Adoption of new Alberta OTC derivatives order to reflect pending legislative changes

Keith Chatwin -

Earlier this week, Alberta Securities Commission staff proposed replacing ASC Blanket Order 91-505 Over-the-Counter Derivatives Transactions, with a new blanket order aimed at conforming the prospectus and dealer registration exemptions available under the existing order to pending amendments to the Securities Act.

The pending amendments will, among other things, exclude “futures contracts” from the definition of “security” while introducing the concept of “derivatives” (which will exclude any products that have attributes of a derivative but are also a security, referred to as “derivative-like securities”) and exclude derivatives from the prospectus requirement entirely. As a result, the new blanket order will no longer provide a prospectus exemption for derivatives.  

However, in order to maintain the scope of the current prospectus and registration exemptions of the existing Blanket Order, the new blanket order will ensure that a prospectus exemption will also be available for over-the-counter trades in derivative-like securities and that a dealer registration exemption will continue to be available for over-the-counter trades in derivatives and derivative-like securities, in each case if (i) at the time of the trade each counterparty was a qualified party; or (ii) the trade was in a physical commodity contract.  

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Ministerial approval granted to Phase 2 of investment fund modernization

Ministerial approval has now been granted to amendments to implement certain aspects of Phase 2 of the Modernization of Investment Fund Product Regulation Project, which includes, among other things, amendments to National Instrument 81-102 Mutual Funds.

The mandate of Phase 2 involves generally addressing the regulatory gap between non-redeemable investment funds and mutual funds by focusing on imposing certain core operational requirements on publicly offered non-redeemable investment funds that are generally analogous to the requirements applicable to mutual funds.

As we've previously discussed, the final amendments come into effect on September 22, with implementation to occur over the next few years.

IIROC republishes proposed CRM changes

The Investment Industry Regulatory Organization of Canada today republished for further comment proposed amendments to its Dealer Member Rules to address specific objectives relating to its Client Relationship Model initiative.

Specifically, the proposed amendments include those in regards to (i) enhanced trade confirmation and account statement reporting; (ii) quarterly reporting on certain off-book client holdings; (iii) annual account performance reporting; and (iv) annual account fee/charge reporting. The proposed amendments were republished in order for IIROC to receive comment on revisions requested by CSA staff.

IIROC is accepting comments on the proposed amendments until November 17, 2014. For more information, see IIROC Notice #14-0214.

TSX clarifies rules regarding appeals of listing decisions

The TSX has announced the adoption of amendments to its Company Manual and to the TSX Rules to clarify matters related to appeals of listing-related decisions, and to ensure consistency between the Manual and the Rules with respect to appeals.

As we discussed when the changes were first proposed in 2012, the amendments (i) address the composition of appeal panels; (ii) codify the existing practice of requiring written requests for appeals and submissions; (iii) clarify that certain decisions may be delegated to listing managers; (iv) clarify the time frame for appeals; and (v) clarify the rules regarding suspension and termination of participating organizations.

The amendments are effective as of today.

AMF extends comment period on draft derivatives data reporting regulation

The period to provide comments on Quebec’s draft Regulation to amend Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting, which was initially set to expire on August 2, 2014, has been extended until August 21. As we reported last month, Quebec’s Autorité des marchés financiers (AMF) published the draft amending regulation on July 3. 

The extension is intended to allow interested parties to consider the amending regulation in light of the AMF’s Decision No. 2014-PDG-0084 – Blanket decision regarding exemption from reporting obligation under Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting (available in French only) that was rendered on July 31.

The stated purpose of the decision is to permit the use of the reporting counterparty determination methodology developed by the International Swaps and Derivatives Association, Inc. (ISDA) by exempting the counterparty that is not the reporting counterparty under that methodology from the reporting obligation under Regulation 91-507 under certain conditions. According to the AMF, the decision is intended to ensure that the implementation of Regulation 91-507 will be harmonized with Ontario and Manitoba. As previously discussed, the Ontario Securities Commission incorporated the ISDA methodology through amendments to OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting, which received Ministerial approval on August 14. The rule in Manitoba was similarly amended effective July 2.

A closer look at investment fund modernization

Darin Renton and Nick Badeen

The Canadian Securities Administrators recently announced the adoption of final amendments that will implement certain aspects of Phase 2 of the Modernization of Investment Fund Product Regulation Project (the Amendments). As we discussed in an earlier post, the stated objective of Phase 2 was to achieve fair and consistent product regulation across the spectrum of retail investment funds, by broadly imposing certain “core” operational requirements on all types of publically offered (prospectus qualified) investment funds, whether such funds are traditional mutual funds or non-redeemable investment funds (NRIFs), which include closed-end funds and exchange traded mutual funds.

Subject to Ministerial approval requirements, the Amendments come into force on September 22, 2014. The Amendments, among other things, introduce the imposition of core investment restrictions for non-redeemable investment funds relating to investments for control, investments in real property, investments in non-guaranteed mortgages, investments in loan syndications and investments in other investment funds (fund-on-fund structure), and extend the framework in respect of securities lending, repurchase and reverse repurchase transactions to NRIFs.

Other elements of NI 81-102 that will be extended to, and to a certain extent expanded in relation to, NRIFs include requirements relating to conflicts of interest and securityholder and regulatory approval for fundamental changes. New requirements and restrictions with respect to the issuance of additional securities will also be implemented.

We will discuss some of the key aspects of the Amendments applicable to NRIFs in further detail below, as well as the applicable transition periods and limited grandfathering provided.

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IIROC to provide extension for including terms in existing DEA agreements

IIROC announced this week that it will grant extensions to the September 1 deadline that requires that certain terms be included in routing arrangements and written agreements to provide direct electronic access. The 60-day extension only applies to pre-existing agreements and must be requested in writing. 

For more information, see IIROC Notice 14-0198.

Use of automatic plans to facilitate trading by company executives

Simon A. Romano, Jonah Mann and Frank W. Selke -

Under Canadian securities laws, insiders of public companies such as officers and directors are generally restricted from trading in the company’s securities when in position of material non-public information (MNPI).  This restriction can prove challenging for those holding investments in their employer-issuers when they may need to purchase or sell securities for legitimate personal, financial or other needs. 

To deal with this restriction, insiders may consider entering into an “automatic plan” to permit the purchase or sale of securities under a prescribed exemption from the general insider trading restriction. Such plans include automatic securities disposition plans (ASDPs) and automatic securities purchase plans (ASPPs), involving the sale or purchase, respectively, of securities from or to the holdings of directors, officers and certain other insiders by a broker, based on a set of pre-arranged instructions (ASDPs and ASPPs are collectively referred to in this article as “Automatic Plans”). 

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Securities Act amendments extend conflict of interest restrictions to all investment funds

On July 24, amendments to Ontario's Securities Act came into effect that extend the conflict of interest investment restrictions previously applicable only to mutual funds to all investment funds.

In response, the Ontario Securities Commission has issued a notice providing staff's views on transition issues. Notably, in respect of non-redeemable investment funds that have not made the prospectus disclosure now required to engage in certain related-party transactions, staff interpret the amendments as applying only to non-redeemable investment funds that file a prospectus on or after July 24, 2014.

The notice also provides a discussion of the relationship between the amendments and the investment fund modernization rules that take effect in September.

For more information, see OSC Staff Notice 81-725.

Canada expands sanctions against Russia

The Canadian government expanded sanctions against designated Russian persons last week, including by adding additional designated persons to the previous list and adding two new schedules of designated persons who are considered to be controlled by persons engaged in activities that facilitate a violation of the sovereignty of Ukraine or a former or current senior official of the Russian government.

The regulations now prohibit, among other things, Canadians and persons in Canada from providing or dealing in new debt and equity financings with certain designated persons, or in respect of the property of such designated persons. For an overview of Russia sanctions to date, see the website of Foreign Affairs, Trade and Development Canada.

CSA release list of Canadian qualifying central counterparties

Earlier this week, the Bank of Canada and securities regulators in Alberta, Quebec, B.C., Manitoba and Ontario released a list of Canadian central counterparties that can be considered qualifying central counterparties (QCCP) under the applicable Basel standard.

Specifically, the Basel standard defines a QCCP as 

…an entity that is licensed to operate as a CCP (including a license granted by way of confirming an exemption), and is permitted by the appropriate regulator/overseer to operate as such with respect to the products offered. This is subject to the provision that the CCP is based and prudentially supervised in a jurisdiction where the relevant regulator/overseer has established, and publicly indicated that it applies to the CCP on an ongoing basis, domestic rules and regulations that are consistent with the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMIs).

In Canada, CDS Clearing and Depository Services Inc., Canadian Derivatives Clearing Corporation, ICE Clear Canada, Inc., and Natural Gas Exchange Inc. have been designated or recognized by at least one of the regulators above.

For more information, see CSA Multilateral Staff Notice 24-311.

MFDA publishes guidance on use of investor questionnaires

Earlier this week, the MFDA released a discussion paper intended to provide guidance on the use by mutual fund dealers of investor questionnaires to assist in the know-your-client process. Among other things, the paper discusses topics such as designing an investor questionnaire, implementation considerations and the benefits and limitations of employing a questionnaire.

For more information, see MFDA Bulletin #0611-C.

CSA intend to publish national rule for clearing agencies

Alix d'Anglejan-Chatillon -

The Canadian Securities Administrators yesterday released an update on the proposed local rules designed to set out certain requirements in relation to the application process for seeking recognition as a clearing agency (or an exemption from the recognition requirement), which were published in December 2013.

As we discussed late last year, the proposed rules were published in substantially the same form by the Ontario Securities Commission, Quebec's Autorité des marchés financiers and the Manitoba Securities Commission, while the securities regulators in British Columbia, Alberta, Saskatchewan, New Brunswick and Nova Scotia announced an intention to develop a materially similar multilateral rule in the future.

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IIROC expands implementation of single-stock circuit breakers

IIROC published guidance yesterday that will expand its implementation of single-stock circuit breakers.

As we discussed in February 2012, under IIROC's current guidance on single-stock circuit breakers, securities that are part of the S&P/TSX Composite Index, as well as ETFs comprised principally of listed securities, will be halted for trading where there has been a price increase or decline of at least 10% in a five minute period. The circuit breaker initially halts 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. The circuit breaker only applies between 9:50 a.m. and 3:30 p.m.

Under the new guidance, single-stock circuit breakers will also now apply to securities that are considered "actively-traded". Actively traded securities are those that are traded at least 500 times per trading day and have an average trading value of at least $1.2 million per trading day, in total across marketplaces, during the preceding three calendar months.

The trigger is also being modified so as to require price volatility of at least 10% and 20 trading increments in a five minute period to avoid inappropriately triggering a circuit breaker for lower-valued securities. Meanwhile, the post-open period (9:30 a.m. to 9:50 a.m.), which IIROC characterizes as a time of natural volatility, and the 30 minute period following the resumption of trading after a regulatory halt, will now be covered by a trigger that applies in the event of a price increase or decline of at least 20% and 40 trading increments in a five-minute period.

The new guidance will come into effect on February 2, 2015. For more information, see IIROC Notice 14-0170.

SEC releases guidance in respect of proxy advisory firms

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

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

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

OSC changes to derivatives data reporting intended to alleviate reporting obligations

Margaret Grottenthaler -

The OSC announced the anticipated further amendments to OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (the TR Rule) to incorporate reporting in accordance with the Canadian Transaction Reporting Requirements issued by ISDA April 4, 2014 where transactions are between two dealers or two non-dealers, thus avoiding (hopefully) double reporting. In order to rely on the ISDA methodology: (i) each party to the transaction must agree to a multilateral agreement administered by and delivered to IDSA and under which the process set out in the ISDA methodology is required to be followed; (ii) the ISDA methodology process must be followed in determining the reporting counterparty in respect of that transaction; and (iii) each party to the transaction must consent to the release to the OSC by ISDA of information relevant in determining the applicability of the first two conditions. 

As we discussed in April, amendments were also recently announced to delay the effective date of reporting obligations under the rule and to lessen the burden on local end-user counterparties.

The amendments announced today also designate the U.S. as a jurisdiction that will satisfy the substituted compliance condition in section 26(5) when reporting pursuant to CFTC data reporting rules. Recall that this substituted compliance rule only applies if the only local counterparty is a party that is a local counterparty because they are registered as a derivatives dealer in the jurisdiction (but are not otherwise located in the jurisdiction) or are an affiliate who liabilities are assumed by a party located in the jurisdiction.

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OSC releases Statement of Priorities for 2014-2015

The Ontario Securities Commission today released its Statement of Priorities for the 2014-2015 financial year. The OSC notice also addresses stakeholder comments received in response to a draft version released earlier this year.

Ultimately, the OSC provides five broad regulatory goals for the upcoming year, namely (i) delivering strong investor protection, including by considering the best interest duty to investors, completing research in regards to embedded fees in mutual funds and publishing final rules to introduce pre-sale delivery of Fund Facts for mutual funds; (ii) delivering responsive regulation by, among other things, publishing proposals to update the order protection rule, developing proposals for streamlining the existing rights offering exemption, and moving forward on proposed rules regarding board gender diversity; (iii) delivering effective enforcement and compliance; (iv) supporting and promoting financial stability, including by developing rules for the clearing of OTC derivatives and implementing trade reporting rules, as well as by working with B.C., Ontario and the federal government to implement a cooperative securities regulator to deliver "more efficient and effective regulation of the capital markets" and oversee sources of systemic risk; and (v) running a modern, accountable and efficient organization.

For more information, see OSC Notice 11-770.

A closer look at the OSC's proposed crowdfunding exemption

As we have previously discussed, the Ontario Securities Commission recently proposed a crowdfunding prospectus exemption aimed at facilitating greater access to capital through the exempt market, particularly for start-ups and small and medium-sized enterprises (SMEs). The exemption is one of four new prospectus exemptions proposed for Ontario.

Under the crowdfunding exemption, both reporting and non-reporting issuers and their affiliates would be able to raise up to $1.5 million per year. Investors would also be limited to investing no more than $2,500 in a single investment, and no more than $10,000 in a year under the exemption.

While the proposed exemption would certainly make it easier for smaller companies to raise capital, as we stated in our comments to the OSC, the following are some proposed restrictions the OSC may want to reconsider to ensure that access to the exemption is not unduly restricted.

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

Jeffrey Keey 

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

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

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

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Investment fund modernization: Phase 2 implementation to start in September of 2014

The Canadian Securities Administrators today announced the adoption of final amendments that will implement certain aspects of Phase 2 of the Modernization of Investment Fund Product Regulation Project.  The mandate of Phase 2 involved generally addressing the regulatory gap between non-redeemable investment funds and mutual funds by focusing on imposing certain core operational requirements on publicly offered non-redeemable investment funds that are generally analogous to the requirements applicable to mutual funds.

The final amendments to be adopted as of September 22, 2014 stem from proposed amendments published last year, and will involve the imposition of core investment restrictions for non-redeemable investment funds while also enhancing disclosure requirements regarding securities lending activities by investment funds. The following is a summary of some of the final amendments that are set to come into force, which we will review in further detail in subsequent posts.  

Notably, the final amendments do not extend to the creation of a more comprehensive alternative funds framework (planned to be effected through an overhaul of National Instrument 81-104 Commodity Pools).  As previously announced by the CSA,  the “alternative funds proposals” have been deferred to allow for further review, along with related restrictions that were proposed with respect to investments in physical commodities, short selling, the use of derivatives and borrowing cash.

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MFDA proposes enhanced client reporting requirements

The Mutual Fund Dealers Association of Canada recently released proposed amendments to its rules aimed at harmonizing these with enhanced CSA client reporting requirements adopted last year.

Among other things, the proposed changes address issues related to client reporting and trade confirmations. As we previously discussed, IIROC also adopted amendments to its Dealer Member Rules for the same purpose earlier last month. Comments on the proposal are being accepted until September 10, 2014.

ISDA conference to consider derivative transaction reporting

Margaret Grottenthaler -

As we've discussed in numerous posts on our structured finance blog, new derivative trade reporting rules were recently enacted that will see the staggered implementation of reporting requirements over the course of the next year. 

The International Swaps and Derivatives Association (ISDA), meanwhile, has developed a number of useful tools for end-users in the Canadian OTC derivatives markets, including a Canadian Representation Letter.

Join me at ISDA's conference on transaction reporting on June 19, where I'll be discussing the contents of the Canadian Representation Letter and its application to reporting requirements. This will be a good conference for not only representatives of derivatives dealers that want to know more about data reporting, but also for those in the end-user community that need to know more about how reporting will affect them and what they have to do to ensure that their dealers can report on their behalf.

Comment period extended on proposed proxy advisory firm guidance

The CSA have extended the comment period in respect of their proposed proxy advisory firm guidance published in April. As we previously discussed, the proposed guidance sets out recommendations for proxy advisory firms in relation to their activities and the services they provide to their clients.

Comments are now being accepted until July 23. For more information, see CSA Staff Notice 11-327.

CSA proposed proxy advisory firm guidance

Martin Langlois and Donald G. Belovich -

On April 24, the Canadian Securities Administrators published for comment National Policy 25-201 Guidance for Proxy Advisory Firms (the Proposed Policy) setting out proposed recommendations for proxy advisory firms in relation to their activities and the services they provide to their clients. The recommendations are primarily designed to (i) promote transparency in the processes leading to a vote recommendation and the development of proxy guidelines and (ii) foster understanding among market participants about the activities of proxy advisory firms. The Proposed Policy recognizes that certain market participants have raised concerns about proxy advisory firms and the services they provide, including the potential for conflicts of interest and concerns in respect of proxy voting recommendations. While applicable to all such firms, the Proposed Policy is not intended to be prescriptive or exhaustive but rather should be considered by proxy advisory firms in developing and implementing their own practices.

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Proposed Risk Acknowledgement Form under amended "accredited investor" exemption would impose burdens

Darin Renton, Alix d’Anglejan-Chatillon and Nick Badeen -

As we have previously discussed, the CSA recently proposed amendments to the “accredited investor” prospectus exemption to require that individual accredited investors complete a Risk Acknowledgment Form (RAF) at the same time or before signing the purchase agreement in order for the accredited investor exemption to apply to a distribution.

Under the proposal, the RAF would include specific disclosure advising purchasers of the risks of investing in securities under the accredited investor exemption, having them acknowledge exactly how they satisfy the exemption and confirming the type and value of the securities they are purchasing. A salesperson involved in selling the securities would also have to sign and date the form, including particulars as to how they may be contacted and their registration status.

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

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

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

ISDA releases FAQ for end-users on Canadian derivatives trade reporting obligations and standardized representations

Alix d'Anglejan-Chatillon and Margaret Grottenthaler -

As a follow-up to our earlier posts, the International Swaps and Derivatives Association, Inc. (ISDA) has developed, in consultation with industry participants in the ISDA Canada Working Group, a number of useful tools for buy-side participants, including asset managers, fund managers and other non-dealer market participants or “end-users” in the Canadian OTC derivatives markets.  On May 23, ISDA published a FAQ for Non-Dealers on Canadian Trade Reporting Obligations which outlines key regulatory requirements relating to the reporting of derivatives transaction data and the procedures developed by the derivatives industry to facilitate dealer and end-user compliance with the new requirements under Rule 91-507 as adopted by the Ontario Securities Commission (OSC), the Manitoba Securities Commission (MSC) and the Autorité des marchés financiers (AMF).

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IIROC adopts enhanced client reporting requirements

The Investment Industry Regulatory Organization of Canada yesterday announced the adoption of amendments to its Dealer Member Rules, part of phase 2 of the Client Relationship Model Project, intended to harmonize its rules with enhanced CSA client reporting requirements adopted last year. Among other things, the amendments will require that retail customers be informed of all fees and charges associated with client instructions to purchase or sell a security before the purchase or sale takes place. An initial version of the amendments was published late last year, and the final amendments will be fully implemented by July 15, 2014.

The CSA, meanwhile, have announced the issuance of parallel orders in jurisdictions that will provide IIROC member firms with relief from the related requirements found in NI 31-103 for those firms that comply with the corresponding IIROC requirements. All CSA members except for Quebec have issued similar parallel orders for MFDA member firms.

For more information, see CSA Staff Notice 31-339 and IIROC Notice 14-0133.

AMF publishes blanket exemption to extend TR reporting deadlines in Quebec

Alix d'Anglejan-Chatillon -

As a follow-up to our post of April 17, the AMF issued its blanket exemption decision on May 15 to extend the date for the commencement of over-the-counter (OTC) derivatives trade reporting under AMF Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting until October 31, 2014 for clearing houses and dealers, and until June 30, 2015 for all other OTC derivatives market participants.

In the accompanying notice, the AMF confirms its intention to make consequential amendments to Regulation 91-507 “to maintain a harmonized national oversight and reporting regime for OTC derivatives markets”. These amendments are expected to be broadly consistent with the amendments to the Ontario and Manitoba TR Rules released on April 17 and discussed in our April post. Both the blanket decision and the accompanying notice are currently available in French only.

A Quebec tipping case serves to caution insiders

Maïté Murray and Vincent Laurin -

On April 7, 2014, the Bureau de décision et de révision (BDR) ruled on an application by the Autorité des marchés financiers (AMF) seeking an administrative penalty against a director of a reporting issuer for having allegedly contravened tipping restrictions under the Securities Act (Quebec). The AMF claimed that a general comment made by the director about the general status of the business of the reporting issuer to the effect that “things were going badly” should be considered as “privileged information” and could lead to a violation of tipping restrictions. (Tipping prohibitions under the securities acts of other Canadian jurisdictions refer to “material fact” and “material change” rather than “privileged information” but have the same purpose, namely ensuring that the investing public has equal access to information relating to reporting issuers.)

The comment in this case would have been made during an informal conversation between the director and a former CFO of the company, at a time when the company was faced with the prospect of having the relationship with its one and only client terminated prematurely. Shortly after this alleged conversation took place, the former CFO sold a significant amount of shares she held in the company.

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CSA consider reducing scope of order protection rule regime

Simon Romano -

On May 15, the Canadian Securities Administrators published for comment proposed amendments to trading rules intended to address the costs and inefficiencies associated with the current order protection rule framework.

The order protection rule, which came into effect in 2011, requires marketplaces to establish and ensure compliance with policies and procedures designed to prevent trade-throughs on that marketplace. The 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.

While the CSA believe that the rule enhances confidence in the fairness and integrity of the market, the fragmentation of order flow across multiple marketplaces has led to increased complexities and costs for market participants. For example, some dealers may pay more in respect of membership or subscriber fees to access certain marketplaces than the total amount invoiced for trades on that marketplace, while the technology costs and risks of managing connections to multiple marketplaces can also impose a significant burden. Meanwhile, the CSA noted that the rule may lead to trading inefficiencies by providing incentives for the launch of new marketplaces or by supporting the viability of existing marketplaces that would not otherwise exist.

In light of these concerns, the proposed amendments to NI 23-101 Trading Rules would reduce the scope of the order protection rule by limiting order protection to marketplaces that meet a certain threshold. Specifically, the displayed orders on a marketplace that enjoys a 5% market share of the adjusted share volume and value of trades would be protected. Based on 2013 market share, displayed orders on the TSX, TSX-V, Alpha and Chi-X would be protected, while those on TMX Select, Omega, CX2 and CSE would not be. The displayed orders of a recognized exchange that did not meet the market share threshold, however, would be protected with respect to those securities listed and traded by the exchange.

While the order protection rule remains a "fundamental part" of the regulatory regime, the CSA believe the reduced scope of the rule would give dealers the flexibility to determine when and if to access trading on certain marketplaces to achieve best execution for clients while still satisfying the objectives of the rule. According to the CSA, the proposed threshold would result in capturing at least 85-90% of the volume and value of adjusted trades. The proposal would also provide for limits on certain trading fees, while introducing a plan to study the impact of disallowing the practice of rebate payments by marketplaces. Further action to regulate certain market data fees is also being considered. 

The CSA are accepting comments on the proposal, including specific questions asked in the request for comment, until September 19, 2014.

IIROC updates proposal on order execution services

On April 24, the Investment Industry Regulatory Organization of Canada re-published proposed amendments to UMIR and its Dealer Member Rules intended to achieve consistency in the oversight of similar activity occurring through different forms of third-party electronic access. IIROC first proposed similar amendments in October 2013, and the latest version address comments received from stakeholders.

Specifically, the proposal would require that dealers providing order execution service (OES) include a client ID on each ordered entered for or on behalf of any client that traded on a marketplace for which IIROC was the regulation services provider and: (i) whose trading activity exceeded a daily average of 500 orders per trading day in any calendar month; (ii) that was not an individual and was registered as a dealer or adviser under applicable securities legislation; or (iii) that was not an individual and was in the business of trading securities in a foreign jurisdiction in a manner analogous to a dealer or adviser.

The OES dealer would be required to provide each client ID and the name of the client associated with it to IIROC. Participants providing execution services for OES dealers would also have to ensure that each order sent to a marketplace included the client ID on each order.

