Ontario Securities Commission Bulletin
Issue 43/52 - December 24, 2020
Ont. Sec. Bull. Issue 43/52
• OSC Staff Notice 11-742 (Revised) -- Securities Advisory Committee
• Notice of Correction -- MOAG Copper Gold Resources Inc. et al. -- ss. 127(1), 127.1
• Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. -- ss. 127, 127.1
• StableView Asset Management Inc. and Colin Fisher -- ss. 127, 127.1
• Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V.
• First Global Data Ltd. et al.
• First Global Data Ltd. et al.
• StableView Asset Management Inc. and Colin Fisher
• Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V.
• Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V.
• Outcome Metric Asset Management Limited Partnership et al.
• Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. -- ss. 144, 147
• George Weston Limited -- s. 6.1 of NI 62-104
• Loblaw Companies Limited -- s. 6.1 of NI 62-104
• Dino Paolucci -- ss. 127(1), 127(10)
• MOAG Copper Gold Resources Inc. et al. -- ss. 127(1), 127.1
• Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. -- ss. 127, 127.1
• Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. -- ss. 127, 127.1
• Temporary, Permanent & Rescinding Issuer Cease Trading Orders
• Temporary, Permanent & Rescinding Management Cease Trading Orders
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OSC Staff Notice 11-742 (Revised) -- Securities Advisory Committee
In a Notice published in the OSC Bulletin on October 8, 2020, the Commission invited applications for positions on the Securities Advisory Committee ("SAC"). SAC provides advice to the Commission and staff on a variety of matters including legislative and policy initiatives and important capital markets trends and brings various issues to the attention of the Commission and staff.
The Commission was very impressed with the number of highly qualified practitioners who applied for positions on SAC and would like to thank all those who applied.
The Commission is pleased to publish the names of the four new members who will be participating on SAC for the next three years:
• Chris Birkett, Toronto Stock Exchange
• Margaret Chow, Richardson GMP Limited
• Bradley Freelan, Fasken Martinea DuMoulin LLP
• Chris Sunstrum, Goodmans LLP
The members of SAC have staggered terms. The continuing members of SAC are:
• Kathryn J. Daniels, Canada Pension Plan Investment Board
• Linda Fuerst, Norton Rose Fulbright Canada LLP
• Desmond Lee, Osler, Hoskin & Harcourt LLP
• Jennifer F. Longhurst, Davies Ward Phillips Vineberg LLP
• Julie Mansi, Borden Ladner Gervais LLP
• Leila Rafi, McMillan LLP
• Rima Ramchandani, Torys LLP
• Ora Wexler, Dentons LLP
The Commission would like to take this opportunity to thank the four members of SAC, listed below, whose terms have ended and who have served on the Committee with great dedication. Their advice and guidance on a range of issues has been very valuable to the Commission.
• Deanna Dobrowsky, Toronto Stock Exchange
• Margaret Gunawan, BlackRock Asset Management
• Barbara Hendrickson, Bax Securities Law
• Blair Wiley, Wealthsimple
Notice of Correction -- MOAG Copper Gold Resources Inc. et al. -- ss. 127(1), 127.1
The Order for MOAG Copper Gold Resources Inc. et al. -- ss. 127(1), 127.1 published at (2020), 43 OSCB 9464 contained an error. The corrected Order is republished in full in Chapter 2 of this issue.
Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. -- ss. 127, 127.1
FILE NO.: 2020-39
PROCEEDING TYPE: Public Settlement Hearing
HEARING DATE AND TIME: December 18, 2020 at 10:00 a.m.
LOCATION: By videoconference
The purpose of this proceeding is to consider whether it is in the public interest for the Commission to approve the Settlement Agreement dated December 15, 2020 between Staff of the Commission, Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. in respect of the Statement of Allegations filed by Staff of the Commission dated December 14, 2020.
Any party to the proceeding may be represented by a representative at the hearing.
IF A PARTY DOES NOT PARTICIPATE, THE HEARING MAY PROCEED IN THE PARTY'S ABSENCE AND THE PARTY WILL NOT BE ENTITLED TO ANY FURTHER NOTICE IN THE PROCEEDING.
This Notice of Hearing is also available in French on request of a party. Participation may be in either French or English. Participants must notify the Secretary's Office in writing as soon as possible if the participant is requesting a proceeding be conducted wholly or partly in French.
L'avis d'audience est disponible en français sur demande d'une partie, que la participation à l'audience peut se faire en français ou en anglais et que les participants doivent aviser le Bureau du secrétaire par écrit dès que possible si le participant demande qu'une instance soit tenue entièrement ou partiellement en français.
Dated at Toronto this 15th day of December, 2020
For more information
Please visit www.osc.gov.on.ca or contact the Registrar at registrar@osc.gov.on.ca.
File No. 2020-39
1. Before foreign and domestic marketplaces are permitted to carry on business in Ontario, they must obtain authorization from the Commission to do so and their application for such authorization must provide candid, accurate and complete information. These requirements serve to protect Ontario market participants and investors and foster fair and efficient markets.
2. In order to manage risks to Ontario investors and market participants, the Commission may also impose terms and conditions on any order issued, including exemptive relief orders. It is critical to fostering fair and efficient capital markets and confidence in capital markets that persons and companies comply with all terms and conditions of exemptive relief orders.
3. Commission and Staff rely upon the completeness and accuracy of information contained in applications made by individuals or companies seeking a recognition or exemption order to manage risks to Ontario investors and market participants. It is therefore critical that persons and companies seeking a recognition or exemption order from the Commission disclose all material information relating to the order sought and that this information is accurate and complete. This ensures that any order that may be issued by the Commission is properly determined to be in the public interest.
4. In this case, two sophisticated corporations -- Bloomberg Trading Facility Limited (BTFL) and Bloomberg Trading Facility B.V. (BV) (collectively, the Respondents) -- failed to comply with Ontario securities law by:
(a) operating a marketplace, and in particular, an exchange without receiving recognition or an exemption;
(b) filing applications that contained inaccurate and incomplete information with the Commission to obtain exemptions, and therefore, to that extent, were misleading to Staff and the Commission; and
(c) in the case of BTFL, failing to comply with the terms and conditions of an interim exemptive relief order.
5. In today's capital markets where the majority of marketplaces operate electronic trading facilities and are no longer reliant on physical floors or have moved from voice to electronic trading, a marketplace is carrying on business in Ontario if it provides direct access to an Ontario participant (whether traders are physically located in Ontario or elsewhere). Once carrying on business in Ontario, Ontario securities laws apply. Foreign marketplaces that provide access to Ontario participants must ensure that they are properly authorized to do so. They must implement a robust compliance system in recognition of the compliance risks associated with operating in multiple jurisdictions, including ensuring appropriate communications about the relevant Ontario regulatory obligations throughout the business.
6. Over a 15-month period and beginning at different times, BTFL provided 18 institutional Ontario participants access to trade in fixed income securities. Over that period of time, 11 of the 18 Ontario participants conducted fixed income trading on BTFL's multilateral trading facility (MTF) in a principal amount of approximately $228.5 billion USD and representing 2.93% of all fixed income trading on BTFL's MTF during that time.
7. Over a one-year period and beginning at different times, BV provided 16 institutional Ontario participants access to trade in fixed income securities. Over that period of time, two of the 16 Ontario participants conducted fixed income trading on BV's MTF in a principal amount of approximately $4.4 billion USD and representing 1.61% of all fixed income trading on BV's MTF during that time.
8. Before the Respondents had sought or obtained recognition or an exemption order from the Commission, they carried on business as exchanges by failing to prevent, or otherwise permitting, fixed income trading by Ontario participants on their MTFs.
9. The Respondents each filed applications with the Commission requesting orders exempting them from the requirement to be recognized as an exchange which contained inaccurate and incomplete information. Specifically, neither BTFL nor BV disclosed the fact that:
(a) Ontario users had already been onboarded to their respective MTFs; and
(b) Ontario users had already engaged in fixed income trading activity on their respective MTFs;
(c) after BTFL obtained an exemption order, it failed to prevent, or otherwise permitted, fixed income trading by Ontario participants on its MTF contrary to the terms and conditions of the exemption order; and
(d) after BTFL obtained an exemption order, it filed quarterly reports that failed to accurately and completely disclose fixed income trading by Ontario participants on BTFL's MTF.
10. These are serious and unacceptable breaches of Ontario securities law. When marketplaces, including exchanges, operate without authorization in Ontario, they undermine investor confidence and the fairness and efficiency of our markets.
Staff of the Enforcement Branch of the Ontario Securities Commission (Staff) make the following allegations of fact:
A. Respondents
11. BTFL is a private limited company organized under the laws of England and Wales and is a wholly owned subsidiary of Bloomberg L.P., a Delaware limited partnership (BLP). BTFL has no physical presence in Ontario.
12. BV is a private limited company organized under the laws of the Netherlands and is a wholly owned subsidiary of BLP. BV has no physical presence in Ontario.
B. Overview and Background
13. In July 2015, BTFL was authorized by the United Kingdom Financial Conduct Authority to act as the operator of an MTF for interest rate swaps and credit default swaps. In 2016, the Financial Conduct Authority varied its authorization to allow BTFL's MTF to trade other financial instruments, including fixed income securities. Fixed income trading on BTFL's MTF became operational or "went live" on July 20, 2017. BTFL's MTF supports request-for-quote and request-for-trade functionality for professional client participants that onboard to BTFL's MTF by signing a user acknowledgement with BTFL.
14. In January 2019, BV was authorized by the Netherlands Authority for the Financial Markets to act as the operator of an MTF. Trading on BV's MTF became operational or "went live" on March 25, 2019. BV's MTF supports request-for-quote and request-for-trade functionality for professional client participants that onboard to BV's MTF by signing a user acknowledgement with BV.
15. For the purposes of Ontario securities law, each of BTFL's MTF and BV's MTF falls under the definition of "marketplace" set out in subsection 1(1) of the Securities Act (the Act) because each brings together buyers and sellers of securities or derivatives and use established, non-discretionary methods under which orders interact with each other.
16. Subsection 3.1(1) of the Companion Policy to National Instrument 21-101 Marketplace Operation provides that a "marketplace" is considered to be an "exchange" if it, among other things, sets requirements governing the conduct of marketplace participants. An MTF has certain obligations to monitor participants' trading activity and because an MTF sets requirements for the conduct of its participants and surveils the trading activity of its participants, it is considered by the Commission to be an "exchange" for purposes of the Act.
17. OSC Staff Notice 21-702 Regulatory Approach for Foreign-Based Stock Exchanges provides that the Commission considers an exchange located outside Ontario to be "carrying on business as an exchange" in Ontario if it provides Ontario participants with direct access to the exchange. This includes a participant with its headquarters or legal address in Ontario (e.g., as indicated by a participant's Legal Entity Identifier (LEI) and all traders conducting transactions on its behalf, regardless of the traders' physical location (inclusive of non-Ontario branches of Ontario legal entities), as well as any trader physically located in Ontario who conducts transactions on behalf of any other entity.
18. Subsection 21(1) of the Act provides that no person or company shall carry on business as an exchange in Ontario unless recognized by the Commission.
19. During a time when neither BTFL nor BV was recognized by the Commission to carry on business as an exchange:
(a) Each of BTFL and BV onboarded Ontario participants to their respective MTFs and carried on business as an exchange by failing to prevent, or otherwise permitting, trading by Ontario participants, including fixed income securities transactions.
(b) Each of BTFL and BV filed an application with the Commission requesting an order to exempt them from the requirement to be recognized as an exchange. In their respective applications, both BTFL and BV did not provide accurate and complete disclosure of the fact that Ontario participants had already been onboarded and had already engaged in fixed income trading activity, which rendered the applications misleading to Staff and the Commission.
(c) In the case of BTFL, during Staff's four-month review of BTFL's application for exemptive relief, BTFL did not provide accurate and complete disclosure to Staff of the fact that Ontario participants had already been onboarded and had already engaged in fixed income trading activity, which rendered the disclosure misleading to Staff.
20. On December 22, 2017, the Commission issued an interim exemptive relief order to BTFL exempting it from the requirement to be recognized as an exchange (the BTFL Order). The BTFL Order, which expires on December 31, 2020, included terms and conditions, including:
(a) A condition that BTFL will not provide access to Ontario users to trading in products other than swaps, and
(b) A condition that BTFL file quarterly reports with the Commission disclosing all trading by Ontario users of BTFL's MTF, including a breakdown by product traded and the total trading volume and value originating from Ontario participants.
21. In the time period following the date of the BTFL Order:
(a) BTFL failed to prevent, or otherwise permitted, trading in products other than swaps, including fixed income, by Ontario participants on BTFL's MTF, and
(b) BTFL filed quarterly reports that did not accurately and completely disclose such trading by Ontario participants on BTFL's MTF.
(1) BTFL Carrying on Business as an Exchange Prior to December 22, 2017
22. On August 2, 2017, BTFL filed an application (the BTFL Application) with the Commission pursuant to section 147 of the Act requesting an interim order exempting BTFL from the requirement to be recognized as an exchange under subsection 21(1) of the Act. The BTFL Application included the following statements:
17. Since the Applicant [BTFL] would provide Ontario Participants with direct access to trading of the MTF Instruments on the Bloomberg MTF, it will be considered by the Commission to be "carrying on business as an exchange" in Ontario, and therefore must either be recognized or exempt from recognition by the Commission;
18. The Applicant submits that an exemption from recognition is appropriate for the MTF because the MTF is subject to regulation by the FCA and full regulation by the Commission would be duplicative and inefficient.
23. The BTFL Application was written in a forward-looking manner and conveyed that there would be Ontario participants at a future time. The BTFL Application did not disclose all material facts relating to BTFL's MTF, including the fact that Ontario participants had already been onboarded and had already engaged in fixed income transactions on BTFL's MTF, prior to the date of the BTFL Application.
24. During Staff's ensuing review of the BTFL Application -- which culminated in the BTFL Order -- although BTFL had corresponded and spoken with Staff frequently, BTFL did not disclose to Staff the fact that Ontario participants had already been onboarded and had already engaged in fixed income transactions on BTFL's MTF. Further, during these discussions between Staff and BTFL, Staff repeatedly advised BTFL that any interim exemptive relief order that might be considered by the Commission would exclude any authorization for BTFL's MTF to facilitate fixed income trading by Ontario participants.
25. Unbeknownst to Staff and the Commission, prior to the issuance of the BTFL Order by the Commission, BTFL had onboarded Ontario participants to its MTF and had failed to prevent Ontario participants from engaging in fixed income securities transactions on its MTF. In particular:
(a) BTFL had onboarded 18 Ontario participants to its MTF prior to the BTFL Order, with the first onboarding of an Ontario participant occurring on September 20, 2016.
(b) The date on which an Ontario participant first conducted a fixed income trade or request for quote on BTFL's MTF was July 20, 2017, approximately one month prior to the BTFL Application.
(c) Five of the Ontario participants onboarded to BTFL's MTF had conducted fixed income trading prior to the BTFL Order.
26. The aggregate principal amount of the fixed income trading by these five Ontario participants on BTFL's MTF prior to the date of the BTFL Order was approximately $57 billion USD.
27. BTFL did not earn fees or other compensation amounts respecting its exchange activities prior to the date of the BTFL Order.
(2) BV Carrying on Business as an Exchange
28. On March 20, 2019, BV filed an application (the BV Application) with the Commission pursuant to section 147 of the Act requesting an interim order exempting BV from the requirement to be recognized as an exchange under subsection 21(1) of the Act. The BV Application made express reference to BTFL and BTFL's MTF and included the following statements:
18. Since the Applicant [BV] would provide Ontario Participants with direct access to trading of the MTF Instruments on BTFE [BV's MTF], it will be considered by the Commission to be "carrying on business as an exchange" in Ontario, and therefore must either be recognized or exempt from recognition by the Commission;
19. The Applicant submits that an exemption from recognition is appropriate for BTFE because BTFE is subject to regulation by the AFM [Netherlands Authority for the Financial Markets] and full regulation by the Commission would be duplicative and inefficient.
