Les Autorités canadiennes en valeurs mobilières (les ACVM) ont publié un important document de consultation dans lequel il est proposé de rehausser considérablement les obligations de tous les conseillers, courtiers et représentants, y compris les membres de l’OCRCVM et de l’ACFM (les personnes inscrites). Les commentaires sur ce document de consultation peuvent être présentés jusqu’au 26 août.
For the first time since 2014, the Ontario Securities Commission (OSC) will send Ontario registrants a risk assessment questionnaire (RAQ) that must be completed by portfolio managers, investment fund managers, exempt market dealers, restricted portfolio managers and restricted dealers registered in Ontario. Registrants will receive the 2016 RAQ tomorrow, May 18.
The OSC uses data gathered through the RAQ to apply a risk ranking to firms. Firms with higher risk rankings are more likely to be targeted by the OSC for compliance reviews. As a result, it is important that the RAQ answers be considered carefully.
The 2016 RAQ will be similar to the 2014 version, but will also include questions intended to assess how registrants, issuers and portals are using newly developed capital-raising prospectus exemptions such as the crowdfunding exemption, offering memorandum exemption and the modernized prospectus-exempt rights offering regime. As we recently reported, the OSC is increasing oversight of market participants who rely on these newly expanded capital-raising exemptions in Ontario and the 2016 RAQ is a key element of this heightened regulatory scrutiny of the exempt market.
Registrants must complete and submit the RAQ online by June 29, 2016.
We invite you to contact a member of our Securities Regulation and Investment Products Group should you have any questions regarding the OSC’s 2016 Risk Assessment Questionnaire.
Des modifications importantes au régime de déclaration du système d’alerte canadien entrent aujourd’hui en vigueur (se reporter à notre article publié le 3 mars 2016 qui s’intitule Les règles du système d’alerte du Canada se resserrent en mai). Nous mettons ici l’accent sur les exigences nouvelles et plus rigoureuses liées à la description de l’objectif de l’acquisition.
Recently, the Canadian Securities Administrators (CSA) released an important Consultation Paper that proposes to significantly increase the obligations of all advisers, dealers and representatives, including IIROC and MFDA members (Registrants). Comments on the Consultation Paper can be made until August 26.
The CSA is proposing two distinct categories of changes that, if adopted, will significantly impact the economics of existing Registrant business models and Registrant compliance costs:
1. Best Interest Standard: A “client best interest” standard against which all Registrant-client obligations would be interpreted.
2. “Targeted Reforms”: A comprehensive set of so-called “targeted reforms” will affect how the following key areas are addressed:
• Conflicts of interest
• Know you client procedures (KYC)
• Know your product procedures (KYP)
• Relationship disclosure
• Business titles
• Use of professional designations
• Role of the ultimate designated person (UDP) and chief compliance officer (CCO)
• Statutory fiduciary duty when client grants Registrant discretionary authority.
The CSA sets out numerous consultation questions in respect of the Best Interest Standard and for each of the Targeted Reforms.
“Best Interest” Standard
The Consultation Paper is the latest in a series of CSA publications since 2012 which have studied the Registrant-client relationship and the possible introduction of a “best interest” standard for Registrants.
The Consultation Paper reveals that CSA jurisdictions are split on the wisdom of introducing a Best Interest Standard. British Columbia is opposed to the Best Interest Standard and is not even soliciting comments on it; Quebec, Alberta, Manitoba and Nova Scotia have strong reservations about it but are interested in receiving and reviewing the comments on the “Best Interest” Standard.
Only Ontario and New Brunswick are in favour and Saskatchewan is open to further consultations.
A regulatory Best Interest Standard would require that a Registrant:
- deal fairly, honestly and in good faith with its clients and act in its clients’ best interests
- adopt the standard of care of a prudent and unbiased firm or representative, acting reasonably
- be guided by the following principles:
- act in the best interest of the client
- avoid or control conflicts of interest in a manner that prioritizes the client’s best interests
- provide full, clear, meaningful and timely disclosure
- interpret law and agreements with clients in a manner favourable to the client’s interest where reasonably conflicting interpretations arise
- act with care.
