Timely Disclosure

Timely Disclosure

Updates and Commentary on Current issues in M&A, Corporate Finance and Capital Markets

Cross-Border Bond Offerings – Implications of a “distribution to the public” under the Canada Business Corporations Act


Economic Environment

The volume of securities purchased by foreign investors in Canada has been steadily increasing in recent years.  While equity securities account for the majority of the increase, debt securities still comprise most of the foreign investment in Canada.[1]  Of these debt securities, corporate bonds attracted the largest increase in investment in 2016 compared to 2015.[2]  The continued significance for Canadian issuers (Issuers) of foreign markets for raising capital emphasizes the importance of understanding the nature of cross-border debt securities offerings (Offerings) and, in particular, uncertainties in their technicalities which, if not properly traversed, can lead to increased costs for Issuers.

Overview of Offerings

Bonds can be offered by Issuers pursuant to a public offering under a prospectus or can be placed privately by way of a private placement, in which case Issuers may choose to prepare and distribute an offering memorandum to potential investors.  The method employed will vary depending on the Issuer’s target market and the extent to which the Issuer is known to participants in the capital markets.  Bonds, regardless of the type of Offering, are typically issued under the terms and conditions of a trust indenture which is entered into between the Issuer and an indenture trustee (Trustee).  The Trustee protects the interests of the Bondholders by enforcing the terms and conditions provided in the trust indenture.

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CSA Provide Update on Enhanced Segregation and Portability Initiatives for Clearing Agencies Serving the Domestic Futures Markets

dubai-1767540_1280The Canadian Securities Administrators (CSA) published a staff notice on February 9, 2017 highlighting the initiatives regulators have taken to enhance segregation and portability arrangements for the exchange-traded derivatives markets in Canada following the CSA’s advanced notice of its adoption of National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (NI 94-102). NI 94-102 implements a segregation and portability regime to protect customer collateral and positions in the over-the-counter derivatives markets.

Since 2015, the CSA have engaged industry stakeholders to determine an appropriate central counterparty segregation and portability model for domestic futures markets. Industry stakeholders, as well as the regulators, have demonstrated support to enhance segregation and portability arrangements through a gross-customer margin (GCM) model.

The GCM model requires daily submission of customer level position data to a derivatives clearing organization (DCO). Unlike the net margin system, the GCM model does not allow futures commission merchants to offset positions of one customer with those of its other customers and submit margins that cover the netted amount. The GCM model has gained support by the industry participants as it will enhance customer protection, especially by strengthening the ability to port customer positions and collateral in the event of a clearing participant default. Furthermore, the GCM model may also reduce systemic risk by bolstering confidence that losses related to counterparty risk will be managed by eliminating the ability to offset margins by netting long and short positions when submitting margins to a DCO.

The GCM model has already been adopted by the Canadian Derivatives Clearing Corporation (CDCC) and ICE Clear Canada Inc. However, the CSA have indicated that they do not intend to impose a GCM model at this time, citing that implementing a GCM framework would be inconsistent with the principled approach taken by the clearing agency requirements in NI 24-102. Moreover, if the CSA were to implement a GCM model, it may require changes to certain dealer member rules under the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund regime currently in place.

The CSA have indicated that they will continue to meet regularly during 2017 to discuss proposed new or amended IIROC or CDCC rules. In the event the CSA decide to implement new rule changes, such changes would be subject to a public comment process and regulatory approval by CSA members.

Statutory Compliance, and the Continued Relevance of the Oppression Remedy, in the Wake of Mennillo v. Intramodal inc.


In its decision Mennillo v. Intramodal inc., 2016 SCC 51 (Intramodal), the Supreme Court of Canada (Court) was asked whether a corporation’s failure to comply with statutory formalities was oppressive against a shareholder. The majority ruled that based on the facts the company’s failure to comply with certain Canada Business Corporation Act (CBCA) requirements did not trigger the oppression remedy. In the words of Justice Cromwell, who provided reasons for the majority, “sloppy paperwork on its own does not constitute oppression” (para 5).

