Timely Disclosure

Timely Disclosure

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

IIROC Proposes Additional Changes to the Dealer Member Plain Language Rule Book

books-1655783_1280On March 9, 2017, the Investment Industry Regulatory Organization of Canada (IIROC) published IIROC Notice 17-0054 – Re-Publication of Proposed IIROC Dealer Member Plain Language Rule Book (the Notice), which republished for comment, the proposed Dealer Member Plain Language Rule Book (the proposed DMPL Rule Book).

The beginnings of the proposed DMPL Rule Book originate in 2008 following a project by the predecessor of IIROC to form a single set of rules to govern all of the individuals and entities now regulated by IIROC. Each section of the proposed DMPL Rule Book was initially published for comment in a number of discrete tranches and subsequently republished for comment in a compiled form in March 2016 (the previous publication).

The proposed DMPL Rule Book being published pursuant to the Notice reflects the changes made to the previous publication as a result of the comments received from the public and the Canadian Securities Administrators, as well as from IIROC’s own review. The principle substantive changes to the previous publication identified by IIROC include the following:

  • Changes to certain proficiency requirements, and shortening of the continuing education cycle from three years to two years, while adjusting the total required hours to 30 over the two-year cycle.
  • Changes to some of the introducing broker/carrying broker requirements.
  • Changes to certain responsibilities assigned to certain dealer member executives.
  • New IIROC approval for dual registration of approved persons.
  • New requirements to assess the appropriateness of accounts and products before opening accounts or recommending products.
  • Application of account opening procedures for retail clients to institutional clients.
  • Inclusion of “know-your-client” and account portfolio information to the managed account agreement.
  • New prohibition against transactions between a client’s management account and the account of a responsible person (akin to Section 13.5(2)(b) of National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations).
  • New retail client suitability rules.
  • Modifications to the Investor Application Form, Investor Notification Form and updated guidance.

Additionally, the proposed DMPL Rule Book includes the Consolidated Enforcement, Examination and Approval Rules which became effective on September 1, 2016. These rules are not being published for comment except to the extent that changes were made to the formatting and definitions to conform to the proposed DMPL Rule Book.

A clean version of the proposed DMPL rule Book and a blackline version of the changes made from the previous publication have been made available by IIROC.

With the exception of the Consolidated Enforcement, Examination and Approval Rules, to the extent discussed above, IIROC is soliciting comments on the entirety of the proposed DMPL Rule Book by May 12, 2017.

Nouveaux changements proposés au Manuel de réglementation en langage simple des courtiers membres de l’OCRCVM

books-1655783_1280Le 9 mars 2017, l’Organisme canadien de réglementation du commerce des valeurs mobilières (l’« OCRCVM ») a publié l’Avis de l’OCRCVM 17-0054 – Nouvelle publication du projet de Manuel de réglementation en langage simple des courtiers membres de l’OCRCVM (l’Avis), publiant une nouvelle fois le projet de Manuel de réglementation en langage simple des courtiers membres (le « projet de Manuel de réglementation LSCM ») à des fins de commentaires.

Les débuts du projet de Manuel de réglementation LSCM trouvent leur origine en 2008 à la suite d’un projet de l’association remplacée par l’OCRCVM pour créer un seul ensemble de règles régissant la conduite des personnes physiques et morales maintenant régies par l’OCRCVM. Chaque section du projet de Manuel de réglementation LSCM avait initialement été publiée en plusieurs tranches individuelles pour faire l’objet d’appels à commentaires distincts, puis a été publiée à nouveau dans le cadre d’un appel à commentaires en version compilée en mars 2016 (la publication précédente).

Le projet de Manuel de réglementation LSCM publié aux termes de l’Avis reflète les modifications apportées à la publication précédente en réponse aux commentaires reçus du public et des Autorités canadiennes en valeurs mobilières, ainsi que des modifications découlant de l’examen de l’OCRCVM. Les modifications de fond aux règles de la publication précédente indiquées par l’OCRCVM comprennent les suivantes :

  • Des modifications aux compétences requises et faire passer le cycle de formation continue de trois à deux ans, ainsi qu’ajuster le nombre total d’heures requises à 30 heures pendant le cycle de deux ans.
  • Des modifications à certaines obligations des remisiers/courtiers chargés de comptes.
  • Des modifications à certaines responsabilités attribuées à certains membres de la haute direction du courtier membre.
  • Une nouvelle approbation de l’OCRCVM en ce qui concerne la double inscription des personnes autorisées.
  • De nouvelles exigences quant à la pertinence d’un compte et d’un produit avant de l’ouvrir ou de le recommander.
  • L’application des exigences de la procédure d’ouverture de comptes de détail aux clients institutionnels.
  • L’inclusion de l’information sur la connaissance du client et le portefeuille du compte à la convention pour comptes gérés.
  • Une nouvelle interdiction pour une personne responsable d’effectuer des opérations entre son propre compte et le compte géré d’un client (analogue à l’article 13.5 (2)(b) du Règlement 31-103 sur les obligations et dispenses d’inscription et les obligations continues des personnes inscrites).
  • De nouvelles règles liées à la convenance dans le cas de clients de détail.
  • Des modifications aux formulaires intitulés Demande de l’investisseur et Notification de l’investisseur et mise à jour de la Note d’orientation connexe.