Opponents of the Best Interest Standard believe it would create more legal uncertainty and investor confusion and may actually exacerbate the expectation gap between clients and Registrants because business models with some fundamental conflicts of interest would continue to be permitted to operate, even as investors would come to believe a true “best interest” standard is in place.
In general, an overarching best interest standard could also impact civil liability of Registrants as it relates to negligence claims. Registered dealers would be most affected by the Best Interest Standard. Investment fund managers and portfolio managers are already subject to fiduciary duties by statute or at common law.
The Targeted Reforms
The Targeted Reforms are presented in the Consultation Paper as a set of proposals separate from the Best Interest Standard. This decoupling is significant as it could allow the Targeted Reforms to advance and be adopted even if CSA members fail to ultimately agree on the more controversial Best Interest Standard.
While the CSA states that elements of the Targeted Reforms are simply meant as an explicit articulation of expectations that the CSA already has for compliance with the current regulatory regime, the Targeted Reforms would nonetheless greatly increase the obligations of Registrants in a number of areas:
- Conflicts of interest. Registrants would be required to respond to all material conflicts of interest in a manner that prioritizes the interests of the client ahead of the interests of the firm and representative. If this is not possible, the Registrant must avoid the conflict by ceasing to provide the service or product, or ending the relationship with the client. Simply disclosing the conflict to clients and getting their consent would not necessarily be sufficient. Under the current regime, a Registrant must avoid a conflict altogether only when the conflict is prohibited by law or when no other “reasonable response” is available.
- KYC and KYP. Both KYC and KYP requirements would be made explicit and enhanced. For KYC, registrants would be required to gather, and regularly update, more client-centered information regarding investment needs and objectives, financial circumstances and client risk profile. For KYP, firms that have a product list that includes both proprietary and non-proprietary products (or non-proprietary products only), would be required to conduct a market investigation and product comparison as to ensure the range of products offered is representative of a broad range of products suitable for their client base.
- Suitability. Suitability obligations would be significantly enhanced. Registrants would be required to consider basic financial strategies which would be more likely to achieve the client’s investment needs and objectives than a transaction in securities. Registrants would also need to identify a basic asset allocation strategy for the client. A targeted rate of return needed to achieve client objectives would need to be identified and any mismatches between the target rate and the client’s risk profile would need to be resolved. Registrants would have to ensure that the purchase, sale, hold or exchange of a security (or the decision not to purchase, sell, hold or exchange a security) was both suitable and “most likely to achieve the client’s investment needs and objectives”. Under the current regime, suitability is primarily a “trade-based” obligation with no explicit requirement to conduct a suitability analysis for a recommendation or decision to hold or exchange securities.
- Relationship disclosure. In addition to the prescribed information that Registrants must currently deliver to clients regarding the Registrant-client relationship, firms would also be required to disclose the actual nature of the client-Registrant relationship in easy-to-understand terms. New disclosure obligations at the time of account opening would also be imposed on Registrants with restricted registration categories, such as mutual fund dealers or exempt market dealers. Registrants would be required to disclose whether they offer proprietary products only, or a mix of proprietary and non-proprietary products and make related disclosures to clients.
- Proficiency. Explicit and increased proficiency requirements for representatives would be introduced.
- Business titles. All client-facing business titles for representatives will be prescribed.
- Use of professional designations. Specific rules would be introduced on the permitted use of professional and educational designations.
- UDP and CCO roles. The roles and obligations of the UDP and CCO would be further clarified by amendments to NI 31-103.
- Statutory fiduciary duty for discretionary accounts. Registrants that manage the investment portfolio of a client through discretionary authority granted by the client would become subject to a new statutory fiduciary duty.
We invite you to contact a member of our Securities Regulation and Investment Products Group should you have any questions regarding how the Targeted Reforms or Best Interest Standard may affect your business.
Effective today, significant amendments to the Canadian early warning reporting (EWR) regime (EWR Amendments) come into force (see our March 3, 2016 publication, Canada’s Early Warning Rules Get Tougher in May). Here we focus on the new, more stringent requirements to describe the purpose of acquisitions.
