Canadian Securities Law

More insight from OSC Staff on NI 43-101 compliance issues for website and third party disclosure

Stikeman Elliott LLP — Thu, 17 May 2012 15:20:16 -0500

Last week, I had the opportunity to present at the 2012 Mine Accounting & Reporting Update conference held in Toronto. The conference covered a variety of topics of interest to mining and exploration issuers, including the issue of website and third party disclosure about which we wrote in early May.

At the conference, OSC Staff expanded on their views on this issue, including with reference to our own blog post on the subject. With respect to compliance with National Instrument 43-101 Standards of Disclosure for Mineral Projects, OSC Staff are of the view that if you publicly disclose it, post it, or link to it, then you "own it” and are responsible for ensuring that the disclosure complies with NI 43-101.

In respect of certain circumstances, such as an issuer’s own fact sheets, presentation slides or other “written disclosure” (as defined in NI 43-101), last week’s presentation by OSC Staff provided a useful reminder for issuers. However, on the subject of website and third party disclosure, the presentation provided confirmation that OSC Staff are continuing to look beyond the disclosure produced by an issuer itself and will consider all disclosure and information the issuer has endorsed (in posting the information or linking to it) when reviewing the issuer's compliance with NI 43-101. In particular, as noted in our earlier post, issuers should be particularly mindful with respect to analysts’ reports (governed also by National Policy 51-201 Disclosure Standards) and quoting or linking to media coverage of any kind.

During the conference, OSC staff also expanded on the use of preliminary economic assessments, an issue that I will canvass in a forthcoming post.

IIROC requests comments on marketplace threshold rules

Stikeman Elliott LLP — Thu, 17 May 2012 09:45:47 -0500

The Investment Industry Regulatory Organization of Canada (IIROC) recently proposed a set of principles intended to guide it as it considers formal proposals to establish marketplace price and volume thresholds. Specifically, two guiding principles are proposed, namely (i) that marketplace thresholds should generally preclude the execution of orders that would otherwise require regulatory intervention by IIROC due to the trigger of a single-stock circuit breaker or the application of policies regarding the variation and cancellation of trades; and (ii) that the application of marketplace thresholds should have the least amount of impact on price discovery and access to tradable liquidity.

The release considers existing mechanisms to control volatility and notes that IIROC has issued guidance or request for comments with respect to single-stock circuit breakers, regulatory intervention for the cancellation or variation of trades and market-wide circuit breakers. IIROC notes, however, that these mechanisms are based on price impact and are not directly affected by the volume of an order. Ultimately, IIROC requests comments on all aspects of controlling price volatility in the Canadian marketplace and specifically on a number of questions, including: (i) whether marketplaces should be required to adopt a form of marketplace thresholds; (ii) whether the proposed guiding principles are appropriate and whether there are additional ones that should be considered; and (iii) whether marketplace thresholds should be more flexible during periods of natural volatility. Comments are being accepted until August 8, 2012.

MFDA releases strategic plan through 2014

Stikeman Elliott LLP — Tue, 15 May 2012 13:52:38 -0500

The Mutual Fund Dealers Association of Canada (MFDA) has released a new strategic plan for the period through 2014. Specifically, the MFDA identifies four key strategic goals for itself in the plan, namely: (i) enhancing collaboration with the industry; (ii) promoting investor confidence and ensuring the MFDA continues to be an active participant in the Canadian securities regulatory landscape; (iii) continuing to pursue staff excellence; and (iv) ensuring that the MFDA continues to pursue opportunities for process efficiencies so that it operates in a responsible and effective manner. For more information, see MFDA Bulletin #0525-M.

IIROC provides information on exemptions granted in 2011

Stikeman Elliott LLP — Tue, 15 May 2012 12:02:48 -0500

Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) released a notice providing information on exemptions granted in 2011. Ultimately, IIROC granted a total of 66 exemptions last year, most of which were related to requests by a Participant to act as a principal or agent in respect of a trade that would be completed off-marketplace. The exemptions covered by the notice, however, do not include those related to proficiency or other registration requirements. For more information, see IIROC Notice 12-0166.

CDS proposes amendments to buy-in process functionality

Stikeman Elliott LLP — Thu, 10 May 2012 15:50:08 -0500

The OSC today published a proposal to amend functionality of CDS' Continuous Net Settlement Service buy-in process. Specifically, the changes would (i) allow the receiver (buyer) to select the specific deliverers (sellers) they wish to grant or deny extensions to; (ii) enhance the Deliverer Buy-in List screen to increase clarity of the status of buy-in extensions; and (iii) introduce a new option that will allow the receiver to instruct the system to automatically create repeat buy-ins.

According to CDS, the proposed amendments will provide processing efficiencies and management flexibility in the buy-in process. Comments on the proposals will be accepted for 30 days from today's publication.