Under the proposed amendments, a definition of "Manipulative and Deceptive Activities" consistent with the definition found in UMIR would also be added to the Dealer Member Rules to ensure clarity, and OES dealers would be required to consider the heightened risks associated with the entry of orders that are not directly handled by staff of the dealer. Related guidance was also published.

IIROC is accepting comments on the proposed amendments until June 23, 2014, and intends to implement the amendments on the later of 180 days following the publication of the notice of approval of the amendments and March 1, 2015. For more information, see IIROC Notice 14-0101.

Nova Scotia, Alberta, New Brunswick move to regulate derivatives

Last week, Nova Scotia introduced amendments to its Securities Act intended to further facilitate the harmonization of derivatives regulation across Canada. Specifically, the amendments would provide the Nova Scotia Securities Commission with the authority to, among other things, recognize clearing agencies, derivatives trading facilities and trade repositories and regulate the trading of derivatives through such facilities. Nova Scotia's proposed amendments follow Alberta's recent adoption of amendments to its Securities Act and New Brunswick's similar amendments, also intended to create frameworks for the regulation of over-the-counter derivatives in those provinces.

The amendments to both Alberta's and Nova Scotia's securities legislation also expand on the definition of "special relationship" in the context of insider trading, similar to changes made in Ontario last year, to include those considering or evaluating whether to make a take-over bid.

As we have discussed in recent months, Manitoba and Ontario also recently enacted legislation to provide for the regulation of derivatives, while substantive regulation has been adopted by those two provinces as well as Quebec.

Changes to Nova Scotia's statute have yet to be enacted, while Alberta's amendments come into force on proclamation. Changes to New Brunswick's legislation, meanwhile, are currently in force.

CSA propose proxy advisory firm guidance in respect of conflicts and transparency

The Canadian Securities Administrators today published for comment a proposed national policy intended to provide guidance to proxy advisory firms on recommended practices in respect of conflicts of interest, transparency and accuracy. The proposed guidance addresses comments from stakeholders provided in response to the CSA's Consultation Paper 25-401, published in June 2012.

Specifically, under proposed National Policy 25-201, proxy advisory firms would be expected to identify, manage and mitigate actual or potential conflicts of interest. The proposed guidance includes specific steps firms should consider to address such conflicts, including by establishing policies and procedures, internal safeguards and controls, and a code of conduct. Firms would also be expected to disclose conflicts of interest to clients.

Further, the CSA would expect proxy advisory firms to implement appropriate practices to promote transparency and accuracy of vote recommendations, including by potentially establishing and, to the extent possible considering the sensitivity of such information, disclosing the approach or methodologies used in the analysis leading to vote recommendations. Firms would also be encouraged to establish internal safeguards and controls to increase the accuracy and reliability of information and data used in the preparation of such recommendations. The guidance would further encourage firms to establish and disclose, again to the extent possible, the process followed in developing proxy voting guidelines.

Meanwhile, in response to concerns from issuers that proxy advisory firms have become de facto corporate governance standard setters, the proposed guidance reminds issuers that they may engage shareholders to address concerns that issuers have practices that differ from the standards set out in proxy advisory firms' proxy voting guidelines.

The CSA is accepting comments, including responses to a number of specific questions set out in the proposal, until June 23, 2014.

CSA propose amendments to marketplace operation and trading rules

The CSA today published for comment proposed amendments to marketplace operations and trading rules intended to update the rules in light of various developments that have occurred.

Specifically, the proposed amendments to NI 21-101 and NI 23-101 would, among other things (i) extend the exemption from the transparency requirements applicable to government debt securities until 2018; (ii) amend existing requirements applicable to marketplaces' and information processors' systems and business continuity planning; (iii) allow marketplaces to provide a marketplace participant's order and trade information to researchers without consent under certain circumstances; and (iv) require marketplaces that have a co-location arrangement with a third-party service provider to disclose that it has the arrangement as well as the name of the provider. 

The CSA are accepting comments on the proposed amendments until July 24, 2014.

Ontario's proposed prospectus exemptions: family, friends and business associates exemption

Kristina Vranjkovic -

The Ontario Securities Commission’s (OSC) proposed family, friends and business associates exemption (the Ontario Exemption), if adopted, would allow small to medium-sized enterprises (SMEs) to raise capital in Ontario from a broader range of permitted individuals, while imposing concurrent parameters and obligations which promote investor protection and consistency of application. With a view to facilitating capital raising by SMEs and harmonizing the exemption across all provinces, the Ontario Exemption is based largely on the existing private issuer and family, friends and business associates exemption available in the other Canadian provinces (the Existing Exemption) with a few notable differences, as summarized below. The OSC’s proposal also calls for the repeal of the existing founder, control person and family exemption in section 2.7 of NI-106 upon enactment of the proposed Ontario Exemption.

As we previously discussed, the Ontario Exemption is one of the prospectus exemptions proposed by the OSC last month.

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Ontario's proposed prospectus exemptions: crowdfunding exemption

Cara Cornacchia -

In its March 20, 2014 proposals for four new prospectus exemptions intended to facilitate capital raising for businesses in Ontario, the Ontario Securities Commission (OSC) proposed a crowdfunding prospectus exemption (the “Crowdfunding Exemption”) aimed at facilitating greater access to capital through the exempt market, particularly for start-ups and small and medium-sized enterprises.

The securities regulatory authorities in each of Quebec, Saskatchewan, New Brunswick, Manitoba and Nova Scotia have also published for comment a crowdfunding exemption substantially similar to the proposed exemption in Ontario. In addition, these regulators, other than Saskatchewan, have published a separate crowd-funding exemption for start-ups, which would provide both a prospectus and registration exemption (the “Start-up Exemption”) as an alternate source of capital for non-reporting issuers in early phases of growth. In these jurisdictions, it is expected that both the Crowdfunding Exemption and the Start-up Exemption will coexist. These regulators believe that the Crowdfunding Exemption and the Start-up Exemption are complementary as they are targeted at issuers at different stages of development. The Start-up Exemption is currently available in Saskatchewan, and is substantially similar to what has been proposed by the other jurisdictions.

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Amendments to derivatives trade reporting rule to lessen burden on local end-user counterparties

The Ontario Securities Commission, among other regulators, released amendments today to OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (the TR Rule). The amendments are intended to lessen the burden on local end-user counterparties, while also delaying the effective date of reporting obligations under the rule.

As we discussed last week, the CSA recently announced a delay in implementation of reporting obligations. Specifically, clearing agencies and dealers will now have to begin trade reporting on October 31, 2014, while all other OTC derivatives market participants will be required to report beginning on June 30, 2015. The requirement for trade repositories to make transaction-level reports publicly available will also be delayed to April 30, 2015.

The amendments also repeal provisions of the rules that established a fall-back mechanism requiring local non-dealer counterparties to monitor the transaction reporting of foreign dealer reporting counterparties. The amendment is intended to relieve a significant burden on local end-user counterparties.

Meanwhile, Quebec’s AMF today stated that it intends to formalize the delay in implementation dates by publishing a blanket exemption to be effective as of July 2, 2014. Further, it also intends to propose amendments to the TR Rule in order to “maintain a harmonized national oversight and reporting regime for OTC derivatives markets”, in the near future. The AMF advises that it therefore seeks to specify that reporting counterparties that are dealers, clearing houses or financial institutions will be required to report derivatives data pursuant to Part 3 of the TR Rule as of October 31, 2014.

Ontario's proposed prospectus exemptions: existing security holder exemption

Emma Parker and Simon Romano -

Of the new prospectus exemptions proposed to be adopted by the Ontario Securities Commission (OSC), the “existing security holder” exemption represents, in many ways, a significantly streamlined avenue for reporting issuers to raise funds from their existing securityholders. While similar in many ways to the corresponding exemption that recently came into force in other Canadian jurisdictions (the “Counterpart Exemption”), the “Ontario Exemption” as proposed includes certain additional requirements, which we examine in detail below.

As we previously discussed, on March 20, 2014, the OSC published for comment the Ontario Exemption along with three other proposed prospectus exemptions. These new exemptions flow from the key themes noted in OSC Notice 45-712 Progress Report on Review of Prospectus Exemptions to Facilitate Capital Raising, including the need to facilitate capital raising for small and medium-sized enterprises, the importance of harmonizing exemptions across Canada and the importance of regulatory monitoring and oversight in the exempt market.

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Exchange of Letters to facilitate Canadian issuer offerings in Chile

The OSC, AMF, ASC and BCSC have entered into an Exchange of Letters with Chile's Superintendencia de Valores y Seguros intended to facilitate the public offering of securities of Canadian reporting issuers in Chile on an exempt basis.

Pursuant to Chilean law, SVS Chile may exempt from its securities registration requirements public offerings of any foreign securities, including securities issued by Canadian-based issuers, provided such securities are issued by issuers under the supervision of a regulator with whom the SVS Chile has entered into a cooperation arrangement, which supports Chilean investors having access to public information regarding the foreign issuer and its securities.

According to the Exchange of Letters, SVS Chile has agreed to provide Canadian regulators with information and trade data in the case of concerns regarding market manipulation, abuse or fraud involving Canadian issuers listed in Chile. Other members of the CSA wishing to become a participant to the Exchange of Letters may do so at any time by executing a counterpart of the letter and providing notice to the SVS Chile and the other Canadian participating regulators.

CSA extend time for OTC derivatives trade reporting

The CSA announced today that they are pushing back the date for the implementation of OTC derivatives trade reporting obligations. Clearing agencies and dealers will now have to begin trade reporting on October 31, 2014, while all other OTC derivatives market participants will be required to report beginning on June 30, 2015.

The extension is intended to provide more time for trade repositories currently engaged in the designation or recognition process to develop reporting infrastructure and accept market participants onto their systems.

Securities regulators sign MOU with Bank of Canada to promote efficient clearing and settlement systems

The OSC, BCSC, AMF and the Bank of Canada have entered into a Memorandum of Understanding intended to promote the safety and efficiency of clearing and settlement systems and manage systemic risk in a coordinated and consistent fashion. The MOU specifically calls on the parties to consult and coordinate with each other on such issues as (i) concerns that could affect the safety or efficiency of a regulated system; (ii) the publication of proposed rules, and amendments to rules, in respect of regulated systems; and (iii) independent reviews or audits in regards to a regulated system.

While the regulated systems governed by the MOU may change from time to time they currently consist of CDSX, the clearing system operated by CDS Clearing and Depository Services Inc., and CDCS, being the Canadian Derivatives Clearing Service operated by the Canadian Derivatives Clearing Corporation.

IIROC releases proposed guidance to establish marketplace thresholds

The Investment Industry Regulatory Organization of Canada yesterday released proposed guidance designed to establish a framework for Canadian marketplaces to adopt appropriate marketplace thresholds. Such controls are intended to control short-term, unexplained price volatility and promote fair and orderly markets.

IIROC initially proposed a set of principles in May 2012 as it considered formal proposals to establish marketplace price and volume thresholds. The proposed guidance is ultimately based on three principles, namely that: (i) marketplace thresholds should operate to generally preclude the execution of orders at prices that would otherwise, on execution, require regulatory intervention by IIROC on the triggering of a single-stock circuit breaker or the application of the unreasonable trade policy; (ii) the volatility control mechanism used by a marketplace should have the least amount of impact that is practical on the market-wide operation of the price discovery mechanism and access to "tradable" liquidity; and (iii) the introduction or amendment of marketplace thresholds by a marketplace should, to the greatest extent possible, not impose a regulatory burden on other marketplaces or stakeholders.

According to IIROC, the proposed guidance is intended to be principles-based, allow each marketplace flexibility in the structure and application of its marketplace threshold, and ensure that marketplace thresholds can be implemented with minimal impact on stakeholders.

Comments are being accepted on the proposed guidance until July 3, 2014. According to IIROC the final guidance will become effective at least 180 days following the publication of a final notice. For more information, see IIROC Notice 14-0089.

IIROC reports best execution survey results

Simon Romano -

On March 28, 2014, IIROC released a notice (14-0082) summarizing the results of an online survey on the issue of best execution of its members engaged in secondary market trading of listed securities. The survey was conducted between December 2012 and February 2013.

“Best execution” is defined under National Instrument 23-101 as the “most advantageous execution terms reasonably available under the circumstances”, and the NI 23-101 obligation is to use “reasonable efforts” to achieve best execution. For IIROC regulated dealers, the obligation as set out in Rule 5.1 of the Universal Market Integrity Rules (UMIR) is to “diligently pursue the execution of each client order on the most advantageous execution terms reasonably available under the circumstances.”

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CSA propose Fund Facts pre-sale delivery requirements

The Canadian Securities Administrators today published proposed amendments to mutual fund prospectus disclosure rules that would implement requirements regarding the pre-sale delivery of Fund Facts. The amendments represent the third stage of the CSA's point of sale disclosure project for mutual funds.

Under the proposed amendments, the most recently filed Fund Facts would have to be delivered to a purchaser before a dealer accepts an instruction for purchase. Delivery would not be required, however, if the purchaser had already received the most recently filed Fund Facts. There would also be an exception, subject to certain conditions, where a purchaser indicated a desire to complete the purchase immediately or by a specified time, and it was not practicable for the dealer to complete pre-sale delivery. In such a case, the Fund Facts would have to be delivered within two days of purchase.

Pre-sale delivery requirements would also not apply to subsequent purchases of securities of a mutual fund pursuant to pre-authorized purchase plans so long as the dealer provided initial and subsequent annual notices to the purchaser that included information on how to access and request the Fund Facts and that the purchaser would not have a right for withdrawal of the purchase.

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IIROC adopts guidance on use of business titles and financial designations

Earlier this week, the Investment Industry Regulatory Organization of Canada announced that it is adopting guidance in respect of regulatory expectations relating to the use of business titles and financial designations. As we discussed earlier this year, IIROC published draft guidance on the subject in January, and the final version of the guidance addresses issues identified by stakeholders during the public consultation period and provides additional guidance where necessary.

For more information, see IIROC Notice 14-0073.

Crowdfunding and other prospectus exemptions proposed by the OSC and other CSA regulators

The Ontario Securities Commission today published for comment four new prospectus exemptions intended to assist companies that are seeking to raise capital, while maintaining an appropriate level of investor protection. As we've previously discussed, the OSC initiated a consultation process in December 2012 to consider potential prospectus exemptions, with updates released in August and December of 2013.

As discussed in detail below, the proposed exemptions announced today consist of an offering memorandum and family friends and business associates exemption, which are available in other provinces but would be new for Ontario, and an existing securityholder exemption, similar to that which was adopted by other Canadian regulators last week. With respect to crowdfunding, the OSC has also published its own proposed exemption, with some of its counterpart regulators proposing a similar but separate exemption.

  1. Offering memorandum exemption. This proposed exemption is based on the existing offering memorandum exemption currently found in section 2.9(2) of NI 45-106 Prospectus and Registration Exemptions that is not available in Ontario. While the proposed exemption would not place limits on the size or frequency of offerings an issuer could make, there would be limits for individual investors, namely $30,000 for eligible investors and $10,000 for non-eligible investors. In addition, individual investors would be required to sign a risk acknowledgement form prior to or at the time of purchasing a security in reliance on this exemption.

    Meanwhile, Alberta, Quebec, and Saskatchewan have also published for comment proposed amendments to NI 45-106 relating to the OM exemption that is currently available in those provinces, intended to generally align the exemption with Ontario's proposal and New Brunswick has proposed amending its OM exemption to conform to that proposed by the OSC.
     
  2. Family, friends and business associates exemption. This proposed exemption is based on the existing family, friends and business associates exemption currently found in section 2.5(1) of NI 45-106 that is not available in Ontario. No limit has been proposed on the size of an offering made under this exemption but only certain types of securities could be distributed. In addition, there would be expanded guidance on the meaning of close personal friend and close business associate, with the onus of establishing the existence of such relationships would be on the issuer.

    Similar to the proposed OM exemption, individual investors would be required to sign a risk acknowledgement form prior to or at the time of purchasing a security in reliance on this exemption. Also of note, in connection with the proposed implementation of this exemption, the OSC is also proposing the repeal of the existing founder, control person and family exemption in section 2.7 of NI 45-106. 
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New York Attorney General combats alleged unfair advantages for high-frequency traders

Simon Romano and Laura Levine -

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

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

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

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

AMF publishes webinar outlining new derivatives reporting requirements

Last week, Quebec's Autorité des marchés financiers published a webinar and related slide presentation summarizing recently adopted derivatives reporting requirements. As our structured finance blog discussed last year, final versions of Rule 91-507 came into force in Quebec, Ontario and Manitoba at the end of last year, with staggered implementation scheduled over the course of 2014.

Ultimately, the online presentation outlines the objectives of reporting, the circumstances that trigger reporting, the use of unique transaction identifiers (legal entity identifiers), data dissemination and access, and the effective dates associated with the various obligations.

While the global legal entity identifier (LEI) system is not yet operational, market participants can request a pre-LEI from an approved local operating unit.

CSA members adopt new "existing security holders" prospectus exemption

The CSA announced yesterday that the securities regulatory authorities in all Canadian jurisdictions, other than Ontario and Newfoundland and Labrador, have adopted a prospectus exemption that, subject to certain conditions, allows issuers listed on the Toronto Stock Exchange (TSX), TSX Venture Exchange (TSX-V), and the Canadian Securities Exchange (CSE) to raise money by issuing securities to their existing security holders.

This new exemption has a significantly broader scope than initially suggested last November in Multilateral CSA Notice 45-312 Proposed Prospectus Exemption for Distributions to Existing Security Holders, which proposed an exemption for TSX-V-listed issuers only. In keeping with several comments received during the consultation period, the final exemption was modified to be available to issuers with equity securities listed on the TSX and the CSE, in addition to those listed on the TSX-V.

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IIROC considers lower capital requirements for introducing brokers

Earlier this week, IIROC published a concept paper that considers lowering the minimum capital requirement for Type 1 and Type 2 introducing brokers. According to IIROC, there is a materially lower risk of client loss in the event of a Dealer Member insolvency in respect to Type 1 and Type 2 introducing brokers as these dealers have, at most, only limited access to client cash or securities.

IIROC is accepting responses to its concept paper until July 9, 2014. In addition to seeking comments on the idea of introducing a lower minimum capital requirement for these types of introducing brokers, IIROC is also requesting feedback on the appropriate level of minimum capital requirement.

For more information, see IIROC Notice 14-0065.

CSA propose amendments to accredited investor and $150k exemptions

Tim McCormick and Ramandeep Grewal -

On February 27, the Canadian Securities Administrators published for comment proposed amendments to prospectus exemption rules, including the “accredited investor” (AI) and “$150,000 minimum investment” ($150K) exemptions. These proposals follow a comprehensive public consultation process and are intended to address the CSA’s concerns that individual investors may not appreciate the risks of investing under the AI exemption, and that the $150K threshold may not provide an adequate proxy for sophistication or the ability to withstand loss.

As such, the CSA’s proposed amendments to the AI exemption would require that individual investors be presented with, and complete and sign, a new risk acknowledgement form (RAF). However, the income and asset thresholds used in the definition of accredited investor would not be changed, with the CSA specifically noting that many responses to its earlier consultation expressed concerns that potential changes to the exemption could limit access to capital. Meanwhile, proposed changes to the $150K exemption would allow only non-individuals to use the exemption. According to the CSA, while this exemption is relied on in respect to less than 1% of distributions, it provides an inexpensive alternative to non-accredited investors and works well in certain circumstances, such as in respect of real estate securities.

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Anti-loss trading rules may impact investment trusts

Katy Pitch and Lindsay Gwyer -

For several decades, corporations have been subject to the Income Tax Act’s “loss streaming” rules, which restrict a corporation’s ability to carry forward losses and certain credits following an acquisition of control of the corporation. In the absence of these rules, a profitable corporation would be able to acquire a corporation with accrued losses, amalgamate with it, and carry the accrued losses forward to shelter future income. The loss streaming rules limit the effectiveness of this kind of transaction in a number of ways, including by preventing a corporation from carrying forward capital losses after an acquisition of control, and by only allowing non-capital losses to be carried forward and deducted against income from the same business or a similar business as the business which generated the losses.

While these rules historically applied only to corporations, recent legislative changes have extended their applicability to trusts. We would like to draw readers’ attention to a number of consequences of the amendments, particularly as they may affect investment fund trusts.

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IIROC publishes guidance for dealers recommending leveraged investing

The Investment Industry Regulatory Organization of Canada yesterday published guidance in respect of the supervision and suitability obligations of dealers and representatives that advise clients to use borrowed money to invest.

Specifically, IIROC's guidance sets out a number of issues that registered representatives should consider before making a specific recommendation that a client invest with borrowed funds, including with respect to the collection of information about the proposed loan, the impact of the proposed loan on the client's financial situation and whether the client's debt to net worth leverage ratio is appropriate.

Guidance is also provided in respect of dealers' supervisory obligations, including in respect of minimum controls that should be in place to identify and supervise the use of leverage strategies, best practices that should be considered in developing and implementing supervisory controls, and red flags that may indicate the existence of off-book client loans.

IIROC published draft guidance on the subject in July 2012, and the final guidance addresses the public comments received in response to the original draft. For more information, see IIROC Notice 14-0044.

CSA sharpen focus on short term securitized products

Mark McElheran

As previously noted in our structured finance blog post of January 24, the Canadian Securities Administrators have published for comment proposed amendments to National Instrument 45-106 Prospectus and Registration Exemptions. These amendments represent a significant retreat from the more comprehensive set of amendments that were originally proposed by the CSA in 2011. Insofar as both the public and private term markets are concerned, status quo is the happy result. This is a sensible and welcome result and credit to the CSA for taking into consideration the feedback received from the industry consultation on the 2011 proposals.

Given that the only troubling issues in the asset-backed securities market during the financial crisis occurred in the asset-backed commercial paper (ABCP) market (albeit in the non-bank sponsored portion of the market), it is not surprising to see the CSA retain some semblance of heightened regulation over this sector. Consistent with the approach taken in 2011, the CSA have (thankfully) chosen not to impose some of the more substantive (and controversial) requirements on transactions that are being implemented in other jurisdictions (such as mandatory risk retention) but instead have chosen to impose additional requirements (that are largely disclosure-based) on ABCP conduit issuers in order for them to be able to access the prospectus-exempt market. 

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OSC publish review of activities and initiatives related to funds in 2013

The Ontario Securities Commission today published a staff notice summarizing key initiatives and activities impacting investment fund issuers and the fund industry.

Specifically, the notice reviews the status of a number of policy initiatives, including with respect to, among other things, the transition to IFRS, mutual fund fees, point of sale and risk classification methodology for Fund Facts, and the modernization of investment fund product regulation.

The OSC also identifies a number of emerging trends over the past year, including an increase in the number of prospectus offerings that proposed to invest substantially all their assets in a pool of mortgages as well as an increase in the use of derivatives to offer more efficient investment exposure to areas that are more difficult to reach through direct investments.

The staff notice also includes a discussion of findings emerging from OSC staff's review of prospectus and continuous disclosure, including in respect of risk ratings in Fund Facts and sales communications and advertising. With respect to the latter issue, OSC staff found that while funds were generally compliant with disclosure requirements related to sales communication, some communication did not contain all the information required.

For more information, see OSC Staff Notice 81-723.

IOSCO considers trends in crowdfunding

The IOSCO Research Department recently released a staff working paper that considers the emerging growth of crowdfunding. In addition to analyzing the benefits and risk of crowdfunding, the paper considers platform business models, current regulatory regimes and trends, and potential regulatory next steps.

As we previously noted, the Ontario Securities Commission intends to release proposed new prospectus exemptions for comment in the first quarter of this year. A crowdfunding exemption is one of four exemptions under consideration.

European Commission proposes "Volcker Rule"-style regulation

Simon Romano and Laura Levine

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

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

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Five developments to follow in 2014 - Securities class actions and fraud-on-the-market theory

Stéphane Rousseau and Benoît C. Dubord -

Later this year, the U.S. Supreme Court will begin hearing arguments in Halliburton Co. v. Erica P. John Fund, Inc., a case that has enormous potential implications for securities class actions. Arguably one of the most important securities cases of the last twenty years, Halliburton concerns the fraud-on-the-market presumption of reliance that applies in class actions under section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

Courts have held that Rule 10b-5 provides a private right of action that allows investors to recover damages in cases of securities fraud. To be entitled for damages, investors must demonstrate: (i) a material misrepresentation or omission by the defendant; (ii) scienter; (iii) a connection between the misrepresentation or omission and the purchase or sale of a security; (iv) reliance upon the misrepresentation or omission; (v) economic loss; and (vi) loss causation. 

In Basic Inc. v. Levinson (1988), the U.S. Supreme Court stated that the reliance requirement placed “an unnecessarily unrealistic evidentiary burden” on plaintiffs who traded on an impersonal market. To alleviate this concern, the Court endorsed the “fraud-on-the-market” theory, pursuant to which plaintiffs benefit from a rebuttable presumption of reliance on material misrepresentations made to the public. The endorsement of the fraud-on-the-market presumption spurred the development of securities class actions in the U.S.

