Header graphic for print

Canadian Securities Regulatory Monitor

News and Insight

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.

The OSC LaunchPad – Unveiled

Posted in Fintech, Industry News, OSC
Ana BadourDan DolinerShauvik ShahRene Sorell

As previously announced, the OSC has opened the OSC LaunchPad which consists of a dedicated team within the securities regulator to support Fintech businesses wishing to navigate securities law requirements.

The OSC LaunchPad will offer tailored support which can include time-limited exemptive relief to allow testing of innovative products and services.

In order to be eligible to receive support from the OSC LaunchPad, a business must meet certain criteria, including:

  • Being a new or early-stage Fintech business that has not yet started operations or is applying to the OSC for exemptive relief.
  • Having a new, innovative or significantly different product from those currently on the market.
  • Developing innovative products and/or services that will provide identifiable benefits to investors.
  • Addressing consumer or investor risks presented by its innovation.
  • Requiring additional support because the business model raises new or complex regulatory questions.

Fintech businesses can contact the OSC LaunchPad team at www.osclaunchpad.ca.

The OSC LaunchPad does not guarantee to provide support to all applicants who meet its criteria.

The OSC will use its OSC LaunchPad experience to modernize regulation for similar businesses and will also establish a Fintech advisory committee.

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

 

IIROC issues cybersecurity report cards to dealer firms

Posted in Broker-Dealers, CSA, IIROC
Cristian BlidariuMichael NicholasSean SadlerRene Sorell

IIROC is providing all dealer member firms it regulates (Firms) with a confidential cybersecurity “report card” that will include:

  • an individual assessment of the Firm’s cybersecurity preparedness program
  • a comparison of the Firm’s cybersecurity practices against the industry and other Firms of similar size and business model
  • a list of cybersecurity areas to which the Firm should be giving priority attention.

The report cards were generated based on the results of an extensive assessment survey that Firms completed in June 2016. The survey responses were benchmarked against a National Institute of Standards and Technology cybersecurity framework that considers governance, threat prevention, threat detection and threat response and recovery criteria.

IIROC is also using the June survey results to assess the adequacy of each Firm’s cybersecurity policies and procedures. Firms that are assessed as lagging their peers may face further regulatory scrutiny.

Cybersecurity is a key regulatory priority for IIROC and the CSA

All registered securities firms can expect continued and heightened scrutiny of their cybersecurity policies and procedures. As we discussed in our earlier blogs (IIROC 2016 Compliance Priorities and CSA Sets Out Priorities for 2016-2019), cybersecurity preparedness is a key regulatory priority for IIROC and the Canadian Securities Administrators (CSA).

Recently, the CSA issued CSA Staff Notice 11-332 – Cyber Security which further highlights the importance of cybersecurity and communicates expectations that the CSA has of market participants in this area, including the following:

Registered securities firms are expected to:

  • remain vigilant in developing, implementing and updating their approach to cybersecurity management
  • review and follow regulatory guidance (e.g. IIROC and MFDA guidance).

Regulated entities (e.g. marketplaces, clearing agencies, information processors) are expected to:

  • examine and review compliance with ongoing requirements outlined in securities legislation, terms and conditions of recognition, registration or exemption orders
  • have internal controls over their systems and to report security breaches
  • adopt a cybersecurity framework provided by a regulatory authority or standard-setting body that is appropriate to their size and scale.

Public companies who have determined that cybersecurity is a material risk are expected to:

  • provide detailed and entity-specific cyber risk disclosure
  • address in any cyber-attack remediation plan:
    • how materiality of an attack would be assessed, including the attack’s impact on the company’s operations and reputation, its customers, employees and investors
    • whether and what, as well as when and how, to disclose a cyber-attack.

In previous guidance (CSA Staff Notice 11-326 – Cyber Security), the CSA also indicated that it expects registrants to implement strong and tailored cybersecurity measures in accordance with prudent business practice and to improve information security, including by:

  • educating staff
  • conducting third party testing and assessment
  • regularly reviewing and updating cybersecurity measures
  • following industry guidelines and best practices.

Improving your firm’s cybersecurity regulatory compliance

Enhanced data protection measures and a robust breach response protocol are key to discharging a registrant’s regulatory compliance obligations, but can also be a potential competitive advantage that differentiates market-leading firms from the competition.

All securities firms, and especially Firms that received a lagging IIROC “report card”, should carefully review their cybersecurity policies and procedures. For more information on how our cross-functional securities regulatory and cyber law expertise may assist in this regard, please contact a member of our Securities Regulation & Investment Products Group. For additional insights on CSA Staff Notice 11-332, please see our colleagues’ recent post on the CyberLex blog.

TSX Releases Guidance with Respect to Pricing a Prospectus Offering or Private Placement where there is Undisclosed Material Information

Posted in Capital Markets, Corporate Finance
Heidi GordonMatthew CummingWendi LockeNicole Rumble

On October 11, 2016, TSX released guidance with respect to pricing a prospectus offering or private placement where there is undisclosed material information. This guidance will be of particular interest to TSX-listed companies contemplating a prospectus offering or private placement of securities, where the proceeds of such financing are to be used to fund an acquisition.