Proposed recognition orders related to Maple acquisition published by OSC

Stikeman Elliott LLP — Thu, 10 May 2012 15:00:54 -0500

On May 3, the Ontario Securities Commission published a notice summarizing the public comments received to date on Maple Group's proposed acquisition of TMX Group and identifying changes to the application since its original publication in October 2011. The notice also contains a proposed order recognizing Maple Group, TMX Group and TSX as exchanges. According to the OSC, the proposed order, which also approves the beneficial ownership by Maple of more than 10% of each of TMX Group and TSX, was released following an extensive review of Maple Group's acquisition proposal.

The recognition order also sets out various terms and conditions applicable to Maple, TMX Group and TSX, including with respect to governance, fee models and financial reporting. Further, a separate order was published to recognize the Canadian Depository for Securities Limited and CDS Clearing and Depository Services as clearing agencies, subject to various terms and conditions.

The OSC is accepting comments on the proposed orders, including their terms and conditions, until June 4, 2012.

More on the CSA's proposed end-user exemption

Stikeman Elliott LLP — Thu, 10 May 2012 14:45:11 -0500

Margaret Grottenthaler -

As we discussed last month, the Canadian Securities Administrators Derivatives Committee recently released the latest in a series of eight papers intended to build on the high-level proposals found in Consultation Paper 91-401 regarding the regulation of OTC derivatives. Specifically, Consultation Paper 91-405 considers the scope and characteristics of a proposed end-user exemption to address market participants that generally only trade to hedge commercial risks. According to the paper, this limited segment of end-users, not systemically important to the market, should be exempted from most of the proposed regulations concerning OTC derivatives. The CSA are accepting comments on the consultation paper until June 15, 2012.

Meeting Requirements

The Consultation Paper considers various criteria for determining who should qualify for the end user exemption. According to the CSA's proposal, an end user would include participants that: (i) trade for their own account; (ii) are not financial institutions; and (iii) hedge to mitigate commercial risks related to the operation of their business or a related affiliated entity or series of legal entities within that affiliated group. End users that otherwise meet the criteria for the exemption may still be found ineligible for the exemption, however, if they are deemed to be "Large Derivatives Participants" considered key participants in the market or whose default would represent a systemic risk to the market. An upcoming consultation paper on registration is expected to consider the thresholds for Large Derivatives Participants. The Committee also specifically rejected including certain criteria in determining whether a participant qualifies as an end-user, including those based on: (i) trade volume or notional dollar values of trades; (ii) sector specific exceptions; and (iii) standardized contracts and clearing.

In considering the definition of "hedging" for the purposes of mitigating commercial risks, the CSA make a number of observations. Specifically, the consultation paper states that the relevant derivatives transactions would have to specifically relate to the risk being hedged and should "reasonably be considered to be a suitable instrument for managing the risk." According to the CSA, the definition of hedging should also include positions that are treated as a hedge for accounting purposes as well as other positions that can be demonstrated to reduce the risk of loss arising from the end-user's business activity.

Ultimately, the CSA cite with approval the definition of hedging accepted by the Committee on Payment and Settlement Systems (CPSS). Generally, the CPSS characterizes hedging as being intended to offset or reduce the risk related to fluctuations in the value of an underlying interest or a position, or to substitute a risk to one currency for a risk to another currency. Under the CPSS definition, the transaction or series of transactions also has to result in a high degree of negative correlation between changes in the value of the underlying interest or position being hedged and changes in the value of the derivatives with which the value of the underlying interests or positions is hedged. According to the CPSS, there must also be reasonable grounds to believe that the transaction no more than offsets the effect of price changes in the underlying interest or position being hedged.

This characterization of hedging, however, assumes that the risk to be hedged will always relate directly to an underlying position or interest. In doing so, the consultation paper ignores activities such as the purchasing of weather derivatives intended to mitigate against the risk of an inclement winter, but that would not directly correlate to an underlying value in frost or snow.

Notification to Regulators

While participants seeking to rely on the end-user exemption would not require formal approval by regulators, they would have to provide notice of an intention to rely on the exemption. This one-time notice would include basic information about the market participant and would only have to be updated if there was a material change in the information.

According to the CSA, the process to be followed by eligible end-users would include attaining approval by the end-user's board of directors of the business plan or strategy authorizing management to use OTC derivatives contracts as a risk management tool. The CSA are silent, however, on how this requirement would apply to non-corporations. The consultation paper also suggests that the business plan would have to be disclosed in order to allow regulators to determine whether there had been compliance with the exemption. According to the consultation paper, these requirements are intended to ensure that the implications of trading OTC derivatives and the implementation of a hedging strategy will be considered by the board and management.

Reporting and Recordkeeping

While end-users would not have to report individual trades to a regulator, the trades would still have to be reported to a trade repository. According to CSA Consultation Paper 91-402, for derivative transactions between non-financial intermediaries, the parties would have to select one of the counterparties to the transaction to be the reporting party.

Considering the breadth of OTC derivatives activity captured, the reporting obligation may prove problematic. For example, is it expected that the obligation to report would capture individuals entering into contracts to hedge against increasing electricity prices, or farmers hedging to protect again inclement weather?

