Ontario Securities Commission Bulletin
Issue 43/49 - December 03, 2020
Ont. Sec. Bull. Issue 43/49
• First Global Data Ltd. et al.
• Update on Proceedings before the Ontario Securities Commission Tribunal
• Fairfax Africa Holdings Corporation
• I.G. Investment Management, Ltd.
• Investors Group Financial Services Inc. and Investors Group Securities Inc.
• Temporary, Permanent & Rescinding Issuer Cease Trading Orders
• Temporary, Permanent & Rescinding Management Cease Trading Orders
• Engine Media Holdings, Inc. -- s. 4(b) of Ont. Reg. 289/00 under the OBCA
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Notice of Memorandum of Understanding for Information Sharing Between the Ontario Securities Commission and the Financial Transactions and Reports Analysis Centre of Canada
The Ontario Securities Commission has recently entered into a Memorandum of Understanding with the Financial Transactions and Reports Analysis Centre of Canada concerning information sharing related to compliance oversight of firms registered with the OSC and who are subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "MOU"). The MOU provides a framework for information-sharing in order to assist the OSC to meet its mandate and to co-operatively rationalize the compliance burden placed on OSC registrants.
The MOU is being published today in the Bulletin in accordance with section 143.10 of the Securities Act (Ontario). This MOU was delivered to the Ontario Minister of Finance on November 19, 2020 and is subject to Ministerial approval.
Questions may be referred to:
Elizabeth KingDeputy Director -- Registrant ConductCompliance and Registrant Regulationeking@osc.gov.on.caMerzana MartinakisSenior AccountantCompliance and Registrant Regulationmmartinakis@osc.gov.on.ca
BETWEEN: THE FINANCIAL TRANSACTIONS AND REPORTS ANALYSIS CENTRE OF CANADA
represented by the Chief Compliance Officer of FINTRAC and herein referred to as "FINTRAC"
AND: THE ONTARIO SECURITIES COMMISSION
represented by the Acting Chair and Chief Executive Officer and herein referred to as the "OSC",
hereinafter individually a "Party" and collectively referred to as the "Parties".
WHEREAS the Parties wish to establish a framework for sharing information between FINTRAC and the OSC in order to assist them in meeting their respective mandates, and to cooperatively ensure rationalization and reconciliation of the compliance burden placed on OSC registrants of their respective activities in this regard.
The Parties have reached the following understanding:
1 INTRODUCTION
1.1 This Memorandum of Understanding (the "MOU") addresses exchanges of information between the Parties.
1.2 FINTRAC is Canada's financial intelligence unit. Its mandate is to facilitate the detection, prevention and deterrence of money laundering and the financing of terrorist activities, while ensuring the protection of personal information under its control. FINTRAC was established by, and operates within the ambit of, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "PCMLTFA") and its Regulations.
1.3 The OSC is an independent Crown corporation that is responsible for regulating the capital markets in Ontario. The OSC's statutory mandate is to provide protection to investors from unfair, improper or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic risk. The OSC's powers are derived from the Securities Act (Ontario), the Commodity Futures Act (Ontario), and certain provisions of the Business Corporations Act.
1.4 Notwithstanding anything herein, FINTRAC will use any information received pursuant to this MOU solely for the purpose of ensuring compliance with Parts 1 and 1.1 of the PCMLTFA (such as record-keeping, client identification, policies and procedures, training, risk assessments and program review).
2 OFFICIALS
2.1 The following officials, for the Parties, and as may be amended from time to time, have overall administrative responsibility for this MOU:
For FINTRAC:
Regional Director
Financial Transactions and Reports Analysis Centre of Canada
655 Bay Street -- Suite #304
Toronto ON M5G 2K4
Telephone: 416-952-0116
Fax: 416-952-0134
For the OSC:
Director, Compliance and Registrant Regulation
20 Queen Street West -- 20th Floor
Toronto ON, M5H 3S8
Telephone: 416-593-8101
2.2 The Parties may name other officials for other purposes in relation to this MOU.
3 CONFIDENTIALITY
Confidential Information
3.1 Notwithstanding anything else herein, the Parties will not provide information to the other Party if doing so would contravene any relevant legislation, policies, or guidance documents. Each Party will ensure that all information received from the other Party (the "Confidential Information") will be kept confidential and will make reasonable security arrangements against such risks as unauthorized access, collection, use, disclosure, or disposal of the Confidential Information.
Disclosure to Third Parties
3.2 Neither Party will disclose any Confidential Information to any third party without the written consent of the other Party except as required by law. Where disclosure of Confidential Information to a third party may be required by law, the Party that may be required to disclose the Confidential Information will give notice to and consult with the other Party on how to protect their interests and the interests of any third party whose information may be disclosed, in any applicable review or process in light of the disclosure requirement. The Party that may be required to disclose the Confidential Information will give such notice promptly after it becomes aware of the possible disclosure requirement.
4 ADMINISTRATIVE DETAILS
4.1 Date in effect
This MOU will come into effect on the later of:
a. the date the MOU is signed by both Parties; and
b. the date determined in accordance with the OSC's applicable legislation.
This MOU shall remain in effect until terminated by the Parties in accordance with section 4.3 or section 4.4.
Additions and amendments
4.2 This MOU may be amended at any time with the mutual consent of the Parties, and such amendments may be effected by an exchange of letters between the persons occupying the positions of the signatories to this MOU.
Termination
4.3 This MOU will be terminated thirty (30) days from the date one Party gives written notice to the other Party of their intention that the MOU be terminated. For this purpose, notice must be given by a person occupying the position of the signatory to this MOU.
4.4 This MOU may be terminated at any time, with the mutual consent of the Parties, through an exchange of letters between the persons occupying the positions of the signatories to this MOU.
5 NATURE OF THIS MOU
This MOU is an administrative understanding between the Parties and is not intended to be legally binding or enforceable before the Courts.
6 INFORMATION THAT MAY BE DISCLOSED BY THE OSC TO FINTRAC
6.1 The OSC agrees to disclose to FINTRAC the following information:
a. on an annual basis, a list of firms registered with the OSC;
b. a copy of the OSC 's procedures used to determine if an OSC registrant has policies and procedures in place to address the following required elements of an anti-money laundering ("AML/ATF") compliance program:
1. appointment of a compliance officer to oversee the AML/ATF compliance program;
2. the existence of written AML/ATF compliance policies and procedures;
3. the existence of an AML/ATF risk assessment process;
4. the existence of an ongoing AML/ATF training program; and
5. the existence of an AML/ATF compliance program effectiveness review process (collectively, the "Compliance Program Requirements");
c. on a semi-annual basis, any findings made by the OSC pursuant to subsection 6.1(b) above about any OSC registrants;
d. upon request, any other information held by the OSC about those OSC registrants about whom the OSC has made findings pursuant to subsection 6.1(c) above, provided that the OSC may redact or decline to provide such information where appropriate at the OSC's discretion; and
e. upon receipt by the OSC of the names of the firms FINTRAC plans to examine pursuant to subsection 7.1(b) below, whether any such firm has been referred within the OSC for further regulatory action.
7 INFORMATION THAT MAY BE DISCLOSED BY FINTRAC TO THE OSC, PURSUANT TO SUBSECTION 65(2) OF THE PROCEEDS OF CRIME (MONEY LAUNDERING) AND TERRORIST FINANCING ACT
7.1 FINTRAC agrees to disclose to the OSC the following information:
a. on an annual basis, a list of OSC registrants examined by FINTRAC and the examination outcomes, including:
(i) No Further Action;
(ii) Consider Follow-up Activity; and
(iii) Consider Enforcement Activity.
The OSC may use this information as part of its risk assessment in determining which OSC registrants it plans to review;
b. in February of each year, the name of each OSC registrant that FINTRAC plans to examine for compliance with Part 1 and / or 1.1 of the PCMLTFA in the coming fiscal year;
c. as they become available, planned dates for the examinations set out in subsection 7.1(b) above; and
d. upon request by the OSC, copies of correspondence, including findings letters, between FINTRAC and an OSC registrant.
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IN WITNESS THEREOF, this Memorandum of Understanding is signed in duplicate, each copy being equally authentic.
SIGNED in Ottawa, Ontario this <<22>> day of <<October>>, 2020 |
SIGNED in Toronto, Ontario this <<18th>> day of <<November>>, 2020 |
FOR THE FINANCIAL TRANSACTIONS AND REPORTS ANALYSIS CENTRE OF CANADA |
FOR THE ONTARIO SECURITIES COMMISSION |
"Donna Achimov" |
"Grant Vingoe" |
____________________ |
____________________ |
DONNA ACHIMOV |
GRANT VINGOE |
Chief Compliance Officer, Financial Transactions and Reports Analysis Centre of Canada |
Acting Chair and CEO of the Ontario Securities Commission |
OSC Notice of General Order -- Ontario Instrument 48-503 Temporary Exemption from Certain Provisions of Ontario Securities Commission Rule 48-501 Trading During Distributions, Formal Bids and Share Exchange Transactions
Temporary Exemption from Certain Provisions of Ontario Securities Commission Rule 48-501 Trading During Distributions, Formal Bids and Share Exchange Transactions (the Order)
Under Ontario Securities Commission Rule 48-501, Trading During Distributions, Formal Bids and Share Exchange Transactions (Rule 48-501 or the Rule), trading restrictions are placed on issuers and selling shareholders and their affiliates, insiders and dealers acting as underwriters, dealer managers or in a similar capacity in respect of a transaction covered by the Rule.
The Order provides temporary relief from certain regulatory requirements under the Rule for certain insiders of issuers involved in a distribution. This relief is tailored to circumstances where exemptive relief is currently routinely granted.
Rule 48-501 restricts bids for, and purchases of, a security that is the subject of a transaction covered by Rule 48-501. Rule 48-501 is intended to prevent market manipulation, specifically activity in the public markets, that can raise the market price of a restricted security with the goal of improving the likelihood of success of a transaction covered by the Rule.
The restrictions on issuer-restricted persons under Rule 48-501 are broader than are restrictions on dealer-restricted persons. This is a particular concern in at-the-market distributions (ATM Distributions), where the restricted period under Rule 48-501 is indefinite and thus, there is a disproportionate burden on directors and officers of issuers who may need to purchase the issuer's securities in the open market to meet the issuer's minimum security-holding requirements.
The Order provides that exemptive relief from Rule 48-501 is granted in respect of a purchase of a restricted security during an issuer-restricted period by a director or officer who is an issuer-restricted person, provided that: in respect of a purchase of a restricted security during an issuer-restricted period by a director or officer who is an issuer-restricted person:
(a) the director or officer is neither a control person of the issuer nor of the selling security holder of the restricted security;
(b) the director or officer is not otherwise acting jointly or in concert with
(i) the issuer nor the selling security holder of the restricted security;
(ii) an affiliated entity of the issuer nor of the selling security holder of the restricted security; or
(iii) a control person of the issuer nor of the selling security holder of the restricted security;
(c) the restricted security is offered pursuant to an at-the-market distribution of equity securities under the shelf prospectus procedures prescribed in Part 9 of National Instrument 44-102 Shelf Distributions; and
(d) the restricted security is a highly-liquid security.
In order to address the burden on issuers and insiders of issuers, the exemptive relief contemplated by the Order has been granted previously in the context of individual applications for exemptive relief. In all cases, the securities were deemed to be highly liquid under Rule 48-501 and the restrictions placed on certain insiders by Rule 48-501 were found to be disproportionate to the benefits of applying Rule 48-501 to prevent manipulative trading activity. This exemptive relief is now considered routine.
In recognition of the burden caused by the application of Rule 48-501 in certain contexts and the associated costs of applications for exemption from the Rule that is routinely granted, the Commission has determined that it would not be prejudicial to the public interest to grant this temporary relief.
The Order comes into effect on November 25, 2020 and will cease to be effective on the date that is 18 months after the date of the Order.
Notice of Memorandum of Understanding Concerning on-going Cooperation, Assistance and Information Sharing with the Financial Services Regulatory Authority of Ontario
December 3, 2020
The Ontario Securities Commission (OSC) has entered into a Memorandum of Understanding (the MoU) with the Financial Services Regulatory Authority of Ontario (FSRA). The purpose of the MoU is to support and facilitate on-going cooperation, assistance and information sharing between the OSC and FSRA.
The MoU is subject to the approval of the Minister of Finance. The MoU was delivered to the Minister of Finance on November 25, 2020.
Questions may be referred to:
Krista Martin GorelleAssociate General CounselTel: 416-593-3689E-mail: kgorelle@osc.gov.on.ca
WHEREAS FSRA is a non-share capital corporation and an agent of the Crown in right of Ontario, established as a financial services regulator pursuant to the Financial Services Regulatory Authority of Ontario Act, 2016 ("FSRA Act") and which is the successor organization to the Deposit Insurance Corporation of Ontario ("DICO") following an amalgamation pursuant to section 2(1) of the FSRA Act;
AND WHEREAS pursuant to a Minister's Transfer Order dated June 6th 2019, and the FSRA Act, FSRA was transferred substantially all of the operations, activities, affairs, assets, liabilities, rights and obligations of the Financial Services Commission of Ontario and amalgamated with the Deposit Insurance Corporation of Ontario;
AND WHEREAS FSRA's mandate, as described in section 3 of the FSRA Act, is to inter alia: regulate and generally supervise the "regulated sectors" (as defined in the FSRA Act), contribute to public confidence in the regulated sectors, cooperate and collaborate with other regulators where appropriate, and to deter deceptive or fraudulent conduct, practices and activities within the regulated sectors;
AND WHEREAS the OSC is a regulatory agency which administers and enforces the Securities Act, R.S.O. 1990, c. S., as amended (the "Securities Act) " and the Commodity Futures Act, R.S.O. 1990, c.C.20, as amended (the "Commodities Act"), to protect investors, foster fair and efficient capital markets and commodity futures markets and contribute to the stability of the financial system and the reduction of systemic risk;
AND WHEREAS the purpose (the "Purpose") of this Memorandum of Understanding ("MOU") is to enhance the collaboration between the Parties by providing a framework for consultation and cooperation as well as the terms and conditions for Information sharing between the Parties;
AND WHEREAS FSRA and the OSC each have registration, licensing, compliance, investigation and enforcement authority and recognize the need for consultation, cooperation, and Information sharing to promote the effective regulation and supervision of any Persons that may be subject to one or both of their respective regulatory authority or jurisdiction;
AND WHEREAS this MOU is intended to facilitate the preservation of the highest level of confidentiality with respect to any Information exchanged pursuant to this MOU.
1. In this MOU:
"Applicable Law" in relation to a Party means any law, regulation, decision, order or other legally binding obligation imposed by a court or tribunal in the Party's province to which the Party is subject.
"FIPPA" means the Freedom of Information and Protection of Privacy Act, RSO 1990 c F 31.
"Information" means any and all information, including Personal Information as defined in FIPPA held by a Party. It does not mean information that is already known to the other Party before disclosure as part of this MOU, or information that is generally known to, or accessible by, the public.
"Party" means either FSRA or the OSC. Together, FSRA and the OSC are the "Parties."
"Person" means a natural person, unincorporated association, partnership, corporation, association, organization, including a self-regulatory organization, society, syndicate, trust, trustee, executor, administrator or other legal representative.
"Request" means a request for Information made by either Party under Article Four of this MOU.
"Requested Party" means the Party to whom a Request is made under this MOU.
"Requesting Party" means the Party making a Request under this MOU.
2. This MOU is a statement of intent to consult, cooperate and exchange Information between the Parties in a manner consistent with, and permitted by, the laws and regulations that govern the Parties. In the event of any conflict between this MOU and the laws and regulations, the laws and regulations will govern.
3. This MOU does not create any enforceable rights or legally binding obligations, and does not modify the responsibilities, authority or jurisdiction of either Party under law or regulation.
4. This MOU is not intended to apply universally. Instead, it only applies where a Party makes a Request pursuant to Article Four and the other Party agrees to fulfil the Request pursuant to Article Five, or in other circumstances as agreed upon between the Parties.
5. The assistance and exchange of Information may be made in response to a specific Request by the other Party, including but not limited to:
(a) as may be mutually agreed to by the Parties from time to time and on an ongoing basis;
(b) where regulatory action, including any investigation or enforcement proceeding in respect of a Person regulated by one or both of the Parties is taken, or may be taken;
(c) where a Party has within its possession or control any Information which may be of assistance to the other Party in carrying out its regulatory responsibilities, including any investigation, enforcement proceeding, compliance review or registration/licensing matter;
(d) on the conditions as agreed to by the Parties in writing; or
(e) where required by the Parties in order to carry out their respective mandates.
6. All Requests under this MOU will be made in writing by the Requesting Party, including by electronic mail or other forms of written communication.
7. Each Request will be submitted using the form, and will specify the information set out, in Schedule "A" or in any other manner as mutually agreed to by the Parties.
8. The Requested Party will confirm receipt of any Request and will make reasonable best efforts to fulfil the Request in a timely manner.
9. If a Request cannot be fulfilled entirely, the Requested Party will consider whether part of the Information requested, or any other relevant Information may be provided.
10. Before the Information is provided to the Requesting Party, the Requested Party should make reasonable best efforts to specify such restrictions on the use of the Information to be provided as the Requested Party considers to be reasonably required to comply with any Applicable Law, regulations or directive, having regard to the Requesting Party's intended purpose.
11. Where the Parties undertake contemporaneous investigations or examinations, relating to enforcement, registration or licensing, of the same Person(s) under their respective jurisdictions, and where the Parties deem it appropriate, reasonable best efforts will be made to coordinate the work involved and the exchange of Information as contemplated in this MOU. Without limiting the generality of the foregoing, this may include coordination with respect to obtaining access to and copies of relevant books, records and documents, preparing reports, interviewing subjects and initiation of, or continuing, enforcement proceedings.
12. Where the Parties undertake contemporaneous compliance reviews related to Persons under their respective jurisdictions, and where the Parties deem it appropriate, reasonable best efforts will be made to coordinate the work involved and the exchange of Information as contemplated in this MOU. Without limiting the generality of the foregoing, this may include coordination with respect to obtaining access to and copies of relevant books, records, documents, preparing reports, interviewing Persons and initiation, or continuing of, compliance reviews.
13. Subject to any restrictions specified by the Requested Party, the Parties will be entitled to use the Information obtained under this MOU for the purposes of:
(a) carrying out their respective mandates; and
(b) in the case of the OSC and in its discretion, sharing Information with the other members of the Canadian Securities Administrators, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada.
14. The Parties confirm that the Requesting Party may use the Information in response to a Request under this MOU in connection with:
(a) any purpose set out in the Request, subject to any restrictions specified by the Requested Party;
(b) an investigation or enforcement action or proceeding, including any constitutionally mandated disclosure obligations; and
(c) compliance reviews of Persons and licensing and/or registration activities as may be applicable.
15. For greater specificity, the Parties reserve the right to place reasonable restrictions on the use of Information exchanged under this MOU, including Information obtained pursuant to powers of compulsion.
16. If a Party intends to use or forward share Information obtained under this MOU for any purpose that is neither permitted nor contemplated under this MOU nor specified in a Request, unless it is required to do so under Applicable Law and subject to the provisions of the Securities Act, it must first obtain the written consent of the Requested Party which shall not be unreasonably withheld. Such written consent may include conditions on the use of the Information as well as restrictions on forward sharing. If such consent is not obtained from the other Party, the Parties will consult to discuss the reason for withholding consent for such purpose and the conditions, if any, under which the intended disclosure might be allowed.
17. Except for disclosures in accordance with this MOU, including permissible uses in Article Seven (which includes disclosures which may be required under Applicable Law but are subject to the provisions of the Securities Act), the Parties undertake to keep Information provided under this MOU confidential and take all reasonable measures to preserve confidentiality and to safeguard against accidental or unauthorized access, use or disclosure, to the extent permitted by Applicable Law, and agree to maintain as confidential:
(a) any Request made under this MOU, the contents of such a Request, and any communications and other matters arising in the course of this MOU's operation. After consultation with the Requesting Party, the Requested Party may disclose the fact that the Requesting Party has made the Request if such disclosure is required to carry out the Request; and
(b) any Information received from the Requested Party under this MOU that has been identified by that Party as "confidential" ("Confidential Information").
18. To the fullest extent permitted by Applicable Law, the Parties will notify each other of any legally enforceable demand for Information provided under this MOU. Prior to compliance with such a demand, the Party subject to the demand will obtain the written consent of the other Party (which shall not be unreasonably withheld) and will assert all appropriate legal exemptions or privileges with respect to such Information as may be reasonably available. Such written consent may include reasonable conditions on the use of the Information as well as with whom it can reasonably be shared. If such consent is not obtained from the other Party, the Parties will consult to discuss the reason for withholding consent for such purpose and the conditions, if any, under which the intended disclosure might be allowed.
19. In the event a Party receives a request under the FIPPA for Information obtained under this MOU that may fall within the scope of section 17 of the FIPPA, the Party subject to the request will consider requesting that its designated head under the FIPPA transfer the request, in part or in full, as may be appropriate, to the other Party.
20. Nothing in this MOU shall be construed as a waiver of a solicitor-client privilege or any other legal privilege that may attach to any Information shared or received under this MOU.
21. For demands for Information provided under this MOU which relate to Confidential Information, the Parties agree to be bound by the specific confidentiality terms as described in this MOU.
22. No Party shall be liable in any way for the accuracy of the Information it provides under this MOU.
23. A Requested Party shall not be liable in any way for any use made by the Requesting Party of the Information provided to it by the Requested Party.
24. An amendment may be made to the terms of this MOU as the Parties deem necessary, but no amendment will be valid unless it is in writing and signed by each Party.
25. Either Party may terminate this MOU by giving thirty (30) days' written notice to the other Party. However, this MOU will continue to have effect with respect to all Requests made before the thirty (30) day notice period expires and until all Requests made before or during the notice period have been fulfilled or otherwise addressed in accordance with Article Five of this MOU.
26. The Parties' obligations under Articles Eight and Nine survive the termination of this MOU and will continue to apply to any Information obtained or provided under this MOU.
27. Where the regulatory functions of a Party to this MOU are transferred or assigned to another authority or authorities, the terms of this MOU shall apply to the successor authority or authorities performing those regulatory functions without the need for any further amendment to this MOU or for the successor to become signatory to this MOU. This will not affect the right of any Party to terminate the MOU if it wishes to do so. The Parties shall work to ensure a seamless transition to any successor into the MOU, including the continued handling of outstanding requests made under this MOU.
28. In the case of the OSC, this MOU will become effective on the date determined in accordance with section 143.10 of the Securities Act. This MOU may be executed and delivered by the Parties in one or more counterparts, each of which when so executed and delivered will be deemed to be the original, and those counterparts will together constitute one and the same instrument. The Parties shall execute and deliver any and all such other instruments and shall take any and all such other actions as may be reasonable or necessary to carry out the intention of this MOU.
29. Any notices, Requests, inquiries or reports shall be delivered to each Party as follows:
To: Financial Services Regulatory Authority of OntarioAttn: EVP, Legal and Enforcement5160 Yonge Street, 16th FloorToronto, OntarioM2N 6L9Email: Jordan.Solway@fsrao.caTo: Ontario Securities CommissionAttn: General Counsel2200 -- 20 Queen Street WestToronto, OntarioM5H 3S8
For requests directed to the Compliance and Registrant Regulation branch of the OSC: inquiries@osc.gov.on.ca
For requests directed to the Enforcement branch of the OSC: EXTERNALREQUESTS@osc.gov.on.ca
IN WITNESS WHEREOF the Parties have made this Agreement.
Financial Services Regulatory Authority of Ontario |
|
"Mark White" |
|
____________________ |
|
Mark White |
|
Chief Executive Officer, |
|
Financial Services Regulatory Authority of Ontario |
|
Date: <<November 17, 2020>> |
|
Ontario Securities Commission |
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"Grant Vingoe" |
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____________________ |
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D. Grant Vingoe |
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Acting Chair and Chief Executive Officer |
|
Ontario Securities Commission |
|
Date: <<November 21, 2020>> |
|
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This request is being made pursuant to the provisions of the FSRA/OSC MOU concerning consultation and cooperation and the exchange of information.
Description of the facts underlying the investigation or request:
> entities/individuals involved and whether regulated or not by the Requesting Party
> type of scheme
> location of investors
> location of affected markets and whether regulated or not by the Requesting Party
> timeframe of the suspected misconduct
> nature of the suspected misconduct
> location of assets
> chronology of relevant events
Identification of the unique identifier, registration or license number for the individual or entity as is applicable
Describe how the Information requested will assist in developing the investigation.
Description of uses for which Information is sought, if other than in accordance with the provisions of the MOU.
Description of the Information needed or assistance sought (e.g., account opening documents, periodic account statements, trade confirmations, etc.).
Time period for which documents should be gathered.
Information useful for identifying the relevant Information (e.g., account number, name, address, date of birth of account holder, names of entities believed to control the accounts).
Sources of information (e.g., regulated individuals and entities, investors, clients, knowledgeable insiders).
Preferred form in which information should be gathered.
Confirm whether the Requesting Party intends to disclose the Information to a third party.
Special precautions.
Dates of previous requests in this matter.
Laws and regulations:
> provisions of the laws that may have been violated
> brief description of the provisions
> explanation of how the activities being investigated may have constituted violations of such provisions
Responsibility for administering and enforcing the applicable laws.
Desired time for a reply.
Preferred manner in which information is to be transmitted (e.g., telephone, courier, email, computer disk and format).
Contact information for the Requesting Party:
> name of contact
> telephone and fax numbers
> e-mail address
Other relevant information.
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FOR IMMEDIATE RELEASE
November 25, 2020
TORONTO -- Take notice an attendance in the above named matter is scheduled to be heard on December 7, 2020 at 2:00 p.m.
For Media Inquiries:
For General Inquiries:
FOR IMMEDIATE RELEASE
November 27, 2020
TORONTO -- The Commission issued an Order in the above named matter.
A copy of the Order dated November 27, 2020 is available at www.osc.gov.on.ca.
For Media Inquiries:
For General Inquiries:
FOR IMMEDIATE RELEASE
November 27, 2020
TORONTO -- Take notice that the hearing in the above named matter scheduled to be heard on November 30 and December 1, 2020 will not proceed as scheduled.
The hearing on the merits will continue on December 2, 2020 at 10:00 a.m.
For Media Inquiries:
For General Inquiries:
FOR IMMEDIATE RELEASE
November 30, 2020
TORONTO -- The Commission issued an Order in the above named matter.
A copy of the Order dated November 30, 2020 is available at www.osc.gov.on.ca.
For Media Inquiries:
For General Inquiries:
Update on Proceedings before the Ontario Securities Commission Tribunal
FOR IMMEDIATE RELEASE
December 1, 2020
TORONTO -- The Ontario Securities Commission (OSC) is taking all necessary precautions to protect the health and safety of its employees and the public as we respond to challenges due to COVID-19. The OSC will not be holding in-person hearings until further notice. However, hearings will continue to be held via videoconference, teleconference or in writing.
A member of the media or public who wishes to observe a videoconference hearing may select the "Register to attend" link from the Upcoming Proceedings webpage at the hearing date and time indicated. A member of the media or public who wishes to hear a teleconference hearing may email their request to the Registrar at registrar@osc.gov.on.ca at least two business days in advance of the hearing, indicating their name, email address and the hearing they wish to hear. The Registrar will provide the requestor with dial-in information on how to hear the proceeding. Requests received less than two business days in advance of the teleconference hearing may not be able to be accommodated. The Secretary's Office will update the Upcoming Proceedings webpage as more information is made available.
For Media Inquiries:
For General Inquiries:
FOR IMMEDIATE RELEASE
December 1, 2020
TORONTO -- Take notice that the hearing in the above named matter scheduled to be heard on December 2 and 3, 2020 will not proceed as scheduled.
The hearing on the merits will continue on December 4, 2020 at 10:00 a.m.
For Media Inquiries:
For General Inquiries:
National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -- Application by Filer for relief from prospectus requirement in connection with distribution by Filer of "contracts for difference" and over-the-counter (OTC) foreign exchange contracts (collectively, CFDs) to investors resident in Applicable Jurisdictions, subject to terms and conditions -- Filer is registered in Ontario as investment dealer and a member of the Investment Industry Regulatory Organization of Canada (IIROC) -- Applicant seeking relief to permit Applicant to offer CFDs to investors in Applicable Jurisdictions, including relief permitting Applicants to distribute CFDs on the basis of clear and plain language risk disclosure document rather than a prospectus -- risk disclosure document contains disclosure substantially similar to risk disclosure document required for recognized options in OSC Rule 91-502 Trades in Recognized Options, the regime for OTC derivatives contemplated by former proposed OSC Rule 91-504 OTC Derivatives (which was not adopted) and the Quebec Derivatives Act -- Relief consistent with relief contemplated by OSC Staff Notice 91-702 Offerings of contracts for difference and foreign exchange contracts to investors in Ontario (OSC SN 91-702) -- Relief replaces relief previously granted to Filer in September 2016 in respect of distribution of CFDs -- Relief granted, subject to terms and conditions as described in OSC SN 91-702 including four-year sunset clause.