The new EWR Amendments require the filer to describe any plans or future intentions it might have with respect to 11 specific potential corporate actions:
- the acquisition of additional securities of the reporting issuer, or the disposition of securities of the reporting issuer;
- a corporate transaction, such as a merger, reorganization or liquidation, involving the reporting issuer or any of its subsidiaries;
- a sale or transfer of a material amount of the assets of the reporting issuer or any of its subsidiaries;
- a change in the board of directors or management of the reporting issuer, including any plans or intentions to change the number or term of directors or to fill any existing vacancy on the board;
- a material change in the present capitalization or dividend policy of the reporting issuer;
- a material change in the reporting issuer’s business or corporate structure;
- a change in the reporting issuer’s charter, bylaws or similar instruments or another action which might impede the acquisition of control of the reporting issuer by any person;
- a class of securities of the reporting issuer being delisted from, or ceasing to be authorized to be quoted on, a marketplace;
- the issuer ceasing to be a reporting issuer in any jurisdiction of Canada;
- a solicitation of proxies from securityholders; and
- an action similar to any of those enumerated above.
The EWR Amendments are intended to elicit early notification of an intent to mount change of control transactions, solicit proxies, or effect other significant corporate changes. This approach reflects the antipathy of Canadian regulators to “boilerplate” which they believe has been widely used by EWR filers. These changes have been in prospect since the initial EWR proposals were published by the CSA in 2013 (see the initial EWR proposals).
The early warning form requires the filer to describe any change in a material fact set out in a previous report filed by the acquiror under the early warning requirements in respect of the reporting issuer’s securities. The United States experience may be enlightening with respect to the need to refile a report, based on U.S. Schedule 13D reporting requirements, which are analogous, but not identical, to the Canadian early warning requirements. In the U.S., a Schedule 13D report must be filed within ten days after a person or group of persons acquires beneficial ownership of more than 5% of a voting class of a company’s equity securities registered under the U.S. Securities Exchange Act of 1934. A “beneficial owner” is broadly defined to include any person who has or shares, directly or indirectly, voting or investment power with respect to a security. Schedule 13D reports must be amended to reflect any material changes in information previously reported. On May 5, 2016 the United States District Court for the District of Columbia ordered a dissident and related defendants who had previously filed Schedule 13D reports disclosing the acquisition of an issuer’s common shares, to file an amended Schedule 13D to also fully disclose their purpose for acquiring the issuer’s senior notes (see Taseko Mines Limited’s press release).
Finally and again in keeping with known regulatory positions, the EWR Amendments disqualify reporters from using the less stringent alternative monthly reporting (AMR) system if they solicit proxies from securityholders in any of the following circumstances:
- in support of one or more director nominees other than persons proposed by management;
- in support of a reorganization, amalgamation or other similar corporate action not supported by management; or
- in opposition to a reorganization, amalgamation or other similar corporate action supported by management.
The Ontario Securities Commission (OSC) released its draft Statement of Priorities for 2016-2017. The comment period ends May 9th.
Investor Protection Priorities
Advance Best Interest Standard – The OSC will recommend and conduct consultations on regulatory provisions to create a “best interest” standard for advisors. This standard is controversial for some industry participants but the OSC is committed to it. The OSC will also continue to focus on advisor compensation practices and identify those that are inconsistent with a “best interest” standard.
Compensation Arrangements in Mutual Funds – The OSC will regulate embedded commissions and other types of compensation practices and develop regulatory proposals to address conflicts of interest created by investment fund compensation practices.
Increased Oversight of Exempt Market – The OSC will increase oversight of market participants who rely on recently expanded capital raising exemptions in Ontario (e.g. the crowdfunding exemption, offering memorandum exemption and the modernized prospectus-exempt rights offering regime), by creating a risk-based supervision program for registrants, issuers and portals using the new exemptions. The OSC will use its 2016 Risk Assessment Questionnaire (RAQ) to gather information on the use of the new exemptions. The OSC also aims to publish a report on exempt market status based on data collected.
Investor Protection for Seniors – The OSC will improve outreach and education for senior and vulnerable investors by responding to issues identified through targeted research, seminars and roundtables. The OSC Investor Office will use the information gathered to develop solutions designed to reach at-risk investor groups, specifically, seniors, millennials and new Canadians.
