Header graphic for print

Canadian Securities Regulatory Monitor

News and Insight

Compensation obligatoire des dérivés de gré à gré par contrepartie centrale au Canada – Mise à jour

Posted in AMF, CSA
Sonia StruthersCandace PalloneMary Jeanne PhelanLaure Fouin

En 2015, les Autorités canadiennes en valeurs mobilières (ACVM) ont proposé de rendre obligatoire la compensation par contrepartie centrale de certaines transactions normalisées de dérivés de gré à gré en vue d’accroître la transparence sur le marché des dérivés de gré à gré et d’atténuer davantage le risque systémique avec le Règlement 94-101 sur la compensation obligatoire des dérivés par contrepartie centrale et l’Instruction générale relative au Règlement 94-101 (Règlement 94-101) ainsi que le Règlement 94-102 sur la compensation des dérivés et la protection des sûretés et des positions des clients et l’Instruction générale relative au Règlement 94-102 (Règlement 94-102).

Le Règlement 94-101 impose la compensation obligatoire par contrepartie centrale de certains dérivés de gré à gré normalisés, sous réserve des dispenses qui y sont prévues. Pour avoir un aperçu détaillé du Règlement 94-101, reportez-vous à notre article précédent sur le Règlement 94-101.

Le Règlement 94-102 vise à ce que la compensation des dérivés de gré à gré de clients locaux s’effectue de manière à protéger leurs positions et leurs sûretés et à renforcer la résistance des chambres de compensation à la défaillance d’un intermédiaire compensateur. Il prévoit des obligations en matière de séparation et de transférabilité des sûretés et des positions des clients ainsi que des obligations précises en matière de tenue de dossiers, de déclaration et de communication d’information. Pour avoir un aperçu détaillé du Règlement 94-102, reportez-vous à notre article précédent sur le Règlement 94-102.

Le 19 janvier 2017, les ACVM ont annoncé que, sous réserve de l’obtention des approbations nécessaires, le Règlement 94-101 entrera en vigueur le 4 avril 2017 et le Règlement 94-102, le 3 juillet 2017.

Les principales modifications apportées au projet de Règlement 94-102 de 2015 sont les suivantes : Continue Reading

OSFI Approves the Use of Notice-and-Access by Banks and Insurance Companies

Posted in Financial Servicecs
Ana BadourPatrick BoucherFraser BourneBarry J. Ryan

Under the notice-and-access process introduced under Canadian provincial securities laws in 2013, a public corporation can deliver its management information circular and financial statements to shareholders by posting those materials on SEDAR and an alternative website. The corporation must send a form of proxy to shareholders together with a notice informing shareholders of the SEDAR and non-SEDAR websites where such materials are posted, and how a paper copy of the materials can be requested and received free of charge. The notice-and-access process therefore allows issuers to mail a thinner set of materials to shareholders, rather than the full proxy package, allowing issuers to realize significant reductions in print, handling and postage costs, and to communicate with shareholders in a more environmentally-friendly way. Continue Reading

Mandatory Central Counterparty Clearing of OTC Derivatives in Canada – Update

Posted in AMF, CSA
Laure FouinCandace PalloneMary Jeanne PhelanSonia Struthers

In 2015, the Canadian Securities Administrators (CSA) proposed mandatory central counterparty clearing of certain standardized over-the-counter (“OTC”) derivatives transactions consistent with its goal to improve transparency in the OTC derivatives market and enhance the overall mitigation of systemic risk: National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives and its related Companion Policy 94-101CP (NI 94-101) and National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions and its related Companion Policy 94-102CP (NI 94-102).

NI 94-101 requires certain counterparties to clear specified standardized OTC derivatives through a central counterparty clearing agency, unless an exemption is available in the instrument. For a detailed overview of NI 94-101, we refer you to our previous article on NI 94-101.

NI 94-102 is designed to protect a local customer’s positions and collateral when clearing OTC derivatives and to improve clearing agencies’ resilience to default by a clearing intermediary: it includes requirements related to the segregation and portability of customer collateral and positions as well as detailed record-keeping, reporting and disclosure requirements. For a detailed overview of NI 94-102, we refer you to our previous article on NI 94-102.

On January 19, 2017, the CSA announced that, subject to necessary approvals, NI 94-101 would come into force on April 4, 2017 and NI 94-102 would come into force on July 3, 2017.

The main amendments made to the 2015 proposed draft of NI 94-102 are as follows:

  • Options on securities are not subject to the segregation and portability requirements. They remain subject to applicable securities regulations or derivatives regulations (in Québec) in order to maintain some consistency with the approaches adopted in the United States (US) and the European Union (EU).
  • Record retention provisions have been amended to avoid duplicative retention of records by both the clearing agencies and clearing intermediaries.
  • Provisions relating to the transfer of a customer’s positions and collateral upon default by a direct intermediary provide more flexibility to facilitate the transfer.
  • Substituted compliance is available where a foreign clearing intermediary or regulated clearing agency in compliance with comparable laws of the US or the EU is involved in clearing a local customer’s cleared derivatives. However, the retention of records, reporting on customer collateral to the customer and the regulator, and the segregation of customer collateral from other property of the customer requirements still apply.
  • Information on customer collateral required to be reported to regulators is required on an aggregate basis, rather than on an individual customer basis; however, there is no substitute compliance for the customer collateral reports requirements.