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CSA propose changes to current short-term debt exemption and new rules for exempt trading of short-term securitized products

The CSA yesterday released proposed two sets of amendments to National Instrument 45-106 Prospectus and Registration Exemptions that would introduce a bifurcated approach to how they will treat asset-backed commercial paper (ABCP) as opposed to commercial paper (CP). 

With respect to CP,  the proposed amendments would remove the current “split rating condition” that requires CP to have a designated rating at or above the designated ratings thresholds, and if a second rating is obtained, require that it not be below any of the same designated rating thresholds. Instead, a “modified split rating condition” is proposed that would require that CP not having any rating below a different (and generally lower) set of designated rating thresholds. Among other things, this is intended to remove the disincentive for issuers of commercial paper to seek additional ratings. According to the CSA, the modified condition would also provide for consistent treatment of commercial paper issuers with similar credit risk and maintain the current credit quality of commercial paper distributed under the exemption.

Meanwhile, the CSA announced that since securitization activity in Canada, with the exception of non-bank ABCP, does not raise systemic risk or investor protection concerns, they do not intend to proceed with their 2011 proposals to introduce a new framework for the regulation of securitized products. However, more targeted amendments focusing on short-term securitized products were included as part of the proposal released yesterday. (For more comprehensive commentary on the various aspects of the earlier proposals, see our Canadian Structured Finance Law blog posts from 2011)

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OSC proposes requiring disclosure of board gender diversity

Amanda Linett and Mike Devereux -

The Ontario Securities Commission today released proposed amendments to enhance the disclosure of boards' gender diversity.

Specifically, the changes to Form 58-101F1 would require that TSX-listed and other non-venture issuers reporting in Ontario annually disclose (i) director term limits; (ii) policies regarding the representation of women on the board; (iii) the board's or nominating committee's consideration of the representation of women in the director identification and selection process; (iv) the issuer's consideration of the representation of women in executive officer positions when making executive officer appointments; (v) targets regarding the representation of women on the board and in executive officer positions; and (vi) the number of women on the board and in executive officer positions.

The disclosure model would be one of "comply or explain", consistent with existing corporate governance disclosure requirements. As such, issuers would be required to explain the absence of required policies or targets.

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CSA release model rules concerning customer clearing of OTC derivatives

The Canadian Securities Administrators today released model provincial rules and related guidance in regards to customer clearing of OTC derivatives and the protection of customer collateral and positions.

Specifically, the proposal sets out requirements in regards to the treatment of customer collateral,  recordkeeping, reporting and disclosure, and the transfer of positions. Ultimately, the intention of the CSA is to ensure that customer clearing proceeds in a manner that protects customer collateral and positions, and improves clearing agencies' resilience in the case of a clearing member default.

The proposal follows the publication of a number of consultations and proposals concerning OTC derivatives, including the recent publication of proposed model rules respecting mandatory central counterparty clearing of derivatives, as well as the February 2012 CSA consultation paper on segregation and portability in OTC derivatives clearing.

The CSA is accepting comments on today's proposal, including responses on a number of specific question, until March 19, 2014. For more information, see CSA Notice 91-304.

IIROC withdraws position regarding clearing arrangements

On January 13, IIROC issued final guidance confirming that it is withdrawing its position that clearing arrangements are a type of introducing broker / carrying broker arrangement to which IIROC Dealer Rule 35 applies.

As we've previously discussed, IIROC released draft guidance on the subject in October 2012, with the final version of the guidance describing the characteristics of clearing arrangements and setting out the practical considerations to be addressed when considering entering into a such an arrangement. IIROC has now also released new guidance in respect of outsourcing arrangements, which clearing arrangements are considered to be.

For more information, see IIROC Notice 14-0010 and 14-0009.

CSA provide guidance on satisfying KYC, KYP and suitability obligations

The Canadian Securities Administrators released a staff notice yesterday to provide guidance to portfolio managers, exempt market dealers and other registrants on best practices in regards to know-your-client (KYC), know-your-product (KYP) and suitability obligations. Of particular interest, the notice also provides examples of practices deemed unacceptable to regulators.

The guidance follows a CSA targeted review in 2012 that found various issues with registrants' compliance with applicable obligations. Specifically in respect of KYC obligations, the notice provides guidance on such things as (i) how often registrants should update KYC information; (ii) the signing and dating of KYC information by clients and registrants; (iii) the processes registrants should follow to determine whether investors are accredited investors; and (iv) how registrants should collect and document KYC information.

Of particular interest, the notice states that factual representations, such as a representation in a subscription agreement, that the client is an accredited investor will generally not be sufficient on their own for a registrant to satisfy KYC obligations. Further, a registrant relying on a permitted client waiver of its KYC and suitability requirements must also collect adequate information to determine that the client is a permitted client, rather than only relying on a client checking off the relevant box on the certificate/attestation form.

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Implications of the new marketing rules for prospectus distributions

Jeffrey Singer and Ramandeep K. Grewal -

Rules governing the marketing of prospectus offerings were amended by the Canadian Securities Administrators in August 2013, in some respects in a significant manner. Intended to ease marketing restrictions and complement existing market practices, the new rules provided some much needed clarity in respect of activities that are commonly undertaken in marketing prospectus offerings. However, they have also given rise to various questions as issuers and underwriters worked through the ramifications of these new requirements in the first few months since their implementation. 

Amendments were made primarily to National Instrument 41-101 General Prospectus Requirements and National Instrument 44-101 Short Form Prospectus Distributions and expressly codified permissible “pre-marketing” and “marketing” activities that can be conducted prior to and after the filing of a preliminary prospectus.

As discussed in detail below, the amendments included a new exemption to permit registered dealers to “test the waters” in connection with an initial public offering (IPO), as well as express rules relating to the use of “standard term sheets” and “marketing materials” and to the conduct of “road shows” during and after the waiting period. Amendments were also made to existing exemptions that permit pre-marketing in connection with a “bought deal agreement” that, among other things, impose new requirements on what will be considered a “bought deal agreement” for the purposes of the exemption. Specific requirements were also imposed on amending the terms of a bought deal agreement, including increasing or decreasing the size of the offering. While these changes have been characterized by the regulators as an easing of restrictions, as discussed below, these accommodations come at the price of specific rules and express policy bias that may cast some doubts on “street” practices that routinely took place. In this article, we review these changes and examine some practical issues faced in their application.

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ASC awaits changes to OTC derivatives regulations

Keith Chatwin -

The Alberta Securities Commission released a staff notice last week to provide an update on the progress made towards revising the statutory framework for OTC derivatives trading in the province.

Specifically, the fall session of Alberta's legislature ended prior to adoption of Bill 42, which would have amended the province's Securities Act to provide the ASC with the authority to make rules dealing with OTC derivatives.  The amendments would also have sought to harmonize Alberta's derivatives regulations with those of other Canadian jurisdictions. Accordingly, until such time that similar legislation is reintroduced, the regulation of OTC derivatives in Alberta will continue under current rules.

As we've previously discussed, amendments related to providing securities regulators with rule-making authority, and rules emanating from the regulators themselves, have recently come into force in Ontario, Quebec and Manitoba.

For more information, see ASC Staff Notice 91-704.

Transition of CSA national systems rescheduled for January 13, 2014

The CSA has now provided an update on the transition of responsibility for the CSA national systems. As we discussed in November, the planned transition date of December 2, 2013 had been deferred, and the transition from CDS to CGI Information and Management Consultants has now been scheduled for January 13, 2014.

Changes to LIBOR: Discontinuation of Canadian Dollar LIBOR

Jeffrey Keey and Stanley McKeen -

The London Inter-bank lending rate (LIBOR) underwent a number of changes last year that have impacted certain existing financial transactions and will continue to shape future transactions in 2014. 

LIBOR is the primary global benchmark, or reference rate, for short term interest rates in major currencies. It is intended to reflect the average rate at which banks can obtain funding in the London inter-bank market for a particular currency and particular time period or “tenor”. The British Bankers Association (BBA) has, since 1986, operated and administered a screen LIBOR rate (BBA LIBOR) calculated from a panel of banks’ submission of the rates at which they can borrow funds.

Over the past few years, the operation of BBA LIBOR has increasingly been a matter of concern among regulators, participants and LIBOR users. The rate submissions that form the basis of BBA LIBOR are estimates of borrowing costs and not actual transactions. As a result, concerns have been raised regarding whether LIBOR is an accurate and reliable benchmark. Additionally, regulatory investigations by UK and overseas authorities have found that attempts have been made to manipulate LIBOR and other benchmarks.

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OTC derivative reporting rules come into force in Ontario

The Ontario Securities Commission announced last week that OSC Rule 91-506 Derivatives: Product Determination and OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting have received Ministerial approval.

As we previously discussed, the final versions of the rules were published in November and came into force beginning on December 31, 2013. The implementation of some requirements, meanwhile, will be staggered over the next year.

A look back at 2013

From the implementation of prospectus pre-marketing rules to a new "notice-and-access" framework for proxy materials, the past year has been a busy one for capital market regulators. And, 2014 is shaping up to be a busy one as well, with indications from regulators that we could soon see the release of proposals related to crowdfunding, proxy voting and gender diversity. Further, the federal government, along with Ontario and B.C. continue to work towards the creation of a cooperative securities regulator.

In case you missed them the first time around, we've compiled some of our most popular and substantive posts from the last 12 months, below.

M&A

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Canadian regulators release significant year-end market infrastructure and CCP rule proposals

Alix d'Anglejan-Chatillon -

Canadian regulators have published for comment proposed rules dealing with clearing agencies and financial market infrastructure and mandatory central counterparty clearing (CCP) of specified OTC derivatives. This most recent round of rulemaking follows the publication of final rules on trade repositories and derivatives trade data reporting which come into effect on December 31, 2013 in certain Canadian jurisdictions, subject to staggered implementation of reporting obligations over the course of 2014. 

Taken together, these proposals are key building blocks in the regulatory architecture currently being developed by the Canadian Securities Administrators (CSA) Derivatives Committee to establish a comprehensive regulatory framework for the trading of derivatives in Canada as part of Canada’s G-20 commitments.

Canadian regulators release proposals for mandatory CCP clearing of derivatives

Alix d'Anglejan-Chatillon -

The CSA yesterday published for comment the CSA Staff Notice 91-303 Proposed Model Provincial Rule on Mandatory Central Counterparty Clearing of Derivatives (the Proposed CCP Model Rule).

The Proposed CCP Model Rule sets out requirements for central counterparty (CCP) clearing of OTC derivatives transactions.  The purpose of the rule is to enhance market transparency and the overall mitigation of risks in OTC derivatives markets through the introduction of requirements for CCP clearing of previously bilaterally cleared or uncleared derivatives transactions.

The CSA Derivatives Committee, in its Consultation Paper 91-406 Derivatives OTC Central Counterparty Clearing published in June 2012, had sought public comment on a number of recommendations relating to the clearing of eligible OTC derivatives which have been incorporated into the Proposed CCP Model Rule.

The Proposed CCP Model Rule is divided into two rule-making areas, namely (i) the determination of derivatives subject to the CCP clearing requirement (the concept of a “clearable derivative”), and (ii) the requirement to submit a “clearable derivative” to a CCP for clearing, subject to proposed end-user and intragroup exemptions.

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Canadian regulators propose adopting international standards for clearing agencies, central securities depositories and settlement systems

Alix d'Anglejan-Chatillon -

The Ontario Securities Commission (OSC), Quebec's Autorité des marchés financiers (AMF) and the Manitoba Securities Commission earlier this week published for comment proposed local rules that would set out certain requirements in relation to the application process for seeking recognition as a clearing agency (or an exemption from the recognition requirement) under local rules, as well as the ongoing requirements for recognized clearing agencies that act as central counterparties, central securities depositories or securities settlement systems.

The requirements under proposed Rule 24-503 Clearing Agency Requirements in Ontario and Manitoba and Regulation 24-503 respecting Clearing House, Central Securities Depository and Settlement System Requirements in Quebec are generally based on the Principles for Financial Market Infrastructures (PFMI) developed by the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements and the Board of the International Organization of Securities Commissions (IOSCO). The PFMI set out in the April 2012 CPSS/IOSCO consultative report are considered to be minimum international standards for payment, clearing and settlement systems which must be implemented globally to strengthen core financial infrastructures and markets (including derivatives markets) and critical market infrastructures, and to limit systemic risks.

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Quebec approves final derivatives determination and trade repositories and derivatives trade data reporting rules

Alix d'Anglejan-Chatillon -

The Quebec government has approved, effective December 6, 2013, Regulation 91-506 respecting Derivatives Determination and Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting which come into force on December 31, 2013, except for the provisions contained in Parts 3 and 5 of Regulation 91-507.

The rules governing derivatives data reporting provide for their staggered implementation over the course of 2014. For more information on these regulations (or equivalent rules in Ontario and Manitoba), please see our earlier post on our Structured Finance Law blog.

Manitoba OTC derivatives amendments come into force at year-end

Alix d'Anglejan-Chatillon -

Amendments to the Manitoba Securities Act providing the Manitoba Securities Commission with authority to regulate over-the-counter derivatives come into force on December 31, 2013. As we described in a post last month, the MSC recently published final rules in respect of product determination, trade repositories and derivatives data reporting that are also expected to come into force on December 31.

Yesterday, the MSC, among other regulators, also published for comment proposed rules to regulate clearing agencies. Until such a rule comes into effect, the MSC has issued a blanket order exempting clearing agencies from the new requirement to be recognized.

For more information, see MSC Notice 2013-49.

BCSC proposes amended conditions of registration for BC dealers trading OTC in U.S.

The British Columbia Securities Commission recently proposed amendments to the conditions of registration for investment dealers that maintain an office in B.C. and trade in U.S. over-the-counter markets. Specifically, the amendments would prohibit investment dealers from engaging in account activity with a financial institution's office if the office was in a jurisdiction outside Canada or the U.S. where the regulator in that jurisdiction was not a signatory to the IOSCO Multilateral Memorandum of Understanding. "Account activity" would include deposits, transfers and trades.

As we discussed last year, the BCSC proposed initial changes in August 2012 to expand reporting requirements. Those proposals have not been adopted at this time. For more information, see BC Notice 2013/09.

CSA provide status update on mutual fund fee structure consultation

The CSA yesterday released a status report on their mutual fund fee consultation initiative. As we discussed last year, the CSA released a discussion paper in December 2012 identifying investor protection and fairness issues resulting from the Canadian mutual fund fee structure and soliciting feedback on the current structure.

Today's report identifies a number of key themes emanating from the consultation process from the point of view of industry and investors. According to industry stakeholders (i) there is no evidence of investor harm warranting a change of the current fee structure; (ii) a ban on embedded compensation would have unintended consequences, including with respect to reduced access to advice for small retail investors and the creation of an unlevel playing field among competing products; and (iii) the impact of domestic and international reforms should be assessed prior to moving ahead with further proposals.

From the point of view of investors, (i) embedded adviser compensation should be banned as it causes a misalignment of interests that impacts investor outcomes; (ii) investors should have, at a minimum, the true choice to not pay embedded commissions; (iii) a best interest duty for advisers should be implemented; and (iv) adviser proficiency requirements should be increased and the use of titles regulated.

The CSA also referred to the status report on the best interest duty, as a number of key messages were found to be similar to those emerging from that consultation process. According to the CSA, the similarity between the two initiatives suggests a need to coordinate policy assessments going forward, and the CSA expect to communicate any potential regulatory actions in the coming months.

Significant disagreement remains over whether to impose best interest standard

The Canadian Securities Administrators yesterday released a status report to update stakeholders on the consultation process undertaken last year to consider the feasibility of imposing a fiduciary duty on advisers and dealers to act in the best interests of clients.

As we discussed last year, the CSA published Consultation Paper 33-403 on the subject in October 2012, with comments accepted until February 2013. Subsequent to the comment period, the Ontario Securities Commission hosted two roundtable discussions on the subject in June, as well as a panel discussion in July.

Ultimately, the report outlines four primary themes identified through the consultation process, namely that (i) there is significant disagreement in regards to whether current adviser and dealer regulations adequately protect investors and what regulatory response is required; (ii) there is broad agreement that a best interest standard, if adopted, should be as clear as possible and include sufficient guidance for advisers and dealers; (iii) the potential negative impact of such a standard, including with respect to, for example, increased costs, legal uncertainty and negative impact on choice, access and affordability, must be carefully assessed; and (iv) more work is needed before moving forward with a statutory best interest standard or other regulatory response.

The CSA also noted that a number of key messages from stakeholders are similar to those emerging from the current mutual fund fees consultation process, and that a connection between the two initiatives suggests a need for CSA staff to coordinate policy considerations on the two projects going forward. The CSA intend to continue their consideration of the information gathered through the consultation process and anticipate communicating next steps in the coming months. For more information, see CSA Staff Notice 33-316.

No gaps found in review of electronic trading regulation

The Ontario Securities Commission released an update yesterday in respect of its risk analysis of electronic trading. As we discussed in November 2012, the OSC retained a consultant last year to analyze tools and controls with respect to electronic trading in Canada and to gather information from market participants regarding the risks posed by electronic trading and the provision of direct electronic access. 

The consultant's report, included as an appendix of the OSC notice, ultimately finds that the new NI 23-103 Electronic Trading provides adequate and comprehensive controls for the risks associated with electronic trading. The report also includes recommendations for improving industry testing, protocols and standards for marketplace operations. The OSC's update also identifies additional risks introduced by the increased use of complex trading technology, namely (i) credit risk; (ii) market integrity risk; and (iii) technology or systems risk, and sets out the regulatory mechanisms in place to address them.

The OSC also stated that it is currently considering whether automated review program requirements for key infrastructure entities require updating and if any of the proposed provisions of the U.S. SEC's proposed Regulation Systems Compliance and Integrity would enhance the Canadian regulatory framework.

For more information, see OSC Staff Notice 23-702.

IIROC will no longer intervene on unreasonably priced odd lot trades

IIROC announced earlier this week that, effective immediately, it will no longer intervene to vary or cancel odd lot trades that execute at unreasonable prices. According to IIROC's recent annual compliance report, odd lot executions do not impact a security's last sale price, volume-weighted average price, closing price or other common benchmarks. Market integrity is not impaired by such trades and, according to the notice, the change is consistent with its existing guidance on variation and cancellations of trades. For more information, see IIROC Notice 13-0297.

CSA propose risk classification methodology for Fund Facts

The CSA today published for comment a proposed risk classification methodology for the use of mutual fund managers in Fund Facts documents. The proposed standardized methodology is intended to address concerns by stakeholders regarding the lack of standardization in risk disclosure, which could result in an inconsistent evaluation of risk and make comparisons between mutual funds difficult.

As we've previously discussed, the Fund Facts currently requires the fund manager of a mutual fund to provide a risk rating for the mutual fund based on a risk classification methodology chosen at the fund manager’s discretion. The fund manager must then identify the mutual fund’s risk level.

The proposed methodology, intended to measure volatility risk, would classify mutual funds based on the degree to which returns vary over time from the average return (standard deviation). Six risk categories would correspond to standard deviation bands and range from "low" (0% - 2% deviation) to "very high" (over 28% deviation). Calculations would be based on the monthly total returns of the fund and mutual funds would have to use returns over the past 10 years to calculate standard deviation. Mutual funds without a sufficient performance history would be able to use a reference index meeting certain criteria.

The CSA are accepting comments on the proposal until March 12, 2014. For more information, see CSA Notice 81-324

IIROC proposes expanded single-stock circuit breakers

On December 11, the Investment Industry Regulatory Organization of Canada released proposed guidance to broaden its application of single-stock circuit breakers.  

Specifically, under the new guidance, IIROC would extend the coverage of SSCBs to include all "actively-traded" securities (securities that traded an average of at least 500 times and with an average trading value of at least $1.2 million per trading day during the previous three months), increase the time during which SSCBs operate to include regular trading hours (i.e. 9:30 a.m. to 4:00 p.m., with a modified threshold during the post-open and pre-close periods), provide that SSCBs remain active for a security on a day when a regulatory halt has occurred on that security, and modify the general trigger for a trading halt to an increase or decline in price of at least 10% and 20 trading increments in a five minute period.

During the post-open (9:30 a.m. to 9:50 a.m.) and pre-close (3:30 p.m. to 4:00 p.m.) periods, the trigger would be a price increase or decline of at least 20% and 40 trading increments in a five minute period. According to IIROC, the post-open and pre-close periods are periods of natural volatility during which a higher threshold should apply.

In connection with the proposal, IIROC will maintain on its website a report listing all securities that are subject to SSCBs, which will be updated monthly and in the event of certain changes. Comments are being accepted by IIROC until March 10, 2014. For more information, see IIROC Notice 13-0298.

IIROC proposes enhanced client reporting requirements

IIROC today published for comment proposed amendments to its Dealer Member Rules intended to harmonize its rules with enhanced CSA client reporting requirements adopted earlier this year.

Among other things, the amendments would require: (i) that retail customers be informed of all fees and charges associated with a client instruction to purchase or sell a security prior to the transaction taking place; (ii) annual account performance reporting; and (iii) annual account fee and charge reporting.

The amendments form part of Phase 2 of the CSA Client Relationship Model (CRM) Project. For the proposals with an intended effective date of July 15, 2014 or earlier, the comment period is 60 days. In the case of proposals scheduled to come into effect on either July 15, 2015 or July 15, 2016, the comment period has been set for 120 days. For more information, see IIROC Notice 13-0300.

U.S. Volcker Rule passed by regulators

Simon Romano and Laura Levine -

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

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

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IIROC provides guidance for providing notice of DEA agreements

On December 3, the Investment Industry Regulatory Organization of Canada published guidance to assist participant dealers in complying with new gatekeeper and notice requirements for direct electronic access (DEA) and routing arrangements.

As we discussed earlier this year, under amendments to NI 23-103 Electronic Trading that come into force on March 1, 2014, only participant dealers may provide DEA, and DEA may not be provided to a client acting and registered as a dealer with a securities regulatory authority. Related amendments to UMIR that come into force on the same day will require dealers to notify IIROC when entering into a written agreement for DEA or a routing arrangement. The changes to UMIR also expand gatekeeper reporting obligations to include certain information related to DEA and routing arrangements.

IIROC's recently released notice, meanwhile, provides guidance on such matters including the means of providing notice, the information that is required in the notice to IIROC and the timing of notice. For more information, see IIROC Notice 13-0290.

OSC to release proposed capital raising prospectus exemptions in Q1 2014

The Ontario Securities Commission announced last week that it will be releasing proposals for new capital raising prospectus exemptions during the first quarter of 2014.

As we've discussed in previous posts, the OSC initiated a consultative process to consider potential new exemptions in December 2012. More recently, the OSC narrowed its consideration to four exemptions, namely: (i) a crowdfunding exemption; (ii) a family, friends and business associates exemption; (iii) a streamlined rights offering exemption and a possible exemption for distributions to a reporting issuer's existing security holders based on the issuer's continuous disclosure obligations; and (iv) an offering memorandum exemption.

According to the OSC's latest update, the regulator intends to publish proposals for comment in respect of the above mentioned four exemptions during the first quarter of 2014. Notably, the OSC also stated that it supports the current CSA proposal of a prospectus exemption for distributions to existing TSX-V issuer security holders and will consider comments in response to the CSA initiative in developing its proposed existing security holder exemption, with a goal of harmonizing the proposals.

Investment Funds Practitioner published for November 2013

Last week, the Investment Funds Branch of the Ontario Securities Commission released the November 2013 issue of the Investments Fund Practitioner. The publication provides an overview of recent issues identified by the Branch arising from prospectus filings, exemptive relief applications and continuous disclosure documents filed by investment funds.

Prospectuses

Of particular interest, the Practitioner states that Branch staff are currently focusing on three priority areas in their prospectus reviews, namely fees and expenses (including whether explanations are in clear and plain language), investment objectives and strategies (including the provision of meaningful information for investors), and conflicts of interest. According to the Practitioner, staff's intention is to encourage more consistent disclosure and promote clear, accurate and understandable disclosure, rather than boilerplate language.

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CSA propose certain limited exemptions for exempt offerings by U.S. and other foreign issuers

Certain members of the CSA proposed regulatory amendments yesterday that would relieve underwriters, under certain circumstances, of the obligation to provide connected and related issuer disclosure in offering documents for certain distributions of securities that qualify as "designated foreign securities" as defined in the proposed amendments. To rely on the exemption, among other things, the offering would have to be restricted to "permitted clients" and the exempt offering document would have to comply with U.S. disclosure requirements on conflicts of interest between issuers and underwriters, regardless of whether or not the U.S. requirements applied to the distribution.

The proposed amendments will not apply to a distribution if a prospectus has been filed with any Canadian securities regulatory authority, as these provisions are intended to relate solely to private placements made to investors that qualify as permitted clients. Finally, the proposal would require specified firm registrants to notify permitted clients that they were relying on the exemptions.