Compliance & Enforcement Priorities
Effective Inspections, Supervision and Oversight – The OSC will conduct targeted compliance reviews of high-risk and new registrants, including online advice and portal business models.
Enforcement Against Fraud and Other Serious Violations – The OSC plans in the Spring of 2016 to implement its Whistleblower Program and establish a staff to supervise it.
OTC Derivatives Priorities
Continue Development and Implementation of OTC Derivatives Regulation – The OSC will develop and implement a regulatory program for effective oversight and supervision of the OTC derivatives market.
Enhance Oversight of Systemic Risk – The OSC will continue to work with domestic and international regulators in order to remain informed of emerging and systemic risks.
Our Business Law and Financial Services lawyers wrote an article on the Revised Clearing Rule Mandatory Central Counterparty Clearing of Derivatives (NI 94-101) — published by the Canadian Securities Administrators (CSA) in February 2016 — which modifies the proposed requirements for regulated clearing agencies to clear certain OTC derivatives transactions. The authors describe the new NI 94-101 requirements of the Revised Clearing Rule, as well as outline the changes that will now affect the Initial Clearing Rule drafted last February.
Our Business Law and Financial Services lawyers wrote an article on a new customer clearing rule published by the Canadian Securities Administrators (CSA) called Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (NI 94-102) and its related Companion Policy 94-102CP, both of which replace CSA’s 2014 Model Provincial Rule on Derivatives. The authors discuss and dissect key features of the new NI 94-102 proposal, as well as comment on the proposed amendments to the Québec Derivatives Regulation (QDR) proposed by Autorité des marchés financiers (AMF).
On April 6, IIROC published Notice 16-0068 – Managing Conflicts in the Best Interest of the Client (the 2016 IIROC Notice). IIROC intends to strengthen compliance by Dealer Members (DMs) with IIROC’s conflicts of interest rules, with a particular focus on the management of compensation-related conflicts.
Specifically, IIROC announced that it will take the following actions:
- Immediately enhance its compliance test procedures to more closely examine compensation grids, supervisory oversight of advisors recommending products with high commissions, and the monitoring of advisors approaching compensation thresholds;
- By June 2016, conduct a comprehensive survey to gather more detailed information on the oversight and monitoring of compensation-related conflicts by DMs to ensure that IIROC can accurately and completely assess the quality of the controls being used;
- Conduct follow-up targeted examinations of DMs where concerns arise from the results of the survey; and
- Use IIROC’s survey and examination results to inform the appropriate regulatory response. This may include rule amendments and/or additional guidance on conflicts of interest that clearly articulate IIROC’s best interest requirements.
The upcoming 2016 sweep is the latest in a series of measures by IIROC in recent years to assess and monitor conflict of interest compliance.
DM examinations in 2014 and targeted surveys in 2015 identified several areas for improvement. Specifically, IIROC examinations of DMs in 2014 found weaknesses in the oversight of the conflicts of interest management process used by some DMs and also showed deficiencies in:
- Policies and procedures concerning conflicts of interest;
- Documentation concerning the analysis of specific conflicts; and
- Disclosure of conflicts to clients.
Targeted surveys conducted in June 2015 of a sample of IIROC regulated firms regarding conflicts of interest identification and management found improved policies and procedures among DMs for dealing with basic conflicts, but concluded that most firms lacked a meaningful process to identify, address, monitor and supervise compensation-related conflicts. IIROC also determined that there was confusion at some firms regarding IIROC’s best interest standard in its conflicts of interest rule (DM Rule 42) and related guidance. Little documentation on compensation-related conflicts was found to support DM responses that the best interests of clients are always prioritized.
The 2016 IIROC Notice comes only a week after the CSA’s recent announcement of their intention to publish later this month CSA Consultation Paper 33-404 – Proposals to Enhance the Obligations of Advisers, Dealers and Representatives Toward Their Clients which will follow the CSA’s 2013 consultation on the appropriateness of introducing a statutory best interest standard when advice is provided to retail clients. IIROC agrees with the CSA that regulatory action is required to better align the interests of registrants to the interests of their clients.
Many boards today realize that proactive engagement between directors and shareholders can address shareholder concerns which, if ignored, can manifest themselves in undesirable ways such as negative votes on “say on pay” resolutions, withheld votes for directors, proxy contests or other forms of shareholder activism.
