced the release of its Transition Plan for the Canadian Securities Regulatory Authority. The Transition Plan provides a roadmap for establishing the CSRA and sets out a vision for the Authority's regulatory approach. Issues considered by the Transition Plan include governance, organization design, business processes and implementation planning.
According to the Transition Office, the next step in the transition will involve the signing of development agreements between the participating provinces and territories and the federal government by September 2010. Under the development agreements, the provinces and territories would assign regulatory and ministry staff to share expertise in establishing the CSRA. Work under the development agreements would be followed by memoranda of understanding between the participating provinces and territories and the federal government to address various matters of interest. These MOUs would be concluded by July 1, 2011. A launch date for the CSRA, meanwhile, has been established as July 1, 2012.
For more information on the move towards a national securities regulator, see our post of June 8, 2010.
Posted on July 12, 2010
On June 30, an amendment to Quebec's Derivatives Regulation came into force, which states that Regulation 23-102, which adopts National Instrument 23-102 Use of Client Brokerage Commissions in the province, applies to dealers and advisers governed by the Derivatives Act.
Posted on July 9, 2010
Mihkel E. Voore and Ramandeep Grewal
As we discussed in our post of April 9, the Canadian Securities Administrators (CSA) have recently published much-anticipated proposals to amend National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101), which would give issuers the option to post proxy-related materials on a non-SEDAR website under a “notice-and-access” model. The proposed amendments aim not only to facilitate communication with shareholders, but also include amendments intended to increase the overall efficiency and equity among key players involved in the securityholder communication process.
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Posted on July 6, 2010
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.
Posted on July 6, 2010
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.
Posted on June 30, 2010
As we discussed in October 2009, National Instrument 23-102 Use of Client Brokerage Commissions, which seeks to regulate soft dollar arrangements across Canada, stipulating the types of goods and services that may be acquired with client brokerage commissions and prescribing related disclosure requirements, comes into force today.
Further, amendments to Form 81-101F2 Contents of Annual Information Form and Form 41-101F2 Information Required in an Investment Fund Prospectus, intended to ensure consistency between disclosure requirements for advisers under NI 23-102 and similar disclosure prescribed for investment funds are also effective today.
Posted on June 29, 2010
The New Brunswick Securities Commission (NBSC), which in April proposed a clarification to the registration exemption in respect of trades in derivatives for qualified parties, has now stated that, subject to Ministerial approval, the proposed amendments will come into force on September 1, 2010.
Posted on June 25, 2010
The Canadian Securities Administrators (CSA) today published proposed amendments to National Instrument 81-102 Mutual Funds, National Instrument 81-106 Investment Fund Continuous Disclosure and related consequential amendments. The amendments would codify exemptive relief that is frequently granted to mutual funds and other investment funds and is intended to replace a patchwork of exemptive relief orders with uniform requirements. The proposed amendments seek to address the following: exchange-traded mutual funds, investments in other mutual funds, short selling, derivatives, money market funds, mutual fund dealers, mutual fund ratings and continuous disclosure requirements.
Today's amendments are described by the CSA as representing the first phase in modernizing the regulation of conventional mutual funds and other investment funds. The second phase of the project will consider "whether there are any market efficiency, fairness or investor protection issues that arise out of the differing regulatory regimes" applying to different types of investment funds and other competing investment products. The CSA will then consider whether NI 81-102 should be further amended to address such issues.
Posted on June 25, 2010
The CSA today published CSA Staff Notice 23-309 - Frequently Asked Questions about the Order Protection Rule and Intentionally Locked or Crossed Markets - Part 6 of National Instrument 23-101 and Related Companion Policy. The FAQ generally deals with key issues and questions respecting compliance with order protection rule requirements, systems issues requirements and the prohibition against intentionally locking or crossing markets.
Effective February 1, 2011, the order protection rule requires marketplaces and marketplace participants that send directed-action orders to establish, maintain and ensure compliance with written policies and procedures that are reasonably designed to prevent trade-throughs. The prohibition under Part 6 of National Instrument 23-101 Trading Rules from intentionally locking or crossing markets is currently in force.
Posted on June 25, 2010
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.
Posted on June 24, 2010
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.
Posted on June 22, 2010
Nunavut has joined most other Canadian provinces and territories in adopting securities transfer legislation. The Securities Transfer Act (Nunavut) was given Royal Assent on June 10.
Posted on June 18, 2010
The Canadian Securities Administrators (CSA) today published CSA Staff Notice 45-307 Regulatory Developments Regarding Securitization. The Notice follows work completed by the CSA subsequent to the publication of its consultation paper on ABCP in October 2008, and states that the CSA's focus "has broadened to encompass all securitized products". The CSA are also considering international regulatory developments in developing their proposals, including recent IOSCO and SEC reports and recommendations.
According to the Notice, the CSA are specifically contemplating changes to the current approach to the issuance of securitized products in the exempt market, enhancements to the disclosure requirements for securitized products distributed by prospectus and changes to continuous disclosure for reporting issuers that have distributed securitized products.
The CSA expect to publish their securitization proposals in the fall, while proposals relating to the regulation of credit rating organizations are expected this summer.
Posted on June 18, 2010
The Ontario Minister of Finance has now approved the amendments to National Instrument 24-101 Institutional Trade Matching and Settlements, which were published on April 16 and are scheduled to come into force on July 1, 2010. A consolidation of the instrument is available here.
Posted on June 18, 2010
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.
Posted on June 8, 2010
On May 26, 2010, the federal Department of Finance released its proposed Canadian Securities Act (the Act). The Act builds upon the Report released last year by the Expert Panel on Securities Regulation and represents the federal government’s proposal for a harmonized national regime to govern capital markets. Following decades of deliberation by various panels and committees, publication of the proposed Act by the Canadian Securities Transition Office evidences this government’s strong commitment to the establishment of a national securities regime and regulator.
The case for regulation of capital markets at a national level is set out in the preamble to the Act. Among other things, the preamble highlights the need to be competitive and consistent, enhance the integrity and stability of the Canadian financial system, have a comprehensive and coordinated enforcement regime and promote Canada’s interests at a national and international level. While the intent is to create a harmonized federal scheme for securities regulation, provincial participation is voluntary and the Act will only apply to those jurisdictions that choose to take part in the federal scheme. As we discussed previously, the draft Act is only a proposal at this stage, and has been referred to the Supreme Court of Canada for a ruling as to its constitutionality.
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Posted on June 7, 2010
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.
Posted on June 4, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) today published proposed amendments to its Dealer Member Rules that would address the fairness of pricing and transparency of OTC market transactions. Initial proposals on the subject were previously published for comment in April 2009 and IIROC has revised its proposals in light of comments received.
Specifically, IIROC's proposals would: (i) require dealers to fairly and reasonably price securities traded in OTC markets, with an exception for primary market transactions and OTC derivatives set out in the rule; (ii) require dealers to disclose yield to maturity on trade confirmations for fixed-income securities and notations for callable and variable rate securities; and (iii) require dealers to include on trade confirmations sent to retail clients in respect of OTC transactions a statement indicating that they have earned remuneration on those transactions unless the amount of any mark-up or mark-down, commissions and other service charges is disclosed on the confirmation. A draft guidance note, describing the scope of the proposed rule, fair pricing considerations and documentation requirements, has also been published by IIROC.
The proposals are open for a 30-day comment period.
Posted on June 2, 2010
On May 26, Alpha Group announced that a new trading fee structure would be coming into effect as of June 1, 2010 subject to regulatory approval. According to Alpha, the new fee reduction "positions Alpha as the market with the lowest active fees" in securities valued greater or equal to $1 and less than $5.
Posted on May 31, 2010
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.
Posted on May 28, 2010
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) today provided an update on their review of market structure issues such as dark pools. The update provides an overview of the views expressed at a consultation forum recently held by the two organizations to discuss Consultation Paper 23-404 Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada. Some of the themes that emerged during the forum included the practice of broker preferencing at the marketplace level and internalization of order flow, the practice of dark pools sending Indications of Interest to attract order flow and the use of market pegged orders. The notice also provides a summary of comments received with respect to the Consultation Paper and states that the CSA and IIROC continue to consider market structure issues and welcome further comments.
Posted on May 28, 2010
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".
Posted on May 21, 2010
CDS Clearing and Depository Services (CDS) has proposed amendments to its procedures to allow qualified CDS participants to issue and maintain security positions in CDSX in an uncertificated format. According to CDS, the amendments would provide "another option for issuers to issue their securities and is a further step supporting the Canadian capital markets' move towards a dematerialized environment." CDS is accepting comments on its proposed amendments for the next 30 calendar days.
Posted on May 19, 2010
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.
Posted on May 19, 2010
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.
Posted on May 19, 2010
Nova Scotia's Bill 33, the Securities Transfer Act, received Royal Assent on May 11. According to Minister of Service Nova Scotia and Municipal Relations Ramona Jennex, the legislation "brings greater legal certainties around the holding, transferring and pledging of securities." Nova Scotia now joins most other provinces, which have previously adopted similar legislation.
Posted on May 18, 2010
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.
Posted on May 18, 2010
Last Friday, the Canadian Securities Administrators (CSA) announced that it was conducting, along with the Investment Industry Regulatory Organization of Canada (IIROC), a "comprehensive analysis" of the events of May 6th with respect to market volatility in the U.S. and Canada. Specifically, the CSA and IIROC state that they will engage in "active dialogue" with other regulators, marketplaces and market participants to consider market volatility issues. Further, they intend to examine electronic trading issues and the appropriateness of the existing circuit breaker policies. For more information on the response of regulators to the events of earlier this month, see our post of May 11.
Posted on May 14, 2010
CDS Clearing and Depository Services (CDS) announced the proposed termination of the Euroclear UK Direct Service last week to reduce operating costs and avoid the projected costs of an anti-money laundering compliance program. CDS also proposed making changes to the form used for participants applying to act as an ISIN activator, security validator or custodian of CDSX eligible securities. The form changes would limit the application to domestic custodians and remove the requirement for Board approval of such applications.
Comments on the proposed amendments are being accepted for 30 calendar days for today's publication in the OSC Bulletin.
Posted on May 13, 2010
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.
Posted on May 12, 2010
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.
Posted on May 11, 2010
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 Authority, NASDAQ, 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."
Posted on May 11, 2010
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.
Posted on May 10, 2010
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."