In conjunction with this proposal, securities regulators, except for those in Ontario and B.C., also proposed certain limited exemptions from prohibitions relating to making listing representations and to require disclosure of statutory rights of action. These exemptions would be available in similar circumstances as the proposed NI 33-105 exemptions and are detailed in the proposed Multilateral Instrument 45-107 Listing Representation and Statutory Rights of Action Disclosure Exemptions. Similar amendments were proposed by Ontario earlier this year and are not required in B.C.

Both of these proposals are intended to codify, on a broader basis, exemptive relief granted earlier this year to certain applicants. Comments on both proposals will be accepted until February 26, 2014.

OSC continues to consider new capital raising prospectus exemptions, including crowdfunding exemption

Rhoda Aylward, Laura Levine and Chad Bass-Meldrum -

Streamlining access to capital has been a popular topic, with regulators around the globe poised to implement various regulatory reforms aimed at simplifying the process for startup companies and small enterprises. As we’ve discussed in the past, the Ontario Securities Commission released a consultation paper on December 14, 2012, and a progress report on August 28, 2013, with respect to the OSC’s consideration of new capital raising prospectus exemptions in Ontario. According to the progress report, which will be discussed in more detail below, the OSC has been directed to focus on four new capital raising prospectus exemptions in the future, namely: (1) a crowdfunding exemption; (2) a family, friends and business associates exemption; (3) an offering memorandum exemption; and (4) a streamlined rights offering exemption. The focus of this post is crowdfunding.  

Crowdfunding covers a wide range of online activities from charities soliciting donations to companies raising capital. In the case of financing a company, crowdfunding refers to a company selling small amounts of securities to a large number of investors via an internet portal intermediary. Crowdfunding can thus be considered an exchange of cash consideration for securities, which raises issues for securities regulators around the globe.

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CRA offers comfort with respect to withholding tax on convertible debentures

Martin Langlois and Lindsay Gwyer -

Convertible debentures have been and continue to be an extremely popular capital raising instrument in Canadian capital markets. Yesterday, Canada Revenue Agency (CRA) officials offered some long-awaited comfort to public company issuers of convertible debentures at the Canadian Tax Foundation’s annual conference in Toronto. As part of a roundtable discussion, CRA officials confirmed that there should not be any withholding tax arising on the conversion of a “standard convertible debenture” issued by a Canadian public corporation and held by a non-resident of Canada.

Since 2008, interest payments made by Canadian issuers to non-residents have generally not been subject to Canadian withholding tax unless the interest was “participating debt interest”, or the recipient did not deal at arm’s length with the issuer. In a ruling released by the CRA last year (2011-0418721R3– Convertible Notes), the CRA found that regular periodic interest payments on a convertible debenture issued by a Canadian public corporation would not constitute “participating debt interest”. However, uncertainty remained as to whether certain provisions of the Income Tax Act might deem a premium arising on the conversion of a debenture to be “participating debt interest” that would be subject to withholding tax. This uncertainty has generally forced corporate issuers to try to comply with specific conditions set out in the Income Tax Act and published by the CRA in order to ensure that their convertible debentures would be excluded from these deeming rules.

While these roundtable comments provide a welcome change, they do not go all the way in addressing the uncertainty surrounding withholding tax on convertible debentures. The comments were expressly limited to “standard convertible debentures” (as that term was defined in a letter from the Joint Committee on Taxation of the Canadian Bar Association and the Canadian Institute of Chartered Accountants sent to the CRA in May 2010) issued by public corporations, such that some uncertainty will remain with respect to convertible debentures issued by trusts, partnerships, and private corporations. Nonetheless, even in these contexts, the comments should offer some comfort as there is no principled reason why the withholding tax rules should apply differently based on the nature of the issuer.  

IIROC releases guidance on marketplace and average price disclosure

The Investment Industry Regulatory Organization of Canada yesterday published guidance on marketplace and average price disclosure language that will be considered acceptable on trade confirmations. As we discussed earlier this year, IIROC released proposed guidance in September, with the final version clarifying that the required disclosures may be located on the back side of the trade confirmation. A summary of comments received to the initial proposal was also published.

For more information, see IIROC Notice 13-0283 (guidance) and IIROC Notice 13-0282 (summary of comments).

Further thoughts on final rules on trade repositories and data reporting

As we discussed earlier this month, the Ontario Securities Commission recently published final rules dealing with the regulation of trade repositories, derivatives data reporting requirements and the scope of derivatives that will be subject to such reporting requirements.

Our colleagues Margaret Grottenthaler and William A. Scott have now published a more comprehensive analysis of the new rules on their structured finance law blog.

Certain Canadian regulators propose prospectus exemption for distributions to existing TSX-V issuer security holders

Canadian securities regulatory authorities in all jurisdictions but Ontario and Newfoundland and Labrador today published for comment a draft prospectus exemption that would allow issuers listed on the TSX Venture Exchange to distribute securities to existing security holders. According to the CSA, the time and cost involved in preparing the required offering documents are currently preventing TSX-V issuers from conducting prospectus offerings or using prospectus exemptions to offer securities to retail investors.

Thus, under the proposal a new prospectus exemption would be available to TSX-V issuers if certain conditions are met, including that: (i) the issuer has a class of equity securities listed on the TSX-V; (ii) the issuer has filed all required timely and periodic disclosure documents; (iii) the offering consists only of the class of equity securities listed on the TSX-V or units consisting of the listed security and a warrant to acquire the listed security; (iv) the issuer issues a news release disclosing the proposed offering, including details of the use of proceeds; and (v) each investor confirms in writing to the issuer that, as at the record date, the investor held the type of listed security that the investor is acquiring under the exemption.

Investors would be limited to investing no more than $15,000 per year under the exemption unless suitability advice from a registered investment dealer is obtained. Further, investors would be provided with certain rights of action in the event of a misrepresentation in an issuer's continuous disclosure record or, if the issuer voluntarily provides one, an offering document. Securities issued under the proposed exemption would be subject to resale restrictions. In order to reinforce the goal of statutory insider trading prohibitions, the proposal requires that issuers represent to prospective purchasers in the subscription agreement that there are no material facts or material changes relating to the issuer that have not been generally disclosed.

The participating jurisdictions are accepting comments on the proposal until January 20, 2014. If implemented, the exemption would expire in some of the jurisdictions at the end of 2015, although the use of the exemption would be assessed for usefulness with the potential for extension. For more information, see Multilateral CSA Notice 45-312.

OSC issues guidance regarding filing of exempt distribution reports

The Ontario Securities Commission today published guidance to assist issuers and underwriters in complying with filing requirements in respect of exempt distribution reports.

Citing the importance of exempt distribution reports to the OSC, the guidance provides a summary of requirements, including in respect of the form of report (reminding issuers of upcoming changes to electronic filing requirements), deadlines, and recent changes to filing fees and late filing fees.

Of particular interest, the OSC states that a report in paper form is considered filed, and a payment is considered made, when the form or payment is received at the OSC's office. A report that uses an e-form is considered filed when the e-form has been successfully submitted online to the OSC. Meanwhile, where a deadline for filing a report falls on a weekend or other day when the OSC is not open, the deadline is the next day the OSC is open.

For more information, see OSC Staff Notice 45-713.

Transition of CSA national systems deferred

The CSA announced today that the transition of responsibility for the CSA national systems is being deferred. The CSA intend to publish a future notice in regards to the new change-over date.

As we discussed on October 8, the responsibility for the CSA national systems were scheduled to be transitioned from CDS to CGI Information and Management Consultants on December 2, 2013. Since Ontario cannot delay the effective date of the amendments to certain national instruments relating to the transition, OSC staff request that Ontario market participants continue to treat CDS Inc. as the SEDAR filing service contractor, SEDI operator and NRD administrator until further notice is given. For more information, see OSC Staff Notice 13-321.

OSC finalizes OTC derivative reporting requirements

The Ontario Securities Commission today published final versions of harmonized derivatives rules in respect of product determination, trade repositories and derivatives data reporting. Quebec's Autorité des marchés financiers and the Manitoba Securities Commission also published final rules.

As we discussed in June, Ontario, Quebec and Manitoba each published draft harmonized rules on the subject earlier this year, while the CSA released draft rules in December 2012.

The final rules released today by the OSC make non-material revisions to the earlier drafts to address comments received from stakeholders. Assuming Ministerial approval, the requirements come into force beginning on December 31, 2013 with the implementation of some requirements staggered over the next year. For example, data reporting obligations for reporting counterparties involving a local counterparty come into effect on July 2, 2014, while obligations regarding the public dissemination of transaction level data by designated trade repositories will come into effect on December 31, 2014. Where both counterparties are non-dealers, no reporting will be required until September 30, 2014.

For more information, see OSC Rule 91-506 and OSC Rule 91-507.

CSA provide update on real-time market data fees

The CSA today provided an update on their previously released consultation paper on real-time market data fees in Canada. That paper, published last year, sought input from marketplace participants and data consumers in respect of concerns that: (i) market data fees are too high; (ii) high fees are a result of participants being part of a "captive market"; and (iii) the process surrounding fee proposals and changes to fee models should be more transparent.

According to the CSA, the comments received were varied with respect to the approach to regulating real-time market data fees. Of the eight options proposed in the consultation paper, only two garnered some level of support: (i) limiting real-time market data fees charged by marketplaces until they reach an established activity level and (ii) publishing data fee proposals and changes to fee models for comment. Those two options, however, do not address concerns regarding the level of current fees that are above the threshold.

Ultimately, the CSA state that the two options on which commenters generally agreed, as well as the possibility of defining core data products that are needed to comply with regulatory requirements, should be explored further. The CSA also noted that as part of the review of the order protection rule, CSA staff will consider the impact of the OPR on fees. For more information, see CSA Staff Notice 21-312.

Insider trading settlement agreement calls to attention consequences of unsolicited expressions of interest

Maïté Murray -

Last July, the former CEO and President of Daylight Energy Ltd. (now Sinopec Daylight Energy Ltd.) entered into a settlement agreement with the Alberta Securities Commission (ASC). The agreement settled claims that he had breached Alberta securities laws and acted contrary to the public interest by purchasing securities of Daylight with knowledge of undisclosed material facts about the company, namely that a potential acquirer was interested in a “major strategic investment transaction”.

Background

In 2011, Daylight, an Alberta corporation engaged in the oil and gas industry with headquarters in Calgary, was acquired by Sinopec International Petroleum Exploration and Production Corporation (SIPC), a wholly-owned subsidiary of the state-owned China Petrochemical Group. The acquisition was carried out by way of a plan of arrangement that was completed in December 2011. Anthony Lambert, the respondent in this matter, had purchased securities of Daylight at various occasions before the transaction was publicly announced in October 2011. He subsequently made a significant profit on the sale of those securities when, pursuant to the plan of arrangement, SIPC acquired all of Daylight’s securities at a substantial premium.

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SEC proposes crowdfunding rules

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

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

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IIROC proposes regulations regarding order execution services

Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) released proposed amendments to UMIR and its Dealer Member Rules intended to ensure that similar activity that occurs through different forms of third-party electronic access is subject to the same degree of supervision and regulatory oversight. The proposals specifically focus on order execution services (OES), being one of the ways of providing direct electronic access, which also include direct electronic access and routing arrangements.

Among other things, the proposals would (i) require that client IDs be assigned to any OES client that meets certain activity thresholds; (ii) introduce a definition of Manipulative and Deceptive Activities that would clarify dealers' supervision requirements for retail and institutional customer accounts; and (iii) introduce into the Dealer Member Rules a requirement for an OES dealer to consider the inherent risks of third-party electronic order entry and identify and address such risks in its policies and procedures. IIROC also published proposed guidance setting out expectations in regards to the proposed supervision requirements.

As we discussed a few months ago, the CSA's requirements in regards to the provision of direct electronic access are set to come into force on March 1, 2014. IIROC's proposals, which set out a number of specific questions for stakeholders to consider, are open for comment until January 14, 2014. For more information, see IIROC Notice 13-0255 and IIROC Notice 13-0256.

OSC grants temporary relief to certain swap execution facilities

Simon Romano and Ramandeep Grewal -

On October 10, 2013 the Ontario Securities Commission issued Staff Notice 21-707 Swap Execution Facilities to notify that it provided exemptive relief in respect of a number of “Swap Execution Facilities” or “SEFs” regulated by the U.S. Commodity Futures Trading Commission (the CFTC) from the requirement to be recognized as an exchange in Ontario.

Background – CFTC regulation of SEFs

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) certain amendments were made to the Commodity Exchange Act (U.S.) (the CEA) to establish a new regulatory framework for swaps. Among other changes to the CEA, the Dodd-Frank Act established SEFs as a new regulated market category, and required that the execution of certain swaps occur on a designated contract market or SEF.           

The Dodd-Frank Act defines an SEF as “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility that: (A) facilitates the execution of swaps between persons; and (B) is not a designated contract market.” The CFTC’s final SEF Rule, adopted on May 16, 2013 (the SEF Rule), formalizes this definition and establishes registration requirements for SEFs as well as core principles to govern the operation of SEFs. 

The SEF Rule had an effective date of August 5, 2013 with general compliance required as of October 2, 2013. The CFTC granted temporary registration to a number of SEFs in advance of the October 2 deadline to be effective until the CFTC has fully reviewed each SEF application for full compliance with the applicable requirements under the CEA and the SEF Rule.

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Consolidation of SEDAR and NRD fees occurs October 12

The Canadian Securities Administrators today provided an update on the implementation of MI 13-102, which consolidates system fees payable to regulatory authorities, as well as the upcoming transition of SEDAR, SEDI and NRD from CDS to CGI Information and Management Consultants.  

While the consolidation of system fees will still be implemented on October 12, 2013 as planned, the transfer of responsibility for the CSA national systems has been delayed until December 2, 2013. As Ontario is not delaying the effective date of the actual regulations, the OSC is requesting that market participants continue to treat CDS Inc. as the SEDAR filing service contractor, SEDI operator and NRD administrator until December 2, 2013.

For more information, see CSA Staff Notice 13-320.

OSC approves new DEA client category

The Ontario Securities Commission announced last week that it has approved amendments to the rules of the TSX and Alpha Exchange, as well as to the TMX Select Trading Policy Manual to provide for a new category of direct electronic access client. Specifically, the new category would apply to non-individuals carrying on business in a foreign jurisdiction and regulated by the foreign jurisdiction, and with securities under administration exceeding $10 million.

The new category of client is intended to accommodate potential clients that, while they may not qualify to use direct electronic access under the existing regime, will qualify to use DEA under the amendments to NI 23-103 coming into effect on March 1, 2014.

IIROC issues draft guidance respecting average price disclosure on trade confirmations

Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) released proposed guidance intended to consolidate previously-issued guidance respecting marketplace and average price trade disclosure on trade confirmations. The proposed guidance also seeks to clarify acceptable average price disclosure language for use on trade confirmations.

Comments on IIROC's proposal is being accepted until November 8, 2013. For more information, see IIROC Notice 13-0241.

CSA to propose guidance on proxy advisory firm best practices in Q1 2014

The CSA today released an update on their consultation process regarding the potential regulation of proxy advisory firms. In view of comments received from various market participants, the CSA have concluded that a policy-based approach providing guidance on recommended practices and disclosure is warranted in response to concerns raised about the services provided by proxy advisory firms. The CSA intend to publish their proposed guidance for comment in the first quarter of 2014.

As we discussed in a post last year, the CSA had published Consultation Paper 25-401 on the subject in June 2012. The list of possible regulatory responses put forth at the time included requiring that proxy advisory firms: (i) separate proxy voting services from advisory or consulting services in order to address potential conflicts; (ii) disclose the analysis behind vote recommendations, as well as the internal procedures, guidelines, assumptions and sources of information supporting the recommendations; and (iii) implement fair and transparent procedures for developing corporate governance standards, and ensure that these procedures and standards are publicly disclosed.

For more information on today's update, see CSA Notice 25-301.

IIROC implements trade matching rule amendments

On September 6, the Investment Industry Regulatory Organization of Canada announced that it will be implementing, as of October 1, 2013, amendments to its Dealer Member Rules in respect of trade related correspondence to clients and trade matching practices. The amendments are ultimately intended to promote compliant trade matching practices and eliminate the sending of duplicative trade related correspondence to clients

As we discussed in a December 2012 post, the OSC approved the amendments late last year. For more information, see IIROC Notice 13-0231.

CSA staff publish guidance on characterization of mortgage investment entities

In light of an increase in prospectus filings by mortgage investment entities in Ontario, the OSC yesterday released staff guidance setting out the factors that staff will consider in determining whether an issuer that proposes to invest all or substantially all of its assets in a pool of mortgages is an investment fund. According to the staff notice, MIEs often describe themselves as non-redeemable investment funds and thus file prospectuses in the form of Form 41-101F2.

In their review of MIE prospectuses, however, staff suggest that MIEs are often an extension of the mortgage originator's business. In the view of staff, "structuring an offering of an issuer that describes itself as a non-redeemable investment fund, where the issuer is, or is an extension of, an operating business is contrary to the spirit and intent of the definition of a non-redeemable investment fund." Even where MIEs exist as separate legal entities, OSC staff are taking a comprehensive look at the relationship between the MIE and originator of the mortgage.

Ultimately, OSC staff characterize such MIEs as more akin to a lending business than an investment fund, and the prospectus form to be completed is Form 41-101F1. For more information, see OSC Staff Notice 81-722. Registration issues arising in connection with MIEs are discussed separately in the previously published CSA Staff Notice 31-323 Guidance Relating to the Registration Obligations of Mortgage Investment Entities.

TSX-V relaxes certain minimum pricing and capital structure requirements

The TSX-V recently announced changes to certain minimum pricing, shareholder approval and other requirements intended to better facilitate access to capital and listing transactions.

A number of the amendments take the form of reductions to minimum acceptable prices for certain types of securities issuances. Specifically, the amendments reduce the minimum acceptable exercise price for share purchase warrants and incentive stock options from $0.10 to $0.05 per share, reduce the minimum acceptable conversion price for debentures from $0.10 to $0.05 per share and reduce the minimum acceptable offering price for a non-Capital Pool Company IPO from $0.15 to $0.10 per security.

In addition, the TSX-V has also relaxed shareholder approval requirements for share consolidations to only require shareholder approval if the consolidation, when combined with any other consolidation conducted by the issuer within the previous two years that was not approved by the issuer's shareholders, would result in a cumulative consolidation of greater than 10 to 1 over that two year period.

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OSC publishes Fund Facts FAQ

The OSC yesterday released a set of frequently asked questions, and associated responses, to assist issuers in using Fund Facts to satisfy the requirements to deliver a prospectus. As we discussed last month, amendments allowing for delivery of Fund Facts, which represent Stage 2 of the CSA's point of sale disclosure framework, came into force on September 1 and will be phased in over the next few years. The FAQ covers issues such as filing of amended Funds Facts, reliance on delivery of Fund Facts prior to the final implementation date of June 13, 2014 and reliance on prior relief granted from prospectus delivery requirements for pre-authorized purchase plans. For more information, see OSC Staff Notice 81-721.

Direct electronic access amendments granted Ministerial approval

The OSC announced yesterday that amendments to NI 23-103 Electronic Trading that impose requirements on participant dealers that provide direct electronic access (DEA) have received Ministerial approval. As we discussed back in July, these amendments provide a framework for the provision of DEA by participant dealers, which includes restrictions on who DEA may be provided to as well as compliance requirements for the provision of DEA generally. The amendments come into force on March 1, 2014.

OSC provides update on crowdfunding consultation

The Ontario Securities Commission yesterday published a progress report on its review of potential new prospectus exemptions. The report provides an update on work completed to date, as well as a roadmap for future work. As we've discussed in the past, the OSC initiated a consultation process on crowdfunding late last year with the release of a consultation paper, and subsequently held a roundable discussion in June to obtain input from investors on the subject. 

According to the report, OSC Staff have been directed to undertake work on four new capital raising prospectus exemptions, namely: (i) a crowdfunding exemption (the report states that $2,500 single investment and $10,000 12-month period limits per investor would be appropriate); (ii) a family, friends and business associates exemption, with the goal of substantial harmonization of the exemption across Canada; (iii) an offering memorandum exemption that is harmonized with the existing Alberta model in NI 45-106; and (iv) a streamlined rights offering exemption and a possible exemption based on a reporting issuer's continuous disclosure and existing securityholder base.

Ultimately, the OSC focus is addressing the capital raising needs of small and medium-sized enterprises while maintaining adequate levels of investor protection. For more information, see OSC Notice 45-712.

Capital Crowdfunding in Canada: Recent developments (Part 1)

Pierre Fournier-Simard -

The recent arrival of the KickStarter platform in Canada serves as a reminder that some interesting developments in the regulation of “crowdfunding” have been occurring in the last several months. This article focuses on the exemption granted to MaRS VX by the Ontario Securities Commission, which recently authorized the very first capital crowdfunding platform in Canada.

Crowdfunding is a way of financing a project or business by pooling small financial contributions obtained through Web platforms (such as La Ruche in the Quebec City region) and making use of social media for advertising and solicitation. A person seeking financing can present the project to the “crowd” using the Web platform and request small contributions from a large number of individuals, thereby raising a sizable sum.

In Canada, some platforms already offer the opportunity to entrepreneurs to obtain financing through crowdfunding in the form of donations or in exchange for rewards, but in the absence of an exemption from the obligation to file a prospectus, the offering of equity is prohibited. Nevertheless, over the course of the last few months, securities commissions across the country have shown some degree of open-mindedness, hinting at the possibility that exemptions from the obligation to file a prospectus may ultimately be granted to businesses that wish to raise capital through crowdfunding. In this regard, capital crowdfunding will soon be permitted in the United States, and is already permitted in Australia and Great Britain (subject, in each of these cases, to various conditions).

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Relying on counsel doesn't excuse illegal share distributions

Denise Duifhuis and Lisa Trienis -

Directors who rely in good faith on advice from professional advisors, such as accountants and lawyers, may have a due diligence defence to certain legal claims in some situations. However, a recent decision of the British Columbia Securities Commission (the Commission) in Photo Violation Technologies Corp. (2013 BCSECCOM 276 and 2012 BCSECCOM 284) makes it clear that reliance on legal counsel doesn’t allow directors to avoid liability under securities laws when a company issues shares without appropriate exemptions from the registration and prospectus requirements.

Background

Photo Violation Technologies Corp. (PVT) raised approximately $5.2 million from 322 investors between 2005 and 2008. In respect of 272 investors, who invested approximately $3.6 million during the relevant period, PVT purported to rely on the friends, family and business associates and accredited investor exemptions from the prospectus and registration requirements of the BC Securities Act, none of which applied in the circumstances.  PVT retained legal counsel, with expertise in financing, who advised them in connection with the private placements.

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Further thoughts on CSA's proposed operational requirements for "closed-end funds"

Darin Renton and Nick Badeen -

As we discussed in an earlier post, the Canadian Securities Administrators recently released proposed changes to National Instrument 81-102 Mutual Funds that would introduce core operational requirements for publicly offered non-redeemable investment funds (commonly referred to as “closed-end funds”) as part of its investment fund modernization project (this part specifically referred to as “Phase 2”). Included as part of Phase 2 is the creation of a comprehensive alternative fund framework (the “Alternative Fund Framework”) through amendments to National Instrument 81-104 Commodity Pools, which would apply to mutual funds and non-redeemable investment funds that use certain “alternative” investment strategies that would not be permitted under NI 81-102.

If Phase 2 is implemented in the form proposed, the regulation of non-redeemable investment funds will see significant changes in that such funds would be subject to operational requirements that are generally analogous to those currently applicable to mutual funds. According to the CSA, Phase 2 would provide baseline protections for investors, mitigate the potential for regulatory arbitrage and contribute to more efficient capital markets.

Some of the key elements of Phase 2 are discussed in further detail below.

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Fund facts amendments receive Ministerial approval

Amendments to NI 81-101 Mutual Fund Prospectus Disclosure to allow for the delivery of Fund Facts to satisfy the requirements to deliver a prospectus within two days of buying a mutual fund have now received Ministerial approval in Ontario. As we've previously discussed, this represents Stage 2 of the CSA's point of sale disclosure framework. The amendments will be phased in beginning on September 1, 2013 and will be fully implemented on June 13, 2014.

CSA abandon proposal to implement tailored disclosure regime for venture issuers

Tim McCormick -

The CSA announced today that they are no longer pursuing the implementation of a proposed new regulatory regime for venture issuers.

Proposed National Instrument 51-103 would have resulted in a separate regulatory regime for venture issuers which, while intended to be more tailored and streamlined, would have resulted in a comprehensive overhaul of applicable prospectus and private placement requirements, as well as continuous disclosure and governance obligations. We previously discussed the proposed versions of NI 51-103 in September 2011 and September 2012.

The CSA’s decision to abandon the proposal was reportedly affected by, among things, concerns expressed by commenters on the burden it would impose on venture issuers in terms of transition to a new regime, and the proposed new disclosure obligations such as the proposed mandatory annual report.