29. Similar to the BTFL Application, the BV Application was written in a forward-looking manner and conveyed that there would be Ontario participants at a future time. The BV Application did not disclose all material facts relating to BV's MTF, including the fact that an Ontario participant had already been onboarded. During Staff's ensuing review of the BV Application, BV did not disclose to Staff the fact that Ontario participants had already been onboarded and had already engaged in fixed income securities transactions on BV's MTF.
30. The Commission has not, to date, issued any order granting any exemptive relief to BV.
31. During the time period commencing March 2019 through to Q1 2020, a total of 16 Ontario participants were onboarded to BV's MTF. In particular:
(a) Two days prior to the date of the BV Application, BV onboarded one Ontario participant to BV's MTF. This Ontario participant never traded fixed income securities on BV's MTF.
(b) The remaining 14 Ontario participants were onboarded to BV's MTF after the date of the BV Application.
(c) Two Ontario participants conducted fixed income securities trading on BV's MTF over a one-year period through to Q1 2020.
32. The aggregate principal amount of the fixed income trading by these two Ontario participants was approximately $4.4 billion USD.
33. BV earned fees relating to its exchange activities totaling $13,440.50 USD.
(1) Prohibition on Providing Access to Ontario Participants to Trading in Products other than Swaps
34. On October 25, 2018, BTFL disclosed to Staff for the first time that it had identified "limited" fixed income trading activity on its MTF by traders physically located in Ontario on behalf of four Ontario participants. BTFL subsequently provided further details to Staff which identified the following:
(a) Following December 22, 2017 and continuing through to October 25, 2018, 11 of the 15 Ontario participants onboarded to BTFL's MTF conducted fixed income trading, contrary to the terms and conditions contained in the BTFL Order. Four of these 15 Ontario participants never conducted any fixed income trading on BTFL's MTF.
(b) The aggregate principal amount of the fixed income securities trading by Ontario participants on BTFL's MTF from the date of the BTFL Order (December 22, 2017) through to October 25, 2018 was approximately $171.5 billion USD and representing 3.09% of all fixed income trading on BTFL's MTF during that time.
35. BTFL earned fees relating to the fixed income securities trading by Ontario participants on BTFL's MTF through to November 1, 2018 totaling approximately $688,496.30 CAD.
(2) Overlapping Fixed Income Trading Activity
36. A limited amount of fixed income trading on BTFL's MTF described above was conducted by (i) a small number of traders located in Québec on behalf of two entities represented by an LEI whose legal entity address and headquarters address are located in Ontario , (ii) a small number of traders located in Ontario on behalf of an entity represented by an LEI whose legal entity address and headquarters address are located in Québec, and (iii) traders located in Ontario, Québec, and elsewhere on behalf of an entity represented by an LEI whose legal entity address is located in Québec and headquarters address is located in Ontario (the Overlapping Activity). The amount of fees attributed to the Overlapping Activity up to November 1, 2018 is $25,191.08 CAD.
(3) Requirement to File Quarterly Reports
37. Following December 22, 2017 and continuing through to Q2 2019, BTFL filed quarterly reports with the Commission that were inaccurate and incomplete as they did not accurately disclose the fixed income securities trading particulars, including those described in paragraph 36 above.
Staff allege the following breaches of Ontario securities law and conduct contrary to the public interest:
38. With respect to BTFL:
(a) Beginning in July 2017 and continuing through to the date of the BTFL Order on December 22, 2017, BTFL carried on business as an exchange in Ontario without being recognized or exempted by the Commission, contrary to subsection 21(1) of the Act.
(b) BTFL filed the BTFL Application with the Commission, which contained inaccurate and incomplete information insofar as BTFL did not disclose the fact that Ontario participants had already been onboarded to BTFL's MTF and that Ontario participants had already engaged in fixed income securities transactions, contrary to the public interest.
(c) BTFL, in the course of responding to Staff's questions relating to Staff's review of the BTFL Application, provided incomplete information. Specifically, BTFL did not disclose the fact that Ontario participants had already been onboarded to BTFL's MTF and that Ontario participants had already engaged in fixed income securities transactions, contrary to the public interest.
(d) During the time period from December 22, 2017 through to October 25, 2018, BTFL failed to administer appropriate systems and controls to prevent Ontario participants from engaging in fixed income securities transactions on BTFL's MTF, contrary to the terms and conditions of the BTFL Order.
(e) During the time period commencing December 22, 2017 and continuing through to Q2 2019, BTFL filed quarterly reports that did not accurately and completely disclose Ontario participants' fixed income securities transactions on BTFL's MTF, contrary to the terms and conditions of the BTFL Order.
39. With respect to BV:
(a) Beginning in March 2019 and continuing through to Q1 2020, BV carried on business as an exchange in Ontario without being recognized or exempted by the Commission, contrary to subsection 21(1) of the Act.
(b) BV filed the BV Application with the Commission, which contained inaccurate and incomplete information insofar as BV did not disclose the fact that Ontario participants had already been onboarded to BV's MTF, contrary to the public interest.
(c) BV, in the course of responding to Staff's questions relating to Staff's review of the BV Application, provided incomplete information. Specifically, BV did not disclose the fact that Ontario participants had already been onboarded to BV's MTF and that Ontario participants had already engaged in fixed income securities transactions, contrary to the public interest.
40. Staff request that the Commission make an order pursuant to subsection 127(1) and section 127.1 of the Act to approve the settlement dated December 14, 2020 between the Respondents and Staff.
41. Staff reserve the right to amend these allegations and to make such further allegations as Staff deem fit and the Commission may permit.
DATED at Toronto this 14th day of December, 2020.
StableView Asset Management Inc. and Colin Fisher -- ss. 127, 127.1
FILE NO.: 2020-40
PROCEEDING TYPE: Enforcement Proceeding
HEARING DATE AND TIME: January 13, 2021 at 2:30 p.m.
LOCATION: By Teleconference
The purpose of this proceeding is to consider whether it is in the public interest for the Commission to make the order requested in the Statement of Allegations filed by Staff of the Commission on December 16, 2020.
The hearing set for the date and time indicated above is the first attendance in this proceeding, as described in subsection 5(1) of the Commission's Practice Guideline.
Any party to the proceeding may be represented by a representative at the hearing.
IF A PARTY DOES NOT ATTEND, THE HEARING MAY PROCEED IN THE PARTY'S ABSENCE AND THE PARTY WILL NOT BE ENTITLED TO ANY FURTHER NOTICE IN THE PROCEEDING.
This Notice of Hearing is also available in French on request of a party. Participation may be in either French or English. Participants must notify the Secretary's Office in writing as soon as possible if the participant is requesting a proceeding be conducted wholly or partly in French.
L'avis d'audience est disponible en français sur demande d'une partie, que la participation à l'audience peut se faire en français ou en anglais et que les participants doivent aviser le Bureau du secrétaire par écrit dès que possible si le participant demande qu'une instance soit tenue entièrement ou partiellement en français.
Dated at Toronto this 17th day of December 2020.
For more information
Please visit www.osc.gov.on.ca or contact the Registrar at registrar@osc.gov.on.ca.
1. This proceeding centres on registrants acting as a portfolio manager (PM) and investment fund manager (IFM) who flagrantly disregarded investment restrictions when managing client money. The registrants advised clients that certain investment parameters and restrictions designed to limit risk would be respected in the registrants' discretionary management of client funds. The registrants then ignored these restrictions and increasingly invested client monies in a thinly-traded penny stock company that was suffering from a deteriorating financial position. In order to prop up this penny stock company, the registrants continued to gamble client money on it, repeatedly throwing good money after bad in a vicious cycle of ever-increasing risks and losses for the investors. The registrants did not tell clients about these investments or their deleterious effect on the restrictions set out in the registrants' agreements with clients. Nor did the registrants tell clients about the corporate registrant's receipt of "consulting" fees from the penny stock company. Through their actions, the registrants exposed clients to risks not contemplated by them and clients have been harmed. The registrants' actions were fraudulent.
2. Stableview Asset Management Inc. (Stableview) and its principal and directing mind, Colin Fisher (Fisher) managed and advised two investment funds that were distributed to Stableview's separately managed account (SMA) clients.
3. Stableview advised its SMA clients that their portfolios would be diversified and that Stableview would follow certain investment parameters and restrictions including limits on investments in private debt. For most SMA clients, this limit was set at 10% of the client's holdings.
4. From 2016 to 2019, Fisher caused Stableview's investment funds to become increasingly concentrated in the private debt of a penny stock company, Clarocity Corporation (Clarocity), formerly known as Zaio Corporation. Prior to and while these investments were made, Clarocity's financial position was substantially deteriorating to the knowledge of Fisher. Moreover, Stableview received compensation from Clarocity for "consulting services" including cash payments totalling $105,000, Clarocity common stock, and a $150,000 Clarocity debenture which it sold to two of the funds it managed. None of this was disclosed to investors. Fisher is the sole owner of Stableview, and Fisher benefitted from Stableview's misconduct.
5. Despite Clarocity's deteriorating financial circumstances, Stableview continued to value the funds' investments in the Clarocity debentures at cost or at par. Stableview eventually sought and obtained a receiver over Clarocity's assets in June 2019. By that date, the funds held Clarocity debentures with a par value of approximately $16.5 million compared to a valuation of the company by Clarocity's receiver in the range of $3 million to $4.8 million.
6. Clients received account statements that showed the number of units they held in the funds and the net asset value of those units. They were not informed of the specific investments held by the funds. As a result, they did not know that their investments were primarily concentrated in Clarocity debentures or that the value of their holdings in the fund(s) was in doubt given Clarocity's significant financial issues.
7. In 2019, Staff from the Compliance and Registrant Regulation Branch of the Ontario Securities Commission (Commission) conducted a compliance review of Stableview's compliance with Ontario securities law and identified numerous significant deficiencies. As a result, terms and conditions were placed on Stableview's registration that included trading and financial restrictions. In order to protect investors from further harm, in the spring of 2020, Staff from the Enforcement Branch (Enforcement Staff) on behalf of the Commission applied for and had a receiver appointed over Stableview and the funds' assets.
8. Clients placed their trust in Fisher and gave Stableview discretionary authority to manage their hard-earned savings. Fisher and Stableview blatantly disregarded the investment restrictions they promised to follow and knowingly breached representations they made to their clients. They were reckless as to the consequences of their conduct. Their actions exposed clients to risks not contemplated by them and were fraudulent.
9. The setting of investment parameters is an important part of the client/registrant relationship. Registrants have a duty under securities law to respect these parameters. Registrants who flagrantly disregard investment restrictions and fail to disclose material facts to investors about their investments significantly undermine the integrity of Ontario's capital markets.
10. Enforcement Staff makes the following allegations of fact:
Background
11. Stableview is registered under the Securities Act, R.S.O. 1990, c S.5 (the Act) as an IFM, PM, and exempt market dealer. Stableview was the PM for approximately 100 SMA clients.
12. Stableview managed and advised the following two funds that were distributed to its SMA clients:
a. Stableview Progressive Growth Fund (the Progressive Fund); and
b. Stableview Yield & Growth Fund (the Yield Fund) (collectively the Pooled Funds).
13. All investment decisions for the Pooled Funds were made by Fisher, who is Stableview's sole director and officer, and is registered under the Act as its sole Advising Representative, sole Dealing Representative, Chief Compliance Officer and Ultimate Designated Person. Fisher was the directing mind of Stableview and made all decisions on its behalf.
14. Stableview also managed a third fund, the Insight Fund LP (the Insight Fund) that was made available to high net worth clients outside of Stableview's SMA client base and was distributed to approximately 7 clients.
15. The Pooled Funds were formed and pooled in July 2016. The features of each fund, including restrictions on their investment activities, were set out in a legal constating document the Respondents called a "regulation", with each fund having its own regulation (collectively, the Regulations). The Pooled Funds are both unit trusts with Stableview acting as the trustee. Following their creation, the Pooled Funds were distributed to Stableview's SMA clients as part of its discretionary portfolio management of the assets of those clients. As of November 30, 2018, the Pooled Funds had 102 investors.
16. After the creation of the Pooled Funds, Stableview primarily invested SMA client monies in one or more of the Pooled Funds for which Stableview received a management fee.
17. From August 2016 to June 30, 2019, Fisher caused the Pooled Funds to become increasingly over-concentrated in Clarocity debt, by acquiring over $16.5 million in Clarocity debentures. Clarocity operated at a loss over this entire period. At all relevant times, Fisher and Stableview knew of Clarocity's poor financial performance.
18. While Fisher was investing SMA client monies (and subsequently the Pooled Funds' monies) in Clarocity, he caused Stableview to enter into fee arrangements with Clarocity. Stableview entered into two agreements with Clarocity. The first agreement dated January 25, 2016, and subsequently amended, involved Stableview entering into a debt facility that Stableview was to coordinate for Clarocity, with funds to be supplied by, among other sources, Stableview's SMA clients (the Debt Coordination Agreement).
19. The second agreement was a financial advisory and consulting agreement made effective as of March 28, 2016 (the Fiscal Advisory/Consulting Agreement). Under this agreement, Stableview was to assist Clarocity in reorganizing its capital structure.
20. Stableview received the following compensation from Clarocity (collectively, the Clarocity Compensation):
a. Debentures: Stableview received a $150,000 debenture under the terms of the Debt Coordination Agreement.
b. Common Shares: Stableview received 1.36 million common shares of Clarocity under the Fiscal Advisory/Consulting Agreement as compensation for assisting Clarocity to reorganize its capital structure.
c. Cash: Stableview received $105,000 under the terms of the Debt Coordination Agreement, paid in 6 quarterly payments of $17,500 each.
21. As Clarocity's financial condition continued to deteriorate, Stableview sought the appointment of a receiver over the business and affairs of Clarocity. On June 11, 2019, a receiver was appointed over Clarocity.
22. According to the first report of Clarocity's receiver, the total indebtedness owing by Clarocity to debenture holders was $23.7 million, including interest (the First Report) (over $16.5 million of which was owed to the Pooled Funds). The three Stableview funds were the largest of the debenture holders, holding in aggregate approximately 90% of the total outstanding indebtedness owed by Clarocity to the debenture holders.
23. According to the First Report, the estimated liquidation value of Clarocity was in the range of $3 to $4.8 million. The First Report also stated that debenture holders would suffer a significant shortfall in the range of $20 to $22 million.
24. As part of the receivership, Stableview negotiated a transaction with Clarocity's receiver and iLookabout Corp. (iLookabout), another penny stock company, in which iLookabout acquired all assets of Clarocity for a purchase price in the amount of the indebtedness owed by Clarocity to iLookabout and the debenture holders payable in common shares, warrants and convertible debentures of iLookabout (the iLookabout Transaction). Following the court's approval of the iLookabout Transaction, the Pooled Funds received an interest in iLookabout encompassing 18,947,182 common shares, 15,652,000 warrants and a $7,166,971 convertible debenture.
i. Fraudulent Conduct
25. By engaging in the conduct described above and below, Fisher and Stableview engaged directly or indirectly in an act, practice or course of conduct relating to securities that they knew or reasonably ought to have known perpetrated a fraud on their SMA clients.
26. In order to open an SMA at Stableview, clients signed a Portfolio Management Agreement and Investment Policy Statement (the PMA & IPS). The PMA & IPS represented to investors that their portfolio would be "diversified over multiple industry sectors" (Diversification Representation).
27. The PMA & IPS also contained a restriction on Stableview's ability to invest funds in illiquid investments, referred to as "alternative investments". The PMA & IPS described "alternative investments" as "investments in non-conventional instruments" that "would include but are not limited to such instruments as hedge funds, venture capital, commodities and private equity funds, private companies, private debt issuance." The investments made by Stableview at Fisher's direction in Clarocity debentures are "alternative investments" under the PMA & IPS.
28. In the alternative, even if some or all of the Clarocity debentures could be characterized as "fixed income" investments, Stableview represented to its SMA clients in the PMA & IPS that the fixed income component of the client's portfolio would be "primarily invested in investment grade bonds as at the date of purchase" (Fixed Income Representation). The Clarocity debentures did not constitute investment grade bonds.
29. Pursuant to the PMA & IPS, Stableview's authority to perform discretionary management over client funds was subject to the investment objectives, policies and restrictions contained in the client's PMA & IPS.