Posted on May 7, 2010
Finance Minister Jim Flaherty is reportedly days away from seeing the completion of draft legislation to create a national securities regulator. According to press reports, Ottawa is planning to send the draft bill to lawmakers and the Supreme Court for a reference on its constitutionality within a few weeks.
Posted on May 7, 2010
CDS Clearing and Depository Services announced proposed amendments to its rules this week to enable the implementation of TRAX, a web application to facilitate communications between transfer agents and participants, as well as to introduce a soft cap and related monitoring mechanism for the net payment obligations of the New York Link service. Both sets of proposals are open for public comment for 30 calendar days from their publication in the OSC Bulletin today.
Posted on April 30, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) published a notice on April 28 providing guidance related to UMIR obligations to mark orders to purchase or sell securities for insiders or significant shareholders. The notice anticipates the upcoming implementation on April 30 of the new insider reporting regime and provides answers to frequently asked questions regarding the UMIR obligations. Questions considered include, among others: (i) whether every order for an insider of a particular security must contain a marker; (ii) when a participant can rely on "know your client" information to establish whether a marker is required; and (iii) whether a marked order can be bundled together with orders for those that are not reporting insiders.
Posted on April 23, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) today published proposed amendments to UMIR respecting market maker, odd lot and other marketplace trading obligations. Specifically, the proposals would replace the definition of "Market Maker Obligations" with a definition of "Marketplace Trading Obligations" in order to provide marketplaces with more flexibility in structuring their market making systems.
Market maker obligations are obligations imposed by the rules of a recognized exchange or recognized quotation and trade reporting system (QTRS) on a person to guarantee (i) a two-sided market for a particular security on a continuous or reasonably continuous basis; and (ii) the execution of orders for the purchase or sale of a particular security which are less than a minimum number of units of the security as designated by the marketplace. The new definition, however, would allow exchanges and QTRSs to structure their market maker systems to provide one or both of the above functions and allow marketplaces to provide for an odd-lot arrangement by contract. The proposed amendments would also make consequential amendments to conform the language used in various UMIR provisions to the new definition.
Comments on the proposals are being accepted by IIROC until June 24, 2010.
Posted on April 23, 2010
It was reported yesterday that Canadian Finance Minister Jim Flaherty, speaking at a financial conference in Toronto on Wednesday, stated that a bill to create a national securities regulator will be ready in a month. According to the Minister, however, the bill will be referred to the Supreme Court of Canada for an opinion on its constitutionality before it is tabled in Parliament. As we discussed in March, the federal government's Budget 2010 set out a three-year target for the establishment of a federal securities regulator.
Posted on April 23, 2010
Alpha ATS announced yesterday that it is seeking regulatory approval from the Ontario Securities Commission (OSC) to become a recognized exchange. According to Alpha, seeking exchange status is the "logical next step" and will allow it to expand into the listing business. Alpha currently generates revenue from trading fees and market data services.
Posted on April 23, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) recently released its Strategic Plan for 2010-2012. The plan describes IIROC's vision and values and sets out the challenges it faces in fulfilling its mandate. Specifically, the plan discusses the following goals:
- Promoting a culture of compliance and high standards among those subject to IIROC's jurisdiction. This will include a reorganization of IIROC's rules to enhance comprehension, providing compliance examination findings and recommendations to members and undertaking periodic industry-wide compliance audits.
- Delivering effective, efficient and expert regulation. Projects that IIROC will undertake in pursuit of this goal include the implementation of a risk-based methodology for registration and completing its framework approach to IFRS.
- Maintaining market integrity by actively monitoring market structure developments and market-related events. IIROC states that it will reduce timelines to complete enforcement investigations and bring proceedings, clarify roles and relationships in order to strengthen the client/adviser relationship and continue to develop its policies respecting OTC and debt markets.
- Ensuring that it discharges its responsibilities in a cost-effective manner, which will include the implementation of an equitable Dealer and Marketplace Member fee model.
- Maintaining a confident and well-trained staff.
Posted on April 22, 2010
The Mutual Fund Dealers Association of Canada (MFDA) recently published a Leverage Supervision Guide to assist its members in meeting their suitability requirements pursuant to MFDA Rule 2.2.1(c).
Pursuant to MFDA Rule 2.2.1(c), MFDA members and approved persons must use due diligence to "ensure that each order accepted or recommendation made for any account of a client is suitable for the client and in keeping with the client's investment objectives". Suitability guidelines were released in April 2008 by the MFDA and the recently-published Guide is intended to provide further guidance and recommended best practices on developing leverage policies and procedures, analyzing practices, maintaining appropriate documentation and supervision of leverage recommendations.
On April 6, meanwhile, the MFDA published revised leverage risk disclosure, which its members must start providing to clients as of July 1.
Posted on April 21, 2010
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.
Posted on April 16, 2010
The Canadian Securities Administrators (CSA) today published amendments to National Instrument 24-101 Institutional Trade Matching and Settlements, its companion policy and related forms. Proposed amendments to NI 24-101, initially published for comment in October 2009, originally considered postponing, from July 1, 2010 to July 1, 2015, the requirement to match DAP/RAP trades by no later than midnight on the trade date. Based on comments received to the earlier proposals, however, the CSA have now decided to maintain the current institutional trade matching requirement of noon on T+1.
Other changes to the Instrument were adopted, however, and the final changes include: (i) amendments to the quarterly exception reporting requirement; (ii) amendments to the pre-DAP/RAP trade execution documentation requirements and related key definition; (iii) amendments to the provisions governing non-western hemisphere institutional investors; and (iv) amendments to clarify certain other definitions and concepts.
The amendments are subject to Ministerial approval and are expected to come into force on July 1, 2010.
Posted on April 16, 2010
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.
Posted on April 15, 2010
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.
Posted on April 14, 2010
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.
Posted on April 9, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) today published proposed amendments to its Dealer Member Rules intended "to promote compliant trade matching practices, as well as to eliminate the sending of duplicative trade related correspondence to clients." Specifically, amendments to Rule 800.49 would: (i) extend the trade reporting requirement; (ii) define a "non-exchange trade"; (iii) provide guidance to allow Dealer Members to classify trades as being either compliant or non-compliant with reporting requirements; and (iv) establish an acceptable monthly compliant trade percentage threshold. Rule 200.1(h) is also subject to change, as an exemption to the trade confirmation requirement would be added in cases where certain conditions were met.
Posted on April 9, 2010
The Ontario Securities Commission (OSC) has approved amendments to the Rules of the Toronto Stock Exchange to eliminate the indicative calculated closing price feature on the TSX's Market On Close facility. The amendments were originally published for comment on May 30, 2008.
Posted on April 8, 2010
The Canadian Securities Administrators (CSA) announced last week that all CSA members except Ontario have issued an order, effective March 27, exempting from the dealer registration requirement scheduled banks, certain other financial institutions, and federally and provincially regulated loan, trust and insurance companies, for trades in a "negotiable promissory note or commercial paper maturing not more than one year from the date of issue", provided the instrument is: (i) not convertible or exchangeable into or accompanied by a right to purchase another security other than a security described in the order, and (ii) has an approved credit rating as specified in the order.
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Posted on April 8, 2010
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.
Posted on April 7, 2010
The New Brunswick Securities Commission (NBSC) yesterday published a proposed amendment to Local Rule 91-501 Derivatives. LR 91-501, which came into force on September 28, 2009, imposes registration and risk disclosure requirements in respect of trades in "derivatives" as defined in the Rule, other than trades among qualified parties.
The proposed amendment published yesterday would modify the language respecting the exemption to state that the registration requirement does not apply "where each party to the trade is a qualified party acting as principal". The change is being proposed in light of inquiries from industry and should clarify the NBSC's intention that the exemption only applies where both parties are qualified parties acting as principal.
The NBSC is accepting comments on the proposed amendment until June 7, 2010. For more information on LR 91-501, see our post of March 25 respecting a derivatives FAQ published by the NBSC.
Posted on April 7, 2010
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.
Posted on April 1, 2010
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.”
Posted on April 1, 2010
On March 26, the Investment Industry Organization of Canada (IIROC) published proposed guidance respecting “locked” and “crossed” markets. The proposed guidance would replace previous guidance that was recently repealed in light of amendments to National Instrument 23-101 Trading Rules. Specifically, IIROC’s proposed guidance would provide assistance in complying with the relevant provisions of NI 23-101 and its Companion Policy, as well as with the “best price” and “best execution” obligations under UMIR.
Posted on March 29, 2010
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.
Posted on March 25, 2010
As we reported back in January, the New Brunswick Securities Commission published answers to frequently asked questions regarding Local Rule 91-501 Derivatives. Last week, the NBSC published a revised notice expanding on its answer regarding whether the rule applies to spot foreign exchange contracts. Specifically, the revised notice states that "LR 91-501 does not apply to spot foreign exchange transactions involving the purchase or sale of a currency (i.e. transactions such as changing money at a currency exchange or withdrawing cash at a foreign ATM)." Whether other spot foreign exchange transactions are subject to LR 91-501, however, remains unclear, as the NBSC's use of "i.e." raises questions as to whether the example provided was intended to be comprehensive.
Posted on March 24, 2010
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.
Posted on March 9, 2010
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.
Posted on March 8, 2010
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On February 26, 2010, members of the Canadian Securities Administrators (CSA) each issued omnibus/blanket orders in response to applications requesting exemptions from certain provisions of National Instrument 31-103 Registration Requirements and Exemptions (31-103). 31-103, together with amendments to related instruments and policies, came into effect on September 28, 2009 (the Effective Date). Notice of these orders was provided under CSA Staff Notice 31-315 Omnibus/Blanket Orders exempting registrants from certain provisions of National Instrument 31-103 Registration Requirements and Exemptions, which was also published on February 26, 2010. The orders are summarized below.
Continuation of transition/grandfathering provisions for registrants adding jurisdiction
Each regulator issued an order that provides a person or company adding a jurisdiction to his, her or its registration, with the benefit of certain grandfathering and transition provisions provided under Part 16 of 31-103 in that additional jurisdiction. Specifically, those grandfathering and transition provisions that deal with proficiency, capital, insurance, relationship disclosure information, referral arrangements, dispute resolution service and client statement requirements were included in the order. To rely on the order, the registrant must: (i) have been continuously registered in a jurisdiction in Canada since the Effective Date; (ii) remain registered in that jurisdiction during its reliance on the order; (iii) be exempt under the relevant section of Part 16 in that jurisdiction; and (iv) register, after the Effective Date, in the same category of registration (and in the case of an individual, with the same sponsoring firm) in an additional jurisdiction.