Venture issuers can thus rest assured that they will not have to contend with any such changes to applicable regulatory obligations for the time being. However, the CSA have also stated that certain proposals contained in the proposed National Instrument 51-103 may be added to the existing regulatory regime for venture issuers. Any such potential amendments would only be implemented following a further comment and review process and would, therefore, not be implemented in the short term. Whether the CSA will pursue such amendments also remains to be seen.

For more information, see CSA Notice 51-340

CSA adopting instrument consolidating SEDAR and NRD system fees

The CSA announced on July 18 the adoption of Multilateral Instrument 13-102 System Fees for SEDAR and NDR. MI 13-102 consolidates and replaces the existing system fee schedules found in the SEDAR Filer Manual and NRD  (National Registration Database) User Guide. The instrument was initially published in January, and the revisions made to the draft are not considered material.

These amendments relate to “system” fees payable to Canadian securities regulatory authorities in connection with SEDAR filings and will result, generally, in an overall reduction in the fees currently charged under the SEDAR Filer Manual or the NRD User Guide. These are separate from the “activity” and “participation” fees otherwise charged by Canadian securities regulatory authorities under local rules and policies.

Assuming Ministerial approvals, the instrument is expected to come into effect on October 12, 2013.

Correction: The original notice contained errors, which have now been corrected.

Mazzarolo v. BMO Nesbitt Burns: why clients should pay close attention to the reports provided by their brokers

Éric Azran and Patrick Desalliers -

The decision rendered by the Québec Court of Appeal on February 11, 2013, in the case of Mazzarolo v. BMO Nesbitt Burns, shows how important it is for investors to pay close attention to the reports they receive from their brokers and to complain within a reasonable time about investments they believe to be unauthorized or non-compliant with their investment profile.

Relevant Facts

On April 26, 2000, the appellant Ivonis Mazzarolo met with representatives of the brokerage firm BMO Nesbitt Burns, L and A, and opened several non-discretionary accounts.

On August 23, 2000, L and A presented Mazzarolo with an investment plan. Mazzarolo would have indicated that the proposal did not provide for a sufficient proportion of investments relating to emerging technologies. By December 31, 2000, such investments (which were considered speculative) comprised approximately 60% of Mazzarolo’s portfolio. The portfolio subsequently generated significant negative returns, leading to a deterioration of the relationship between the investor and the representatives of Nesbitt Burns.

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SEC eliminates private placement solicitation and advertising prohibitions

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

IIROC issues guidance regarding management of stop loss orders

The Investment Industry Regulatory Organization of Canada (IIROC) today issued final guidance regarding the management of stop loss orders in light of dealers' obligations under the new UMIR electronic trading rule amendments effective March 1, 2013. The guidance supplements prior guidance regarding the execution of triggered stop loss orders, and also includes answers to a number of frequently asked questions regarding managing stop loss orders.

For more information, see IIROC Notice 13-0191.

CSA finalize requirements for provision of direct electronic access

The Canadian Securities Administrators today released final amendments to NI 23-103 Electronic Trading intended to impose requirements on participant dealers that provide direct electronic access (DEA). Proposed amendments were initially released in October 2012, and the final version of the amendments take into account comments received from stakeholders.

Under the amendments, only a participant dealer may provide DEA, and DEA may not be provided to a client that is acting and registered as a dealer with a securities regulatory authority. In clarifying the type of entities that are excluded from DEA access, the CSA state that the exclusion extends to mutual fund dealers, scholarship plan dealers, exempt market dealers and restricted dealers.

The amendments also require that, before providing DEA, a participant dealer must (i) establish, maintain and apply appropriate standards designed to manage associated risks; (ii) enter into written agreements with DEA clients; and (iii) satisfy itself that clients have reasonable knowledge of applicable marketplace and regulatory requirements and the dealer's standards. Further, on providing DEA, participant dealers must ensure that clients have unique DEA client identifiers. DEA clients may also generally only trade for their own accounts.

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CSA extend comment period on closed-end funds proposal

The CSA today announced an extension to the comment period regarding their proposed changes to NI 81-102 Mutual Funds that would introduce core operational requirements for publicly offered non-redeemable investment funds generally analogous to the requirements applicable to mutual funds and eventually create an alternative investment fund framework under NI 81-104 Commodity Pools.

The CSA are now accepting comments on their proposals until August 23 and invite stakeholder comments on proposals prioritized in the notice. For more information, see CSA Staff Notice 11-324.

Fund Facts delivery requirements finalized

The Canadian Securities Administrators recently announced the implementation of the second stage of their point of sale disclosure project for mutual funds. Stage 2 of the project consists of amendments to NI 81-101 Mutual Fund Prospectus Disclosure and related instruments and forms.

The amendments, which are intended to allow for the delivery of Fund Facts to satisfy the requirements to deliver a prospectus within two days of buying a mutual fund, were previously published for comment in August 2011 and June 2012. The released changes take into account feedback received in the latest round of consultations. While no changes were made to the delivery requirements related to Fund Facts, various changes were made to the form.

Subject to Ministerial approvals, the amendments will be phased in beginning on September 1, 2013 and will be fully implemented on June 13, 2014.

As part of Stage 3 of the project, the CSA intend to publish proposed requirements requiring point of sale delivery of Fund Facts for conventional mutual funds. The CSA will also consider requiring a similar document for other types of publicly offered investment funds.

Canadian jurisdictions proposes OTC derivative reporting requirements

The Ontario Securities Commission, Quebec's Autorité des marchés financiers and the Manitoba Securities Commission have each published proposed harmonized rules that would require, among other things, that all over-the-counter derivative transactions be reported to trade repositories. The proposals would also define the types of derivatives subject to reporting requirements and attempt to enhance transparency and promote the effective regulation of trade repositories.

While the proposals in each jurisdiction are based on the draft model rules released by the CSA in December 2012, modifications were made to, among other things, clarify the treatment of physical commodities, limit the definition of "local counterparty" and clarify the reporting and recordkeeping requirements.

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Canadian regulators finalize changes to marketing rules for prospectus offerings

Yesterday, the Canadian Securities Administrators (CSA) published final amendments to their securities rules that will expand the scope of marketing activities that can be conducted in connection with prospectus offerings .

The amendments to National Instrument 41-101 General Prospectus Requirements and National Instrument 44-101 Short Form Prospectus Distributions expressly codify permissible “pre-marketing” and “marketing” activities that can be conducted prior to and after the filing of a preliminary short or long form prospectus.  Not only do these amendments ease restrictions on the types of activities that can be conducted, they also expressly acknowledge and codify various marketing activities in a manner that better reflects the practical reality of how offerings are marketed.

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Latest issue of Investment Funds Practitioner addresses mortgage investment entities and certain prospectus and website disclosure

Darin Renton -

The Investment Funds Branch of the Ontario Securities Commission recently released its latest issue of the Investment Fund Practitioner, dated May 2013. The publication provides an overview of issues identified by the Branch arising from prospectus filings, exemptive relief applications and continuous disclosure documents filed by investment funds.

Of particular interest, Branch staff are looking at whether an issuer investing in non-guaranteed mortgages is, in substance, a corporate issuer rather than an investment fund. In response to an increase in the number of non-redeemable investment funds investing all or most of their assets in pools of non-guaranteed mortgages (also referred to as mortgage investment corporations or MICs), staff have begun to examine the substance of such transactions. According to the Practitioner, any degree of control or active involvement by the mortgage originator or service provider in the formation or operation of the non-redeemable investment fund or portfolio of the fund will cause staff to question whether the issuer is an investment fund. While further guidance on the issue is expected, the Branch recommends that counsel contact staff at an early stage of planning in these types of situations.

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Amendments to instrument regarding designated rating organizations approved

The OSC announced today that amendments to the registration, prospectus and continuous disclosure rules related to National Instrument 25-101 Designated Rating Organizations have received Ministerial approval. As we've previously discussed, the amendments are intended to fully implement the new regulatory regime surrounding designated rating organizations pursuant to NI 25-101 Designated Rating Organizations .

The amendments come into force on May 31, 2013.

Chicago Mercantile Exchange applies for exemption from clearing agency recognition requirement

The Ontario Securities Commission announced today that Chicago Mercantile Exchange Inc. has applied for an exemption from the requirement to be recognized as a clearing agency on the basis that it is subject to an appropriate regulatory and oversight regime in its home jurisdiction. The OSC is thus publishing for comment a draft order that would provide such an exemption. The OSC's criteria for exemption from recognition are included as a schedule to the draft order and comments are being accepted until June 16, 2013.

OSC to hold crowdfunding roundtable

The Ontario Securities Commission has announced that it will be hosting a roundtable discussion on June 11 to obtain input from investors regarding investing in small and medium sized enterprises and start-ups. As we discussed in December, the OSC is currently considering a number of new capital raising prospectus exemptions to address the desire among some in the investing community to increase access to capital for issuers and to increase investment opportunities. The comment period in respect of the OSC's most recent consultation paper on the subject ended on March 8. The topics for discussion at the roundtable, meanwhile, include crowdfunding, as well as the type of information investors would require in order to make investment decisions.

Amendments to prospectus rules approved

The Ontario Securities Commission announced today that Ministerial approval has been received with respect to the prospectus rule amendments released earlier this year that are intended to clarify certain provisions, address gaps, streamline requirements and codify prospectus relief that has been granted in the past. Amendments to the requirements and related forms respecting scholarship plans, first announced in January, were also approved.

Most of the amendments come into force on May 14, 2013. Those regarding scholarship plans come into force on May 31.

Further analysis on limited disclosure relief for certain private placements by qualified non-Canadian issuers

Ken Ottenbreit and Ralph Hipsher -

As we initially discussed in an earlier post, on April 23 the Canadian Securities Administrators issued a decision providing a specified group of dealers limited exemptive relief (the Relief) from certain disclosure requirements under Canadian securities laws otherwise applicable where a foreign prospectus or offering memorandum (a Foreign Offering Document) is delivered by a dealer to a Canadian “permitted client” in connection with a private placement of foreign securities in Canada.

While any efforts to streamline the disclosure requirements applicable to private placements into Canada are certainly welcome, the Relief has limitations and imposes specific compliance obligations. Although the Relief may be helpful in resolving some of the timing concerns associated with extending certain qualified foreign offerings to Canadian “permitted clients”, it also imposes a number of conditions and requirements that will require advance planning and monitoring to maintain eligibility and to ensure there are no time delays in the preparation and delivery of offering documents.

Among the significant conditions and requirements that may impede the usefulness of the Relief are the requirement to satisfy certain disclosure standards applicable to U.S. registered offerings, inter-syndicate restrictions applicable to dealers not qualified under the Relief, additional compliance obligations associated with the requisite client notice – return receipt requirement and the additional monthly reporting of transaction information to the Canadian securities regulators.

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TSX-V extends private placement pricing requirements to August

As we discussed earlier this year, the TSX Venture Exchange in January extended temporary relief from certain pricing requirements related to private placements. The TSX-V has now modified the relief and extended its application until August 31, 2013. 

Specifically, the requirement that at least 75% of the private placement must be subscribed for by parties that are not related to the issuer has been changed to permit up to $200,000 in gross proceeds to be raised from related parties without any arm's length component. In cases where more than an aggregate of $200,000 is to be raised from related parties, at least 75% of the additional amounts must come from parties not related to the issuer. The relief also clarifies that capital pool companies may not rely on the relief.

Regulators provide limited relief to select applicants from certain disclosure requirements applicable to private placements and propose related rule amendments

Ken Ottenbreit -

On April 23, 2013, the Ontario Securities Commission issued an exemptive relief order exempting certain U.S. broker-dealers from having to provide certain stipulated “wrapper” disclosure in connection with specified private placements. Typically, when securities are offered to Canadian purchasers on a prospectus exempt basis and an offering document constituting an “offering memorandum” is provided, disclosure that is required to be included in the offering memorandum under Canadian securities laws is provided in a Canadian wrapper.

Under the Order, the OSC (on behalf of other Canadian regulators) has exempted the applicant dealers from the requirement to include certain prescribed disclosure relating to statutory rights of action and underwriting conflicts. Notably, the relief is only available if the purchaser is a “permitted client” (as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations), the securities are offered primarily in a foreign jurisdiction and (i) the issuer is incorporated, formed or created under the laws of a foreign jurisdiction, has its head office or principal executive office outside of Canada and is not a reporting issuer in Canada, or (ii) the securities are issued or guaranteed by a foreign government.

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IIROC proposes guidance on management of stop loss orders

Last week, the Investment Industry Regulatory Organization of Canada released draft guidance on the use and management of stop loss orders. While IIROC's 2011 guidance on best execution addressed the management of stop loss orders in an attempt to prevent such orders from executing at "clearly erroneous" prices, regulatory intervention has still been required in a number of cases.

According to IIROC, the disruption of a fair and orderly market could occur where the execution of an order would result in the trigger of a single stock circuit breaker or exceed the "no touch zone" limits for which there will generally be no regulatory intervention. With IIROC considering all stop loss orders without a reasonable limit price to be "inherently risky in fast moving markets", the guidance would encourage that Participants require limit prices on all stop loss orders, especially in cases of automated handling of stop loss orders.

The proposed guidance also considers the expectations when "booking" a stop loss order on a marketplace, the ongoing regulatory expectations respecting stop loss orders that have been booked, and the expectations if execution of a triggered stop loss order is handled manually. IIROC also states that while it is not prohibiting stop loss orders that when triggered become market orders, it is considering doing so in the future. For more information, see IIROC Notice 13-0106.

Trade-for-trade reporting facility open for setting up required users

As we discussed earlier this year, IIROC has announced that the requirement to report "trade-for-trade" extended failed trades will become effective on April 15, 2013. Yesterday, IIROC provided an update regarding implementation, announcing that firm administrators can access the system between April 9 and  April 15 to set up the required users in advance of implementation. For more information, see IIROC Notice 13-0100.

CSA propose operational requirements for closed-end funds

Joel Binder -

The Canadian Securities Administrators yesterday proposed changes to National Instrument 81-102 Mutual Funds (NI 81-102) that would introduce core operational requirements for publicly offered non-redeemable investment funds generally analogous to the requirements applicable to mutual funds.

This "Phase 2" of the CSA's Modernization of Investment Fund Product Regulation Project involves significant changes to the regulation of non-redeemable investment funds. Key elements of the proposals include (i) extending the application of investment restrictions under NI 81-102 to non-redeemable investment funds; (ii) imposing a 10% concentration restriction (with fixed portfolio ETFs permitted to exceed this limit); (iii) limiting investments in physical commodities and specified derivatives with underlying interests in physical commodities; (iv) imposing a cash borrowing limit of up to 30% of NAV (and permitting borrowing only from "Canadian financial institutions" and limiting borrowing activities to cash borrowing only); and (v)limiting investments in mortgages to guaranteed mortgages only. In addition, dilutive securities issuances would be prohibited with specific prohibitions on the ability to issue warrants or similar securities.  

Non-redeemable investment funds would also be prohibited from investing in other non-redeemable investment funds (fund-of-funds) while a larger portion of fund assets would be permitted to be invested in illiquid assets. The proposals would also impose a framework for securities lending, repurchases and reverse repurchases similar to that applicable to mutual funds and introduce new requirements for the manager to bear the organizational costs of launching a new fund, as well as prescribe requirements governing conflicts of interest and circumstances where regulatory and/or securityholder approval will be required for certain fund or management changes. Changes are also proposed to requirements for custodianship of assets, redemptions and prescribed prospectus disclosure.

While the proposals relate principally to non-redeemable investment funds, some of the proposed amendments would also impact mutual funds.

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CSA adopt changes to terms regarding designated rating organizations

The Canadian Securities Administrators today announced the adoption of amendments to a number of national instruments and policies, including those respecting registration requirements, prospectus distributions and disclosure obligations, that would replace current references to "approved rating organization" and "approved credit rating organization" with "designated rating organization". Meanwhile, the terms "approved rating" and "approved credit rating" are being replaced with "designated rating".

The changes, initially proposed in July 2012, are intended to fully implement the new regulatory regime surrounding designated rating organizations pursuant to National Instrument 25-101 Designated Rating Organizations. In light of concerns from commenters (including members of our firm) that the amendments would create unintended adverse consequences for existing agreements that refer to "approved" credit ratings or "approved" credit rating organizations, the CSA has added language to the relevant instruments stating that it is reasonable to interpret the predecessor terms as having the same meaning as their respective successor terms.

The amendments come into force on May 31, 2013.

CSA release final "one-year" amendments to prospectus rules

The Canadian Securities Administrators yesterday released the final version of amendments to NI 41-101 General Prospectus Requirements and related changes intended to address issues that have arisen with the prospectus rules since their implementation in March 2008. The changes are intended to clarify certain provisions, address gaps, streamline requirements and codify prospectus relief that has been granted in the past. Notably, these are not proposed amendments relating to “pre-marketing” that were published for comment in November 2011 (which we discussed in a series of posts in 2011 and 2012).

The amendments were originally published in July 2011, and a number of changes have been made in response to feedback received. Notably, the final amendments include changes to the requirements for filing PIFS or “personal information forms” (including the contents of the PIFS) and changes to the time limits for filing amendments to preliminary prospectuses and final prospectuses. The Companion Policy to NI 41-101 has also been amended in a number respects, including with respect to guidance on when the purchaser of a convertible, exchangeable or exercisable security should retain the benefit of an applicable statutory right of rescission.

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CSA and IIROC abandon further changes to trade transparency

The CSA and IIROC issued a notice yesterday summarizing comments in response to their March 2012 joint notice regarding disclosure and transparency measures related to short sales and failed trades. Ultimately, the notice states that, pursuant to reviewing the comments received, data on short sales and failed trades, as well as international developments, CSA and IIROC staff do not believe that additional measures are needed or desirable at the present time. For more information, see IIROC Notice 13-0064.

Matters to consider before implementing "notice-and-access"

Robert Carelli, Ramandeep Grewal, Jonathan Moncrieff and Zev Zelman -

Amendments to National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101) are now in force. These amendments give reporting issuers and others the option to use the “notice-and-access” method to post proxy-related materials on a website (in addition to SEDAR) instead of having to mail materials to registered holders (under National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102)) and to beneficial owners (under NI 54-101).

This is the second part of our two-part series which addresses the implementation of notice-and-access. In the first part, we provided a summary of how notice-and-access is intended to work and highlighted items that reporting issuers needed to prepare for in advance. In this part, we examine some of the issues and considerations involved with implementing notice-and-access.

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IIROC proposes expanded oversight of debt securities trading

On February 20, IIROC released for comment a proposed new rule that would require reporting of debt transactions.

Specifically, under the proposal, each IIROC dealer member would have to report on a post-trade basis all debt market transactions executed by the dealer member, including those executed on an Alternative Trading System (ATS) or through an Inter-Dealer Bond Broker (IDBB).

For these purposes, “debt securities”  would mean any securities that provide the holder with a legal right, in specified circumstances, to demand payment of the amount owing, including in respect of a debtor-creditor relationship. The fact that a security was issued in another country or denominated in a foreign currency would not disqualify it from being a debt security and the term would include securities with short-term maturities or mandatory tender periods such as commercial paper and floating rate notes as well as traditional notes and bonds. Debt securities, however, would not include derivative products that are not securities (e.g., futures contracts, interest-rate swaps).

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IIROC coordinates circuit breakers with updated U.S. triggers

Earlier this week, IIROC released a guidance notice with regards to the new U.S. market-wide trading circuit breakers.  Effective April 8, 2013, trading halt triggers in the U.S. will be based on declines of the S&P 500 Index of 7% (a Level 1 halt), 13% (Level 2) and 20% (Level 3).

For days that U.S. markets are closed and Canadian marketplaces are open, trading halts will be triggered based on similar percentage declines of the S&P/TSX Composite Index. The timing and duration of the market-wide trading halts will otherwise match U.S. requirements.

For more information, see IIROC Notice 13-0059.

IIROC releases guidance on deceptive trading practices

On February 14, the Investment Industry Regulatory Organization of Canada (IIROC) confirmed that it considers certain trading strategies typically associated with high frequency trading (HTF) as manipulative and deceptive in respect of the Universal Market Integrity Rules.

Specifically, IIROC outlined that it considers layering, quote stuffing, quote manipulation, spoofing and abusive liquidity detection to contravene Rule 2.2 of UMIR. That said, IIROC's notice also clarified that it was not censuring algorithmic or high frequency trading generally, as some HFT strategies, for example, contribute to the quality of price discovery in a stock. Further, while the listed practices are generally associated with automated order systems, the notice stated that the offending strategies are prohibited whether conducted electronically or manually.

IIROC released a draft version of the guidance in July 2012. A summary of comments received to the draft guidance, as well as IIROC's responses, was also released. For more information, see IIROC Notice 13-0053 and Notice 13-0054.

BCSC releases proposed prospectus exemption

Earlier this week, the British Columbia Securities Commission released for comment a proposed new prospectus exemption similar to the offering memorandum exemption found in NI 45-106 Prospectus and Registration Exemptions that would allow issuers (excluding reporting issuers, investment funds, mortgage investment entities and real estate issuers) to raise up to $500,000 without a prospectus. 

Issuers relying on the exemption would only have to provide unaudited financial statements, so long as certain conditions were met. Specifically, issuers would have to include a bold warning on the front page of the offering memorandum and would not be able to distribute complex securities. Further, the exemption would limit investors to investments of no more than $2,000 in any 12-month period. According to the BCSC, the new exemption would address the cost of complying with the OM exemption's financial statement requirements, and would be consistent with the CSA's new OM-form exemption announced in December 2012, with the exception that British Columbia's proposal would require the issuer to identify use of the exemption when filing Form 45-106F6. The CSA's OM-form exemption does not apply to British Columbia or Ontario.

The BCSC is accepting comments on the proposed exemption until April 12, and is specifically asking a number of questions regarding respondents' experience with current exemptions.

As we've discussed in the past, the Canadian Securities Administrators are currently reviewing potential prospectus exemptions, as is the Ontario Securities Commission. Whether British Columbia intends to continue to participate with the CSA's consideration of potential exemptions, or whether it will strike out on its own, remains to be seen.

Standard interpretation of OSA applied: secondary market purchasers have no cause of action for misrepresentation in a prospectus

Adrian C. Lang, Vanessa Voakes and Genna Wood -

In the recently released decision of Justice Perell in Tucci v. Smart Technologies, secondary market purchasers were excluded from a proposed plaintiff class seeking damages stemming from an alleged misrepresentation in a prospectus under s. 130(1) of the Ontario Securities Act (the “OSA”). This decision confirms the conventional interpretation of s. 130(1), which restricts the statutory cause of action to primary market purchasers.

Background

On July 15, 2010, Smart Technologies, a maker of educational interactive technology products, filed a final Supplemental Prep Prospectus, for its initial public offering (the “IPO”). The IPO closed on July, 20, 2010, and purchasers in the IPO received their Class A shares. However, the Class A shares had also begun trading in the secondary market on July 15, 2010 during the IPO. The proposed plaintiffs argued that the disclosure in the offering materials was materially deficient, and that they suffered damages by acquiring Smart Technologies shares at an inflated price under s. 130 of the OSA (and its provincial equivalents) when a correction regarding disclosure was made on November 9, 2010.

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CSA intend to prohibit EMDs from conducting brokerage activities

Ken Ottenbreit and Terence Doherty -

The Investment Industry Regulatory Organization of Canada today announced that it has decided not to proceed with its proposed new "Restricted Dealer Member" class of IIROC member.  IIROC initially proposed the new dealer category in July 2012 in response to policy concerns regarding exempt market dealers, typically based in the U.S., that are conducting brokerage activities in Canada. IIROC specifically cited the resistance from those commenting on the initial proposal as the reason behind its decision to withdraw from its plan to establish the new category of dealer. Summaries of the comments IIROC received are included in the notice released today.

Concerns regarding the scope of brokerage activities conducted by some firms through the EMD registration category, however, remain among regulators. In light of IIROC's decision, the Canadian Securities Administrators released a notice stating that they intend to publish proposed amendments to NI 31-103 later this year that would prohibit EMDs from conducting brokerage activities. The CSA outlined its concerns on the subject in September 2011. Thus, despite the fact that IIROC has decided not to move forward with a new category, EMDs that are currently conducting brokerage activities in accordance with the terms and conditions of their registration  will likely be subject to restrictions in the near future. In the interim, EMDs (and Restricted Dealers) will have their registration and any related exemptive relief extended to the date the NI 31-103 amendments are effective.

For more information, see IIROC Notice 13-0042 and CSA Staff Notice 31-333.

IIROC releases guidance regarding non-arm's length investments

The Investment Industry Regulatory Organization of Canada yesterday released recommendations and best practices respecting the distribution by dealers to clients of non-arm's length investment products. Such products include those issued by: the dealer itself, an issuer or selling securityholder with which the dealer does not deal at arm's length, or an issuer or selling securityholder to which a dealer is otherwise connected or related.