The Institute of Corporate Directors (“ICD”) has now published “ICD Guidance for Director-Shareholder Engagement” (the “Guidelines”) to assist boards with shareholder engagement processes and procedures.
The ICD Guidelines are intended to be flexible and are meant to be tailored to a company’s individual circumstances. The ICD Guidelines are based on six factors discussed below:
1. KNOW YOUR MOST SIGNIFICANT INVESTORS
The ICD recommends that management should inform the board about the company’s most significant shareholders, including details such as:
- the investor’s strategy, philosophy, track record and, to the extent known, the cost basis for its investment;
- the investor’s percentage holding of the company and whether the investor has been adding to or reducing its position;
- the structure and hierarchy behind the investor’s decision-making process;
- how the investor votes (e.g., does it always follow the recommendations of a proxy advisory firm?);
- the percentage of the investor’s portfolio that the company comprises; and
- any and all material policy restrictions under which the investor operates.
The Guidelines also recommend that management should regularly report to the board on the aggregate short position in the company’s shares.
2. RECOGNIZE THE KEY BENEFITS OF ENGAGEMENT
The ICD believes that boards that adhere to the Guidelines will know how management is regarded, how shareholders and the market view the company’s strategic direction and other important information.
3. TAILOR A PROCESS THAT WORKS FOR YOU
The ICD recommends that the board should keep track of its significant shareholders and make time each year to meet with them.
The Guidelines recommend that the board identify:
- the circumstances in which it will engage with shareholders;
- the criteria for identifying shareholders with which it will engage; and
- the frequency of the engagement.
In determining the shareholders it should engage with, the board should consider factors such as the size, make-up and breadth of its shareholder base, as well as the size of the company’s business and industry-related factors.
4. SET TOPICS OF DISCUSSION
Prior to meeting with investors, the ICD recommends that a clear agenda should be set. Appropriate areas for directors to discuss include:
- board oversight of strategy;
- corporate mission and goals;
- executive compensation;
- succession planning and board composition;
- board oversight of risk, accounting and auditing and internal controls; and
- board decision-making process.
Topics relating to operational matters or financial performance should be left to management as management is best able to speak and respond to such matters and the risk of selective disclosure is higher. However, if investors share views on operational matters or financial performance the ICD recommends that directors listen to such views and share this information with the board and management.
In advance of any meeting with shareholders, the company should develop a clear and consistent disclosure policy to avoid any selective disclosure of material non-public information. Directors must also be aware of the limits on communication under proxy solicitation rules which prohibit communications under circumstances reasonably calculated to result in the giving, withholding or revocation of a proxy for any matter to be voted upon at a shareholder meeting.
5. INVITE THE RIGHT PARTICIPANTS
Meetings with shareholders as part of any shareholder engagement program should be attended by the Chair of the board and at least one other independent director. It may be appropriate for the other present director to be a committee chair, depending on the topics to be discussed. On the investors’ side, the meeting may be with an individual or a group. In the case of an institutional investor, it is wise to have key decision makers from both portfolio management and governance teams who regularly attend these meetings for the sake of consistency.
It is important that directors are prepared and briefed before any meeting with shareholders. Prior to any meeting, the corporate secretary, investor relations personnel or other company personnel should inform the directors and provide briefing materials in respect of the relevant information about the investors, including potential hot button topics that may be brought up by the investor.
6. REVIEW AND CONSIDER WHAT YOU LEARN
The ICD Guidelines recommend that directors attending shareholder engagement meetings share the results of these meetings with the rest of the board for the board to consider and reflect upon, either on an annual basis or more frequently. Having the directors report to the board on the information shared in these meetings allows the board to consider the questions it should be asking management based on feedback and input from the company’s most significant shareholders.
The Chair of the board should also maintain regular dialogue with the CEO of the company regarding issues raised by shareholders in the shareholder engagement meetings.
For the full text of the ICD Guidelines, see http://www.icd.ca/getmedia/b2bf5cc8-324d-4b5c-842f-1af40026fe5b/ICD_Engagement_Paper_EN.pdf.aspx