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53 and 74(1).
OSC Rule 91-502 Trades in Recognized Options.
OSC Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario.
Proposed OSC Rule 91-504 OTC Derivatives (not adopted).
November 24, 2020
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) that the Filer and its officers, directors and representatives be exempt from the prospectus requirement in respect of the distribution of contracts for difference and over-the-counter (OTC) foreign exchange contracts (collectively, CFDs) to investors resident in the Applicable Jurisdictions (as defined below), subject to the terms and conditions below (the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application (the Principal Regulator); and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada, other than the provinces of Québec and Alberta (the Non-Principal Jurisdictions, and, together with the Jurisdiction, the Applicable Jurisdictions).
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this Decision, unless otherwise defined.
This Decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under the Ontario Business Corporations Act, with its head office in Toronto, Ontario.
2. The Filer is registered as a dealer in the category of investment dealer in each of the provinces and territories of Canada, and is a member of the Investment Industry Regulatory Organization of Canada (IIROC).
3. The Filer is not in default of applicable securities legislation in any province or territory of Canada, or IIROC Rules or IIROC Acceptable Practices (each, as defined below).
4. The Filer does not have any securities listed or quoted on an exchange or marketplace in any jurisdiction inside or outside of Canada.
5. The Filer has previously been granted exemptive relief substantially identical to the Requested Relief by Decision dated September 16, 2016 (the Existing Relief). The Filer has been offering CFDs to investors, including retail investors, on the basis of the Existing Relief and in compliance with applicable IIROC Rules and other IIROC Acceptable Practices. The Existing Relief expired on September 16, 2020. The effect of the Requested Relief is to renew the Existing Relief, on substantially the same terms and conditions, for a further interim period of up to four years (as described below). For the time period from the date of the Existing Relief to the date of this Decision, the Filer has been in compliance with the terms and conditions of the Existing Relief
6. The Filer wishes to continue to offer CFDs to investors in the Applicable Jurisdictions on the terms and conditions described in this Decision. For the Interim Period (as defined below), the Filer is seeking the Requested Relief in connection with this proposed continued offering of CFDs in Ontario and intends to rely on this Decision and the "Passport System" described in MI 11-102 to offer CFDs in the Non-Principal Jurisdictions.
7. In Québec, the Filer is qualified by the Autorité des marches financiers (AMF) pursuant to sections 82 and 83 of the Derivatives Act (Québec) (the QDA) and authorized to market certain forward contracts and CFDs offered to the public, subject to the terms and conditions of its qualification decision and related provisions of the QDA.
8. The Filer understands that staff of the Alberta Securities Commission have public interest concerns with CFD trading by retail clients and, accordingly, the Filer intends to offer CFDs to investors in Alberta in reliance upon National Instrument 45-106 Prospectus Exemptions. The Filer undertakes not to give notice that subsection 4.7(1) of MI 11-102 is intended to be relied upon in Alberta.
IIROC Rules and Acceptable Practices
9. As a member of IIROC, the Filer is only permitted to enter into CFDs pursuant to the rules and regulations of IIROC (the IIROC Rules).
10. In addition, IIROC has communicated to its members certain additional expectations as to acceptable business practices (IIROC Acceptable Practices) as articulated in IIROC's paper "Regulatory Analysis of Contracts for Differences (CFDs)" published by IIROC on June 6, 2007, as amended on September 12, 2007 (the IIROC CFD Paper), for any IIROC member proposing to offer CFDs to investors. The Filer is in compliance with IIROC Acceptable Practices in offering CFDs. The Filer will continue to offer CFDs in accordance with IIROC Acceptable Practices as may be established from time to time, and will not offer CFDs linked to bitcoin, cryptocurrencies or other novel of emerging asset classes to investors in the Applicable Jurisdictions without the prior written consent of IIROC.
11. The Filer is required by IIROC to maintain a certain level of capital to address the business risks associated with its activities. The capital reporting required by IIROC (as per the calculation in the Form 1 Joint Regulatory Financial Questionnaire and Report (Form 1), and in the Monthly Financial Reports to IIROC) is based predominantly on the generation of financial statements and calculations so as to ensure capital adequacy. The Filer, as an IIROC member, is required to have a specified minimum capital which includes having any additional capital required with regards to margin requirements and other risks. This risk calculation is summarized as a risk adjusted capital calculation which is submitted in the Filer's Form 1 and required to be kept positive at all times.
Online Trading Platform
12. The Filer offers online self-directed trading in CFDs via an online trading platform (the Platform), which is a proprietary and fully automated internet-based trading platform.
13. The Filer utilizes the Platform to process CFD transactions under a software license and services agreement with Saxo Bank S/A, a leading global provider of private and white label CFD trading solutions (the "Platform Provider").
14. The Platform technology has certain client protection mechanisms and risk management tools. It provides transparency of price to clients. The Platform is a key component of a comprehensive risk management strategy, which will help the Filer's clients and the Filer to manage the risk associated with leveraged products. This risk management system has evolved over many years with the objective of meeting the mutual interests of all relevant parties (including, in particular, clients). These attributes and services are described in more detail below:
(a) Client reporting. Clients are provided with a real-time view of their margin balance, including how tick-by-tick price movements affect their margin balances. Clients can view this information throughout the trading day at any time by logging into their trading screen. Clients can also set up alerts that instruct the Platform to automatically send an email, text or notice within the Platform notifying them of key identified levels being hit in the market.
(b) Automated risk management system. Clients are instructed that they must maintain the required margin against their position(s). If a client's funds drops below the required margin, margin calls are regularly issued via email and automated platform message, alerting the client to the fact that the client is required to either deposit more funds to maintain the position or close/reduce it voluntarily. Where possible, daily telephone margin calls are provided as a supporting communication for clients. However, if a client fails to deposit more funds, where required, the client's position is liquidated. This liquidation procedure is intended to act as a mechanism to help reduce the risk of losses being greater than the amount deposited. The risk management functionality of the Platform ensures that client positions are closed out when the client no longer maintains sufficient margin in their account to support the position, thereby preventing the client from losing more than their stated risk capital or cumulative loss limit. This functionality also ensures that the Filer will not incur any credit risk vis-a-vis its customers in respect of transactions in CFDs.
(c) Wide range of order types. The Platform also provides risk management tools such as stops, limits, and contingent orders, which are available on all CFDs. These tools are designed to help reduce the risk of losses being greater than the amount deposited by a client.
15. The Platform is similar to those developed for on-line brokerages in that the client trades without other communication with, or advice from, the dealer.
16. Clients conduct CFD transactions through the Platform. The Platform is not a "marketplace" as defined in National Instrument 21-101 Marketplace Operation since a marketplace is any facility that brings together multiple buyers and sellers by matching orders in fungible contracts in a nondiscretionary manner. The Platform does not bring together multiple buyers and sellers; rather it offers clients direct access to real time currency rates and prices quotes for the CFDs.
17. The CFDs are not transferable or fungible with other contracts or financial instruments.
18. The Filer will be the counterparty to trades by its clients in CFDs (CFD Transactions). It will not act as an intermediary, broker or trustee in respect of CFD Transactions. The Filer does not manage any discretionary accounts, nor does it provide any trading advice or recommendations.
19. The Filer manages the risk in its client positions by simultaneously placing the identical CFD Transaction on a back-to-back basis with the Platform Provider, which is an "acceptable institution" (as the term is defined in IIROC Form 1) (the Acceptable Institution). The Acceptable Institution, in turn, automatically offsets each position against other client positions on a second-by-second basis, and either "hedges" its net exposure by trading with liquidity providers (banks) or using its equity capital, or both. By virtue of this risk management functionality inherent in the Platform, the Filer eliminates both market risk and counterparty risk. This also means that the Filer does not have an inherent conflict of interest with its clients since it does not profit on either the loss or gain of the client. The Filer does not charge any account opening or maintenance fees however it charges commissions and other fees such as rollover, carrying, and finance costs and is compensated by the spread where applicable. If the Filer makes any changes to this compensation model in the future, including introducing any fees, commissions or other charges in respect of CFDs, the Filer will provide reasonable prior notice to its clients and to IIROC and will ensure that all such changes are in accordance with IIROC Rules and IIROC Acceptable Practices.
20. The ability to lever an investment is one of the principal features of CFDs. Leverage allows clients to magnify investment returns (or losses) by reducing the initial capital outlay required to achieve the same market exposure that would be obtained by investing directly in the underlying currency or instrument.
21. IIROC Rules and IIROC Acceptable Practices set out detailed requirements and expectations relating to leverage and margin for offerings of CFDs. The degree of leverage may be amended in accordance with IIROC Rules and IIROC Acceptable Practices as may be established from time to time.
22. Pursuant to Section 13.12 Restriction on lending to clients of National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations, only those firms that are registered as investment dealers (a condition of which is to be a member of IIROC) may lend money, extend credit or provide margin to a client.
Structure of CFDs
23. A CFD is a derivative product that allows clients to obtain economic exposure to the price movement of an underlying instrument, such as a share, index, market sector, currency pair, treasury or commodity, without the need for ownership and physical settlement of the underlying instrument. Unlike certain OTC derivatives, such as forward contracts, CFDs do not require or oblige either the client or principal counterparty (being the Filer for purposes of the Requested Relief), nor any agent of the principal counterparty (also being the Filer for the purposes of the Requested Relief) to deliver the underlying instrument.
24. The CFDs to be offered by the Filer will not confer the right or obligation to acquire or deliver the underlying security or instrument itself, and will not confer any other rights of shareholders of the underlying security or instrument, such as voting rights. Rather, a CFD is a derivative instrument which is represented by an agreement between a client and a counterparty to exchange the difference between the opening price of a CFD position and the price of the CFD at the closing of the position. The value of the CFD is generally reflective of the movement in prices at which the underlying instrument is traded at the time of opening and closing the position in the CFD.
25. CFDs allow clients to take a long or short position on an underlying instrument, but unlike futures contracts they have no fixed expiry date or an obligation for physical delivery of the underlying instrument.
26. CFDs allow clients to obtain exposure to markets and instruments that may not be available directly, or may not be available in a cost-effective manner.
CFDs Distributed in the Applicable Jurisdictions
27. Certain types of CFDs may be considered to be "securities" under the securities legislation of the Applicable Jurisdictions.
28. Investors wishing to enter into CFD transactions with the Filer must open an account with the Filer.
29. Prior to a client's first CFD Transaction and as part of the account opening process, the Filer will provide the client with a separate risk disclosure document that clearly explains, in plain language, the transaction and the risks associated with the transaction (the Risk Disclosure Document). The Risk Disclosure Document includes the required risk disclosure set forth in Schedule A to the Regulations to the QDA and leverage risk disclosure required under IIROC Rules. The Risk Disclosure Document contains disclosure that is substantially similar to the risk disclosure statement required for recognized options in OSC Rule 91-502 Trades in Recognized Options (which provides both registration and prospectus exemptions) (OSC Rule 91-502) and the regime for OTC derivatives contemplated by OSC SN 91-702 (as defined below) and proposed OSC Rule 91-504 OTC Derivatives (which was not adopted) (Proposed Rule 91-504). The Filer will ensure that the Principal Regulator will receive a complete copy of the Risk Disclosure Document. Furthermore, prior to a client's first CFD Transaction, a complete copy of the Risk Disclosure Document will be delivered to the client through the online account application.
30. As part of the account opening process and prior to the client's first CFD Transaction, the Filer will obtain a written or electronic acknowledgement from the client confirming that the client has read and understood the Risk Disclosure Document. Such acknowledgment will be separate and prominent from other acknowledgements provided by the client as part of the account opening process.
31. As is customary in the industry, and due to the fact that this information is subject to factors beyond the control of the Filer (such as changes in IIROC Rules), information such as the underlying instrument listing and associated margin rates would not be disclosed in the Risk Disclosure Document but will be part of a client's account opening package and will be available on both the Filer's website and the Platform.
Satisfaction of the Registration Requirement
32. The role of the Filer as it relates to the offering of CFDs is limited to acting as an execution-only dealer. In this role, the Filer will, among other things, be responsible for approving all marketing, for holding of clients funds and for client approval (including the review of know-your-client (KYC) due diligence and account opening suitability assessments) pursuant to NI 31-103.
33. IIROC Rules exempt member firms that provide execution-only services, such as discount brokerage, from the obligation to determine whether each trade is suitable for the client. However, IIROC has exercised its discretion to impose additional requirements on IIROC members proposing to trade in CFDs (namely the IIROC Acceptable Practices described in paragraph 11) which requires, among other things, that:
(a) applicable risk disclosure documents and client suitability waivers be provided in a form acceptable to IIROC;
(b) the firm's policies and procedures, amongst other things, require the Filer to assess whether trading in CFDs is appropriate for a client before an account is approved to be opened. This account opening suitability process includes an assessment of the client's investment knowledge and trading experience, client identification, screening applicants and customers against lists of prohibited/blocked persons, and detecting and reporting suspicious trading and potential terrorist financing and money laundering activities to applicable enforcement authorities;
(c) the Filer's registered salespeople who assist clients with their KYC and their supervisory trading officer, meet or are exempted from proficiency requirements for futures trading, and are registered with IIROC as Investment Representatives (IR) for retail customers in the product categories of Futures Contracts and Futures Contracts Options. The course proficiency requirements for an IR, Futures Contracts and Futures Contract Options include the completion of the Derivatives Fundamental Course and Futures Licensing Course. In addition, the Filer must have a fully qualified Supervisor who has completed the Canadian Commodity Supervisors Examination in addition to Derivatives Fundamentals Course and Futures Licensing Course.
(d) cumulative loss limits for each client's account be established (this is a measure normally used by IIROC in connection with futures trading accounts).
34. The CFDs offered in Canada are offered in compliance with applicable IIROC Rules and other IIROC Acceptable Practices.
35. IIROC limits the underlying instruments in respect of which a member firm may offer CFDs since only certain securities are eligible for reduced margin rates. For example, underlying equity securities must be listed or quoted on certain "recognized exchanges" (as that term is defined in IIROC Rules) such as the Toronto Stock Exchange or the New York Stock Exchange. The purpose of these limits is to ensure that CFDs offered in Canada will only be available in respect of underlying instruments that are traded in well-regulated markets, in significant enough volumes and with adequate publicly available information, so that clients can form a sufficient understanding of the exposure represented by a given CFD.
36. IIROC Rules prohibit the margining of CFDs where the underlying instrument is a synthetic product (single U.S. sector or "mini-indices"). For example, Sector CFDs (i.e., basket of equities for the financial institutions industry) may be offered to non-Canadian clients; however, this is not permissible under IIROC Rules.
37. IIROC members seeking to trade CFDs are generally precluded, by virtue of the nature of the contracts, from distributing CFDs that confer the right or obligation to acquire or deliver the underlying security or instrument itself (convertible CFDs), or that confer any other rights of shareholders of the underlying security or instrument, such as voting rights.
38. The Requested Relief, if granted, would (and the Existing Relief does) substantially harmonize the position of the regulators in the Applicable Jurisdictions on the offering of CFDs to investors in the Applicable Jurisdictions with how those products are offered to investors in Québec under the QDA. The QDA provides a legislative framework to govern derivatives activities within Quebec. Among other things, the QDA requires such products to be offered to investors through an IIROC member and the distribution of a standardized risk disclosure document rather than a prospectus in order to distribute such contracts to investors resident in Québec.
39. The Requested Relief, if granted, would (and the Existing Relief is) be consistent with the guidelines articulated by Staff of the Principal Regulator in OSC Staff Notice 91-702 Offerings of Contracts for Difference and Foreign Exchange Contracts to Investors (OSC SN 91-702). OSC SN 91-702 provides guidance with regards to the distributions of CFDs, foreign exchange contracts (forex or FX contracts) and similar OTC derivative products to investors in the Jurisdiction.
40. The Principal Regulator has previously recognized that the prospectus requirement may not be well suited for the distribution of certain derivative products to investors in the Jurisdiction, and that alternative requirements, including requirements based on clear and plain language risk disclosure, may be better suited for certain derivatives. In the Jurisdiction, both OSC Rule 91-502 and OSC Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario (OSC Rule 91-503) provide for a prospectus exemption for the trading of derivative products to clients. The Requested Relief is consistent with the principles and requirements of OSC Rule 91-502, OSC Rule 91-503 and Proposed Rule 91-504.
41. The Filer submits that the Requested Relief, if granted, would (and the Existing Relief does) harmonize the Principal Regulator's position on the offering of CFDs with certain other foreign jurisdictions that have concluded that a clear, plain language risk disclosure document is appropriate for retail clients seeking to trade in foreign exchange contracts.
42. The Filer is of the view that requiring compliance with the prospectus requirement in order to enter into CFDs with retail clients would not be appropriate since the disclosure of a great deal of the information required under a prospectus and under the reporting issuer regime is not material to a client seeking to enter into a CFD Transaction. The information to be given to such a client should principally focus on enhancing the client's appreciation of product risk including counterparty risk. In addition, most CFDs are of short duration (positions are generally opened and closed on the same day and are in any event marked to market and cash settled daily).
43. The Filer is regulated by IIROC, which has a robust compliance regime including specific requirements to address market, capital and operational risks.
44. The Filer submits that the regulatory regimes developed by the AMF and IIROC for CFDs adequately address issues relating to the potential risk to the clients of the Filer acting as counterparty. In view of these regulatory regimes, investors would receive little or no additional benefit from requiring the Filer to also comply with the prospectus requirement.
45. The Requested Relief in respect of each Applicable Jurisdiction is conditional on the Filer being registered as an investment dealer with the Commission in such Applicable Jurisdiction and maintaining its membership with IIROC and that all CFD Transactions be conducted pursuant to IIROC Rules and in accordance with IIROC Acceptable Practices.
The Principal Regulator is satisfied that the test set out in the Legislation to make the Decision is met.
The Decision of the Principal Regulator is that the Requested Relief is granted provided that:
(a) all CFDs traded with residents in the Applicable Jurisdictions shall be executed through the Filer;
(b) with respect to residents of an Applicable Jurisdiction, the Filer remains registered as a dealer in the category of investment dealer with the Principal Regulator and the Commission in such Applicable Jurisdiction and a member of IIROC;
(c) all transactions in CFDs with clients resident in the Applicable Jurisdictions shall be conducted pursuant to IIROC Rules imposed on members seeking to trade in CFDs and in accordance with IIROC Acceptable Practices, as amended from time to time;
(d) all transactions in CFDs with clients resident in the Applicable Jurisdictions be conducted pursuant to the rules and regulations of the QDA and the AMF, as amended from time to time, unless and to the extent there is a conflict between (i) the rules and regulations of the QDA and the AMF, and (ii) the requirements of the securities laws of the Applicable Jurisdictions, the IIROC Rules and IIROC Acceptable Practices, in which case the latter shall prevail;
(e) prior to a client first entering into a CFD transaction, the Filer has provided to the client the Risk Disclosure Document and has delivered, or has previously delivered, a copy of the Risk Disclosure Document to the Principal Regulator;
(f) prior to a client's first CFD transaction and as part of the account opening process, the Filer has obtained a written or electronic acknowledgement from the client, as described in paragraph 32, confirming that the client has received, read and understood the Risk Disclosure Document;
(g) the Filer has furnished to the Principal Regulator the name and principal occupation of its officers and directors, together with either the personal information form and authorization of indirect collection, use and disclosure of personal information provided for in National Instrument 41-101 General Prospectus Requirements or the registration information form for an individual provided for in Form 33-109F4 of National Instrument 33-109 Registration Information Requirements completed by any officer or director;
(h) the Filer shall promptly inform the Principal Regulator in writing of any material change affecting the Filer, being any change in the business, activities, operations or financial results or condition of the Filer that may reasonably be perceived by a counterparty to a derivative to be material;
(i) the Filer shall promptly inform the Principal Regulator in writing if a self-regulatory organization or any other regulatory authority or organization initiates proceedings or renders a judgment related to disciplinary matters against the Filer concerning the conduct of activities with respect to CFDs;
(j) within 90 days following the end of its financial year, the Filer shall submit to IIROC, and the Principal Regulator upon request, the audited annual financial statements of the Filer; and
(k) the Requested Relief shall immediately expire upon the earliest of
i. four years from the date that this Decision is issued;
ii. in respect of an Applicable Jurisdiction or Quebec, the issuance of an order or decision by a court, the Commission in such Applicable Jurisdiction, the AMF or other similar regulatory body that suspends or terminates the ability of the Filer to offer CFDs to clients in such Applicable Jurisdiction or Québec; and
iii. with respect to an Applicable Jurisdiction, the coming into force of legislation or a rule by its Commission regarding the distribution of CFDs to investors in such Applicable Jurisdiction;
(l) It is further the Decision of the Principal Regulator that the Existing Relief is hereby revoked.
(the Interim Period).
Fairfax Africa Holdings Corporation
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- issuer required to comply with Item 14.2 of Form 51-102F5 -- Information Circular in respect of an acquisition that triggered the 20% threshold significance test for reporting issuers that are not venture issuers -- on November 18, 2020 rule amendments come into force that increase the threshold significance test for reporting issuers that are not venture issuers to at least two of the existing significance tests at 30% threshold level -- the acquisition is not significant under the amended threshold -- relief granted from requirement to comply with Item 14.2 of Form 51-102F5.
Form 51-102F5 to National Instrument 51-102 Continuous Disclosure Obligations, Item 14.2.
October 28, 2020
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that the Filer be exempt from the requirements of Item 14.2 of Form 51-102F5 Information Circular (Form 51-102F5) in connection with the management information circular (the Circular) prepared in relation to the Acquisition described below (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filer has provided notice that Section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (collectively, with Ontario, the Jurisdictions).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation governed by the Canada Business Corporations Act.
2. The head and registered office of the Filer is located at 95 Wellington Street West, Suite 800, Toronto, Ontario, M5J 2N7.
3. The Filer is a reporting issuer in each of the Jurisdictions and is not in default of any requirement of the securities legislation in the Jurisdictions.
4. The subordinate voting shares of the Filer are listed and posted for trading on the Toronto Stock Exchange under the symbol "FAH.U".
5. The Filer is an investment holding company whose investment objective is to achieve long-term capital appreciation, while preserving capital, by investing in public and private equity securities and debt instruments of African businesses or other businesses with customers, suppliers or business primarily conducted in, or dependent on, Africa.
6. On July 10, 2020, the Filer entered into a purchase and sale agreement with HFA TopCo, L.P. (the Partnership), Helios Holdings Limited (HHL) and Helios Holdings Partners Limited (HHPL), pursuant to which the Filer will acquire: (a) all of the issued and outstanding Class A partnership interests of the Partnership from HHL; and (b) all of the issued and outstanding Class B partnership interests of the Partnership from HHPL, in exchange for such number of multiple voting shares and subordinate voting shares of the Filer so that HHL and HHPL will collectively hold beneficial ownership of 45.9% of the total equity and 45.9% of the voting power of the pro forma share capital of the Filer (the Acquisition).
7. The Filer will call a special meeting (the Meeting) at which the shareholders of the Filer (the Shareholders) will be asked to approve, among other things, an amendment to the Filer's articles and bylaws in order to give effect to the Acquisition. In addition, certain aspects of the Acquisition must be approved by: (i) at least 66 ?% of the votes cast by the Shareholders (including certain votes on a class by class basis), present in person or represented by proxy and entitled to vote at the Meeting, and (ii) at least a simple majority of the votes cast by the holders of the Filer's subordinate voting shares, present in person or represented by proxy and entitled to vote at the Meeting, who are not excluded by operation of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) (because certain elements of the transaction are "related party transactions" within the meaning of MI 61-101), being all holders of subordinate voting shares of the Filer other than Fairfax Financial Holdings Limited and its affiliates.
8. Item 14.2 of Form 51-102F5 to National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) provides that if action is to be taken at a shareholder meeting in respect of a "significant" acquisition, the circular must include, among other things, disclosure for the business being acquired.
9. Under Part 8 of NI 51-102, an acquisition is determined to be significant if the acquisition satisfies any of the significance tests in subsection 8.3(2) of NI 51-102 or the optional significance tests in subsection 8.3(4) of NI 51-102. The threshold of the significance tests for reporting issuers that are not venture issuers is 20%.
10. Effective November 18, 2020, amendments have been made to NI 51-102 such that: (i) an acquisition is determined to be significant if the acquisition satisfies any two of the significance tests in subsection 8.3(2) of NI 51-102 or the optional significance tests in subsection 8.3(4) of NI 51-102; and (ii) the threshold of the significance tests for reporting issuers that are not venture issuers is increased from 20% to 30%.
11. Under section 8.3 of NI 51-102, the "Investment Test" for the Acquisition is 29.92%. Because the Filer is required to determine the significance of the Acquisition prior to November 18, 2020, without the Exemption Sought being granted, the Filer is required to comply with the requirements of Item 14.2 of Form 51-102F5.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted.
I.G. Investment Management, Ltd.
Pursuant to National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from the know-your-client and suitability requirements, and the requirements to deliver account statements and investment performance reports granted to a portfolio manager in respect of investors in a model portfolio program offered by an affiliated mutual fund dealer and investment dealer.
Multilateral Instrument 11-102 Passport System, s. 4.7(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.2, 13.3, 14.14, 14.14.1, 14.18, 15.1.
Order No. 7533
November 25, 2020
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filer from the following requirements with respect to clients invested in the Model Portfolios (as defined below):
(a) the requirement (the Know Your Client Requirement) in the Legislation that the Filer must take reasonable steps to:
(i) establish the identity of a client and, if the Filer has cause for concern, make reasonable inquiries as to the reputation of the client;
(ii) establish whether the client is an insider of a reporting issuer or any other issuer whose securities are publicly traded;
(iii) ensure that the Filer has sufficient information regarding the client's investment needs, objectives, financial circumstances and risk tolerance, among other information, to enable the Filer to meet its obligations under the Legislation to make determination with respect to the Suitability Requirement (as defined below); and
(iv) keep the information described above current;
(collectively, the Know Your Client Exemption);
(b) the requirement in the Legislation (the Suitability Requirement) that the Filer take reasonable steps to ensure that, before it makes a recommendation to or accepts an instruction from a client to buy or sell a security, or makes a purchase or sale of a security for a client's account, or upon the occurrence of any other required suitability assessment event, such action is suitable for the client (the Suitability Exemption); and
(c) the requirement (the Statement Delivery Requirement) in the Legislation that the Filer deliver account statements and investment performance reports to clients who have invested in the Model Portfolios (the Statement Delivery Exemption);
The Know Your Client Exemption, Suitability Exemption, and Statement Delivery Exemption are collectively referred to as the Exemption Sought.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Manitoba Securities Commission is the principal regulator for this application;
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon by the Filer in British Columbia, Alberta, Saskatchewan, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (together with Manitoba and Ontario, the Jurisdictions); and
(c) The decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
Facts
The Filer and Dealers
1. The head office of the Filer is located in Winnipeg, Manitoba.
2. The Filer is the investment fund manager of certain mutual funds that will form part of a model portfolio service (the "Service") offered exclusively to clients of Investors Group Financial Services Inc. (IGFS) and Investors Group Securities Inc. (IGSI), dealers that are affiliated with the Filer (individually a Dealer and collectively, the Dealers).
3. The Filer is registered as an investment fund manager in Manitoba, Ontario, Québec and Newfoundland & Labrador, and as an advisor in the category of portfolio manager in Manitoba, Ontario, Québec. The Filer will seek registration as an advisor in each of the remaining Jurisdictions where it will offer the Service.
4. Each Dealer is registered as a dealer in all provinces and territories of Canada. IGFS is registered as a mutual fund dealer and is a member of the Mutual Fund Dealers Association of Canada (MFDA). IGSI is registered as an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC).
5. The Filer, the Dealers and the Funds (as defined below) are not in default of the securities legislation in any of the Jurisdictions.
The Service
6. As part of the Service, the Filer constructs and makes available to clients of the Dealers, asset allocation portfolios comprised entirely of mutual funds for which the Filer acts as investment fund manager (the Funds) as well as cash and cash equivalents (the Model Portfolios).
7. Each Fund is, or will be, a reporting issuer in one or more of the Jurisdictions, and subject to the requirements of National Instrument 81-102 Investment Funds. Securities of the Funds are, or will be, qualified for sale pursuant to a simplified prospectus, annual information form and Fund Facts that have been, or will be, prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
8. The Service offers a number of Model Portfolios that correspond to a different investment objective, investment horizon and risk profile. The Model Portfolios are designed to meet a wide range of investor goals and span a broad risk-return spectrum.
9. Each Model Portfolio has a specified target fund allocation that defines the percentage of the portfolio to be invested in each Fund (the Target Weight). Due to changes in the relative market value of each Fund, the weighting of each Fund may increase or decrease within an upper and lower range from its Target Weight (the Permitted Range).