Users of the exemption would also have to maintain records of all trading activity, a record of the board's approval of the use of OTC derivatives and records demonstrating the analysis completed to demonstrate satisfaction of all necessary requirements. The consultation paper, however, does not provide information regarding whether the regulator may inspect the records, or the length of time that such records would have to be maintained.

As stated above, the consultation paper, which includes specific questions for the consideration of commentators, is open for public comment until June 15.

OTC issuer disclosure rules effective July 31, 2012

Stikeman Elliott LLP — Thu, 10 May 2012 14:15:03 -0500

The Canadian Securities Administrators, except for the OSC, today released Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets, intended to improve disclosure by issuers whose securities are quoted in U.S. OTC markets and with a significant connection to a Canadian jurisdiction. The instrument is also intended to discourage the manufacture and sale in Canada of U.S. OTC quoted shell companies that can be used for abusive purposes.

As we discussed in our post describing a draft version of the rule published in June 2011, a significant connection to a Canadian jurisdiction will be found to exist where (i) the OTC issuer's business is directed or administered in or from Canada; (ii) promotional activities are conducted from Canada; or (iii) the issuer distributes securities in Canada prior to obtaining a ticker symbol for the purpose of having its securities quoted on an OTC market in the U.S. and those securities become the issuer's OTC-quoted securities. Under the new rules, issuers subject to the instrument will generally have to comply with the continuous disclosure regime to which venture issuers are subject and, additionally, file annual information forms (which venture issuers may do voluntarily, but are not required to).

The instrument follows British Columbia's adoption of a local rule regulating issuers quoted in U.S. OTC markets and that have a significant connection to B.C. Having found that the adoption of the B.C. rule resulted in OTC issuers migrating to other Canadian jurisdictions, the CSA released a proposed draft of the multilateral instrument in June 2011. The final version released today reflects the comments received to the proposed draft. Assuming ministerial approvals are obtained, the OTC rule will come into force on July 31, 2012.

Changes to short sales, failed trades and dark liquidity moved to October 15

Stikeman Elliott LLP — Thu, 10 May 2012 10:12:32 -0500

IIROC this week announced a change in the implementation dates for UMIR amendments respecting short sales and failed trades, previously scheduled to occur on September 1, 2012, to October 15, 2012. Meanwhile, the implementation of amendments respecting dark liquidity, previously scheduled to occur on October 10, 2012, has now also been changed to October 15, 2012. According to IIROC, the dates have been consolidated to facilitate the technical changes that market participants, marketplaces and service providers need to make and to provide for one testing window for the changes. For more information, see IIROC Notice 12-0158.

Roundtable discussion considers issues in anti-corruption policies and practices

Stikeman Elliott LLP — Tue, 08 May 2012 13:20:37 -0500

Lisa Culbert -

On April 19, Transparency International Canada Inc. hosted its second annual Day of Dialogue featuring 12 roundtable discussions on current issues in anti-corruption policies and practices. Transparency International is part of an international coalition that monitors global corruption and provides education, information and training to the Canadian business community, the general public and government agencies to facilitate effective anti-corruption programs.

This year’s Day of Dialogue focused on current key topics, including the Niko Resources Ltd.prosecution and probation order, issues in creating and operating a compliance program, understanding corruption risks and impacts and compliance-based due diligence in mergers and acquisitions, among other items. As discussed in our post of August 10, 2011, the Niko prosecution signalled Canada’s ramp up of anti-corruption enforcement under the Corruption of Foreign Public Officials Act (the CFPOA). One of the key terms of the Niko plea agreement was the requirement to design and implement a compliance program to detect and deter CFPOA violations. The program was required to meet thirteen requirements, which mirrored the order from the probation order in U.S. v. Panalpina World Transport (Holding) Ltd. – a case where Panalpina, a Switzerland-based freight company admitted to paying over $27 million in bribes to foreign officials. The thirteen requirements for the corporate compliance program, consistent with the expectations of the CFPOA include:

implementing a clearly articulated and visible corporate policy against violating anti-corruption laws;
ensuring senior management provide strong, explicit, and visible support and commitment to its corporate policy against violations of its compliance program;
developing and promulgate compliance standards and procedures designed to reduce the prospect of violations at all levels of the company and parties with which it deals;
engaging in corruption risk assessment addressing the individual circumstances of the company and its interactions with other parties;
reviewing and update anti-corruption compliance programs annually;
designating one or more senior corporate executive(s) to manage the program;
ensuring financial and accounting procedures to maintain internal control;
communicating program to all relevant parties, including training and certification;
facilitating compliance with the program, in an internal and external system that is responsive to needs for advice, guidance, confidentiality, and action;
determining appropriate discipline to address violations, remedy harm, and prevent recurrences;
implementing comprehensive due diligence and compliance measures for agents or business partners;
enclude standard provisions in contracts to prevent violations of anti-corruption laws; and
conduct periodic review, testing, and improvement of the compliance program.

These compliance program requirements were consistent themes throughout the Day of Dialogue as participants discussed the importance of companies’ transitioning from an approach to compliance based on a code of conduct and business ethics to a more comprehensive mandate of anti-corruption policies and practices. The complete report summarizing the discussion from the Day of Dialogue will be made available on the Transparency International website.