The main amendments made to the 2015 proposed draft of NI 94-101 are as follows:

  • Affiliated entities of a clearing participant are subject to NI 94-101’s clearing obligation only if its month-end gross notional amount of outstanding OTC derivatives exceeds CAD$ 1 billion, excluding intragroup transactions. A 90 day transition period is provided to such affiliated entities following the date on which it reaches the CAD$ 1 billion threshold.
  • A six month transition period after the effective date of NI 94-101 (expected to be April 4, 2017) is provided to market participants that are not clearing participants, but are subject to NI 94-101, in order to set up clearing relationships.
  • The companion policy to 94-101 specifies that parties may rely upon factual statements of the other party to determine whether the other party is subject to NI 94-101, as long as it does not have reasonable grounds to believe such statements are false.
  • The companion policy to 94-101 clarifies how to treat swaptions, complex swaps and packaged transactions: (a) swaptions entered into before the effective date of NI 94-101, even physically settled after the effective date, do not have to be mandatorily cleared; (b) counterparties do not have to disentangle a mandatory clearable component of a complex swap in order to clear that portion; however (c) counterparties must clear each mandatory clearable component of packaged transactions.
  • Substituted compliance is available to foreign derivatives dealers who are “local counterparties” if the mandatory clearable derivative is submitted for clearing in accordance with the mandatory clearing rules in the US or the EU.

In Quebec, the Autorité des marchés financiers (AMF) has published consequential amendments to Regulation 91-506 respecting Derivatives Determination (Regulation 91-506) and its related Policy Statement to Regulation 91-506 respecting Derivatives Determination in order to include references to NI 94-101 and NI 94-102.

Regulation 91-506 currently determines the scope of application of Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting. Once NI 94-101 and NI 94-102 come into force, Regulation 91-506 will also determine the scope of derivatives subject to mandatory clearing and protection of customer collateral rules.

Update on the CSA’s “Proxy Plumbing” Initiative

Posted in Industry News, Proposals
Rene SorellHeidi GordonShauvik Shah

The Ontario Securities Commission (OSC) recently held a roundtable on the “Proposed Protocols for Meeting Vote Reconciliation”. The purpose of this roundtable was to discuss issues identified during the consultation phase of CSA Multilateral Staff Notice 54-304, Final Report on Review of the Proxy Voting Infrastructure and Request for Comments on Proposed Meeting Vote Reconciliation Protocols (Staff Notice) as well as to discuss the OSC’s proposed next steps in implementing the protocols outlined in Annex A of the Staff Notice, which protocols are intended to address some of the widely accepted issues with the proxy voting infrastructure.

 Background on the Proxy Plumbing Initiative

Shareholder voting in Canada generally occurs through proxy voting as well as in person attendance. As most shareholders are not registered shareholders and hold their shares through intermediaries, proxy votes are typically submitted by intermediaries and not the actual shareholder. Intermediaries in turn hold their shares with a central depository, the Canadian Depository for Securities Limited (CDS). This indirect manner of holding shares is known as the “intermediated holding system”.

Various entities implement the processes used to tabulate proxy votes for shares held through intermediaries. The OSC refers to these processes as “meeting vote reconciliation”.

There have been concerns raised by issuers and investors, as outlined in the Staff Notice, that the proxy voting infrastructure and meeting vote reconciliation systems are inaccurate, unreliable and non-transparent in the following respects.

  1. Over-voting: over-voting is an instance of an intermediary submitting proxy votes and the meeting tabulator being unable to establish that the intermediary has any vote entitlements, or the number of proxy votes submitted exceeds the number of vote entitlements as calculated by the tabulator.
  2. Missing votes: voting results suggest proxy votes were not included in the tabulation and therefore went “missing”. Beneficial owners largely cannot find out whether a tabulator or meeting chair accepted their intermediary’s proxy votes.

Proposed Protocols

The protocols outlined in the Staff Notice aim to address two key issues: information gaps and communication gaps.

Information gaps relate to the fact that meeting tabulators do not always have the accurate and complete vote entitlement information they require to properly establish which intermediaries have vote entitlements for a meeting and how many vote entitlements these intermediaries have.

To address information gaps, the protocols provide guidance on: (i) the vote entitlement information intermediaries should provide to tabulators and how to generate this information; (ii) how the tabulator should use this information to establish which intermediaries are entitled to vote, and how many proxy votes they can submit; (iii) how the tabulator can match proxy votes to vote entitlement positions; and (iv) what the tabulator should do if it appears that depositories or intermediaries have not provided necessary vote entitlement information.

Communication gaps relate to the fact that there is no way to accurately and efficiently confirm that all necessary information has been sent and received by tabulators and intermediaries, such that problems giving rise to proxy votes being rejected or pro-rated at meetings can be detected in advance.

To address communication gaps, the protocols outlined in the Staff Notice provide guidance on: (i) the OSC’s expectation regarding tabulators, intermediaries and Broadridge (the main proxy voting agent for intermediaries) developing appropriate mechanisms to confirm that all votes submitted by Broadridge on behalf of intermediary clients have been received by the tabulator, as well as appropriate mechanisms to do so; (ii) steps tabulators should take to obtain missing vote entitlement information if the intermediary appears to the tabulator to be in an over-vote position; and (iii) how parties should communicate with each other where proxy votes from an intermediary are rejected, uncounted or pro-rated to enable beneficial owners to know if proxy votes submitted in respect of their shares were not accepted at a meeting and the reason why.

Results of the Roundtable

Panelists at the November 18 roundtable included representatives from Broadridge, the Governance Professionals of Canada, the Securities Transfer Association of Canada and institutional investors. A transcript of the roundtable can be viewed here.