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Posted on March 5, 2010
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) are hosting a forum on March 23 at the Design Exchange in Toronto to discuss Consultation Paper 23-404, "Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada", published in September 2009. Interested parties can register on the IIROC website.
Posted on March 5, 2010
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.
Posted on February 19, 2010
The Canadian Securities Administrators (CSA) published implementation milestones today for the order protection rule contained in recent amendments to National Instrument 23-101 Trading Rules. The order protection rule, which comes into effect on February 1, 2011, requires marketplaces to establish and ensure compliance with policies and procedures designed to prevent trade-throughs on that marketplace. The CSA notice, meanwhile, aims to facilitate implementation of the order protection rule by establishing various technical milestones for marketplaces to meet. According to the notice, marketplaces will be expected to provide the CSA with information regarding their progress on each milestone date. The CSA are also encouraging marketplaces to consider whether to publicly disclose progress-related information. A notice providing details about an industry-wide test is expected to be published by the CSA in the coming months.
Posted on February 18, 2010
On February 12, the Alberta Securities Commission issued a blanket order making available certain limited trade-based registration exemptions to persons who would otherwise be required to register as exempt market dealers in Alberta. As previously discussed, with the implementation of the new registration regime and National Instrument 31-103 Registration Requirements and Exemptions, trade-based registration exemptions that parallel prospectus exemptions available under National Instrument 45-106 Prospectus and Registration Exemptions are to be repealed on March 27, 2010.
Pursuant to the blanket order, effective March 27, 2010, an exemption from the EMD registration requirement will be available for persons trading in securities in reliance on certain prospectus exemptions under NI 45-106, specifically, section 2.3 ("accredited investor"), section 2.5 ("family, friends and business associates"), section 2.9 ("offering memorandum") and section 2.10 ("minimum investment amount").
The blanket order, however, applies only where certain conditions are met. Specifically, the person or company seeking to rely on the exemption: (i) must not be registered or required to be registered in any jurisdiction, including a foreign jurisdiction; (ii) must not have provided advice to the purchaser with respect to suitability; (iii) must obtain from the purchaser a signed risk acknowledgement in the form prescribed by the blanket order; (iv) must not have provided financial services to the purchaser at any time (other than in connection with a prospectus-exempt distribution under sections 2.3, 2.5, 2.9 or 2.10 of NI 45-106); (v) must not hold or have access to the purchaser's assets; and (vi) must electronically file with the ASC a current or updated information report in the prescribed form within ten days of relying on the exemption. A notice issued along with the blanket order provides additional guidance with respect to the applicable requirements.
Alberta, which is the first of the "North West" jurisdictions to issue such a blanket order, is expected to be joined by British Columbia, Saskatchewan, Manitoba, Northwest Territories, Nunavut and the Yukon Territory, whose regulators have announced their intention to issue similar orders.
For more information on the impact of the new registration regime on dealers trading in the exempt market, see our July 2009 publication: "Impact on Limited Market Dealers and Unregistered Dealers Trading in the Exempt Market".
Posted on February 18, 2010
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.
Posted on February 17, 2010
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.
Posted on February 16, 2010
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.
Posted on February 11, 2010
On January 14, the Saskatchewan Financial Services Commission, the securities regulator for the province of Saskatchewan, announced that it will participate along with other "North Western" jurisdictions in making available certain trade-based registration exemptions to persons who would otherwise be required to register as exempt market dealers. As a result of the implementation of the new registration regime and National Instrument 31-103 Registration Requirements and Exemptions, trade-based registration exemptions that parallel prospectus exemptions available under National Instrument 45-106 Prospectus and Registration Exemptions are to be repealed on March 27, 2010.
Pursuant to a blanket order to be issued by the SFSC, an exemption from the EMD registration requirement will be made available for persons trading in securities in reliance on certain prospectus exemptions, including the "accredited investor" and the "minimum investment amount" exemptions under section 2.3 and section 2.10 of NI 45-106, provided the conditions set out in the blanket order are satisfied. Saskatchewan will be joining Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut and the Yukon Territory, whose regulators had previously announced their intention to issues similar blanket orders. The orders granting the exemption are anticipated to be issued on March 27, 2010.
For more information on the impact of the new registration regime on dealers trading in the exempt market, see our July 2009 publication: "Impact on Limited Market Dealers and Unregistered Dealers Trading in the Exempt Market".
Posted on February 11, 2010
IIROC yesterday repealed an earlier notice that provided guidance on "locked" and "crossed" markets in the context of a dealer's obligations under the Universal Market Integrity Rules (UMIR). The repeal of the guidance results from recent amendments to NI 23-101 Trading Rules and its Companion Policy, which contain provisions regarding locked and crossed markets.
Posted on February 3, 2010
Silver v. IMAX Corporation et al. [2009] O.J. Nos. 5573 and 5585 (S.C.J.)
Simon Bieber and Jennifer Imrie
On December 14, 2009, Justice van Rensburg of the Ontario Superior Court of Justice handed down two related rulings in the Silver v. IMAX Corporation litigation. The first (the “Leave Decision”) granted the plaintiffs leave to proceed with their class action against IMAX Corporation and certain individual respondents (collectively, the “IMAX Defendants”) under section 138.8 of Ontario’s Securities Act (“OSA”), while the second (the “Certification Decision”) certified the action, including both statutory and common law claims, as a class proceeding.
The Leave Decision is the first to consider the leave requirements for a statutory misrepresentation claim under the secondary market liability provisions in Part XXIII.1 of the OSA, while the Certification Decision appears to accept the “efficient market” (or “fraud on the market”) theory for common law misrepresentation claims. Justice van Rensburg permitted certification despite the defendant’s argument that the claim as pleaded is deficient for not alleging individual reliance by each member of the proposed class and accepted the plaintiffs’ argument that certification should extend to a global class of plaintiffs consisting of all persons who acquired securities of IMAX Corporation (“IMAX”) during the defined “Class Period” of February 17, 2006 to August 9, 2006 and who continued to hold some or all of those securities at the close of trading on August 9, 2006.
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Posted on February 3, 2010
On February 1, the Canadian Securities Administrators (CSA) released its 2009 Enforcement Report. According to the report, 141 enforcement cases were concluded in 2009, resulting in over $153 million in fines and administrative penalties ordered and over $92 million in restitution, compensation and disgorgement. The fines and penalties assessed in 2009 represented a large increase from the $12 million ordered in 2008. The report also discusses the preventative measures employed by the CSA as well as the sharp increase in the use of reciprocal orders since 2008. Meanwhile, a number of case summaries are presented in the report to describe the main categories of violations and to illustrate the type of activity that constitutes each type of violation.
Posted on February 1, 2010
CDS Clearing and Depository Services Inc. (CDS) recently published proposed amendments to its rules regarding the processes for issuing, transferring and maintaining custody of money market securities in CDSX. Specifically, the amendments (i) clarify the process by which securities become eligible for CDSX; (ii) provide for an exception allowing CDS to release confidential information concerning a participant where the information concerns material risk events; (iii) create a single, uniform qualification for all participants acting as issuer agents; and (iv) create new internal control standards for participant issuer agents.
CDS is accepting comments on the proposed amendments for 30 calendar days following the January 29th publication of the proposals.
Posted on January 26, 2010
On January 7, the New Brunswick Securities Commission (NBSC) published NBSC Notice 91-701 to respond to certain frequently asked questions on NBSC Local Rule 91-501 Derivatives (the Rule). As discussed in our previous update dated December 14, 2009, the Rule imposes registration and risk disclosure requirements in respect of trades in “derivatives” as defined in the Rule, other than trades among qualified parties.
The notice clarifies that a qualified party that engages in a derivatives transaction is responsible for determining whether the other party is also a qualified party. To do so, it may rely on factual statements made by the other party provided that it does not have reasonable grounds to believe that the statements are false. The qualified party is also responsible for determining whether the exemptions under the Rule are applicable based on the facts supplied by the other party and should retain all documentation relating to its determination.
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Posted on January 22, 2010
On January 12, 2010, the Minister of Finance approved amendments to National Instrument 21-101 Marketplace Operation and National Instrument 23-101 Trading Rules, which were originally published in November 2009 with technical corrections made in December 2009. The amendments not related to the "order protection rule" (i.e. changes other than to Part 6 of NI 23-101) are scheduled to come into force on January 28, 2010. Those related to the "order protection rule" will come into force on February 1, 2011. The Canadian Securities Administrators intend to publish a notice shortly that will outline the expected milestone dates regarding the implementation of the "order protection rule".
Posted on January 22, 2010
On January 11, ICE Futures Canada published a notice regarding amendments to its Rules in order to "more accurately define the information which should be contained" in the "FIX tags" used to identify traders and companies on trades submitted via ISV front-end trading systems.
Posted on January 8, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) today announced that securities regulators have approved amendments to the Universal Market Integrity Rules (UMIR) respecting trading during certain securities transactions. Rule 7.7 of the UMIR governs the activities of dealers, issuers and others in connection with a distribution of securities, securities exchange take-over bid, issuer bid or amalgamation, arrangement, capital reorganization or similar transaction. Rule 7.7, paralleled OSC Rule 48-501 Trading During Distributions, Formal Bids and Share Exchange Transactions prior to approval of these amendments. While some provisions of Rule 7.7 will now differ from OSC Rule 48-501, both rules will remain substantively similar and it is intended they will be applied in a consistent manner. Among other things, the amendments:
- modify the exemption governing bids or purchases of certain securities during restricted periods by permitting such bids at the best independent bid price at the time of order entry rather than at the last independent sale price;
- replace the requirement that a mutual fund be designated by the market regulator prior to qualifying as an exempt exchange-traded fund with a provision that any mutual fund with units that are listed or quoted security in continuous distribution in accordance with legislation would qualify unless the regulator has designated the mutual fund to be a security excluded from the definition of "Exempt Exchange-traded Fund";
- clarify the definition and interpretation of "restricted period";
- clarify the types of private placements that may become subject to restrictions under Rule 7.7 of UMIR;
- clarify that in determining the "best ask price" or "best bid price", reference is made only to orders contained in a consolidated market display for a marketplace that is then open for trading; and
- make further consequential and editorial amendments.