According to IIROC, dealers are expected to follow a sequence of steps in order to satisfy their obligations in respect of the distribution of non-arm's length products, namely: (i) conducting product due diligence; (ii) completing a conflict of interest assessment; and (ii) assessing client-specific suitability. IIROC also stated that compliance reviews will focus on dealers' written policies and procedures, with the guidance providing a list of particulars expected in written policies.

IIROC originally published for comment draft expectations in February 2010. A summary of comments received, and IIROC's responses, was also published yesterday. For more information, see IIROC Notice 13-0039 and Notice 13-0040.

OSC extends consultation period on potential prospectus exemptions

The Ontario Securities Commission announced yesterday that it is extending the consultation period on potential new capital-raising prospectus exemptions. As we've previously discussed, the OSC initiated a consultative process in December with release of a paper on the subject. For more information, see OSC Staff Notice 45-711.

TSX-V extends relief related to private placement pricing

In mid-December, the Toronto Venture Exchange extended temporary relief from certain pricing requirements related to private placements. Under the relief, issuers conducting private placements may, under certain conditions, offer shares at a price below the regulated minimum of $0.05 per share, or convertible debentures below the regulated minimum of $0.10 per share.

In order to rely on the relief, an issuer must, among other things, demonstrate immediate or imminent financial hardship and that it does not have the time or resources necessary to complete a share consolidation prior to closing of the private placement, disseminate a news release providing an itemized breakdown of the use of proceeds and provide the TSX-V with a certificate in prescribed form, signed by the CEO or CFO attesting to the need for relief. At least 75% of the private placement must be subscribed for by parties that are not related to the issuer, and up to $50,000 of the gross proceeds raised in reliance on the relief may be used for general working capital purposes.

The relief, initially issued in August 2012 will expire on April 30, 2013.

CSA provide guidance for advising representative applicants

The Canadian Securities Administrators released a staff notice last week that provides prospective Advising Representatives (ARs) and Associate Advising Representatives (AARs) with guidance regarding the relevant investment management experience required to qualify for registration. The notice also provides a summary of decisions made by the CSA based on various fact situations.

Among the other guidance provided, the CSA state that it is unlikely that client relationship management experience would qualify an applicant for AR registration, while corporate finance experience and consulting experience with portfolio manager selection and monitoring may qualify an applicant for AR registration.

Ultimately, the notice suggests that prospective applicants (of which there have been over 2500 since the advent of NI 31-103) consider the information provided in the notice in deciding whether to apply for registration and when preparing an application. For more information, see CSA Staff Notice 31-332.

ASC issues new OTC derivatives order

Keith Chatwin -

On December 31, 2012, the Alberta Securities Commission replaced Blanket Order 91-503 with Blanket Order 91-505 Over-the-Counter Derivatives.

As we discussed in an earlier post, an initial version of Rule 91-505 was published in February 2011, with a revised rule proposed in October 2012. As we discussed at the time, the revised proposal reintroduced the concept of “qualified parties” and created an exemption from the prospectus and registration requirements for all over-the-counter futures contracts where each party is a qualified party, subject to the potential for incremental future requirements as may be imposed as a result of the CSA’s ongoing initiatives relating to trade reporting, clearing and other associated matters in relation to derivatives.

The final Blanket Order is consistent with the form of the October proposal.

Modified OM private placement exemption announced to facilitate early stage financing

Keith Chatwin -

On December 20, 2012, the Canadian Securities Administrators, excluding Ontario and British Columbia, announced that they would be publishing harmonized interim local orders to provide exemptions from certain disclosure requirements relating to the use of the "OM exemption" under NI 45-106 and the use of Form 45-106F2 Offering memorandum for non-qualifying issuers. This new "OM-form exemption" is intended to facilitate capital raising for early stage and other small and medium sized businesses. The harmonized interim local orders will not apply in Ontario or B.C. The OM exemption was never available in Ontario and neither the OSC nor the BCSC are party to the multilateral staff notice. Local orders have now been issued in most of the participating jurisdictions.

Among other limitations, the OM-form exemption will not be available to issuers who are reporting issuers (either in a jurisdiction of Canada or the equivalent in a foreign jurisdiction) or to investment funds, mortgage investment entities or those engaged in the real estate business.

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Reports for "trade-for-trade" extended failed trades required as of April 15

IIROC announced this week that the requirement to report "trade-for-trade" extended failed trades will be implemented on April 15, 2013.

As we've previously discussed, the requirement for Participants and Access Persons to report trade variations and cancellations, as well as extended failed trades with respect to trades executed on a marketplace that settle through the continuous net settlement facilities of CDS, took effect on June 1, 2011. The requirement to file extended failed trade reports did not initially extend to trades using the trade-for-trade settlement facility of CDS. As such, such trades will now also be captured by the requirement to report failed trades that are unresolved for more than 10 days after the settlement date.

IIROC's notice also provides a set of questions and answers regarding the new requirement. For more information, see IIROC Notice 13-0014.

IIROC looks to address use of business titles and financial designations

Earlier this week, IIROC published the results of a dealer survey on the use of business titles and financial designations and provided draft guidance on the subject.

According to IIROC, the results of the survey suggest that a wide variety of business titles and financial designations are currently used by licensed representatives within and across firms, including many that do not provide a "meaningful" description of the types of services or products provided to clients. Meanwhile, only about 40% of responding firms had specific written policies and procedures in place respecting the use of titles and financial designations for licensed representatives. That said, 87% of responding firms did have a review and approval process for the use of such titles and designations.

The proposed guidance, meanwhile, communicates IIROC's expectations that firms will implement policies and procedures on business titles and the use of financial designations that will "promote greater transparency" for clients. To increase public understanding, IIROC suggests that business titles be coupled with an explanation of an individual's IIROC approval category and corresponding proficiencies. With respect to the approval of financial designations, IIROC states that a number of factors should be considered, including whether the designation has a rigorous curriculum, a continuing education requirement and a public disciplinary process.

IIROC is accepting comments on its draft guidance until March 9, 2013. For more information, see IIROC Notice 13-0005.

New prospectus form adopted for scholarship plans

The Canadian Securities Administrators yesterday announced its final amendments to NI 41-101 General Prospectus Requirements, the companion policy and related forms to enhance the prospectus disclosure provided by scholarship plans. Specifically, the amendments introduce a new prospectus form that is tailored to the unique features and complexities of such plans and that will require that key information be provided to investors in a simple and accessible format.

The CSA first published its proposals in March 2010 and released a revised set of amendments in November 2011. Subject to Ministerial approval, the final amendments will come into force on May 31, 2013.

IIROC releases statistical analysis of high frequency traders

Last month, the Investment Industry Regulatory Organization of Canada published the first two phases of a study into high-frequency trading (HFT) in Canadian equity markets. The report, which provides a statistical analysis of the trading activity of a study group of traders with relatively high order-to-trade (HOT) ratios between August 1 and October 31, 2011, is intended to assist regulators in determining the most appropriate response to the growth of HFT over the last few years.

Ultimately, the report found that 11% of all traders during the study period were HOT traders and that this group accounted for 22% of the total share volume, 32% of dollar value and 42% of all trades. Among other things, the study also found that the HOT group, which traded predominantly in TSX-listed securities trading between $1 and $5, was responsible for a greater percentage of dark activity than lit, a large number of orders cancelled in comparison to trades executed and used the Anonymous marker more often than other market participants.

The third part of the study is intended to assess the impact of HFT activity with respect to market quality and integrity. Concurrent with the release of its report, IIROC also published a proposed request for assistance, which includes several questions IIROC seeks to address, from those with demonstrated expertise in the area of equity market structure. According to IIROC, the work of outside experts will supplement the internal analysis being undertaken by the organization.

Comments on the proposed request for assistance will be accepted until January 11, 2013. For more information, see IIROC Notice 12-0374.

IIROC publishes circuit breaker levels for Q1 2013

The Investment Industry Regulatory Organization of Canada (IIROC) this week published its circuit breakers for the first quarter of 2013, which are set in coordination with those in 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 Q1 2013 are 1,300 points, 2,650 points and 3,950 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,250 points; Level 2 (20%) - 2,450 points and Level 3 (30%) - 3,700 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. For more information, see IIROC Notice 13-0002.

CSA release FAQ regarding electronic trading regulations

On December 20, the Canadian Securities Administrators released a set of responses to frequently asked questions regarding NI 23-103 Electronic Trading. As we've previously discussed, the instrument, designed to address the risks of electronic trading, will come into force on March 1 of this year.

The FAQ released by the CSA covers such issues as the instrument's scope of application, pre-trade risk management and supervisory controls, monitoring of trading activity and automated order systems.

Exchanges release paper on emerging market issuers

Ivan T. Grbešić -

The TSX and TSX-V issued a joint consultation paper earlier this week intended to identify the potential risks associated with listing emerging market issuers and provide preliminary guidance to issuers with respect to applicable listing considerations.

Specifically, the paper identifies a number of risks applicable to emerging market issuers, including with respect to (i) management and corporate governance concerns due to management's potential lack of familiarity with Canadian regulatory requirements or a lack of familiarity with the laws and requirements of the jurisdiction in which the issuer carries on business; (ii) unsatisfactory financial reporting as a result of auditors lacking sufficient expertise in the applicable jurisdiction; (iii) non-traditional corporate/capital structures due to foreign ownership restrictions in certain jurisdictions; and (iv) legal concerns relating to title and the ability to conduct operations.

The consultation paper thus asks for stakeholder input on a number of specific questions concerning the issues identified above, as well as with respect to the definition of "emerging market issuer", other potential risks not identified in the paper and related party transactions. Feedback is also requested on the issues of sponsorship requirements (which the paper suggests will not be waived in the case of emerging market issuers listing on the TSX) and potential supplemental ongoing requirements, which may ultimately include pre-clearance of a change of auditors, new board members or new senior management.

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IIROC describes expectations regarding sale of PPNs

The Investment Industry Regulatory Organization of Canada yesterday released a guidance note setting out its expectations regarding application of know your client and suitability obligations to dealings in principal protected notes (PPNs) by IIROC dealer members. The guidance follows publication of a CSA staff notice (excluding Quebec) this past August that described the CSA's expectations that deposit-taking institutions will use registered dealers and individuals to distribute all PPNs that are not “Specified PPNs,” being those with a term of five years or less.

IIROC Dealer Member Rule 18.14 allows registered representatives and investment representatives to engage in another gainful occupation provided certain conditions are met, effectively permitting dual employment with the investment dealer and an affiliated financial institution. According to IIROC, the sale of PPNs by such a dually employed individual could create client confusion as to which entity the client is dealing with (the financial institution or the IIROC dealer) and would result in the application of know your client and suitability protections dependent on the distribution channel.

Consequently, IIROC states that all sales of PPNs by an IIROC registered individual must be transacted solely in their capacity as an employee or agent of the dealer member. IIROC also expects that all dealers will have policies and procedures to give this expectation effect and to ensure adequate supervision and compliance oversight. For more information, see IIROC Notice 12-0384.

Canadian crowdfunding? OSC releases consultation paper on potential prospectus exemptions

Simon Romano -

The Ontario Securities Commission released a paper today intended to initiate a broad consultative process to consider a number of potential new capital raising prospectus exemptions.  

Specifically, the consultation paper canvasses the exemptions currently available in various jurisdictions, including the U.S., Australia and the U.K. These exemptions are generally based on (i) investor attributes (such as income and financial assets); (ii) relationships with the issuer (such as the family, friends and business associates exemption available in jurisdictions other than Ontario); (iii) investment size (such as Ontario's $150,000 minimum investment amount exemption); (iv) disclosure; (v) "crowdfunding"; and (vi) offering size.

With respect to "crowdfunding" (which is the popular term for funding a project or venture through small amounts of money raised from a large number of people over the internet via an internet portal intermediary), the potential for an exemption is examined using the provisions of the U.S. JOBS Act as a basis for discussion. Issues considered include issuer restrictions, investor protection measures, and the registration of funding portals. The paper also explores a potential OM exemption (which, unlike other Canadian jurisdictions, is not available in Ontario under NI 45-106) with a $1.5 million limit on the amount of capital that could be raised by an issuer in a 12-month period and a limit on a purchaser's annual investment of $10,000. The concept OM exemption is not intended to be a recommendation and was provided by the OSC for discussion purposes.

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Amendments to UMIR to extend supervisory requirements to electronic trading

Last week, the Investment Industry Regulatory Organization of Canada announced amendments to UMIR intended to align IIROC's trading supervisory requirements with the requirements found in NI 23-103 Electronic Trading. As we've discussed previously on this blog, NI 23-103 and its Companion Policy were recently adopted in order to address the risks of electronic trading, specifically with respect to credit risk, market integrity risk, technology or systems risk and regulatory arbitrage risk

The amendments to UMIR, meanwhile, are intended to: (i) expand existing trading supervision obligations to specifically address the risks associated with electronic trading ; (ii) set out specific supervisory provisions related to the use of automated order systems; (iii) clarify the circumstances under which a trade may be cancelled, varied or corrected with notice to, or consent of, a market regulator; (iv) allow for a participant to authorize an investment dealer to perform on its behalf the setting or adjusting of a specific risk management or supervisory control, policy or procedure, or for a participant to use the services of a third party provider; and (v) establish certain gatekeeper obligations for participants who have authorized an investment dealer to perform on its behalf the setting or adjustment of a risk management or supervisory control, policy or procedure.

The amendments become effective on March 1, 2013 and, while most requirements must be implemented by that date, IIROC will allow participants and access persons until May 31, 2013 to complete testing and implementation of automated controls. Meanwhile, IIROC also released guidance that address the amended provisions. For more information, see IIROC Notices 12-0363 and 12-0364.

IIROC provides guidance on meaning of "date of the offering" for quiet periods

The Investment Industry Regulatory Organization of Canada (IIROC) released guidance earlier this week on the meaning of "date of the offering" in order to clarify how to determine the length of a quiet period during which time IIROC Dealer Members are prohibited from issuing research relating to equity or equity-related securities when acting as manager or co-manager in an offering of securities. Specifically, Rule 3400 prohibits dealers from issuing research for 40 calendar days following the date of the offering for an IPO or ten days in the case of a secondary offering.

According to IIROC, for the purposes of the rule, the "date of the offering" is (i) the date of the final receipt for the prospectus in the case of prospectus offerings; (ii) the date of pricing in the case of private placements; and (iii) the date of the prospectus supplement in the case of shelf-offerings.

Further, the count for the quiet periods starts on the day after the date of the offering, thereby excluding the actual date of the offering from the count.

For more information, see IIROC Notice 12-0369.

CSA initiate consultation on mutual fund fee structure

The Canadian Securities Administrators yesterday released a discussion paper intended to solicit feedback on the structure of mutual fund fees in Canada. In addition to providing an overview of the current mutual fund fee structure, the paper identifies investor protection and fairness issues resulting from the current structure, and also considers the potential regulatory options available to the CSA to address the identified issues.

Specifically, the paper considers such issues as the lack of investor understanding of fund costs, potential conflicts of interest at the mutual fund manufacturer and advisor levels, the potential for cross-subsidization of commission costs, alignment of advisor compensation and services, and the potential for low-cost options for do-it-yourself investors.

In response to the identified issues, the CSA state that they may consider a number of potential regulatory changes, including: (i) establishing a minimum level of ongoing services that advisors would have to provide investors in exchange for payment of trailing commissions; (ii) requiring a standard class for DIY investors with no or reduced trailing commissions; (iii) requiring that the trailing commission component of a mutual fund's management fee be unbundled and charged and disclosed as a separate fee; (iv) setting a maximum limit on the portion of mutual fund assets that could be used to pay trailing commissions to advisors; and (v) implementing additional standards or duties for advisors.

Also of note, the impact of any potential regulatory changes could affect stakeholders outside the mutual fund industry. Specifically, the CSA state that while the paper focuses on mutual funds, the regulatory changes may also eventually capture investment funds and comparable securities products. 

The CSA are accepting feedback on the consultation paper until April 12, 2013. For more information, see CSA Discussion Paper 81-407.

Relief for testing of automated pre-trade risk controls under NI 23-103

Parallel orders have been issued in Quebec, British Columbia and Alberta to provide temporary relief from the requirement in NI 23-103 Electronic Trading that a marketplace participant's risk management and supervisory controls, policies and procedures be reasonably designed to systematically limit the financial exposure of the marketplace participant.

Amid concerns that marketplace participants may not be able to adequately complete testing of the automated pre-trade risk controls before the instrument takes effect on March 1, 2013, the parallel orders will apply if a marketplace participant is testing automated pre-trade risk controls by March 1, 2013. The relief applies until May 31, 2013. For more information, see Multilateral CSA Staff Notice 23-313.

CSA publish model derivatives rules

The Canadian Securities Administrators yesterday published for comment model provincial rules to introduce a framework for the regulation of derivatives across Canada. Specifically, the model rules would set out the scope of derivatives products and provide for regulations respecting trade repositories and derivatives data reporting. The model rules, which are based on Ontario's Securities Act, are intended to provide a "responsive and flexible" foundation for derivatives regulation.

Comments on the model rules are being accepted until February 4, 2013. Check back next week for further commentary.

IIROC amends rules regarding trade matching

The OSC yesterday announced the approval of amendments to IIROC's Dealer Member Rules that are intended to promote compliant trade matching practices and eliminate the sending of duplicative trade related correspondence to clients.

Specifically, amendments to Rule 800.49 will seek to provide dealers with clarity in respect of broker-to-broker trade reporting and matching requirements, while amendments to Rule 200.1(h) will provide an exemption from the trade confirmation requirement in cases where certain conditions are met.

The amendments were originally proposed in April 2010.

International regulatory authorities meet to discuss OTC derivatives

Margaret Grottenthaler -

The uncertainty around the extent of the extra-territorial reach of the Dodd-Frank Act into the business of Canadian and other non-U.S. market participants has been a major concern. Regulators are well aware of this concern and have their own reasons to want to reduce regulatory conflict. It is top of their agenda as well. To that end, on November 28, regulatory authorities from various international jurisdictions (including the OSC and AMF) met in New York to discuss reform of the cross-border OTC derivatives market. It looks as though progress was made but much work is yet to be done.

While the authorities noted that complete harmonization across jurisdictions would be difficult, their joint release identified the need to reduce regulatory uncertainty and reduce the application of conflicting rules. Ultimately, the meeting, which included representatives from the Ontario Securities Commission, Quebec's Autorité des marchés financiers, the Australian Securities and Investments Commission, Brazil's Comissão de Valores Mobiliários, the European Commission and European Securities and Markets Authority, Hong Kong's Securities and Futures Commission, Japan's Financial Services Agency, the Monetary Authority of Singapore, the Swiss Financial Market Supervisory Authority, and the U.S. Commodity Futures Trading Commission and Securities and Exchange Commission, was intended to continue moving towards the goal of an enhanced regime of OTC derivatives regulation, as pledged by G-20 leaders in 2009.

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CSA adopt "notice-and-access" allowing electronic posting of proxy and other materials

Ramandeep Grewal -

The Canadian Securities Administrators yesterday announced the adoption of regulatory changes to improve the communications process between reporting issuers and shareholders. Specifically, the amendments would introduce a notice-and-access mechanism for reporting issuers to send proxy-related and other materials to shareholders, simplify the process of appointing beneficial owners as proxy holders and require reporting issuers to provide enhanced disclosure regarding the beneficial owner voting process.

The amendments, which include changes to NI 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuers, NI 51-102 Continuous Disclosure Obligations, and related forms and companion policies, were initially proposed in 2010 and republished in 2011. While the final amendments announced yesterday include changes to the 2011 proposals, the CSA have deemed the changes immaterial and are, thus, not republishing the amendments for further comment.

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Glass Lewis releases 2013 Canadian policy guidelines

Proxy advisory firm Glass Lewis recently released its Proxy Paper Guidelines for the 2013 proxy season for issuers listed in Canada. According to Glass Lewis, its research and advice is intended to encourage governance structures that will "drive performance, create shareholder value and maintain a proper tone at the top." Ultimately, the guidelines set out the key issues Glass Lewis will consider in making recommendations with respect to the election of directors, financial reporting, executive compensation, governance structure and environmental and social risk.

Election of Directors

According to the guidelines, boards that protect and enhance shareholders' best interests are those that (i) are independent; (ii) have directors with diverse backgrounds; (iii) have a record of positive performance; and (iv) have members with a breadth and depth of experience.

On the issue of board composition and director independence, the guidelines state that Glass Lewis will usually recommend that shareholders withhold votes for directors that (i) attend less than 75% of the board and/or key committee meetings; (ii) serve on the board while also serving as the issuer's CFO; (iii) serve on an "excessive" numbers of boards (although the definition of excessive is not provided); (iv) provided material professional services to the company during the past year, or whose immediate family member provided such services; (v) engage in commercial deals, including perk-type grants from the company, or whose immediate family member engaged in such deals; or (vi) have interlocking directorships with one of the company's executives.

Further, according to Glass Lewis, only independent directors should serve on a company's audit, compensation, nominating and governance committees, and the firm will generally recommend a withholding of votes from any insider or affiliated director seeking to be appointed to such a committee. While Glass Lewis does not generally recommend that shareholders withhold votes from chief executives that chair the board, the guidelines state that the roles should be separated. Meanwhile, an exception to independence standards is provided for controlled companies.

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ISS updates 2013 proxy voting guidelines

Last week, ISS released its Canadian corporate governance policy updates for 2013. The updates, which reflect changes to its proxy voting policies for the upcoming proxy season, are effective for meetings held on or after February 1, 2013. As we discussed in a post earlier this month, ISS published proposed changes to its guidelines earlier this Fall that focused on pay for performance. While the final policies include the contemplated changes to the methodology to measure pay-for-performance alignment, the guidelines respecting slate voting, majority owned companies and advance notice requirements, among others, have also been updated.

Slate Voting

Key changes to ISS policies include an update to its recommendation regarding slate ballots. Specifically, the updated guidelines recommend withholding votes from all directors nominated by slate ballot, regardless of whether additional governance concerns have been identified. Further, the exemptions for companies newly graduated from the venture exchange or that commit to replacing slate director elections within a year have also been removed. The policy, however, does not apply to contested director elections. The main reason cited for this change in policy is the TSX's recently announced amendments that will prohibit single slate ballots (coming into effect on December 31, 2012) and a similar prohibition in the TSX-V's policies.

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OSC seeks participants for analysis of electronic trading risks

The Ontario Securities Commission today announced that its staff have retained a consultant to analyze tools and controls with respect to electronic trading in Canada. Part of the consultant's work will include gathering information from market participants regarding the risks posed by electronic trading and the provision of direct electronic access (DEA). The notice also specifically asks interested participants to contact the OSC.

As we discussed last month, the CSA recently introduced proposed amendments to NI 23-103 Electronic Trading to impose requirements on participant dealers that provide direct electronic access and address the fact that the instrument, which comes into effect on March 1, 2013, does not currently include requirements regarding the provision of DEA.

According to the OSC, the analysis to be performed by the consultant will not impact the timelines for the proposed amendments to NI 23-103. For more information, see OSC Staff Notice 23-701.

CSA consider perception that market data fees too high

The CSA today released a consultation paper that considers real-time market data fees in Canada and seeks input on addressing the issues identified by the regulators. The paper specifically discusses three main concerns raised by marketplace participants and data consumers, namely that: (i) market data fees are too high; (ii) high fees are a result of participants being part of a "captive market"; and (iii) the process surrounding fee proposals and changes to fee models should be more transparent.

Ultimately, the paper concludes that while TSX and TSX-V market data fees do not appear unreasonable, marketplaces with smaller market shares are charging fees that are high in relation to their share of trading activity. Meanwhile, the paper suggests that the data fees charged by marketplaces in Canada and the U.S. should ideally be closer. The CSA, however, recognize that such an outcome may be unrealistic considering the differences in regulatory environment, industry structure, scale and size of the two markets.

Potential options considered by the paper include capping fees for "core data", capping fees for data sold through an information processor, regulating consolidated market data fees charged by the information processor, capping consolidated data fees sold by marketplaces to all data vendors, mandating a data ultility to operate on a cost-recovery basis, and requiring marketplaces to publish for comment any amendments to market data fee schedules.

The consultation paper also sets out a number of specific questions for stakeholders to consider, and comments are being accepted until February 8, 2013. For more information, see CSA Staff Consultation Paper 21-401.

CSA and IIROC release provisions regarding third-party electronic access to marketplaces

The Canadian Securities Administrators yesterday introduced proposed amendments to NI 23-103 Electronic Trading to impose requirements on participant dealers that provide direct electronic access (DEA). As we've discussed in the past, the CSA adopted NI 23-103, intended to address the risks of electronic trading, specifically with respect to credit risk, market integrity risk, technology or systems risk and regulatory arbitrage risk, earlier this year. However, the instrument, which comes into effect on March 1, 2013, did not include requirements regarding the provision of DEA. The proposals released yesterday are thus intended to address the need for appropriate controls to manage risks associated with providing DEA.