30. For some long-standing clients of Fisher, the only PMA & IPS that Stableview had on file was the PMA & IPS between the client and Fisher's predecessor employer. Those PMA & IPSs contained the same representations and restrictions as referred to above.
31. Virtually all of the PMA & IPSs on file for Stableview's SMA clients stipulated a maximum investment in alternative investments of 10% (10% Alternative Investment Restriction).
32. The Pooled Funds were created in July 2016. According to the Pooled Funds' Regulations, which constituted their legal constating documents, the intention was for the Pooled Funds to be invested "primarily in a diversified group of securities in both public and private companies which are deemed to represent solid return on equity for as minimal a risk as possible for the given return" (Diversification Provision) and leverage was supposed to be limited to 20% (20% Leverage Restriction).
33. By August 2016, Fisher caused the Pooled Funds to invest more than 10% of their holdings in private debt. This caused SMA client investments in the Pooled Funds to be offside the 10% Alternative Investment Restriction. From that point onward, Fisher grossly disregarded the Diversification Representation, the 10% Alternative Investment Restriction, the Fixed Income Representation and/or the Diversification Provision in making investment decisions on behalf of the Pooled Funds.
34. According to Clarocity's publicly-filed financial statements, Clarocity had a cumulative deficit of $91.2 million as of December 31, 2015. This cumulative deficit continued to grow during the period of the Pooled Funds' direct and indirect investments in Clarocity debentures from August 2016 to July 2019.
35. The following summarizes the Pooled Funds' investments in Clarocity debentures as a percentage of the Pooled Funds' portfolio holdings from August 31, 2016 to June 30, 2019 (prior to the Clarocity receivership and iLookabout Transaction):
Date
Progressive Fund
Yield Fund
Aug 31, 2016
13%
14%
Dec 31, 2016
22%
22%
May 31, 2017
27%
31%
Sep 30, 2017
37%
43%
Dec 31, 2017
38%
42%
July 31, 2018
44%
48%
Dec 31, 2018
70%
83%
Jun 30, 2019
67%
96%
36. SMA clients' total exposure to one issuer (Clarocity) and one sector (technology) was even greater than the percentages set out above because the Pooled Funds' held other Clarocity securities and Fisher caused some SMA clients to hold direct investments in Clarocity securities over and above their exposure to Clarocity through their investments in the Pooled Funds.
37. Following the Clarocity receivership, Fisher initiated the iLookabout Transaction, which resulted in the Pooled Funds continuing to be overconcentrated in debentures and in the securities of one issuer and one sector. As of October 31, 2019, investments in iLookabout debentures as a percentage of the Pooled Funds' portfolio holdings was 60% for the Yield Fund, and 39% for the Progressive Fund and investments in iLookabout securities (shares and debentures) as a percentage of the Pooled Fund's holdings was 95% for the Yield Fund and 62% for the Progressive Fund.
38. The Pooled Funds' over-concentrations in Clarocity debentures arose as a result of:
a. Fisher causing the Pooled Fund to continuously over-invest in Clarocity debentures from August 2016 to August 2018;
b. Fisher directing the Yield Fund, in August 2018, to purchase $75,000 of the $150,000 Clarocity debenture Stableview received as compensation from Clarocity when the Yield Fund's concentration in Clarocity debentures was already at 48%; and
c. Fisher causing the Progressive Fund, in March and July 2019, to purchase units in the Yield Fund (a fund that was almost entirely comprised of Clarocity debentures by that time) for $1,742,000 in order to bring needed cash into the illiquid Yield Fund to reduce its use of margin in its margin account at an investment dealer when the Progressive Fund's concentration in Clarocity debentures was already at 66%. These transactions increased the Progressive Fund's concentration in Clarocity debentures to 76%.
39. Fisher also blatantly disregarded the 20% Leverage Restriction when making investment decisions on behalf of the Pooled Funds. As of the end of 2017, the Yield Fund and Progressive Fund leverage ratios were double and triple the 20% limit. The following summarizes leverage as a percentage of the Pooled Funds' net assets as of the end of 2017 to the end of 2018:
Date
Yield Fund
Progressive Fund
Dec 31, 2017
64%
45%
July 31, 2018
78%
45%
Dec 31, 2018{1}
45%
26%
{1} On August 7, 2018, the Pooled Funds' custodian (an investment dealer) restricted Stableview's margin accounts to redemptions only. By the end of 2018, the Pooled Funds' leverage ratios reflected the custodian's externally-imposed leverage restriction but were still considerably offside the 20% Leverage Restriction.
40. In addition, from December 2019 to February 2020, Fisher caused the Progressive Fund to make loans of approximately $45,000 and $117,000 to the Insight Fund and the Yield Fund respectively either to cover their negative cash balances that arose from the payment of invoices, including the payment of monthly management fees to Stableview or to allow them to pay such invoices (Inter-Fund Loans).
41. In causing the transactions referred to in paragraphs 33 and 40 above to occur, the Respondents blatantly disregarded and breached the Diversification Representation, the 10% Alternative Investment Restriction, the Fixed Income Representation, the Diversification Provision, and/or the 20% Leverage Restriction.
42. The Respondents failed to disclose the facts referred to in paragraphs 33 to 41 above to SMA clients, which facts, individually and/or collectively constituted material facts. Other material facts the Respondents omitted to disclose to SMA clients included:
a. Stableview's receipt of the Clarocity Compensation{2}; and
b. Clarocity's financial difficulties, which eventually led Stableview to seek the appointment of a receiver over Clarocity's assets.
43. This conduct put investors' pecuniary interests at risk.
44. By engaging in the conduct described above, Fisher and Stableview knowingly contravened representations they made to investors and restrictions contained in the Pooled Funds' legal constating documents, failed to disclose material facts to clients and/or put their own interests or the interests of one fund ahead of the interest of another fund. They were reckless as to the consequences of their conduct. Their conduct exposed investors to risks not contemplated by them by the terms of their PMA and IPS agreement with Stableview. Their conduct was fraudulent.
ii. Breach of Subsection 44(2) of the Act
45. Through their conduct described at paragraphs 33 to 42 above, Fisher and Stableview made untrue statements about matters that a reasonable investor would consider relevant in deciding whether to enter into or maintain a trading or advising relationship and/or omitted information necessary to prevent statements from being false or misleading in the circumstances in which they were made, contrary to subsection 44(2) of the Act.
iii. Breaches of Duties and Obligations as Registrants
46. At all material times, Fisher and Stableview were registrants. The conduct described above not only constituted fraud but also resulted in numerous breaches of the Respondents' duties and obligations as registrants as set out in Part D below.
iv. Fisher Authorized and Acquiesced in Stableview's Misconduct
47. At all material times, Fisher was the sole directing mind of Stableview and authorized and directed the conduct of Stableview described above and is responsible for Stableview's breaches of Ontario securities law pursuant to section 129.2 of the Act.
D. Breaches of Ontario Securities Law and Conduct Contrary to the Public Interest
48. Enforcement Staff alleges the following breaches of Ontario securities law and/or conduct contrary to the public interest as a result of the conduct described above:
a. Fisher and Stableview directly or indirectly engaged in or participated in acts, practices, or courses of conduct relating to securities that they knew or reasonably ought to have known perpetrated a fraud on persons or companies, contrary to subsection 126.1(1)(b) of the Act;
b. Fisher and Stableview made untrue statements about matters that a reasonable investor would consider relevant in deciding whether to enter into or maintain a trading or advising relationship and/or omitted information necessary to prevent statements from being false or misleading in the circumstances in which they were made, contrary to subsection 44(2) of the Act;
c. Stableview (as PM) breached its duty to identify, respond and disclose material conflicts of interest as required by subsection 32(1) of the Act and section 13.4 and 14.2 of National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) in relation to its receipt of the Clarocity Compensation and by causing the Yield Fund to purchase a $75,000 Clarocity debenture owned by Stableview;
d. Stableview (as PM) breached its obligations pursuant to section 14.2 of NI 31-103 to deliver to the holders of the SMAs all information that a reasonable investor would consider important about their relationship with Stableview, which, under the circumstances, would include a description of the conflict of interest created by Stableview' receipt of the Clarocity Compensation and the Yield Fund's purchase of a $75,000 Clarocity debenture owned by Stableview;
e. Stableview (as PM) and Fisher (as Advising Representative) failed to fulfill the obligation to make suitable investments for the Pooled Funds and the holders of the SMAs as set out in section 13.3 of NI 31-103;
f. Stableview (as PM) and Fisher (as Advising Representative and Dealing Representative) breached the duties owed to the Pooled Funds and the holders of the SMAs to deal with them fairly, honestly and in good faith as set out in section 2.1 of OSC Rule 31-505 -- Conditions of Registration (Rule 31-505);
g. Stableview (as IFM) breached the duties owed to the Pooled Funds to act honestly, in good faith and in the best interests of the Pooled Funds, and to exercise the degree of care, diligence, and skill that a reasonably prudent person would exercise in the circumstances as required by section 116 of the Act;
h. Stableview (as PM) breached the prohibition against knowingly causing an investment portfolio managed by it to purchase a security from a responsible person (i.e., Stableview and Fisher) as set out in subsection 13.5(2)(b)(i) of NI 31-103 when it caused the Yield Fund to purchase a $75,000 Clarocity debenture from Stableview;
i. With regard to the Inter-Fund Loans, Stableview (as IFM) breached the prohibition against inter-fund loans as set out in section 111 of the Act and failed to file the required report documenting the Inter-Fund Loans as required by section 117 of the Act;
j. Fisher (as Ultimate Designated Person) breached the duties prescribed by s. 5.1 of NI 31-103, including promoting compliance with securities legislation;
k. Fisher (as Chief Compliance Officer) breached the duties prescribed by s. 5.2 of NI 31-103, including monitoring and assessing compliance with securities legislation;
l. Fisher (as the officer and director of Stableview) authorized, permitted or acquiesced in Stableview's breaches of the obligations and duties above and is thereby liable for these breaches under section 129.2 of the Act; and
m. Fisher and Stableview have engaged in conduct that is contrary to the public interest.
49. Enforcement Staff reserve the right to amend these allegations and to make such further and other allegations as Enforcement Staff may advise and the Commission may permit.
50. Enforcement Staff request that the Commission make the following orders:
a. that the registration of the Respondents under Ontario securities law be terminated, or be suspended or restricted for such period as is specified by the Commission pursuant to paragraph 1 of subsection 127(1) of the Act;
b. that trading in any securities or derivatives by the Respondents cease permanently or for such period as is specified by the Commission, pursuant to paragraph 2 of subsection 127(1) of the Act;
c. that the Respondents be prohibited from acquiring any securities permanently or for such period as is specified by the Commission, pursuant to paragraph 2.1 of subsection 127(1) of the Act;
d. that any exemptions contained in Ontario securities law do not apply to the Respondents permanently or for such period as is specified by the Commission, pursuant to paragraph 3 of subsection 127(1) of the Act;
e. that the Respondents be reprimanded, pursuant to paragraph 6 of subsection 127(1) of the Act;
f. that Fisher resign one or more positions that he holds as a director or officer of any issuer or registrant pursuant to paragraphs 7, 8.1 and 8.3 of subsection 127(1) of the Act;
g. that Fisher be prohibited from becoming or acting as a director or officer of any issuer or registrant, pursuant to paragraphs 8, 8.2 and 8.4 of subsection 127(1) of the Act;
h. that the Respondents be prohibited from becoming or acting as a registrant or promoter permanently or for such period as is specified by the Commission, pursuant to paragraph 8.5 of subsection 127(1) of the Act;
i. that the Respondents each pay an administrative penalty of not more than $1 million for each failure to comply with Ontario securities law, pursuant to paragraph 9 of subsection 127(1)(9) of the Act;
j. that the Respondents disgorge to the Commission any amounts obtained as a result of non-compliance with Ontario securities law, pursuant to paragraph 10 of subsection 127(1)(10) of the Act;
k. that the Respondents pay costs of the Commission investigation and the hearing, pursuant to section 127.1 of the Act; and,
l. such other order as the Commission considers appropriate in the public interest.
Dated this 16th day of December, 2020
{2} While the PMA and IPS contained some boilerplate disclosure that the PM may receive fees from providing financial advisory services to corporations whose securities are purchased for the investment account, no details of the Clarocity Compensation were disclosed to SMA clients.
Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V.
FOR IMMEDIATE RELEASE
December 16, 2020
TORONTO -- The Office of the Secretary issued a Notice of Hearing for a hearing to consider whether it is in the public interest to approve a settlement agreement entered into by Staff of the Commission and Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. in the above named matter.
The hearing will be held on December 18, 2020 at 10:00 a.m.
A copy of the Notice of Hearing dated December 15, 2020 and Statement of Allegations dated December 14, 2020 are available at www.osc.gov.on.ca.
For Media Inquiries:
For General Inquiries:
FOR IMMEDIATE RELEASE
December 16, 2020
TORONTO -- Take notice that additional merits hearing dates in the above-named matter are scheduled for January 18, 21, 25, and 26, 2021 at 10:00 a.m. on each day.
For Media Inquiries:
For General Inquiries:
FOR IMMEDIATE RELEASE
December 17, 2020
TORONTO -- The Commission issued an Order in the above named matter.
A copy of the Order dated December 17, 2020 is available at www.osc.gov.on.ca.
For Media Inquiries:
For General Inquiries:
FOR IMMEDIATE RELEASE
December 17, 2020
TORONTO -- The Commission issued an Order in the above named matter.
A copy of the Order dated December 17, 2020 is available at www.osc.gov.on.ca.
For Media Inquiries:
For General Inquiries:
FOR IMMEDIATE RELEASE
December 17, 2020
TORONTO -- Take notice that the hearing in the above named matter scheduled to be heard on December 18, 2020 will not proceed as scheduled.
The hearing on the merits will continue on January 7, 2021 at 10:00 a.m.
For Media Inquiries:
For General Inquiries:
StableView Asset Management Inc. and Colin Fisher
FOR IMMEDIATE RELEASE
December 17, 2020
TORONTO -- The Office of the Secretary issued a Notice of Hearing on December 17, 2020 setting the matter down to be heard on January 13, 2021 at 2:30 p.m. or as soon thereafter as the hearing can be held in the above named matter
A copy of the Notice of Hearing dated December 17, 2020 and Statement of Allegations dated December 16, 2020 are available at www.osc.gov.on.ca.
For Media Inquiries:
For General Inquiries:
Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V.
FOR IMMEDIATE RELEASE
December 18, 2020
TORONTO -- Following a hearing held today, the Commission issued an Order in the above named matter approving the Settlement Agreement reached between Staff of the Commission and Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V.
A copy of the Order dated December 18, 2020 and the Settlement Agreement dated December 15, 2020 are available at www.osc.gov.on.ca
For Media Inquiries:
For General Inquiries:
Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V.
FOR IMMEDIATE RELEASE
December 21, 2020
TORONTO -- The Commission issued its Reasons for Approval of a Settlement in the above named matter.
A copy of the Reasons for Approval of a Settlement dated December 18, 2020 is available at www.osc.gov.on.ca.
For Media Inquiries:
For General Inquiries:
FOR IMMEDIATE RELEASE
December 22, 2020
TORONTO -- The Commission issued its Reasons and Decision and an Order pursuant to Subsections 127(1) and 127(10) of the Securities Act in the above named matter.
A copy of the Reasons and Decision and the Order dated December 21, 2020 are available at www.osc.gov.on.ca.
For Media Inquiries:
For General Inquiries:
Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from the take-over bid requirements in Part 2 of NI 62-104 to allow for take-over bid thresholds to be calculated based on the aggregate number of non-multiple voting shares outstanding, as opposed to on a per-class basis -- multi-class share structure among non-multiple voting shares was implemented solely to ensure the issuer's continued status as a "foreign private issuer" under U.S. securities laws; all classes of non-multiple voting shares are freely tradable, trade under the same trading symbol, have identical economic attributes and are automatically and mandatorily inter-convertible based on the shareholder's status as a U.S. Person -- relief granted to allow offerors to calculate their ownership position by combining the outstanding classes of non-multiple voting shares for the purposes of determining whether take-over bid requirements are triggered.