The amendments are effective as of today, January 8, 2010.
Posted on December 4, 2009
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The British Columbia Securities Commission today published a Companion Policy to Blanket Order 91-502 Short Term Foreign Exchange Transactions to clarify when a foreign exchange contract may be considered a "security" for the purposes of the British Columbia Securities Act.
The Companion Policy states that under s. 1(1) of the Securities Act, the following three components of the definition of “security” could describe a forex contract:
(a) a document, instrument or writing commonly known as a security;
...
(l) an investment contract;
...
(n) an instrument that is a futures contract or an option but is not an exchange contract.
The Blanket Order states that a contract or other obligation to purchase or sell the currency of any jurisdiction, where the terms of the transaction require settlement not later than three business days after the entering into of the transaction, is not a futures contract, provided that the contract or obligation is not otherwise a security under the Securities Act. The purpose of the Companion Policy is to clarify that the Blanket Order is limited to determining when a foreign exchange contract is not a futures contract. A forex contract may still be a “security” if it falls under any of the other relevant branches of the definition.
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Posted on November 16, 2009
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.
Posted on November 13, 2009
The Canadian Securities Administrators (CSA) published a notice today outlining amendments to National Instrument 21-101 Marketplace Operation, National Instrument 23-101 Trading Rules and their related companion policies. The amendments follow in the footsteps of earlier proposals, discussed in our post of October 2008. Meanwhile, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice today regarding proposed amendments to the Universal Market Integrity Rules that would complement the changes announced by the CSA.
Under the CSA amendments, an order protection rule would require marketplaces to establish and ensure compliance with policies and procedures designed to prevent trade-throughs on that marketplace. Such protection is intended to ensure that all immediately accessible, visible, better-priced limit orders are executed before inferior-priced limit orders and are not traded through. A number of exceptions to the prohibition, however, are included in the amendments, including directed-action orders, non-standard orders, closing-price orders and trade-throughs that occur when the best protected bid is higher than the best protected offer (crossed market). Amendments respecting fair access to marketplaces, trading fee limitations and locked and crossed markets were also included under the order protection rule. Additional changes are also being made to marketplace systems, transparency requirements and the technological requirements and obligations of an information processor.
Subject to Ministerial approvals, the changes other than those relating to the Order Protection Rule are scheduled to come into force on January 28, 2010, while the Order Protection Rule will become effective on February 1, 2011.
Under IIROC's proposed amendments, meanwhile, rules and policies respecting "best price" obligations, which currently address order protection in Canada, would be repealed and a number of consequential changes to UMIR would also be implemented. Comments on IIROC's proposed amendments are being accepted until January 12, 2010.
Posted on November 6, 2009
On October 30, the British Columbia Securities Commission (BCSC) announced amended conditions of registration for investment dealers that maintain an office in British Columbia and trade in U.S. OTC markets, and who have not filed a prescribed form of undertaking. Specifically, the BCSC has clarifed certain aspects of the previous obligations, amended Form B (reporting of OTC trading commissions) and revised language to reflect National Instrument 31-103 Registration Requirements. Of particular note, the conditions now specify who can act as a designated individual, as IIROC has removed that definition from its Dealer Member Rules. Like their previous incarnation, the conditions of registration include the effective management of risks and monitoring, recordingkeeping and reporting requirements. An interpretation note was also published to explain how the BCSC interprets the conditions. The amended obligations are effective immediately and are set to expire on December 31, 2011.
Posted on November 6, 2009
As described in our earlier post, on October 9, the Ontario Securities Commission (OSC) introduced a new process for reviewing changes to certain operations of exchanges and ATSs. According to the notice, OSC Staff believe that proposals to operational changes to exchanges and ATSs should be subject to an appropriate degree of transparency. Thus, the OSC intends to apply new publication requirements in the case of proposed changes to order types or features/characteristics of orders, procedures regarding order entry, display and execution, and changes to procedures relating to special facilities or marketplace sessions. The OSC may also request that other changes be published if regulatory concerns are raised.
Generally, under the new procedures, exchanges and ATs must file with the OSC and publish a notice in the OSC Bulletin describing, among other things, the proposals, rationale and expected impact of the proposed changes. The OSC will review the proposals and market participants will be afforded 30 days to provide feedback. Absent any regulatory concerns, the proposed changes would become effective 45 days after publication of the notice. In the case of regulatory concerns, the OSC would work with the exchange or ATS to resolve the issues, but implementation may be delayed in such a case.
Posted on October 30, 2009
The Canadian Securities Administrators (CSA) have recently published proposed amendments to National Instrument 24-101 Institutional Trade Matching and Settlement (NI 24-101) and its companion policy for a 90 day comment period. Principally, the proposed amendments would postpone, from July 1, 2010 to July 1, 2015, the requirement to match DAP/RAP trades by no later than midnight on the trade date. Further, the CSA are proposing to extend for two years the current deadline for matching DAP/RAP trades from noon on the business day following the trade to 2:00 p.m. on the business day following the trade. Documentation and exception reporting requirements, meanwhile, would also be amended under the proposals. Comments are being accepted on the proposals until January 28, 2010.
For more information on the history of NI 24-101, see our posts of June 8, 2007 and September 14, 2007.
Posted on October 27, 2009
In response to numerous inquiries, the Ontario Securities Commission (OSC) issued a notice today outlining the OSC Staff's view on the applicability of securities laws to offerings of Contracts for Difference (CFDs), foreign exchange contracts (FX contracts) and similar OTC derivative products. While the notice focuses on CFDs, the guidance is intended to apply generally to FX contracts and OTC derivatives as well.
Specifically, OSC Staff consider CFDs to be securities and, as such, CFD providers offering such products to Ontario investors must comply with registration and prospectus requirements of Ontario securities law absent statutory exemptions or exemptive relief. The notice states, however, that as the prospectus requirement may not be well-suited for certain types of OTC derivative products, OSC staff "may be prepared to recommend relief" from the prospectus requirement under certain situations. The circumstances under which an exemption may be provided are discussed in the notice and an example of such an exemption was provided last week.
The notice is intended to provide interim guidance until such time that a harmonized approach to the regulation of OTC derivatives is developed by the Canadian Securities Administrators and/or Ontario introduces derivatives legislation.
Posted on October 21, 2009
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.
Posted on October 19, 2009
On October 16th, the Ontario Securities Commission (OSC) granted relief on an application by CMC Markets U.K. and its Canadian affiliate allowing CMC Canada to distribute contracts for difference and foreign exchange contracts (collectively, CFDs) to Ontario investors without having to file a prospectus. CFDs are derivative products that "allow clients to obtain exposure to markets and instruments that may not be available directly, or may not be available in a cost-effective manner."
In granting the relief, the OSC stated that the requested relief would "substantially harmonize the Commission's position on the offering of CFDs to investors in Ontario with how those products are offered to investors in Quebec" under the Derivatives Act (Quebec). Under the QDA, such products may be offered through the distribution of a standardized risk disclosure document rather than a prospectus. The OSC noted that it had previously recognized that similar disclosure may be better suited for such products than a prospectus.
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Posted on October 16, 2009
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.
Posted on October 15, 2009
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.
Posted on October 9, 2009
The Ontario Securities Commission (OSC) released a notice today respecting the review by OSC staff of the regulatory requirements for stock exchanges and alternative trading systems and their practices. The OSC identified the first phase of the review as focusing on initiatives "that can be taken in the short-term on the transparency of filings" by exchanges and ATSs where their operations are similar. The next phase of the review will consider the requirements set out in National Instrument 21-101 Marketplace Operations to ensure that marketplace rules "are able to provide for flexibility in a competitive environment while providing regulators with the information they need to meet their mandate." The notice released today also sets out the process for reviewing changes to exchange and ATS operations.
Posted on October 7, 2009
Jennifer Northcote | PDF Version | Version française
Yesterday, the Canadian Securities Administrations (CSA) published the final version of National Instrument 23-102 Use of Client Brokerage Commissions and the accompanying companion policy. The instrument and policy seek to regulate soft dollar arrangements across Canada, stipulating the types of goods and services that may be acquired with client brokerage commissions and prescribing related disclosure requirements. The instrument and policy apply to registered advisers, who obtain the goods and services and to registered dealers, who accept the brokerage commissions.
NI 23-102 and its companion policy were initially published in July 2006. The 2006 proposals applied to all types of transactions where brokerage commissions or similar transaction-based fees were charged, and imposed duties on advisers to ensure that soft dollars were used to benefit the client and were reasonable in relation to the value of goods and services received. The proposals further specified that the goods and services acquired using client brokerage commissions were restricted to "order execution services" and "research", and prescribed detailed disclosure requirements for advisers. In response to comments submitted, the CSA republished the proposals in January 2008. Substantive changes were made to the 2006 proposals regarding: (i) the breadth of the application of the instrument and policy; (ii) definitions of order execution services and research services; (iii) the framework for client brokerage commission practices; (iv) disclosure of client brokerage commission practices; and (v) the addition of a transition period.
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Posted on October 5, 2009
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.
Posted on October 2, 2009
On October 1, the Investment Industry Regulatory Organization of Canada (IIROC) published a guidance note 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 2009 as 950 points, 1,950 points and 2,900 points respectively.
It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite. The TSX trigger levels are: Level 1 (10%) - 1,150 points; Level 2 (20%) - 2,250 points and Level 3 (30%) - 3,400 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.
Posted on October 2, 2009
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.
Posted on October 2, 2009
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.
Posted on September 30, 2009
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) today announced the publication of Joint Consultation Paper 23-404, entitled "Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada". The paper discusses the evolution of the Canadian market and specifically considers the emergence of multiple marketplaces. The lack of transparency associated with some alternative trading systems is noted and specific questions are raised regarding dark pools, dark orders, market pegged orders and smart order routers.
Written submissions on the issues set out in the consultation paper are being accepted until December 29, 2009. The CSA and IIROC also stated that they intend to convene a roundtable to discuss the issues and the submissions received.