Industry participants were generally supportive of the proposed changes. One of the key impediments identified to improving the system was an over-reliance on paper based systems, the costs of transforming which are unknown at this time.

Panelists noted that the primary unsettled issue arising from any Canadian Securities Administrators (CSA) proxy infrastructure reforms would be the allocation of increased costs between participants. Likewise, it was suggested that efficiency gains from new technology, such as blockchain, could actually reduce the cost of meeting vote reconciliation procedures over time.

Looking Ahead

The OSC hopes that the protocols will eventually lay the foundation in the future to eliminate paper and move to an electronic transmission of vote entitlement and proxy vote information, and develop end-to-end vote confirmation capability that would allow beneficial owners, if they wish, to receive confirmation that their voting instructions have been received by their intermediary and submitted as proxy votes, and that those proxies have been received and accepted by the tabulator.

The securities regulators aim to publish the final protocols as a CSA staff notice at the end of 2016 in time for the 2017 proxy season.

Proposed regulations to Bill C-25 have now been released, and they add clarity to contemplated changes to majority voting, notice-and-access procedures and diversity disclosure for public corporations governed by the Canada Business Corporations Act

Posted in Continuous and Timely Disclosure, Industry News, Proposals
David E. WoollcombeRobert HansenFraser BourneHeidi GordonShauvik Shah

On December 14, 2016, the Government of Canada published proposed regulations to Bill C-25. Bill C-25, which completed the second reading debate stage in the Parliament of Canada on December 9, 2016, would, if passed into law, result in important changes for public corporations that are governed by the Canada Business Corporations Act (CBCA).

For a summary of the proposed changes, see our previous post Bill C-25 contemplates important changes to director elections, notice-and-access procedures and other matters for public corporations governed by the Canada Business Corporations Act.

This post discusses updates regarding certain of the proposed changes based on new information provided in the proposed regulations.

Majority Voting

In our previous post, we noted that the Bill proposes to eliminate the plurality system by building majority voting into the CBCA. This significant change means that a director would only be elected if the number of votes cast in his or her favour represents a majority of the total number of votes cast at a shareholder meeting. The proposed regulations provide details on the circumstances in which a board of directors could effectively overrule the shareholders where a director nominee does not receive a majority of the votes cast in his or her favour.  The proposed regulations contemplate that a nominee who does not receive a majority of the votes could be appointed to the board by the directors only if the nominee is needed to meet one of the following two requirements under the CBCA:

  • to have at least two directors who are not officers or employees of the corporation or its affiliates; or
  • to have at least 25% of the directors be resident Canadians (or where a corporation has fewer than four directors, to have at least one resident Canadian).

By providing only two specific circumstances under which a board of directors could effectively overrule the shareholders where a director nominee does not receive a majority of the votes cast in his or her favour, the proposed changes to the CBCA are more rigid than the TSX’s existing majority voting rules discussed in our previous post.

Notice-and-Access

In our previous post, we noted that the Bill appears to propose to alleviate any existing questions about the ability of a CBCA corporation to make use of the notice-and-access process, but that the Bill itself did not propose to alleviate or provide an exemption to the requirement that CBCA corporations deliver annual financial statements. The proposed regulations, however, contain significant changes to existing financial statement delivery requirements under the CBCA.  Corporations using the notice-and-access process would only need to include a reference to a website link in the notice provided to shareholders and those not using notice-and-access would only have to send annual financial statements to those shareholders who request them. This will be welcome news to CBCA corporations looking to save on the costs of printing and mailing annual financial statements.

The proposed regulations also specify what documents are required to be sent by an intermediary to a beneficial owner under section 153 of the CBCA when a corporation is using notice-and-access.

We note that neither the proposed amendments to the CBCA nor the proposed regulations modify the management circular delivery requirement under section 150(1) of the CBCA in a way that permits the use of notice-and-access. As a result, it appears that corporations will continue to have to obtain an exemption from section 150(1) of the CBCA pursuant to section 151(1) of the CBCA in order to use notice-and-access unless a blanket exemption is provided under new section 258.3 of the CBCA or other adjustments are made to the proposed amendments and regulations prior to their coming into force.

Diversity

In our previous post, we noted that information released in connection with the Bill suggested we should expect additional changes regarding the disclosure of gender composition of boards and senior management of public CBCA corporations and a “comply or explain” approach to the disclosure of diversity policies. As anticipated, the proposed regulations confirm that the proposed CBCA gender disclosure rules would be consistent with the gender disclosure rules now mandated by Canadian provincial securities laws. However, the CBCA disclosure rules extend beyond gender diversity and would also require annual “comply or explain” disclosure regarding diversity other than gender among the directors and members of senior management.

Timing

As noted in our previous post, these changes are not expected to be enacted for some time, as the Bill still needs third reading in the House of Commons and three readings in the Senate.

The Finish Line: CSA Publishes Proposed Amendments in Final Phase of Modernization of Investment Fund Product Regulation

Posted in Amendments, Closed-End Funds, CSA, Investment Funds, Mutual Funds
Andrew ArmstrongMichael EldridgeMichael NicholasSean Sadler

On September 22, 2016, the Canadian Securities Administrators (the “CSA”) published CSA Notice and Request for Comment – Modernization of Investment Fund Product Regulation – Alternative Funds (the “Proposed Amendments”).  The Proposed Amendments represent the final phase of the CSA’s ongoing policy work to modernize investment fund product regulation in Canada (the “Modernization Project”).  While primarily aimed at the development of a more comprehensive regulatory framework for commodity pool mutual funds that are currently governed by National Instrument 81-104 – Commodity Pools (“NI 81-104”), if adopted, the Proposed Amendments will also have a meaningful impact on other types of mutual funds, including conventional mutual funds and exchange traded mutual funds (“ETFs”), as well as non-redeemable investment funds (“NRIFs”).