Companies, directors and their shareholders should be cautious, however, not to draw the wrong lesson from the majority’s decision in Intramodal. Compliance with corporate statutes, whether federal or provincial, is not optional. In addition to violating the law, a failure to comply with corporate statutory formalities can still trigger an oppression remedy where the violation frustrates the reasonable expectations of a company stakeholder, which includes a company’s shareholders, directors, officers and creditors.

As this post will discuss, the decision in Intramodal did not establish a precedent that statutory non-compliance on its own cannot result in an oppression remedy.

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Cybersecurity Risk Disclosure and Reporting Issuers


Recent computer-security breaches have brought to the forefront the need for enhanced cybersecurity and disclosures surrounding cybersecurity risks.

In response to the growing risks associated with a digitally-linked world, the Canadian Securities Administrators (CSA) issued Staff Notice 11-332 Cybersecurity to review current issues in cybersecurity from a reporting issuer’s point of view.  That Staff Notice was followed by Multilateral Staff Notice 51-347 Disclosure of cybersecurity risks and incidents (MSN 51-347) in January 2017 – recognizing implicitly that the effectiveness of an issuer’s cybersecurity infrastructure may be as important as an issuer’s internal control of its financial reporting processes.

While MSN 51-347 states that each issuer should not compromise its security by disclosing sensitive information, impetus is put on reporting issuers to disclose material risks relating to cybersecurity in such a manner as to provide detailed entity specific disclosure and avoid boiler- plate language – something which the CSA remind issuers in reviewing other types of disclosure.  Thus, risks relating to financial institutions may not be the same as those relating to an industrial manufacturer and should not be treated as such by reporting issuers.

The CSA did issue guidelines in MSN 51-347 to consider factors identified by the International Organization of Securities Commissions and to review mitigation strategies (such as preventative measures) and apply disclosure controls and procedures to ensure incidents are reported to management and assessed for materiality and potential disclosure.

What is key is to review what is “material”.  National Policy 51-201 Disclosure Standards (NP 51-201) provides guidance and issuers and their counsel should continue to look at NP 51-201 for a view as to what requires timely disclosure with respect to cybersecurity incidents.  Clearly, whether the risk is a material fact or a material change does not change whether or not the risk is related to cybersecurity.

Potential breaches of an issuer’s confidential electronic files are a cause for concern and should be treated like any other business risk and disclosed as required under Canadian securities legislation and regulations.  For example, the breach of confidential banking or personal information for a large number of customers of a financial institution or a retailer will, most likely, require timely disclosure of the incident.

Other jurisdictions, such as the United States, have not provided specific guidance relating to cyber risk disclosure but have rather encouraged issuers to disclose cyber risks.  These risks are factors which may increase the risk of making an investment in a particular issuer so that investors may make informed decisions on the investment.  The U.S. also enacted the Cybersecurity Information Sharing Act of 2015 which has developed procedures to share information about cybersecurity threats across different agencies and other levels of government which have appropriate security clearances and with businesses where such information is unclassified.

Clearly, cybersecurity is a key concern for all reporting issuers – some being impacted more than others.  This is a dynamic and fluid landscape which requires much investment and attention by issuers.

Canadian Securities Regulators Publish Final Proxy Voting Protocols to Improve the Proxy Voting Experience

architecture-22231_1920On January 26, 2017, the Canadian Securities Administrators (CSA) published CSA Staff Notice 54-305 Meeting Vote Reconciliation Protocols, which provides guidance for establishing accurate, reliable and accountable meeting vote reconciliation protocols (Protocols). The whole, with the goal of improving the transparency and the quality of shareholder voting and ostensibly, shareholder engagement in publicly traded companies.