Posted on September 29, 2009
Pursuant to amendments to the Bankruptcy and Insolvency Act and Companies' Creditors Arrangement Act that took effect on September 18, 2009, an automatic stay of proceedings initiated on the filing of a proposal or notice of intention does not apply to regulatory bodies acting strictly as regulators. As such, the Toronto Stock Exchange (TSX) announced yesterday that it intends to continue to investigate and take action against listed issuers that are insolvent or have made an assignment for the purposes of enforcing the continued listing requirements in section 708 of the TSX Company Manual. The TSX also confirmed that the temporary relief respecting the Remedial Review Process would expire as planned at the end of this month.
Posted on September 18, 2009
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.
Posted on August 28, 2009
On August 26, the Ontario Securities Commission released a decision refusing to intervene in a case where the TSX allowed a private placement of units of a real estate investment trust without unitholder approval. The application to review the TSX decision was brought by NorthWest Value Partners, which objected to, among other things, the placement proceeding without being put to a vote of unitholders. The placement represented approximately 49% of outstanding units of InterRent Real Estate Investment Trust.
The OSC noted that it was entitled to intervene in cases where (i) the TSX proceeded on an incorrect principle; (ii) the TSX erred in law; (iii) the TSX overlooked material evidence; and (iv) new and compelling evidence was presented to the OSC that was not presented to the TSX. It stated, however, that it would do so "only in the rare case" where an applicant met the "heavy burden of proving such intervention is justified" in accordance with the above principles or some other acceptable ground. In the immediate case, the OSC found that the TSX considered all the relevant information, assessed relevant considerations, followed the appropriate process and carefully articulated its reasons. As such, the application to review the decision was dismissed.
The OSC ruling was released on an expedited basis and full reasons are expected in the near future.
Posted on August 24, 2009
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.
Posted on August 21, 2009
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.
Posted on August 17, 2009
Kenneth G. Ottenbreit and Terry Doherty | PDF Version
Recent rulemaking across Canada and proposed rules in Quebec (if adopted) will have a significant impact on the cross-border trading activities of non-Canadian dealers, advisers, futures commission merchants (FCMs) and commodity-trading advisers (CTAs) with respect to commodity futures contracts and commodity futures options (futures) as well as security options.
On July 17, 2009, the Canadian Securities Administrators (CSA) published their final proposal for National Instrument 31-103 - Registration Requirements and Exemptions (31-103). Subject to governmental and other local approval requirements, 31-103 will come into force on September 28, 2009 (the Implementation Date). While the regulation of futures activities was not the focus of 31-103, the new securities registration rules will have some impact on the regulation of futures activities in Canada. For further information and a complete breakdown of the new regime, please refer to Stikeman Elliott’s Registration Reform in Canada: The Finish Line is Here.
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Posted on August 6, 2009
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."
Posted on August 5, 2009
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.
Posted on July 16, 2009
The British Columbia Securities Commission (BCSC) announced today that it is launching an expedited review process for mining companies seeking to distribute securities through the short form prospectus process. Citing the short window available to such companies to complete financing, the BCSC stated that it will use "best efforts" to review the company's SEDAR disclosure, including annual information forms and existing technical reports for compliance with National Instrument 43-101 Standards of Disclosure for Mineral Projects before the preliminary prospectus is filed. Companies for which British Columbia is the principal regulator may request such a review by emailing the BCSC's Chief Mining Advisor at least 10 days prior to filing the preliminary short-form prospectus.
Posted on July 7, 2009
On July 2, the Investment Industry Regulatory Organization of Canada (IIROC) published a guidance note 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 2009 as 850 points, 1700 points and 2600 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. The TSX trigger levels are: Level 1 (10%) - 1,050 points; Level 2 (20%) - 2,050 points and Level 3 (30%) - 3,100 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.
Posted on July 6, 2009
The Joint Standing Committee on Retail Investor Issues today issued the Retail Information Survey Report, based on a survey of Canadians who use an investment advisor when making investment decisions. The Joint Standing Committee is made up of representatives of the Investment Industry Regulatory Organization of Canada, Mutual Fund Dealers Association, Ombudsman for Banking Services and Investments and Ontario Securities Commission, and was created with the purpose of, among other things, providing a forum for the discussion of retail investor issues. The report's findings provide insight into the way Canadian investors make decisions and their use of investment advisors and according to the release, provide data and analysis to assist the four organizations involved in their policy making activities with respect to retail investors.
Posted on June 10, 2009
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.
Posted on June 5, 2009
On June 5, the CSA announced that, commencing July 1, 2009 and continuing for a period of five years, TSX Inc. (TSX) will act as an information processor for exchange-traded securities other than options under NI 21-101 Marketplace Operation. As described by the CSA, an information processor "provides consolidated data to investors and market participants, facilitating compliance with regulatory requirements." The CSA also published a "Questions and Answers" supplement to their notice respecting the role of the TSX.
Posted on May 25, 2009
On May 22, 2009, the Investment Industry Regulatory Organization of Canada (IIROC) released proposed amendments to Dealer Member Rule 1300.1, regarding the trading in securities of U.S. over-the-counter (OTC) issuers. Under the proposed amendments, Dealer Members would not be permitted to accept an order to sell OTC issuer securities until the dealer had "made the inquiries necessary to form a reasonable belief" that it knew the "true identity of every beneficial owner of those securities". In cases where the beneficial owner is not a natural person, the dealer would have to form a reasonable belief as to the identity of every natural person who controls the beneficial owner. Exemptions to this requirement would be permitted for American Depository Receipts and for any OTC securities for which the issuer has a class of securities listed or quoted on the TSX, TSXV, CNQ, NYSE, AMEX or NASDAQ and under certain circumstances, isolated trades.
The intention of the amendments is to "discourage abusive and illegal OTC market activity", which the notice stated has been a "source of scandal". IIROC cited the actions taken in British Columbia to prevent such abuse and the need to prevent such behaviour moving elsewhere within Canada. Comments on the proposed amendments are being accepted until July 21, 2009.
Posted on April 28, 2009
Simon Romano, Alex Colangelo and Ramandeep Grewal | PDF Version | Version française
The recent volatility in equity markets led to a variety of responses by regulators. A particularly popular response internationally was the introduction of limits to short sales of securities, a tool used in an attempt to ease the downward pressure on the value of certain companies. In the United States, for example, the Securities and Exchange Commission (SEC) prohibited short selling in the shares of financial companies in the fall of 2008, a move followed by the Ontario Securities Commission (OSC) restriction on short sales of securities of companies that were inter-listed on a US exchange and on the SEC’s restricted list. While these particular restrictions soon lapsed, the general rules respecting short sales in Canada have been under consideration by regulators for some time. Further, the Investment Industry Regulatory Organization of Canada (IIROC) recently released two studies related to short sales, one of which considered the effects of the recently imposed restrictions. This update, meanwhile, seeks to review the current rules respecting short sales in Canada, recent amendments and the proposals for change.
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Posted on April 28, 2009
The Toronto Stock Exchange (TSX) recently issued a staff notice providing listed issuers with guidance on submissions in connection with the use of the financial hardship exemption under subsection 604(e) of the TSX Company Manual. Subsection 604(e) provides an exemption from securityholder approval for certain transactions and was adopted to provide listed issuers with the opportunity to improve their financial situation in a timely manner when in serious financial difficulty.
Posted on April 13, 2009
On April 9, 2008, the Investment Industry Regulatory Organization of Canada published a notice regarding "locked" and "crossed" markets in the context of a dealer's obligations under the Universal Market Integrity Rules (UMIR). The guidance is intended to reflect the amendments to UMIR with respect to "best execution" and "best price" obligations, supplement and reaffirm certain guidance provided in Market Integrity Notice 2008-010 Complying with "Best Price" Obligations and provide guidance "with respect to the inappropriateness of certain recent practices associated with 'rebate arbitrage'."
Posted on April 9, 2009
On April 8, 2009, the U.S. Securities and Exchange Commission voted to seek public comment on proposals to impose short sale price restrictions or circuit breaker restrictions and “whether such measures would help promote market stability and restore investor confidence.” The introduction of an uptick rule would be permanent and market-wide, while a "circuit breaker" would limit short selling for particular securities for the remainder of the day in the case of a severe decline in the security’s price. The SEC plans to publish the full text of the full proposals as soon as possible.
The proposals are now available here.
Posted on April 2, 2009
On January 23, 2009, the Mutual Fund Dealers Association of Canada published Bulletin #0354-P with respect to proposed amendments to MFDA Rules relating to the sale of all principal protected notes (PPNs) aimed at ensuring that PPNs are subject to due diligence, KYC and suitability obligations. The CSA previously published a number of notices on the issue and, as set out in the MFDA's Bulletin, has requested that the MFDA take appropriate action. As such, the MFDA has stated that it intends to develop a discussion paper for consideration by the MFDA Policy Advisory Committee and had invited comments on the impact of potential amendments in order to assist MFDA staff in developing a proposal.
For more information, see also:
CSA Notice 46-303 - Principal Protected Notes (July 7, 2006)
CSA Notice 46-304 - Update on Principal Protected Notes (July 27, 2007)
CSA Notice 46-305 - Second Update on Principal Protected Notes (August 29, 2008)
Posted on March 13, 2009
The OSC has approved amendments to the procedures of Clearing and Depository Services Inc. (CDS) to reflect the transfer of the ISIN issuance service from CDS to a subsidiary as well as amendments to the rules of CDS relating to issuer electronic payments. The latter amendments will require that entitlement payments made to CDS be in electronic format as of November 1, 2011.
Posted on February 27, 2009
The Investment Industry Regulatory Organization of Canada (IIROC) has announced the deferral of the implementation date of certain amendments to the Universal Market Integrity Rules (UMIR) requiring the reporting of trade variations and unresolved failed trades. IIROC published a notice on October 15, 2008 approving the amendments and the implementation date had been set for March 1, 2009.
Posted on February 23, 2009
Earlier this month, the Manitoba Securities Commission issued a notice repealing the requirements imposed on mutual fund dealers and salespeople set out in MSC Staff Notice 2001-11 with respect to the sale of Labour Sponsored Investment Funds (LSIFs). The MSC indicated that the imposed requirements were no longer applicable.
Posted on February 5, 2009
On February 4, the Investment Industry Regulatory Organization of Canada (IIROC) released two studies related to short sales. The first study, "Recent Trends in Trading Activity, Short Sales and Failed Trades", reviewed trading trends during the period of May 1, 2007 to September 30, 2008 with a particular focus on short selling and failed trades. The study found that despite the fact that the average number of daily trades increased "significantly" during the study period, "there was no significant change" with respect to short sales.