OSC hosts meeting of international regulators regarding OTC derivatives

Stikeman Elliott LLP — Tue, 08 May 2012 10:31:47 -0500

On May 4, the Ontario Securities Commission released a statement regarding a meeting held in Toronto earlier this month and attended by various international regulatory agencies regarding the regulation of OTC derivatives. Various issues surrounding implementation were discussed, including transparency, margin for uncleared derivatives, coordination of clearing mandates, access to data in trade repositories, and cross border clearing house crisis management. Ultimately, the meeting's purpose was to provide a forum for discussion among the regulators as they work toward international harmonization of the regulatory requirements.

In addition to the OSC and Quebec's Autorité des marchés financiers, the meeting included representatives from the Australian Securities and Investments Commission, Brazil's Comissão de Valores Mobiliários, the European Commission and European Securities and Markets Authority, Hong Kong's Securities and Futures Commission, Japan's Financial Services Agency, the Monetary Authority of Singapore, the Swiss Financial Market Supervisory Authority, and the U.S. Commodity Futures Trading Commission and Securities and Exchange Commission.

Stock dividend programs - Is it time to turn off the DRIP?

Stikeman Elliott LLP — Mon, 07 May 2012 10:52:35 -0500

Keith Chatwin and Doug Richardson -

For as long as corporations have been paying dividends and trusts have been paying distributions, issuers have been seeking ways to encourage their securityholders to reinvest those cash payments into the issuer. These programs have typically taken the form of dividend or distribution reinvestment plans (DRIPs), which in their various incarnations have enabled securityholders to direct that cash dividends or distributions be used to acquire additional securities of the issuer from treasury or the open market; at the prevailing market price or at a discount, some with an ability to contribute further cash to acquire even more securities and, more recently, with an ability to direct those securities to a plan broker for subsequent sale in exchange for a premium cash payment pursuant to so-called “premium” DRIPs. DRIPs have largely been a win-win scenario, enabling securityholders to maximize their investment in an issuer in a convenient and economical way without incurring service charges or brokerage fees while at the same time representing a significant source of capital for issuers without the need to undertake a prospectus qualified offering or private placement with the associated expense and potential liability.

However, for all their benefits, there are a number of aspects of DRIPs that have materially limited participation by certain securityholders and thereby opened the door to critical thinking on alternative mechanisms to foster improved participation:

The amount of a dividend or distribution will, generally, be included in the income of a securityholder regardless of whether the securityholder elects to reinvest such amount in new securities pursuant to a DRIP, subject to the gross-up and dividend tax credit rules normally applicable; and
To the extent a DRIP is extended to non-residents of Canada, the fact that any such non-resident securityholder elects to reinvest dividends or distributions pursuant to the DRIP does not relieve that securityholder of liability for non-resident withholding tax applicable to the dividend or distribution. As the rate of withholding tax under the Income Tax Act (Canada) on distributions is generally 25% (subject to reduction by the terms of any applicable tax treaty, such as to 15% for most U.S. participants), withholding tax implications discourage non-resident participation in a DRIP.

The Stock Dividend Programs (SDPs) only beginning to find their way into the proxy circulars of dividend-paying issuers represent an opportunity to retain the attributes of DRIPs that have made them so popular, while addressing those two limitations.

Stock Dividend Program Mechanics and Advantages

So how does the SDP turn water into wine? By and large by replacing the concept of “reinvestment” of a cash dividend or distribution with the issuance from treasury of stock of the issuer by way of a stock dividend. While practically the result may seem similar - as an investment by a securityholder in additional securities of the issuer in the amount of the cash dividend foregone - the tax implications are considerably different.

Unlike a DRIP, where a securityholder’s tax liability is determined by reference to the market value of the securities issued pursuant to the reinvested dividend and the amount of the dividend is included in such securityholder’s income, the tax liability associated with the SDP is driven by the amount that the board of directors of the issuer determines to add to the stated capital account in relation to the securities being issued. Therefore, if the board of directors of the issuer determines to add only a marginal amount to the stated capital account for such securities, securityholders holding the issuer’s securities as capital property would not be expected to be attributed any material income.

As a result, securityholders participating in an SDP will have effectively converted their exposure to income tax in the year in which the dividend is paid into a capital gain payable at the time at which the securities acquired pursuant to the stock dividend are ultimately disposed. For “buy and hold” securityholders that may not liquidate their position in an issuer for a considerable period of time, this represents a potentially very significant deferral while also enabling such securityholder to utilize any capital losses accrued in the interim to offset those future gains.

In relation to non-resident securityholders, the implications flow from the same fundamental distinction in mechanics. Because the stock dividend is not characterized as a reinvested cash dividend, the non-resident securityholder may receive the value of the cash dividend in stock rather than a net amount after deduction of withholding tax.