10. When one or more Funds in a client's Model Portfolio exceed the Permitted Range, the Filer will execute appropriate trades so that each Fund is returned to a relative weight that is within the Permitted Range (the Rebalancing Trades).
11. In addition, as part of the Service, the Filer may also reallocate securities of the Funds held in a client's account through purchases and redemptions of securities of the Funds in order to change the composition of the selected Model Portfolio, including to:
(a) add one or more new Funds to a Model Portfolio (the Fund Addition Trades);
(b) remove one or more Funds from a Model Portfolio (the Fund Removal Trades); and
(c) change the Target Weight and/or Permitted Range of one or more Funds within a Model Portfolio (the Weighting Change Trades, and together with the Rebalancing Trades, Fund Addition Trades and the Fund Removal Trades, the Service Trades).
12. To the extent the Filer effects a Service Trade, the Service Trade will be consistent with the investment objective, investment time horizon, and risk profile of the Model Portfolio.
13. In order to invest in a Model Portfolio, clients will meet with a registered representative of their Dealer who will collect and assess the client's financial circumstances, investment knowledge, investment objectives, investment time horizon and risk tolerance.
14. The registered representative of the Dealer and client may also complete a questionnaire (the "Questionnaire") to determine which Model Portfolio is suitable for the client. The Dealers and the Filer jointly created the Questionnaire, and each agree that the Questionnaire is an effective tool for determining whether each client is suitable for a Model Portfolio.
15. The Dealers will use the information obtained from the client as well as the registered representative's knowledge of the client's affairs, to complete a know your client and suitability assessment on the client's affairs as required under sections 13.2 and 13.3 of National Instrument 31-103Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103"), and similar provisions of IIROC and MFDA rules, as applicable.
16. The Model Portfolio will be selected by the client in consultation with their Dealer based on the know your client and suitability assessment, and the investment mandate of each Model Portfolio.
17. Clients will have no direct contact with the Filer in connection with the selection of the Model Portfolio as well as the Filer's management of the Model Portfolio. Clients will instead interact solely with their Dealer and their Dealer's registered representatives.
18. If a client decides to invest in a Model Portfolio, the client will complete an agreement with the Filer and the applicable Dealer (the Agreement). The Agreement will:
(a) be signed by the client and include an investment policy statement that will describe the investment objectives and composition of the Model Portfolio, including the Funds in the Model Portfolio as well as their respective Target Weights and Permitted Ranges;
(b) authorize the Filer to act as manager of the cash and securities held in respect of the client's account with the Dealer on a discretionary investment basis in accordance with the selected Model Portfolio, including to rebalance the percentage allocations of the Funds in the selected Model Portfolio within their applicable Permitted Range, add and remove Funds from the selected Model Portfolio, and change the applicable Target Weight and Permitted Ranges of the Funds.
(c) establish a clear understanding of the roles and responsibilities of the Filer and the respective Dealers. This will include disclosure that the Filer is responsible for managing the Model Portfolio without reference to the client's circumstances and only in accordance with the Model Portfolio selected by the client, and the Dealers alone will have the responsibility for gathering and periodically updating the Know Your Client Information concerning the client and for determining that the selected Model Portfolio is and remains suitable for the client. The client will also acknowledge that the Dealers will not have discretionary authority to participate in the management of the Model Portfolio.
19. To the extent the Dealers and/or registered representatives acting on behalf of the Dealers determine that a Model Portfolio is no longer suitable for a Client, the Client will no longer be permitted to invest in the model and will be recommended a suitable alternative.
20. There will be no duplication of any fees or charges as result of a client's decision to use the Service. In particular:
(a) The Filer will receive management and administration fees directly from each Fund in respect of the client's holding of securities of the Funds, which reflects the costs associated with performing its portfolio manager responsibilities of the Service. Only series of securities that do not pay advisor service fees such as trailing commissions to the Dealers (currently series I and/or series Ti securities of the Funds) will be used in the Service;
(b) The Dealers and their registered representatives will not receive any advisor service fees such as trailing commissions from the Funds and instead will receive advisor services fees directly from each client in the Service, which reflects the costs associated with performing its dealer responsibilities for the Service; and
(c) No sales charges, redemption fees, switch fees or early trading fees will be charged in connection with any trades under the Service.
21. The fees and expenses charged in respect of the Service by the Dealers and the Filer through the Funds will be disclosed in the Agreement. The fees and expenses pertaining to the particular Funds used in the Model Portfolio will be set out in the simplified prospectus and Fund Facts of the Funds.
22. Fund Facts will be delivered to each client as required by Legislation, subject to any applicable exemption or relief order. Trade confirmations will also be provided to each client as required by Legislation.
23. Consistent with the discretionary nature of the Service, clients will not receive any advance notice of changes to their Model Portfolio. However, changes to a Model Portfolio's Target Weights, Permitted Ranges, and/or constituent Funds will be communicated to clients in writing -- in their account statement or otherwise -- on a no less than semi-annual basis.
24. The following monitoring and oversight procedures will be carried out in connection with each client's account in the Service:
(a) An annual portfolio review will be conducted by the registered representative of the Dealer to determine whether there have been any changes to the client's circumstances that would warrant the selection of another Model Portfolio; and
(b) Ongoing oversight of each Model Portfolio by the Filer, including to determine whether the composition of the Model Portfolio remains suitable for the risk profile of the model or whether any changes to the Target Weights and/or Permitted Ranges of the Funds within the model would be appropriate.
Know Your Client and Suitability
25. As a registered portfolio manager and the manager of the Service, the Filer is responsible for ensuring that the client's assets are invested in accordance with the terms of the selected Model Portfolio and for monitoring the suitability of trading decisions, including the Service Trades, it makes at the level of the Model Portfolio such that the trading decisions are suitable for the particular risk-return profile of the Model Portfolio selected by the client.
26. As the Filer does not have any direct interaction with the client, the Service contemplates that the Dealer is solely responsible for compliance with the Know Your Client Requirement and the Suitability Requirement at the level of the client. In particular, it is the program intention that the Dealer is solely responsible for gathering and periodically updating Know Your Client information concerning the client and confirming the suitability of the selected Model Portfolio for the client given the client's financial goals, risk tolerance and unique circumstances.
27. In order to give effect to the program intention, the Filer will maintain and apply policies and procedures designed to provide reasonable assurance that the Dealers comply with the Know Your Client Requirement and the Suitability Requirement with respect to each Client. These policies and procedures (the KYC and Suitability Oversight Policies and Procedures) include:
(a) a written explanation in the Agreement of the different roles and responsibilities of the Filer and the Dealers, and specifically the Filer's expectation that the Dealers will be solely responsible for gathering and periodically updating Know Your Client information concerning the client and confirming the suitability of the selected Model Portfolio for the client given the client's financial goals, risk tolerance and unique circumstances; and
(b) a requirement that the Dealers responsible for gathering and periodically updating Know Your Client information concerning the client and confirming the suitability of the selected Model Portfolio for the client will, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that the Dealers have complied with their Know Your Client and suitability obligations.
Account Reporting
28. Under the Service, the Filer maintains records of portfolio assets, including all purchases and redemptions of Funds as a result of Service Trades.
29. The securities of the Funds that comprise each Model Portfolio are directly held by each client in his/her own account(s) established with the respective Dealer.
30. All trades, including the Service Trades, will be effected by the Dealers solely upon the instruction of the Filer, and reflected in each client's account(s) with the respective Dealer on the business day following such trades.
31. An account statement will be sent to the client by the respective Dealer on a monthly basis for clients of IGSI and on a quarterly basis for clients of IGFS. An investment performance report will also be sent to the clients annually.
32. The Filer will maintain and apply policies and procedures designed to provide reasonable assurance that the Dealers through which the Model Portfolios are marketed and sold comply with the client-reporting obligations under the applicable rules of the MFDA or IIROC (the Client Reporting Oversight Policies and Procedures). These polices and procedures will include, without limitation,
(a) a requirement that the Filer maintain records of each client's investment positions and trades;
(b) A requirement that the Filer inform each client in writing, in the Agreement or otherwise, that it will not provide account statements and investment performance reports in addition to those delivered by the Dealer; and
(c) A requirement that, for the duration that a client holds an account with the Dealer, the Filer will take reasonable steps, including documented sample testing and reconciliations, to verify that account statements and investment performance reports are provided by the Dealers, and are complete, accurate and delivered on a timely basis in a format that is compliant with the MFDA or IIROC rules, as applicable.
33. The respective responsibilities of the Filer and Dealers regarding the delivery of account statements and investment performance reports will be set out in a written agreement between the Filer and the Dealers.
Exemption Sought
34. In the absence of the Exemption Sought, the Filer would be required to:
(a) gather and update the information contemplated by the Know Your Client Requirement for each client;
(b) ensure that each trade in a given client's Model Portfolio is suitable for such client in accordance with the Suitability Requirement rather than invested on terms that are suitable to the particular Model Portfolio itself; and
(c) deliver account statements and investment performance reports to clients who have invested in the Model Portfolios.
35. The Dealers do not require an exemption from the adviser registration requirement under the Legislation as a result of their involvement with the Model Portfolios as they will not be engaged in providing discretionary management advice to clients in connection with the management of the Model Portfolios.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision. The decision of the principal regulator under the Legislation is that the Exemption Sought is granted on the following conditions:
(a) the Filer is, at the time of any Service Trade, registered under the Legislation as an adviser in the category of portfolio manager;
(b) each Service Trade is made in accordance with the terms of the selected Model Portfolio;
(c) the Filer has adopted and maintains and applies the KYC and Suitability Oversight Policies and Procedures; and
(d) the Filer has adopted and maintains and applies the Client Reporting Oversight Policies and Procedures.
Investors Group Financial Services Inc. and Investors Group Securities Inc.
National Policy 11-203 — Process for Exemptive Relief Applications in Multiple Jurisdictions — Relief granted from the requirement in s. 3.2.01(1) of NI 81-101 to deliver a fund facts document to investors for subsequent purchases of mutual fund securities made pursuant to a model portfolio program, subject to certain conditions — National Instrument 81-101 Mutual Fund Prospectus Disclosure.
Multilateral Instrument 11-102 Passport System, s. 4.7(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.2, 13.3, 14.14, 14.14.1, 14.18, 15.1.
Order No. 7534
November 25, 2020
The principal regulator (Principal Regulator) in the Jurisdiction has received an application from the Filers and I.G. Investment Management, Ltd. (IGIM) for a decision under the securities legislation of the Jurisdiction (Legislation) exempting the Filers from the requirements of subsection 3.2.01(1) of National Instrument 81-101 -- Mutual Fund Prospectus Disclosure (NI 81-101) to deliver or send the most recently filed fund facts document (a Fund Facts) in the manner required under the Legislation (the Fund Facts Delivery Requirement) in respect of purchases of securities of the Funds (as defined below) for clients invested in the Model Portfolios (as defined below) that are made in connection with Service Trades and Additional Investments (each as defined below) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Manitoba Securities Commission is the principal regulator for this application;
(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon by the Filers in British Columbia, Alberta, Saskatchewan, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (together with Manitoba and Ontario, the Jurisdictions); and
(c) The decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filers and IGIM:
Facts
The Filers and the Investment Fund Manager
1. The head office of each of the Filers is located in Winnipeg, Manitoba.
2. Each Filer is registered as a dealer in all provinces and territories of Canada. IGFS is registered as a mutual fund dealer and is a member of the Mutual Fund Dealers Association of Canada (MFDA). IGSI is registered as an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC).
3. IGIM is the investment fund manager of certain mutual funds that will form part of a model portfolio service (the Service) offered exclusively to clients of the Filers, which are affiliated with IGIM.
4. IGIM is registered as an investment fund manager in Manitoba, Ontario, Québec and Newfoundland & Labrador, and as an advisor in the category of portfolio manager in Manitoba, Ontario, Québec. IGIM will seek registration as an adviser in each of the remaining Jurisdictions where it will offer the Service.
5. The Filers, IGIM and the Funds (as defined below) are not in default of the securities legislation in any of the Jurisdictions.
The Service
6. As part of the Service, IGIM constructs and makes available to clients of the Filers, asset allocation portfolios comprised entirely of mutual funds for which IGIM acts as investment fund manager (the Funds) as well as cash and cash equivalents (the Model Portfolios).
7. Each Fund is, or will be, a reporting issuer in one or more of the Jurisdictions, and subject to the requirements of National Instrument 81-102 Investment Funds. Securities of the Funds are, or will be, qualified for sale pursuant to a simplified prospectus, annual information form and Fund Facts that have been, or will be, prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
8. The Service offers a number of Model Portfolios that correspond to a different investment objective, investment horizon and risk profile. The Model Portfolios are designed to meet a wide range of investor goals and span a broad risk-return spectrum.
9. Each Model Portfolio has a specified target fund allocation that defines the percentage of the portfolio to be invested in each Fund (the Target Weight). Due to changes in the relative market value of each Fund, the weighting of each Fund may increase or decrease within an upper and lower range from its Target Weight (the Permitted Range).
10. When one or more Funds in a client's Model Portfolio exceed the Permitted Range, IGIM will execute appropriate trades so that each Fund is returned to a relative weight that is within the Permitted Range (the Rebalancing Trades).
11. In addition, as part of the Service, IGIM may also reallocate securities of the Funds held in a client's account through purchases and redemptions of securities of the Funds in order to change the composition of the selected Model Portfolio, including to:
(a) add one or more new Funds to a Model Portfolio (the Fund Addition Trades);
(b) remove one or more Funds from a Model Portfolio (the Fund Removal Trades); and
(c) change the Target Weight and/or Permitted Range of one or more Funds within a Model Portfolio (the Weighting Change Trades, and together with the Rebalancing Trades, Fund Addition Trades and the Fund Removal Trades, the Service Trades).
12. To the extent IGIM effects a Service Trade, the Service Trade will be consistent with the investment objective, investment time horizon, and risk profile of the Model Portfolio.
13. Clients may, from time to time, contribute additional funds to their accounts with a Filer for investment in the selected Model Portfolio through the Service. Such additional funds will be applied towards the purchase of additional securities of the Funds in accordance with the Target Weight of each Fund (the Additional Investments).
14. In order to invest in a Model Portfolio, clients will meet with a registered representative of a Filer who will collect and assess the client's financial circumstances, investment knowledge, investment objectives, investment time horizon and risk tolerance.
15. The registered representative of the Filer and client may also complete a questionnaire (the Questionnaire) to determine which Model Portfolio is suitable for the client. The Filers and IGIM jointly created the Questionnaire, and each agree that the Questionnaire is an effective tool for determining whether each client is suitable for a Model Portfolio.
16. The Filers will use the information obtained from the client as well as the registered representative's knowledge of the client's affairs, to complete a know your client and suitability assessment on the client's affairs as required under sections 13.2 and 13.3 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, and similar provisions of IIROC and MFDA rules, as applicable.
17. The Model Portfolio will be selected by the client in consultation with their Filer based on the know your client and suitability assessment, and the investment mandate of each Model Portfolio.
18. Clients will have no direct contact with IGIM in connection with the selection of the Model Portfolio as well as IGIM's management of the Model Portfolio. Clients will instead interact solely with their respective Filer and their registered representatives.
19. If a client decides to invest in a Model Portfolio, the client will complete an agreement with IGIM and the applicable Filer (the Agreement). The Agreement will:
(a) be signed by the client and include an investment policy statement that will describe the investment objectives and composition of the Model Portfolio, including the Funds in the Model Portfolio as well as their respective Target Weights and Permitted Ranges;
(b) authorize IGIM to act as manager of the cash and securities held in respect of the client's account with a Filer on a discretionary investment basis in accordance with the selected Model Portfolio, including to rebalance the percentage allocations of the Funds in the selected Model Portfolio within their applicable Permitted Range, add and remove Funds from the selected Model Portfolio, and change the applicable Target Weight and Permitted Ranges of the Funds; and
(c) establish a clear understanding of the roles and responsibilities of IGIM and the respective Filer. This will include disclosure that IGIM is responsible for managing the Model Portfolio without reference to the client's circumstances and only in accordance with the Model Portfolio selected by the client, and the respective Filer alone will have the responsibility for gathering and periodically updating the Know Your Client Information concerning the client and for determining that the selected Model Portfolio is and remains suitable for the client. The client will also acknowledge that the Filer will not have discretionary authority to participate in the management of the Model Portfolio.
20. To the extent the Filers and/or registered representatives acting on behalf of the Filers determine that a Model Portfolio is no longer suitable for a Client, the Client will no longer be permitted to invest in the model and will be recommended a suitable alternative.
21. There will be no duplication of any fees or charges as result of a client's decision to use the Service. In particular:
(a) IGIM will receive management and administration fees directly from each Fund in respect of the client's holding of securities of the Funds, which reflects the costs associated with performing its portfolio manager responsibilities for the Service. Only series of securities that do not pay advisor service fees such as trailing commissions to the Filers (currently series I and/or series Ti securities of the Funds) will be used in the Service;
(b) The Filers and their registered representatives will not receive any advisor service fees such as trailing commissions from the Funds and instead will receive advisor service fees directly from each client in the Service, which reflects the costs associated with performing its dealer responsibilities for the Service; and
(c) No sales charges, redemption fees, switch fees or early trading fees will be charged in connection with any trades under the Service.
22. The fees and expenses charged in respect of the Service by the Filers as well as IGIM through the Funds will be disclosed in the Agreement. The fees and expenses pertaining to the particular Funds used in the Model Portfolio will be set out in the simplified prospectus and Fund Facts of the Funds.
23. Consistent with the discretionary nature of the Service, clients will not receive any advance notice of changes to their Model Portfolio. However, changes to a Model Portfolio's Target Weights, Permitted Ranges, and/or constituent Funds will be communicated to clients in writing -- in their account statement or otherwise -- on a no less than semi-annual basis.
24. Trade confirmations will be provided to each client as required by Legislation.
25. The following monitoring and oversight procedures will be carried out in connection with each client's account in the Service:
(a) An annual portfolio review will be conducted by the registered representative of the Filer to determine whether there have been any changes to the client's circumstances that would warrant the selection of another Model Portfolio; and
(b) Ongoing oversight of each Model Portfolio by IGIM, including to determine whether the composition of the Model Portfolio remains suitable for the risk profile of the model or whether any changes to the Target Weights and/or Permitted Ranges of the Funds within the model would be appropriate.
26. The securities of the Funds that comprise each Model Portfolio are directly held by each client in his/her own account(s) established with the respective Filer, which will be the account used for the administration of the Service.
27. IGIM has received separate exemptive relief to address compliance with the KYC, suitability and account reporting requirements in the Legislation relating to the Service.
Exemption Sought
28. The Service Trades and Additional Investments will result in redemptions and/or purchases of securities of one or more Funds in the Model Portfolio. Each such purchase is a "distribution" under the Legislation, which triggers the Fund Facts Delivery Requirement.
29. The Fund Facts Delivery Requirement requires that a dealer, unless it has previously done so, deliver or send to a purchaser of a security of a fund the most recently filed Fund Facts for the fund before the dealer accepts an instruction from the purchaser for the purchase of the security.
30. Prior to the initial set-up of a new Model Portfolio for a client under the Service, the Filer will send or deliver the Fund Facts in respect of each Fund in the selected Model Portfolio to the client, in accordance with the Fund Facts Delivery Requirement.
31. With respect to Fund Addition Trades, the Filer will provide the client with the most recently filed Fund Facts for any new Funds that are added to the applicable Model Portfolio as soon as practicable following the settlement date of the Fund Addition Trade.
32. In the absence of the Exemption Sought, unless the Filer has previously done so, the Filer would be required to deliver the most recently filed Fund Facts for each affected Fund in a client's selected Model Portfolio prior to each Service Trade that results in a purchase of securities and for Additional Investments.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision. The decision of the principal regulator under the Legislation is that the Exemption Sought is granted on the following conditions:
(a) the Filer provides each client with the most recently filed Fund Facts for any new Funds that are added to the applicable Model Portfolio as soon as practicable following the settlement date of a Fund Addition Trade;
(b) each client in a Model Portfolio is sent or delivered a notice that states:
(i) that except as provided for in paragraphs 25 and 26 above, the client will not receive the Fund Facts for the Funds in the Model Portfolio after the date of the notice, unless the client specifically requests them;
(ii) that the client is entitled to receive upon request, at no cost to the client, the most recently filed Fund Facts for the Funds in the Model Portfolio by calling a specified toll-free number, or by sending a request by mail or e-mail to a specified address or e-mail address;
(iii) how to access the Fund Facts for the Funds in the Model Portfolio electronically;
(iv) that except for securities of new Funds that are purchased pursuant to Fund Addition Trades, the client will not have a right of withdrawal under the Legislation for Rebalancing Trades, Weighting Change Trades and Additional Investments, but will continue to have a right of action if there is a misrepresentation in the prospectus or any document incorporated by reference into the prospectus; and
(v) that the client may terminate the Agreement at any time;
(c) at least annually, the client will be advised in writing of how he/she can request the most recently filed Fund Facts; and
(d) the most recently filed Fund Facts is sent or delivered to the client if the client requests it.
File No. 2020-38
November 27, 2020
WHEREAS on November 27, 2020, the Ontario Securities Commission (the Commission) held a hearing by teleconference;
ON HEARING the submissions of the representatives for Staff of the Commission (Staff) and for Daniel Sheehan (the Respondent);
IT IS ORDERED THAT:
1. Staff shall disclose to the Respondent non-privileged relevant documents and things in the possession or control of Staff by no later than December 18, 2020;
2. Staff shall file and serve a witness list, and serve a summary of each witness' anticipated evidence on the Respondent and indicate any intention to call an expert witness, and if so, provide the expert's name and the issues on which the expert will give evidence, by no later than February 11, 2021;
3. the Respondent shall advise Staff of any intention to bring a motion regarding Staff's disclosure or seeking disclosure of additional documents by no later than January 18, 2021; and
4. a second attendance in this matter is scheduled for February 22, 2021 at 10:00 a.m., by teleconference, or on such other date and time as may be agreed to by the parties and set by the Office of the Secretary.
File No. 2020-16
November 30, 2020
WHEREAS on November 30, 2020, the Ontario Securities Commission held a hearing by teleconference;
ON HEARING the submissions of the representatives for Staff of the Commission (Staff) and for Aurelio Marrone (Marrone);
IT IS ORDERED THAT:
1. each Party shall serve the other Party with a hearing brief containing copies of the documents, and identifying the other things, that the Party intends to produce or enter as evidence at the merits hearing, by no later than April 20, 2021;
2. each Party shall serve and file any affidavit evidence for the merits hearing by no later than April 20, 2021;
3. each Party shall provide to the Registrar a completed copy of the E-hearing Checklist for Videoconference Hearings by no later than April 26, 2021;
4. a further attendance in this proceeding is scheduled for April 30, 2021 at 10:00 a.m., by teleconference, or on such other date and time as may be agreed to by the parties and set by the Office of the Secretary;
5. each Party shall provide to the Registrar the electronic documents that the Party intends to rely on or enter into evidence at the merits hearing, along with an Index File, in accordance with the Protocol for E-hearings, by no later than May 21, 2021; and
6. the merits hearing shall take place by videoconference and commence on May 31, 2021 at 10:00 a.m., and continue on June 3, 4, 7, 9, 10, 11, 14, 16, and 17, 2021, at 10:00 a.m. on each day, or on such other dates and times as may be agreed to by the Parties and set by the Office of the Secretary.
Ontario Instrument 48-503 Temporary Exemption from Certain Provisions of Ontario Securities Commission Rule 48-501 Trading during Distributions, Formal Bids and Share Exchange Transactions
The Ontario Securities Commission, considering that to do so would not be prejudicial to the public interest, orders that effective on November 25, 2020 Ontario Instrument 48-503 Temporary exemption from certain provisions of Ontario Securities Commission Rule 48-501 Trading during Distributions, Formal Bids and Share Exchange Transactions is made.
November 25, 2020
Authority under which the order is made:
Act and section: Securities Act, subsection 143.11(2)
1. Terms defined in the Securities Act (Ontario) (OSA) and Ontario Securities Commission Rule 48-501 Trading during Distributions, Formal Bids and Share Exchange Transactions (the Rule or Rule 48-501) have the same meaning in this Order.
2. Rule 48-501 places trading restrictions on issuer-restricted persons and dealer-restricted persons in respect of a transaction covered by the Rule.
3. Specifically, Rule 48-501 restricts bids for, and purchases of, a security that is the subject of a transaction covered by Rule 48-501. Rule 48-501 is intended to prevent market manipulation with respect to activity that can raise the market price of a restricted security with the goal of improving the likelihood of success of a transaction covered by the Rule.
4. The restrictions under the Rule are absolute and apply even where there is no intent to manipulate the market price of the restricted security. The restrictions may inhibit insiders who are issuer-restricted persons from complying with the issuer's minimum security-holding requirements for officers and directors. This is a particular concern in at-the-market offerings, where the restricted period under Rule 48-501 may prohibit issuers from buying restricted securities altogether for an indefinite period.
5. In order to address the burden caused by an open-ended prohibition on purchases, the exemptive relief contemplated by this Order has been granted previously in the context of individual applications for exemptive relief. The Commission considers the granting of such relief to be routine.
6. In all cases, the securities were deemed to be highly liquid under Rule 48-501 and the restrictions placed on certain insiders by Rule 48-501 were found to be disproportionate to the benefits of applying Rule 48-501.
7. Under subsection 143.11(2) of the Securities Act (Ontario) (OSA) if the Commission considers that it would not be prejudicial to the public interest to do so, the Commission may, on application by an interested person or company or on its own initiative, make an order exempting a class of persons or companies, trades, intended trades, securities or derivatives from any requirement of Ontario securities law on such terms or conditions as may be set out in the order, effective for a period of no longer than 18 months after the day on which it comes into force unless extended pursuant to paragraph (b) of subsection 143.11(3) of the OSA.
8. Recognizing the burden caused by the restrictions on trading and by the cost of and effort required for applications for exemption from Rule 48-501 in circumstances where exemptive relief has previously been granted, the Commission is satisfied that, subject to the conditions of this Order, it would not be prejudicial to the public interest to provide, on an interim basis, exemptions to allow certain issuer-restricted persons to purchase restricted securities on the same terms as prior exemptive relief.
9. Consequently, this Order provides for the temporary exemption listed below.
10. An exemption from Rule 48-501 is granted in respect of a purchase of a restricted security during an issuer-restricted period by a director or officer who is an issuer-restricted person, provided that:
(a) the director or officer is neither a control person of the issuer nor of the selling security holder of the restricted security;
(b) the director or officer is not otherwise acting jointly or in concert with
(i) the issuer nor the selling security holder of the restricted security;
(ii) an affiliated entity of the issuer nor of the selling security holder of the restricted security; or
(iii) a control person of the issuer nor of the selling security holder of the restricted security;
(c) the restricted security is offered pursuant to an at-the-market distribution of equity securities under the shelf prospectus procedures prescribed in Part 9 of National Instrument 44-102 Shelf Distributions; and
(d) the restricted security is a highly-liquid security.
11. This Order comes into effect on November 25, 2020 and will cease to be effective on the date that is 18 months after the date of this Order.
Section 144 of the Securities Act (Ontario) -- Application for a partial revocation of a failure-to-file cease trade order -- Issuer cease traded due to failure to file audited annual financial statements and management's discussion and analysis -- Issuer applied for a variation of the cease trade order to permit the Issuer to complete a private placement to accredited investors -- Issuer will use proceeds to bring itself into compliance with its continuous disclosure obligations, retire existing debt and to fund certain expenses to maintain operations -- Partial revocation granted subject to conditions.
Securities Act, R.S.O. 1990, c. S.5, as am., s.144.
National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions.
1. 3 Sixty Risk Solutions Ltd. (the Issuer) is subject to a failure-to-file cease trade order (the FFCTO) issued by the Ontario Securities Commission, its principal regulator (the Principal Regulator) on July 15, 2020.
2. The Issuer has applied to the Principal Regulator for a partial revocation order of the FFCTO.
Terms defined in National Instrument 14-101 Definitions or in National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions (NP 11-207) have the same meaning if used in this order, unless otherwise defined.
3. This decision is based on the following facts represented by the Issuer:
(a) The Issuer is a corporation existing under the Business Corporations Act (British Columbia).
(b) The Issuer's registered office is located at 12-83 Little Bridge Street, Almonte, Ontario, K0A 1A0.
(c) The Issuer is a reporting issuer in Ontario, British Columbia and Alberta. The Issuer is not a reporting issuer in any other jurisdiction in Canada.
(d) The authorized share capital of the Issuer consists of an unlimited number of common shares. The Issuer currently has 183,677,892 common shares issued and outstanding. In addition, the Issuer has issued 5,126,066 warrants to acquire common shares and has granted 6,781,537 stock options to acquire common shares.