The second study released was the "Study on the Impact of the Prohibition on the Short Sale of Inter-Listed Financial Sector Issuers". The purpose of this study was to review the impact of recent restrictions by the OSC in September and October of 2008 (see below) to curb short selling in the face of increased market volatility. Notably, the study found that the OSC Orders "did not appear to have had any appreciable effect on the price of securities" of either the securities of restricted or non-restricted financial issuers. The Orders, however, had "a significant impact on market quality" for the trading of restricted financial securities, as the Orders reduced the liquidity available in the restricted financials and increased the spread between the ask price and closing bid.
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Posted on January 30, 2009
First Policy Statements Published
Alix d'Anglejan-Chatillon | PDF Version | Version française
As a follow-up to the recent announcement by the Quebec Government on the coming into force of the new Derivatives Act (the “QDA” or “Act”) on February 1, 2009, the Autorité des marchés financiers (the “AMF”, Quebec’s financial services regulator) issued a press release on January 26, 2009 to announce a series of important transitional measures. The coming-into-force documents published by the AMF also include three policy statements relating to the definition of “accredited counterparties”, the characterization of “hybrid instruments” and self-certification of rules made by “recognized regulated entities”.
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Posted on January 21, 2009
No transitional relief issued to date
Alix d'Anglejan-Chatillon | PDF Version | Version française
The Quebec Government has proclaimed the Derivatives Act (QDA) in force as of February 1, 2009. The Act had received royal assent on June 20 2008.
The QDA is the first comprehensive standalone derivatives legislation to be adopted in Canada. The Act regulates both over-the-counter (OTC) and exchange-traded derivatives, subject to certain carve outs for OTC derivatives activities involving “accredited counterparties” and in other cases to be specified by regulation. An earlier post regarding the adoption of the QDA can be found here.
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Posted on November 28, 2008
The CSA have announced that they are extending the time for public comment on their consultation paper regarding the effects of recent credit market turmoil on ABCP markets in Canada to February 16, 2009. For more information on the consultation paper, see our post of October 6, 2008. The comment period was originally set to expire on December 20, 2008.
Posted on November 18, 2008
On November 14, 2008, the President’s Working Group on Financial Markets (PWG) announced a number of initiatives intended to provide regulatory oversight and prudent management of the over-the-counter derivatives market in the U.S. These initiatives include the implementation of central counterparty services for credit default swaps and the signing of a Memorandum of Understanding between the Federal Reserve, SEC and the Commodity Futures Trading Commission with respect to information sharing and consultation regarding CDS central counterparties issues. The PWG also announced a set of policy objectives to “guide efforts to address challenges associated with OTC derivatives.”
Posted on November 13, 2008
The Department of Finance has now released the terms of the Canadian Lenders Assurance Facility. For more information on the Facility, see our post of October 23, 2008.
Posted on November 12, 2008
Lewis Smith and Justin Parappally | PDF Version
The Government of Canada has introduced new measures to provide liquidity to Canadian financial institutions. Earlier measures are described in this post of October 23.
Today, the Ministry of Finance advised that the mortgage-backed securities purchase program announced previously will be increased from $25 billion to $75 billion. $12 billion in purchases have already been made from the first tranche of the purchase program, with an additional $7 billion expected to be purchased in an auction taking place today. The final purchases from the first tranche are expected to take place on November 21.
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Posted on November 12, 2008
This morning, the Department of Finance announced a plan to add up to $50 billion to its Insured Mortgage Purchase Program. The additional investment brings the maximum value of securities purchased through the CMHC to $75 billion. Meanwhile, the base commercial pricing of the recently-announced Canadian Lenders Assurance Facility will drop by 25 basis points and the 25 basis point surcharge for insurance will also be waived until further notice. The latter changes are intended to make the Facility “more competitive with similar programs offered in other countries.”
Posted on November 6, 2008
Following the completion of its recent testing phase, Alpha Trading Systems (Alpha), a Canadian alternative trading system (ATS) has announced that it will formally launch on November 7, 2008. Owned by nine major Canadian financial institutions, Alpha will operate as a visible continuous auction market and initially support trading of ten TSX-listed securities. Its stated objective, however, is to have all TSX and TSXV-listed securities available for trading on its platform by the end of the first quarter of 2009.
Alpha is the latest new marketplace to join the Canadian landscape, which also includes Pure Trading, Omega ATS, Chi-X Canada and Blockbook.
Posted on October 28, 2008
In response to the CSA's proposed amendments to NI 23-101 Trading Rules, released earlier this month, IIROC has now published for comment proposed amendments to the Universal Market Integrity Rules that would correspond to the changes to NI 23-101. IIROC's proposed amendments would include repealing the rule and policies respecting the "best price" obligation concurrent with the implementation of trade-through protection. With the publication of the proposed amendments, IIROC also withdrew from further consideration interim provisions on trade-through obligations, previously published by Market Regulation Services (a predecessor to IIROC). Until the amendments implementing trade-through protection are made to NI 23-101 and UMIR, however, Participants remain subject to the "best price" obligation under Rule 5.2 of UMIR.
Posted on October 23, 2008
In response to the recent turmoil in global markets, Canadian Minister of Finance Jim Flaherty announced this morning the creation of the Canadian Lenders Assurance Facility. The facility, to commence in November and run for six months, will offer insurance on the wholesale term borrowing of federally regulated deposit-taking institutions. Insurance will be available on certain debt issues with a term to maturity of at least three months. The stated intention of the initiative is to ensure that Canadian financial institutions "are not put at a competitive disadvantage when raising funds in wholesale markets given similar actions recently announced by other countries."
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Posted on October 17, 2008
The CSA have published proposed amendments to National Instrument 21-101 Marketplace Operation (NI 21-101) and National Instrument 23-101 Trading Rules (NI 23-101) (the ATS Rules) (and their related companion policies) for comment and review. The proposed amendments include proposals for a framework to implement trade-through protection that will require all visible, immediately accessible, better-priced limit orders to be filled before other limit orders at inferior prices, regardless of the marketplace where the order is entered. Other amendments relate to clock synchronization, technology requirements for marketplaces, information processor requirements, and best execution reporting requirements.These proposed amendments on trade-trough protection have been developed further to the discussion paper published by the CSA on July 22, 2005, entitled CSA Discussion Paper 23-403 Market Structure Developments and Trade-through Obligations and the Joint Notice on Trade-Through, Best Execution and Access to Marketplaces published by the CSA in conjunction with RS (now IIROC) on April 20, 2007. Comments on these proposed amendments will be accepted until January 15, 2009.
Posted on October 17, 2008
In addition to its ABCP study, IIROC has also published for comment a draft guidance note entitled "Best practices for product due diligence". Specifically, IIROC is requesting comment on the relevant criteria in determining whether a product should be subject to a due diligence review, factors to be considered in conducting product due diligence and the structures and procedures necessary for an effective review.
Posted on October 17, 2008
On October 17, the Investment Industry Regulatory Organization of Canada (IIROC) announced the publication of a study concerning the manufacture and distribution of third-party asset-backed commercial paper in Canada. The study reviews the events leading up to the "liquidity crisis" of August 2007 in the ABCP market and includes recommendations concerning product due diligence, product transparency, conflicts of interest and credit ratings.
Posted on October 16, 2008
In June, the BCSC imposed Conditions of Registration for B.C. investment dealers that trade in securities of over-the-counter (OTC) issuers through a B.C. office. Investment dealers that trade in American OTC markets must complete and file Form B, which records the information required under the conditions, within 30 days of the end of each calendar quarter.
The conditions expire on December 31, 2011.
Posted on October 16, 2008
On October 15, 2008, IIROC published a notice regarding the approval of amendments to the Universal Market Integrity Rules respecting short sales and failed trades. The amendments are based on an earlier notice, published in September 2007, and are intended to address potential abusive short selling and failed trade activity. These amendments will require reporting of failed trades after 10 trading days, limit the ability to cancel or vary executed trades, and allow IIROC to designate certain securities as ineligible for short sales entirely. They are also expected to involve the imposition of hard “pre-borrow” requirements in the case of persons who have executed failed trades, which will be subject to a request for comments. IIROC also announced that it is deferring adopting the removal of current short sale price restrictions and the removal of current requirements to file bi-monthly aggregate short position reports.
Posted on October 16, 2008
On October 9, 2008, the Alberta Securities Commission announced that it was granting recognition to the Natural Gas Exchange (NGX) to operate as an Exchange and Clearing Agency. Wholly owned by TMX Group, the NGX is based in Calgary and operates an energy exchange and a physical clearning and settlement facility for natural gas and electricity contracts.
Posted on October 7, 2008
In response to last week's OSC Extension Order with regards to the prohibition on the short sale of certain TSX-listed financial companies, IIROC has published guidance on the handling of short sales.
Posted on October 6, 2008
PDF Version
On October 6, 2008 the Canadian Securities Administrators (the CSA) published CSA Consultation Paper 11-405 entitled “Securities Regulatory Proposals Stemming from the 2007 – 08 Credit Market Turmoil and its effect on the ABCP Markets in Canada” (the Consultation Paper). The Consultation Paper is divided into two parts, with the first part providing a narrative overview of the background to the credit market turmoil in the United States, its spread into Canada and its impact on the non-bank sponsored portion of the asset-backed commercial paper (ABCP) market in Canada. The second part of the paper sets out proposals made under the Concept Paper to deal with the credit market turmoil and related issues in Canada.
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Posted on October 3, 2008
Today, the OSC extended its prohibition on short sales of certain TSX-listed financial companies that are interlisted in the U.S. or have outstanding securities that are interchangeable into shares of a financial company listed in the similar SEC Order. The prohibition expires on October 8, 2008, which corresponds to the expiration of the SEC Order, now that the "bailout" bill has been signed. The original Temporary Order, implemented September 19 and amended on September 22, was set to expire today.
Posted on October 3, 2008
The SEC announced yesterday that it was extending the Emergency Order of September 18 prohibiting the short selling of financial institutions. The Order was set to end at the end of the day on October 2nd, but considering the current state of the market, the SEC decided to extend the Order until the earlier of either the President's signing of the market "bailout" bill or 11:59 p.m. on October 17th, 2008.