On October 11, 2016, Toronto Stock Exchange (TSX) issued Staff Notice 2016-0006 (the Notice), providing guidance with respect to pricing a prospectus offering or private placement where there is undisclosed material information. This guidance will be of particular interest to TSX-listed companies contemplating a prospectus offering or private placement of securities, where the proceeds of such financing are to be used to fund an acquisition.

The Notice provides the following general guidance with respect to the relationship between the dissemination of information about the company and the pricing of a prospectus offering or a private placement:

  • Companies proposing a prospectus offering or a private placement should price their offerings in the context of the market with reference to the “market price” (as determined in accordance with the TSX Company Manual);
  • Generally, when pricing a financing, the market price should reflect all material events, changes or announcements (collectively, Material Information); and
  • Where there is undisclosed Material Information, it is not appropriate to price a financing prior to dissemination of Material Information, as the market price of the securities may not accurately reflect the business and affairs of the company. This means that in the case of a prospectus offering or private placement of securities, where the proceeds of such financing are to be used to fund a material acquisition, TSX will typically require that the material acquisition be announced prior to the pricing of the financing.

Despite this general guidance, TSX has historically allowed an exception to pricing a financing where there is undisclosed Material Information if the event would not otherwise occur without a financing arrangement (the Pricing Exception).

The Pricing Exception is most often relevant where there is a prospectus offering or private placement of securities and the proceeds of such financing are used to fund an acquisition. For these transactions, the principal terms of the financing (including the price) are typically announced concurrently with the acquisition; therefore, financing is priced prior to the acquisition being disclosed to the public.

The Notice confirms that TSX will generally: (i) accept pricing of such financings in this manner, provided that TSX is satisfied that the acquisition would not otherwise have been approved by the board of directors of the company, but for the financing arrangement, and (ii) require an officer’s certificate confirming that the board of directors of the company would not have entered into the acquisition agreement without also having entered into the financing arrangement.

Importantly, the Notice flags two scenarios where TSX may have concerns about allowing the Pricing Exception for financings:

  1. Where the net proceeds of the financing significantly exceed the cash consideration of the acquisition, in which case TSX may require the company: (i) to reduce the gross proceeds of the offering (so that the acquisition and financing are more clearly aligned); (ii) set the price of the financing after the acquisition has been disclosed; or (iii) obtain security holder approval as a condition of the financing. Note that TSX will generally consider a financing to significantly exceed the cash consideration where the financing raises 30% or more in excess of the cash consideration.
  2. Where the financing provides for significant insider participation. Significant insider participation by officers, directors and major shareholders may provide or appear to provide insiders with an economic advantage not generally available to the investing public.

Although the Notice provides some helpful guidance, pricing and disclosure issues often require careful consideration, and in some cases, may necessitate prior consultation with the company’s legal advisors and/or TSX. If you have questions about the Notice feel free to reach out to us.

 

 

Preparing for the Implementation of T+2 Settlement

Posted in Amendments, CSA, Proposals
Matthew ApplebyMichael EldridgeZachary Masoud

In August 2016, the Canadian Securities Administrators (“CSA”) published for comment Proposed Amendments to National Instrument 24-101 (“NI 24-101”) – Institutional Trade Matching and Settlement, Proposed Changes to Companion Policy 24-101 (“CP 24-101”) – Institutional Trade Matching and Settlement and CSA Consultation Paper 24-402 – Policy Considerations for Enhancing Settlement Discipline in a T+2 Settlement Cycle Environment (the “Consultation Paper”).

The proposed amendments to NI 24-101 and CP 24-101 (the “Proposed Amendments”) are intended to assist in a successful migration to T+2 settlement from the current T+3 regime. The Proposed Amendments also update NI 24-101 to reflect certain developments since it came into force in 2007, as well as clarify certain existing provisions. For example, the Proposed Amendments include making trades in exchange-traded mutual fund (ETF) securities, a significant area of growth since 2007, subject to NI 24-101. Other proposed revisions to modernize or clarify NI 24-101 and CP 24-101 include broadening the definition of “clearing agency” to include clearing agencies other than CDS and enhancing the provisions on matching services utilities systems and business continuity planning.

The Consultation Paper provides an overview of existing settlement discipline measures in the Canadian equity and debt markets and raises policy considerations for addressing the risk that the transition to a standard T+2 settlement cycle might increase settlement failures. The CSA is using the Consultation Paper to seek comments on whether (i) additional settlement discipline measures might be required, including additional amendments to NI 24-101 and CP 24-101, and (ii) other settlement discipline mechanisms – similar to those already in place or proposed in certain foreign jurisdictions, such as a settlement-fail penalty mechanism or a close-out (or forced buy-in) requirement – for the Canadian equity and debt markets would deter settlement failures.

The comment period on the Proposed Amendments and the Consultation Paper expires on November 16, 2016.