The Protocols target key service providers involved in meeting vote reconciliation, namely: CDS, intermediaries (such as bank custodians and investment dealers), the primary intermediary voting agents (such as Broadridge), and transfer agents that act as meeting tabulators (key service providers). The guidance provided by the Protocols addresses the types of operational processes which should be implemented by these key service providers so that they can better work together to improve meeting vote reconciliation. Furthermore, the CSA hope that the Protocols will set the groundwork for paperless voting and information transmission as well as the development of end-to-end voting confirmation capabilities.

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Mutual Fund Risk Classification Methodology Amendments to come into force March 8, 2017

pexels-photo-27406Commencing March 8, 2017, new rules relating to the risk classification of conventional mutual funds and exchange-traded funds (collectively, mutual funds) will come into force. The new rules will primarily involve amendments to National Instrument 81-102 Investment Funds (NI 81-102), but will also involve consequential amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), certain forms under NI 81-101, and its companion policy (the Amendments).

The Canadian Securities Administrators (CSA) initially introduced the idea of a standardized risk classification methodology applying to all mutual funds in December 2013 and later refined it in draft amendments published in December 2015. The CSA considered the comments it received on both publications in developing this final version of the Amendments, which is largely similar to the 2015 version.

Pursuant to the Amendments, mutual fund managers will be required to use a standardized methodology, based on standard deviation, to classify the investment risks of their mutual funds. Currently, mutual fund managers are permitted to adopt a risk classification methodology of their own choosing, provided it is described in the mutual fund’s prospectus and fund facts. The CSA believe that a standardized methodology will allow investors to better compare the investment risk levels of different mutual funds.

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The Canadian Say on “Say on Pay”


As the New Year rolls along, so does commentary on executive compensation. According to the Canadian Centre for Policy Alternatives, by 11:47 am on the first working day of 2017 (January 3rd) Canada’s 100 highest paid CEOs on the TSX index had earned the equivalent of the average annual Canadian wage.

Shareholder votes on the executive compensation disclosed in management proxy circulars (“say on pay”) are not mandated in Canada. However, according to the Institute for Governance of Private and Public Organizations, 80% of the largest Canadian companies have adopted the practice voluntarily or as a result of pressure from investors.

Say on pay initiatives have been well under way in many jurisdictions for a number of years and the reviews are in.

International Say On Pay

In the US, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities Exchange Commission requires a mandatory advisory say on pay for top executives compensation for public companies. Under the compensation discussion and analysis section of the proxy statement, shareholders do not vote on bonuses, stock options, retirement pay or other specific elements of compensation, simply an “up” or “down” to compensation.

In the UK, companies with shares on the Financial Services Authority’s List require a binding (rather than advisory) annual say on pay vote by shareholders.

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FINRA Releases Report on Implications of Blockchain for the Securities Industry


On January 18, 2017, the United States Financial Industry Regulatory Authority (FINRA) released for comment a report titled Distributed Ledger Technology: Implications of Blockchain for the Securities Industry.

The report provides a helpful overview of distributed ledger technology (DLT) which FINRA describes as involving a distributed database maintained over a network of computers connected on a peer-to-peer basis, such that network participants can share and retain identical, cryptographically secured records in a decentralized manner.

The report sets out examples of DLT applications being explored in the U.S. securities industry by market participants including the following:

  • a system to track the trading and ownership of private company shares,
  • the issuance of a class of digital shares on a proprietary DLT network allowing for the shares to be traded on the platform with same day settlement,
  • a DLT network to facilitate faster clearing and settlement of syndicated loans or repurchase agreements,
  • the issuance and trading of corporate bonds on a distributed ledger network such that the terms of the bond are embedded as code on the digital asset allowing for automated calculation and payment of coupons,
  • a DLT network to manage and monitor credit default swaps,
  • a DLT-based central repository of standardized reference data for various securities products, and
  • a centralized identity management function to manage global customer identities through a single interface with the information to be shared with other participants on the network.