Posted on October 2, 2008
The SEC has also extended its Emergency Order of September 17, 2008, which banned "naked" short selling. The Order was set to expire at the end of day October 1, but has now been extended to 11:59 p.m. on October 17, 2008. In the press release accompanying the extension Order, the SEC also communicated that the temporary reporting requirements regarding new short sales and the penalties for violations will extend beyond the above date in the form of an interim final rule.
Posted on October 2, 2008
On October 1, the SEC announced that it is extending its Emergency Order of September 18 temporarily broadening the safe harbour from liability for issuers repurchasing securities. The extended Order will now terminate at 11:59 p.m. on October 17, 2008.
Update: The TSX has taken a similar course of action, extending its previous notice to October 17.
Posted on September 23, 2008
On September 22, the OSC issued an amended Temporary Order with respect to the restrictions on short sales in order to address technical and operational matters originating from their original Temporary Order and to support similar issues addressed by the SEC.
Further, IIROC has released a Restated Reminder Respecting Obligations in the Conduct of Short Sales in order to review the obligations of Participants and Access Persons in the handling of short sales. Of interest, the reminder also states that as part of its market activity monitoring, IIROC intends to increase surveillance of short selling activity, in particular of issuers in the financial sector not covered by the OSC's Temporary Order.
Posted on September 22, 2008
On September 19, the OSC issued a Temporary Order to restrict short selling in certain TSX-listed financial companies that are interlisted in the U.S. or have outstanding securities that are interchangeable into shares of a financial company listed in last week's SEC Order. The OSC's order is intended "to prevent regulatory arbitrage with respect to short selling in Ontario of...and promote fair and orderly markets in Ontario for" the relevant securities. Unless extended, the Temporary Order will expire on October 3, 2008.
Posted on September 18, 2008
The U.S. SEC has recently issued new rules, effective September 18, which require short sellers and broker-dealers to deliver securities by the close of business on the settlement date. A broker-dealer in violation of the close-out requirement will be forced to locate and pre-borrow securities for future short sales in the same security. The SEC took action due to its concern "about the possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions and other issuers exacerbated by 'naked' short selling."
Posted on September 9, 2008
IIROC has approved amendments to Dealer Member Rules 100.2, 100.2(j) – Interest Rate Swaps and 100.2(k) – Total Performance Swaps in order to clarify the margin requirements for swaps where the counterparty is a regulated entity. The amendments were approved by the IDA Board of Directors on December 12, 2007 and took effect September 8, 2008.
Posted on September 8, 2008
On August 12, 2008, the Minister of Finance approved amendments to NI 21-101 and NI 23-101, which are set to come into force on September 12, 2008. As described in our earlier post, the CSA initially approved amendments to NI 21-101 Marketplace Operation (NI 21-101) and NI 23-101 Trading Rules (NI 23-101) in June 2008 to deal mostly with the best execution obligation of dealers and advisers. An unofficial consolidation of the amendments can be found here.
Posted on August 29, 2008
On Friday, the CSA published CSA Notice 46-305 Second Update on Principal Protected Notes. The purpose of this notice is to provide an update on the CSA’s review of PPNs and the recent coming into force of federal regulation applicable to PPNs (the “Federal PPN Regulations”).
The CSA are of the view that the Federal PPN Regulations, together with the CSA’s continuing regulatory initiatives and discussions with IIROC and the MFDA, will substantially address the CSA’s key concerns with PPNs, which were identified in CSA Notice 46-303.
Posted on August 28, 2008
Sterling H. Dietze
An Act respecting the transfer of securities and the establishment of security entitlements (the Quebec STA) received Royal Assent on June 20, 2008 and will come into force on January 1, 2009. The adopted legislation differs from Bill 47 as initially introduced in the National Assembly and upon which we commented in December 2007.
The Quebec STA seeks to implement the principles of the Uniform Securities Transfer Act, while harmonizing Quebec's rules with the securities transfer legislation of other provinces. The concepts found in the Quebec STA follow the model of the USTA and Article 8 of the U.S. Uniform Commercial Code (including the companion provisions of UCC Article 9). The Quebec STA introduces or formalizes into Quebec law concepts such as adverse claims, securities intermediaries, security entitlements, entitlement holders, securities accounts, financial assets, control and protected purchasers.
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Posted on August 13, 2008
In a press release dated August 13, 2008, the U.S. SEC announced that it was publishing for comment an agreement among self-regulatory organizations intended to improve the surveillance and detection of insider trading. The agreement seeks to better protect investors and improve market integrity by reallocating regulatory responsibility in order to eliminate duplication and gaps in surveillance among equity markets.
Posted on June 26, 2008
Philip Henderson
On June 11, 2008, the federal government published the new Principal Protected Notes Regulations (the Regulations), which are intended to come into force on July 1, 2008. The Regulations were introduced in response to the growing variety and complexity of principal protected notes (PPNs) currently being offered by financial institutions and build on the existing Index-linked Deposits Interest Disclosure Regulations, which will be repealed with the adoption of the new Regulations. The new requirements seek to ensure that investors in PPNs are adequately informed by improving the manner, content and timing of disclosure for these types of investments.
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Posted on June 24, 2008
The CSA have approved amendments to NI 21-101 Marketplace Operation (NI 21-101) and and NI 23-101 Trading Rules (NI 23-101) to deal mostly with the best execution obligation of dealers and advisers.
The Amendments, now scheduled to come into force on September 12, 2008, were initially published for comment along with other proposed amendments on April 20, 2007 with the Joint Notice on Trade-Through, Best Execution and Access to Marketplaces (originally published in conjunction with RS, now IIROC. The CSA have now decided to separate these three topics and deal with each separately on separate timetables.
The current amendments deal with best execution along with some other minor changes, including changes related to the electronic audit trail provisions. Amendments dealing with trade-through protection and rules related to access to marketplaces are proposed to be dealt with under separate requests for comment in the coming months.
Posted on June 18, 2008
Alix d'Anglejan-Chatillon and Jason Streicher | Version française
On May 30, 2008, the Montréal Climate Exchange (MCeX) officially launched the trading of a futures contract on Canada carbon dioxide equivalent (CO2e) units.
As was noted by MCeX chairman Luc Bertrand at the official launch ceremony, "the listing of the MCeX futures contract is a 'first' and it makes the Montréal Climate Exchange the first regulated environmental market in Canada." The MCeX is a joint venture between the TMX Group's Montréal Exchange (MX) (the Canadian derivatives exchange) and the Chicago Climate Exchange® (CCX), which operates the world's first greenhouse gas (GHG) emissions reduction and trading system. The launch of the MCeX is intended, in the words of CCX Chairman and Founder Richard Sandor, to position Canada "at the forefront of environmental finance and integrated emissions trading."
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Posted on June 10, 2008
Ralph A. Hipsher and Kenneth G. Ottenbreit | Version française
The Ontario Securities Commission has recently granted relief to dealers distributing foreign securities by way of private placement into Canada to address uncertainties caused by new forward-looking information disclosure requirements.
Effective December 31, 2007, the Canadian Securities Administrators (CSA) made significant amendments to forward-looking information disclosure requirements under continuous disclosure rules applicable to Canadian reporting issuers. The Ontario Securities Commission (OSC) also concurrently amended requirements relating to offering memoranda disclosure contained in OSC Rule 45-501. As a result of these amendments to OSC Rule 45-501, any offering memorandum provided to purchasers in Ontario that contains material forward-looking information (including future-oriented financial information and financial outlooks) is required to also contain certain prescribed forward-looking information disclaimers or safe-harbour type of disclosure. While this disclosure is similar to safe-harbour disclosure provided under U.S. or foreign securities law requirements, it also requires the issuer to address additional matters not typically encompassed by the equivalent non-Canadian disclosure.
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Posted on June 9, 2008
The OSC has approved amendments to NI 24-101 to further extend the phased-in transition periods under that Instrument. Under this extension, the deadline for registrants to comply with the matching deadline of midnight on T has been extended to July 1, 2010 and other transitional phase-in periods have been extended by another 24 months.
Posted on May 20, 2008
Kenneth G. Ottenbreit, Ralph A. Hipsher and Terence W. Doherty | Version française
On February 29, 2008, the Canadian Securities Administrators (CSA) published their revised proposals on National Instrument 31-103 Registration Requirements ("the Instrument"), relating to registration requirements for dealers, advisers and investment fund managers. The proposed registration reforms represent a major restructuring of the Canadian dealer, adviser and investment fund manager registration rules and have implications for non-Canadian dealers, advisers and investment fund managers doing business on a registered or exempt basis in any province or territory of Canada.
The Instrument is intended to create a streamlined and harmonized approach to the regulation of investment activities across Canada. Canada does not have a national or federal securities regulator; securities activities are regulated by Canada's thirteen provincial and territorial securities regulators (the CSA is their umbrella organization).
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Posted on April 17, 2008
Alix d'Anglejan-Chatillon and Sterling H. Dietze| Version française
A legislative proposal to establish a new Derivatives Act was tabled by the Québec Minister of Finance on April 9, 2008. Bill 77 follows the publication in August 2007 by the Autorité des marchés financiers (Québec's financial markets regulator) of a proposed framework for the regulation of the derivatives markets in Québec and an earlier concept paper in May 2006, both of which attracted detailed comments by Canadian and foreign stakeholders in the industry. The proposed Québec Derivatives Act would regulate both over-the-counter (OTC) and exchange-traded derivatives in standalone legislation, subject to certain carve outs for OTC derivatives activities involving designated "accredited counterparties".
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Posted on March 19, 2008
Alix d'Anglejan-Chatillon, Jennifer Northcote and Kenneth G. Ottenbreit | Version française
On February 29, 2008, the Canadian Securities Administrators (CSA) published their revised proposals relating to national registration requirements for dealers, advisers and investment fund managers. Over 260 comment letters were received on the original proposals (published in February of 2007). These proposals constitute an overhaul of registration requirements and registration exempt activities, and are intended to present a streamlined and harmonized approach to the regulation of investment activities across Canada. The revised proposals are open for comments until May 29, 2008.
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Posted on January 28, 2008
Jennifer Northcote and Alex Colangelo
On January 11, 2008, the Canadian Securities Administrators (CSA) published a revised version of National Instrument 23-102 Use of Client Brokerage Commissions as Payment for Order Execution Services or Research Services (the Instrument) as well as Companion Policy 23-102 CP (the Policy). The Instrument and Policy were originally published in July 2006 (the 2006 Instrument and Policy) [See Stikeman Elliott Securities Law Update of August 2006]. In response to numerous comments received, the CSA has made substantive amendments to the 2006 Instrument and Policy by limiting the application of the Instrument, broadening the definition of permitted services that may be paid for by soft dollars and relaxing the disclosure requirements.