(e) The Issuer's common shares are listed for trading on the Canadian Security Exchange under the symbol "SAFE". A trading halt was implemented on July 16, 2020 following the issuance of the FFCTO after the close of trading on July 15, 2020.
(f) The FFCTO was issued as a result of the Issuer's failure to file the following continuous disclosure materials as required by Ontario securities law:
i. audited annual financial statements for the year ended December 31, 2019, as required by National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102);
ii. management's discussion and analysis (MD&A) relating to the audited annual financial statements, as required by NI 51-102; and
iii. CEO and CFO certificates relating to the audited annual financial statements, as required by National Instrument 52-109 Certification of Disclosure in Filer's Annual and Interim Filings ("NI 52-109");
(collectively, the Required Annual Filings).
(g) The Required Annual Filings were not filed due to several factors including (i) the impact of the COVID-19 pandemic on the Issuer, including the affliction of certain staff critical to financial reporting for the Issuer, (ii) the former Interim Chief Financial Officer of the Issuer resigned, as disclosed in a press release dated June 1, 2020, and (iii) the Issuer being made aware near the end of the planned audit process of the need to reassess the amounts recorded in the Issuer's interim financial statements for intangible assets and goodwill for each of the three month periods ended March 31, 2019, June 30, 2019 and September 30, 2019 as it relates to the Issuer's acquisition of Total Cannabis Security Solutions in January 2019 and the resulting necessity of amending and restating these interim financial statements and related management's discussion and analysis, which the Issuer must do prior to finalizing and filing the financial results for the fourth quarter and fiscal year ended December 31, 2019.
(h) No later than July 15, 2020, the Issuer was required to file the following continuous disclosure materials
i. interim financial statements for the three months ended March 31, 2020, as required by NI 51-102;
ii. MD&A relating to the interim financial statements, as required by NI 51-102; and
iii. CEO and CFO certificates relating to the interim financial statements, as required by NI 52-109;
(collectively, the Required Interim Filings and together with the Required Annual Filings, the Required Filings).
(i) The Issuer is seeking a partial revocation of the FFCTO to complete a private placement (the Private Placement) for aggregate gross proceeds of up to $6,750,000 in order to raise the funds necessary to complete and file the outstanding Required Filings and fund the expenses as outlined below. The Private Placement will be comprised of:
i. a secured demand loan in the principal amount of up $2,750,000 pursuant to a demand loan agreement secured by a general security agreement over all of the assets of the Issuer and its subsidiary, 3 Sixty Secure Corp; and
ii. a factoring arrangement in the principal amount of up to $4,000,000 pursuant to an account sale and purchase agreement, secured by a general security agreement over all of the assets of the Issuer and 3 Sixty Secure Corp.
On closing of the Private Placement, the Issuer intends to draw approximately $4,600,000 of the funds available from the loan facilities.
(j) The Private Placement will be conducted on a prospectus exempt basis with lenders in Alberta and Ontario who are accredited investors (as defined in section 73.3 of the Securities Act (Ontario) (the Act) and National Instrument 45-106 -- Prospectus Exemptions.
(k) The Issuer intends to prepare and file the Required Filings and any other filings then due in order to bring itself into compliance with its disclosure obligations and pay all outstanding fees as set out below. The Issuer also intends to apply to the Principal Regulator to have the FFCTO fully revoked within a reasonable time following completion of the Private Placement.
(l) The Private Placement is subject to certain filings required by the Canadian Securities Exchange and will be completed in accordance with all applicable laws.
(m) The Issuer is not considering, nor is it involved in, any discussions relating to a reverse take-over, merger, amalgamation or other form of combination or transaction similar to any of the foregoing.
(n) Other than the failure to file the Required Filings, the Issuer is not in default of any of the requirements of the Act or the rules and regulations made pursuant thereto. The Issuer's SEDAR and SEDI profiles are up to date.
(o) The Issuer intends to allocate the proceeds from the Private Placement as follows:
Description
Cost
Accounting, audit and legal fees associated with the preparation and filing of the relevant continuous disclosure documents
$45,000
Retirement of Existing Debt
$4,050,000
Costs of providing services
$300,000
Salary and wages
$160,000
Ongoing Working Capital
$45,000
Total
$4,600,000
(p) The Issuer reasonably believes that, while there are no assurances that the Private Placement will be completed on the terms set out above, if completed in that manner, it will be sufficient to bring its continuous disclosure obligations up to date and pay all related outstanding fees and provide it with sufficient working capital to enable it to continue operations.
(q) As the Private Placement would involve a trade of securities and acts in furtherance of trades, the Private Placement cannot be completed without a partial revocation of the FFCTO.
(r) Prior to completion of the Private Placement, the Issuer will:
i. provide any lender in the Private Placement with a copy of the FFCTO and a copy of the partial revocation order;
ii. obtain from each lender in connection with the Private Placement a signed and dated acknowledgment which clearly states that all of the Issuer's securities, including any securities issued in connection with the Private Placement, will remain subject to the FFCTO, and that the issuance of a partial revocation order does not guarantee the issuance of a full revocation order in the future; and
iii. will make available a copy of the written acknowledgements referred to in paragraph 3(r)(ii) to staff of the Principal Regulator on request.
(s) Additionally, the Issuer will issue a press release announcing the order and the intention to complete the Private Placement. Upon completion of the Private Placement, the Issuer will issue a press release and file a material change report. As other material events transpire, the Issuer will issue appropriate press releases and file a material change report as applicable.
4. The Principal Regulator is satisfied that a partial revocation of the FFCTO meets the test set out in the Legislation for the Principal Regulator to make the decision.
5. The decision of the Principal Regulator under the Legislation is that the FFCTO is partially revoked solely to permit the trades in securities of the Issuer (including for greater certainty, acts in furtherance of trades in securities of the Issuer) that are necessary for and are in connection with the Private Placement, provided that:
(a) Prior to completion of the Private Placement, the Issuer will:
i. provide to each lender under the Private Placement a copy of the FFCTO;
ii. provide to each lender under the Private Placement a copy of this Order; and
iii. obtain from each lender under the Private Placement a signed and dated acknowledgment, which clearly states that all of the Issuer's securities, including the securities issued in connection with the Private Placement will remain subject to the FFCTO, and that the issuance of a partial revocation order does not guarantee the issuance of a full revocation order in the future.
(b) the Issuer will make available a copy of the written acknowledgements referred to in paragraph 5(a)(iii) to staff of the Principal Regulator on request;
(c) the partial revocation order only varies the FFCTO order and does not provide an exemption from the prospectus requirement; and
(d) this Order will terminate on the earlier of (A) the closing of the Private Placement and (B) 60 days from the date hereof.
DATED this 08th day of October, 2020.
Becksley Capital Inc. and Fabrizio Lucchese -- s. 28
1. Becksley Capital Inc. (Becksley) is registered under the Securities Act, R.S.O. 1990, c. S.5 (the Act) as an exempt market dealer.
2. Fabrizio Lucchese (Lucchese) is registered under the Act as Becksley's ultimate designated person (UDP).
3. On November 5, 2020, staff of the Ontario Securities Commission (Staff) sent a letter to Lucchese (the Letter) informing him that Staff had recommended to the Director that the registration of both Becksley and of Lucchese (collectively, the Registrants) be suspended, pursuant to s. 28 of the Act.
4. The Letter made the following allegations against the Registrants in support of Staff's recommendation that their registration be suspended:
(a) Lucchese is the mind and management of Becksley, and is personally accountable for its acts and omissions.
(b) As of the date of the Letter, Becksley was not in compliance with at least two fundamental requirements of Ontario securities law:
(i) The firm did not meet the minimum working capital requirement in s. 12.1(2) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). Moreover, this capital deficiency was discovered by Staff when in fact it should have been self-reported by Becksley, as required by s. 12.1(1) of NI 31-103.
(ii) Becksley terminated its chief compliance officer (CCO) in March 2020 without notifying Staff, as required by s. 3.1(1)(b) of National Instrument 33-109 Registration Information (NI 33-109), and no new CCO had been designated, contrary to s. 11.3(1) of NI 31-103. Staff only learned of this termination from the former CCO directly, in August 2020, approximately five months after the fact. Moreover, Lucchese failed to respond to follow-up inquiries by Staff about the CCO's termination and other compliance matters.
(c) The working capital and CCO issues were the latest in a pattern of non-compliance by Becksley with its obligations under Ontario securities law:
(i) Pursuant to terms and conditions on its registration first imposed in May 2014 and subsequently modified over time, Becksley was required to redeem approximately $2.5 million to investors for investments sold to them that were either unsuitable, or where a prospectus exemption was not available for the distribution in the first place.
(ii) From October 2015 to October 2016, Becksley was on financial reporting terms and conditions resulting from its failure to meet the minimum working capital requirement as at July 31 and August 31, 2015. This working capital deficiency had not been reported by Becksley as required by s. 12.1(1) of NI 31-103, but was instead discovered by Staff.
(iii) In November 2015, Staff discovered that two civil lawsuits commenced against Becksley and a FINTRAC Notice of Violation against the firm had not been disclosed to Staff, as required by s. 3.1(1)(b) of NI 33-109.
(d) As UDP of Becksley, Lucchese had failed to comply with his duties under s. 5.1 of NI 31-103 to (a) supervise the activities of the firm that are directed towards ensuring compliance with securities legislation by the firm and each individual acting on the firm's behalf, and (b) promote compliance by the firm, and individuals acting on its behalf, with securities legislation.
(e) On the basis of the allegations set out in the Letter, Staff was of the view that the Registrants had failed to comply with Ontario securities law, lacked the requisite integrity for registration, and their registration was objectionable.
5. The Letter notified the Registrants of their right under s. 31 of the Act to an opportunity to be heard (an OTBH) by the Director before the Director made a decision regarding Staff's recommendation that their registrations be suspended. The Letter provided the Registrants with a deadline of November 19, 2020 to request an OTBH. Despite Staff following up with Lucchese, the Respondents never responded to the Letter or otherwise requested an OTBH.
6. It appears to me, in my capacity as Director under the Act, that the uncontested allegations in the Letter are substantiated, and accordingly, it appears to me that the Registrants have failed to comply with Ontario securities law, lack the requisite integrity for registration, and their registration is objectionable. Accordingly, the registrations of the Registrants are hereby suspended pursuant to s. 28 of the Act, effective immediately.
November 20, 2020
Temporary, Permanent & Rescinding Issuer Cease Trading Orders
Company Name |
Date of Temporary Order |
Date of Hearing |
Date of Permanent Order |
Date of Lapse/Revoke |
|
||||
THERE IS NOTHING TO REPORT THIS WEEK. |
||||
Company Name |
Date of Order |
Date of Revocation |
|
||
ProSmart Enterprises Inc. |
February 1, 2019 |
November 27, 2020 |
Temporary, Permanent & Rescinding Management Cease Trading Orders
Company Name |
Date of Order |
Date of Lapse |
|
||
THERE IS NOTHING TO REPORT THIS WEEK. |
||
Outstanding Management & Insider Cease Trading Orders
Company Name |
Date of Order or Temporary Order |
Date of Hearing |
Date of Permanent Order |
Date of Lapse/ Expire |
Date of Issuer Temporary Order |
|
|||||
Performance Sports Group Ltd. |
19 October 2016 |
31 October 2016 |
31 October 2016 |
__________ |
__________ |
Company Name |
Date of Order |
Date of Lapse |
|
||
Agrios Global Holdings Ltd. |
September 17, 2020 |
__________ |
CSA Consultation Paper 25-403 -- Activist Short Selling
December 3, 2020
The purpose of this consultation paper (the Consultation Paper) is to facilitate discussion of concerns relating to activist short selling and its potential impact on Canadian capital markets.
Since 2019, a committee (we or the Committee) comprised of staff from the Canadian Securities Administrators (CSA) has undertaken research and analysis on activist short selling. The CSA's consideration of this activity arose in the wake of an increased number of campaigns targeting Canadian issuers (Campaigns) and concerns raised about the potential impact of activist short selling on our markets.{1} We have also heard concerns from stakeholders about potential regulatory intervention inhibiting beneficial short selling activity and detracting from the price discovery process.{2}
To further inform our analysis of the issues, and to ensure that the CSA has all relevant information before determining whether regulatory intervention is required, the Committee is consulting with the public on issues identified through our research. While this Consultation Paper discusses our understanding of the concerns raised and summarizes the research we have undertaken, we are focussed on soliciting feedback, supported by evidence whenever possible, from stakeholders on specific questions, which are set out in this Consultation Paper.
This Consultation Paper is organized into four parts; Part I provides an introduction and background to the Committee's consideration of activist short selling with the three remaining Parts dedicated to the specific areas of consultation, namely:
(II) The nature and extent of activist short selling activity in Canada;
(III) The Canadian and international regulatory framework; and
(IV) Issues related to enforcement and other potential remedial actions.
Each Part summarizes the Committee's research, our understanding of the issues and concerns raised and sets out questions for consultation.
We use the term "activist short selling" to refer to instances where an individual or entity takes a short position in a security and then makes a public statement, issues a report, or otherwise publicly shares information or analysis that is likely to have a negative effect on the price of the security. If the value of the security declines, the short seller realizes a profit.{3} Activist short sellers are a subset of "directional" short sellers.{4} The key difference between activist and other directional short sellers is that activists will publicly disclose concerns they have identified with an issuer. Material and accurate information about issuers, whether it is positive or negative, assists in ensuring market prices reflect the fundamental value of the issuer's securities. However, the utility or harm of activist short selling to the market depends on the materiality and accuracy of the information relied upon and whether there is a manipulative intent to spread falsehood or to distort prices.
Activist short selling is not new. However, these types of campaigns have received considerably more attention in recent years. This may be due, in part, to the rise in the use of social media and its impact on markets.{5} Indeed, through social media platforms, prominent activists with a large following can promote and disseminate their short theses about target companies to a broader audience and at a much faster pace.{6}
While traditional long shareholder activism is a well-accepted practice in our markets and viewed by most as an effort to improve shareholder value in public companies, activism by short sellers is often viewed differently. Activist short sellers state that they create real value for public markets by contributing to market efficiency and price discovery. Some take it even further describing their work as a "first line of defence against fraud and subsequent losses."{7} The approach of activist short sellers is not without controversy. If an activist short seller's objective is met, it will mean they have convinced the market of their thesis and caused a decline in a target issuer's share price, leading to a loss of value for its shareholders.{8}
A. Concerns Raised
In the last few years, certain Canadian market stakeholders, primarily in the issuer community, have raised concerns about activist short selling and its impact on our markets.{9} These concerns appear to be based on perceptions that:
• There is an increasing number of activist short selling Campaigns in Canada;{10}
• The Canadian regulatory framework addressing short selling is less strict in comparison to other jurisdictions;{11} and
• There is inadequate deterrence to problematic conduct given the limited number of enforcement proceedings involving problematic activist short selling as well as a lack of meaningful remedial actions for misconduct.{12}
In contrast, activist short sellers have said they target Canadian firms because Canada is "fertile ground for corporate malfeasance"{13} and that their research and analysis serve an important function in the price discovery process by bringing to light new information.{14} Shorts sellers and others have expressed concerns that regulatory intervention that restrict activist short selling could inhibit beneficial short selling activity.{15}As the CSA considered these issues, additional information was necessary to properly analyze the concerns raised. For example, with the exception of activist short sellers that have become well-known in the media or have publicly issued full reports and analysis, there is very limited information and data about other less prominent activist short selling activity (e.g., an anonymous negative commentary or analysis about an issuer posted on social media platforms). Even among more prominent activists, there is little information on the impact such campaigns have on affected issuers and on markets more generally.
As regulators considering the overall impact of activist short selling on our markets, it is important to consult and understand the concerns that have been raised from all stakeholders and understand the evidentiary basis for these concerns.
B. Short Selling
Short selling, as a trading activity, is subject to a well-developed risk based regulatory regime and is overseen mainly by the Investment Industry Regulatory Organization of Canada (IIROC), as will be further discussed below in Part III. IIROC's Universal Market Integrity Rules (UMIR) define a short sale as a sale of a security, other than a derivative instrument, which the seller does not own either directly or through an agent or trustee.{16} It involves selling the borrowed securities at the current market price with the expectation of being able to cover the short position by purchasing later at a lower price to replace the borrowed securities.
Short selling is a legitimate trading practice which contributes to market liquidity and price efficiency.{17} It also contributes to the price discovery process by providing an opportunity for negative views about the issuer to be reflected in the price of a security thereby limiting overvaluation and biased price increases.{18} Short selling can also be an important part of an investor's hedging and investment risk management strategy.{19} For example, the proceeds from a short sale may be applied to a long position in a different security. Even so, there is also risk inherent in short sales because unless the sale is otherwise "hedged", a short seller can lose a potentially unlimited amount if the price of the security rises unexpectedly.
A short seller can take a short position in a stock either directly (by borrowing shares to sell short){20} or synthetically (via options or stock futures). There are, however, obstacles to short selling. For example, it can be difficult or expensive to borrow shares to sell short if the securities are thinly traded, in large demand by other short sellers, or not readily made available for loan.{21} Further, many Canadian listed issuers trade infrequently{22} and the available inventory of equities in the Canadian securities lending market, where short sale shares are typically borrowed, tends to be more heavily concentrated in securities of larger, widely held, heavily traded issuers.{23} Similarly, it can also be difficult to take a synthetic short position as the listed derivatives market for derivatives with an underlying equity is relatively small in Canada, representing only a small proportion of listed equity securities.{24}
C. Activist Short Selling
In most CSA jurisdictions, activist short sellers are not currently subject to specific regulatory requirements,{25} nor are they defined or easily identifiable. However, as with other market activity conducted by non-regulated or unregistered entities or individuals, short selling activism is subject to the existing prohibitions under securities law, for instance prohibitions against market manipulation, making misleading statements or fraud.{26}
Activist short selling campaigns can be understood as occurring on a spectrum and their utility to the market ultimately depends on whether the information being disseminated is material and neither false nor misleading.{27} At one end of the spectrum, there are beneficial campaigns that can contribute to price discovery by producing research and analysis about issuers based on facts. At the other end of the spectrum, there are campaigns that may involve either intentionally producing false information about the issuer or making misleading or untrue statements for which there is no factual foundation. These are often referred to as "short and distort" campaigns.{28}
The types of conduct that give rise to concerns in the context of activist short selling campaigns include:
• disseminating unbalanced information that does not provide a complete picture, does not include other material contrary information or is inconsistent with information disclosed in a broader report;
• disseminating exaggerated reports or commentary;
• making conclusions without an evidentiary basis; or
• making potentially misleading statements through links to other documents.
Exacerbating these concerns is the speed at which information spreads through social media and the constraints on the target of a campaign to respond or disprove allegations before the price of their stock is impacted. However, issues arising from the use of social media or similar online platforms to spread information to the market are not limited to activist short selling. The CSA has acknowledged that social media can present challenges when used for sharing information with the market.{29} While we acknowledge that the new market reality is that any individual (e.g., influencers, customers, clients, vendors) can easily share unverified information on social media about an issuer that could potentially impact its stock price,{30} the integrity of the capital markets is undermined if those participating in our markets engage in activity that may mislead investors or otherwise artificially distorts an issuer's share price.
In order to be successful, an activist short seller must, at the very least, have some credibility and their thesis should raise sufficient doubt about an issuer that it convinces existing shareholders to sell their shares, and potentially other investors to short the stock or not buy it. Unlike long-only investors, activist short sellers generally incur direct costs to maintain their positions. Once a campaign is launched, activist short sellers are also exposed to the additional risk that the target's share price does not decline because of responses from issuers, opposing views from long traders, large institutional shareholders and analysts. If the share price rises significantly this can make the cost to close out the short position very expensive.{31}
As discussed in further detail in Part II, our research indicates that the prominent activist short sellers behind the Campaigns are relatively well-established (e.g., close to 80% of the 48 activist short sellers identified have been active for over 5 years) and predominantly based in the U.S. (approximately 60%, compared to 13% that are Canadian-based).{32} Anonymous or pseudonymous short sellers, or those with only a presence on SeekingAlpha.com (SA),{33} account for less than 20% of the 48 activist short sellers that have targeted Canadian issuers since 2010.{34}
The CSA's research consisted of an empirical analysis of activist short seller Campaigns and an academic literature review related to activist short selling.{35} The empirical analysis was limited to Campaigns identified by Activist Insight (AI), a third-party data provider focused on tracking activist investors on both the long and short side. AI's database only tracks campaigns by prominent activist short sellers, whether they are named or they are anonymous individuals or entities.{36} This data would cover campaigns that have the most market impact but may also potentially overlook campaigns by less prominent actors engaged in similar activities.
The current academic literature on activist short selling activity is sparse and is focused predominantly on U.S. markets where, as explained below, there is a sufficiently greater amount of activist short selling activity and data to conduct a more rigorous analysis.
A. Activist Short Selling Activity
Between 2010 and September 2020, a total of 73 Canadian issuers have been the target of 116 Campaigns and among them 16 Campaigns (including all 12 Campaigns from 2020){37} are still active according to AI.{38} While there has been increased activity since 2015, annually there have been no more than 5 Canadian targets for every 1,000 Canadian listed issuers.{39} In comparison, U.S. issuers are more frequently targeted by activist short sellers -- an average of 21 U.S. targets annually for every 1,000 U.S. listed issuers.{40}
For the small number of Canadian targets identified, annual Campaign activity appears to be highly cyclical as evidenced in Figure 1. In general, short sellers gravitate towards the securities of issuers and sectors where there is a perceived overvaluation (See Figure 2).{41} In peak Campaign years, this is evident as activist short sellers targeted Canadian issuers in specific, potentially overheated, sectors. For instance, in 2018 among a record 17 Canadian targets, approximately 35% (or 6 targets) were operating in the cannabis industry.{42} However, Campaign activity was largely muted in 2017 with 8 Canadian targets and in 2019 with only 7 Canadian targets. In 2020, there have been 12 new campaigns targeting Canadian issuers as of September 2020, however 4 of those Canadian issuers were also the target of activist short sellers in prior years.
Figure 2 -- Activist Short Seller Targets by Sector (2010 -- Sept. 2020){43}
B. Canadian Campaign Characteristics
The following highlights select Campaign characteristics to provide a better understanding of the types of Canadian issuers targeted; the target size; the stock price impact; the pattern of allegations made by activist short sellers; and the proportion of targets that engaged in a strategic response or were impacted by certain negative outcomes during the Campaign as identified by AI.
i. Target Size
The Campaigns tended to be focused on relatively larger issuers (with a median market capitalization of $867 million and average market capitalization of $4.5 billion{44}) compared to the broader Canadian market.{45} This is in some ways not surprising given AI's focus on prominent activist short sellers but it is also consistent with the findings of U.S. academic studies indicating that target firms are more likely to be larger sized issuers with listed securities that are more heavily traded in both the cash and options markets.{46}
ii. Price Impact
Most Campaigns analyzed (75% of targets) experienced a negative price impact on the day of the first-campaign announcement and up to one month after the first-campaign announcement.{47} However, the extent of the short-term price impact varied across targets and also over time (see Figure 3). Approximately 26% of targets experienced less than a 5% price decline on the day of the first-campaign announcement. The proportion of targets with negative share price returns of 10% or greater increased over time from day of first-campaign announcement (approximately 30% of targets) to 1-month after first-campaign announcement (approximately 45% of targets).{48}
iii. Campaign Allegations
Across all 116 Canadian Campaigns, 40% involved allegations of some type of fraud at the issuer. The most common type of fraud allegation was that of there being a stock promotion scheme (or an alleged "pump and dump" scheme), where the company was being promoted by a connected third party (e.g., an outside firm) (see Figure 4).{49} In peak Campaign years (2015, 2016 and 2018) fraud-related allegations accounted for under one-third of the Campaigns. Allegations related to business or industry issues (e.g., drop in commodity prices) and more general market overvaluation concerns have been more common in recent years.
iv. Target Responses and Outcomes
Across the 73 Canadian targets in the 116 Campaigns identified, approximately 73% of targets pursued certain responses during the Campaign (Figure 5). These responses included either changing or replacing the CEO or CFO, hiring a new auditor or independent investigator, halting the issuer's stock from trading, pursuing a lawsuit against the activist short seller or announcing a capital market transaction (e.g., divestiture, acquisition, private placement) during the Campaign.{50}
Separately, the AI data also identified certain outcomes which occur following a Campaign and would generally be viewed as negative by the market (e.g., a delisting, auditor resignation or class-action lawsuit). Among the Canadian targets, approximately 29% of them experienced at least one of these outcomes.{51} Class action lawsuits against issuers were the most common among the three types of outcomes considered. In about 23% of the Canadian targets, class action proceedings were commenced following a Campaign (as compared to U.S. (23%) and other foreign (21%) targets).{52} We cannot know with any certainty that the issuer's responses or the outcomes experienced were the direct result of the Campaign, however, academics have considered such responses (or similar ones) to be indicative that a campaign brought to light problems with the issuer.{53}
C. Analysis and Consultation Questions
There appears to be a perception that activist short selling is on the rise in Canada{54} and that this form of activism plays a negative role in our markets. As previously noted, taking into consideration the size of our market and the number of public companies, it does not appear that Canada's experience with activist short selling is disproportionately high compared to the U.S. With that said, we recognize that comparisons of this nature, or simply comparing the absolute number of campaigns, does not provide the necessary context to understand the issues. Market factors unique to each jurisdiction must be considered.
The available empirical evidence indicates that recent increases in Campaigns may be indicative of a cyclical trend, i.e., activist short sellers targeting issuers in specific potentially overheated sectors. This suggests that our market will see increases in activism of this nature where there is a sense that an industry sector or issuer is overvalued, but does not necessarily address whether, in this context, there is misconduct by activist short sellers.
Activism by short selling is premised on effecting a loss of shareholder value for the target issuer, which makes it controversial. Most academic studies of U.S. markets support the notion that activist short sellers are more likely to improve the market's informational/price efficiency by identifying actual problems with an issuer's business and operations, than they are to engage in "short and distort" strategies. The analysis of post-Campaign outcomes and responses by issuers suggests the allegations have been a force for change although it is not obvious that such changes were intended to address the concerns raised by the Campaign.
Activist short sellers are also criticized for being driven by short-term trading profits rather than promoting long-run price accuracy. However, they can also serve as a countervailing check on the potential for excessive market optimism.
Lastly, we recognize that targeted issuers may be reluctant to complain to the securities regulator about what they view as problematic conduct in the context of a campaign as this may be seen as inviting a review of the allegations by the regulator. An issuer's response following a campaign may be seen as giving credibility or in some way substantiating the legitimacy of the issues raised, however, it also may be that issuers are choosing to respond for other strategic reasons.
Consultation Questions
1. What is your perception about activist short sellers? Please describe the basis of that perception.
2. Can you give examples of conduct in activist short selling Campaigns that you view as problematic?
3. Given the focus of the available data is on prominent activist short sellers, what is your view regarding less prominent activist short sellers or pseudonymous activist short sellers targeting Canadian issuers? How can they be identified? Is there any evidence that they are engaging in short and distort Campaigns?
4. What empirical data sources related to Campaigns should we consider?
5. In 2019, there was a large drop in the number of Canadian issuers targeted by prominent activist short sellers compared to the year before. Are there market conditions or other circumstances that in your view could lead to an increase? Please explain.
6. Is there any specific evidence that would suggest that Canadian markets are more vulnerable to activist short selling, including potentially problematic activist short selling (e.g., size and type of issuers, industries/sectors represented or other market conditions)? Please provide specific examples of these vulnerabilities, and how they differ from other jurisdictions.
7. Do issuers have practical limitations in terms of their ability to respond to allegations made in a Campaign? If so, what are these limitations, and do you have any recommendations on how to alleviate them?
8. Are issuers reluctant to approach securities regulators when they believe that they are being unfairly targeted by an activist short seller? If so, why? If not, why not?
A. Canada -- Monitoring, Reporting and Restrictions on Short Selling Activity
Activist short sellers are not subject to formal securities regulatory requirements (for example, Canadian securities legislation does not regulate the content of an activist short seller's statements). Short selling as a trading activity however is subject to a well-developed framework that is largely administered by IIROC involving a detailed reporting regime that provides timely information to IIROC enabling it to monitor and supervise any potentially inappropriate short selling practices. It includes:
• a requirement to mark all orders representing a short sale as either "short" or "short-marking exempt";{55}
• a requirement to disclose "Extended Failed Trades" to IIROC;{56}
• a requirement that, if an Extended Failed Trade report is filed with IIROC, further short sales generally cannot be made by that Participant{57}(acting as a principal or as an agent) or by an access person without prior arrangements to borrow the securities necessary for settlement (that is, IIROC may require pre-borrowing in certain circumstances);{58} and
• the ability for IIROC to designate a security as a "Short Sale Ineligible Security."{59}
Canadian securities legislation also requires a person who places an order for the sale of a security with a registered dealer to declare to the dealer at the time of placing the order if they do not own the security.{60} This statutory requirement is supported by UMIR which requires Participants to calculate and report to IIROC the aggregate short position of each individual account twice a month,{61} which IIROC then publishes on its website.{62} IIROC also aggregates trades marked "short sale" from all of the marketplaces it monitors, consolidates that information, and publishes a semi-monthly report showing the total industry short sales for each security over the reporting period.{63} In contrast to other jurisdictions discussed below (EU, Australia), there are no reporting requirements or obligations to disclose information on the short position of an individual account to IIROC or to the public. Even so, it is not uncommon for an activist short seller to voluntarily disclose that they are short a particular issuer when they commence a campaign.