Le projet de Manuel de réglementation LSCM comprend aussi les Règles consolidées de mise en application, d’examen et d’autorisation qui sont entrées en vigueur le 1er septembre 2016. Ces règles ne sont pas publiées pour solliciter des commentaires à leur égard excepté dans la mesure où des modifications ont été apportées au format et aux définitions pour les faire concorder avec le projet de Manuel de réglementation LSCM.

Une version nette du projet de Manuel de réglementation LSCM et une version soulignée des modifications apportées à la publication précédente ont été fournies par l’OCRCVM.

L’OCRCVM sollicite des commentaires d’ici le 12 mai 2017 sur l’ensemble du projet de Manuel de réglementation LSCM, à l’exception des Règles consolidées de mise en application, d’examen et d’autorisation, dans la mesure discutée ci-dessus.

Use of Proxies within the Context of a Limited Partnership

berlin-2018056_1280A recent case in Manitoba has explored certain issues relating to the use of proxies within the context of a limited partnership.  The case, 177061 Canada Ltd. et al. v. 5771723 Manitoba Ltd. et al., 2016 MBQB 40, discusses two points of interests relating to proxies in a limited partnership setting (and, by logical extension, a partnership setting): (1) whether, under Manitoba law, a unit holder in a limited partnership can give to another person an irrevocable proxy to vote, which extends beyond a single meeting or adjourned meeting, and (2) if so, whether such irrevocable proxy can be revoked.

The case concerns proxies that were created in 1998 as part of a payment for debt for various transactions between two sophisticated business parties (Lount and Shelter).  One of the parties, Lount, a respondent in this case, received two  “irrevocable voting proxies” from a company controlled by the other sophisticated party, Shelter, and from the wife of a business associate of Shelter (Sikora), each an applicant in this case, for voting rights of a limited partnership (unrelated to the transactions) which beneficially owned an apartment building in Winnipeg.

Lount proceeded to use the proxies until 2011.  An annual and special meeting of the limited partnership was scheduled for December 2013 in which significant changes to the limited partnership agreement were to be considered.

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Majority Voting: Latest Developments

chairs-1840377_1280Stephen Erlichman recently wrote “Majority Voting: Latest Developments in Canada”, a short piece published in the March 22 edition of the Harvard Law School Forum on Corporate Governance and Financial Regulation. The article explains the latest developments in Canada with respect to 1) the Toronto Stock Exchange’s new guidance with respect to its majority voting listing requirement, 2) the federal government’s Bill C-25 that proposes amendments to the Canada Business Corporations Act which include true majority voting for directors, and 3) Ontario’s Business Law Advisory Council’s recent statement with respect to majority voting.

OSC Highlights Potential Securities Law Requirements for Businesses Using Distributed Ledger Technologies such as Blockchain

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By a press release issued March 8, 2017, the Ontario Securities Commission (OSC) warned businesses that use distributed ledger technologies (DLT), such as blockchain, as part of their financial products or service offerings that they may be subject to Ontario securities law requirements.

The OSC noted that businesses are using DLT in a variety of ways including, with respect to initial coin or token offerings where ownership of the coins or tokens is tracked using DLT, or the establishment of investment funds with DLT-based virtual currencies in their portfolios. The OSC advised that products or other assets that are tracked and traded as part of a distributed ledger may be securities, even if they do not represent shares of a company or ownership of an entity. Accordingly, the use of DLT may trigger Ontario securities law requirements, including the need to file a prospectus or rely on an exemption from prospectus requirements or for participants to be registered  as a dealer, adviser or investment fund manager.

The OSC reminded businesses to consider the types of offerings that involve securities within the meaning of securities legislation (e.g., evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company, a product that is an investment contract) and the types of trading activities that will occur.  In addition, the OSC suggested that businesses may contact the OSC LaunchPad to discuss the associated securities law requirements.

Corporate Disclosure by Reporting Issuers on Social Media

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It would be an understatement to characterize the presence and use of social media in our daily lives as being ubiquitous in scope and nature. The proliferation of social media venues allows us to communicate and share ideas and opinions in a manner beyond anything that we have experienced in human existence. The casual observer could easily see the impact which social media has on our personal lives and in the political arena. Clearly, business is not immune to the tool that is social media.