Relief from the early warning requirements to allow early warning thresholds to be calculated based on the aggregate number of non-multiple voting shares outstanding, as opposed to on a per-class basis -- multi-class share structure among non-multiple voting shares was implemented solely to ensure the issuer's continued status as a "foreign private issuer" under U.S. securities laws; all classes of non-multiple voting shares are freely tradable, trade under the same trading symbol, have identical economic attributes and are automatically and mandatorily inter-convertible based on the shareholder's status as a U.S. Person -- relief granted to allow acquirors to calculate their ownership position by combining the outstanding classes of non-multiple voting shares for the purposes of determining whether early warning requirements are triggered.
Relief from the issuer-bid requirements in Part 2 of NI 62-104 to allow for the thresholds in the normal course issuer bid exemption in s.4.8(3) of NI 62-104 to be calculated based on the aggregate number of non-multiple voting shares outstanding, as opposed to on a per-class basis -- multi-class share structure among non-multiple voting shares was implemented solely to ensure the issuer's continued status as a "foreign private issuer" under U.S. securities laws; all classes of non-multiple voting shares are freely tradable, trade under the same trading symbol, have identical economic attributes and are automatically and mandatorily inter-convertible based on the shareholder's status as a U.S. Person -- relief granted to allow the issuer to calculate thresholds for normal course issuer bid exemption by combining the outstanding classes of non-multiple voting shares.
Relief from the requirement to issue and file a news release in section 5.4 of NI 62-104 to provide that the threshold triggering the requirement for an acquiror to file a news release during a take-over bid or an issuer bid is to be calculated based on the aggregate number of non-multiple voting shares outstanding, as opposed to on a per-class basis -- multi-class share structure among non-multiple voting shares was implemented solely to ensure the issuer's continued status as a "foreign private issuer" under U.S. securities laws; all classes of non-multiple voting shares are freely tradable, trade under the same trading symbol, have identical economic attributes and are automatically and mandatorily inter-convertible based on the shareholder's status as a U.S. Person -- relief granted to allow acquirors to calculate their ownership position by combining the outstanding classes of non-multiple voting shares for the purposes of determining whether the requirement to file a news release during a take-over bid or issuer bid is triggered.
Relief so that the issuer can provide disclosure on significant shareholders in its information circular on a combined basis among non-multiple voting shares, rather than for each class of non-multiple voting shares -- to be calculated based on the aggregate number of non-multiple voting shares outstanding, as opposed to on a per-class basis -- multi-class share structure among non-multiple voting shares was implemented solely to ensure the issuer's continued status as a "foreign private issuer" under U.S. securities laws; all classes of non-multiple voting shares are freely tradable, trade under the same trading symbol, have identical economic attributes and are automatically and mandatorily inter-convertible based on the shareholder's status as a U.S. Person -- relief granted to allow issuer to provide disclosure on holders of its non-multiple voting shares on a combined basis in its information circular.
Issuer granted relief from requirements under National Instrument 41-101 General Prospectus Requirements, National Instrument 51-102 Continuous Disclosure Requirements and OSC Rule 56-501Restricted Shares to refer to Limited Voting Shares using prescribed restricted security term -- relief subject to condition that specified alternate term is used.
National Instrument 62-104 Take-Over Bids and Issuer Bids, Part 2, ss. 5.2, 5.4 and 6.1.
National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues, ss. 4.1, 4.5 and 11.1.
National Instrument 51-102 Continuous Disclosure Obligations, s. 13.1.
National Instrument 41-101 General Prospectus Requirements, s. 19.1.
Ontario Securities Commission Rule 56-501 Restricted Shares, s 4.2.
December 3, 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 of the principal regulator (the "Legislation") that:
1. In connection with National Instrument 62-104 Take-Over Bids and Issuer Bids ("NI 62-104") and National Instrument 62-103 The Early Warning System and Related Take-over Bid and Insider Reporting Issues ("NI 62-103"):
(a) an offer to acquire outstanding subordinate voting shares ("Subordinate Voting Shares"), restricted voting shares ("Restricted Voting Shares") or limited voting shares ("Limited Voting Shares", and collectively with the Subordinate Voting Shares and the Restricted Voting Shares, the "non-Multiple Voting Shares") of the Filer, as the case may be, which would constitute a take-over bid under the Legislation as a result of the securities subject to the offer to acquire, together with the offeror's securities, representing in the aggregate 20% or more of the outstanding Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as the case may be, at the date of the offer to acquire, be exempt from the requirements set out in Part 2 of NI 62-104 applicable to take-over bids (the "TOB Relief"),
(b) an acquiror who triggers the disclosure and filing obligations pursuant to the early warning requirements contained in the Legislation with respect to the Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as the case may be, be exempt from such requirements (the "Early Warning Relief"),
(c) an acquiror who acquires, during a take-over bid or an issuer bid, beneficial ownership of, or control or direction over, Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as the case may be, that, together with the acquiror's securities of that class, would constitute 5% or more of the outstanding Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as the case may be, be exempt from the requirement to issue and file a news release set out in section 5.4 of NI 62-104 (the "News Release Relief"),
(d) an issuer bid made by the Filer in the normal course on a published market, other than a designated exchange, with respect to Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as the case may be, be exempt from the requirements set out in Part 2 of NI 62-104 applicable to issuer bids (the "NCIB Relief" and together with the TOB Relief, the News Release Relief and the Early Warning Relief, the "Bid Relief");
2. The Filer be exempt from the disclosure requirements in Item 6.5 of Form 51-102F5 Information Circular ("Form 51-102F5") (the "Alternative Disclosure Relief", and together with the Bid Relief, the "Aggregation Relief"); and
3. The requirements under:
(a)
(i) subsections 12.2(3) and 12.2(4) of National Instrument 41-101 General Prospectus Exemptions ("NI 41-101"), (ii) Item 1.13(1) of Form 41-101 F1 Information Required in a Prospectus ("Form 41-101F1"); and (iii) item 1.12(1) of Form 44-101F1 Short Form Prospectus (including in respect of any equivalent disclosure in a prospectus or supplement filed pursuant to National Instrument 44-102 Shelf Distributions ("NI 44-102")) relating to the use of restricted security terms,
(b) subsections 10.1(1)(a), 10.1(4) and 10.1(6) of NI 51-102 Continuous Disclosure Obligations ("51-102") relating to the use of restricted security terms, and
(c) subsections 2.3(1)(1.), 2.3(1)(3.) and 2.3(2) of Ontario Securities Commission Rule 56-501 Restricted Shares ("OSC Rule 56-501") relating to the use of restricted share terms,
shall not apply to the Limited Voting Shares (the "Nomenclature Relief", and together with the Aggregation Relief, 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 Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Quebec, Saskatchewan and the Yukon Territory.
Terms defined in National Instrument 14-101 Definitions, MI 11-102, NI 62-103 and NI 62-104, including without limitation, "offeror", "offeror's securities", "offer to acquire", "acquiror", "acquiror's securities", "eligible institutional investor", and "security-holding percentage", have the same meaning if used in this decision, unless otherwise defined herein.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation continued under the Business Corporations Act (British Columbia) (the "BCBCA").
2. The Filer is a reporting issuer in each of the provinces and territories of Canada, except Quebec, and is not in default of the securities legislation in any of these jurisdictions.
3. The Filer's head office is located at 590 Madison Ave., 26th Floor, New York, NY 10022.
4. The Filer's authorized share capital consists of (i) an unlimited number of multiple voting shares ("Multiple Voting Shares" and together with the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares, the "Shares"), and (ii) an unlimited number of Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares.
5. As of December 2, 2020, 3,696,486 Multiple Voting Shares and 20,875,997 non-Multiple Voting Shares were issued and outstanding.
6. The Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares are listed on the CSE under the symbol "AYR.A".
7. The Filer is a vertically integrated multi-state operator in the U.S. cannabis sector, with operations in Massachusetts and Nevada. Through its operating companies, the Filer is a leading cultivator, manufacturer and retailer of cannabis products and branded cannabis packaged goods.
Aggregation Relief
8. As at June 30, 2020, the Filer believes it qualified as an FPI under Rule 405 of the U.S. Securities Act of 1933, as amended, and Rule 3b-4(b) of the U.S. Securities Exchange Act of 1934, as amended, as:
(a) the Filer is continued under the laws of British Columbia; and
(b) based on reasonable enquiry, less than 50% of the Filer's outstanding voting securities are held directly or indirectly of record by residents of the United States (the "FPI Threshold").
9. For the purposes of the FPI Threshold, "voting securities" are defined as those securities that entitle the holders to vote for the election of directors at the time of such determination.
10. As (a) the majority of the Filer's executive officers and directors are U.S. citizens or residents, (b) more than 50% of the Filer's assets are located in the United States, and (c) the Filer's business is administered primarily in the United States, the Filer will not qualify as an FPI should it exceed the FPI Threshold at the applicable time.
11. The Filer derives material benefits from its status as an FPI.
12. On December 3, 2020, the Filer amended its articles (the "Amendments") to (a) create and set the terms of two new share classes of the Filer, being the Restricted Voting Shares and the Limited Voting Shares, including applying coattail terms to such shares similar to those applicable to the existing Subordinate Voting Shares, and (b) amend the terms of the Filer's existing Multiple Voting Shares and Subordinate Voting Shares, including by amending the requirements in respect of who may hold Subordinate Voting Shares.
13. The Filer received the shareholder approvals required under applicable corporate and securities laws to implement the Amendments at the annual general and special meeting of the Filer held on November 4, 2020.
14. The Amendments are intended to ensure that the Filer maintains its FPI status under applicable U.S. securities laws and thereby avoids a commensurate material increase in its ongoing costs. This is to be accomplished by implementing a mandatory conversion mechanism in the Filer's share capital to decrease the number of shares eligible to be voted for directors of the Filer if the Filer's FPI Threshold would be exceeded.
15. For the purposes of the Amendments, a "U.S. Person" means a U.S. person as defined in Regulation S (promulgated under the U.S. Securities Act of 1933) in Section 902(k)(1) (as amended or replaced from time to time), and a "Non-U.S. Person" is any person who is not a U.S. Person. Under the Amendments, where Subordinate Voting Shares are held, beneficially owned or controlled, directly or indirectly, or jointly by (a) one or more U.S. Persons, and (b) one or more Non-U.S. Persons, such Subordinate Voting Shares shall be deemed to be held, beneficially owned or controlled by a U.S. Person.
16. Subject to the Specified Exceptions (as defined below), the Subordinate Voting Shares may only be held, beneficially owned or controlled by Non-U.S. Persons, and will carry one vote per share for the election of directors (and for all other purposes). The Subordinate Voting Shares will be automatically converted, without further act or formality, on a one-for one basis into Restricted Voting Shares if they become held, beneficially owned or controlled by a U.S. Person.
17. Subject to the Specified Exceptions, (a) the Restricted Voting Shares may be held, beneficially owned or controlled only by U.S. Persons and will carry one vote per share for the election of directors (and for all other purposes), and (b) the Limited Voting Shares may be held, beneficially owned or controlled only by U.S. Persons and will carry one vote per share on all matters except the election of directors, as the holders of Limited Voting Shares shall not have any entitlement to vote in respect of the election for directors of the Filer.
18. If, at any given time, the Restricted Voting Shares or the Limited Voting Shares are held, beneficially owned or controlled by Non-U.S. Persons, they will be automatically converted, without further act or formality, on a one-for-one basis into Subordinate Voting Shares.
19. Notwithstanding the foregoing, if, at any given time, the total number of Restricted Voting Shares represents a number equal to or in excess of the formulaic threshold set forth below, representing the FPI Threshold, then the minimum number of Restricted Voting Shares required to stay within the FPI Threshold will be automatically converted, without further act or formality, on a pro-rata basis across all registered holders of Restricted Voting Shares (rounded up to the next nearest whole number of shares), on a one-for-one basis, into Limited Voting Shares:
- - - - - - - - - - - - - - - - - - - -
(0.50 x Aggregate Number of Multiple Voting Shares, Subordinate Voting Shares and Restricted Voting Shares) -- (Aggregate Number of Multiple Voting Shares held, beneficially owned or controlled by U.S. Persons)
- - - - - - - - - - - - - - - - - - - -
20. Notwithstanding the foregoing, in connection with a formal bid for all equity shares on identical terms made in compliance with Canadian securities laws that results in the bidder owning or controlling more than fifty percent (50%) of the total voting power of the voting securities of the Filer for the election of directors (assuming for such purposes that the Limited Voting Shares each have one (1) vote per share for the election of directors), the bidder may elect, by way of written notice to the Filer, that the Restricted Voting Shares it so acquires not be automatically converted into Limited Voting Shares.
21. If, at any given time, the total number of Restricted Voting Shares represents a number below the FPI Threshold, then a number of Limited Voting Shares will be automatically converted, without further act or formality, on a pro-rata basis across all registered holders of Limited Voting Shares (rounded down to the next nearest whole number of shares), on a one-for-one basis, into Restricted Voting Shares, to the maximum extent possible such that the Restricted Voting Shares then represent a number of Shares that is one share less than the FPI Threshold.
22. The "Specified Exceptions" are (i) Shares held, beneficially owned or controlled by one or more underwriters for the purposes of a distribution to the public, and (ii) Shares held by a person acting solely in the capacity of an intermediary in connection with either the payment of funds and/or the delivery of securities and that provides centralized facilities for the deposit, clearing or settlement of trades in securities (including CDS Clearing and Depositary Services Inc., or any successor or assign).
23. The Multiple Voting Shares may be held, beneficially owned or controlled, directly or indirectly, by U.S. Persons or Non-U.S. Persons, and each Multiple Voting Share carries 25 votes per share. Each Multiple Voting Share will be convertible at the holder's option, on a one-for-one basis, into (a) a Subordinate Voting Share, if such Multiple Voting Share is held, beneficially owned or controlled by a Non-U.S. Person, and (b) a Restricted Voting Share, if such Multiple Voting Share is held, beneficially owned or controlled by a U.S. Person.
24. All Shares shall rank equally with the other Shares as to dividends on a share-for-share basis, without preference or distinction, except that, subject to applicable regulatory and stock exchange approvals, stock dividends or distributions may be declared by the Filer's board of directors that are payable in Multiple Voting Shares on the Multiple Voting Shares, in Subordinate Voting Shares on the Subordinate Voting Shares, in Restricted Voting Shares on the Restricted Voting Shares, and in Limited Voting Shares on the Limited Voting Shares, provided an equal number of shares is declared as a dividend or distribution on a per-share basis in each case. All Shares will rank pari passu on a per-share basis in the event of the Filer's liquidation, dissolution or winding-up, or a distribution of assets of the Filer for the purposes of a dissolution or winding-up of the Filer. All holders of Shares will be entitled to receive notice of, to attend (if applicable, virtually) and vote at all meetings of the Filer's shareholders, except that they will not be able to vote (but will be entitled to receive notice of, to attend (if applicable, virtually) and to speak) at those meetings at which the holders of a specific class are entitled to vote separately as a class under the BCBCA.
25. Each class of Shares shall be subject to coattail provisions to be contained in the terms of such class of Shares, pursuant to which each class of Shares may be converted into another class of Shares in the event an offer is made to purchase such other class of Shares and the offer is one which is required to be made to all or substantially all the holders in Canada of such other class of Shares (assuming that the offeree was resident in Ontario).
26. Aside from the differences in (a) who may hold Subordinate Voting Shares and Restricted Voting Shares and Limited Voting Shares as between U.S. Persons and Non-U.S. Persons, and (b) the voting rights attributable to each class of non-Multiple Voting Shares set out above, the non-Multiple Voting Shares are the same in all respects and are mandatorily inter-convertible (continuously and without formality) based on (i) the holder's status as a U.S. Person or Non-U.S. Person, and (ii) the Filer's FPI status.
27. The multi-class share structure among the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares was implemented solely to ensure the Filer's continued status as an FPI and thereby reduce compliance costs; it has no other purpose.