B. Prohibition on Deceptive or Manipulative Activity
Securities legislation, National Instrument 23-101 Trading Rules and UMIR prohibit activities that are manipulative and/or deceptive. In the context of short selling activity this would include the entering of an order for the sale of a security without, at the time of entering the order, having the reasonable expectation of settling any trade that would result from the execution of the order.{64} As such, "naked short selling", as that term is sometimes understood, is not permitted under UMIR.{65}
IIROC monitors for potentially abusive trading activity. For example, in the context of short selling activity, IIROC uses algorithms to monitor for unusual levels of short selling coupled with significant price movements and reviews alerts to determine the cause of the price movement and whether there is an indication of manipulative trading activities. These reviews may include a review of social media or chatrooms as well as Extended Failed Trades reports for indications of settlement issues. If appropriate, referral to the enforcement branch of the appropriate CSA jurisdiction for investigation may also occur.
As set out in Part I, securities legislation also contains provisions which address prohibitions on manipulative activity that apply to all market participants, including activist short sellers.
C. International Regulatory Frameworks
The most notable difference among the regulatory frameworks that apply to activist short selling in the European Union (EU) and Australia relates to the reporting and disclosure of position size and the identity of short sellers generally.{66}
The European Securities and Markets Authority (ESMA) requires that net short positions (including direct and synthetic shorts) of "natural or legal persons" be made first to the regulator at 0.2% and that the position be publicly disclosed if the position reaches 0.5% of the issued share capital of the company concerned, and each 0.1% above that.{67} Anyone can therefore view the identity of holders of short positions that meet these position-level thresholds for an EU security.{68} This is more granular public transparency compared to aggregated data that is publicly available in Canada. Requiring disclosure of this nature was seen as an alternative policy tool to short selling bans, with the similar aim of introducing a constraint on short selling activity. Indeed, the relevant EU regulation was created primarily in response to the financial crises and the sovereign debt crisis, with the goal of promoting market stability.{69}
In Australia, there are short selling reporting requirements for both transactions{70} and positions above a certain threshold.{71} Based on this information, the total of short positions for financial products on a given reporting day will be published on the Australian Securities and Investments Commission's website, and the Australian Securities Exchange website will publish the transaction reports. These reports will not contain short seller details but will provide an indication of the proportion of trades in a particular security that are short sales and the aggregate level of short positions for each security.{72}
D. Analysis and Consultation Questions
Concerns have been raised that Canadian issuers are vulnerable to abusive short selling based on the perception that the Canadian regulatory framework for short selling is "permissive and lax."{73} We note that while the regulatory framework in Canada differs in some ways from other jurisdictions, it is consistent with the four IOSCO principles for the effective regulation of short selling.{74}
Over the years, IIROC has reviewed the regulatory regime governing short sales to determine whether it continues to be appropriate. In 2012, a number of amendments to UMIR regarding short sales and failed trades were approved by the CSA and implemented.{75} These amendments included:
• repealing the "tick test";{76}
• imposition of pre-borrow requirements for short sales made in certain circumstances; and
• introduction of the "short-marking exempt" designation.{77}
The amendments were part of an overall strategy on regulation of short sales and failed trades that included increasing transparency around information regarding short sale activity and failed trades, monitoring regulatory arbitrage opportunities related to short sales and enhancing monitoring of short sales and failed trades. It was also at this time that the pre-borrow requirements for short sales in certain circumstances were introduced as another mechanism to monitor and address potentially problematic short selling.
Also at the time of these amendments, the CSA and IIROC published a request for comment to solicit feedback on aspects of disclosure and transparency measures regarding short sales and failed trades.{78} After consideration of comments received and of the data on short sales and failed trades,{79} it was determined that no additional regulatory requirements were needed at that time.{80} It is important to note that failed trades occur in both long and short sales for a variety of reasons. Failed trades are not always evidence of abusive or naked short selling. There are many justifiable reasons why a trade fails, and failures may be more common for thinly traded or illiquid stocks.{81} IIROC indicated that it would continue to monitor international developments in the regulation of short selling and failed trades related issues. It has recently commenced looking into required data sources to initiate its work on a new broader and more granular failed trade study.{82}
Concerns around short selling regulation have seen a resurgence both in Canada and abroad.{83} Internationally, we have also seen that heightened concerns around short selling activities have led some foreign public and private actors to impose restrictions or bans on short selling and related activities.{84} For example, in December 2019, the world's largest pension fund, the Japanese Government Pension Investment Fund announced that it had suspended stock lending activities relating to its portfolio of non-Japanese equity securities 'until further notice.'{85} Earlier in 2019, ESMA backed Germany's two-month short sale ban on payment firm Wirecard following a report of financial irregularities by certain Wirecard critics.{86} Other jurisdictions have called for increased transparency and disclosure. In October 2019, the National Assembly in France released a report on activist investors recommending that France should increase disclosure requirements when activist investors and short sellers take large positions in French companies.{87}
In Canada, there appears to be perception by some that the current regulatory environment is disproportionately conducive to problematic activist short selling. Some who have raised concerns have suggested increased transparency around short selling as a response to these concerns, similar to the approach that currently exists in the EU. In their view, this type of disclosure can equip issuers and investors with additional information upon which to trade, as well as act as a constraint on inappropriate short selling. However, some studies have noted that such disclosure obligations may have undesirable effects, such as compromising the strategies short sellers use, which would inevitably lead to decreased market liquidity or price discovery.{88} Increased transparency on the identity of a short seller may also expose them to litigation and regulatory action, potentially stifling legitimate short selling activity.{89} One study found that when required to disclose their positions short sellers simply remain below the public disclosure threshold (0.5%) deliberately to protect their private information.{90} The impact of additional disclosure around short selling must be considered in light of these issues to determine whether this tool meets the policy outcome desired without introducing undue constraints on legitimate short selling and activist short selling activity.
As discussed in Part I, short sellers already face significant risks and costs in taking such positions and these risks are amplified for activist short sellers. Some academics have suggested that policy makers should consider efforts to reduce the difficulties and costs associated with short selling given the potential for improvements in market efficiencies introduced by campaigns.{91} Others have suggested alternative approaches to the EU model of disclosure that more directly addresses concerns raised around problematic conduct by activist short sellers as well as the implications of social media on promotional activities, whether short or long. For example, a group of U.S. academics recently petitioned the SEC to impose a "duty to update" a short position when there has been a voluntary disclosure of that short position.{92} The rationale for such a requirement being that when a short seller voluntary discloses a short position, failure to disclose the position closed is "doubly misleading" because their original disclosure of being short is no longer accurate and the short seller's "negative opinion lacks the skin in the game element that gives market participants reason to believe the underlying claims are true."{93} Another example is a proposal for a ten-day minimum holding period that would apply to any stock promoter or short seller who opens a large position and disseminates market-moving information, irrespective of the medium. The theory behind this proposal is that a holding period could provide the market with an opportunity to evaluate the quality and credibility of the information.{94}
Consultation Questions
9. Is the existing regulatory framework adequate to address the risks associated with problematic activist short selling? Please explain why or why not and provide specific examples of concerns and areas where, in your view, the regulatory framework may not be adequate.
10. Have there been market developments or new information since 2012, when UMIR amendments regarding short selling and failed trades were implemented, that would warrant revisiting the existing regulatory framework for short selling? If so, please describe these new developments or information and indicate, providing evidence to support your views:
a. whether, in your view, there is a connection between failed trades and activist short selling;
b. what changes should be considered and why, and specifically with respect to potentially problematic activist short selling activities; and
c. whether there are relevant regulatory requirements in other jurisdictions that should be considered and why.
11. Is the existing disclosure regime for short selling activities adequate? Please explain why or why not, indicating:
a. what disclosure requirements would address risks associated with potentially problematic activist short selling and how would such requirements improve deterrence;
b. what should be the trigger and the timing of any additional disclosure;
c. how can additional disclosure be meaningful without negatively impacting market liquidity; and
d. do you foresee any issues with imposing a duty to update once there has been a voluntary disclosure of a short position?
A. Oversight of Activist Short Sellers
In most CSA jurisdictions, there is no mechanism under securities law that explicitly regulates the activities of activist short sellers or the form or content of their public statements.{95} However, there is potential for the conduct and statement of an activist short seller to fall offside of securities legislation if it involves making materially misleading or untrue statements to the market.{96} Securities legislation generally requires that a person or company not make a statement that they know, or reasonably ought to know,
(a) in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading; and
(b) would reasonably be expected to have a significant effect on the market price or value of a security, derivative or underlying interest of a derivative.{97}
Recent B.C. Securities Act amendments introduced an additional prohibition for those engaged in promotional activities. Under this prohibition, a person engaged in a promotional activity must not make a statement or provide information that is false or misleading in circumstances where a reasonable investor/person would consider that statement or information important when making an investment decision. Unlike other securities law prohibitions against making a misrepresentation, this prohibition does not require that the statement or the information:
• be materially misleading or untrue;
• be reasonably expected to have a significant effect on the market price or value of a security.{98}
Canadian securities legislation also contains fraud and market manipulation prohibitions{99} that could, in appropriate circumstances, be used to address misconduct by activist short sellers. In general, these provisions prohibit persons from directly or indirectly engaging in acts relating to securities, and in some cases derivatives,{100} that:
• the person knows (or reasonably ought to know), results in or contributes to a misleading appearance of trading activity or an artificial price for a security, or
• perpetrates a fraud on any person or company.{101}
In Québec, it is also an offence to influence or attempt to influence the market price or the value of securities by means of unfair, improper or fraudulent practices.{102}
B. Remedies
In Canada, there is no mechanism under securities law for issuers or investors to seek damages against activist short sellers for statements made in the context of campaigns.{103} Some jurisdictions like Australia have provisions under their corporate or securities legislation which provide a private right of action for certain contraventions, including prohibitions on the making or dissemination of false or misleading information and statements by any person, which could capture activist short selling activity.{104}
Apart from statutory remedies under securities law, there may be common law or civil code remedies available to issuers and/or investors who wish to commence legal proceedings for damages arising from allegations of problematic conduct by activist short sellers. There are, however, very few recent Canadian judicial decisions that deal with activist short selling.{105} This may be due to the practical and evidentiary challenges of civil litigation.{106}
C. Analysis and Consultation Questions
There is a concern that limited regulatory proceedings in Canada arising from the conduct of activist short sellers may contribute to a perception that current enforcement tools are ineffective in addressing or deterring problematic conduct.{107} From an enforcement perspective, securities regulators have tools to address activist short seller behaviour that constitutes fraud, market manipulation or making a misleading statement to the market. However, for many of the misleading statement offences under Canadian securities legislation, evidence of a threshold of unlawful conduct and materialityand market impact related to a statement must be proven.{108} The use of social media to convey information has also introduced new complexities, including in terms of understanding and demonstrating market impact of a particular statement.
An additional means of deterrence, statutory civil liability for misrepresentations in the context of a campaign, does not currently exist in Canada. Initiating civil proceedings has also not been widely used by issuers or investors in relation to allegations of problematic conduct. This may be due to difficulties in the civil litigation process,{109} including challenges in pursuing defamation and/or libel claims. It could also reflect an issuer's desire to simply put an end to the issue rather than to prolong it through litigation. In most cases, it seems litigation is an undesirable route to seek meaningful and timely redress.{110} The concern is therefore whether a lack of meaningful remedial options provides further incentives for activist short sellers to engage in problematic conduct. A statutory provision which addresses some of the practical complexities of seeking redress in the civil courts may provide an additional means of deterring problematic conduct, however, this would be somewhat novel and may have corresponding unintended liability for others, including analysts.
Consultation Questions
12. In your view, do the existing enforcement mechanisms adequately deter problematic activist short selling? If so, why? If not, why not?
a. Can deterrence be improved through specific regulation of activist short sellers? If so, how?
13. Are there additional or different regulatory or remedial provisions that could be considered to improve deterrence of problematic conduct? If so, what are these provisions?
14. Can you provide examples of specific activist short selling conduct that in your view is problematic but may not fall within the scope of existing securities offences such as market manipulation and misrepresentation/misleading statements? In your view, how should this problematic conduct be addressed by securities regulators?
15. Is it important that a statement have actual market impact to trigger enforcement action by securities regulators?
a. Should another standard be used? For example, in your view is the "reasonable investor" standard a preferable approach (e.g., would a reasonable investor consider that statement important when making an investment decision)? If so, why? What are the potential implications of such a change?
1. What is your perception about activist short sellers? Please describe the basis of that perception.
2. Can you give examples of conduct in activist short selling Campaigns that you view as problematic?
3. Given the focus of the available data is on prominent activist short sellers, what is your view regarding less prominent activist short sellers or pseudonymous activist short sellers targeting Canadian issuers? How can they be identified? Is there any evidence that they are engaging in short and distort campaigns?
4. What empirical data sources related to Campaigns should we consider?
5. In 2019, there was a large drop in the number of Canadian issuers targeted by prominent activist short sellers compared to the year before. Are there market conditions or other circumstances that in your view could lead to an increase? Please explain.
6. Is there any specific evidence that would suggest that Canadian markets are more vulnerable to activist short selling, including potentially problematic activist short selling (e.g., size and type of issuers, industries/sectors represented or other market conditions)?
a. Please provide specific examples of these vulnerabilities, and how they differ from other jurisdictions.
7. Do issuers have practical limitations in terms of their ability to respond to allegations made in a Campaign? If so, what are these limitations, and do you have any recommendations on how to alleviate them?
8. Are issuers reluctant to approach regulators when they believe that they are being unfairly targeted by an activist short seller? If so, why? If not, why not?
9. Is the existing regulatory framework adequate to address the risks associated with problematic activist short selling? Please explain why or why not and provide specific examples of concerns and areas where, in your view, the regulatory framework may not be adequate.
10. Have there been market developments or new information since 2012, when UMIR amendments regarding short selling and failed trades were implemented, that would warrant revisiting the existing regulatory framework for short selling? If so, please describe these new developments or information and indicate, providing evidence to support your views:
a. whether, in your view, there is a connection between failed trades and activist short selling;
b. what changes should be considered and why, and specifically with respect to potentially problematic activist short selling activities; and
c. whether there are relevant regulatory requirements in other jurisdictions that should be considered and why.
11. Is the existing disclosure regime for short selling activities adequate? Please explain why or why not, indicating:
a. what disclosure requirements would address risks associated with potentially problematic activist short selling and how would such requirements improve deterrence;
b. what should be the trigger and the timing of any additional disclosure;
c. how can additional disclosure be meaningful without negatively impacting market liquidity; and
d. do you foresee any issues with imposing a duty to update once there has been a voluntary disclosure of a short position?
12. In your view, do the existing enforcement mechanisms adequately deter problematic activist short selling? If so, why? If not, why not?
a. Can deterrence be improved through specific regulation of activist short sellers? If so, how?
13. Are there additional or different regulatory or remedial provisions that could be considered to improve deterrence of problematic conduct? If so, what are these provisions?
14. Can you provide examples of specific activist short selling conduct that in your view is problematic but may not fall within the scope of existing securities offences such as market manipulation and misrepresentation/misleading statements? In your view, how should this problematic conduct be addressed by regulators?
15. Is it important that a statement have actual market impact to trigger enforcement action by securities regulators?
a. Should another standard be used? For example, in your view is the "reasonable investor" standard a preferable approach (e.g., would a reasonable investor consider that statement important when making an investment decision)? If so, why? What are the potential implications of such a change?
Comments and submissions
The Committee invites participants to provide input on the issues outlined in this public consultation paper. You may provide written comments in hard copy or electronic form. The consultation period expires March 3, 2021.
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Statement for consultation paper
Certain CSA regulators require publication of the written comments received during the comment period. We will publish all responses received on the websites of the Autorité des marchés financiers (www.lautorite.qc.ca), the Ontario Securities Commission (www.osc.gov.on.ca), and the Alberta Securities Commission (www.albertasecurities.com). Therefore, you should not include personal information directly in comments to be published. It is important that you state on whose behalf you are making the submission.
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Please submit your comments in writing on or before March 3, 2021. Please send your comments by email in Microsoft Word format.
Please address your submission to all members of the CSA as follows:
British Columbia Securities CommissionAlberta Securities CommissionFinancial and Consumer Affairs Authority of SaskatchewanThe Manitoba Securities CommissionOntario Securities CommissionAutorité des marchés financiersFinancial and Consumer Services Commission (New Brunswick)Superintendent of Securities, Prince Edward IslandNova Scotia Securities CommissionSuperintendent of Securities, Newfoundland and LabradorSuperintendent of Securities, Yukon TerritorySuperintendent of Securities, Northwest TerritoriesSuperintendent of Securities, Nunavut
Please deliver your comments only to the addresses below. Your comments will be distributed to the other participating CSA members.
Please refer your questions to any of the following:
{1} See e.g., Barbara Shecter, "Activist short-sellers are increasingly targeting Canadian companies -- is Canada ready?", Financial Post (6 October 2017) [Shecter]; Orestes Pasparakis, Walied Soliman & Joe Bricker, "It's time for legislators to crack down on abusive short-selling", Globe and Mail Op-ed (18 January 2019) [Pasparakis, Soliman & Bricker]; and Pete Evans, "Canada needs to toughen short selling rules to weed out abuse, market watchers say", CBC News (11 February 2019) [Evans]; Yves Allaire "Short-seller heists: Why do institutional investors support activist hedge funds only out for a quick profit?", Financial Post Op-ed (13 December 13 2019)
{2} See e.g., Larry MacDonald, "Regulations to rein in short-sellers must not undercut activists' positive effects", The Globe and Mail (30 January 2020)
{3} For further details on the mechanics of short selling, see Part I, Section B below. See also e.g., Wuyang Zhao, "Activist Short-Selling and Corporate Opacity" (January 28, 2020), available at SSRN [Zhao]; and Alexander Ljungqvist & Wenlan Qian, "How Constraining Are Limits to Arbitrage?" (March 5, 2016), Institute of Global Finance Working Paper No. 7, available at SSRN [Ljungqvist & Qian]. Some academics also refer to this type of activity as "negative activism", see Joshua Mitts, "A Legal Perspective on Technology and the Capital Markets: Social Media, Short Activism and the Algorithmic Revolution" (October 28, 2019), Columbia Law and Economics Working Paper No. 615, available at SSRN.
{4} Directional short sellers anticipate a decline in the market price of a security sold, in contrast to other short sellers who hedge a long position or take advantage of an arbitrage opportunity and who will not benefit from subsequent downward or upward price movements.
{5} See Adam Kornblum "11 Tweets that Turned the Stock Market Upside Down" Ogilvy Insights (13 August 2018).
{6} Michael P. Regan, "The Tiny Activist Fund That Reaped 24% Return by Unearthing 'Cockroaches", Bloomberg Markets (20 May 2019).
{7} Letter from Fahmi Quadir, Chief Investment Officer, Safkhet Capital Management LLC to Dr. Jean-Pierre Bussalb, Head of Short Selling Section, Bundesanstalt für Finanzdienstleistungsaufsicht dated March 15, 2019. [Safkhet Open Letter]
{8} As noted by Partoy et al., "unlike positive activism, which often carries a powerful and positive normative presumption, negative activism faces an uphill normative battle, the presumption being that it destroys shareholder value." Barbara A Bliss, Peter Molk & Frank Partnoy, "Negative Activism" (February 25, 2019) 97 Washington University Law Review, Forthcoming. University of Florida Levin College of Law Research Paper No. 19-19 at 11. Available at SSRN. [Bliss, Molk & Partnoy]
{9} As discussed in Part III.D, concerns about short selling and activist short selling have also seen a resurgence in other jurisdictions.
{10} See e.g., Shecter, supra note 1; Pasparakis, Soliman & Bricker, supra note 1; Evans supra note 1.
{11} See e.g., Justice Perell's statement in Harrington Global Opportunities Fund S.A.R.L. v Investment Industry Regulatory Organization of Canada, 2018 ONSC 7739 at para. 11: "There is a perception that the regulation of shorting [sic] selling is permissive and lax in Canada compared to other capital markets." [Harrington]
{12} Paul Davis et al, "An Analysis of the Short Selling Landscape in Canada: A New Path Forward is Needed to Improve Market Efficiency and Reduce Systemic Risk" (2019) McMillan LLP. [Davis et al.]
{13} See e.g., Shecter, supra note 1.
{14} See e.g., Ben Axler "Counterpoint: Short sellers like us create real value for public markets by telling Canadian investors the truth", Financial Post (17 December 2019).
{15} See Safkhet Open Letter, supra note 7, criticizing the short sale ban on Wirecard: "Short selling, writ large, affords positive externalities on the broader market, and more specifically to the investors which regulators have a duty to protect...the data does not support the existence of any material level of short seller manipulation."
{16} Universal Market Integrity Rule (UMIR), Part 1 -- Definitions and Interpretation, Rule 1.1.
{17} Carole Comerton-Forde, Charles M Jones & Talis J Putnins, "Shorting at Close Range: A Tale of Two Types" (March 18, 2015). Journal of Financial Economics (JFE), Forthcoming; AFA 2012 Chicago Meetings Paper; Columbia Business School Research Paper No. 12/22, available at SSRN.
{18} Ekkehart Boehmer and J Julie Wu, "Short Selling and the Price Discovery Process" (July 16, 2012). Review of Financial Studies, Forthcoming, available at SSRN.
{19} See: Canadian Securities Administrators/Investment Industry Regulatory Organization of Canada, CSA/IIROC Joint Notice 23-312 Request for Comment -- Transparency of Short Selling and Failed Trades, (2 March 2012). [Joint Notice 23-312].
{20} Short sales made without prior arrangements to borrow or reasonable expectation to borrow the security first are considered "naked short sales" and not permitted under securities legislation and UMIR except for short sales by market makers that provide liquidity in the stock (See Rules Notice -- Notice of Approval -- Provisions Respecting Regulation of Short Sales and Failed Trades, IIROC Notice 12-0078 (2 March 2012) [IIROC Notice 12-0078]). Naked short sales can lead to failed trades when the seller is not able to deliver the shares within the two-day settlement period. Discussed further in section III.B.
{21} See Owen A. Lamont, "Go Down Fighting: Short Sellers vs. Firms" (July 24, 2009). Yale ICF Working Paper No. 04-20, available at SSRN [Lamont].
{22} For example, in the years 2017-2019, between 50% to 57% of listed issuers in Canada's two largest marketplaces (based on number of issuers) had fewer than 2,500 trades per year or an average of less than 10 trades per day. Also, more than two-thirds of listed issuers had an annual traded volume of less than 25 million shares or an average daily traded volume of under 100,000 shares. (Based on aggregated annual trade counts and volume traded of TSX and TSXV issuers obtained from TMX listings data.)
{23} Short sellers represent only one of many borrowers in the securities lending market. Since securities lending is a scale business, the lenders are typically large buy-side firms (pension funds, insurance firms, mutual fund/ETF providers etc.) that offer for loan their holdings of securities of mostly large and frequently traded issuers. Additionally, IIROC's fully-paid securities lending (FPL) program will only include certain equity securities that meet at least one of three minimum requirements: volume-weighted average price ($2.00), average trading volume (100,000 share) or average free float market capitalization ($2 million) over a six-month period. For more information on securities lending, see Bank of Canada, Staff Discussion Paper 2019-5, Canadian Securities Lending Market Ecology (2019). For more information on IIROC's FPL program see IIROC Notice 19-0109 Fully-paid Securities Lending (June 17, 2019).
{24} For example, as of March 11, 2020, Canada's primary options exchange, the Montreal Exchange, listed fewer than 300 companies (under 10% of all TSX and TSXV issuers) on their equity options list and only 223 of those had available options contracts on the market.
{25} For example, activist short sellers would not be required to obtain registration under securities law requirements unless they otherwise meet a registration requirement, such as fund manager. See also in British Columbia where recent amendments to the Securities Act introduced rule making authority over those engaged in "promotional activities." "Promotional activities" is defined to include any activity / communication that encourages a person to buy, not buy, sell or hold a security or derivative. Note there is rulemaking authority to prescribe that certain activities are not promotional activities. See Securities Act (British Columbia), RSBC 1996, c 418, s. 1 and 183(12.2).
{26} See e.g., Securities Act (Ontario), RSO 1990, c S.5, ss 126.1 and 126.2; Securities Act (Québec), V-1.1, ss 199.1 and 196; Securities Act (Alberta), RSA 2000, c S-4, ss 93 and 221.1; Securities Act (British Columbia), RSBC 1996, c 418, ss 57 and 168.1; Securities Act (Manitoba), CCSM, c S50, ss 76 and 136(1); and The Securities Act (Saskatchewan), 1988-98 c S-42.2, ss 55.1, 55.11, 55.13(1).
{27} Bliss, Molk & Partnoy describes this as "informational negative activism" -- behaviour that seeks to uncover and then communicate the truth about companies whose shares the activists believe are overvalued. It can be focussed on past disclosures by companies which the activist argues contain misrepresentations or omissions or on future expectations about a company's prospects. See: Bliss, Molk & Partnov, supra note 8 at 12.
{28} Although out-of-scope, we also recognize that within the context of social media, the converse is also true -- the potential for investors or related parties to spread false or misleading positive information about the issuer in order to profit from a rise in the issuer's share price (otherwise known as a "pump and dump").
{29} See CSA Staff Notice 51-348 Staff's Review of Social Media Used by Reporting Issuers and CSA Staff Notice 51-356 Problematic Promotional Activities by Issuers.
{30} Social media's implications on financial markets extends beyond activist short selling and is therefore outside the scope of this consultation paper. For more information see Lin, Tom C. W., The New Market Manipulation (July 3, 2017). Emory Law Journal, Vol. 66, p. 1253, 2017; Temple University Legal Studies Research Paper No. 2017-20, available at SSRN.
{31} See: Ljungqvist & Qian, supra note 3. In that paper, the authors conclude that the main barrier to launching public short campaigns is the cost to produce credible and new information that will convince long investors to sell, rather than a lack of capital or other short-sale constraints (such as cost of borrowing).
{32} Academic studies have noted that a key component for the activist short seller's strategy is dependent on its own track record to convince current long shareholders to sell. See: Ibid. Statistics based on AI data of short campaigns targeting issuers with Canadian headquarters as of December 31, 2019.
{33} SA is a crowdsourced research platform and claims to be "the world's largest investing community" with approximately 17 million users per month; over 16,000 contributors; and a dedicated section to short selling for called "Short Ideas" for paid subscribers. The platform requires all contributors to disclose positions in stocks they write about and to obtain editor approval before posting information. SA states that pseudonym contributors are held to the same compliance and biographical standards and their real name and contact information are kept confidential. Additionally, contributors involved in a settlement or SEC action must reveal their real names. For more information see, About Seeking Alpha.
{34} This may be a relevant factor to understanding the potential impact of activist short sellers on Canadian markets as a recent U.S. academic study found evidence that potential short and distort strategies are more likely to be associated with pseudonymous authors than with identifiable individuals. Activist short sellers identified in the study were authors who published a negative article about an issuer and declared that they held a short position on SA. See: Joshua Mitts, "Short and Distort" (February 13, 2020) Columbia Law and Economics Working Paper No. 592, available at SSRN.
{35} This analysis was based on listed issuers with a head office in Canada. Canadian listed issuers without a Canadian head office are not captured. In 2019, there was only one Campaign that targeted a Canadian listed issuer without a Canadian head office.
{36} AI considers prominent activist short sellers to be those with a history of disclosing strong thesis or reports, disclosing a position in the target company and having a considerable impact on the target's stock price.
{37} In 2020, there have been twelve Campaigns identified as of September 30, 2020.
{38} Based on AI data from January 1, 2010 to September 30, 2020. Canadian issuers are identified based on the location of their headquarters. Some issuers are targeted by multiple activist short sellers. AI identifies whether a campaign status is ended (as opposed to current) when "the short seller either no longer supports its position according to publicly available information or there has been one year of inactivity from the short seller. As announcements regarding this are rare most campaigns are ended due to inactivity".
{39} OSC calculations based on AI data of annual campaign targets from 2010 to September 2020 and end-of year listed issuer counts from the World Federation of Exchanges from 2010 to June 2020. Includes all domestic NASDAQ and NYSE issuers for the U.S. Market and all domestic TSX and TSXV issuers for the Canadian market, excluding investment funds.
{40} See Ibid.
{41} Ekkehart Boehmer, Charles M Jones & Xiaoyan Zhang, "Which Shorts are Informed?" (February 4, 2007). AFA 2007 Chicago Meetings Paper, available at SSRN.