Comments on the Proposed Amendments have been requested by the CSA on or before December 22, 2016. We would be happy to discuss any comments or concerns you may have with respect to the Proposed Amendments.

Background to Proposed Amendments

Phase 1 of the Modernization Project, which came into force in 2012, focused primarily on publicly offered mutual funds. The first stage of Phase 2 of the Modernization Project, which mostly came into force in September 2014, introduced core investment restrictions and fundamental operational requirements for NRIFs and also introduced enhanced disclosure requirements for securities lending activities by investment funds.

The Proposed Amendments are the second and final stage of Phase 2 of the Modernization Project and have been in development for some time. The CSA first published an outline of a proposed regulatory framework for alternative funds (the “Alternative Funds Proposal”) in March 2013.  In June 2013, the CSA determined that it would consider the Alternative Funds Proposal at a later date in conjunction with certain investment restrictions for NRIFs that the CSA considered to be interrelated with the Alternative Funds Proposal (the “Interrelated Investment Restrictions”) as part of the second stage of Phase 2 of the Modernization Project.

Since NI 81-104 first came into force in 2002, the range of investment fund products and strategies in the domestic and international marketplace has expanded substantially. According to the CSA, the Proposed Amendments reflect the CSA’s efforts to modernize the existing commodity pools regime and to help facilitate more alternative and innovative investment strategies while maintaining the necessary restrictions to protect retail investors.  The Proposed Amendments seek to move most of the current regulatory framework applicable to commodity pools in NI 81-104 into National Instrument 81-102 – Investment Funds (“NI 81-102”) and to rename these funds “alternative funds”.  While the Proposed Amendments are principally focused on alternative funds, as mentioned above, they also include provisions that will impact other types of mutual funds, as well as NRIFs through the Interrelated Investment Restrictions.  The highlights of the Proposed Amendments are summarized below.

Highlights of Proposed Amendments

1.    Repeal of NI 81-104

  • The CSA is proposing to repeal NI 81-104.
  • The repeal of NI 81-104 will result in the operational framework and investment restrictions applicable to alternative funds being contained in NI 81-102 and will further the CSA’s goal of transforming NI 81-102 into the foundational operational rule for all investment funds.

2.    Definition of “Alternative Fund”

  • The CSA is proposing to replace the definition of “commodity pool” in NI 81-104 with a slightly broader definition of “alternative fund” in NI 81-102.
  • “alternative fund” will be defined in NI 81-102 as a mutual fund that has adopted fundamental investment objectives that permit it to invest in asset classes or adopt investment strategies that are otherwise prohibited but for prescribed exemptions from the investment restrictions in Part 2 of NI 81-102.

3.    Investment Restrictions

(a)  Concentration Restrictions

  • The CSA is proposing a concentration limit for alternative funds of 20% of NAV, rather than the 10% of NAV limit currently applicable to conventional mutual funds and commodity pools.
  • The Proposed Amendments will impose the same concentration limit of 20% of NAV on NRIFs – which are not currently subject to any concentration restrictions under NI 81-102. According to the CSA, one of the reasons it is proposing to impose concentration limits on NRIFs is that many NRIFs already limit the concentration of their investments to 20% of NAV at the time of purchase. However, this would clearly create a problem for certain narrowly focused NRIFs which would need to alter their investment strategies.

(b)  Illiquid Assets

  • NRIFs currently are not limited in their ability to invest in illiquid assets. The CSA is proposing to introduce a limit on investing in illiquid assets for NRIFs to ensure NRIFs are able to meet their redemption obligations.
  • Under the Proposed Amendments, NRIFs will not be permitted to invest in illiquid assets if, after the purchase, more than 20% of the fund’s NAV would be invested in illiquid assets, with a hard cap of 25% of NAV. The current investment restrictions on illiquid assets for mutual funds and commodity pools are 10% of the fund’s NAV, with a hard cap of 15% of NAV.
  • The CSA is not proposing to increase the permitted level of investment in illiquid assets for alternative funds or for other mutual funds but is seeking feedback on whether a higher illiquid asset limit might be appropriate for alternative funds that are prepared to offer redemptions on a less frequent basis so they can devote a larger proportion of their portfolios to illiquid holdings.

(c)  Fund-of-Fund Structures

  • The CSA is proposing to permit mutual funds (other than alternative funds) to invest up to 10% of their net assets in securities of alternative funds and NRIFs provided those funds are subject to NI 81-102.
  • The CSA is also proposing to permit mutual funds to invest up to 100% of their NAV in any other mutual fund (other than an alternative fund) that is subject to NI 81-102, rather than just those that file a simplified prospectus under National Instrument 81-101 – Mutual Fund Prospectus Disclosure (“NI 81-101”). The foregoing will codify existing exemptive relief and will permit a conventional mutual fund to invest up to 100% of its NAV in ETFs.
  • The Proposed Amendments will also allow mutual funds to invest in another investment fund as long as it is a reporting issuer in at least one Canadian jurisdiction, i.e. doing away with the requirement that the investee fund be a reporting issuer in the investor fund’s “local jurisdiction”.
  • Alternative funds will be permitted to invest up to 100% of their NAV in any other mutual fund (which includes other alternative funds) or NRIF provided the other fund is subject to NI 81-102.
  • The CSA is not proposing to make any changes to the fund-of-fund rules for NRIFs.