28. The non-Multiple Voting Shares will be automatically and mandatorily inter-convertible based on (a) the holder's status as a U.S. Person or Non-U.S. Person (as between Subordinate Voting Shares and Restricted Voting Shares/Limited Voting Shares), and (b) the status of the Filer's FPI Threshold (as between Restricted Voting Shares and Limited Voting Shares), in each case without any further act of the Filer or the holder or further formality.
29. An investor will not control or choose which class of non-Multiple Voting Shares it acquires and holds. There are no unique features of any class of non-Multiple Voting Shares which an existing or potential investor will be able to choose to acquire, exercise or dispose of; the class ultimately available to an investor will be a function of such investor's status as a U.S. Person or Non-U.S. Person and the Filer's FPI status only. Moreover, if after having acquired non-Multiple Voting Shares (a) a holder's status as a U.S. Person or Non-U.S. Person changes, or (b) the Filer's FPI status changes in a material manner, such Shares will convert accordingly and automatically, without formality or regard to any other consideration.
Nomenclature Relief
30. Section 1.1 of NI 41-101 and Section 1.1 of NI 51-102 defines "restricted security terms" to mean each of the terms "non-voting security", "subordinate voting security" and "restricted voting security".
31. Section 1.1 of OSC Rule 56-501 defines "restricted share terms" to mean "non-voting shares", "subordinate voting shares", "restricted voting shares" or any other term deemed appropriate by the Director.
32. The Limited Voting Shares may be considered restricted securities and restricted shares, as applicable, under NI 41-101, NI 51-102 and OSC Rule 56-501 as there will be (a) another class of shares that carries a disproportionate vote per share relative to the Limited Voting Shares, and (b) the share terms of the Limited Voting Shares contain provisions that nullify certain of the voting rights attributable to the Limited Voting Shares.
33. The Filer is limited to the restricted security term "non-voting" in respect of the nomenclature for the Limited Voting Shares insofar as (a) the restricted security terms "subordinate voting" and "restricted voting" are already taken by the Subordinate Voting Shares and Restricted Voting Shares, respectively, and (b) also naming the Limited Voting Shares as "restricted voting shares" would cause market confusion and be impracticable from a logistical standpoint given the need to distinguish the Limited Voting Shares from the Restricted Voting Shares.
34. It would be inappropriate to use the restricted security term "non-voting" in respect of the Limited Voting Shares because they will carry the right to vote generally other than in respect of the election of the Filer's directors.
35. The Filer desires to refer to such shares as Limited Voting Shares in any offering documents, in any future prospectuses and in all future continuous disclosure documents of the Filer to avoid confusing the Limited Voting Shares with Subordinate Voting Shares and/or Restricted Voting Shares.
36. The features of the Limited Voting Shares will be set out in disclosure documents pursuant to NI 41-101, National Instrument 44-101 Short Form Prospectus Distributions, NI 44-102 and NI 51-102, as applicable, in compliance with the form requirements of such instruments.
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 provided that:
1. the Filer publicly discloses the Exemption Sought and the terms and conditions of this decision in a news release filed on SEDAR promptly following the issuance of this decision;
2. the Filer discloses the Exemption Sought and the terms and conditions of this decision in each of its annual information forms and management information circulars filed on SEDAR following the issuance of this decision and in any other filing where the characteristics of the Shares are described;
3. with respect only to the TOB Relief, the securities subject to the offer to acquire, together with the offeror's securities, would not represent in the aggregate 20% or more of the outstanding Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares, as the case may be, calculated using (a) a denominator comprised of all of the outstanding Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares, determined in accordance with subsection 1.8(2) of NI 62-104 on a combined basis, as opposed to a per-class basis, and (b) a numerator including as offeror's securities all of the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares, as applicable, that constitute offeror's securities;
4. with respect only to the News Release Relief, the Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as the case may be, that the acquiror acquires beneficial ownership of, or control or direction over, when added to the acquiror's securities of that class, would not constitute 5% or more of the outstanding Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as the case may be, calculated using (a) a denominator comprised of all of the outstanding Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares, determined in accordance with subsection 1.8(2) of NI 62-104 on a combined basis, as opposed to a per-class basis, and (b) a numerator including as acquiror's securities, all of the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares that constitute acquiror's securities;
5. with respect only to the NCIB Relief, the Filer complies with the conditions in subsection 4.8(3) of NI 62-104, except that: (a) the bid is for not more than 5% of the outstanding Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares on a combined basis, as opposed to a per-class basis, and (b) the aggregate number of Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares acquired in reliance on the NCIB Relief by the Filer and any person acting jointly or in concert with the Filer within any 12-month period does not exceed 5% of the outstanding Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares on a combined basis, as opposed to a per-class basis, at the beginning of such 12-month period;
6. with respect only to the Early Warning Relief:
(a) the acquiror complies with the early warning requirements, except that, for the purpose of determining the percentage of outstanding Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as the case may be, that the acquiror has acquired or disposed of beneficial ownership, or acquired or ceased to have control or direction over, the acquiror calculates the percentage using (i) a denominator comprised of all of the outstanding Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares, determined in accordance with subsection 1.8(2) of NI 62-104, on a combined basis, as opposed to a per-class basis, and (ii) a numerator including, as acquiror's securities, all of the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares, as applicable, that constitute acquiror's securities; or
(b) in the case of an acquiror that is an eligible institutional investor, the acquiror complies with the requirements of the alternative monthly reporting system set out in Part 4 of NI 62-103 to the extent it is not disqualified from filing reports thereunder pursuant to section 4.2 of NI 62-103, except that, for purposes of determining the acquiror's securityholding percentage, the acquiror calculates its securityholding percentage using (i) a denominator comprised of all of the outstanding Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares determined in accordance with subsection 1.8(2) of NI 62-104 on a combined basis, as opposed to a per-class basis, and (ii) a numerator including all of the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares, as applicable, beneficially owned or controlled by the eligible institutional investor;
7. with respect only to the Alternative Disclosure Relief, the Filer provides the disclosure required by Item 6.5 of Form 51-102F5 except that for purposes of determining the percentage of voting rights attached to the Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, the Filer calculates the voting percentage using (a) a denominator comprised of all of the outstanding Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares on a combined basis, as opposed to a per-class basis, and (b) a numerator including all of the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares beneficially owned, or over which control or direction is exercised, directly or indirectly, by any person who, to the knowledge of the Filer's directors or executive officers, beneficially owns, controls or directs, directly or indirectly, voting securities carrying 10% or more of the voting rights attached to the outstanding Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares on a combined basis, as opposed to a per-class basis; and
8. with respect only to the Nomenclature Relief, the Limited Voting Shares are referred to as "Limited Voting Shares".
Outcome Metric Asset Management Limited Partnership et al.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- One-time transfer of portfolio securities between two pooled funds, both advised by the same portfolio adviser, to implement a merger between the funds -- Funds have substantially similar investment objectives and strategies, fees and valuation policies -- Costs of the merger borne by manager -- Sale of securities exempt from the self-dealing prohibition in paragraph s.13.5(2)(b)(iii), National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations.
National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss.13.5(2)(b)(iii) and 15.1.
December 17, 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) for an exemption from subparagraph 13.5(2)(b)(iii) of National Instrument 31-103 Registration Requirements Exemptions and Ongoing Registrant Obligations (NI 31-103), which prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of an investment fund for which a responsible person acts as an adviser, in order to effect the proposed merger (the Merger) of the Terminating Fund into the Continuing Fund (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 of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning 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 limited partnership established under the laws of Ontario with its head office in Toronto, Ontario. The general partner of the Filer, Outcome Metric Asset GP Inc., is a corporation formed under the laws of Canada.
2. The Filer is registered as a portfolio manager, investment fund manager, exempt market dealer and commodity trading manager in Ontario, as an exempt market dealer in British Columbia, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Saskatchewan, and as portfolio manager, investment fund manager, exempt market dealer and derivatives portfolio manager in Quebec.
3. The Filer's registration is subject to terms and conditions to address a unique situation, specifically, the Filer must ensure that the general partner of the Filer, identified in the limited partnership agreement governing the affairs of the Filer, and any other general partner of the Filer, will not carry on any activities other than as general partner of the Filer and that any activities they do carry on will be for or on behalf of the Filer.
4. The Filer is the trustee, portfolio manager and investment fund manager of the Terminating Fund, and the portfolio manager and investment fund manager of the Continuing Fund. The Filer will become the trustee of the Continuing Fund on January 1, 2021. The current trustee of the Continuing Fund is TSX Trust Company.
5. The Filer is not in default of securities legislation in any Jurisdiction.
The Funds:
6. Each of the Terminating Fund and Continuing Fund (together, the Funds and each, a Fund) is an open-end mutual fund trust established under the laws of Ontario. The Funds are not reporting issuers in any jurisdiction and are not subject to National Instrument 81-102 Investment Funds or National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).
7. Each Fund offers its units in all provinces and territories of Canada pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions.
8. The Funds are not in default of securities legislation in any Jurisdiction.
9. Currently, neither Fund qualifies as a "mutual fund trust" under the Income Tax Act (Canada) (the Tax Act) as neither Fund has at least 150 unitholders.
The Merger:
10. The Filer wishes to merge the Terminating Fund into the Continuing Fund on or with effect December 31, 2020 (the Effective Date), subject to receipt of all regulatory, and other, approvals. The Filer has decided to effect the Merger because of the substantial similarities in the Funds' investment portfolios and the desire to potentially reduce the management expense ratio by virtue of increased assets in the Continuing Fund.
11. Pursuant to the declaration of trust of the Terminating Fund, a special meeting of unitholders has been called by the Filer, to take place on December 30, 2020, whereat unitholders will be asked to approve the Merger. Unitholders were provided with an information circular (the Circular) providing relevant details of the Merger and a form of voting proxy. Provided approval of unitholders of the Terminating Fund is obtained in accordance with the declaration of trust, the Filer, in its capacity as trustee of the Terminating Fund, may effect the Merger and other related amendments.
12. There is no requirement in the declaration of trust of the Continuing Fund to provide notice to or obtain approval of unitholders for the issuance of units pursuant to the Merger or otherwise in connection therewith. The Filer has determined that the Merger is not material to the Continuing Fund.
13. There will be no change in management fees paid by unitholders of the Terminating Fund or the Continuing Fund as a result of the Merger.
14. No redemption fees, other fees or commissions will be payable by the Funds' unitholders in connection with the Merger. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the Terminating Fund's investment portfolio.
15. The costs associated with the Merger will be paid by the Filer.
16. As the Funds do not qualify as "mutual fund trusts" under the Tax Act, the Merger is not eligible to be completed on a tax deferred basis and, accordingly, will be completed on a taxable basis. Unitholders of the Terminating Fund will trigger a disposition for tax purposes on the effective date of the Merger, which will trigger a taxable gain or loss depending on the adjusted cost base of each unitholder's units, but will not give rise to material adverse tax consequences for the Terminating Fund and the vast majority of its unitholders. Unitholders of the Terminating Fund were provided with disclosure in the Circular that the Merger will be effected on a taxable basis because a tax-deferred alternative was not possible under the Tax Act.
17. Unitholders of the Terminating Fund will be able to redeem their units at net asset value (NAV) at all redemption dates up to the Effective Date.
18. The investment objectives and portfolios of the Continuing Fund and the Terminating Fund are substantially similar and both Funds primarily invest in exchange traded funds. The portfolio of assets of the Terminating Fund to be acquired by the Continuing Fund arising from the Merger will be consistent with the investment objectives of the Continuing Fund.
19. The NAV of each of the Funds is determined using substantially similar valuation principles and the Funds have similar redemption policies.
20. The following steps will be carried out to effect the Merger:
a. the value of the Terminating Fund's investment portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with its declaration of trust;
b. any securities in the investment portfolio of the Terminating Fund which do not conform to the investment objective and strategies of the Continuing Fund will be sold in the market for cash;
c. the Continuing Fund will acquire the portfolio assets and other assets of the Terminating Fund in exchange for units of the Continuing Fund;
d. the units of the Continuing Fund received by the Terminating Fund will have an aggregate NAV equal to the value of the Terminating Fund's portfolio assets and other assets that the Continuing Fund is acquiring, which units will be issued at the applicable NAV per security as of the close of business on the effective date of the Merger;
e. if necessary, the Terminating Fund will distribute a sufficient amount of its income and capital gains, if any, to ensure that the Terminating Fund will not be liable for income tax under Part I of the Tax Act, other than alternative minimum tax, for its current taxation year. Currently, it is expected that there will not be any distributions from the Terminating Fund;
f. immediately thereafter, the units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund on a dollar-for-dollar basis in exchange for their respective equivalent class of units in the Terminating Fund; and
g. as soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
21. The assets of the Funds will be valued in accordance with the valuation policies and procedures outlined in the declaration of trust of each Fund, and, at this value, the assets of the Terminating Fund will subsequently be exchanged for units of the Continuing Fund as described above.
22. The transfer of the assets of the Terminating Fund to the Continuing Fund will not adversely impact the liquidity of the Continuing Fund.
23. The board of directors of the general partner of the Filer, on behalf of the Filer, has determined that the Merger is in the best interests of the Funds and has approved the Merger, subject to obtaining the Exemption Sought.
24. The Filer believes that the Merger is in the best interests of unitholders of the Funds for the following reasons:
a. the Merger will result in a more streamlined and simplified product line-up that is easier for investors to understand;
b. the Merger will eliminate similar fund offerings across product line ups, reducing duplication and redundancy;
c. it is expected that the increased assets and larger unitholder base in the Continuing Fund will potentially allow for the reduction in management expense ratio; and
d. the Continuing Fund will benefit from its larger profile in the marketplace.
25. The desired end result of the Merger could be achieved by each unitholder redeeming his or her units of the Terminating Fund and using the proceeds to purchase units of the Continuing Fund. Executing the trades in this manner would result in negative consequences to the Terminating Fund and the Continuing Fund through the incurrence of unnecessary brokerage charges relating to the sale and repurchase of portfolio securities.
26. The portfolio securities and other assets of the Terminating Fund will be transferred from the Terminating Fund to the Continuing Fund in accordance with the steps described above. Because the transfer of portfolio securities and assets will take place at a value determined by common valuation procedures and the issue of units will be based upon the relative net asset value of the portfolio securities and other assets received by the Continuing Fund, and notice and redemption rights have been provided to Terminating Fund unitholders, it is the Filer's submission that any potential conflict of interest has been adequately addressed and as a result there is no conflict of interest for the Filer in effecting the Merger.
27. The sale of the assets of the Terminating Fund to the Continuing Fund and the corresponding purchase of such assets by the Continuing Fund as a step in the Merger may be considered a purchase or sale of securities, knowingly caused by a registered adviser that manages the investment portfolios of both Funds, from the Terminating Fund to, or by the Continuing Fund from, an investment fund for which a "responsible person" acts as an adviser, contrary to subparagraph 13.5(2)(b)(iii) of NI 31-103.
28. Unless the Exemption Sought is granted, the Filer would be prohibited from knowingly causing the securities of the Terminating Fund to be transferred to the Continuing Fund in connection with the Merger.
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 provided that the Merger is approved at a special meeting of unitholders of the Terminating Fund held for that purpose.
Northwest & Ethical Investments L.P.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval of investment fund mergers -- approval required because the mergers do not meet all the pre-approval criteria in National Instrument 81-102 Investment Funds -- mergers are not a "qualifying exchange" -- continuing funds and terminating funds do not have substantially similar investment objectives -- securityholders of the terminating funds provided timely and adequate disclosure regarding the mergers.
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.6(1), 5.7(1)(b) and 19.1(2).
December 18, 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) approving (the Approval Sought) the proposed mergers of the Terminating Funds (as defined below) with the Continuing Funds (as defined below) (the Proposed Mergers) pursuant to clause 5.5(1)(b) of National Instrument 81-102 -- Investment Funds (NI 81-102).
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 the other provinces and territories of Canada (together with Ontario, the Jurisdictions).
Terms defined in National Instrument 14-101 -- Definitions and MI 11-102 have the same meaning in this decision unless they are otherwise defined in this decision. The terms below have the following meanings:
Circular
means the joint management information circular of the Terminating Funds.