{42} Cannabis issuers were categorized under the healthcare sector. The 2019 AI report on Activist Investing in Canada reported that the precedent set in 2018 was "largely due to exuberance in the emerging cannabis sector, which invited detractors." In 2016, increased activist short seller activity was concentrated among materials and mining issuers.
{43} The number of Campaigns and targets are not equivalent for any given year because there may be multiple Campaigns against the same target.
{44} Market capitalization calculated 1-day prior to the announcement of the first activist short seller campaign for 69 Canadian targets from 2010 to September 30, 2020 for which historical market data was available.
{45} In contrast, the year-end median market capitalization of all TSX issuers from 2014 to 2019 was between $112 million and $153 million. As of September 30, 2020, approximately 64% of TSX issuers had a market capitalization of $300 million or less and 92% of TSXV issuers had a market capitalization of $100 million or less.
{46} See: Ljungqvist & Qian, supra note 3; Ian Appel, Jordan Bulka & Vyacheslav Fos, "Public Short Selling by Activist Hedge Funds" (October 1, 2018); and Zhao, supra note 3.
{47} Stock price returns were calculated by OSC from 1-day prior to the first Campaign announcement for 69 Canadian targets between 2010 and September 2020 for which historical market data was available. Stock price returns reflect more than just the disclosure of a short seller's Campaign, it also incorporates other positive or negative information about the target either specifically or more broadly (e.g., market or sector).
{48} Ibid.
{49} Based on AI's assessment of the Campaigns.
{50} Issuer responses identified from AI data.
{51} This is consistent with campaign outcomes for foreign issuers in foreign markets as well (see Figure 5).
{52} Our review confirmed that almost all class proceedings commenced following a Campaign made the same or similar allegations as those made in the Campaign. We acknowledge that the commencement of a class proceeding, even with similar allegations, does not establish the veracity of the underlying allegations in a Campaign.
{53} A U.S. study reviewed 124 campaigns in an effort to determine whether activist short sellers were engaged in short and distort campaigns based on a study of subsequent events. The study indicated that separate investigations by the Securities and Exchange Commission and the Department of Justice reached similar conclusions as the activist short sellers in 90% of those campaigns and eventually, 50% of the targets were delisted, 47% replaced auditors, and 23% restated earnings. See: Ljungqvist & Qian, supra note 3.
{54} For example, see: Schecter, supra note 1. We note that activism in general has increased (both long and short). See e.g., "Shareholder Activism: 2019 Trends and Major Developments", Davies Corporate Governance Insights 2019 (3 October 2019); Eric Woerth and Benjamin Dirx, Report to the National Assembly (France) on Shareholder Activism (October 2, 2019) [Woerth Report].
{55} See UMIR, Part 3 -- Short Selling, Prohibition on the Entry of Orders, Rule 3.2 [Rule 3.2]. A short-marking exempt order includes an order for a security from an arbitrage account, an account of a market maker for that account, or other specified accounts that buy and sell securities and that has at the end of any trading day no more than a nominal long or short position in any security. UMIR, Part 1 -- Definitions and Interpretation, Rule 1.1.
{56} A trade that did not settle and was not rectified within 10 trading days from the original settlement must be reported to IIROC. See: UMIR, Part 7 Trading in a Marketplace -- Extended Failed Trades, Rule 7.10.
{57} Participants include dealers that are members of an exchange, users of a quotation and trade reporting system or subscribers to an alternative trading system.
{58} "Pre-Borrow Security" means a security that has been designated by a Market Regulator to be a security in respect of which an order, that on execution would be a short sale, may not be entered on a marketplace unless the Participant or Access Person has made arrangements to borrow the securities that would be necessary to settle the trade prior to the entry of the order. UMIR, Part 1 -- Definitions and Interpretation, Rule 1.1. See also, UMIR, Policy 1.1, Definitions of Pre-Borrow Security, 1.1; UMIR, Part 6 -- Order Entry and Exposure -- Entry of Orders on Marketplace, Rules 6.1(4) and 6.1(6).
{59} "Short Sale Ineligible Security" is defined as a security or a class of securities that has been designated by a market regulatory to be a security in respect of which an order on execution would be a short sale may not be entered on a marketplace for a particular trading day or trading days. UMIR, Part 1 -- Definitions and Interpretation, Rule 1.1; See also, Rule 3.2, supra note 55 at (1)(b).
{60} Note for instance section 194 of the Securities Act (Québec), which provides that no person may sell a security short without previously notifying the dealer responsible for carrying out the transaction. See also, Securities Act (Ontario), section 48.
{61} UMIR, Part 10 -- Compliance, Report of Short Positions, Rule 10.10.
{62} The Consolidated Short Position Report (CSPR) shows the aggregate short positions on all listed securities as of the current reporting date and the net change in short positions from the previous reporting date, on a per security basis, pursuant to UMIR 10.10. The report is published twice monthly and based on the short position information submitted to IIROC by Participant Dealer Members and applicable Access Persons.
{63} The Short Sale Trading Statistics Summary Report is based on data for trades marked "short sale" supplied by each marketplace that IIROC monitors. The report is published twice monthly.
{64} See: Companion Policy to National Instrument 23-101-- Trading Rules, s 3.1(3)(f); UMIR, Part 2 -- Abusive Trading, Manipulative and Deceptive Activities, Policy 2.2 at Part 2 (g)-(h).
{65} As previously noted in IIROC Notice 12-0078 -- Provisions Respecting Regulation of Short Sales and Failed Trades, supra note 19, there is no universally accepted definition of "naked short selling". The most common usage is in connection with a short sale when the seller has intentionally chosen not to make arrangements to borrow any securities that may be required to settle the resulting trade. Some commentators use a more restrictive interpretation that describes any short sale when the seller has not pre-borrowed the securities necessary for settlement.
{66} Note, in the US, only the short selling volume for individual securities is published daily and individual short sale transactional information is published on a one-month delay but does not contain short seller details.
{67} See Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (2012). Note, in 2017 ESMA considered whether to further increase transparency of short positions by publishing aggregate short positions that are currently still confidential. See: European Securities and Markets Authority, Final Report, Technical Advice on the Evaluation of Certain Elements of the Short Selling Regulation (21 December 2017). On the issue of transparency, the technical advice made by ESMA to the European Commission was: "practical improvements of the current regime including building a centralised notification and publication system across Europe...[and] supports requiring the LEI for the identification of certain position holders." More specifically, for the area discussed in the paper, "ESMA also recommends that NCAs should be allowed to periodically publish anonymised aggregated net short positions by issuer on a voluntarily basis when they consider that the issues described above can be adequately addressed in their jurisdiction."
{68} In the context of activist short sellers, additional disclosure may be required by the market abuse regulations which provide that conflicts of interest be disclosed by any entity issuing recommendations where it holds a net short or long position of 0.5% or more of the capital of the company concerned by the recommendation. See Market Abuse Regulation -- Regulation 596/2014 of the European Parliament and of the Council.
{69} Corrado Malberti, Stephane Rousseau & Konstantinos Sergakis, "The Regulation of Short Selling: A Transatlantic Discussion on Policy Issues and Instruments" (October 6, 2018), Corporate Finance and Capital Markets Law Review, RTDF No. 4-2018. [Malberti, Rousseau & Sergakis]
{70} Short sale transaction reporting is the reporting of daily volumes of products that are short sold in the market.
{71} A person may be required to report a short position, i.e., where the quantity of the product that a person has, when acting in a particular capacity, is less than the quantity of the product that the person has an obligation to deliver when acting in the same capacity. Short position reporting is exempt where the seller's short position is less than or equal to (a) $100,000; and (b) 0.01% of the total quantity of securities or products in the relevant class of securities or products. The total of short positions for financial products on a given reporting day will be published on the ASIC website four days after the reporting day (T+4). These reports will not contain short seller details.
{72} Australian Securities & Investments Commission, "Regulatory Guide 196: Short Selling" (October 2018), see Reg. 196.8.
{73} Harrington, supra note 11.
{74} See IOSCO report entitled "Regulation of Short Selling -- Final Report" (June 2009), which articulates four high-level principles for the effective regulation of short selling and is designed to assist regulators in the management of risk through a regulatory regime for short selling. See also Joint Notice 23-312 supra note 19. Note the International Monetary Fund's Financial Sector Assessment Program Report "Canada : Financial Sector Assessment Program-IOSCO Objectives and Principles of Securities Regulation-Detailed Assessment of Implementation" which reviewed Canada's short selling regime as part of Principle 37 (Regulation should aim to ensure the proper management of large exposures, default risk and market disruption) and it was found to be "fully implemented" (March 7, 2014). See p. 18, 27 and 239-243.
{75} IIROC Notice 12-0078 supra note 20.
{76} The tick test was a requirement under UMIR that a short sale not be made at a price which is less than the last sale price of the security.
{77} See footnote 55.
{78} Joint Notice 23-312, supra note 19.
{79} See IIROC Study on the Impact of the Prohibition on the Short Sale of Inter-listed Financial Sector Issuers (February 2009) [IIROC Study].
{80} CSA/IIROC Notice 23-315 Summary of Comments on CSA IIROC Notice 23-312 Request for Comments -- Transparency of Short Selling and Failed Trades, (28 February 2013).
{81} See Securities and Exchange Commission, 2016a. Frequently Requested FOIA Document: Fails-to-Deliver Data -- Archive Data. See also Talis J Putnins, "Naked Short Sales and Fails to Deliver: An Overview of Clearing and Settlement Procedures for Stock Trades in the US" (October 27, 2009). Journal of Securities Operations and Custody, Forthcoming, available at SSRN.
{82} Note ESMA has adopted new rules related to failed trades set to come into effect next year. Trades that fail to settle -- usually within a window of two or three days -- face a mandatory "buy-in" to close the deal and cash penalties on failed transactions. Commission Delegated Regulation (EU) 2018/1229 of 25 May 2018 supplementing Regulation (EU) No 909/2014 of the European Parliament and of the Council with regard to regulatory technical standards on settlement discipline. See ESMA Final Report -- CSDR RTS on Settlement Discipline -- postponed entry into force (4 February 2020).
{83} E.g. Issues around transparency and disclosure of short selling information, lack of locate requirement and lack of a tick test in Canada. See: Davis et al, supra note 12.
{84} Lawrence Delevingne, Simon Jessop, & Jonathan Spicer, "Return of short-selling bans: market protection of 'war against truth'?", Reuters (19 November 2019).
{85} GPIF claimed that the current framework lacks transparency over who is the "ultimate borrower" of a stock after a short seller sells the shares loaned to them and added that a third party could vote GPIF shares contrary to GPIF's policies or interests. GPIF has not ruled out returning to the stock lending space in the future but clarified that "improvements" to "enhance transparency" would need to be introduced first. See: Billy Nauman & Leo Lewis, "This is a decision between making cash immediately or being better stewards for our constituency", The Financial Times (12 December 2019). This decision was not without cost, as it has been estimated the GPIF earned approximately US$115 million in fees annually through stock lending. See Tim Kelly, "World's largest pension fund halts stock lending to short sellers," Reuters (3 December 2019).
{86} Note that in 2020, following the short sale ban and a subsequent special audit by KPMG it was uncovered that approximately [EURO]1.9 billion on Wirecard's balance sheet could not be verified, and likely did not exist. This accounting scandal has not only resulted in the collapse of Wirecard, but also prompted ESMA to assess the supervisory response of Germany's financial regulator and oversight bodies in the events leading up to its collapse. On November 3, 2020, ESMA published the results of its Fast Track Peer Review. See: "Fast Track Peer Review on the Application of the Guidelines on the Enforcement of Financial Information (ESMA/2014/1293) by BaFin and FREP in the Context of Wirecard."
{87} David Keohane and Harriet Agnew, "France seeks crackdown on short sellers and activist investors", FT Online (2 October 2019); Woerth Report, supra note 54.
{88} Malberti, Rousseau & Sergakis, supra note 69; Julien Mazzacurati "The public disclosure of net short positions" in ESMA Report on Trends, Risks, Vulnerabilities, No 1 (2018) at 60. See also at ESMA Final Report -Technical Advice on the evaluation of certain elements of the Short Selling Regulation (December 21, 2017) at p. 51. ESMA confirmed that "some investors avoid crossing the 0.5% threshold, as reflected in the lower frequency of short position increases and relatively longer duration of positions just below the threshold."
{89} Bliss, Molk & Partnoy, supra note 8 at 14, 17. "Owen Lamont provides evidence that firms take legal and regulatory action against shorts sellers, by alleging criminal conduct, suing them, hiring private investigators, asking public authorities to investigate them, and manipulating securities markets to impede short selling." See: Lamont, supra note 21.
{90} Rients Galema and Dirk Gerritsen, "The effect of the accidental disclosure of confidential short sales positions" (2018) Finance Research Letters, Forthcoming.
{91} Bliss, Molk & Partnoy, supra note 8 at 46-47.
{92} See Petition for Rule Making on Short and Distort, Letter to Vanessa Countryman, Secretary of U.S. Securities and Exchange Commission (February 16, 2020); John Coffee Jr & Joshua Mitts, "Petition for Rule Making on Short and Distort", The CLS Blue Sky Blog (February 18, 2020).
{93} Ibid. The authors have also asked the SEC to confirm that rapidly closing a position after publishing a report, without specifically disclosing an intent to do so can constitute fraud in violation of Rule 10b-5, and propose a safe harbour provision for closing at a price that is the equal to or lower the valuation stated or implied in the report.
{94} Mark Cohodes, "Pump-and-dump stock trading needs new rules for the digital age", FT Online, April 26, 2020.
{95} In British Columbia recent amendments to section 1(1) of the Securities Act introduced a new definition of "promotional activities." "Promotional activities" is defined to include any activity / communication that encourages or could reasonably encourage a person to purchase, not purchase, trade or not trade a security or derivative. Note the definition of "promotional activities" provides the British Columbia Securities Commission with rulemaking authority to prescribe that certain activities are not promotional activities. Section 183 generally, section 183 (12.2) and section 184 (1)(b) provide rulemaking authority to make rules imposing disclosure requirements on a person engaging in promotional activities and to impose different requirements, restrictions or prohibitions on different classes of persons engaging in promotional activity. BCSA Amendments supra note 26.
{96} See e.g., Re Cohodes, 2018 ABASC 161 [Cohodes].
{97} See e.g., Securities Act (Ontario), RSO c S.5, s 126.2.
{98} BCSA Amendments, section 50(3), supra note 26.
{99} See e.g., subsection 126.1(1) of the Securities Act (Ontario).
{100} See e.g., Derivatives Act (Québec), CQLR c. I-14.01, s. 151, Securities Act (Ontario), s. 126.1(1)
{101} In some jurisdictions, including British Columbia, Alberta, Québec and Ontario, it is also an offence to attempt to engage in a fraud or market manipulation.
{102} Securities Act (Québec), CQLR c V-1.1, s. 195.2 and Derivatives Act (Québec), CQLR c. I-14.01, s. 150. It is also an offence, for [e]very person who, not being registered as a dealer, adviser or representative, gives out information to investors which could influence their investment decisions and derives advantage therefrom separate from his ordinary remuneration. See Securities Act (Québec), section 200.
{103} Depending on circumstances, statutory civil liability for misrepresentations generally only attaches to statements made by issuers, their directors, certain officers and other "influential persons." See e.g., Part XXIII and Part XXIII.1 of Securities Act (Ontario) and Division II of Chapter II of Title VIII of Securities Act (Québec).
{104} See e.g., Rural Funds Management Limited as Responsible Entity for the Rural Funds Trust and RF Active v Bonitas Research LLC [2020] NSWSC 61, 12 February 2020. Note also that Singapore securities legislation also provides a private right of action for contravention of its legislation. Securities and Futures Act (Sing), Cap 289 (2006 rev ed), ss 199, 234(1A).
{105} Most of the judicial decisions dealing with activist short selling are defamation or libel actions against activist short sellers.
{106} For example, some Canadian jurisdictions have passed what is known as 'Anti-SLAPP' legislation which provides a preliminary, pretrial procedure for a defendant to seek dismissal of a defamation suit when they are brought for tactical reasons (e.g., to silence critics or suppress debate or publication on matters of public interest). Recently, the Ontario Court of Appeal provided some assurances to analysts who write reports critical of issuers when it struck down a defamation suit brought by an issuer against an analyst (Fortress Real Developments Inc. v Rabidoux, 2017 ONSC 167). These applications are, however, highly fact-driven and courts have also ruled against a prominent short seller in his Anti-SLAPP application, notwithstanding the acknowledgement that information on "management of publicly traded corporations is a matter of public interest". See: Thompson v Cohodes, 2017 ONSC 2590.
{107} For example, see Re Carnes, 2015 BCSECCOM 187; Cohodes, supra note 96. However, it should also be noted that this issue is not unique to Canada. There are very few enforcement cases against activist short sellers in other jurisdictions as well.
{108} See footnote 97.
{109} For example, see Harrington supra note 11.
{110} As noted, "When a short-seller seriously attacks the integrity of a company's senior executives or Board members, the temptation to sue for defamation is almost impossible to overcome. Some believe that they almost have to sue for defamation, for fear that their failure to do so will be viewed as an admission of the short-seller's claims. Canadian CEOs and companies have accordingly sued in the past over critical reports. But the business wisdom of pursuing such a claim is not universally supported, and the efficacy of such defamation claims is disputed. ... Moreover, there is a risk that the short-seller will maintain its position in the company for a longer period of time after being hit with a defamation claim, in order to avoid reputational risk" Bell, Derek and Ellins, Katelyn, "Get Shorty: Defamation and Regulatory Claims in Canada" (DLA Piper Canada), July 26, 2017.
Proposed OSC Rule 32-506 (Under the Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers -- Proposed Amendment to OSC Rule 91-502 Trades in Recognized Options under the Securities Act
December 1, 2020
The Ontario Securities Commission (the OSC) is publishing the following for a 90-day comment period, expiring on March 1, 2021:
• Proposed OSC Rule 32-506 (Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers (Proposed OSC Rule 32-506), and
• Proposed amendment to OSC Rule 91-502 Trades in Recognized Options (OSC Rule 91-502) (the Proposed 91-502 Amendment and, together with Proposed OSC Rule 32-506, theProposed Instrument).
Proposed OSC Rule 32-506 is a proposed rule made under the Commodity Futures Act (Ontario) (the CFA). The Proposed 91-502 Amendment is a proposed amendment to an existing rule made under the Securities Act (Ontario) (the OSA).
The Proposed Instrument is a regulatory burden reduction initiative and is intended to codify relief that is routinely granted by the Commission under both the CFA and OSC Rule 91-502 to international dealers, international advisers and international sub-advisers (collectively, international firms).
The Proposed Instrument is intended to be an interim measure until such time as the CFA may be repealed and replaced with new legislation, such as the proposed Capital Markets Act as part of the Co-operative Capital Markets Regulatory Authority (CMRA) initiative.
We are issuing this Notice to solicit comments on the Proposed Instrument. We welcome all comments on this publication.
The substance and purpose of the Proposed Instrument is to codify in a rule certain exemptions from the registration requirements in the CFA that are routinely granted by the Commission to international firms on an application basis. These applications also sometimes include a request for an exemption from the options proficiency requirements in OSC Rule 91-502 that may otherwise be applicable to international firms and their representatives.
The Proposed Instrument codifies relief that is now granted on a routine basis in order to
• enhance institutional investor access to international options and futures markets and thereby reduce regulatory costs for such investors, and
• reduce regulatory burden by eliminating the need for international firms to file applications for exemptive relief.
The exemptions in the Proposed Instrument are generally consistent with the exemptions contained in recent decisions but have been streamlined slightly to remove certain terms and conditions that we have concluded are no longer justified on cost-benefit grounds. (The changes from recent decisions and the reasons for the changes are summarized below.)
OSC staff will continue to consider on a case-by-case basis applications for exemptive relief by international firms and other market participants that raise novel issues or that indicate that the standard set of terms and conditions set out in the Proposed Instrument are not appropriate for the applicant's business model or institutional client base.
The Proposed Instrument is one of the burden reduction initiatives identified in the OSC Report entitled Reducing Regulatory Burden in the Capital Markets and published on November 19, 2019 (the OSC Burden Reduction Report). Specifically, this matter relates to the following Decisions and Recommendations discussed in the OSC Burden Reduction Report:
• R-27 Develop a rule that exempts international dealers, advisers and sub-advisers from registration under the CFA (Page 67 of the Report)
• D-18 Review the application of proficiency requirements, relating to registered and exempt advising representatives when advising in recognized options, and consider providing clarification (Page 81 of the Report)
Please see below for a discussion of the anticipated costs and benefits of the Proposed Instrument.
Overview of regulatory regime in Ontario
Generally, under the CFA, no person may trade{1} in a commodity futures contract or a commodity futures option (collectively, a contract){2} unless the person is registered as a dealer [Futures Commission Merchant], or as a representative or as a partner or officer of the dealer and is acting on behalf of such dealer, or an exemption from the registration requirement is available.
Similarly, under the CFA, no person may act as an adviser{3} unless such person is registered as an adviser or is registered as a representative or as a partner or officer of the adviser and is acting on behalf of such adviser, or an exemption from the registration requirement is available.
The CFA contains certain exemptions from the adviser registration requirement in s. 31 of the CFA and certain exemptions from the dealer registration requirement in s. 32 of the CFA. Additional registration exemptions can be found in the General Regulation under the CFA and under certain rules made under the CFA including the following:
• Section 44 of the CFA General Regulation{4}
• OSC Rule 32-504 Advisory Registration Exemption (Commodity Futures Act)
Absence of codified exemptions for international firms under the CFA
In contrast to the regulatory regime for securities, the regulatory regime for contracts that trade on exchanges does not include a standardized set of exemptions for international firms that deal only with institutional clients.
Specifically, there is no set of exemptions under the CFA comparable to the following exemptions in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) for international firms that deal with institutional clients in relation to securities (collectively, the NI 31-103 international firm exemptions):
• section 8.18 [international dealer]
• section 8.26 [international adviser]
• section 8.26.1 [international sub-adviser]
Consequently, international firms that wish to provide trading or advisory services to institutional clients in relation to contracts that trade on foreign exchanges (foreign contracts) are generally required to file applications for relief with the OSC by analogy to these exemptions in NI 31-103. These applications also sometimes include a request for an exemption from the options proficiency requirements in OSC Rule 91-502 that may otherwise be applicable to the international firms and their representatives.
The exemptions in the Proposed Instrument are intended to eliminate the need for international firms to file these applications for relief.
Minor differences between the NI 31-103 exemptions and CFA exemptive relief decisions
There are a number of minor differences in the terms and conditions of the NI 31-103 international firm exemptions and the terms and conditions of exemptive relief orders that are granted under the CFA. In part, this is because there are a number of differences between the registration regime and the scheme of exemptions under the OSA and the CFA.
In addition, over the last few years, OSC staff together with staff in the other Canadian Securities Administrators (CSA) jurisdictions have been examining more closely the trading and advising activities of international firms vis-à-vis Canadian investors in connection with exchange-traded and over-the-counter (OTC) derivatives. The enhanced focus on these products and markets reflects both ongoing work by the OSC and CSA in developing a modernised and harmonised regime for derivatives as well as the identification by OSC staff of certain market practices and interpretations of requirements and exemptions under the CFA by international firms that staff believe are contrary to the public interest (including improper use of the "unsolicited trade" exemption and the "hedger" exemption in the CFA).{5}
For these reasons, staff have typically requested certain representations and conditions in exemptive relief decisions granted under the CFA that are not present in the corresponding exemptions in NI 31-103. In addition, these decisions have also included sunset clauses in these decisions as the form and content of these decisions have continued to evolve.
However, based on our experience with recent applications for relief, we are now satisfied that we can codify this relief on the basis of a "standard" set of terms and conditions in order to eliminate frequently occurring applications for relief. We also propose to eliminate certain terms and conditions that are currently found in the exemptive relief orders. Based on our experience with these applications and discussions with counsel in relation to the international firms' experience in complying with these terms and conditions, we recommend removing these conditions on cost-benefit grounds. These changes are explained below.
Minor changes to current standard form of exemptive relief decisions
As noted above, the exemptions in the Proposed Instrument generally reflect the standard terms and conditions of such decisions but have been streamlined to remove certain terms and conditions.
The changes from the recent standard form of exemptive relief decisions are as follows:
• Recent decisions have generally included a condition that the international firm only trade with or advise clients that are "permitted clients" as defined in NI 31-103. The Proposed Instrument includes a definition of "CFA permitted client" that includes any person or company that is a "permitted client" as defined NI 31-103 but also includes certain additional categories, including the following:
• a person or company registered under the commodity futures or derivatives legislation of a jurisdiction of Canada as an adviser or dealer; (clause (d.1)),
• a family trust established by a permitted client that meets certain criteria (clause (o.1)), and
• an individual who, together with a spouse and/or a family trust that meets the criteria in clause (o.1), beneficially owns net financial assets that exceed $5 million (clause (o.2)).{6}
• Certain references to "securities legislation" in the definition of "permitted client" in NI 31-103 have been replaced with "securities, commodity futures or derivatives legislation" in the definition of "CFA permitted client" in the Proposed Instrument.
• Recent decisions have generally included a condition that the international firm notify the Commission of any regulatory action in respect of the applicant firm or predecessors or specified affiliates of the applicant firm by completing and filing a notice set out in an appendix to the decision. The required disclosure is generally similar to the disclosure required of registered firms by Part 7 of Form 33-109F6 Registration Information (Form 33-109F6). The condition may allow the applicant firm to satisfy this disclosure requirement by filing a notice that incorporates by reference certain disclosure made by the firm in its home jurisdiction.
• Based on our experience with these applications and discussions with counsel in relation to the international firms' experience in complying with these terms and conditions, we have decided not to include this condition as a condition of the exemptions in the Proposed Instrument since
• there is no corresponding notification requirement in the exemptions for international firms in NI 31-103; and
• we have been advised by applicant firms that compliance with this condition may result in significant additional regulatory burden, since it may require substantial amounts of regulatory disclosure that is already publicly available being reformatted and restated to comply with the form requirements of NI 33-109 and the appendix to the decision.
Even if staff were not receiving such notifications from international firms, staff would still be able to obtain the necessary information. International firms that rely on these exemptions are "market participants" under the CFA. They are therefore required by sections 14 and 14.1 of the CFA to keep, and to produce when requested, relevant books and records. In addition, in many cases the relevant information is readily available to staff through regulatory disclosure websites such as the FINRA BrokerCheck system or the NFA Background Affiliation Status Information Center (BASIC) disclosure system.
Accordingly, after further consideration, OSC staff accept that the costs of requiring this notification outweigh the benefits and that these costs may deter international firms providing trading or advising services to institutional clients in Canada.
• Certain drafting changes have been made to the international dealer, international adviser and international sub-adviser exemptions in the Proposed Instrument to make them more consistent with the drafting of the corresponding exemptions in NI 31-103.
The Proposed Instrument includes the following exemptions:
• PART 2 DEALER REGISTRATION EXEMPTIONS
• Section 3 [Dealer registration exemption -- International dealer]
• Section 4 [Dealer registration exemption -- CFA permitted client of an international dealer]
• Section 5 [Exemption from the trading restrictions in the CFA]
• PART 3 ADVISER REGISTRATION EXEMPTIONS
• Section 7 [Adviser registration exemption -- International adviser]
• Section 8 [Adviser registration exemption -- International sub-adviser]
• FORM 32-506F1 SUBMISSION TO JURISDICTION AND APPOINTMENT OF AGENT FOR SERVICE
Proposed OSC Rule 32-506 is set out in Annex A.
Proficiency requirements in OSC Rule 91-502
Section 3.1 of OSC Rule 91-502 generally requires a person or company that wishes to trade a recognized option (as defined in OSC Rule 91-502) as agent for a client or give advice to a client in respect of a recognized option to have successfully completed the Derivatives Fundamentals and Options Licensing Course.{7}
The proficiency requirements in OSC Rule 91-502 are in addition to the proficiency requirements applicable to registered individuals in Part 3 [Registration Requirements -- Individuals] of NI 31-103. For example, an individual who applies for registration as an advising representative (portfolio manager) and who is proposing to advise a fund that will focus on options trading strategies is generally required to meet the specific options proficiency requirements of OSC Rule 91-502 in addition to the general proficiency requirements in NI 31-103. The options proficiency requirements of OSC Rule 91-502 are generally similar to the options proficiency requirements applicable to registered representatives of investment dealers who deal with customers in options.{8}
Historically, there has been some uncertainty as to whether the options proficiency requirements in OSC Rule 91-502 also apply to representatives of international firms when trading with or advising permitted clients in reliance on registration exemptions under NI 31-103 or exemptive relief orders under the CFA and it is relatively common for applicants to seek exemptive relief from this requirement in exemptive relief decisions.