(d)  Borrowing, Short Selling and Combined Limit on Cash Borrowing and Short Selling    

  • The CSA is proposing to permit alternative funds to borrow up to 50% of their NAV and is also proposing to impose this borrowing limit on NRIFs which are not currently subject to any borrowing limits.
  • The CSA is also proposing to make borrowing for alternative funds and NRIFs subject to the following additional conditions:
    • Funds may only borrow from entities that would qualify as an investment fund custodian under s. 6.2 of NI 81-102, i.e. essentially banks and trust companies in Canada (or their dealer affiliates);
    • Where the lender is an affiliate of an alternative fund’s investment fund manager, approval of the fund’s independent review committee will be required under National Instrument 81-107 – Independent Review Committee for Investment Funds (“NI 81-107”); and
    • Any borrowing agreements must be in accordance with normal industry practice and be on standard commercial terms.
  • The CSA is proposing to increase the aggregate market value of securities that can be sold short by alternative funds to 50% of the NAV of the fund, an increase from the 20% of NAV currently applicable to all mutual funds (including commodity pools). The CSA is also proposing to apply these limits to NRIFs which currently are not subject to any such restrictions.
  • The CSA is also proposing to increase the aggregate market value of all securities of any issuer that may be sold short by an alternative fund to 10% of the NAV of the fund at the time of the short sale, an increase from the current limit applicable to mutual funds (including commodity pools) of 5% of NAV.
  • The Proposed Amendments will also exempt alternative funds from the cash cover requirements in ss. 2.6.1(2) and (3) of NI 81-102.
  • The CSA views short-selling as another form of borrowing and, as such, is also proposing to make the combined limit on cash borrowing and short-selling by alternative funds and NRIFs 50% of NAV.

(e)  Use of Derivatives

  • The CSA is proposing to codify exemptive relief (the “Dodd-Frank Relief”) frequently granted to mutual funds in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in the United States and similar legislation in Europe. The Dodd-Frank Relief is intended to facilitate entering into transactions for cleared derivatives under the infrastructure mandated by Dodd-Frank and similar legislation in Europe.
  • The CSA is proposing to create a new definition for “cleared specified derivatives”, which will refer to any derivative cleared through the Dodd-Frank infrastructure, and will exempt all investment funds from the rules in ss. 2.7(1) and 2.7(4) of NI 81-102 for exposure to “cleared specified derivatives” and amend s. 6.8 of NI 81-102 in order to provide a specific exemption from the general custodian requirement to permit a fund to deposit assets with a dealer as margin in respect of cleared specified derivatives transactions.
  • The CSA is proposing to exempt alternative funds from all of s. 2.7(1) of NI 81-102, including the designated rating requirements of ss. 2.7(1)(b) and 2.7(1)(c), to permit alternative funds to engage in OTC derivatives transactions with a wider variety of international counterparties. NRIFs are already exempt from s. 2.7(1) of NI 81-102.
  • Subject to the general exemption for “cleared specified derivatives”, the CSA is proposing to make both alternative funds and NRIFs subject to the requirement to limit their mark-to-market exposure with any one counterparty to 10% with the intention of reducing credit risk to a single counterparty, particularly in connection with OTC derivatives.
  • The CSA is proposing to retain exemptions for alternative funds and NRIFs from ss. 2.8 and 2.11 of NI 81-102 to permit them to use specified derivatives to create synthetic leveraged exposure.

(f)  Leverage

  • The CSA is proposing to create a single limit on the total leveraged exposure of an alternative fund or NRIF.
  • The CSA is proposing that the aggregate gross exposure by an alternative fund or NRIF, through cash borrowing, short-selling and the use of specified derivatives, including through investing in underlying funds that employ leverage, cannot exceed 3x the fund’s NAV.
  • On a daily basis – and not just at the time a transaction creating leverage is entered into – alternative funds and NRIFs will have to calculate:

Total amount of outstanding cash borrowed + Combined market value of securities the fund sells short + Aggregate notional amount of the fund’s specified derivatives positions
(including those used for hedging purposes)


Net assets

(g)  Investments in Physical Commodities

  • The CSA is proposing to expand the scope of permitted investments in physical commodities (the “Commodity Restriction”) for mutual funds that do not qualify as alternative funds to include the ability to invest directly in silver, palladium and platinum, in addition to gold (including certificates representing these precious metals), and to obtain indirect exposure to any physical commodity through the use of specified derivatives.
  • Despite expanding the scope of the Commodity Restriction, mutual funds will still be limited to investing a combined 10% of their NAV at the time of purchase in physical commodities.
  • Alternative funds and NRIFs will remain exempt from the provisions in NI 81-102 governing investments in physical commodities.
  • In order to codify existing exemptive relief, the CSA is proposing to adopt the definition of “precious metals funds” currently in NI 81-104 into NI 81-102. Mutual funds that fit this definition will be exempt from the 10% limit on investment in physical commodities in respect of their investment in permitted precious metals.

4.    New Alternative Funds: Seed Capital and Organizational Costs

  • The CSA is proposing that alternative funds comply with the same seed capital and other start-up requirements applicable to other mutual funds under Part 3 of NI 81-102. As a result, the seed capital requirements for alternative funds will increase from $50,000 (the current requirement for commodity pools) to $150,000.
  • The new start-up requirements for alternative funds in the Proposed Amendments will also mean that rather than having to maintain $50,000 invested in the fund, the seed capital of an alternative fund’s manager could be redeemed once there is $500,000 invested in the fund from outside investors.