The report reviews the potential impact of the technology, including key implementation and U.S. regulatory considerations for broker-dealers such as governance, operational structure, network security and regulatory considerations, customer data privacy, trade and order reporting requirements, supervision and surveillance, fees and commissions, customer confirmations and account statements and business continuity planning.

FINRA is seeking comments from interested parties by March 31, 2017.

CSA Provides Results of Survey Reviewing Types of Representative Incentives


On December 15, 2016, the Canadian Securities Administrators (CSA) published CSA Staff Notice 33-318 Review of Practices Firms Use to Compensate and Provide Incentives to their Representatives (Notice) summarizing the results of a survey conducted in 2014 that gathered information relating to compensation arrangements and incentive practices that firms use to motivate their representatives (Survey).

The Survey was conducted as part of a larger framework of proposed reforms to enhance the client-registrant relationship, as set out in the CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives toward their Clients, published on April 28, 2016 (Consultation Paper).  The Consultation Paper is part of the CSA’s initiative towards improving the relationship between clients and their advisers, dealers and representatives.

The Survey asked adviser and dealer firms to identify the compensation practices used to compensate their representatives.  The Survey was focused on the incentive practices used for retail representatives who fell under the oversight of the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC), as well as representatives with portfolio managers or exempt market dealers working with high net worth clients.

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U.S. Federal Prosecutors Achieve Resounding Victory in Tipping Case


Last month, federal prosecutors achieved a resounding victory in a tipping case before the U.S. Supreme Court in Salman v. United States, 580 U. S. ____ (2016).  In its much anticipated decision, the Court held that a jury could infer that the tipper personally benefited from making a gift of confidential information to a trading relative, even where the tipper did not receive something of a “pecuniary or similarly valuable nature” in return.


Bassam Y. Salman was indicted for trading on inside information he received from a friend and extended relative, Michael Kara, who, in turn, had received the information from his brother, Maher Kara, a former investment banker at Citigroup (who was also Salman’s brother-in-law).  Maher testified at trial that he shared inside information with Michael to benefit him and expected him to trade on it, while Michael testified to sharing that information with Salman, who knew that it had originated with Maher.

Salman argued that he could not be held liable as a tippee because the tipper (Maher) did not personally receive money or property in exchange for the tips and thus did not personally benefit from them.

The Government, meanwhile, argued that a gift of confidential information to anyone, not just a “trading relative or friend,” is enough to prove securities fraud because a tipper personally benefits through any disclosure of confidential trading information for a personal (non-corporate) purpose.

The Decision

In rejecting Salman’s argument, the Court relied on a 1983 decision by the Burger Court, Dirks v. SEC, 463 U. S. 646 (1983), where the Court explained that tippee liability hinges on whether the tipper’s disclosure breaches fiduciary duty, which occurs when the tipper discloses the information for a personal benefit.  The Court held that a personal benefit may be inferred where the tipper receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.”

The Court explained that “making a gift of inside information to a relative . . . is little different from trading on the information, obtaining the profits and doling them out to the trading relative.  The tipper benefits either way.”

In rendering its decision, the Court declined to follow a decision by the Second Circuit in United States v. Newman, 773 F. 3d 438 (2d Cir. 2014), cert. denied, 577 U. S. ___ (2015), which was issued while Salman’s appeal was pending.  There, the court had concluded that to infer a personal benefit to the tipper from a gift of confidential information to trading relative or friend “required proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature.”  773 F. 3d, at 452.

Going Forward

What remains unclear is how the personal benefit requirement might apply to circumstances not involving friends or relatives, but what appears to be clear is that the common struggle to establish that an insider was expecting a benefit in exchange for the tip to a friend or relative is now a thing of the past.

The analysis applicable in the United States is in contrast to the tipping prohibitions found in Canadian provincial securities statutes, which do not require that the tipper received a personal benefit from the provision of material non-public information to a tippee.  To establish tipping in Canada, it need only be proved that a person in a special relationship to an issuer conveyed material non-public information to a tippee or recommended or encouraged another to trade.