The Proposed Amendment to OSC Rule 91-502 is intended to provide an exemption from the proficiency requirement in section 3.1 of OSC Rule 91-502 in connection with advice relating to options that trade on foreign exchanges to permitted clients or trades in such foreign options to, with or on behalf of permitted clients if the person or company is in compliance with the terms of the exemption from the dealer or adviser registration requirement.
The Proposed Amendment to OSC Rule 91-502 is set out in Annex B.
We believe the Proposed Instrument, if adopted, will have the following benefits to international firms and to institutional investors that rely upon the trading and advisory services of such firms:
• it will have the effect of enhancing institutional investor choice and thereby reduce costs for institutional investors, since institutional investors will now be able to receive services from any international firm that is appropriately registered in its home jurisdiction and meets the other conditions of the exemptions in the rule, and will not be limited to those international firms that have taken the additional step of applying for and obtaining discretionary relief orders;
• it will eliminate the need for international dealers, advisers and sub-advisers to have to make individual applications for exemptive relief under the CFA in order to be able to benefit from the exemptions, thereby eliminating the need to pay application fees and associated legal counsel fees (which in some cases may otherwise be passed on to the firm's Canadian institutional clients);
• it will respond to stakeholder comments that the OSC and the CSA should propose amendments to their legislation to introduce an international dealer, international adviser and international sub-adviser exemption for international firms similar to the exemptions for international firms in Sections 8.18, 8.26 and 8.26.1 of NI 31-103;{9} and
• it should help standardize the terms and conditions of the international firm exemptions and eliminate certain terms and conditions that are currently found in discretionary relief orders.
Please refer to to the separate Cost-Benefit Analysis set out as Annex C for additional information about the anticipated benefits from this initiative.
In developing the Proposed Instrument, we have not relied on any significant unpublished study, report or other written materials.
We anticipate that the Proposed Instrument will have the effect of enhancing institutional investor choice and thereby reduce costs for institutional investors, since institutional investors will now be able to receive services from any international firm that is appropriately registered in its home jurisdiction and meets the other conditions of the exemptions in the rule, and will not be limited to those international firms that have applied for and obtained discretionary relief orders.
As noted above, the current standard form of exemptive relief decision typically includes a sunset clause of up to five years. An example of the current standard form of sunset clause is as follows:{10}
This Decision will terminate on the earliest of:
(a) such transition period as provided by operation of law, after the effective date of the repeal of the CFA;
(b) such transition period as provided by operation of law, after the coming into force of any amendments to Ontario commodity futures law or Ontario securities law (as defined in the OSA) that affect the dealer registration requirements in the CFA; and
(c) five years after the date hereof.
The Proposed Instrument, if made as a rule by the Commission and approved by the Minister in accordance with Part XV of the CFA, will represent an "amendment ... to Ontario commodity futures law ... that affects the dealer registration requirements in the CFA". Consequently, any existing decisions that contain a sunset clause substantially consistent with the above will expire on the coming into force of the Proposed Instrument.
We have not included a transition period in the Proposed Instrument as we believe the exemptions in the Proposed Instrument are generally more permissive than the exemptions that are contained in the existing decisions. However, if an international firm or other market participant is concerned that they may be prejudiced by the coming into force of the Proposed Instrument and the consequent expiry of their existing decision, they are requested to contact staff at the address below.
An alternative to proceeding with the Proposed Instrument would be to maintain the status quo, which would mean staff would continue to process applications for exemptive relief. However, based on our experience with recent applications for relief, we are now satisfied that we can codify relief on the basis of a "standard" set of terms and conditions in order to eliminate frequently occurring applications for relief. We also propose to eliminate certain terms and conditions that are currently found in the discretionary relief orders but that we have determined are unnecessary.
The Proposed Instrument is intended to be an interim measure until such time as the CFA may be repealed and replaced with new legislation, such as the proposed Capital Markets Act as part of the CMRA initiative. Accordingly, another alternative to proceeding with the Proposed Instrument would be to wait until the CFA is repealed and replaced with new legislation.
However, repealing the CFA would likely require extensive amendments to the OSA and to current and proposed rules (including the proposed derivatives registration and business conduct rules). Accordingly, we believe it makes sense to proceed with the Proposed Instrument as an interim measure.
The rule-making authority for Proposed OSC Rule 32-506 is provided in paragraphs 8 to 11 and 16 of subsection 65(1) of the CFA.
The rule-making authority for the Proposed 91-502 Amendment is provided in paragraphs 8 to 11 and 16 of subsection 65(1) of the CFA and paragraphs (1), (2), (8.1) and 35 of subsection 143(1) of the Securities Act (Ontario).
We welcome your comments on the Proposed Instrument.
Please submit your comments in writing on or before March 1, 2021. If you are not sending your comments by email, an electronic file containing the submissions should also be provided (in Microsoft Word format).
Deliver your comments only to the address below.
We cannot keep submissions confidential because applicable legislation requires publication of the written comments received during the comment period. All comments received will be posted on the website of the OSC at www.osc.gov.on.ca. Therefore, you should not include personal information directly in comments to be published. It is important that you state on whose behalf you are making the submission.
This Notice includes the following annexes:
Annex A |
Proposed OSC Rule 32-506 (Commodity Futures Act) Registration Exemptions for International Dealers, Advisers and Sub-Advisers |
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Annex B |
Proposed Amendment to OSC Rule 91-502 Trades in Recognized Options |
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Annex C |
Cost-Benefit Analysis |
Please refer your questions to any of the following:
Paul HaywardSenior Legal Counsel, Compliance and Registrant RegulationOntario Securities Commission(416) 593-8288phayward@osc.gov.on.caRobert F. KohlSenior Legal Counsel, Compliance and Registrant RegulationOntario Securities Commission(416) 593-8233rkohl@osc.gov.on.caMaye MouftahSenior Legal Counsel, Compliance and Registrant RegulationOntario Securities Commission(416) 593-2358mmouftah@osc.gov.on.ca
{1} See s. 22(1)(a) of the CFA.
{2} These terms are defined in the CFA as follows:
"contract" means any commodity futures contract and any commodity futures option;
"commodity futures contract" means a contract to make or take delivery of a specified quantity and quality, grade or size of a commodity during a designated future month at a price agreed upon when the contract is entered into on a commodity futures exchange pursuant to standardized terms and conditions set forth in such exchange's by-laws, rules or regulations;
"commodity futures option" means a right, acquired for a consideration, to assume a long or short position in relation to a commodity futures contract at a specified price and within a specified period of time and any other option of which the subject is a commodity futures contract;
{3} See s. 22(1)(b) of the CFA. An "adviser" means a person or company engaging in or holding himself, herself or itself out as engaging in the business of advising others as to trading in contracts.
{4} R.R.O. 1990, Reg. 90: GENERAL under Commodity Futures Act, R.S.O. 1990, c. C.20.
{5} For an example of some of these concerns, please see OSC Staff Notice 33-744 -- Availability of registration exemptions to foreign dealers in connection with trades in options and futures contracts under the Commodity Futures Act (Ontario), available at https://www.osc.gov.on.ca/en/SecuritiesLaw_sn_20140918_33-744_availability-registration-exemptions-foreign.htm
{6} The additional categories of CFA permitted clients as described in clauses (o.1) and (o.2) are consistent with exemptive relief granted by the Commission in Re J.P. Morgan Securities LLC dated November 18, 2019, at http://www.osc.gov.on.ca/en/SecuritiesLaw_ord_20191121_214_jp-morgan-securities.htm
{7} Section 3.1 of OSC Rule 91-502 provides as follows:
3.1 Proficiency Requirements -- No person shall trade as agent in, or give advice in respect of, a recognized option unless he or she has successfully completed the Canadian Options Course.
The Canadian Options Course no longer exists. However, OSC Rule 91-502 defines the term as follows:
"Canadian Options Course" means the course prepared and conducted by The Canadian Securities Institute and so named by that Institute on the date that this Rule comes into force and every predecessor to that course and every successor to that course that does not significantly narrow a subject matter;".
The Derivatives Fundamentals and Options Licensing Course is the successor course to this course. The Proposed Amendment includes an amendment to reflect this course name change.
{8} See Section 8 of IIROC Rule 2900.
{9} See letter dated March 8, 2013 from the Investment Industry Association of Canada (IIAC) to the CSA Derivatives Committee. A copy of this letter can be found at the following link under the date March 8, 2013: http://iiac.ca/resources/submissions/ OSC staff published OSC Staff Notice 33-744 Availability of registration exemptions to foreign dealers in connection with trades in options and futures contracts under the Commodity Futures Act (Ontario) (OSC Staff Notice 33-744) in September 2014 in response to this letter.
{10} See Re HSBC Securities (USA) Inc. dated January 24, 2020.
1. Definitions
(1) In this Rule,
"Act" means the Commodity Futures Act, R.S.O. 1990, c. C.20, as amended from time to time;
"Canadian financial institution" has the meaning ascribed to that term in section 1.1 [definitions] of NI 45-106 under the Securities Act;
"CFA adviser registration requirement" means the provisions of section 22 of the Act that prohibit a person or company from acting as an adviser as to trading in a contract unless the person or company is registered in the appropriate category of registration under the Act;
"CFA dealer registration requirement" means the provisions of section 22 of the Act that prohibit a person or company from trading in a contract unless the person or company is registered in the appropriate category of registration under the Act;
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Note: The following definition of "CFA permitted client" includes any person or company that is a "permitted client" as that term is defined in section 1.1 of NI 31-103 but also includes certain additional categories, including the following:
• a person or company registered under the commodity futures or derivatives legislation of a jurisdiction of Canada as an adviser or dealer; (clause (d.1))
• a family trust established by a permitted client that meets certain criteria (clause (o.1))
• an individual who, together with a spouse and/or a family trust that meets the criteria in clause (o.1), beneficially owns net financial assets that exceed $5 million (clause (o.2))
In addition, certain references to "securities legislation" in the definition of "permitted client" in NI 31-103 have been replaced with "securities, commodity futures or derivatives legislation".
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"CFA permitted client" means any of the following:
(a) a Canadian financial institution or a Schedule III bank;
(b) the Business Development Bank of Canada incorporated under the Business Development Bank of Canada Act (Canada);
(c) a subsidiary of any person or company referred to in paragraph (a) or (b), if the person or company owns all of the voting securities of the subsidiary, except the voting securities required by law to be owned by directors of the subsidiary;
(d) a person or company registered under the securities legislation of a jurisdiction of Canada as an adviser, investment dealer, mutual fund dealer or exempt market dealer;
(d.1) a person or company registered under the commodity futures or derivatives legislation of a jurisdiction of Canada as an adviser or dealer;
(e) a pension fund that is regulated by either the federal Office of the Superintendent of Financial Institutions or a pension commission or similar regulatory authority of a jurisdiction of Canada or a wholly-owned subsidiary of such a pension fund;
(f) an entity organized in a foreign jurisdiction that is analogous to any of the entities referred to in paragraphs (a) to (e);
(g) the Government of Canada or a jurisdiction of Canada, or any Crown corporation, agency or wholly-owned entity of the Government of Canada or a jurisdiction of Canada;
(h) any national, federal, state, provincial, territorial or municipal government of or in any foreign jurisdiction, or any agency of that government;
(i) a municipality, public board or commission in Canada and a metropolitan community, school board, the Comité de gestion de la taxe scolaire de l'île de Montréal or an intermunicipal management board in Québec;
(j) a trust company or trust corporation registered or authorized to carry on business under the Trust and Loan Companies Act (Canada) or under comparable legislation in a jurisdiction of Canada or a foreign jurisdiction, acting on behalf of a managed account managed by the trust company or trust corporation, as the case may be;
(k) a person or company acting on behalf of a managed account managed by the person or company, if the person or company is registered or authorized to carry on business as an adviser or the equivalent under the securities, commodity futures or derivatives legislation of a jurisdiction of Canada or a foreign jurisdiction;
(l) an investment fund if one or both of the following apply:
(i) the fund is managed by a person or company registered as an investment fund manager under the securities legislation of a jurisdiction of Canada;
(ii) the fund is advised by a person or company authorized to act as an adviser under the securities, commodity futures or derivatives legislation of a jurisdiction of Canada;
(m) in respect of a dealer, a registered charity under the Income Tax Act (Canada) that obtains advice on the securities to be traded from an eligibility adviser, as defined in section 1.1[definitions] of NI 45-106, or an adviser registered under the securities legislation of the jurisdiction of the registered charity;
(n) in respect of an adviser, a registered charity under the Income Tax Act (Canada) that is advised by an eligibility adviser, as defined in section 1.1[definitions] of NI 45-106, or an adviser registered under the securities, commodity futures or derivatives legislation of the jurisdiction of the registered charity;
(o) an individual who beneficially owns financial assets, as defined in section 1.1[definitions] of NI 45-106, having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5 million;
(o.1) in the case of a CFA permitted client that is an individual, a trust established by the individual for the benefit of the individual's family members of which a majority of the trustees are CFA permitted clients and all of the beneficiaries are the individual's spouse, a former spouse or a parent, grandparent, brother, sister, child or grandchild of that individual, of that individual's spouse or of that individual's former spouse;
(o.2) an individual who is not a CFA permitted client under clause (o) of the definition of CFA permitted client but who, together with a spouse and/or a family trust as described in clause (o.1) above established by the individual or the individual's spouse, beneficially own financial assets, as defined in section 1.1 of NI 45-106, having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5 million;
(p) a person or company that is entirely owned by an individual or individuals referred to in paragraph (o), who holds the beneficial ownership interest in the person or company directly or through a trust, the trustee of which is a trust company or trust corporation registered or authorized to carry on business under the Trust and Loan Companies Act (Canada) or under comparable legislation in a jurisdiction of Canada or a foreign jurisdiction;
(q) a person or company, other than an individual or an investment fund, that has net assets of at least $25 million as shown on its most recently prepared financial statements;
(r) a person or company that distributes securities of its own issue in Canada only to persons or companies referred to in paragraphs (a) to (q);
"commodity trading manager" means an adviser that is registered under the Act in the category of "commodity trading manager" as provided for in section 8[categories of registration] of Regulation 90 under the Act;
"foreign contract" means a contract that is primarily traded on one or more non-Canadian exchanges and primarily cleared through one or more clearing corporations that are located outside of Canada;
"individual" means a natural person, but does not include a partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, or a natural person in his or her capacity as trustee, executor, administrator or other legal personal representative;
"investment fund" has the meaning ascribed to that term in subsection 1(1) of the Securities Act;
"jurisdiction of Canada" means a province or territory of Canada;
"managed account" means an account of a client for which a person or company makes the investment decisions if that person or company has discretion to trade in securities, contracts or derivatives for the account without requiring the client's express consent to a transaction;
"NI 14-101" means National Instrument 14-101 Definitions under the Securities Act;
"NI 31-103" means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations under the Securities Act;
"NI 45-106" means National Instrument 45-106Prospectus Exemptions under the Securities Act;
"non-Canadian exchange" means a commodity futures exchange that is located outside of Canada;
"non-registrant CFA permitted client" means a person or company that is a CFA permitted client other than a person or company that is registered as an adviser or dealer under the securities, commodity futures or derivatives legislation of a jurisdiction of Canada;
"OSA adviser registration requirement" means the provisions of section 25 of the Securities Act that prohibit a person or company from engaging in the business of, or holding himself, herself or itself out as engaging in the business of, advising anyone with respect to investing in securities or buying or selling securities unless the person or company satisfies the applicable provisions of section 25 of the Securities Act;
"OSA dealer registration requirement" means the provisions of section 25 of the Securities Act that prohibit a person or company from engaging in the business of, or holding himself, herself or itself out as engaging in the business of, trading in securities unless the person or company satisfies the applicable provisions of section 25 of the Securities Act;
"OSA international adviser exemption" means the exemption from the OSA adviser registration requirement set out in section 8.26 [international adviser] of NI 31-103 under the Securities Act;
"OSA international dealer exemption" means the exemption from the OSA dealer registration requirement set out in section 8.18 [international dealer] of NI 31-103 NI 31-103 under the Securities Act;
"OSA international sub-adviser exemption" means the exemption from the OSA adviser registration requirement set out in section 8.26.1 [international sub-adviser] of NI 31-103 under the Securities Act;
"permitted client" has the meaning ascribed to that term in section 1.1[definitions] of NI 31-103 under the Securities Act;
"principal adviser" means an adviser registered under the Act in the category of commodity trading manager for which a sub-adviser provides sub-advisory services;
"Schedule III bank" means an authorized foreign bank named in Schedule III of the Bank Act (Canada);
"Securities Act" means the Securities Act, R.S.O. 1990, c. S.5, as amended from time to time;
"securities legislation" means, for a local jurisdiction of Canada, the statute and other instruments listed in Appendix B of NI 14-101, opposite the name of the local jurisdiction;
"specified foreign jurisdiction" means any of Australia, Brazil, any member country of the European Union, Hong Kong, India, Japan, Korea, Mexico, New Zealand, Singapore, Switzerland, the United Kingdom of Great Britain and Northern Ireland, and the United States of America;
"sub-adviser" means an adviser to
(a) a registered adviser, or
(b) a registered dealer acting as a commodity trading manager as permitted by subsection 44(2)[exemptions from registration requirements] of Ontario Regulation 90
"sub-advisory services" means services provided by a sub-adviser to a principal adviser for purposes of providing, on a discretionary basis, adviser services in respect of contracts to the principal adviser's sub-advisory clients;
"sub-advisory client" means a client of a principal adviser for whom a sub-adviser to the principal adviser provides sub-advisory services;
"trading restrictions in the CFA" means the provisions of section 33 of the Act that prohibit a person or company from trading in contracts unless the person or company satisfies the applicable provisions of section 33 of the Act;
"U.K." means the United Kingdom of Great Britain and Northern Ireland; and
"U.S." means the United States of America.
(2) Terms used in this Rule that are defined in the Act have the meaning ascribed to them in the Act, unless otherwise defined in this Rule or the context otherwise requires.
(3) Terms used in this Rule that are not defined in the Act but are defined in subsection 1(1) of the Securities Act have the same meaning as in the Securities Act unless the context otherwise requires.
(4) In this Rule, a person or company is deemed to be an affiliate of another person or company if one of them is the subsidiary of the other or if both are subsidiaries of the same person or company or if each of them is controlled by the same person or company.
(5) A person or company is deemed to be controlled by another person or company or by two or more persons and companies if,
(a) voting securities of the first-mentioned person or company carrying more than 50 per cent of the votes for the election of directors are held, otherwise than by way of security only, by or for the benefit of the other person or company or by or for the benefit of the other persons and companies; and
(b) the votes carried by such securities are entitled, if exercised, to elect a majority of the board of directors of the first-mentioned person or company.
(6) A person or company shall be deemed to be a subsidiary of another person or company if,
(a) it is controlled by,
(i) that other, or
(ii) that other and one or more persons and companies each of which is controlled by that other, or
(iii) two or more persons and companies each of which is controlled by that other; or
(b) it is a subsidiary of a person or company that is that other's subsidiary.
2. General condition to exemptions from the CFA dealer registration requirement
The exemptions in this Part are not available to a person or company if the person or company is registered under the Act and if their category of registration permits the person or company to act as a dealer or trade in the contract for which the exemption is provided.
3. Dealer registration exemption -- International dealer
(1) The CFA dealer registration requirement does not apply to a person or company in respect of a trade in a contract to, with or on behalf of a CFA permitted client, where the person or company is acting as principal or agent in such trade to, with or on behalf of the CFA permitted client, if at the time of the trade all of the following apply:
(a) the trade is in respect of a foreign contract on a non-Canadian exchange;
(b) the person or company:
(i) has its head office or principal place of business in a specified foreign jurisdiction and does not have an office or place of business in Ontario;
(ii) engages in the business of trading in contracts in the specified foreign jurisdiction; and
(iii) is registered, licensed or otherwise authorized under the securities, commodity futures or derivatives legislation of the specified foreign jurisdiction in which its head office or principal place of business is located in a category of registration, licensing or authorization that permits it to carry on the activities in that jurisdiction that registration as a dealer would permit it to carry on in Ontario;
(c) the person or company has provided to the CFA permitted client, other than a CFA permitted client that is registered under the securities, commodity futures or derivatives legislation of a jurisdiction of Canada, the following disclosure in writing:
(i) a statement that the person or company is not registered in Ontario to trade in contracts as principal or agent;
(ii) a statement specifying the location of the head office or principal place of business of the person or company;
(iii) a statement that all or substantially all of the assets of the person or company may be situated outside of Canada;
(iv) a statement that there may be difficulty enforcing legal rights against the person or company because of the above; and
(v) the name and address of the person or company's agent for service of process in Ontario; and
(d) the person or company has submitted to the Commission a completed Form 32-506F1 Submission to Jurisdiction and Appointment of Agent for Service;
(2) A person or company that relied on the exemption in subsection (1) during the 12-month period preceding December 1 of a year must notify the Commission of that fact by December 1 of that year.
(3) Subsection (2) does not apply to a person or company that complies with the filing and fee payment requirements applicable to an unregistered exempt international firm under Ontario Securities Commission Rule 13-502 Fees.
(4) If a person or company relied on the exemption in subsection (1) during the 12-month period preceding December 1 of a year and is not registered under the Securities Act and does not rely on the OSA international dealer exemption, the person or company must pay a participation fee based on its specified Ontario revenues for its previous financial year in compliance with the requirements of Part 3 and section 6.4 of OSC Rule 13-502 Fees, as if the person or company relied on the OSA international dealer exemption.
(5) The CFA adviser registration requirement does not apply to a person or company that is exempt from the CFA dealer registration requirement under this section if the person or company provides advice to a CFA permitted client and the advice is
(a) in connection with an activity or trade described under subsection (1), and
(b) not in respect of a managed account of the CFA permitted client.
4. Dealer registration exemption -- CFA permitted client of an international dealer
The CFA dealer registration requirement does not apply to a CFA permitted client in respect of a trade in a contract on a non-Canadian exchange to, with or on behalf of a person or company relying on the dealer registration exemption in section 3.
5. Exemption from the trading restrictions in the Act
The trading restrictions in the Act do not apply to a person or company in connection with a trade in a contract on a non-Canadian exchange if the person or company is exempt from the CFA dealer registration exemption under section 3 or section 4.
6. General condition to exemptions from the CFA adviser registration requirement
The exemptions in this Part are not available to a person or company if the person or company is registered under the Act and if their category of registration permits the person or company to act as an adviser in respect of the activities for which the exemption is provided.
7. Adviser registration exemption -- International adviser
(1) The CFA adviser registration requirement does not apply to a person or company in respect of advice provided to a non-registrant CFA permitted client as to the trading of foreign contracts provided that at the time of providing the advice all of the following apply:
(a) the person or company provides advice to the non-registrant CFA permitted client only as to the trading of foreign contracts and does not provide advice as to the trading of contracts that are not foreign contracts, unless providing such advice is incidental to its providing advice on foreign contracts;
(b) the person or company:
(i) has its head office or principal place of business in a specified foreign jurisdiction;
(ii) engages in the business of advising others in relation to contracts in the specified foreign jurisdiction; and
(iii) is registered in a category of registration, or operates under an exemption from registration, or is otherwise licensed or authorized under the applicable securities, commodity futures or derivatives legislation of the specified foreign jurisdiction to carry on the activities in the specified foreign jurisdiction that registration under the Act as an adviser in the category of commodity trading manager would permit it to carry on in Ontario;
(c) as at the end of the person or company's most recently completed financial year, not more than 10% of the aggregate consolidated gross revenue of the person or company, its affiliates and its affiliated partnerships, excluding the gross revenue of an affiliate or affiliated partnership of the person or company if the affiliate or affiliated partnership is registered under securities legislation, commodity futures legislation or derivatives legislation of a jurisdiction of Canada, was derived from the portfolio management activities of the person or company, its affiliates and its affiliated partnerships in Canada (including for clarity both securities-related and commodity-futures-related activities);
(d) prior to advising a non-registrant CFA permitted client with respect to a foreign contract, the person or company provides the non-registrant CFA permitted client the following disclosure in writing:
(i) a statement that the person or company is not registered in Ontario to provide the advice described in paragraph (a) of this exemption;
(ii) a statement specifying the location of the head office or principal place of business of the person or company;
(iii) a statement that all or substantially all of the assets of the person or company may be situated outside of Canada;
(iv) a statement that there may be difficulty enforcing legal rights against the person or company because of the above;
(v) the name and address of the person or company's agent for service of process in Ontario;
(e) the person or company has submitted to the Commission a completed Form 32-506F1 Submission to Jurisdiction and Appointment of Agent for Service;
(2) A person or company that relied on the exemption in subsection (1) during the 12-month period preceding December 1 of a year must notify the Commission of that fact by December 1 of that year.
(3) Subsection (2) does not apply to a person or company that complies with the filing and fee payment requirements applicable to an unregistered exempt international firm under Ontario Securities Commission Rule 13-502 Fees.
(4) If a person or company relied on the exemption in subsection (1) during the 12-month period preceding December 1 of a year and is not registered under the Securities Act and does not rely on the OSA international adviser exemption, the person or company must pay a participation fee based on its specified Ontario revenues for its previous financial year in compliance with the requirements of Part 3 and section 6.4 of OSC Rule 13-502 Fees, as if the person or company relied on the OSA international adviser exemption.
8. Adviser registration exemption -- International sub-adviser
(1) The CFA adviser registration requirement does not apply to a person or company acting as a sub-adviser to a principal adviser in respect of the provision of sub-advisory services if at the time of providing the sub-advisory services all of the following apply:
(a) the principal adviser is registered under the Act as an adviser in the category of commodity trading manager;
(b) the head office or principal place of business of the person or company acting as sub-adviser is in a specified foreign jurisdiction;
(c) the person or company acting as sub-adviser engages in the business of advising others in relation to contracts in the specified foreign jurisdiction;
(d) the person or company acting as sub-adviser is registered in a category of registration, or operates under an exemption from registration, or is otherwise licensed or authorized under the applicable securities, commodity futures or derivatives legislation of the specified foreign jurisdiction to carry on the activities in the specified foreign jurisdiction that registration under the Act as an adviser would permit it to carry on in Ontario;
(e) the obligations and duties of the person or company acting as sub-adviser are set out in a written agreement with the principal adviser;
(f) the principal adviser has entered into a written agreement with each sub-advisory client in respect of whom the person acting as sub-advisor is providing sub-advisory services, agreeing to be responsible for any loss that arises out of the failure of the person or company acting as sub-adviser:
(i) to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the principal adviser and the sub-advisory client; or
(ii) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances (together with (i), the Assumed Obligations);
(g) if a sub-advisory client for whom sub-advisory services are being provided is an investment fund, the prospectus or other offering document (in either case, the Offering Document) of the investment fund includes, or will include, the following:
(i) a statement that the principal adviser is responsible for any loss that arises out of the failure of the person or company acting as sub-adviser in respect of the sub- advisory services to meet the Assumed Obligations; and
(ii) a statement that there may be difficulty in enforcing any legal rights against the person or company acting as sub-adviser in respect of the sub-advisory services (or any of its representatives) because that person or company is resident outside of Canada and all or substantially all of their assets are situated outside of Canada;
(h) the disclosure required by paragraph 8(1)(g) is provided in writing prior to purchasing any contracts for each sub-advisory client that is a managed account for which the principal adviser engages the person or company to provide the sub-advisory services.
9. Effective date
This Instrument comes into force on.
1. Name of person or company ("International Firm"):
2. If the International Firm was previously assigned an NRD number as a registered firm or an unregistered exempt international firm, provide the NRD number of the firm:
3. Jurisdiction of incorporation of the International Firm:
4. Head office address of the International Firm:
5. The name, e-mail address, phone number and fax number of the International Firm's individual(s) responsible for the supervisory procedure of the International Firm, its chief compliance officer, or equivalent.
Name:
E-mail address:
Phone:
Fax:
6. The International Firm is relying on an exemption under OSC Rule 32-506 and/or an exemption order under section 38 or section 80 of the Commodity Futures Act (Ontario) that is similar to the following exemption in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (the "Relief Order"):
[ ] Section 8.18 [international dealer]
[ ] Section 8.26 [international adviser]
[ ] Other [specify]:
7. Name of agent for service of process (the "Agent for Service"):
8. Address for service of process on the Agent for Service:
9. The International Firm designates and appoints the Agent for Service at the address stated above as its agent upon whom may be served a notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal or other proceeding (a "Proceeding") arising out of or relating to or concerning the International Firm's activities in the local jurisdiction and irrevocably waives any right to raise as a defence in any such proceeding any alleged lack of jurisdiction to bring such Proceeding.
10. The International Firm irrevocably and unconditionally submits to the non-exclusive jurisdiction of the judicial, quasi-judicial and administrative tribunals of the local jurisdiction in any Proceeding arising out of or related to or concerning the International Firm's activities in the local jurisdiction.