To the extent non-residents of Canada would be subject to capital gains tax in Canada on the ultimate disposition of the securities acquired pursuant to the SDP, the SDP represents an enticing mechanism by which non-residents may be able to avoid significant barriers to their participation in DRIPs by receiving full value stock dividends with minimal withholding tax implications and potentially no capital gains implications on disposition.

Implementation of a Stock Dividend Program

Although there are clearly differences between the DRIP and the SDP, the most significant of which being the reinvestment in securities under a DRIP as compared to the stock dividend under an SDP as discussed above, fundamentally the programs operate in the same way and afford securityholders the same rights. For instance:

Securityholders are able to elect whether to participate in the SDP to receive stock dividends just as they are able to elect whether to participate in the DRIP to reinvest dividends. Absent such an election in either case, a securityholder will receive the cash dividend;
Securityholders may be able to acquire stock at a discount to the applicable trading price pursuant to the stock dividend under the SDP just as they acquire additional securities at a discount to the applicable trading price under the DRIP;
Registered securityholders that elect to participate in an SDP or DRIP will be enrolled automatically for all successive dividend payments, unless they revoke that participation; and
Beneficial securityholders electing through their nominees to participate in an SDP or DRIP will need to have their nominee elect to participate on their behalf every dividend period.

In order to implement an SDP, issuers will generally seek the approval of their securityholders to amend their articles in order to modify the terms of the applicable security to contemplate the stock dividend concept discussed above. As such, approval will constitute special business and either a special meeting of securityholders will need to be called or approval sought at the next annual meeting of securityholders.

It is anticipated, given the practical similarities of the SDP and the DRIP, that most issuers choosing to implement an SDP will concurrently or, following a transition period intended to enable participants to enroll in the SDP, terminate their existing DRIP. Given the relative duplication and clear benefits of the SDP as compared to the DRIP, that ultimate transition is understandable.

While the benefits of the SDP seem clear and the movement of many DRIP issuers towards this model seems inevitable over the coming months, it is of course worth sounding a note of caution. Although the SDP has been in operation in at least one case for over a year, and more issuers seem to be recognizing the huge potential it creates by proposing the adoption of an SDP to replace their DRIP at their 2012 annual meetings, there is always the potential that a taxing authority such as the Canada Revenue Agency will revisit the characterizations offered above in relation to the SDP and diminish or eliminate the tax benefits.

SIGMA X Canada ceases operations

Stikeman Elliott LLP — Fri, 04 May 2012 09:10:45 -0500

According to an IIROC notice issued last week, SIGMA X Canada ceased operations as of the end of trading on April 27, 2012. SIGMA X operated as an alternative trading system, or ATS, and began trading Canadian listed securities in October 2011. For more information, see IIROC Notice 12-0148.

CSA designate rating organizations under NI 25-101

Stikeman Elliott LLP — Thu, 03 May 2012 15:18:10 -0500

On April 30, the Canadian Securities Administrators announced the designation of DBRS Limited, Fitch, Inc., Moody's Canada Inc., and Standard & Poor's Rating Services (Canada) as designated rating organizations under National Instrument 25-101 Designated Rating Organizations. As we discussed last month, the CSA recently adopted NI 25-101, which sets out a regulatory framework for the oversight of credit rating organizations.

According to the CSA, the four rating agencies granted DRO status are in compliance in all material respects with relevant U.S. federal securities laws applicable to nationally recognized statistical rating organizations, which are equivalent to the obligations under NI 25-101. Under the designation orders, each DRO will have a six month transition period to fully implement all NI 25-101 requirements.

"Did we really say that?" - Website and third party disclosure considerations for resource issuers

Stikeman Elliott LLP — Tue, 01 May 2012 10:45:14 -0500

Maurice Swan and Andrew Bozzato -

While a company’s website can host a wealth of information and form a key part of an investor relations strategy, managing that information also poses unique challenges. These challenges are heightened for resource issuers given the additional disclosure obligations under National Instrument 43-101 Standards of Disclosure for Mineral Projects that apply to technical or scientific disclosure. In particular, companies should carefully consider how their disclosure obligations under securities laws generally, and NI 43-101 in particular, are impacted by third party information that is republished or linked to from the company’s website.

NI 43-101 provides a comprehensive code governing disclosure of scientific or technical information by resource issuers. Under the Instrument, “disclosure” includes any written or oral disclosure made by or on behalf of the issuer that is intended to or reasonably likely to be made available to the public in Canada, and “written disclosure” is specifically defined to include any “writing, picture, map or other printed representation whether produced, stored or disseminated on paper or electronically, including websites.”

While it may be a matter of interpretation as to what constitutes “disclosure by the issuer” under NI 43-101, recent experience suggests that securities regulatory staff are increasingly taking the view that re-publication or posting of, and even hyperlinking to, third party information makes that document or information subject to NI 43-101 compliance. This includes analyst reports and media coverage, but could arguably apply to any type of third party information that is directly re-published on the company’s website or accessible via hyperlink. Beyond the risk of non-compliance with NI 43-101 and a delay in completing a financing, re-publication (and possibly linking), may also cause reputational harm, and worse, could subject the company to liability where the third party content is misleading or inaccurate.