Specifically, the amendments would: (i) limit the registrants that may provide DEA to fully registered dealers, and limit those that may use DEA to portfolio managers and restricted portfolio managers (thereby excluding exempt market dealers); (ii) require dealers to establish, maintain and apply appropriate standards for providing DEA and assess and document whether each client meets the standards; (iii) require that dealers have a written agreement with each DEA client ; (iv) require dealers to determine what training their clients need to understand the marketplace and regulatory requirements; (v) require that dealers assign each DEA client a unique identifier; and (vi) generally only allow a DEA client to trade for its own account.

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CSA publish consultation paper exploring fiduciary duty for dealers and advisers

The Canadian Securities Administrators today published a consultation paper that considers the desirability and feasibility of imposing a statutory fiduciary duty on advisers and dealers to act in the best interests of clients.

A proposed duty, or "best interests" standard, would be intended to address the CSA's five primary investor protection concerns related to the conduct of advisers and dealers, namely that (i) there may be an inadequate principled foundation for the standard of conduct owed to clients; (ii) the current standard of conduct may not fully account for the difference in information and financial literacy between retail clients and advisers/dealers; (iii) there is an expectation gap between investors and advisers/dealers as investors incorrectly assume that advisers and dealers must always provide advice in the client's best interest; (iv) while advisers and dealers must recommend suitable investments, the investments need not necessarily be in the client's best interest; and (v) the application in practice of current conflicts of interest rules may be less effective than intended. According to the CSA, acting in the client’s best interests means the dealer or adviser must ensure that client interests are paramount, services are performed reasonably prudently and clients are provided with full disclosure and not exploited.

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IIROC reconsiders position regarding clearing arrangements

On October 22, IIROC released draft guidance withdrawing its position that clearing arrangements are a type of introducing broker / carrying broker arrangement to which IIROC Dealer Rule 35 applies. In the absence of applicable rules, the notice sets out the practical considerations, outsourcing due diligence obligations and IIROC notification requirements that would apply to clearing arrangements. As we discussed in an earlier post, IIROC also released draft guidance regarding outsourcing arrangements on the same day. Comments on the notice are being accepted until January 20, 2013. For more information, see IIROC Notice 12-0312.

Further thoughts on TSX changes to director elections and majority voting

Andrew Bozzato and David Weinberger -

The Toronto Stock Exchange recently announced proposed amendments to the TSX Company Manual that would require all TSX-listed issuers to elect directors by majority vote (the “Proposed Amendments”). If the Proposed Amendments are adopted, security holders will effectively be required to vote “for” or “against” each individual board nominee, in contrast to the default plurality voting under Canadian corporate law whereby security holders voting by proxy either vote “for” or “withhold” when electing directors.

Under the Proposed Amendments, the TSX would require that all listed issuers adopt majority voting for uncontested director elections.1 This could be implemented by the board’s adoption of a majority voting policy, as opposed to formally amending an issuer’s constating documents. Where a majority voting policy is adopted, security holders voting by proxy would still vote “for” or “withhold” for each individual board nominee, as required by corporate law. However, “withhold” votes would be considered “against” votes and counted as part of the total votes cast. The type of majority voting policy described in the Proposed Amendments would require that (i) a director who received a majority of “withhold” votes tender his/her resignation immediately following the meeting, to be effective upon acceptance by the board; and (ii) the board consider whether to accept the resignation and disclose its decision within 90 days of the receipt of such resignation. Under the existing voting regime, even if a director receives a majority of “withhold” votes in an uncontested election, the director is still elected under corporate law for the ensuing term.

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TSX to clarify rules regarding appeals of listing decisions

The TSX last week published proposed amendments to its Company Manual and to the TSX Rules to clarify matters related to appeals of listing-related decisions, and to ensure consistency between the Manual and the Rules with respect to appeals.

Specifically, the proposed changes would (i) address the composition of appeal panels; (ii) codify the existing practice of requiring written requests for appeals and submissions; (iii) clarify that certain decisions may be delegated to listing managers; (iv) clarify the time frame for appeals; and (v) clarify the rules regarding suspension and termination of participating organizations.

Comments on the proposals are being accepted until November 12.

ASC amends proposed new derivatives rule

Keith Chatwin -

In our blog post of March 11, 2011, we discussed the proposed repeal by the Alberta Securities Commission of Blanket Order 91-503 and its replacement with Rule 91-505 Over-the-Counter Derivatives. At the time, and in the context of ongoing efforts by the  Canadian Securities Administrator to bring the regulation of OTC derivatives within the four corners of securities legislation to comply with G20 commitments, the proposed Rule 91-505 would have resulted in OTC derivatives and commodity futures contracts being considered "futures contracts" under the Securities Act (Alberta). Historically, under BO 91-503, such OTC derivatives and commodity futures contracts were exempted from the definition of “futures contract” and thereby not considered “securities” under the Securities Act

In the context of the sea change in regulatory philosophy being undertaken by the CSA and reflected in proposed Rule 91-505, only a narrow registration exemption was proposed for OTC physical commodity contracts. The proposed Rule would have abandoned the current concept of prospectus and registration relief for a broad array of OTC transactions and commodity contracts between qualified parties.

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Repeal of IIROC tick test for short sales goes into effect October 15

Simon Romano -

Effective October 15, 2012, IIROC's price restrictions that prohibit short sales on a “downtick” are being repealed. The repeal of the "tick test" has been in the works for a number of years, since similar action was taken by the U.S. Securities and Exchange Commission to repeal short sale restrictions in 2007. Although, unlike the U.S. rules, IIROC has not incorporated a circuit breaker that would trigger a tick test. In certain circumstances, however, a pre-borrow requirement for short sales, which requires a person entering the order to have made arrangements to borrow the securities required to settle the trade prior to the entry of the order, is imposed.

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OSC releases notice regarding marketplaces' initial filings

The Ontario Securities Commission last week released a staff notice setting out the process for OSC Staff's review of the initial filings of entities applying to become recognized exchanges or alternative trading systems. The notice updates and replaces OSC Staff Notice 21-703, which was published in 2010. The notice also describes OSC Staff's expectations regarding the timing of a marketplace's commencement of operations and of the implementation of material system changes. Specific processes for the review of the information contained in Forms 21-101F1 and 21-101F2 were also published.

For more information, see OSC Staff Notice 21-706.

Regulators to allow central clearing through global CCPs

The Canadian Securities Administrators on Monday issued a news release to update stakeholders on efforts to reform Canada's OTC derivatives market to conform with G-20 commitments.

As we discussed earlier this year, the CSA released a consultation paper in June that proposed making central counterparty clearing of eligible OTC derivatives mandatory. While today's release reiterated Canadian regulators' commitment to CCP clearing, the CSA stated that market participants would be able to do so through any CCP that was recognized by Canadian authorities, including global CCPs. According to the CSA, "global CCPs will provide a safe, robust and resilient environment for clearing OTC derivatives" provided that they comply with appropriate international safeguards.

IIROC publishes circuit breaker levels for Q4 2012

The Investment Industry Regulatory Organization of Canada (IIROC) yesterday published its circuit breakers for the fourth quarter of 2012, which are set in coordination with those in 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 Q4 2012 are 1,350 points, 2,700 points and 4,050 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%) - 1,250 points; Level 2 (20%) - 2,450 points and Level 3 (30%) - 3,700 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. For more information, see IIROC Notice 12-0285.

Electronic trading instrument to come into effect March 1, 2013

As we discussed in June, the CSA recently announced the adoption of National Instrument 23-103 Electronic Trading, intended to address the risks of electronic trading, specifically with respect to credit risk, market integrity risk, technology or systems risk and regulatory arbitrage risk. With ministerial approval secured, the new instrument will come into force in Ontario on March 1, 2013.

As we previously noted, unlike an earlier proposed version, the final version of NI 23-103 does not include requirements regarding the provision of direct electronic access. Rather, the CSA and IIROC intend to release proposed rules in the upcoming months intended to ensure that similar forms of marketplace access are treated similarly.

BCSC proposes expanded reporting for BC dealers that trade OTC in the U.S.

On August 31, the British Columbia Securities Commission proposed changes to the conditions of registration for investment dealers that maintain an office in B.C. and trade in U.S. over-the-counter markets, and who have not filed a prescribed form of undertaking. Ultimately, the proposal would expand investment dealers' current reporting requirements to include: (i) clients' jurisdictions when refusing to accept securities of specified OTC issuers; (ii) significant client holdings of shares in specified OTC issuers; and (iii) significant trading in a single specified OTC issuer facilitated by a B.C. investment dealer.

Significantly, the amended conditions would replace the current definition of OTC-quoted securities (which names two marketplaces) with the definition of OTC-quoted securities from Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets (which refers to U.S. OTC markets generally). Therefore, if adopted, firms operating in or through an office in BC, and those firms previously unaffected, will need to consider the implications of the expanded definition of U.S. OTC markets on their reporting obligations.

According to the BCSC, the proposed changes "further address the risk of abusive practices in U.S. OTC markets involving an investment dealer with a BC office." Comments on the proposals are being accepted until October 30, 2012.

CSA Staff provide third update on PPNs

CSA staff (but for Quebec) published an update today to supplement their previous notices on Principal Protected Notes (the most recent being published in August 2008). The notice provides an update on the CSA's work with IIROC and the MFDA to ensure that suitability and know-your-client obligations apply to all dealings in PPNs by registered representatives. The notice also sets out the CSA's expectations that deposit-taking institutions will use registered dealers and individuals to distribute PPNs that do not fall within a limited class.

Of interest, the notice states that IIROC and the MFDA will soon be issuing notices to their members setting out the expectation that all dealings in PPNs by registered representatives be transacted by the representatives in their capacity as an employee or agent of their member firm.

Issues with the sales of PPNs were also highlighted in IIROC's August 2010 publication of findings and recommendations emanating from its compliance review regarding the sale of PPNs.

With respect to deposit-taking institutions, the CSA state that they will continue to monitor the distribution of PPNs and may take further action should they become aware that sales practices of such institutions do not accord with expectations. As discussed by Phil Henderson when they were first introduced, PPN distribution by federally regulated financial institutions is also governed by the Principal Protected Notes Regulations. For more information, see CSA Multilateral Staff Notice 46-306.

More blanket relief from new OTC issuer rule

New Brunswick, Nova Scotia and Manitoba have now issued blanket orders, substantially similar to those issued in other provinces, to exempt certain issuers from the recently enacted Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the Counter Markets.

As we've discussed previously on this blog, the Canadian Securities Administrators other than Ontario recently adopted MI 51-105 which, among other things, can subject issuers who carry out private placements in any of the adopting jurisdictions to Canadian public company obligations. The stated purpose of the instrument is to discourage the manufacture and sale of OTC quoted shell companies that can be used to facilitate abusive market practices.

In response to the concern that the instrument would have the unintended effect of subjecting major well-established issuers that trade OTC in the U.S. to Canadian public company reporting obligations, regulators have been providing blanket orders to exempt certain issuers from the application of the instrument. As we discussed on August 2, British Columbia, Alberta and Quebec issued blanket orders at the end of July, with Quebec's Autorité des marchés financiers revising its order on August 14 to clear up issues with interpretational issues.

IIROC extends comment period on marketplace threshold rules

On August 13, IIROC announced the extension of the comment period regarding its proposed set of marketplace threshold rules. As we discussed in a post of May 17, IIROC proposed two guiding principles, specifically that (i) marketplace thresholds should generally preclude the execution of orders that would otherwise require regulatory intervention by IIROC due to the trigger of a single-stock circuit breaker or the application of policies regarding the variation and cancellation of trades; and (ii) the application of marketplace thresholds should have the least amount of impact on price discovery and access to tradable liquidity.

While comments were initially due by August 8, IIROC has now extended the comment period until September 10, 2012. For more information, see IIROC Notice 12-0250.

CSA publish guidance for Cease Trade Order Database users

Staff of the CSA yesterday released a notice setting out recent and upcoming changes to the Cease Trade Order Database and to provide guidance to users of the database. The database, which is publicly searchable, contains all cease trade orders issued by participating CSA members and allows for the dissemination of those orders to subscribers. 

Ultimately, the guidance provides information regarding recent changes respecting the database's use of stock symbols, security identifiers and date format, while explaining the upcoming change to the classification of cease trade orders. Specifically, cease trade orders will now be classified into two distinct groups: (i) orders that ban trading in securities of a reporting issuer or a non-reporting issuer; and (ii) orders that ban trading by certain individuals and/or companies, in each case regardless of whether the order resulted from a continuous default of the issuer or an enforcement action. Where orders fall into both categories, the orders will appear in both categories and two distinct notifications will be sent out to subscribers.

For more information, see CSA Staff Notice 11-318.

IIROC provides guidance on variation and cancellation of trades

On August 20, Investment Industry Regulatory Organization of Canada (IIROC) released guidance regarding the circumstances in which it may intervene to vary or cancel trades it considers "unreasonable" or not in compliance with UMIR. As we discussed in an earlier post, IIROC released proposed guidance on the subject in April, and the final version of the guidance reflects changes suggested in response to comments received in response to the original proposal.

Ultimately, guidelines are provided with regards to (i) a "no touch zone" for which there will generally be no regulatory intervention when the price difference between the erroneous trade and the current fair value of the security does not exceed the greater of 10% of the security's price or 10 trading increments; (ii) the limited conditions under which IIROC would consider intervening to cancel an erroneous trade; and (iii) the market-based conditions used to determine whether a higher threshold than the "no touch zone" will be used when an erroneous trade has been executed during significant market volatility, outside normal trading hours or in a security of limited or very limited liquidity. For more information, see IIROC Notice 12-0259.

CSA extend comment period regarding proxy advisory firm regulation

The CSA announced last week that it is extending the comment period associated with its consultation paper concerning the regulation of proxy advisory firms. As we discussed in a June post, the CSA's consultation paper, which identified concerns raised by market participants regarding the services provided by proxy advisory firms, requested comments from stakeholders by August 20. The comment period has now been extended to September 21, 2012. For more information, see CSA Staff Notice 11-319.

Alpha proposals to bring dark liquidity changes to Intraspread functionality

Alpha Exchange yesterday published proposed public interest rule amendments intended to bring IntraSpread functionality in compliance with UMIR dark liquidity provisions that are coming into force on October 15, 2012. Specifically, the amendments would amend its IntraSpread dark pool functionality to remove dark orders that provide price improvement of 10% over the national best bid and offer, and introduce dark orders that can trade at the NBBO with SDL orders (orders with "fill or kill" duration that execute actively against dark orders) under certain circumstances.

The amendments are intended to come into effect on October 15, 2012. Comments are being accepted on the proposed amendments until August 27.

CSA publish proposed amendments to reflect designation of credit rating organizations

The CSA yesterday published proposed consequential amendments to a number of national instruments, policies and forms intended to implement the new regulatory regime surrounding designated rating organizations. As we discussed in an April post, the CSA recently adopted National Instrument 25-101, which sets out filing, disclosure and governance requirements applicable to such designated rating organizations.

The new requirement for a rating organization to apply for designation stems from the relevant securities legislation. On April, 30, 2012, the CSA announced the designation of DBRS Limited, Fitch, Inc., Moody’s Canada Inc. and Standard & Poor’s Rating Services (Canada) as “designated rating organizations”. The purpose of the consequential amendments is therefore to amend all references to “approved” credit organization to refer to “designated” rating organizations and to otherwise provide for consistent terminology across rules and regulations dealing with credit ratings.

Comments on the proposed amendments are being accepted until October 24, 2012.

IIROC releases draft guidance on deceptive trading practices

Earlier this week, the Investment Industry Regulatory Organization of Canada released proposed guidance in which it confirms that certain trading strategies, including "layering", "quote stuffing" and "spoofing" are considered to be manipulative and deceptive trading practices under UMIR. The guidance was published in light of the evolution in recent years towards automated order systems, including algorithmic trading and high frequency trading. According to the IIROC notice, while no consensus definition exists on what constitutes "high frequency trading" or "HFT", recent industry estimates suggest HFT activity makes up between 25% and 40% of trades on Canadian marketplaces.

IIROC is accepting comments on the proposed guidance until October 15, 2012. For more information, see IIROC Notice 12-0221.

Alberta and B.C. publish recognition orders for Maple acquisition of TMX

Yesterday, the British Columbia Securities Commission published its final recognition orders regarding Maple Group's acquisition of the TMX Group. Of particular interest, the recognition order respecting the TSX Venture Exchange requires that at least 25% of the directors of the TSX-V have relevant venture experience, that the TSX-V maintain regional advisory committees comprised of participants in the Canadian public venture capital market, and that the TSX-V maintain an office in Vancouver that has a role in certain functions.

The Alberta Securities Commission also issued its final orders related to the acquisition yesterday. Similar to provisions in the BCSC's order, the Alberta order contains provisions respecting director experience and the requirement that the TSX-V maintain an office in Alberta.

IIROC publishes draft guidance for dealers regarding leveraged investing

Earlier this week, the Investment Industry Regulatory Organization of Canada released draft guidance regarding the responsibilities of dealers and representatives that advise clients to use borrowed money to invest or who become aware that a client intends to make such leveraged investments. In releasing the guidance, IIROC cited an increasing number of cases where inappropriate leveraging strategies were recommended to clients or where risks were not sufficiently disclosed.

The guidance thus provides a checklist of issues that registered representatives should consider before making a recommendation to invest with borrowed funds. These considerations apply whether a client is engaging in leveraged strategies through margin loans advanced by the dealer (on-book borrowing), or loans from third parties (off-book borrowing).

The guidance also sets out the minimum controls that dealers should have in place, including with respect to suitability reviews of client accounts employing a leveraging strategy. Minimum controls expected of dealers also include procedures to ensure compliance with the requirements related to permitted referral arrangements.

Comments on the draft guidance are being accepted until October 4, 2012. For more information, see IIROC Notice 12-0208.

OSC approves Maple acquisition of TMX

Michael Kilby -

The Ontario Securities Commission has now issued final recognition orders regarding the Maple Group's proposed acquisition of TMX Group, Alpha Group and Canadian Depository Services.

Meanwhile, the Commissioner of Competition has also issued a “no-action letter” to Maple Group in respect of its proposed acquisition of TMX Group, Alpha Group and Canadian Depository Services. The Competition Bureau’s review of the Maple / TMX transaction was extensive. Maple Group (whose investors are Alberta Investment Management Corporation, Caisse de dépôt et placement du Québec, Canada Pension Plan Investment Board, CIBC World Markets Inc., Desjardins Financial Group, Dundee Capital Markets Inc., Fonds de solidarité des travailleurs du Québec (F.T.Q.), National Bank Financial & Co. Inc., Ontario Teachers' Pension Plan, Scotia Capital Inc., TD Securities Inc. and The Manufacturers Life Insurance Company) announced on May 15, 2011, in the midst of the failed bid by the TSX to merge with the LSE, that the Group had submitted a proposal to acquire the TMX Group. Maple filed an application for an advance ruling certificate on June 7, 2011. The transaction was therefore under active Competition Bureau review for a period of some 13 months.   

The Commissioner stated in a press release that “the measures contained in the OSC's final recognition orders materially change the regulatory environment sufficient to substantially mitigate the Bureau's competition concerns” thereby addressing the serious competition concerns that the Bureau had previously communicated to Maple in two areas: equities trading, and post-trade services, including clearing, settlement and depository services. 

Notably, there is no consent agreement under the Competition Act in respect of the proposed transaction, with the result that beyond the standard one-year period after closing within which the Commissioner may challenge a transaction on the grounds that it substantially lessens or prevents competition, there will be no ongoing monitoring or enforcement of any competition law remedy.  Such ongoing monitoring and regulation will instead fall to the OSC and other securities law regulators.

TSX proposes providing "post order" functionality to dark orders

The Toronto Stock Exchange yesterday proposed providing optional "post only" order functionality for dark orders on the TSX. Currently, the post only feature is only offered for visible orders. According to the TSX, the expanded feature will "encourage all potential liquidity providers to post price improved liquidity to the benefit of retail, institutional or dealer order flow."

IIROC publishes circuit breaker levels for Q3 2012

Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 12-0207 setting out its circuit breakers for the third quarter of 2012, which are set in coordination with those in 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 Q3 2012 are 1,250 points, 2,500 points and 3,750 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,150 points; Level 2 (20%) - 2,300 points and Level 3 (30%) - 3,400 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.

Note: The thresholds in the original IIROC notice were inadvertently transposed. An updated notice is expected soon.

SEC prohibits listings of issuers not in compliance with compensation requirements

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

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

Regulators adopt national policy on electronic trading

The Canadian Securities Administrators today announced the adoption of National Instrument 23-103 Electronic Trading. The Instrument and its Companion Policy are intended to address the risks of electronic trading, specifically with respect to credit risk, market integrity risk, technology or systems risk and regulatory arbitrage risk. 

As we discussed in a post last year, the CSA initially proposed the Instrument in April 2011, and the final version addresses the public comments received. Ultimately, the Instrument sets out requirements with respect to controls, policies and procedures that are applicable to marketplace participants, marketplaces and the use of automated order systems. Notably, however, while the 2011 proposal included requirements regarding the provision of direct electronic access, the final version of the Instrument excludes such requirements. According to the CSA notice, in considering those particular provisions, it was determined that similar forms of marketplace access, such as dealer-to-dealer routing, raise risks similar to those of direct electronic access. As such, the CSA and IIROC intend to release proposed rules in the upcoming months intended to ensure that similar forms of marketplace access are treated similarly.

Further, those jurisdictions that are a party to MI 11-102 Passport System (all jurisdictions other than Ontario) have also announced amendments to permit the use of the passport system with the Instrument. In conjunction with the CSA's amendments, the Investment Industry Regulatory Organization of Canada has also published proposed changes to its Universal Market Integrity Rules to introduce supervision and gatekeeper obligations for IIROC Dealer Members and align UMIR requirements to NI 23-103. Draft guidance relating to the new supervisory requirements under UMIR were also released.

Assuming the requisite ministerial approvals, the Instrument will come into force on March 1, 2013. For more information on IIROC's releases, see IIROC Notices 12-0200 and 12-0201.

HMRC accepts no 1.5% stamp duty charge on overseas fundraising by UK companies

Jeffrey Keey and Kate DaSilva -

Her Majesty’s Revenue and Customs (HMRC) recently announced that it would not appeal the February 2012 UK First-tier Tribunal decision in HSBC Holdings Plc and The Bank of New York Mellon Corporation v. The Commissioners for Her Majesty’s Revenue & Customs in which it was held that the 1.5% stamp duty reserve tax (SDRT) charge on the issue of shares of a UK company to a depositary or clearance system outside the EU was in breach of EU law.

This is a welcome announcement for UK companies seeking to raise capital as they will no longer be faced with having to bear the 1.5% duty which previously applied when they issued shares on a fundraising into depositary or clearance systems (whether within or outside the EU). Duty previously paid may also be reclaimed.

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Securities regulators consider regulation of proxy advisory firms

Mihkel Voore -

The Canadian Securities Administrators today released a consultation paper considering concerns raised by market participants regarding the services provided by proxy advisory firms. The concerns identified in the paper include those with respect to: (i) potential conflicts of interest; (ii) perceived lack of transparency; (iii) potential inaccuracies and limited engagement with issuers; (iv) potential corporate governance implications; and (v) the extent of reliance by institutional investors on recommendations.

Ultimately, the objectives of the consultation are to obtain information and views regarding the concerns raised, as well as to outline potential regulatory responses. The consultation paper specifically requests feedback on a number of possible regulatory responses to the concerns identified, including requiring that proxy advisory firms: (i) separate proxy voting services from advisory or consulting services in order to address potential conflicts; (ii) disclose the analysis concerning vote recommendations, as well as internal procedures, guidelines, assumptions and sources of information supporting recommendations; and (iii) implement fair and transparent procedures for developing corporate governance standards, and ensure that these procedures and standards are publicly disclosed, in light of the potential impact on issuers of the policies recommended by proxy advisory firms.

The paper also considers existing regulatory frameworks, such as those respecting adviser registration and proxy solicitation, and finds these existing regimes inappropriate for the regulation of proxy advisory firms. As such, the paper recommends that any proposed regulatory framework include the adoption of a new, stand-alone securities regulatory instrument. 

Comments on the consultation paper are being accepted until August 20, 2012. For more information, see Consultation Paper 25-401 Potential Regulation of Proxy Advisory Firms.

CSA update proposals regarding Fund Facts delivery

The CSA today published for a second time proposed amendments to NI 81-101 Mutual Fund Prospectus Disclosure regarding the delivery of Fund Facts following the purchase of a mutual fund. As we discussed last year, the CSA initially released their Stage 2 proposals in August 2011, and the current version of the amendments are intended to address stakeholder feedback.

Stage 2 of the point of sale disclosure framework is intended to allow the delivery of Fund Facts to satisfy the requirements under securities legislation to deliver a prospectus within two days of buying a mutual fund. The changes published today focus primarily on the requirements regarding the presentation of risk in the Fund Facts document.