Continuing Funds
means each of NEI U.S. Equity RS Fund, NEI International Equity RS Fund, NEI Select Income RS Portfolio, NEI Select Income & Growth RS Portfolio, NEI Select Balanced RS Portfolio, NEI Select Growth & Income RS Portfolio, NEI Select Growth RS Portfolio, NEI Select Maximum Growth RS Portfolio, and NEI Balanced Yield Portfolio.
Fund or Funds
means the Terminating Funds and the Continuing Funds.
IRC
means the Independent Review Committee of the Funds.
NE
means Northwest & Ethical Investments L.P.
SEDAR
System for Electronic Document Analysis and Retrieval.
Tax Act
means the Income Tax Act (Canada).
Taxable Merger
means the proposed mergers of:
NEI Select Income Portfolio into NEI Select Income RS Portfolio;
NEI Select Income & Growth Portfolio into NEI Select Income & Growth RS Portfolio;
NEI Select Balanced Portfolio into NEI Select Balanced RS Portfolio;
NEI Select Growth & Income Portfolio into NEI Select Growth & Income RS Portfolio;
NEI Select Maximum Growth Portfolio into NEI Select Maximum Growth RS Portfolio;
and
NEI Tactical Yield Portfolio into NEI Balanced Yield Portfolio.
Tax-deferred Merger
means the proposed mergers of:
NEI U.S. Equity Fund into NEI U.S. Equity RS Fund;
NEI International Equity Fund into NEI International Equity RS Fund; and
NEI Select Growth Portfolio into NEI Select Growth RS Portfolio.
Terminating Funds
means each of NEI U.S. Equity Fund, NEI International Equity Fund, NEI Select Income Portfolio, NEI Select Income & Growth Portfolio, NEI Select Balanced Portfolio, NEI Select Growth & Income Portfolio, NEI Select Growth Portfolio, NEI Select Maximum Growth Portfolio, and NEI Tactical Yield Portfolio.
This decision is based on the following facts represented by the Filer:
A. The Manager is an Ontario limited partnership. The general partner of the Manager is Northwest & Ethical Investments Inc., a corporation formed under the laws of Canada with its head office in Toronto, Ontario.
B. The Manager is the investment fund manager of the Funds and is registered as (i) a portfolio manager and commodity trading manager in Ontario, (ii) an exempt market dealer in British Columbia, Ontario, Quebec and Saskatchewan, and (iii) an investment fund manager in British Columbia, Newfoundland and Labrador, Ontario and Quebec.
C. Each of the Funds is a mutual fund trust established under the laws of British Columbia or Ontario and is a reporting issuer under the applicable securities legislation of each Jurisdiction.
D. The securities of each Fund are qualified for distribution in the Jurisdictions pursuant to simplified prospectuses and annual information forms prepared and filed in accordance with the securities legislation of the Jurisdictions.
E. Each Fund is subject to the requirements of NI 81-102 (to the extent varied by exemptive relief if and as applicable). The securities of each Fund are issuable and redeemable on any business day.
F. Neither the Manager nor any Fund is in default of securities legislation in any Jurisdiction.
G. In accordance with National Instrument 81-106 -- Investment Fund Continuous Disclosure (81-106), on December 15, 2020 a press release announcing the Proposed Mergers was issued, a material change report with respect to the Proposed Mergers was filed on SEDAR and Amendments to the Funds' simplified prospectus, annual information form and Fund Facts were filed on SEDAR.
H. The Manager has received approval from its Board of Directors to proceed with the Proposed Mergers.
I. Meetings of the unitholders of the Terminating Funds will be held on or about March 9, 2021 (the Meetings), with the Proposed Mergers, if approved, being completed on or about April 16, 2021 in respect of the NEI U.S. Equity Fund and NEI International Equity Fund and April 23, 2021 in respect of the remaining Terminating Funds, or such later date as may be determined by the Manager (the Effective Date).
J. Pursuant to a Notice-and-Access decision{1} (the Notice-and-Access Decision), the Filer has obtained an exemption from the requirement in paragraph 12.2(2)(a) of NI 81-106 to send an information circular and proxy-related materials to the securityholders of each Terminating Fund and instead allows each Terminating Fund to make use of a notice-and-access process.
K. The notice prescribed by the Notice-and-Access Decision (the Notice-and-Access Document), the form of proxy and the fund facts document(s) relating to the relevant series of the applicable Continuing Fund will be sent to securityholders of each Terminating Fund commencing on or about February 5, 2021. Additionally, the Notice-and-Access Document, form of proxy and information circular (the Meeting Materials) will be filed via SEDAR and posted on the Filer's website on or about February 5, 2021.
L. The Meeting Materials will provide securityholders of each Terminating Fund with sufficient information to permit them to make an informed decision as to whether or not to approve the Proposed Mergers, including a discussion regarding the tax implications of the Proposed Mergers and the potential benefits of the Proposed Mergers.
M. Unitholders of the Funds will continue to have the right to redeem units of the Funds up to the close of business on the business day immediately prior to the Effective Date.
N. The application was made in connection with the following Proposed Mergers:
TERMINATING FUND
CONTINUING FUND
NEI U.S. Equity Fund{*}
NEI U.S. Equity RS Fund{*}
NEI International Equity Fund{*}
NEI International Equity RS Fund{*}
NEI Select Income Portfolio
NEI Select Income RS Portfolio
NEI Select Income & Growth Portfolio
NEI Select Income & Growth RS Portfolio
NEI Select Balanced Portfolio
NEI Select Balanced RS Portfolio
NEI Select Growth & Income Portfolio
NEI Select Growth & Income RS Portfolio
NEI Select Growth Portfolio{*}
NEI Select Growth RS Portfolio{*}
NEI Select Maximum Growth Portfolio
NEI Select Maximum Growth RS Portfolio
NEI Tactical Yield Portfolio
NEI Balanced Yield Portfolio
{*} Tax-deferred Mergers
O. The Proposed Mergers do not meet the requirements in section 5.6(1) of NI 81-102 as:
(a) in the case of the Taxable Mergers they will not be implemented as "qualifying exchanges" within the meaning of the Tax Act or as tax-deferred transactions under the Tax Act; and
(b) each Continuing Fund has investment objectives and strategies that are similar, but not necessarily substantially similar in all respects, to the applicable Terminating Fund.
P. The Taxable Mergers are proposed to proceed as a taxable merger as:
(a) implementing the Taxable Mergers on a taxable basis will preserve any unused tax losses of a Continuing Fund, which would otherwise expire upon implementation of the Taxable Merger on a tax deferred basis and therefore would not be available to shelter income and capital gains realized by the Continuing Fund in future years; and
(b) the Terminating Funds have or expect to have available loss-carryforwards, capital gains refunds, and/or accrued but as of yet unrealized losses on certain portfolio holdings that should serve to reduce the aggregate potential net realized capital gains resulting from the Proposed Mergers.
Q. Unitholders of the Terminating Funds will be provided with information about the tax consequences of the Proposed Mergers in the Circular and will have the opportunity to consider such information prior to voting on the Proposed Mergers.
R. Except as noted above, the Proposed Mergers will otherwise comply with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
S. The Manager has determined that the Proposed Mergers do not result in a material change for the Continuing Funds.
T. It is proposed that the following steps will be carried out to effect each Proposed Merger:
Step 1: Before the effective date of the Proposed Merger, certain of the securities in the portfolios of the Terminating Fund will be liquidated.
Step 2: The Terminating Fund will distribute to its unitholders sufficient amounts of its net income and net realized capital gains so that it will not be subject to tax under Part I of the Tax Act for its current taxation year.
Step 3: The Terminating Fund will transfer all of its assets, which will consist of cash and/or portfolio securities less an amount required to satisfy the liabilities of the Terminating Fund, to the applicable Continuing Fund, in exchange for units of the applicable Continuing Fund.
Step 4: Immediately following the above-noted transfer, the Terminating Fund will distribute to its unitholders the units of the applicable Continuing Fund so that following the distribution, the unitholders of the Terminating Fund will become direct holders of the applicable series of units of the applicable Continuing Fund.
Step 5: As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
U. The Manager believes the Proposed Mergers to be in the best interests of unitholders of the Terminating Funds for the following reasons:
(a) each Continuing Fund will have a larger net asset value following the Proposed Mergers, allowing for greater portfolio diversification opportunities, a potential for decreased amounts of assets dedicated to redemption, and a reduction in some shared transactional costs, than the Terminating Funds and Continuing Funds would enjoy separately;
(b) the Proposed Mergers will result in a more streamlined and simplified product line-up that is easier for investors to understand; and
(c) each Continuing Fund, as a result of its increased size, will benefit from a more significant profile in the marketplace.
V. No sales charges, redemption fees or other fees or commissions will be payable by unitholders in connection with the Proposed Mergers or with respect to any portfolio rebalancing in the Terminating Funds arising in connection with the Proposed Mergers. The costs and expenses specifically associated with the Proposed Mergers will be borne by the Manager.
W. Unitholders of a Terminating Fund will receive the same series of securities of the Continuing Fund as such unitholders hold in the Terminating Fund upon closing of the Proposed Merger.
X. The combined management and administrative fees for the relevant series of the applicable Continuing Fund are, or will as of the Effective Date be, in each case, the same as or lower than those of each Terminating Fund.
Y. The valuation procedures for the applicable Continuing Fund are the same as those of each Terminating Fund.
Z. Investors in the Terminating Funds will have the right to vote on the Proposed Mergers. Due to the redemption rights of unitholders, each unitholder ultimately can choose whether to remain in the Continuing Fund or not.
AA. Subsequent to the completion of the Proposed Mergers, the Terminating Funds will be wound up.
BB. Investors of each Terminating Fund are expected to benefit from the increased scale and operational efficiencies of the Continuing Fund, enjoying the same management fees.
CC. The Manager has referred the Proposed Mergers to the IRC for review, and after reasonable inquiry, the IRC has determined that the Proposed Mergers achieve a fair and reasonable result for the Terminating Funds and their unitholders. The results of the IRC's review of the Proposed Mergers will be referred to in the Circular.
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 Approval Sought is granted, provided that the Manager obtains the prior approval of the unitholders of the Terminating Funds for the Proposed Mergers at a special meeting held for that purpose.
{1} The Manager will be relying on the notice-and-access method pursuant to Re: Brandes Investment Partners & Co., 2016 CanLII 84805 (ON SEC).
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 service offered through unaffiliated mutual fund dealers and investment dealers.
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 and 15.1(2).
November 12, 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 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 a 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 (the Suitability Requirement) in the Legislation 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 the Statement Delivery Exemption are collectively referred to as 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 by the Filer in all of the other provinces of Canada (the Other Jurisdictions, and, together with Ontario, the Canadian Jurisdictions) in respect of the Exemption Sought.
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
NI 31-103 means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under the laws of Ontario with its head office located in Toronto, Ontario.
2. The Filer is registered under the Legislation as a portfolio manager and is also registered as a portfolio manager under the securities legislation in each of the Other Jurisdictions.
3. The Filer is not in default of securities legislation in any of the Canadian Jurisdictions.
The Model Portfolio Service
4. The Filer proposes to use its valuation and selection methodologies to construct and maintain model investment portfolios for various stated investment objectives (each a Model Portfolio and collectively theModel Portfolios).
5. Each Model Portfolio will have investment guidelines governing the acceptable minimum and maximum allocation to various asset classes within the Model Portfolio (the Permitted Ranges, and each, a Permitted Range).
6. Each Model Portfolio will be comprised exclusively of open-ended mutual funds, including exchange-traded mutual funds (ETFs), (collectively Funds and individually a Fund) established under the laws of a Canadian Jurisdiction and available on the platform of the Dealers, and cash and cash equivalents.
7. Each of the Funds is, or will be, a reporting issuer in one or more of the Canadian Jurisdictions, and subject to the requirements of National Instrument 81-102 Investment Funds.
8. The securities of each of the Funds are, or will be, qualified for distribution in one or more of the Canadian Jurisdictions pursuant to a: (a) simplified prospectus, annual information form and Fund Facts prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure, or (b) long form prospectus and ETF Facts prepared and filed in accordance with National Instrument 41-101 General Prospectus Requirements.
9. The securities of each Fund that is an ETF are, or will be, listed and traded on a recognized exchange.
10. Each of the Funds is, or will be, managed by a third-party investment fund manager that is unaffiliated with the Filer. In the future, one or more of the Funds may be managed by the Filer or an affiliate of the Filer.
11. The Model Portfolios will be offered as a service (the Service) to investors through registered dealers that are not affiliated with the Filer and that are either registered mutual fund dealers and members of The Mutual Fund Dealers Association of Canada (MFDA), or registered investment dealers and dealer members of the Investment Industry Regulatory Organization of Canada (IIROC) (collectively Dealers and individually a Dealer).
12. The applicable Dealer will collect all of the required know your client (KYC) and suitability information for each client considering the Service. Based on an assessment of the client's KYC and suitability information, the Dealer's dealing representative will recommend a Model Portfolio for the client.
13. The client will discuss the recommended Model Portfolio and the Funds within the Model Portfolio with their Dealer's dealing representative, and the client ultimately chooses the Model Portfolio. Model Portfolios are not changed or tailored for individual Clients.
14. If the client decides to invest in a Model Portfolio, a tripartite agreement (the Agreement) is entered into between the client, the Dealer and the Filer in respect of the Service as described below.
15. Securities of the Funds that comprise each Model Portfolio will be distributed through the Dealers to clients and will be held either directly by each client in his/her own account(s) established with the Dealer, or in the case of nominee accounts, in the Dealer's name, in trust for the client.
16. Clients will have no direct contact with the Filer in connection with the Filer's management of the Model Portfolios and will interact solely with their Dealer and approved persons of their Dealer in connection with the Filer's management of the Model Portfolios and the Dealer's administration of its accounts.
17. Each Dealer has the option of imposing a minimum investment amount for clients to participate in the Service, and the minimum investment amount for different Dealers may vary.
18. The Dealer will be responsible for gathering and periodically updating KYC information concerning the client and confirming, on at least an annual basis, the suitability of the Model Portfolio for the client.
19. Where a Dealer determines that a Model Portfolio is no longer appropriate for the client or that a different Model Portfolio would be more appropriate for the client, this will be communicated to the Filer and the client by the Dealer, and the Dealer will take appropriate action. A change to a different Model Portfolio will not be made without the client entering into a new Agreement in respect of the new Model Portfolio.
20. A client may terminate the Service at any time by instructing the Dealer to redeem or switch the client's investment out of the Funds. The Dealer and the Filer can terminate the Service under the conditions set out in the Agreement.
Monitoring, Service Trades and Additional Investment Trades
21. The Filer will oversee and monitor each Model Portfolio to ensure it remains in compliance with its stated investment objective and investment guidelines at all times and to determine whether any changes to the composition of the Model Portfolio or Permitted Ranges would be appropriate.
22. As part of the Service, provided that the Model Portfolio remains consistent with its stated investment objective at all times, the Filer may, from time to time, use its discretion to make decisions regarding certain changes to the holdings of a Model Portfolio within the Permitted Ranges (the Optimization Changes).
23. As part of the Service, provided that the client is given at least 60 days' advance written notice (the Written Notice) and the Model Portfolio remains consistent with its stated investment objective at all times, the Filer may also, from time to time, use its discretion to make decisions regarding certain changes to the Permitted Ranges (the Weighting Changes).
24. The Written Notice will describe the proposed Weighting Change and specify that if the client does not provide his or her objection to the proposed Weighting Change by a specified date, this non-objection will be deemed to be consent for the change on the effective date.
25. The Optimization Changes and Weighting Changes to Model Portfolios that are determined from time to time by the Filer will be communicated by the Filer to the Dealers in writing and will be effected in a client's account by the relevant Dealer through the following types of trades:
(a) purchase of securities to increase holdings of an existing Fund in a Model Portfolio (the Increase Trades);
(b) sale of securities to decrease holdings of an existing Fund in a Model Portfolio (the Decrease Trades);
(c) purchase of securities to add a new Fund to a Model Portfolio (the New Fund Trades); and
(d) sale of securities to remove an existing Fund from a Model Portfolio (the Fund Removal Trades, and together with the Increase Trades, Decrease Trades and New Fund Trades, the Service Trades).