5.    Proficiency

  • The CSA is not proposing to move the specific proficiency requirements in Part 4 of NI 81-104 for sales of commodity pool securities into NI 81-102 and will instead rely on the existing registrant regulatory regime.
  • Notwithstanding the foregoing, the CSA is aware that in order to sell alternative fund securities additional education, training and experience requirements may be necessary for dealing representatives to fully understand the structure, features, and risks of the alternative fund securities that he or she may recommend. The CSA is engaging with the Mutual Fund Dealers Association of Canada to determine appropriate proficiency requirements to trade in securities of alternative funds and this process will be completed prior to the Proposed Amendments coming into force.

6.    Disclosure

(a)  Form of Prospectus/Point of Sale

  • The CSA is proposing that alternative funds that are not listed on an exchange be subject to the simplified prospectus, annual information form and fund facts disclosure regime, with the fund facts having to be delivered at or before the point of sale.
  • The new “ETF facts” summary disclosure document requirements, currently being finalized by the CSA, once in force, will also be applicable to listed alternative funds.
  • The CSA is also proposing changes to the fund facts for alternative funds to include additional disclosure requirements regarding differences from other mutual funds in terms of investment strategies and permitted asset classes.

(b)  Financial Statement Disclosure

  • Part 8 of NI 81-104 currently requires commodity pools to include in their annual financial statements and interim financial reports disclosure regarding their actual use of leverage (the “Leverage Disclosure Requirements”) over the period in question.
  • With the proposed repeal of NI 81-104, the CSA is planning to incorporate the Leverage Disclosure Requirements into NI 81-106, which will result in such requirements becoming applicable to NRIFs as well. The CSA is also proposing that the Leverage Disclosure Requirements apply to management reports of fund performance.

7.    Transition/Coming Into Force

  • Subject to the nature of any comments received and any applicable regulatory requirements, if approved, the CSA expects the Proposed Amendments to come into force approximately 3 months after their final publication date.
  • The Proposed Amendments would:
    • immediately apply to any investment fund that files a preliminary prospectus subsequent to the date the Proposed Amendments come into force; and
    • apply to an investment fund that filed a preliminary prospectus but not a final prospectus when the Proposed Amendments come into force.
  • The CSA is proposing a grandfathering period for existing funds of 6 months from the date the Proposed Amendments come into force (provided that the fund has filed its final prospectus before the Proposed Amendments come into force).
  • The CSA is also proposing a grandfathering period from the fund facts pre-sale delivery requirements for existing funds of 6 months from the date the Proposed Amendments come into force.

 

Bill C-25 contemplates important changes to director elections, notice-and-access procedures and other matters for public corporations governed by the Canada Business Corporations Act

Posted in Continuous and Timely Disclosure, Industry News, Proposals
David E. WoollcombeRobert HansenFraser BourneHeidi GordonShauvik Shah

On September 28, 2016, Bill C-25 passed first reading in the Parliament of Canada. The Bill is currently at the second reading debate stage. If passed into law, the Bill will result in important changes for public corporations that are governed by the Canada Business Corporations Act (CBCA) including:

  • Director Election Matters. Enshrining majority voting into the CBCA such that a director will only be elected if the number of votes cast in his or her favour represents a majority of the total number of votes cast at the meeting, enshrining the practice of “individual voting” rather than “slate voting” for directors and shortening the maximum duration of director terms from three years to one year.
  • Notice-and-Access. Broadening the scope of the exemptions available under the CBCA related to the requirement to deliver proxy-related materials to shareholders so that CBCA corporations will be able to make use of the notice-and-access procedures available under Canadian securities laws.
  • Other Matters. Mandating gender diversity disclosure, simplifying the timeline for shareholders to submit shareholder proposals and clarifying that all certificates representing shares and share warrants must be in registered (and not bearer) form.

Director Election Matters

Majority Voting

The election of directors of a CBCA corporation is currently based on a “plurality” system under which a shareholder can either vote “for” a director nominee or “withhold” the shareholder’s vote. Shareholders are not currently entitled to “vote against” a director. If the number of nominees presented for election as directors is the same as the number of directors fixed by the management of a CBCA corporation, management’s slate will be elected even if only one vote “for” is cast for each director and all other votes are “withheld”. The corporate law theory behind this practice is that, while allowing shareholders to express their objection, a corporation should not be deprived of a board of directors.

By contrast, majority voting provides that a director will only be elected if he or she has received a majority of the votes cast at the meeting at which he or she is seeking to be elected. The Toronto Stock Exchange (TSX) introduced new rules in 2014 requiring all corporations listed on the TSX whose articles or by-laws do not already contain majority voting provisions to adopt a written majority voting policy. These policies must provide that for uncontested meetings (i.e. where the number of directors nominated for election is the same as the number of board seats available), a director must immediately tender his or her resignation if he or she is not elected by at least a majority of the votes cast and that the board of directors must determine to accept or refuse (but only in exceptional circumstances) a tendered resignation within 90 days of the relevant meeting. Since the adoption of the TSX’s majority voting rules, there have been a number of situations where a board of directors has refused to accept such a resignation, and the relevant director has continued to serve on the corporation’s board.