Canadian Deposit Insurance – Framework Under Review

Posted in Industry News
Daniel BénayMason Gordon

Overview

On September 16, 2016, Canada’s federal Department of Finance launched a consultation process on the deposit insurance framework. The consultation paper can be found here. The consultation process is to help determine whether the scope of targeted Canadian financial products requires adjustments to ensure the deposit insurance framework continues to serve Canadians effectively.

The review comes as a response to changes to the global banking landscape since 2008 financial crisis and, more specifically, changes to deposit products offered by financial institutions. The policy objectives relating to the review include protecting depositors, supporting financial stability and promoting efficient and competitive financial services.

Current Canadian Deposit Insurance Framework

Canada’s deposit insurance framework is administered by the Canada Deposit Insurance Corporation (CDIC). CDIC has 80 members and is comprised of banks, federally incorporated trust and loan companies, federal credit unions, provincially incorporated trust and loan companies, and cooperative retail associations.

Canada’s deposit insurance coverage framework consists of:

  • seven coverage categories
  • scope of eligible deposits
  • coverage limit

The seven categories of deposits to which coverage extends are:

  • deposits held in one name (individual)
  • deposits held in more than one name (joint deposits)
  • deposits held in trust for another person
  • deposits in Registered Retirement Savings Plans
  • deposits in Registered Retirement Income Funds
  • deposits in Tax Free Savings Accounts
  • deposits held in mortgage tax accounts

Coverage extends to:

  • savings and chequing accounts
  • Guaranteed Investment Certificates (GICs) and other term deposits of five years or less
  • money orders, travellers’ cheques and bank drafts issued by CDIC members and cheques certified by CDIC members
  • debentures issued by loan companies that are CDIC members

The coverage limit has been $100,000 since 1983 (when it was raised from $60,000) and applies to deposits of up to $100,000 in each of the above seven categories. Therefore, by holding deposits in multiple categories, and with multiple CDIC member institutions, depositors can access coverage above $100,000.

Policy Framework Considerations

The Department of Finance Canada is seeking views on possible enhancements to the deposit insurance framework in three broad categories: streamlining deposit categories; updating the scope of eligible deposits; and addressing the complexity of trust deposits. The specific issues for consideration regarding each area are noted below. For each issue, the Government has proposed questions to solicit comments in the consultation paper.

Streamlining Deposit Categories

Mortgage Tax Accounts: Given the declining use of mortgage tax accounts, mortgage tax deposits may no longer warrant their own separate category of deposit insurance. To keep the deposit insurance framework current, the Government is considering removing mortgage tax accounts as a separate insured category of deposit.

Registered Products: Registered Retirement Savings Plans (RRSPs) and Registered Disability Savings Plans (RDSPs) do not receive the same coverage as other registered products. The Government is considering the addition of two new deposit categories for RESPs and RDSPs. This approach would ensure that every registered product would be equally covered up to the same $100,000 limit. Alternatively, all registered products could be amalgamated into one deposit category with a higher insurance limit.

Updating the Scope of Eligible Deposits

Travellers’ Cheques: Given that CDIC member institutions no longer issue travellers’ cheques, the Government is considering modernizing the deposit insurance framework by removing travellers’ cheques as an eligible deposit.

Foreign Currency Deposits: Given that foreign currency deposits are widely held in Canada, the Government is considering the addition of foreign currency as an eligible deposit. To reduce complexity, any funds paid out to depositors holding eligible foreign currency accounts could be paid in Canadian dollars.

Temporary High Balances: Temporary high balances include large lump-sum payments such as payment received from an inheritance, an insurance payout, a divorce settlement or the sale of property. The creation of temporary high balance coverage in Canada would add complexity to the deposit insurance framework and increase CDIC exposure. Funds necessary to cover temporary high balances under deposit insurance could likely only be collected subsequent to a bank failure.

Addressing the Complexity of Trusts

Disclosure of Beneficiary Information: For CDIC to be able to quickly and accurately pay out deposit insurance, they need to have ready access to beneficiary information. Insufficient or incorrect beneficiary information may result in a reduction in coverage available to beneficiaries.

Brokered Deposits: Brokers can deposit funds either as an agent or in their own name in a trust for their client. Brokered deposits receive coverage differently depending on the approach the broker chooses. If the deposit broker acts as agent, the amount is considered part of the client’s $100,000 limit in the individual category of deposit insurance. In the trust form, the client is a beneficiary, and coverage is dependent on the provision of accurate beneficiary information by the trustee to the member institution before the institution fails. In the latter case, brokers may be reluctant to provide client information to CDIC member institutions who are potential competitors. Therefore the Government is seeking views on how to ensure beneficiaries of brokered trustee deposits retain their coverage.

Comments

Written comments can be sent by November 30, 2016 to DepositInsuranceReview-ExamenDuCadreDAssuranceDepots@canada.ca or to:

Financial Systems Division
Financial Sector Policy Branch
Department of Finance Canada
90 Elgin Street
Ottawa, Canada
K1A 0G5