26. In each case, the Dealer will confirm receipt of the Filer's instructions and will provide written confirmation to the Filer that the Service Trades have been effected in accordance with the Filer's instructions in the applicable client accounts.
27. A client may, from time to time, contribute additional funds to the client's account with a Dealer 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 Permitted Ranges (the Additional Investment Trades). All Additional Investment Trades will be effected by the relevant Dealer.
28. Dealers will not have discretionary authority to participate in the management of the Model Portfolios or to recommend Optimization Changes or Weighting Changes.
Fees and Expenses
29. Each client pays the Dealer a negotiated fee for the Service that is calculated as a percentage of the market value of the client's investment in the Service. Independent of the Service, each client also negotiates a separate fee for the services of their Dealer's dealing representative.
30. The Filer's fee for managing the Model Portfolios may vary from Dealer to Dealer, and is calculated based on the aggregate amount of assets held in Model Portfolios by all the Dealer's clients. This fee is paid by the Dealer and included in the service fee that the client pays to the Dealer.
31. The Model Portfolios will be comprised of institutional series units of Funds that are not ETFs, and regular units of Funds that are ETFs. The management fees for institutional series units of Funds that are not ETFs will be charged outside the Funds and are negotiable with the applicable Fund manager. The Dealer is responsible for negotiating the management fees for these Funds and these management fees will be included in the negotiated service fee that each client pays the Dealer. Certain institutional series of Funds that are not ETFs have operating expenses that will be charged within the Funds. The management fees and operating expenses for ETFs will be charged within the ETFs.
32. There will be no duplication of any fees or charges as a result of a client's decision to use the Service.
33. For Model Portfolios comprised of Funds that are not ETFs, there will be no separate fees, such as sales charges, redemption fees, switch fees or early trading fees, charged in connection with the Service Trades.
34. For Model Portfolios comprised of Funds that are ETFs, there will be no separate fees, such as sales charges, redemption fees, switch fees or early trading fees, charged in connection with the Service Trades except for brokerage fees (also known as trading or transaction fees) charged by the Dealer for each Service Trade, if any, which will be charged to each client on a proportional basis.
Agreement among the Filer, the Dealer and the Client and Client Reporting
35. The Agreement entered into among the Filer, the Dealer and each client in respect of the Service will set out, among other matters, the following:
(a) the name, investment objective and Permitted Ranges of the selected Model Portfolio, and the names of the underlying Funds that form part of the selected Model Portfolio at the time the Agreement is entered into;
(b) the role, duties and responsibilities of the Filer, including:
(i) that the client authorizes the Filer to manage the client's investments on a discretionary basis in accordance with the terms of the Model Portfolio selected by the client and without reference to the client's circumstances;
(ii) that the Filer has the discretion to make Optimization Changes, provided the Model Portfolio remains consistent with its stated investment objective and the Permitted Ranges;
(iii) that the Filer has the discretion to recommend Weighting Changes, provided the Client is given at least 60 days' advance written notice and does not object and the Model Portfolio remains consistent with its stated investment objective;
(c) the role, duties and responsibilities of the Dealer, including:
(i) that the Dealer will be solely responsible for gathering and periodically updating KYC information concerning the client and confirming, on at least an annual basis, the suitability of the selected Model Portfolio for the client;
(ii) that the Dealer will not have discretionary authority to participate in the management of the Model Portfolio or to recommend Optimization Changes or Weighting Changes;
(iii) that the Dealer is responsible for effecting all trades for the client associated with the Service, including the Service Trades;
(iv) that the Dealer is responsible for providing the client with all required reporting under the Legislation in connection with the Service, including trade confirmations, account statements and investment performance reports;
(d) a description of all fees and expenses payable by a client in respect of an investment in a Model Portfolio, including those charged directly to a client in respect of the Service and those charged in respect of an investment in the Funds through the Service, as well as confirmation that there will be no duplication of any fees or charges as a result of the client's decision to use the Service, as described in paragraphs 29 to 34 above;
(e) a statement that the Filer's fee, which is paid by the Dealer and included in the service fee that the client pays to the Dealer, is calculated based on the aggregate amount of assets held in Model Portfolios by all the Dealer's clients, and that it may vary from Dealer to Dealer;
(f) how the Service may be terminated.
36. The Dealer will provide a copy of the Agreement to the client and be responsible for ensuring that the client understands the Service and the topics covered in the Agreement.
37. The Dealer will reflect the Service Trades and Additional Investment Trades in each client's account(s) on the next business day following such trades, subject to technological limitations.
38. Clients will be able to access their accounts via Dealer online access on a daily basis.
39. Fund Facts and ETF Facts will be delivered to each client by the Dealer as required by the Legislation, subject to any applicable exemption.
40. Trade confirmations for every transaction in a client's account, including Service Trades, will be provided to the client by the Dealer in accordance with the requirements under the Legislation.
41. The Dealer will send account statements and investment performance reports to each client in the Service in accordance with the requirements under the Legislation.
42. The Dealer will provide each client in the Service with an annual tax reporting package.
Exemption Sought
43. In the absence of the Exemption Sought, the Filer would be required:
(a) to gather and update the information contemplated by the Know Your Client Requirement in section 13.2 of NI 31-103 for each client in the Service;
(b) to ensure that each Service Trade is suitable for each client in the Service in accordance with the Suitability Requirement in section 13.3 of NI 31-103, rather than invested in accordance with the terms of the client's Model Portfolio; and
(c) to deliver account statements and investment performance reports to clients who have invested in the Model Portfolios in accordance with the Statement Delivery Requirement in sections 14.14, 14.14.1 and 14.18 of NI 31-103.
44. The Dealers do not require an exemption from the adviser registration requirement under the Legislation as a result of their involvement with the Service as they will not be engaged in providing discretionary management advice to clients in connection with the management of the Model Portfolios and will be effecting the Service Trades in accordance with the Filer's instructions, without exercising any discretion.
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 provided that:
(a) the Filer is, at the time of each 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) each client in the Service is informed in writing in the Agreement or otherwise:
(i) of the roles, duties and responsibilities of the Filer and the Dealer, including that:
a. the Filer will manage the Model Portfolios without reference to the client's circumstances and only in accordance with the terms of the Model Portfolio selected by the client;
b. the Dealer will be solely responsible for gathering and periodically updating KYC information concerning the client and confirming, on at least an annual basis, the suitability of the selected Model Portfolio for the client;
(ii) that the client will receive account statements and performance reports from the Dealer, and will not receive account statements and performance reports from the Filer;
(d) the Filer will adopt, maintain and apply policies and procedures designed to provide reasonable assurance that each Dealer complies with its KYC and suitability obligations with respect to each client in the Service, including requiring that:
(i) the Dealer not market and sell the Model Portfolios through an order-execution-only, suitability-exempt channel;
(ii) the Dealer notify the Filer of each instance where a Model Portfolio is sold to a client on the basis of a client-directed trade as contemplated in section 13.3 of NI 31-103 and similar provisions under IIROC or MFDA rules;
(iii) the Dealer be responsible for gathering and periodically updating KYC information concerning the client and confirming, on at least an annual basis, the suitability of the selected Model Portfolio for each client, and
(iv) the Dealer, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that the Dealer has complied with its KYC and suitability obligations with respect to each client in the Service.
(e) the Filer will adopt, maintain and apply policies and procedures designed to provide reasonable assurance that each Dealer complies with the client reporting obligations under the rules of the MFDA or IIROC, as applicable, in respect of clients in the Service, including requiring that the Dealer, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that:
(i) the Dealer has complied with its client reporting obligations under the rules of the MFDA or IIROC, as applicable, and
(ii) the Dealer has performed and documented sample testing and reconciliations to provide reasonable assurance that account statements and investment performance reports delivered to clients are complete, accurate and delivered on a timely basis in a format that is compliant with the rules of the MFDA or IIROC, as applicable.
(f) the Filer will adopt, maintain and apply policies and procedures designed to provide reasonable assurance that each Dealer complies with its obligations in respect of all trading for clients in connection with the Service, including requiring that the Dealer, on an annual basis, no later than 30 days after the end of the calendar year, provide a certificate to the Filer that:
(i) the Dealer has effected all trades for clients in connection with the Service, including all Additional Investment Trades, in accordance with the selected Model Portfolios, and
(ii) the Dealer has effected all Service Trades in accordance with the Filer's written instructions in the applicable client accounts.
(g) the Filer has a written agreement in place with each Dealer concerning their respective roles, duties and responsibilities to clients in respect of the Service.
File No. 2019-44
December 17, 2020
WHEREAS on December 17, 2020, the Ontario Securities Commission held a hearing by teleconference to consider a request by Staff of the Commission (Staff) for an adjournment of the merits hearing in this proceeding, previously set by order of the Commission dated July 15, 2020;
ON HEARING the submissions of the representatives for Staff and for Miner Edge Inc., Miner Edge Corp. and Rakesh Handa, and on considering the parties consent to the making of this order;
IT IS ORDERED THAT:
1. the hearing dates of February 1, 2021 and March 1, 3, 4, 5, 8, 10, 11, 12, 15 and 17, 2021 are vacated;
2. 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 May 4, 2021;
3. each party shall file a completed copy of the E-hearing Checklist for Videoconference Hearings by no later than May 7, 2021;
4. a further attendance in this proceeding is scheduled for May 14, 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 June 7, 2021; and
6. the merits hearing shall take place by videoconference and commence on June 15, 2021 at 10:00 a.m. and continue on June 16, 17, 18, 21, 22, 23, 24, 25 and 28, 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.
File No. 2019-48
December 17, 2020
WHEREAS on December 16, 2020, the Ontario Securities Commission held a hearing by teleconference;
ON HEARING the submissions of the representatives for Staff of the Commission and for the respondent, David Randall Miller, and on considering a joint request for an adjournment of the hearing on the merits, and the parties' consent to the making of this order;
IT IS ORDERED THAT:
1. the merits hearing scheduled to begin on January 18, 2021 is adjourned;
2. the merits hearing shall take place by videoconference and commence on May 28, 2021, at 10:00 a.m., and continue on May 31, June 3, 4, 7, 9, 10 and 11, 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;
3. 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 19, 2021;
4. each Party shall provide to the Registrar a completed copy of the E-hearing Checklist for Videoconference Hearings by no later than 4:30 p.m. on April 23, 2021;
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 containing hyperlinks to the documents in the hearing brief, in accordance with the Protocol for E-hearings, by no later than 4:30 p.m. on May 21, 2021; and
6. a further attendance in this proceeding is scheduled for April 28, 2021, by teleconference, at 10:00 a.m., or on such other date and time as may be agreed to by the Parties and set by the Office of the Secretary.
Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. -- ss. 144, 147
Application for revocation under s. 144 of Securities Act and for interim exemptions from recognition as exchanges under s. 21(1) of Act pursuant to section 147 of Act -- interim relief granted to BTFL and BV -- subject to terms and conditions.
WHEREAS BTFL is authorized by the U.K. Financial Conduct Authority, a financial regulatory body in the United Kingdom, to act as the operator of a multilateral trading facility (MTF), specifically BMTF;
AND WHEREAS BV is authorized by the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) as an investment firm with permission to operate an MTF, specifically BTFE;
AND WHEREAS BTFL and BV (together, the Applicants) have participants located in Ontario;
AND WHEREAS an MTF that allows access by Ontario participants is considered by the Ontario Securities Commission (Commission) to be carrying on business as an exchange in Ontario;
AND WHEREAS on December 22, 2017, the Commission issued an interim order under section 147 of the Act exempting BTFL on an interim basis from the requirement in subsection 21(1) of the Act to be recognized as an exchange (Interim Order);
AND WHEREAS on December 14, 2018, the Commission issued an order varying the termination date of the Interim Order (First Variation Order);
AND WHEREAS on June 27, 2019, the Commission issued a second order varying the termination date of the Interim Order (Second Variation Order);
AND WHEREAS on December 13, 2019, the Commission issued a third order varying the termination date of the Interim Order (Third Variation Order);
AND WHEREAS the Interim Order, as varied by the First Variation Order, the Second Variation Order, and the Third Variation Order will terminate on the earlier of (i) December 31, 2020 and (ii) the effective date of a subsequent order exempting BTFL from the requirement to be recognized as an exchange under section 21(1) of the Act, unless further extended by order of the Commission;
AND WHEREAS the Interim Order and all subsequent variations contained a condition that BTFL not provide access to Ontario participants to trading in products other than swaps, as defined in section 1a(47) of the United States Commodity Exchange Act, as amended, without prior Commission approval;
AND WHEREAS pursuant to the terms of a settlement agreement approved by the Commission on December 18, 2020 (the Settlement Agreement), BTFL admitted that it breached Ontario securities laws by, among other things failing to prevent, or otherwise permitting, trading in fixed income securities by Ontario participants in contravention of the terms of the Interim Order and subsequent variations of the Interim Order;
AND WHEREAS pursuant to the terms of the Settlement Agreement, BV admitted it breached Ontario securities laws by, among other things, failing to prevent, or otherwise permitting, trading by Ontario participants without being recognized as an exchange by the Commission or obtaining an exemption from the requirement to be recognized;
AND WHEREAS pursuant to the terms of the Settlement Agreement, the Applicants have been ordered to:
1. Each conduct an internal review of their compliance practices and procedures relating to ensuring compliance with Ontario securities laws, and institute any necessary changes in accordance with the process set forth in Schedule "A" to the Settlement Order, pursuant to paragraph 4 of subsection 127(1) of the Act;
2. Disgorge to the Commission amounts obtained as a result of non-compliance with Ontario securities law in the amount of $663,305.20, pursuant to paragraph 10 of subsection 127(1) of the Act;
3. Pay an administrative penalty in the amount of $2,506,011.80, pursuant to paragraph 9 of subsection 127(1) of the Act; and
4. Bring themselves into compliance with Ontario securities law by submitting an application with the Commission, pursuant to sections 144 and 147 of the Act, requesting that the Interim Order be revoked and restated to exempt BTFL and BV on an interim basis from the requirement in subsection 21(1) of the Act to be recognized as an exchange and to allow for the trading of swaps and fixed income securities, provided that applications for Subsequent Decisions (as defined below) for each of the Applicants are filed by January 31, 2021;
AND WHEREAS the MTFs operated by the Applicants are important sources of liquidity to Ontario participants for derivatives and fixed income securities;
AND WHEREAS requiring the MTFs operated by the Applicants to cease operating prior to the issuance of Subsequent Decisions could potentially burden Ontario participants and disrupt the capital markets;
AND WHEREAS the Applicants have submitted applications dated December 14, 2020 pursuant to sections 144 and 147 of the Act (the Applications) requesting that the Interim Order be revoked and restated to exempt BTFL and BV on an interim basis from the requirement in subsection 21(1) of the Act to be recognized as an exchange and to allow for the trading of swaps and fixed income securities (the Restated Order);
AND WHEREAS the products traded on the Applicants' MTFs, BMTF and BTFE, are not commodity futures contracts as defined in the Commodity Futures Act (Ontario) and the Applicants are not considered to be carrying on business as commodity futures exchanges in Ontario;
AND WHEREAS each of the Applicants is required under the Settlement Agreement to file a full application for subsequent decisions to allow for the trading of swaps and fixed income securities by January 31, 2021 (the Subsequent Decisions);
AND WHEREAS as part of the application or filings for the Subsequent Decisions, the Applicants must include a request for the registration and authorization of a Canadian affiliate as an alternative trading system, as that term is defined in National Instrument 21-101 Marketplace Operation;
AND WHEREAS pursuant to the Settlement Agreement, the Applications, and the representations made by the Applicants to the Commission, the Commission has determined that the granting of the Restated Order would not be prejudicial to the public interest;
IT IS HEREBY ORDERED by the Commission that
1. Pursuant to section 144 of the Act, the Interim Order is hereby revoked.
2. Pursuant to section 147 of the Act, BTFL is exempt from recognition as an exchange under subsection 21(1) of the Act to operate BMTF, provided that
(a) BTFL complies with the terms and conditions contained in Schedule "A"; and
(b) BTFL files an application for a Subsequent Decision by January 31, 2021.