The Bill proposes to do away with the plurality system by building majority voting into the CBCA so that a director will only be elected if the number of votes cast in his or her favour represents a majority of the total number of votes cast at the meeting. This will result in a significant change to the status quo for CBCA corporations. It is not clear whether the majority voting requirements will be more onerous than the TSX’s majority voting rules which permit a board of directors to effectively overrule the shareholders where a director does not receive a majority of the votes cast in his or her favour. The Bill does contemplate exceptions that would permit a director who does not receive a majority of the votes to be elected but the criteria to rely on these exceptions is not set out in the text of the Bill and would be dealt with by regulation.

Individual Voting

The Bill proposes to enshrine the practice of most Canadian public corporations to allow shareholders to vote in respect of each individual director nominee. This practice of “individual voting” on a director by director basis can be contrasted with “slate voting” where director elections are held on an all or none basis. The practice of “individual voting” has been mandated by the TSX since 2012, and so these proposed changes are not expected to change the status quo for CBCA corporations with securities listed on the TSX.

Annual Elections

The Bill proposes to shorten the duration of director terms from a maximum of three years to one year. One year director term limits have been mandated by the TSX since 2012, so these proposed changes are not expected to change the status quo for CBCA corporations with securities listed on the TSX.

Notice-and-Access

Notice-and-access is intended to facilitate electronic methods of communicating with shareholders. This can substantially reduce the cost of printing and mailing proxy-related materials. Under the notice-and-access process introduced under Canadian provincial securities laws in 2013, a public corporation can (at least as far as provincial securities laws are concerned) deliver proxy-related materials by posting the relevant information circular or, if appropriate, other materials, on SEDAR and an alternative website.

The CBCA requires corporations to deliver proxy-related materials to shareholders. Currently, CBCA corporations can obtain an exemption from the requirement to deliver proxy-related materials to shareholders to take advantage of the notice-and-access process. The statutory authority on which the exemption is based does not extend to the duties of intermediaries to deliver materials to beneficial shareholders under section 153 of the CBCA and Corporations Canada has stated that it takes no position as to the effect of the exemption on those duties. Although it is not clear how an issuer’s use of notice-and-access would preclude an intermediary from complying with its duties under section 153 of the CBCA, this statement by Corporations Canada has led to some uncertainty as to whether CBCA corporations can practically make use of notice-and-access. The Bill proposes to expand the scope of available exemptions, and thus would presumably remove any question about the ability of a CBCA corporation to make use of the notice-and-access process and the effect that this would have on the duties of intermediaries. We expect that if the Bill becomes law, we will see an increase in the number of public corporations governed by the CBCA making use of the notice-and-access process.[1]

To learn more about notice-and-access, see our article New Notice-and-Access Process – Streamlined Delivery of Proxy Materials, but Use With Care!

Other Matters

Information released in connection with the Bill suggests that additional changes, not yet fully articulated in the text of the Bill, will also be contemplated, including:

  • Requiring, at every annual general meeting, that public corporations governed by the CBCA identify the gender composition of their boards and senior management and to disclose their diversity policies or explain why none are in place. It remains to be seen how these CBCA diversity requirements will intersect with the gender disclosure rules now mandated by Canadian provincial securities laws, but we would expect them to be consistent.
  • Simplifying the timeline for shareholders to submit shareholder proposals.
  • Clarifying that all certificates representing shares and share warrants must be in registered form, thus prohibiting the issuance and use of bearer shares and bearer share warrants that can be exploited for illegal purposes.

Timing

These changes are not expected to be enacted for some time, as the Bill still needs third reading in the House of Commons and three readings in the Senate. Further, certain provisions contemplate regulations which have not yet been proposed and approved by the federal cabinet.

 

[1] We do note, however, that Bill C-25 does not propose to alleviate or provide an exemption to the requirement that CBCA corporations deliver annual financial statements to all shareholders, except those who have informed the corporation in writing that they do not want to receive a copy.

One Try Only: Insider Trading Appeal Reminder of Court’s Deference to Commission

Posted in Securities Litigation
Shane C. D'SouzaAndrew MathesonMichael O'BrienSean SadlerRene Sorell

The Divisional Court’s recent decision in Fiorillo,[1] upholding the findings of the Ontario Securities Commission (the “Commission”) that three traders violated the insider trading provisions of the Ontario Securities Act[2], sustained rulings by the Commission on important evidentiary and procedural issues,  and serves as a reminder that the Divisional Court generally defers to the Commission in securities enforcement cases.

Continue Reading

Revised CSA Staff Notice gives further guidance on preparing and filing reports of exemption distribution

Posted in CSA
Heidi GordonAndrew ParkerDean Xiao

On September 29, 2016, the Canadian Securities Administrators published a further revised version of CSA Staff Notice 45-308 (Revised) – Guidance for Preparing and Filing Reports of Exempt Distribution under National Instrument 45-106 Prospectus Exemptions.

On September 29, 2016, the Canadian Securities Administrators (“CSA”) published a further revised verison of CSA Staff Notice 45-308 (Revised) – Guidance for Preparing and Filing Reports of Exempt Distribution under National Instrument 45-106 Prospectus Exemptions (the “Notice”). The Notice amends and restates a previous amended and restated version of the Notice, which was published on April 7, 2016. The purpose of the Notice is to assist issuers, underwriters and their advisors in preparing and filing reports of exempt distribution on Form 45-106F1 Report of Exemption Distribution (the “New Report”) following a distribution of securities in reliance on certain prospectus exemptions under National Instrument 45-106 Prospectus Exemptions (“NI 45-106”). The New Report, which is now harmonized across all Canadian jurisdictions, came into effect on June 30, 2016 in connection with changes to NI 45-106.