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Posted on December 7, 2007
New rules largely consistent with other jurisdictions
Brian G. Hansen and
Ralph A. Hipsher
In Canada, disclosure of forward-looking information (FLI) (including disclosure of future-oriented financial information (FOFI) and financial outlooks) has been governed by the somewhat outdated and imprecise National Policy 48 (NP 48). Effective December 31, 2007, the Canadian Securities Administrators (CSA) will be revoking NP 48 and replacing it with harmonized national rules in the form of amendments to National Instrument 51-102 Continuous Disclosure (NI 51-102).
These amendments to NI 51-102 will apply to all disclosure of FLI and will primarily govern disclosure of FLI by entities that are "reporting issuers" in a Canadian jurisdiction. Notably, however, disclosure of FLI contained in prospectuses, rights offering circulars and offering memoranda issued by non-reporting issuers will also be subject to these requirements. While many non-reporting issuers may not previously have been subject to NP 48, there has long been some confusion about its application and breadth. The clear and concise requirements of the proposed amendments are therefore a welcome development, particularly as they largely reflect similar disclosure requirements in other jurisdictions.
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Posted on December 1, 2007
On November 24, 2007, Canada's federal Department of Finance announced proposed new regulations under the Bank Act, Cooperative Credit Associations Act and Trust and Loan Companies Act that will apply to Principal Protected Notes (PPNs). As reported in the Canada Gazette, the new regulations would define PPNs and specify "the content, manner and timing of disclosure that federally regulated deposit-taking institutions are required to provide at the point of sale for various sales channels" as well as other consumer-related requirements. The proposal is part of the federal government's "Advantage Canada" competitiveness program, designed to promote flexible outcomes-focussed approaches to regulation in response to rapid developments in global financial markets. Those wishing to comment have 30 days from the date of publication to respond.
The draft regulation is available online in the Canada Gazette, Part I for November 24, 2007, beginning on page 3279.
Posted on October 11, 2007
Posted with permission and appears in Euromoney's Global Banking & Financial Policy Review 2006/2007
Sherry Roth and
D'Arcy Nordick
The maple bond market in Canada evolved as a result of changes announced in the February 2005 Canadian Federal Budget removing the "foreign property limit" that restricted Canadian institutional and individual investors in tax deferred investments (including pension and retirement funds) to holding no more than 30% of total assets in foreign securities. Since then, the maple bond market has been accessed by numerous foreign debt issuers, and some domestic Canadian issuers, using existing debt issuance programmes.
PDF version of entire article
Posted on September 14, 2007
Daniella Laise and Jennifer Northcote
This is a reminder that the deadline for compliance with the first phase of National Instrument 24-101 - Institutional Trade Matching and Settlement (NI 24-101) is just around the corner, with certain provisions of the instrument coming into force on October 1, 2007.
NI 24-101 requires that all participants involved in institutional trades (which includes investment advisers, investment dealers and custodians) make changes to their trade order management systems and operational processes to meet the timing and performance objectives set out in NI 24-101 to achieve trade-matching by the end of business on trade date (T).
NI 24-101 adopts a phased-in approach, setting out progressive trade-matching milestones, with the expectation that matching institutional trades by the end of T will be achieved by July 1, 2008.
As part of the initial phase-in of NI 24-101, compliance with the following is required by no later than October 1, 2007:
- Trade-matching parties are to adopt and enforce policies and procedures designed to achieve matching as soon as practical after an institutional trade is executed;
- Registered dealers and advisers will be prohibited from accepting or giving orders to execute DAP or RAP on behalf of an institutional investor unless each trade-matching party has either entered into a trade-matching agreement or provided a trade-matching statement containing assurances that they have established and enforce policies and procedures to meet the requirements of NI 24-101;
- Exception reporting requirements are triggered if less than 80% of institutional trades are matched by noon on T + 1.
For additional information and compliance deadlines, please see this update.
See also CSA Staff Notice 24-305 issued December 14, 2007 for answers to frequently asked questions on NI 24-101.
Posted on June 8, 2007
NI 24-101 IMPORTANT DATES
- Trade-matching agreements or written statements are to be in place by October 1, 2007.
- Progressive trade-matching milestones begin on October 1, 2007, when 80 % of institutional trades must be matched by noon on T+1.
- By January 1, 2010, 95% of all trades must be matched on T.
National Instrument 24-101 - Institutional trade matching and settlement (Instrument), which came into force on April 1, 2007, represents the first step in an initiative to implement straight-through processing (STP) for institutional trades. The new regime will require all participants in institutional trades (which includes investment advisers, investment dealers and custodians) to make changes to their trade order management systems and operational processes to meet the timing and performance objectives set out in the Instrument to achieve trade matching by the end of business on trade date (T).
In establishing a framework for achieving STP, the Instrument introduces a timeframe under which all details for the accurate clearing and settlement of an institutional trade must be agreed, confirmed and verified by and between the adviser, dealer and custodian ("matching"). All participants in institutional trades will be required to adopt policies and procedures on how they propose to meet the prescribed progressive trade-matching milestones and deadlines, and the Instrument also requires exception reporting for registrants who fail to meet prescribed trade-matching rate targets within specified periods (with the target being a 95% matching rate on T by January 1, 2010).
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Posted on July 18, 2006
OSC Staff Notice 55-701 sheds light on the circumstances in which the purchase or disposition of securities under pre-arranged structured sales or acquisition plans by an insider do not constitute illegal insider trading.
On June 2, 2006 the Ontario Securities Commission (the "OSC") released OSC Staff Notice 55-701 - Automatic Securities Disposition Plans and Automatic Securities Purchase Plans (the "Staff Notice"), addressing frequently asked questions concerning the exemption from insider trading and insider reporting for acquisitions and dispositions of securities under certain types of automatic disposition or purchase plans in Ontario.
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Posted on November 18, 2005
CDS Declines to Accept Legended Securities in the Book-Entry System
With the coming into force of National Instrument 45-106 -
Prospectus and Registration Exemptions(NI 45-106)
, the Canadian Securities Administrators (CSA) also adopted a number of consequential amendments to various related policies and instruments. These included consequential amendments to Multilateral Instrument 45-102 -
Resale of Securities (now National Instrument 45-102 or NI 45-102).
Under NI 45-102, the first sale of securities issued in reliance upon certain private placement exemptions is considered to be a distribution (i.e. generally requiring a prospectus), unless certain prescribed conditions are satisfied. One of these conditions is that the certificate representing the security carries a legend indicating that the securityholder may not sell the security until the later of four months and a day after the acquisition date or the date the issuer becomes a reporting issuer. This requirement was amended, effective March 30, 2004 to respond to the increased use of book-entry-only securities. Since the time of this amendment, subsection 2.5(2)3 of NI 45-102 has required that the certificate representing the security, or an ownership statement issued under a direct registration system or other electronic book-entry system, carry the prescribed legend. Section 1.7 of the Companion Policy to NI 45-102 (the Companion Policy) stated (prior to the implementation of the amendment discussed below) that "[i]nvestors may receive either a paper certificate representing their security or an electronic alternative such as an ownership statement under a direct registration system."
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Posted on September 18, 2005
On Friday, August 26, the Canadian Securities Administrators (CSA) issued Staff Notice 41-304 - Income trusts: prospectus disclosure of distributable cash. The Notice is intended to provide additional guidance on the CSA's expectations about the nature and extent of estimated distributable cash disclosure in prospectuses.
Most income trust issuers present information about estimated distributable cash (or distributable income) in their prospectuses, as this often forms the basis upon which an income trust is valued in connection with its initial public offering. These estimates are usually based on trailing 12-month net income, adjusted for interest expenses, taxes, depreciation and amortization (EBITDA). EBITDA is usually further adjusted for certain additional items, ranging from non-recurring historical items to normalizing the effect of a recent or prospective acquisition, in order to arrive at distributable cash. The specific adjustments, as well as the level of explanatory disclosure provided in prospectuses concerning these various adjustments, generally vary from issuer to issuer.
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Posted on May 18, 2005
Rule 48-501 replaces OSC Policy 5.1 paragraph 26 and OSC Policy 62-601
Ontario Securities Commission Rule 48-501 -
Trading during Distributions, Formal Bids and Share Exchange Transactions (Rule 48-501) was approved by the OSC on February 15, 2005 and came into force on May 9, 2005. Rule 48-501 replaces OSC Policy 5.1 paragraph 26 and OSC Policy 62-601.
Rule 48-501, which has been harmonized with the Universal Market Integrity Rules amendments of Market Regulations Services Inc., imposes trading restrictions on dealers, issuers and certain related parties involved in the distribution of securities, take-over bids, amalgamations and issuer bids. The objective of Rule 48-501 is to reduce the possibility of price manipulation by those with an interest in the outcome of a distribution of securities or other transaction. Rule 48-501 also attempts, to the extent possible, to impose trading restrictions that are consistent with those imposed by the United States Securities and Exchange Commission's Regulation M.
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Posted on February 17, 2005
Members of the Canadian Securities Administrators (CSA) recently published for comment proposed National Instrument 45-106 - Prospectus and Registration Exemptions (the Instrument).
Substance and Purpose
The Instrument is intended to:
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consolidate and harmonize the prospectus and registration exemptions contained in various provincial statutes and national, multilateral and local instruments, and the disclosure and filing requirements associated with those exemptions, into a single national instrument;
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repeal or make consequential amendments to a number of national and multilateral instruments;
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modify the existing exemptions to make them more concise and consistent; and
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create new exemptions for relatively routine exemptive relief applications.
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Posted on January 17, 2005
Back in 2000, the Canadian Securities Administrators (CSA) published a concept proposal for an integrated disclosure system (IDS) to streamline the prospectus offering system. The proposal was premised in part on enhanced continuous disclosure requirements, which are now in force via
NI 51-102 (and, soon,
NI 81-106 for investment funds). Accordingly, the CSA are now proposing amendments to the short-form, shelf, and post-receipt pricing rules, among others, to simplify and broaden the short-form prospectus system. Comments are due by April 8, 2005, and implementation is being targeted for July 2005.
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