Public companies should generally assume that their corporate website will be scrutinized if the issuer becomes subject to a continuous disclosure review or files a prospectus. For resource issuers in particular, it appears that securities regulatory staff will review all materials published and hyperlinked from the company’s website for NI 43-101 compliance, including third party materials such as analyst reports (which are also specifically addressed in National Policy 51-201 Disclosure Standards). It is also not uncommon for issuers to be faced with questions regarding re-publication of or hyperlinks to third party information in the context of prospectus financings, and for regulatory staff to delay clearing the issuer for filing a final prospectus until the offending information is corrected or the link is removed. We have seen several instances of this in the recent past. Moreover, the company may also be required to issue a press release stating that it has been required to correct and/or remove third party information from its website at the request of the regulator which, from a reputational perspective, is of course less than ideal. On that note, a review of an issuer’s website should, in our view, form part of the standard due diligence review that an underwriter would conduct in connection with a financing.

As discussed by our colleagues in their post on the Supreme Court of Canada’s recent decision in Crookes v. Newton, Canada’s top court has held that simple hyperlinking will generally not constitute “publication” for the purposes of the tort of libel. The majority compared a simple hyperlink to a footnote or other similar reference, finding that liability should generally only flow where the hyperlinked content is repeated. However, it is worth noting that two of the nine justices reasoned, in their minority decision concurring in the result, that liability should also flow where the text indicates adoption or endorsement of the hyperlinked content, even if the content is not actually repeated. This decision involved the issue of whether a simple hyperlink constitutes “publication” (not disclosure), in the context of a defamation claim. Recent experience suggests that, in the view of securities regulatory staff, information that is linked to from an issuer’s website will be considered to have been “disclosed” by the issuer, at least for NI 43-101 purposes. While it remains to be seen whether securities regulators would attempt to broaden the scope of the decision in an enforcement proceeding, the minority’s views may be instructive when considering the potential liability for issues of website and third party disclosure.

Public companies would be well advised to ensure their corporate disclosure policies include appropriate guidelines governing website disclosure. This includes guidelines on the type of information that will be published (like the company’s SEDAR filings, press releases, etc.), as well as the company’s policy on re-publication or posting of, and hyperlinking to, third party information. The risks associated with re-publication or hyperlinks should be carefully weighed against any perceived benefits. In all cases, the company should consider obtaining express permission to re-publish, clearly attributing the information (views, opinions, etc.) to the author, and disclaiming any responsibility for the content. These and other precautions are suggested by the TSX in its Electronic Communications Disclosure Guidelines, which also advises that re-publication should not be selective and cautions that posting an analyst report may be seen to endorse the content and could give rise to an obligation to correct the report if the content is, or becomes, misleading. Similar precautions should also be applied to hyperlinks, including the use of disclaimers advising that the reader is leaving the company’s website and that the issuer is not responsible for the content that the reader is being redirected to. Generally, third party information should only be republished with caution and, given recent experience, resource issuers should also carefully review all third party information on or accessible from its website, whether re-published, posted or hyperlinked, to ensure NI 43-101 compliance.

OSC releases April 2012 issue of Investment Funds Practitioner

Stikeman Elliott LLP — Mon, 30 Apr 2012 14:00:48 -0500

Darin Renton -

The Investment Funds Branch of the Ontario Securities Commission recently published the April 2012 issue of its Investment Funds Practitioner. The publication provides an overview of issues identified by the Branch arising from exemptive relief applications, prospectus filings and continuous disclosure documents filed by investment funds with the OSC.

Prospectus Issues

The Practioner highlights a number of issues that have come to light in the course of prospectus reviews, including amending a final prospectus to fix incorrect fee disclosure, and fund names that are inconsistent with the fund's investment objectives or strategies. On the latter issue, Branch Staff state that fund managers should select names that "closely reflect the fund's investment objectives" and that distinguish the funds from others. Branch Staff will consider whether additional guidance or rule-making is needed on this point.

Staff have also considered the issue of ETFs that track indices that are not widely used or recognized. According to the Practitioner, a fund's disclosure respecting investment objectives cannot be limited to a statement that the fund aims to replicate the performance of a specific index. Additional information is required, including with respect to primary asset composition and key features of the fund under normal market conditions. Staff have also started reviewing portfolio transparency of actively-managed ETFs in continuous distribution and advise that they expect any separate fees that are paid to a counterparty under a forward agreement (intended to compensate for the cost of hedging its exposure) to be disclosed in the prospectus of the fund.

Also discussed is Branch Staff's concern with closed-end funds that propose to invest either directly or through a derivative such as a forward agreement, in foreign-based investment funds or portfolios that are not reporting issuers in Canada. According to the Practitioner, Branch Staff will generally ask for certain disclosure concerning each underlying fund in the course of their prospectus review, and may ask that certain disclosure, such as the risk associated with enforcing legal rights against non-residents, be highlighted and put in a textbox on the prospectus cover page. Staff further express their views on how continuous disclosure obligations of the fund may be impacted and advise that they typically will request the underlying fund manager to file a submission of jurisdiction and appointment for service of process. The Practitioner advises that Staff typically will ask that the financial statements and other continuous disclosure of the underlying fund be filed on the SEDAR profile of the closed-end fund.