11. Until 6 years after the International Firm ceases to rely on an exemption in section 3[international dealer] or section 7 [international adviser] of Ontario Securities Commission Rule 32-506 (under the Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers, the International Firm must submit to the regulator
(a) a new Submission to Jurisdiction and Appointment of Agent for Service in this form no later than the 30th day before the date this Submission to Jurisdiction and Appointment of Agent for Service is terminated;
(b) an amended Submission to Jurisdiction and Appointment of Agent for Service no later than the 30th day before any change in the name or above address of the Agent for Service; and
(c) a notice detailing a change to any information submitted in this form, other than the name or above address of the Agent for Service, no later than the 30th day after the change.
12. This Submission to Jurisdiction and Appointment of Agent for Service is governed by and construed in accordance with the laws of the local jurisdiction.
Dated: ____________________
______________________________
(Signature of the International Firm or authorized signatory)
______________________________
(Name of signatory)
______________________________
(Title of signatory)
The undersigned accepts the appointment as Agent for Service of ______________________________ [Insert name of International Firm] under the terms and conditions of the foregoing Submission to Jurisdiction and Appointment of Agent for Service.
Dated: ____________________
______________________________
(Signature of the Agent for Service or authorized signatory)
______________________________
(Name of signatory)
______________________________
(Title of signatory)
This form, and notice of a change to any information submitted in this form, is to be submitted through the Ontario Securities Commission's Electronic Filing Portal:
https://www.osc.gov.on.ca
1. Ontario Securities Commission Rule 91-502 Trades in Recognized Options is amended by this Instrument.
2. Section 1.1 is amended by deleting the definition of "Canadian Options Course" and by adding the following definitions:
"Derivatives Fundamentals and Options Licensing Course" means the course prepared and conducted by The Canadian Securities Institute and so named by that Institute on the date that this Rule comes into force and every predecessor to that course and every successor to that course that does not significantly narrow a subject matter;
3. Section 3.1 is amended by replacing "the Canadian Options Course" with "the Derivatives Fundamentals and Options Licensing Course".
4. Part 3 is amended by adding the following section:
3.2 Section 3.1 does not apply to
(a) a person or company exempt from the dealer registration requirement or the adviser registration requirement if the person or company complies with the terms and conditions of the exemption from the registration requirement; and
(b) a person or company exempt from the CFA dealer registration requirement or the CFA adviser registration requirement (as those terms are defined in Ontario Securities Commission Rule 32-506 (Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers) if the person or company complies with the terms and conditions of the exemption from the registration requirement.
5. This Instrument comes into force on.
The Ontario Securities Commission (the OSC) is publishing the following for a 90-day comment period:
• Proposed OSC Rule 32-506 (Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers (Proposed OSC Rule 32-506), and
• Proposed amendment to OSC Rule 91-502 Trades in Recognized Options (OSC Rule 91-502) (the Proposed 91-502 Amendment and, together with Proposed OSC Rule 32-506, theProposed Instrument).
The Proposed Instrument, if implemented, will codify exemptive relief that is granted by the OSC on a routine basis under both the Commodity Futures Act (the CFA) and OSC Rule 91-502 to international firms.
This relief will allow international firms to provide trading or advisory services in relation to foreign contracts to institutional clients (referred to as CFA permitted clients in the Proposed Instrument) in Ontario on similar terms and conditions to the international firm exemptions set out in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).
The exemptions in the Proposed Instrument generally reflect the standard terms and conditions of recent OSC exemptive relief decisions but have been streamlined to remove certain minor terms and conditions that we have concluded are no longer justified on cost-benefit grounds.
The stakeholders who will be impacted by the Proposed Instrument are CFA permitted clients and international firms that provide trading or advisory services in relation to foreign contracts to CFA permitted clients.
The term "CFA permitted client" includes the following:
• registered firms under the Securities Act (Ontario) (the OSA) and the CFA
• pension funds
• investment funds
• registered charities
• certain high-net-worth individuals and their spouses and family trusts
• any other person or company who is a "permitted client" under NI 31-103.
Please refer to Proposed OSC Rule 32-506 for the complete definition of CFA permitted client.
The registration exemptions in Proposed OSC Rule 32-506 are generally available to the following international firms:
• an international dealer that has its head office or principal place of business in a specified foreign jurisdiction{11} and that is registered, licensed or otherwise authorized under the applicable legislation of the specified foreign jurisdiction to carry on the activities in that jurisdiction that registration as a dealer would permit it to carry on in Ontario;
• an international adviser that has its head office or principal place of business in a specified foreign jurisdiction and that is registered or is otherwise licensed or authorized under the applicable legislation of the specified foreign jurisdiction to carry on the activities in that jurisdiction that registration under the CFA as an adviser in the category of commodity trading manager would permit it to carry on in Ontario; and
• an international sub-adviser that has its head office or principal place of business in a specified foreign jurisdiction and that is registered or is otherwise licensed or authorized under the applicable legislation of the specified foreign jurisdiction to carry on the activities in the specified foreign jurisdiction as an adviser would permit it to carry on in Ontario and that has entered into an agreement with a principal adviser in Ontario.
Please refer to the terms and conditions of the applicable exemptions in OSC Rule 32-506 as applicable.
The Proposed Amendment to OSC Rule 91-502 is intended to provide an exemption from the proficiency requirement in section 3.1 of OSC Rule 91-502 in connection with advice relating to options that trade on foreign exchanges to permitted clients or trades in such foreign options to, with or on behalf of permitted clients if the person or company is in compliance with the terms of the exemption from the dealer or adviser registration requirement.
In this section we present our qualitative and quantitative assessment of the anticipated benefits of the Proposed Instrument to CFA permitted clients and international firms that provide trading or advisory services in relation to foreign contracts to CFA permitted clients. The baseline underpinning our analysis is the current set of regulatory requirements applicable to international firms under the CFA and OSC Rule 91-502.
Qualitative Analysis
The Proposed Instrument, if implemented, will have the following benefits to CFA permitted clients and international firms that provide trading or advisory services in relation to foreign contracts to CFA permitted clients:
• it will have the effect of enhancing institutional investor choice and thereby reduce costs for institutional investors, since institutional investors will now be able to receive services from any international firm that is appropriately registered in its home jurisdiction and that meets the other conditions of the exemptions in the rule, and will not be limited to those international firms that have taken the additional step of applying for and obtaining exemptive relief from the OSC;
• it will eliminate the need for international firms to have to make individual applications for relief with the OSC in order to be able to benefit from the exemptions, thereby eliminating the need to pay application fees and associated legal fees (which in some cases may be passed on to the firm's Canadian institutional clients); and
• it will respond to stakeholder comments that the OSC and the CSA should propose amendments to their legislation to introduce an international dealer, international adviser and international sub-adviser exemption for international firms similar to the exemptions for international firms in NI 31-103.{12}
We are of the view that there will be minimal compliance costs associated with the Proposed Instrument in the form of time spent by international firms and CFA permitted clients to review and familiarize themselves with new requirements.
Quantitative Analysis
The tables below set out the estimated cost reductions (subject to the assumptions below) that may arise as a result of the implementation of the Proposed Instrument.
The estimated cost reductions fall broadly into two categories:
(i) estimated costs associated with filing an application for relief from the registration requirements applicable to international dealers, advisers and sub-advisers under the CFA (Table 1), and
(ii) estimated costs associated with filing an application for relief from the options proficiency requirement in OSC Rule 91-502 (Table 2).
We have not attempted to quantify the reduced regulatory costs for institutional investors resulting from the enhanced institutional investor choice described above as we believe this initiative is justified on the above cost-reduction grounds alone. In addition, we have not attempted to quantify the reduced regulatory costs for international firms resulting from our streamlining the exemptions to remove certain minor terms and conditions that we have concluded are no longer justified on cost-benefit grounds. However, these reduced regulatory costs for institutional investors and international firms would be in addition to these cost savings.
As part of our research, we conducted analysis on the historical applications filed by international firms over the period January 1, 2017 to December 31, 2019.
Based upon a review of our records, the OSC received the following applications for relief under the CFA between January 1, 2017 and December 31, 2019:
• International dealer:
15
• International adviser:
20
• International sub-adviser:
22
• Options proficiency:
18
____
Total:
75
Average per annum:
25
The filing fees for such applications are generally as follows (per Filer):
International dealer: |
$4800{13} |
|
|
International adviser: |
$4800 |
|
|
International sub-adviser: |
$4800 |
|
|
Options proficiency relief: |
$4800{14} |
{13} An application for international dealer relief under the CFA typically includes a request for relief from the dealer registration requirement in s. 22 of the CFA and the trading restrictions in s. 33 of the CFA. Technically the fee for two heads of relief under OSC Rule 13-503 (Commodity Futures Act) Fees is $7,000. However, this fee is typically reduced to $4800 for just s. 22 relief with a partial fee waiver by the Director.
{14} An application for options proficiency relief under OSC Rule 91-502 is typically combined with an application for international dealer relief or international adviser relief under the CFA. However, there is an additional fee requirement of $4800 under OSC Rule 13-502 Fees applicable to this relief.
Based on this analysis and using the estimated cost information in Tables 1 and 2 noted above, we have estimated the cost savings to international firms (which should result in reduced costs to their institutional clients) of our Proposed Amendments (Table 3).
TABLE 1 |
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|
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Application for Registration Relief under the CFA |
|||
|
|||
Legal |
Time (# hours){15} |
Hourly costs ($xx/hour){16} |
Total |
|
|||
How many hours, on average, is required for legal counsel to prepare, file and engage with the OSC and the international firm on the application process? |
10-15 hours |
$350 |
$3,500-$5,250 |
|
|||
Regulatory Cost |
|||
|
|||
Cost of application |
N/A |
$4,800{17} |
$4,800 |
|
|||
Total estimated time and costs associated with each application for relief |
10-15 hours |
$8,300-$10,050 |
|
{15} In order to develop an estimate of the number of hours required for an international firm and its advisors to file an application for registration relief and options proficiency relief, we have relied on data derived from staff's consultations with a small number of advisors and/or consultants involved in the preparation of these applications. We have not included any time spent by representatives of the international firm in working with counsel to prepare, file and engage with OSC staff on the application.
{16} We assume that an international firm applying for relief would engage external legal counsel to prepare the application. We further assume that a lawyer with approximately 6-10 years' experience would represent the international firm on the application and the average hourly rate for a lawyer with this level of experience in Ontario is $350. (Canadian Lawyer's 2019 Legal Fees Survey)
{17} Application fee paid to the OSC in accordance with OSC Rule 13-503 (Commodity Futures Act) Fees.
TABLE 2 |
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|
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Application for Options Proficiency Relief under OSC Rule 91-502 |
|||
|
|||
Legal |
Time (# hours) {18} |
Hourly costs ($xx/hour) |
|
|
|||
How many hours, on average, is required for legal counsel to prepare, file and engage with the OSC and the international firm on the application process? |
5 hours |
$350 |
$1,750 |
|
|||
Regulatory Cost |
|||
|
|||
Cost of application |
N/A |
$4,800{19} |
$4,800 |
|
|||
Total estimated time and costs associated with each application for relief |
5 hours |
$6,550 |
|
{18} We have discounted the time estimates for the applications for options proficiency relief as these are typically combined with an application for dealer registration relief or adviser registration relief.
{19} Application fee paid to the OSC in accordance with OSC Rule 13-502 Fees.
Estimated Cost Savings
Estimated cost savings to the international firm of filing an application for relief (based on historical research) (average/year):
TABLE 3
Number of applications filed requesting relief from registration requirements under the CFA (average/year)
Number of applications filed requesting relief from options proficiency requirements (average/year)
Total reduction of time spent on preparing, filing and completing these applications with the OSC
Total cost reduction from eliminating the need to file an application for relief. (# of applications that would no longer be filed x average cost of preparing and completing an application -- see Tables 1 & 2 above)
19
6
10-15 hours per application
$157,700-$190,950 (CFA relief) $39,300 (91-502 relief)
As noted above, the exemptions in the Proposed Instrument are generally consistent with the exemptions contained in recent exemptive relief decisions but have been modified and streamlined slightly to remove certain terms and conditions that we have concluded are no longer justified on cost-benefit grounds.
The principal change to the current standard form of decision is as follows:
Recent decisions have generally included a condition that the international firm notify the Commission of any regulatory action in respect of the applicant firm or predecessors or specified affiliates of the applicant firm by completing and filing a notice set out in an appendix to the decision. The required disclosure is generally similar to the disclosure required of registered firms by Part 7 of Form 33-109F6 Registration Information (Form 33-109F6). The condition may allow the applicant firm to satisfy this disclosure requirement by filing a notice that incorporates by reference certain disclosure made by the firm in its home jurisdiction.
Based on our experience with these applications and discussions with counsel in relation to the international firms' experience in complying with these terms and conditions, we have decided not to include this condition as a condition of the exemptions in the Proposed Instrument since
• there is no corresponding notification requirement in the exemptions for international firms in NI 31-103; and
• we have been advised by applicant firms that compliance with this condition may result in significant additional regulatory burden, since it may require substantial amounts of regulatory disclosure that is already publicly available being reformatted and restated to comply with the form requirements of NI 33-109 and the appendix to the decision.
Even if staff were not receiving such notifications from international firms, staff would still be able to obtain the necessary information. International firms that rely on these exemptions are "market participants" under the CFA. They are therefore required by sections 14 and 14.1 of the CFA to keep, and to produce when requested, relevant books and records. In addition, in many cases the relevant information is readily available to staff through regulatory disclosure websites such as the FINRA BrokerCheck system or the NFA Background Affiliation Status Information Center (BASIC) disclosure system.
Accordingly, after further consideration, OSC staff accept that the costs of requiring this notification outweigh the benefits and that these costs may deter international firms providing trading or advising services to institutional clients in Canada.
An alternative to proceeding with the Proposed Instrument would be to maintain the status quo, which would mean staff would continue to process applications for exemptive relief. However, based on our experience with recent applications for relief, we are now satisfied that we can codify relief on the basis of a "standard" set of terms and conditions in order to eliminate frequently occurring applications for relief. We also propose to eliminate certain terms and conditions that are currently found in the discretionary relief orders but that we have determined are unnecessary.
The Proposed Instrument is intended to be an interim measure until such time as the CFA may be repealed and replaced with new legislation, such as the proposed Capital Markets Act as part of the CMRA initiative. Accordingly, another alternative to proceeding with the Proposed Instrument would be to wait until the CFA is repealed and replaced with new legislation.
However, repealing the CFA would likely require extensive amendments to the OSA and to current and proposed rules (including the proposed derivatives registration and business conduct rules). Accordingly, we believe it makes sense to proceed with the Proposed Instrument as an interim measure.
{11} The term "specified foreign jurisdiction" means any of Australia, Brazil, any member country of the European Union, Hong Kong, India, Japan, Korea, Mexico, New Zealand, Singapore, Switzerland, the United Kingdom of Great Britain and Northern Ireland, and the United States of America. This list of foreign jurisdictions is based on the list of foreign specified foreign jurisdictions in OSC Rule 72-503 Distributions Outside Canada, the foreign jurisdictions under consideration for proposed NI 93-101 Derivatives: Business Conduct (NI 93-101) and NI 93-102 Derivatives: Registration (NI 93-102) and foreign jurisdictions in respect of which Commission has granted international firm relief. The fact that a foreign jurisdiction is not included in the definition of "specified foreign jurisdiction" is not intended to suggest any policy concern with the regulatory regime of that foreign jurisdiction. It simply means OSC staff have not had an opportunity to consider an application for relief from a firm in that foreign jurisdiction. We anticipate that this definition may be amended from time to time to include additional foreign jurisdictions once we have had a chance to consider the regulatory regimes in these additional foreign jurisdictions.
{12} See letter dated March 8, 2013 from the Investment Industry Association of Canada (IIAC) to the CSA Derivatives Committee. A copy of this letter can be found at the following link under the date March 8, 2013: http://iiac.ca/resources/submissions/ OSC staff published OSC Staff Notice 33-744 Availability of registration exemptions to foreign dealers in connection with trades in options and futures contracts under the Commodity Futures Act (Ontario) (OSC Staff Notice 33-744) in September 2014 in response to some of the concerns raised in this letter.
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Project #3136326
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3134441
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3133173
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #2950423
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3138680
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3111537
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3133726
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #2964632
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #2964661
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #2964633
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3137099
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3138464
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3132191
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3136391
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3136407
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3124157
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3137170
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3136461
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Issuer Name:
Type and Date:
Offering Price and Description:
Underwriter(s) or Distributor(s):
Promoter(s):
Project #3132419
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Type |
Company |
Category of Registration |
Effective Date |
|
|||
Change in Registration Category |
COTE 100 INC./QUOTE 100 INC. |
From: Portfolio Manager |
November 24, 2020 |
|
|||
To: Portfolio Manager and Investment Fund Manager |
|||
|
|||
New Registration |
Portfolio HiWay Inc. |
Investment Dealer |
November 30, 2020 |
|
|||
Change in Registration Category |
Cardinal Capital Management Inc. |
From: Portfolio Manager and Investment Fund Manager |
November 30, 2020 |
|
|||
To: Portfolio Manager, Investment Fund Manager and Exempt Market Dealer |
|||
|
|||
New Registration |
iCapital IFM, LLC |
Portfolio Manager, Investment Fund Manager, and Exempt Market Dealer |
November 30, 2020 |
Investment Industry Regulatory Organization of Canada (IIROC) -- Proposed Amendment to IIROC By-law No. 1 Section 1.1 (Definition of "Marketplace") -- Request for Comment
IIROC is publishing for public comment a proposed amendment to section 1.1 of its By-law No. 1 (By-law) to align the definition of "Marketplace" in the By-law with the:
• definitions of "marketplace" and "published market" as set out in securities legislation
• definition of "commodity futures exchange" as set out in commodity futures legislation.
The definition of "Marketplace" in the By-law currently limits IIROC to acting as a regulation services provider only to an exchange, quotation and trade reporting system, and alternative trading system. The proposed change would remove this constraint and allow IIROC to act as a regulation services provider to any platform that constitutes a "marketplace", "published market" or "commodity futures exchange" as set out in securities legislation and commodity futures legislation.
If approved, IIROC intends to seek Member approval of the proposed amendment at a special meeting in February 2021.
A copy of the IIROC Notice, including the proposed amendment, is also published on our website at www.osc.gov.on.ca. The comment period ends on January 4, 2021.
NEO Exchange Inc. -- Listing Manual and Listing Forms Amendments (December 3, 2020) -- Notice of Approval
(DECEMBER 3, 2020)
In accordance with the Process for the Review and Approval of Rules and the Information Contained in Form 21-101F1 and the Exhibits Thereto, Neo Exchange Inc. ("NEO Exchange") has adopted housekeeping rule changes (the "Housekeeping Rule Amendments"). The OSC has not disagreed with the housekeeping categorization. The Amendments comprise the following changes:
The proposed Housekeeping Rule Amendments are and, for the most part, address minor formatting, spelling, typographical and numbering errors as described in subsection 6.1(5) of Companion Policy 21-101CP to NI 21-101.
Section(s) of the Listing Manual |
Amendment |
Rationale |
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1. |
Part II. Initial Listing Requirements |
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2.02(5) Commentary, paragraphs 2.02(7)(a), 2.10(4), 2.10(6)(e), 2.10(8) Commentary |
Minor typographical and formatting changes |
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paragraph 2.13(5)(b) |
Replace "NEO" with "Neo" |
To correct typographical error. |
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sections 2.13 and 2.14 |
Remove references to Form 1A and Form 1B |
To reflect the previous consolidation of Form 1, Form 1A and Form 1B into the current consolidated Form 1. |
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2. |
Part III. Continuous Listing Requirements |
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subsection 3.01(4) |
Replace "float" with "Float" |
To correct typographical error. |
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3. |
Part IV. Ongoing Requirements |
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Paragraphs 4.05, 4.07(1)(a) and (c) Clause 4.07(2)(b) |
Minor typographical and formatting changes |
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Insert "interim management's discussion and analysis or" after "with" |
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4. |
Part VI. Dividends or Other Distributions |
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section 6.01 |
Expand section 6.01 to include "(4) Section 6.01(1) does not apply to a distribution by a Listed Issuer where the units will be immediately consolidated, resulting in no change to the number of securities held by security holders. In such case, the Listed Issuer must disseminate a news release with the estimated distribution amount at least four trading days prior to the Record Date. Upon determination of the exact amount of any estimated distribution, the Listed Issuer must disseminate the final details by way of news release." |
To clarify that the dividend notification requirement is not applicable for distributions made by NEO-listed issuers where the distribution is paid entirely in securities and immediately consolidated following the distribution. |
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Currently, section 6.01 requires that all listed issuers declaring a dividend on listed shares must provide notice to NEO and a bulletin is then issued by NEO to commence "ex" trading of the shares. |
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On June 4, 2020 the Toronto Stock Exchange removed this notification requirement from its Company Manual as part of its housekeeping rule amendments, to which the OSC did not object. We propose to removed notification requirement as we are also of the view that NEO bulletin in the context serves no purpose and may confuse the market. |
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5. |
Part VII. Corporate Finance and Capital Structure Changes |
||
subsection 7.01(2) |
Insert "Unless otherwise provided for in this manual," at the beginning of the paragraph, and delete "that are not otherwise provided for in this Part" |
To provide clarification to the advance notice requirements. |
|
subsection 7.03(1) |
Insert ", and in no case, less than the period set out in subsection 7.01(2)," after "promptly" |
To provide clarification to filing timelines. |
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subsection 7.05(1) -- clarify "no maximum discount to exercise price of convertible securities" |
Corrected minor spacing error Insert new commentary box immediately after the subsection with the following: "Maximum Discount to Market Price shall not apply to the exercise price of a convertible, exercisable or exchangeable security." |
To clarify the existing requirement that convertible, exercisable or exchangeable securities issued as part of a "sweetener" in conjunction with a private placement or public offering shall not be issued in the money. |
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6. |
Part X. Corporate Governance And Security Holder Approval |
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subsection 10.16(10) and clause 10.16(24)(b) |
Minor typographical and formatting changes |
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|||
Listing Form |
Amendment |
Rationale |
|
|
|||
7. |
Form 9 Notice of Private Placement |
Minor typographical and formatting changes |
|
Minor instruction clarifications |
To provide additional guidance. |
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Addition of a space for the date of the news release announcing the closing of the offering |
The space is added to allow Listed Issuers to provide additional detail regarding the closing of the offering. |
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|
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8. |
Form 9A Price Reservation Form |
Minor typographical and formatting changes |
|
Minor instruction clarifications |
|||
|
|||
9. |
Form 10 Notice of Acquisition |
Minor typographical and formatting changes |
|
Addition of a space for the date of the news release announcing the closing of the acquisition |
The space is added to allow Listed Issuers to provide additional detail regarding the closing of the offering. |
||
Minor instruction clarifications |
To provide additional guidance regarding the time of determination for outstanding securities and last closing price. |
||
The Listing Manual and Listing Forms can be viewed at:
https://www.aequitasneo.com/en/exchange/resources
The Amendments are effective as of the date hereof.
NEO Exchange Inc. -- Proposed Amendment to the Listing Manual December 3, 2020 -- Request for Comments
December 3, 2020
Neo Exchange Inc. ("NEO Exchange" or "Exchange") is publishing a proposed public interest rule amendment to the NEO Exchange Listing Manual in accordance with Schedule 4 to its recognition order, as amended. The public interest rule amendment was filed with the Ontario Securities Commission ("OSC") and is being published for comment. A description of the public interest rule amendment is set out below and the text of the public interest rule amendment is set out in Appendix A. Subject to any changes resulting from comments received, the public interest rule amendments will be effective upon publication of the notice of approval on the OSC's website.
Decrease the number of public securityholders required for minimum distribution of supplemental listings under subsection 2.02 (6) (a)(ii) of the Listing Manual from 150 to 50.
NEO Exchange seeks to implement the public interest rule in mid-January 2021.
The revision to subsection 2.02(6) of the Listing Manual stems from a waiver codification. NEO has granted several waivers from this requirement in the context of a supplemental listing (in most cases of a convertible security) where a small number of investors (in NEO's experience between 15 -- 100 Public Security Holders) took a sizeable position in the offering which contributed to a lower number of expected public security holders. In our experience, the requirement of having 150 Public Security Holders does not provide any additional protection to the public in this context, and to decrease the required number to 50 Public Security Holders would not result in a material change to NEO's listing requirements.
There is no anticipated impact on the market structure and a positive one on issuers and the capital markets generally, due to the positive impact on issuers' ability to raise capital and meet exchange requirements.
The proposed amendment will not adversely impact the Exchange's compliance with Ontario securities laws, including requirements for fair access and maintenance of fair and orderly markets. The amendment seeks to provide additional clarity to our existing rules and streamline the listing process for new issuers (and harmonize with other requirements where applicable).
The Public Interest Rule Amendment does not impact members or service vendors.
None of the Public Interest Rule Amendments introduce any material new feature.
Comments should be provided, in writing, no later than January 3, 2021 to:
Dmitri SmidovichHead of Listings RegulatoryNeo Exchange Inc.155 University Avenue, Suite 400 Toronto, ON M5H 3B7dmitri@neostockexchange.com
with a copy to:
Market Regulation BranchOntario Securities Commission20 Queen Street West, 22nd FloorToronto, ON M5H 3S8marketregulation@osc.gov.on.ca
Please note that, unless confidentiality is requested, all comments will be publicly available.
2.02 ...
(6)
(a)
(i) ...
(ii) Minimum Distribution -- 150 Public Security Holders each holding at least a Board Lot (or $1,000 in the case of convertible debentures) and for securities other than convertible debentures, a Public Float of at least 150,000 securities.
(ii) Minimum Distribution -- A Public Float of at least 150,000 supplemental securities (that are not convertible debentures) held by at least 50 Public Security Holders, each holding at least a Board Lot. In the case of convertible debentures, a minimum of 50 Public Security Holders each holding at least $1000 and together holding a minimum of $150,000 convertible debentures.
Engine Media Holdings, Inc. -- s. 4(b) of Ont. Reg. 289/00 under the OBCA
Consent given to an offering corporation under the Business Corporations Act (Ontario) to continue under the Business Corporations Act (British Columbia).
Business Corporations Act, R.S.O. 1990, c. B.16, as am., s. 181.
Regulation made under the Business Corporations Act, Ont. Reg. 289/00, as am., s. 4(b).
UPON the application (the Application) of Engine Media Holdings, Inc. (the Applicant) to the Ontario Securities Commission (the Commission) requesting the Commission's consent to the Applicant continuing in another jurisdiction pursuant to section 181 of the OBCA (the Continuance);
AND UPON considering the Application and the recommendation of the staff of the Commission;
AND UPON the Applicant having represented to the Commission that:
1. The Applicant is an offering corporation under the OBCA.
2. The Applicant's registered and head office is located in Ontario and the Commission is the principal regulator of the Applicant.
3. The Applicant intends to apply to the Director under the OBCA pursuant to section 181 of the OBCA (the Application for Continuance) for authorization to continue as a corporation under the Business Corporations Act (British Columbia), S.B.C. 2002, c.57, as amended (the BCBCA).
4. The Applicant's authorized share capital consists of an unlimited number of common shares (the Common Shares). The Common Shares are listed on the TSX Venture Exchange (TSXV) under the symbol "GAME". The Applicant's Common Shares trade on the OTCQB under the symbol "MLLLF". As at the close of business on September 11, 2020, the Applicant had 7,766,136 issued and outstanding Common Shares.
5. The Applicant is a reporting issuer under the Securities Act, R.S.O. 1990, c. S.5, as amended (the Act) and the securities legislation in Alberta and British Columbia (collectively, the Legislation). The Applicant will remain a reporting issuer in these jurisdictions following the Continuance.
6. The Applicant is not in default of any provision of the OBCA, the Act or the Legislation, including the regulations made thereunder.
7. The Applicant is not in default of any of the rules, regulations or policies of the TSXV or the OTCQB.
8. The Applicant is not subject to any proceeding under the OBCA, the Act or the Legislation.
9. The proposed continuance of the Applicant under the laws of British Columbia was voted on and duly approved by the shareholders of the Applicant at the annual general and special meeting held on July 15, 2020. No shareholder exercised dissent rights pursuant to section 185 of the OBCA.
10. The Company was originally incorporated, and currently exists, under the laws of the Province of Ontario but has no meaningful nexus to Ontario at this time. In order to maintain flexibility to apply to list its Common Shares on the NASDAQ, the Board has determined that it would be in the best interests of the Company to effect the Continuance, if and when determined by the Board.
11. The material rights, duties and obligations of a corporation, governed by the BCBCA are substantially similar to those under the OBCA.
12. The common shares of the Applicant will continue to be listed on the TSXV following the Continuance.
13. Pursuant to subsection 4(b) of the Regulation, where a corporation is an offering corporation under the OBCA, the Application for Continuance must be accompanied by a consent from the Commission.
AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;
THE COMMISSION CONSENTS to the Continuance of the Applicant under the BCBCA.
DATED at Toronto, Ontario this 20th day of October, 2020.