However the use of social media by reporting issuers to communicate with the market and shareholders raises certain issues relating to disclosure and is fraught with traps. The issue was dealt with in the United States when the Securities and Exchange Commission (SEC) stated that issuers may disclose key information on social media outlets to the extent that investors received prior notice as to which social media outlet was being used to publish the information [1].

The Canadian Security Administrators (CSA), which have traditionally taken a more conservative approach to disclosing information, clarified in a report last week that they do not intend to join the United States’ method of allowing information-sharing on social media pages, unless the disclosure complies with applicable securities laws and regulations. Published on March 9, 2017, CSA Staff Notice 51-348 Staff’s Review of Social Media Used by Reporting Issuers (Notice) directed public issuers to continue to report material information through traditional press releases, clarifying however that social media platforms could be used to disseminate and further publicize news after it is made public on the System for Electronic Document Analysis and Retrieval (SEDAR[2].

The Notice was written in an attempt to determine whether the disclosure provided by the new and growing venues complies with the principles enunciated in the National Policy 51-201 Disclosure Standards (NP 51-201) and the requirements of the National Instrument Continuous Disclosure Obligations (NI 51-102). After examining 111 reporting issuers that use social media in Quebec, Ontario and Alberta, the CSA identified three key areas where issuers need to take greater care when disseminating information through these new venues:

  1. Selective or early disclosure occurs when some investors receive privileged information due to their presence on a social media platform. The CSA specified that the nature of marketing on social media can lead to breaches of obligations that public issuers have under securities law. The CSA also recorded a number of instances where issuers disclosed forward-looking information online without ensuring that this information was disclosed to all stakeholders. Often, companies disclosed information on social media before disclosing it on SEDAR.
  2. Unbalanced or misleading disclosure on social media disclosure occurs where information is not sufficient to provide a complete picture or is inconsistent with information already disclosed on SEDAR. The CSA reported that issuers often provided a commentary on social media that was inconsistent with their SEDAR disclosures. For instance, they might sometimes disclose non-GAAP measures which were not officially disclosed elsewhere and without the accompanying information that should be included to understand the non-GAAP measures.. Moreover, the very fact that Twitter messages cannot be longer than 140 characters limits the accuracy of the information that can be provided in a single post.
  3. The social media governance policies in place to support social media activity are lacking or insufficient. A significant number of issuers do not have policies, procedures, and controls in place to ensure that information disseminated on social media reaches the same standards as it would in a regulatory filing. The CSA provided recommendations of some of the elements that ought to be included to ensure good social media practices. These include determining who can post information on the site, what types of sites can be used, what information can be disclosed on the sites, what approvals are needed before the information is posted, and who is responsible for monitoring the social media accounts.

In view of some alarming figures brought forth in the Notice, Canada’s decision to implement stricter social media disclosure guidelines is a responsible approach. Such a position will ensure that all material information reaches investors simultaneously and will ensure it will be complete when published. Clearly, posting a tweet does not amount to a full public announcement and does not constitute wide dissemination of information to the public. Unlike the United States, where an attempt to adopt conservative measures by the SEC was considered a lack of understanding of market realities by the regulatory authorities, the CSA’s report has clearly justified their reasons for holding higher standards for the dissemination of information on social media.

The Notice also reminds issuers that disclosures of material information must be made in accordance with securities laws – no matter what the venue. The danger lies in the fact that social media does not lend itself well to subtle and complex financial disclosure and that such disclosure, without first widely disseminating it, may indeed constitute selective disclosure.

[1] Securities and Exchange Commission, “SEC Says Social Media OK for Company Announcements if Investors Are Alerted” SEC Press Release, 02 April 2013

[2]  McFarland, Janet. “Canadian firms can’t use social media to report key information, CSA rules”, The Globe and Mail, 09 Mar. 2017

OSC releases results of #RegHackTO, its first regulatory hackathon

apple-1853306_1280On March 6, 2017, the Ontario Securities Commission issued a white paper titled “Insights from Canada’s first regulatory hackathon”.  The paper provides an overview of the RegHackTO hackathon hosted by the OSC on November 25-27, 2016.   At the event, more than 120 members of the fintech community competed to find solutions to regulatory problems in four areas: RegTech, Know-Your-Client (KYC)/identity authentication, financial literacy and transparency in the capital markets.

The solutions presented by the various teams included technologies that would standardize data in the capital markets, applications to allow for easier investment product comparability, and surveillance applications to conduct analytics and identify industry trends.

The winning teams were as follows:

First place: Existence Labs for “KeyStamp” which uses blockchain technology to verify compliance with securities requirements such as KYC and suitability in real time.