Comments on the proposed amendments are being accepted until September 6, 2012.

CSA Derivatives Committee recommends mandatory CCP clearing of eligible OTC derivatives

Yesterday, the Canadian Securities Administrators published Consultation Paper 91-406 describing the CSA Derivatives Committee's proposals relating to central counterparty clearing of over-the-counter derivatives. The consultation paper is the latest in a series of eight papers intended to build on the high-level proposals found in Consultation Paper 91-401 released in November 2010.

Ultimately, the paper proposes that regulators make CCP clearing of eligible OTC derivatives mandatory. Under the Committee's recommendations, CSA members would also develop rules and procedures to determine the eligibility of OTC derivatives contracts for central clearing and procedures for the recognition of CCPs and the approval of CCP rules and policies in regards to the clearing of OTC derivatives contracts.

Comments on the consultation paper are being accepted until September 21, 2012.

IOSCO releases report on regulation of DMIs

Margaret Grottenthaler -

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

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

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

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

Amendments to marketplace and trading rules in force July 1

The Ontario Securities Commission announced today that amendments to NI 21-101 Marketplace Operations, NI 23-101 Trading Rules, their companion policies and related forms to update and streamline the instruments' regulatory and reporting requirements have now received Ministerial approval. As previously discussed, the relevant changes will come into force on July 1, 2012, except for Form 21-103F3, which will come into force on December 31, 2012. As previously announced, OSC Rule 21-501 Deferral of Information Transparency Requirements for Government Debt Securities in National Instrument 21-101 -- Marketplace Operation is also being repealed.

TSX staff concerned about bundling blocks under NCIBs

Staff of the Toronto Stock Exchange released a notice last week providing guidance on the TSX Company Manual's provisions regarding the use of block purchase exemptions under normal course issuer bids. Specifically, TSX staff addressed the practice of dealers bundling pre-existing blocks to sell into one purchase order under an NCIB.  In the view of TSX staff, such bundling is considered inconsistent with the block purchase exemption since it allows issuers to exceed the one block per week limitation.

The guidance notice also addressed the issue of securities purchased in error under an NCIB. According to TSX staff, such securities purchased in error under an NCIB that are taken into inventory by the buying broker firm may not be resold into an NCIB since such trades would be considered pre-arranged.

Securities regulators continue their review of the "accredited investor" and other prospectus exemptions

Ramandeep Grewal -

The Canadian Securities Administrators today published an update on the status of their review of the “$150,000 minimum amount” and “accredited investor” exemptions. As we discussed in a blog post last year, CSA staff published a consultation paper in November, 2011 on the subject and requested feedback from market participants.

Today's update provides a short overview of some of the comments received in response to the consultation paper, including with respect to the impact that any changes to the exemptions would have on capital raising and investment opportunities. As expected, the CSA received mixed feedback. With respect to the accredited investor exemption, some respondents urged the CSA to keep the status quo, while others suggested a broader exemption to provide better access to capital for business and investment opportunities for the exempt market. Some of the suggestions included lowering the prescribed income and asset thresholds or adding new categories based on an investor’s education, work experience or investment experience.

Respondents also gave mixed feedback on the $150,000 minimum investment amount exemption, ranging from criticism of it being a flawed basis on which to measure investor sophistication to support on the basis of its simplicity and usefulness when no other exemption is available. As we discussed back in January of this year, the SEC undertook a similar review of exemptions available under the Securities Act of 1933, adopting an amended “accredited investor” net worth standard.

Moving forward, the CSA also intend to analyze information from exempt distribution reports before making any further recommendations and expect to publish their conclusions later this year. Of particular note, the notice suggests that some CSA jurisdictions are also considering expanding their review to include other capital raising exemptions, including the “offering memorandum” exemption, which we note is not universally available throughout Canada. The OSC also announced today that it is broadening the scope of its exempt market review to consider the introduction of new prospectus exemptions, and intends to publish a second consultation notice seeking additional public feedback.

While it is unclear whether any specific exemptions will be formally considered, as we noted in a post last month, a "crowdsourcing" exemption in the U.S. has recently garnered much publicity. Whether any additional exemptions are ultimately adopted, however, remains to be seen.

U.S. adopts JOBS Act, containing crowdfunding provisions and benefits for FPIs

On April 5, U.S. President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a law intended to help small businesses and startups raise capital. As we discussed in a post earlier this year, the legislation provides a "crowdfunding" registration exemption for transactions involving individual investments not exceeding certain thresholds based on an investor's income and net worth.

The amount raised under the crowdfunding exemption must also be limited to an aggregate annual amount of $1 million. The issuer or intermediary will also have to comply with certain requirements in order to utilize the exemption, including with respect to providing investor warnings, and resales of any securities purchased would be limited for one year.

Of particular interest to Canadian companies are the Act's provisions respecting emerging growth companies (those with annual gross revenues of less than $1 billion), which also apply to foreign private issuers. Among other things, EGCs will now be permitted to communicate, orally or in writing, with qualified institutional investors and institutional accredited investors to gauge interest in a potential offering prior to the filing of a registration statement.

The Act will also affect the disclosure obligations of EGCs by, among other things, permitting an EGC to provide only two years of audited financial statements in an IPO registration statement instead of three years and reducing public company reporting requirements post-IPO. For example, the JOBS Act amends the Sarbanes-Oxley Act of 2002 to exempt EGCs from the requirement that an auditor attest to and report on management's assessment of internal controls over financial reporting.

IIROC requests comments on marketplace threshold rules

The Investment Industry Regulatory Organization of Canada (IIROC) recently proposed a set of principles intended to guide it as it considers formal proposals to establish marketplace price and volume thresholds. Specifically, two guiding principles are proposed, namely (i) that marketplace thresholds should generally preclude the execution of orders that would otherwise require regulatory intervention by IIROC due to the trigger of a single-stock circuit breaker or the application of policies regarding the variation and cancellation of trades; and (ii) that the application of marketplace thresholds should have the least amount of impact on price discovery and access to tradable liquidity.

The release considers existing mechanisms to control volatility and notes that IIROC has issued guidance or request for comments with respect to single-stock circuit breakers, regulatory intervention for the cancellation or variation of trades and market-wide circuit breakers. IIROC notes, however, that these mechanisms are based on price impact and are not directly affected by the volume of an order. Ultimately, IIROC requests comments on all aspects of controlling price volatility in the Canadian marketplace and specifically on a number of questions, including: (i) whether marketplaces should be required to adopt a form of marketplace thresholds; (ii) whether the proposed guiding principles are appropriate and whether there are additional ones that should be considered; and (iii) whether marketplace thresholds should be more flexible during periods of natural volatility. Comments are being accepted until August 8, 2012.

MFDA releases strategic plan through 2014

The Mutual Fund Dealers Association of Canada (MFDA) has released a new strategic plan for the period through 2014. Specifically, the MFDA identifies four key strategic goals for itself in the plan, namely: (i) enhancing collaboration with the industry; (ii) promoting investor confidence and ensuring the MFDA continues to be an active participant in the Canadian securities regulatory landscape; (iii) continuing to pursue staff excellence; and (iv) ensuring that the MFDA continues to pursue opportunities for process efficiencies so that it operates in a responsible and effective manner. For more information, see MFDA Bulletin #0525-M.

CDS proposes amendments to buy-in process functionality

The OSC today published a proposal to amend functionality of CDS' Continuous Net Settlement Service buy-in process. Specifically, the changes would (i) allow the receiver (buyer) to select the specific deliverers (sellers) they wish to grant or deny extensions to; (ii) enhance the Deliverer Buy-in List screen to increase clarity of the status of buy-in extensions; and (iii) introduce a new option that will allow the receiver to instruct the system to automatically create repeat buy-ins.

According to CDS, the proposed amendments will provide processing efficiencies and management flexibility in the buy-in process. Comments on the proposals will be accepted for 30 days from today's publication.

Proposed recognition orders related to Maple acquisition published by OSC

On May 3, the Ontario Securities Commission published a notice summarizing the public comments received to date on Maple Group's proposed acquisition of TMX Group and identifying changes to the application since its original publication in October 2011. The notice also contains a proposed order recognizing Maple Group, TMX Group and TSX as exchanges. According to the OSC, the proposed order, which also approves the beneficial ownership by Maple of more than 10% of each of TMX Group and TSX, was released following an extensive review of Maple Group's acquisition proposal.

The recognition order also sets out various terms and conditions applicable to Maple, TMX Group and TSX, including with respect to governance, fee models and financial reporting. Further, a separate order was published to recognize the Canadian Depository for Securities Limited and CDS Clearing and Depository Services as clearing agencies, subject to various terms and conditions.

The OSC is accepting comments on the proposed orders, including their terms and conditions,  until June 4, 2012.

More on the CSA's proposed end-user exemption

Margaret Grottenthaler -

As we discussed last month, the Canadian Securities Administrators Derivatives Committee recently released the latest in a series of eight papers intended to build on the high-level proposals found in Consultation Paper 91-401 regarding the regulation of OTC derivatives. Specifically, Consultation Paper 91-405 considers the scope and characteristics of a proposed end-user exemption to address market participants that generally only trade to hedge commercial risks. According to the paper, this limited segment of end-users, not systemically important to the market, should be exempted from most of the proposed regulations concerning OTC derivatives. The CSA are accepting comments on the consultation paper until June 15, 2012.

Meeting Requirements

The Consultation Paper considers various criteria for determining who should qualify for the end user exemption. According to the CSA's proposal, an end user would include participants that: (i) trade for their own account; (ii) are not financial institutions; and (iii) hedge to mitigate commercial risks related to the operation of their business or a related affiliated entity or series of legal entities within that affiliated group. End users that otherwise meet the criteria for the exemption may still be found ineligible for the exemption, however, if they are deemed to be "Large Derivatives Participants" considered key participants in the market or whose default would represent a systemic risk to the market. An upcoming consultation paper on registration is expected to consider the thresholds for Large Derivatives Participants. The Committee also specifically rejected including certain criteria in determining whether a participant qualifies as an end-user, including those based on: (i) trade volume or notional dollar values of trades; (ii) sector specific exceptions; and (iii) standardized contracts and clearing.

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Changes to short sales, failed trades and dark liquidity moved to October 15

IIROC this week announced a change in the implementation dates for UMIR amendments respecting short sales and failed trades, previously scheduled to occur on September 1, 2012, to October 15, 2012. Meanwhile, the implementation of amendments respecting dark liquidity, previously scheduled to occur on October 10, 2012, has now also been changed to October 15, 2012. According to IIROC, the dates have been consolidated to facilitate the technical changes that market participants, marketplaces and service providers need to make and to provide for one testing window for the changes. For more information, see IIROC Notice 12-0158.

OSC hosts meeting of international regulators regarding OTC derivatives

On May 4, the Ontario Securities Commission released a statement regarding a meeting held in Toronto earlier this month and attended by various international regulatory agencies regarding the regulation of OTC derivatives. Various issues surrounding implementation were discussed, including transparency, margin for uncleared derivatives, coordination of clearing mandates, access to data in trade repositories, and cross border clearing house crisis management. Ultimately, the meeting's purpose was to provide a forum for discussion among the regulators as they work toward international harmonization of the regulatory requirements.

In addition to the OSC and Quebec's Autorité des marchés financiers, the meeting included representatives from the Australian Securities and Investments Commission, Brazil's Comissão de Valores Mobiliários, the European Commission and European Securities and Markets Authority, Hong Kong's Securities and Futures Commission, Japan's Financial Services Agency, the Monetary Authority of Singapore, the Swiss Financial Market Supervisory Authority, and the U.S. Commodity Futures Trading Commission and Securities and Exchange Commission.

Stock dividend programs - Is it time to turn off the DRIP?

Keith Chatwin and Doug Richardson -

For as long as corporations have been paying dividends and trusts have been paying distributions, issuers have been seeking ways to encourage their securityholders to reinvest those cash payments into the issuer. These programs have typically taken the form of dividend or distribution reinvestment plans (DRIPs), which in their various incarnations have enabled securityholders to direct that cash dividends or distributions be used to acquire additional securities of the issuer from treasury or the open market; at the prevailing market price or at a discount, some with an ability to contribute further cash to acquire even more securities and, more recently, with an ability to direct those securities to a plan broker for subsequent sale in exchange for a premium cash payment pursuant to so-called “premium” DRIPs. DRIPs have largely been a win-win scenario, enabling securityholders to maximize their investment in an issuer in a convenient and economical way without incurring service charges or brokerage fees while at the same time representing a significant source of capital for issuers without the need to undertake a prospectus qualified offering or private placement with the associated expense and potential liability.

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SIGMA X Canada ceases operations

According to an IIROC notice issued last week, SIGMA X Canada ceased operations as of the end of trading on April 27, 2012. SIGMA X operated as an alternative trading system, or ATS, and began trading Canadian listed securities in October 2011. For more information, see IIROC Notice 12-0148.

CSA designate rating organizations under NI 25-101

On April 30, the Canadian Securities Administrators announced the designation of DBRS Limited, Fitch, Inc., Moody's Canada Inc., and Standard & Poor's Rating Services (Canada) as designated rating organizations under National Instrument 25-101 Designated Rating Organizations. As we discussed last month, the CSA recently adopted NI 25-101, which sets out a regulatory framework for the oversight of credit rating organizations.

According to the CSA, the four rating agencies granted DRO status are in compliance in all material respects with relevant U.S. federal securities laws applicable to nationally recognized statistical rating organizations, which are equivalent to the obligations under NI 25-101. Under the designation orders, each DRO will have a six month transition period to fully implement all NI 25-101 requirements.

IIROC proposes changes to execution and reporting of off-marketplace trades

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

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

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

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CSA Staff identify issues in exempt distribution form filings

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

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

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

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

No more 1.5 % Stamp Duty Charge on overseas fundraising by UK companies?

Jeffrey Keey -

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

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

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

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CSA and IIROC announce implementation of dark liquidity framework

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

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

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

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

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

Ontario approves various regulatory amendments

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

CSA release consultation paper on derivatives end-user exemption

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

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

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

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

Omega ATS proposes allowing "iceberg" orders

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

IIROC webcast considers "accredited investors" issues

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

IIROC publishes circuit breaker levels for Q2 2012

The Investment Industry Regulatory Organization of Canada (IIROC) today published Notice 12-0122 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets for the second quarter of 2012.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for Q2 2012 are 1,300 points, 2,600 points and 3,900 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,250 points; Level 2 (20%) - 2,500 points and Level 3 (30%) - 3,750 points, and result in trading halts ranging from 30 minutes to the balance of the trading session, depending on the time of day and magnitude of the market decline.

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

Kate DaSilva and Stanley McKeen -

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

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IIROC announces implementation of core elements of CRM project

Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) announced the approval of amendments to Dealer Member Rules to adopt core elements of its Client Relationship Model (CRM) Project for investment dealers. Specifically, the amendments provide for(i) improved relationship disclosure, including requiring that investors receive more information on account types and transaction and account fees; (ii) enhanced standards regarding conflicts of interest management and disclosure; (iii) increased suitability assessment standards to ensure that investments are appropriate to investors' objectives and time horizon; and (iv) account performance reporting.

While most of the amendments will come into force over the next two years, the account performance reporting requirements have been deferred until the CSA performance reporting requirement have been finalized. The amendments were last published for comment in January 2011. The approved amendments reflect revisions made to address comments received.

Meanwhile, IIROC also published guidance to assist dealers on compliance with the new requirements, as well as guidance relating to "know your client" and suitability obligations. For more information, see IIROC Notices 12-0107, 12-0108 and 12-0109.

OSC recommendations for emerging market issuers, including auditors and underwriters

Jay C. Kellerman, Simon A. RomanoBrian G. Hansen -

On March 20, the Ontario Securities Commission published a staff notice outlining the results of its regulatory review of emerging market issuers. The review was prompted by recent concerns involving some emerging market issuers, given the growing importance of these issuers to global and Canadian capital markets. As we discussed earlier this week, OSC Staff Notice 51-719 Emerging Market Issuers Review (the Staff Notice) identifies the following four principal areas of concern: (i) issuer governance and disclosure; (ii) the adequacy of the external audit function; (iii) due diligence conducted by underwriters; and (iv) the exchange listing and approval process. 

The review encompassed issuers listed on the TSX, TSXV or the CNSX whose principal active operations were outside of Canada and in regions such as Asia, Africa, South America and Eastern Europe.  This resulted in a pool of 108 issuers with a total market capitalization of $40 billion (in contrast to over 4,000 exchange-listed reporting issuers in Canada with a market capitalization of $2.39 trillion).

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CSA adopt size threshold for dark orders and other amendments to marketplace and trading rules

Ramandeep Grewal -

The Canadian Securities Administrators today announced the adoption of amendments to NI 21-101 Marketplace Operations, NI 23-101 Trading Rules, their companion policies and related forms to update and streamline the instruments' regulatory and reporting requirements. As we discussed last year, the CSA initially proposed amendments to the instruments in March 2011.

While minor changes have been made to the original proposals in response to comments received, the changes are not considered material by the CSA. Most of the amendments are expected to come into force on July 1, 2012.

Among other things, the amendments relate to increased transparency of marketplace operations and will update and streamline regulatory and reporting requirements, including requirements relating to conflicts of interest and outsourcing arrangements, and provide guidance on issues such as when a dealer that uses an automated system to match order flow would be considered a marketplace, the types of “services” encompassed under the fair access requirement  and when indications of interest would be considered to be firm orders. 

The amendments also implement further restrictions on the pre-trade transparency exemption contained in NI 21-101 to include a requirement that orders meet a specified size threshold in order to be exempt.  NI 21-101 generally requires that any marketplace that displays orders of exchange-traded securities must provide information regarding the order to an information processor.  However, there is an exemption that permits “dark pools” or “dark orders”  to operate and for orders to be entered with no pre-trade transparency. The actual threshold is not included in the amendments but is the subject of a joint CSA/IIROC initiative under Staff Notice 23-311 as we discussed last August. The Companion Policy to NI 21-101 has also been amended to clarify when pre-trade transparency requirements, or exemptions, may apply to “indications of interest” or “IOIs”.

In jurisdictions that are a party to MI 11-102 Passport System (all but Ontario), amendments were also published to permit certain exemptive relief applications. Ontario, meanwhile, has announced the repeal of OSC Rule 21-501 Information Transparency Requirements for Government Debt Securities in National Instrument 21-101 - Marketplace Operation to correspond with the amendments taking effect.

Alpha Exchange to launch trading on April 2

The Investment Industry Regulatory Organization of Canada (IIROC) announced on March 21 that Alpha Exchange Inc. will begin trading as of Monday, April 2, 2012. Therefore, the last day of trading on Alpha ATS will thus be on Friday, March 30. As we discussed in December 2011, the OSC approved Alpha Group's application to become a recognized exchange late last year. Upon the commencement of trading on Alpha Exchange, all open orders with an expiry date beyond the last trading date on Alpha ATS will automatically be migrated to the new exchange. For more information, see IIROC Notice 12-0103.

TMX migrating to IIROC's STEP surveillance platform

Earlier this week, IIROC announced that it has reached an agreement with the TMX Group to employ its Surveillance Technology Enhancement Platform (STEP) to provide single-market monitoring services to the TSX and TSX-V. The platform, launched in 2010, provides IIROC with a comprehensive multi-market surveillance system. IIROC's agreement with the TMX Group is effective April 1, 2012.

IOSCO issues consultation report on ETFs

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

Canadian regulators sign MOU with ESMA regarding credit rating agencies

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

Congress considers registration exemption for "crowdfunding"

The U.S. House of Representatives recently passed a "crowdfunding" bill that would allow companies to sell securities to individual investors via non-traditional means such as social networking websites. Specifically, the proposed amendments to the Securities Act of 1933 would provide a registration exemption for transactions involving individual investments limited to the lesser of $10,000 and 10% of an investor's income. The amount raised under the exemption would also be limited to an aggregate annual amount of $1 million, or $2 million if the issuer provided potential investors with audited financial statements. The issuer or intermediary would have to comply with certain requirements in order to utilize the exemption, including with respect to providing investor warnings, and resales of any securities purchased would be limited for one year.

While President Obama has communicated his support for the bill, it has yet to pass the Senate. Whether the bill ultimately survives the legislative process remains to be seen, but advocates are clearly excited at the potential of allowing small businesses to use websites like Kickstarter or social networking sites like Facebook to offer stock to small-stake investors.

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SEC issues guidance on amended accredited investor net worth standard

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

Mutual fund dealers now required to send clients quarterly statements

On March 2, the Mutual Fund Dealers Association of Canada (MFDA) announced the adoption of amendments to MFDA Rule 5.3 (Client Reporting), which are now in effect. The amendments, intended to ensure that the frequency of account statement delivery requirements under MFDA rules are consistent with those established under NI 31-103, require mutual fund dealers to deliver a statement to all clients at least once every three months. The amendments were initially proposed in October 2011. For more information, see MFDA Bulletin #0521-P.

IIROC proposes guidance on short sale order designations

In light of its announcement last week that UMIR amendments will soon result in the repeal of pricing restrictions on short sales, IIROC has also issued proposed guidance on short sale and short-marking exempt order designations. Specifically, the proposed guidance is intended to assist in the correct use of the designations. An earlier version of the guidance was initially released last year.

IIROC expects to issue a final version of the guidance in advance of the date on which the amendments to UMIR are scheduled to take effect. IIROC is accepting comments on the proposed guidance until May 2. For more information, see IIROC Notice 12-0079.

IIROC releases study on effects of short sale circuit breakers

Last week, the Investment Industry Regulatory Organization of Canada released a study that considered whether short selling activity on Canadian markets of inter-listed securities is affected by the triggering of short sale circuit breakers in the U.S. Specifically, the study sought to determine whether cases of U.S. circuit breakers being triggered during the study period in early 2011 resulted in any systemic redirection of short selling activity to Canadian markets.

Ultimately, the study found that such circuit breaker events in the U.S. had minimal effects on short selling activity on Canadian markets. According to IIROC, the results of the study and other studies on the subject demonstrate that Canada has not had the problems with short sales and failed trades experienced in other jurisdictions.

CSA outline concerns regarding issuers' financial condition during prospectus offering

The CSA today published a staff notice outlining its approach to situations where it has concerns with the financial condition of an issuer and/or the sufficiency of proceeds from the offering during a prospectus review. According to the CSA, there are limited circumstances where such concerns may lead to a refusal to issue a prospectus receipt.

The notice specifically identifies five areas of concern, namely with respect to: (i) missing information regarding offering amount and pricing; (ii) offering structure; (iii) use of proceeds disclosure; (iv) risk factor disclosure; and (v) representations to support ability to continue operations. Of particular interest, guidance is also provided to assist issuers in addressing each concern.

According to the notice, the list is not exhaustive and the CSA state that they will continue to assess and review each prospectus on its own merits. For more information, see Staff Notice 41-307.

CSA and IIROC ask for feedback on trade transparency

The Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada released a joint notice today requesting feedback from investors and market participants regarding disclosure and transparency measures related to short sales and failed trades. The notice was published in conjunction with the announcement that IIROC will adopt amendments to UMIR as of September 1, 2012 to repeal pricing restrictions on short sales, first proposed last year.

Ultimately, the notice seeks feedback on various approaches to enhance disclosure of short sales and failed trades as part of an ongoing project between IIROC and the CSA to monitor international developments and regulatory approaches. The notice outlines these developments and poses specific questions to stakeholders regarding potential regulatory changes.

Comments are being accepted until May 31. For more information, see CSA/IIROC Joint Notice 23-312 and IIROC Notice 12-0078.

OSC releases 2012-2015 Strategic Plan

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

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

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

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

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

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

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

Alan D’Silva, Lesley Mercer and Ingrid Minott  -  

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

Background

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

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CSA release 2011 enforcement report

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

EU adopts new regulation on short selling and credit default swaps

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

Proposed amendments to prospectus marketing rules: road shows

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

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

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

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Canadian regulators sign MOU with Australian regulator

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

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

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

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

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

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

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

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

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

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

The paper is one of a series of eight papers building on the high-level proposals found in Consultation Paper 91-401 released in November 2010. For more information, see CSA Consultation Paper 91-404 Derivatives: Segregation and Portability in OTC Derivatives Clearing.

CFTC and SEC release joint report on international swap regulation

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

IIROC publishes proposed dealer margin rules

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

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

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

TSX adopts Due Bill initiative

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

IIROC implements single-stock circuit breakers

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

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

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

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

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

IIROC provides guidance on seeking UMIR exemptions

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.

TSX amends rules relating to market making

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.

Quebec adopts material housekeeping amendments to derivatives legislation

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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AMF tables proposed rules on the derivatives qualification requirement in Quebec

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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IIROC proposes more generic marketplace disclosure on trade confirmations

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.

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

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

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

BCSC extends conditions for registration of investment dealers trading in U.S. OTC markets

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.

IIROC releases guidance allowing dea