The most recent iteration of the Notice adds:

  1. clarification regarding the certification of the Report;
  2. guidance on reasonable steps the underwriter filing the report should undertake to obtain and confirm the required information regarding the issuer;
  3. guidance on the procedures that an issuer or underwriter could implement in order to reasonably confirm that a purchaser meets the conditions for a particular exemption;
  4. guidance on the increased flexibility for completing Schedule 1 for purchasers in certain circumstances who may qualify under more than one paragraph of the definition of “accredited investor”; and
  5. a new Annex 5 with contact information of public officials regarding indirect collection of personal information.

1. Certification of the Report

The Report must be certified by the issuer or the underwriter, which will generally require the signature of the director or officer of the issuer or underwriter filing the Report. In signing the certification, the director or officer certifying the report is doing so on behalf of the issuer or underwriter. A filing agent, such as a law firm, completing the Report on an issuer’s or underwriter’s behalf cannot certify the Report on behalf of the issuer or the underwriter.

The Report states that it is an offense to make a misrepresentation in the Report. Securities legislation of a jurisdiction in which the Report is filed may impose liability on any person that makes a statement in the Report that, in a material respect and at the time and in light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading. Securities legislation may also impose liability on any director or officer of an issuer or underwriter who authorizes, permits or acquiesces in the filing of such a Report, including the individual signing the Report for and on behalf of the filer. Such legislation may also provide a defence to liability based on the person or company’s knowledge after exercising reasonable diligence. The potential liability of directors and officers of the filer is determined by applicable securities legislation and case law.

2. Guidance on reasonable steps to obtain and confirm issuer information

Where an underwriter is filing the Report, the underwriter should take reasonable steps to obtain and confirm the information regarding the issuer that is required by the Report. These reasonable steps may include: (i) reviewing the offering document prepared in connection with the distribution of securities; (ii) reviewing the issuer’s public continuous disclosure record, where available; (iii) reviewing information provided by the issuer’s or the underwriter’s legal counsel; and (iv) making inquiries of the issuer.

3. Guidance on procedures to confirm that purchaser meets conditions of exemption

The person relying on a prospectus exemption (i.e. the issuer or the seller) is responsible for determining whether the terms and conditions of the prospectus exemption are met. Section 1.9(4) of Companion Policy 45-106CP Prospectus Exemptions describes procedures that an issuer (or seller) could implement in order to reasonably confirm that the purchaser meets the conditions for a particular exemption. Some examples of these steps include: (i) establishing policies and procedures to confirm that all parties acting on behalf of the issuer (or seller) understand the conditions that must be satisfied to rely on the exemption; and (ii) obtaining information that confirms the purchaser meets the criteria in the exemption.

Whether the types of steps are reasonable will depend on the particular facts and circumstances of the purchaser, the offering and the exemption being relied on.

4. Guidance where purchasers qualify under multiple paragraphs of “accredited investor” exemption

Certain purchasers may qualify as an accredited investor under more than one paragraph of the definition of “accredited investor”; however, it may not always be clear to the filer which paragraph the purchaser qualifies under for the purposes of a particular distribution. For example, trust companies, trust corporations, registered advisors and registered dealers may be purchasing securities as principal for their own account, and/or may be deemed to be purchasing securities as principal on behalf of a fully managed account.

If a purchaser is a trust company or a trust corporation, the filer can select paragraphs “(a) and/or (p)” of the definition of “accredited investor” for that purchaser when completing Schedule 1 if the trust company or trust corporation is: (i) purchasing as principal for its own account and qualifies as an accredited investor under paragraph (a) of that definition; and/or (ii) deemed to be purchasing as principal on behalf of a fully managed account and qualifies as an accredited investor under paragraph (p) of that definition.

If a purchaser is a registered adviser or registered dealer, the filer can select paragraphs “(d) and/or (q)” for that purchaser when completing Schedule 1 if the registered adviser or registered dealer is: (i) purchasing as principal for its own account and qualifies as an accredited investor under paragraph (d) of that definition; and/or (ii) deemed to be purchasing as principal on behalf of a fully managed account and qualifies as an accredited investor under paragraph (q) of that definition.

5. Contact information of public officials regarding indirect collection of personal information

The Report requires the filer to confirm that each individual listed in Schedules 1 and 2 of the Report was notified about certain information, including the title of the public official in the local jurisdiction who can answer questions about the security regulatory authority’s or regulator’s indirect collection of personal information. Annex 5 includes the contact information and title of the public official in each local jurisdiction who can answer such questions.

Ontario and Australian securities regulators become fintech friends

Posted in Fintech, Industry News, OSC
Heidi Gordon

On the heels of its OSC Launch Pad initiative, the Ontario Securities Commission (OSC) has announced another first – an agreement with the Australian Securities and Investments Commission (ASIC), under which innovative fintech companies in Ontario and Australia will be able to draw upon support from the combined resources of the OSC and ASIC as such companies seek to operate in the others’ market. One of the purposes of the arrangement is to help innovative fintech companies reduce regulatory uncertainty and time to market.

To qualify for the support offered by the agreement, innovative businesses will need to meet the eligibility criteria of their home regulator. Once referred by the regulator, and ahead of applying for authorisation to operate in the new market, the business will have access to dedicated staff who will help them to understand the regulatory framework in the market they wish to access.

The OSC and ASIC have also committed to share information on emerging trends in each other’s markets and the potential impact on regulation.

To learn more about the OSC LaunchPad see our previous post.

For more information about our Firm’s Fintech expertise, please see our Fintech group’s page.