Second place: RicLoo for “TLSRegistry”, another blockchain-based solution, which verifies identities using existing secure websites and permits certain actions such as granting permissions and providing proof of employment.

Third place: Extreme Securities 2k16 for “Rubix Solution” which is a portal that validates initial coin offerings and provides standardized data for comparing investment products in key areas such as returns and fees and allows real time oversight by regulators.

The OSC identified three themes that emerged from the event: (i) technology (and in particular distributed ledger technology) is rapidly changing how financial services are delivered; (ii) open access to data is essential for advancing fintech solutions; and (iii) regulators must be open to new ways of doing business.

In addition, the OSC set out a list of next steps including considering ways to leverage technologies such as DLT and artificial intelligence in its regulatory work, supporting the facilitation of access to data, subject to privacy and security concerns, and reviewing potential solutions to centralized KYC information collection and verification processes.

For more information, please see the RegHackTO site.

American Bar Association Publishes Canadian Private Target Mergers and Acquisitions Deal Points Study

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The American Bar Association has published its Canadian Private Target Mergers & Acquisitions Deal Point Study[1] (Study) analyzing transactions that involved Canadian private targets that were acquired or sold by public companies in 2014 and 2015. The Study included a sample of 101 transactions and excluded transactions with a value less than C$5 million, transactions where the target was in bankruptcy, transactions involving non arm’s length parties, transactions not governed by Canadian law and transactions otherwise deemed inappropriate for inclusion.

A subset of the Study’s findings include:

  • Transaction values ranged between C$5.78 million and C$4 billion, with 41% of transaction values ranging between C$5 million and C$50 million.
  • The majority of the transactions (55%) consisted of all cash consideration, whereas 6% of transactions included all share consideration and 39% of transactions included cash and share consideration.
  • The principal industries of the targets were: natural resources (17%); oil & gas (16%); and industrial goods & services (11%).
  • 71% of transactions involved corporate sellers compared to 17% with entrepreneurial sellers and 8% with private equity sellers.
  • 87% of transactions involved corporate buyers compared to 10% with private equity buyers and 2% with entrepreneurial buyers.

The Study analyzed additional deal points, including financial provisions, qualifiers, representations & warranties, closing conditions, indemnification and dispute resolution.

 

[1] Membership to ABA required

The Canadian Securities Administrators Launch a Regulatory Sandbox Initiative for FinTech, RegTech and other innovative products

toronto-73565_1280On February 23, 2017, the Canadian Securities Administrators (CSA), the umbrella organization of Canada’s provincial and territorial securities regulators, launched a regulatory sandbox initiative to support businesses seeking to offer innovative products, services and applications including:

  • online platforms, including crowdfunding portals, online lenders, angel investor networks or other technological innovations for securities trading and advising;
  • business models using artificial intelligence for trades or recommendations;
  • cryptocurrency or distributed ledger technology based ventures; and
  • technology service providers to the securities industry, such as non-client facing risk and compliance support services (also known as regulatory technology or regtech).

The CSA stated that they will consider applications, including for time-limited registrations, on a coordinated and flexible basis to provide a harmonized approach throughout Canada for business models, whether they are start-ups or incumbents.

The sandbox is open to business models that are truly innovative from a Canadian market perspective. The CSA intend to assess the merits of each business model, on a case-by-case basis, and businesses that register or receive relief could be permitted to test their products and services throughout the Canadian market.

To apply to the CSA regulatory sandbox, businesses should contact their local securities regulator, which will consider the eligibility of their business model and refer it to the CSA regulatory sandbox if it provides genuine technological innovation in the securities industry. As part of the application process, CSA Staff may request live environment testing, a business plan and demonstration of potential investor benefits (as well as how investor risks are minimized).

The CSA advised that local securities regulators can also provide early stage guidance on the application of current securities regulatory obligations, as well as information and support.

The CSA Move Forward on Consultations Regarding the Discontinuation of Embedded Commissions

office-1209640_1280On January 10, 2017, the Canadian Securities Administrators (CSA) issued for comment CSA Consultation Paper 81-408 – Consultation on the Option of Discontinuing Embedded Commissions (the Consultation Paper) for a 150-day comment period. The Consultation Paper presents for discussion, the CSA’s position regarding the effects of sales of investment fund securities or structured notes through commissions, including sales and trailing commissions, paid by investment fund managers (embedded commissions), and proposes that the use of embedded commissions be discontinued in favour of direct pay arrangements.

Proposed Changes

The Consultation Paper currently anticipates that the new regulatory framework would aim to

discontinue any payment of money to dealers in connection with an investor’s purchase or continued ownership of a security described above that is made directly or indirectly by a person other than the investor.

This would, at a minimum, include ongoing trailing commissions or service fees as well as upfront sales commissions for purchases made under a deferred sales commission (DSC) option.

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