Finally, with respect to prospectus offerings, Branch Staff have highlighted their ongoing concerns with standalone warrant offerings by closed-end funds, including the dilutive effective on the value of units, the potential for such offerings to be coercive to existing unitholders and the potential conflict of interest that may exist with respect to the manager of the fund.

Continuous Disclosure Issues

In this area, the Practioner canvasses issues emanating from Branch Staff's recent review of select investment funds that make regular distributions to investors. A number of issues emanating from the review were identified, including the practice of paying distributions that are regularly and significantly in excess of the fund's increase in NAV from operations. According to Branch Staff, whereas terms such as "yield" or "income" imply earnings, such distributions are, in substance, a return to investors of capital.

Further, Branch Staff state that funds that pay distributions in the form of reinvested units as a default conflicts with a fund's stated focus of providing investors with regular income, as the onus falls on the investor to select distributions in cash. The Practioner thus outlines a number of disclosure related obligations required of such funds. Further guidance or rule-making may be released.

The Practitioner also discusses Branch Staff's recent reviews of portfolio disclosure (observations and guidance arising out of the review are expected by this summer) and Fund Facts risks. On the latter issue, Branch Staff remind filers that they will generally consider changes to a mutual fund's risk level to be a material change under securities legislation.

Staff of the Investment Funds Branch are accepting feedback on the Practioner and suggestions for future topics to be reviewed.

IIROC proposes changes to execution and reporting of off-marketplace trades

Stikeman Elliott LLP — Fri, 27 Apr 2012 14:10:13 -0500

The Investment Industry Regulatory Organization of Canada (IIROC) recently published proposed amendments to the Universal Market Integrity Rules (UMIR) regarding the execution and reporting of certain off-marketplace trades. While the UMIR generally require orders to be entered and executed on a marketplace, they also contain a number of exceptions from this requirement and give IIROC the authority to grant exemptions form this requirement on application. The proposed amendments would provide an automatic exception for four of the most commonly sought exemptions, namely, to complete an “off-marketplace” trade in connection with:

an exempt distribution from control pursuant to section 2.8 of National Instrument 45-102 – Resale of Securities;
an exempt take-over bid;
a purchase from a shareholder in a control position under a normal course issuer bid; and
the sale of securities which are subject to resale restrictions.

A blanket exemption would also be provided for an off-marketplace trade if the Participant was involved as principal or agent and applicable legislation required the trade to be completed in a private or "non-public" transaction. Such trades would have to be reported to IIROC.

Meanwhile, the proposals would see an anti-avoidance provision added to the Order Exposure Rule to prevent a small client order from being executed on a foreign organized regulated market unless the order had been entered on a market that displays order information or is executed at a better price. The change is intended to ensure that client orders receive a comparable level of price improvement whether executed as a dark order in Canada or on a non-transparent foreign market.

The proposals follow changes to UMIR recently announced by the CSA and IIROC to address dark liquidity on Canadian equity marketplaces scheduled to come into effect on October 10, 2012. As we previously described, those changes provide that (i) visible orders will have execution priority over dark orders on the same marketplace at the same price; (ii) in order to trade with a dark order, smaller orders must receive a minimum level of price improvement; and (iii) IIROC will have the ability to designate a minimum size for dark orders.

IIROC is accepting comments on its proposals until July 13, 2012. The proposals also seek comment on certain specific questions included in the notice. For more information, see IIROC Notice 12-0131.

CSA Staff identify issues in exempt distribution form filings

Stikeman Elliott LLP — Fri, 27 Apr 2012 13:55:03 -0500

Staff of the Canadian Securities Administrators published a staff notice yesterday to highlight issues identified in reports of exempt distributions (private placements) filed under Form 45-106F1, and providing guidance relevant to the preparation of the form.

Issues identified by CSA Staff include: filing of the BC Form 45-106F6 outside of BC, failing to file on time or pay the required filing fee, failing to include a complete list of purchasers and to reconcile information in the form with what is reported in the schedule to the form, failing to disclose compensation that should be considered a "commission" or "finder's fee" and failing to certify the form. As we discussed in December, British Columbia recently adopted its own form of exempt trade report under Form 45-106F6, which requires more information than what is required in the F1 in certain circumstances.

Meanwhile, members of the CSA except Ontario also released a staff notice yesterday identifying deficiencies in offering memoranda prepared in accordance with Form 45-106F2 when relying on the "offering memorandum" exemption under section 2.9 of NI 45-106. Common deficiencies included failing to include sufficient information to allow a prospective purchaser to make an informed investment decision, inadequately disclosing available funds and use of available funds and omitting to include, among other things, key terms of material agreements. The notice also provides guidance for those intending to rely on the OM exemption of NI 45-106.

For more information, see CSA Staff Notice 45-308 and Multilateral CSA Staff Notice 45-309.

Canada eases sanctions against Burma

Stikeman Elliott LLP — Fri, 27 Apr 2012 13:40:11 -0500

The Canadian government announced earlier this week that it is easing some of the sanctions against Burma (found in the 2007 Special Economic Measures (Burma) Regulations) in response to reforms occurring within the country. Components of the sanctions regime that were repealed include provisions prohibiting importing from and exporting into the country, as well as the prohibitions against investing in property situated in Burma. The sanctions still preclude, however, business dealings with prohibited persons and transactions involving arms and related material. Burma has also been removed from the Area Control List, which will permit the export of goods and technology found in the Export Control List without an export permit.

No more 1.5 % Stamp Duty Charge on overseas fundraising by UK companies?

Stikeman Elliott LLP — Thu, 26 Apr 2012 11:07:35 -0500

Jeffrey Keey -

The recent First Tier Tribunal decision in HSBC Holdings Plc and The Bank of New York Mellon Corporation v The Commissioners for Her Majesty’s Revenue & Customs brings positive news for UK companies aiming to undertake a fundraise or listing outside the EU involving the use of overseas depositary or clearance systems.

Subject to an appeal by Her Majesty’s Revenue & Customs (HMRC), the current 1.5% stamp duty reserve tax (SDRT) charge on fundraisings by UK companies involving the use of non-EU depositary or clearance systems will no longer apply making non-EU fundraising and listings more attractive and increasing the fungibility of the shares of UK companies with non-EU dual listings, including those listed in London and Toronto.

Pending any HMRC appeal, companies may choose not to pay the applicable duty although they could be faced with a claim for its payment (together with penalties and interest) if HMRC are successful on any appeal ultimately brought.

Background

SDRT at 1.5% is payable in the United Kingdom if shares of a UK company are issued or transferred into a clearance or depositary system. This charge, which is intended to compensate for the non-payment of stamp duty on transfers within clearance or depositary systems, has been seen as a hindrance for UK companies wishing to raise funding or list on overseas markets (such as the Toronto Stock Exchange) where the use of local clearance systems (such as CDS) for the holding of or settlement of transactions in shares is required or expected. UK companies can be faced with having to bear the 1.5% duty as part of the cost of any such funding or listing.

In 2009 it was established that the 1.5% duty could not be applied to UK shares which go into clearance or depositary systems in the European Union. The Tribunal ruling extends this prohibition to the use of clearance and depositary systems outside the European Union and so removing a potential funding cost of overseas listings by UK companies.

The Tribunal held that where the transfer of existing shares into a depositary receipt system forms an integral part of a capital-raising transaction by a European company, only taxes in accordance with the EU Capital Duty Directive (the Directive) may be imposed and the imposition in the United Kingdom of SDRT at a rate of 1.5% is a contravention of EU law. The Tribunal also found that the SDRT charge was contrary to the freedom of movement of capital under the EU Treaty.

The decision further confirmed that:

the imposition of SDRT regarding the issuance of depository receipts under s.93 of the Finance Act 1986 (UK) contravenes EU law (specifically Article 10 and 11 which stipulate, respectively, that a tax on the increase in capital of a company or on the issue of shares is unlawful) if the tax is imposed in relation to the raising of capital by a European company even if the depository happens to be outside of the EU;
Article 12 of the Directive, which permits the charging of “duties on the transfer of securities” must be construed narrowly and does not save the imposition of SDRT in this circumstance, as the transfer in this case was an “integral part” of the raising of capital. In defining “integral” the court found that:
- any element of the transaction by which capital actually was raised is an integral part of the transaction;
- it does not matter that an element of the transaction was not essential in the sense that the overall transaction could have been structured differently so as not to include a transfer;
- the test for whether a transfer was integral is objective and the taxpayer’s motivation in structuring the transaction is irrelevant;
the location of the taxpayer is not determinative of the territorial scope of the Directive; rather the important point is whether a European company is raising the capital because the Directive refers to how member states can tax EU resident companies without any reference to the residence of the investors.

Implications of the Decision

Should this decision prove final, UK companies will be able to structure capital-raising activities within and outside the EU in a manner that will not trigger the 1.5% SDRT charge. For a UK company wishing to list on, for example, the Toronto Stock Exchange, it will be able to deliver shares into CDS and those shares may then be dealt with within CDS without any SDRT being payable. This should increase the attraction of such listings for UK companies and ought, for dual listed companies, to increase the fungibility of their shares between markets.

Although HMRC is currently considering whether they wish to appeal the decision, HMRC has not previously sought to appeal decisions which ruled that the 1.5% charge was not applicable when shares are issued or transferred into European Union clearance and depositary systems. Whilst HMRC decides whether to appeal, no repayments of SDRT will be made. If the Tribunal decision becomes final, HMRC will publish guidance on how claims for repayment of incorrectly paid SDRT can be submitted. Pending that decision, HMRC has announced that it will not take active steps to recover applicable SDRT although, if it succeeds. HMRC could seek payment of the unpaid duty (together with any applicable penalty and interest).