3. Pursuant to section 147 of the Act, BV is exempt from recognition as an exchange under subsection 21(1) of the Act to operate BTFE, provided that
(a) BV complies with the terms and conditions contained in Schedule "A"; and
(b) BV files an application for a Subsequent Decision by January 31, 2021.
4. For each of BTFL or BV, this Order shall terminate on the earlier of (i) June 30, 2021 and (ii) the effective date of the Subsequent Decisions in respect of BTFL or BV, as the case may be.
DATED December 18, 2020
1. The Applicants will maintain their registration, in the case of BTFL, as a multilateral trading facility (MTF) with the U.K. Financial Conduct Authority (the FCA), and, in the case of BV, as an investment firm with permission to operate an MTF with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) (the AFM).
2. BTFL will continue to be subject to the regulatory oversight of the FCA.
3. BV will continue to be subject to the regulatory oversight of the AFM.
4. The Applicants will continue to comply with the ongoing requirements applicable to them as MTFs registered with the FCA and AFM.
5. The Applicants will promptly notify the Commission if their registration as MTFs has been revoked, suspended, or amended by the FCA or AFM, as applicable, or the basis on which their registration as MTFs has been granted has significantly changed.
6. The Applicants must do everything within their control, which includes cooperating with the Commission as needed, to carry out their activities as exchanges exempted from recognition under subsection 21(1) of the Act in compliance with Ontario securities law.
7. The Applicants will not provide direct access to a participant in Ontario (Ontario User) unless the Ontario User is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements.
8. For each Ontario User provided direct access to its MTF, each Applicant will require, as part of its application documentation or continued access to the MTF, the Ontario User to represent that it is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements.
9. The Applicants may reasonably rely on a written representation from the Ontario User that specifies either that it is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements, provided the Applicant notifies such Ontario User that this representation is deemed to be repeated each time it enters an order, request for quote or response to a request for quote or otherwise uses the Applicants' MTFs.
10. The Applicants will require Ontario Users to notify the Applicants if their registration as applicable under Ontario securities laws has been revoked, suspended, or amended by the Commission or if they are no longer exempt from or become subject to those requirements and, following notice from the Ontario User and subject to applicable laws, the Applicants will promptly restrict the Ontario User's access to the Applicants if the Ontario User is no longer appropriately registered or exempt from those requirements.
11. The Applicants must make available to Ontario Users appropriate training for each person who has access to trade on the Applicants' facilities.
12. The Applicants will not provide access to an Ontario User to trading in any products other than swaps, as defined in section 1a(47) of the United States Commodity Exchange Act as amended (but without regard to any exclusions from the definition), or fixed income securities without prior Commission approval.
13. With respect to a proceeding brought by the Commission arising out of, related to, concerning or in any other manner connected with the Commission's regulation and oversight of the activities of the Applicants in Ontario, the Applicants will submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario and (ii) an administrative proceeding in Ontario.
14. The Applicants will maintain with the Commission a valid and binding appointment of an agent for service in Ontario upon whom the Commission may serve a notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding arising out of, related to, concerning or in any other manner connected with the Commission's regulation and oversight of the Applicants' activities in Ontario.
15. The Applicants will provide to its Ontario Users disclosure that:
a. rights and remedies against the Applicants may only be governed by the laws of the United States (U.S.), as applicable, rather than the laws of Ontario and may be required to be pursued in the U.S., as applicable, rather than in Ontario; and
b. the rules applicable to trading on the Applicants may be governed by the laws of the U.S., United Kingdom, or the Netherlands, rather than the laws of Ontario.
16. The Applicants will notify staff of the Commission promptly of:
a. any material change to their businesses or operations or the information provided in the Application, including, but not limited to material changes:
i. to the regulatory oversight by the FCA and AFM, as applicable;
ii. the corporate governance structure of the Applicants;
iii. the access model, including eligibility criteria, for Ontario Users;
iv. systems and technology; and
v. the clearing and settlement arrangements for the Applicants;
b. any condition or change in circumstances whereby the Applicants are unable or anticipates they will not be able to continue to meet any of the relevant rules and regulations of the FCA or AFM, as applicable;
c. any known investigations of, or any disciplinary action against the Applicants by the FCA, AFM, or any other regulatory authority to which they are subject;
d. any matter known to the Applicants that may materially and adversely affect their financial or operational viability, including, but not limited to, any declaration of an emergency pursuant to the Applicants' rules;
e. any default, insolvency, or bankruptcy of a participant of the Applicants known to the Applicants or its representatives that may have a material, adverse impact upon the Applicants; and
f. any material systems outage, malfunction or delay.
17. The Applicants will promptly provide staff of the Commission with the following information to the extent it is required to provide to or file such information with the FCA or AFM:
a. details of any material legal proceeding instituted against the Applicants;
b. notification that the Applicants have instituted a petition for a judgment of bankruptcy or insolvency or similar relief, or to wind up or liquidate the Applicants or has a proceeding for any such petition instituted against them; and
c. the appointment of a receiver or the making of any voluntary arrangement with creditors.
18. The Applicants will maintain the following updated information and submit such information in a manner and form acceptable to the Commission on a quarterly basis (within 30 days of the end of each calendar quarter), and at any time promptly upon the request of staff of the Commission:
a. a current list of all Ontario Users and whether the Ontario User is registered under Ontario securities laws or is exempt from or not subject to registration, and, to the extent known by the Applicants, other persons or companies located in Ontario trading on the Applicants' MTFs as customers of participants (Other Ontario Participants);
b. the legal entity identifier assigned to each Ontario User, and, to the extent known by the Applicants, to Other Ontario Participants in accordance with the standards set by the Global Legal Entity Identifier System;
c. a list of all Ontario Users whom the Applicants have referred to the FCA or AFM, as applicable, or, to the best of the Applicants' knowledge, whom have been disciplined by the FCA or AFM, as applicable, with respect to such Ontario Users' activities on the Applicants' MTFs and the aggregate number of all participants referred to the FCA and/or the AFM, as applicable in the last quarter by the Applicants;
d. a list of all active investigations during the quarter by the Applicants relating to Ontario Users and the aggregate number of active investigations during the quarter relating to all participants undertaken by the Applicants;
e. a list of all Ontario applicants for status as a participant who were denied such status or access to the Applicants during the quarter, together with the reasons for each such denial;
f. a list of all additions, deletions, or changes to the products available for trading since the prior quarter;
g. for each product,
i. the total trading volume and value originating from Ontario Users, and, to the extent known by the Applicants, from Other Ontario Participants, presented on a per Ontario User or per Other Ontario Participant basis; and
ii. the proportion of worldwide trading volume and value on the Applicants conducted by Ontario Users, and, to the extent known by the Applicants, by Other Ontario Participants, presented in the aggregate for such Ontario Users and Other Ontario Participants;
provided in the required format; and
h. a list outlining each material incident of a security breach, systems failure, malfunction, or delay (including cyber security breaches, systems failures, malfunctions or delays reported under section 15(g) of this Schedule) that occurred at any time during the quarter for any system relating to trading activity, including trading, routing or data, specifically identifying the date, duration and reason, to the extent known or ascertainable by the Applicants, for the failure, malfunction or delay, and noting any corrective action taken.
19. The Applicants will provide such information as may be requested from time to time by, and otherwise cooperate with, the Commission or its staff, subject to any applicable privacy or other laws (including solicitor-client privilege) governing the sharing of information and the protection of personal information.
George Weston Limited -- s. 6.1 of NI 62-104
Section 6.1 of NI 62-104 -- Issuer bid -- relief from requirements applicable to issuer bids in Part 2 of NI 62-104 -- issuer proposes to repurchase 1,300,000 of its common shares at a discount to market price from a related party -- the subject shares represent less than 1% of the issuer's outstanding shares -- the repurchase is an exempt related party transaction under MI 61-101 -- selling shareholder is not able to sell shares into the market and is required to restrict sales to persons that are related to it or else put the tax-deferred nature of the butterfly reorganization at risk, to the detriment of the issuer and all other shareholders -- repurchase was reviewed, negotiated and unanimously approved by issuer's independent directors with the support of a financial advisor -- shares are highly liquid securities and the purchase price will be at a discount to the prevailing market price of the shares so other shareholders will be able to sell their shares in the market at a higher price than what the selling shareholder is receiving from the issuer -- share repurchase is exempt from the requirements applicable to issuer bids in Part 2 of NI 62-104, subject to conditions, including that, the repurchase is announced at least two clear trading days before it is completed so that the purchase price takes into account any changes in the market price following announcement of the repurchase.
National Instrument 62-104 Take-Over Bids and Issuer Bids, Part 2 and s. 6.1.
UPON the application (the "Application") of George Weston Limited ("GWL") to the Ontario Securities Commission (the "Commission") for an order of the Commission pursuant to section 6.1 of National Instrument 62-104 Take-Over Bids and Issuer Bids ("NI 62-104") exempting GWL from the requirements applicable to issuer bids in Part 2 of NI 62-104 (the "Issuer Bid Requirements") in respect of the proposed purchase by GWL of 1,300,000 of GWL's common shares (the "Subject Shares") in one trade executed following the close of markets on December 21, 2020 (the "GWL Transaction") from 1283837 Ontario Limited, an entity controlled by W. Galen Weston (the "Weston Entity", and together with the other entities controlled by W. Galen Weston, the "Weston Control Group");
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON GWL (and the Weston Control Group in respect of paragraphs 6, 7, 13, 15, 16, 17, 21, and 31, as they relate to the Weston Entity or the Weston Control Group) having represented to the Commission that:
1. GWL is a corporation existing under the Canada Business Corporations Act and is in good standing.
2. The registered and head office of GWL is located at 22 St. Clair Avenue East, Suite 700, Toronto, Ontario, Canada, M4T 2S5.
3. GWL is a reporting issuer in each of the provinces and territories of Canada, and is not in default of any requirements under applicable securities legislation or the rules and regulations made pursuant thereto in the jurisdictions in which it is a reporting issuer.
4. The authorized share capital of GWL consists of an unlimited number of common shares (the "GWL Shares"), up to 10,000,000 preferred shares, series I ("GWL Series I Preferred Shares"), up to 10,600,000 preferred shares, series II ("GWL Series II Preferred Shares"), up to 10,000,000 preferred shares, series III ("GWL Series III Preferred Shares"), up to 8,000,000 preferred shares, series IV ("GWL Series IV Preferred Shares"), and up to 8,000,000 preferred shares, series V ("GWL Series V Preferred Shares"). As of December 7, 2020, there were 153,670,563 GWL Shares, 9,400,000 Series I Preferred Shares, no Series II Preferred Shares, 8,000,000 Series III Preferred Shares, 8,000,000 Series IV Preferred Shares, and 8,000,000 Series V Preferred Shares issued and outstanding.
5. The GWL Shares, GWL Series I Preferred Shares, GWL Series III Preferred Shares, GWL Series IV Preferred Shares, and GWL Series V Preferred Shares are listed on the Toronto Stock Exchange (the "TSX") under the symbols "WN", "WN.PR.A", "WN.PR.C", "WN.PR.D", and "WN.PR.E", respectively.
6. W. Galen Weston is the controlling shareholder of GWL. As of December 7, 2020, the Weston Control Group beneficially owned or had control or direction over an aggregate of 81,706,054 GWL Shares (which include the Subject Shares), representing approximately 53.2% of the issued and outstanding GWL Shares. All of the Subject Shares are held by the Weston Entity in the Province of Ontario.
7. GWL is the controlling shareholder of Loblaw Companies Limited ("Loblaw"). As of December 7, 2020, GWL was the beneficial owner of an aggregate of 184,020,849 common shares of Loblaw (the "Loblaw Shares"), representing approximately 52.2% of the issued and outstanding Loblaw Shares. Through his control of GWL, W. Galen Weston also controls Loblaw.
8. Pursuant to a "Notice of Intention to Make Normal Course Issuer Bid" dated May 21, 2020 that was filed with, and accepted by, the TSX, GWL is permitted to make purchases of up to 7,683,528 GWL Shares, representing approximately 5% of outstanding GWL Shares as at the date specified in the notice, pursuant to a normal course issuer bid (the "GWL NCIB") during the 12-month period beginning on May 25, 2020 and ending on May 24, 2021. As at December 7, 2020, no GWL Shares have been acquired under the GWL NCIB.
9. To the best of GWL's knowledge, as of December 7, 2020, the "public float" for the GWL Shares represented approximately 46.5% of all issued and outstanding GWL Shares for purposes of the TSX rules governing normal course issuer bids (the "TSX NCIB Rules").
10. The GWL Shares are "highly-liquid securities" within the meaning of section 1.1 of Commission Rule 48-501 Trading during Distributions, Formal Bids and Share Exchange Transactions ("Rule 48-501") and section 1.1 of the Universal Market Integrity Rules ("UMIR").
11. On November 1, 2018, Loblaw spun out its approximate 61.6% effective interest in Choice Properties Real Estate Investment Trust ("Choice REIT") by way of a butterfly reorganization (the "Butterfly Reorganization"). In connection with the Butterfly Reorganization, holders of Loblaw Shares (the "Loblaw Shareholders") other than GWL received 0.135 of a GWL Share for each Loblaw Share held, which was equivalent to the market value of their pro rata interest in Choice REIT, and GWL received Loblaw's approximate 61.6% effective interest in Choice REIT.
12. The Butterfly Reorganization was the only form of spin-out that could be implemented on a basis that was tax efficient for both Loblaw and its Canadian shareholders. At the time of announcement of the Butterfly Reorganization, Loblaw's interest in Choice REIT had an embedded deferred liability for Canadian income tax purposes in an amount of approximately $640 million. Had Loblaw spun-out, or directly distributed, its interest in Choice REIT to all Loblaw Shareholders, Loblaw would have triggered that entire tax liability for itself, to the detriment of Loblaw Shareholders in an implied amount of approximately $1.70 per Loblaw Share. In addition, such a direct distribution would generally have been taxable to Loblaw Shareholders as a dividend.
13. The Weston Control Group has indicated to GWL that it wishes to sell 1,300,000 Subject Shares held by the Weston Entity. The Weston Control Group confirmed that these sales are part of an internal reorganization of W. Galen Weston's holdings and that the Weston family intends to maintain its control position in GWL.
14. The Subject Shares represent approximately 0.85% of the issued and outstanding GWL Shares as at December 7, 2020.
15. The Weston Control Group has also indicated to Loblaw that it wishes to sell 3,269,208 Loblaw Shares held by the Weston Entity as part of an internal reorganization of W. Galen Weston's holdings. Loblaw has also made an application to the Commission for an order of the Commission pursuant to section 6.1 of NI 62-104 exempting Loblaw from the Issuer Bid Requirements in respect of the proposed purchase by Loblaw of 3,269,208 Loblaw Shares from the Weston Entity on substantially the same terms as the GWL Transaction.
16. For the purposes of the "butterfly" rules in section 55 of the Income Tax Act (the "Tax Act"), if a "specified shareholder" (for the purposes of those rules) sells GWL Shares or Loblaw Shares to an unrelated person or partnership in certain circumstances, this could cause the Butterfly Reorganization to become taxable to GWL and Loblaw and each of them would be liable for a substantial amount of tax. The members of the Weston Control Group, including the Weston Entity, are "specified shareholders" for the purposes of the "butterfly" rules in section 55 of the Tax Act.
17. The Weston Entity could effect the sale of the Subject Shares in the open market in reliance on the exemption for a trade by a control person provided in National Instrument 45-102 Resale of Securities (the "NI 45-102 Exemption"). However, as a result of the Butterfly Reorganization and in order to not put the tax-deferred nature of the Butterfly Reorganization at risk, the Weston Entity is unable to sell the Subject Shares into the market and must restrict sales to persons that are related to it. Accordingly, the NI 45-102 Exemption is not available to facilitate the sale of the Subject Shares. As the only practical alternative, the Weston Control Group approached GWL to ask GWL to consider repurchasing the Subject Shares.
18. The GWL Transaction will be executed at a price that is 97% of the lesser of: (a) the volume weighted average price (the "VWAP") of the GWL Shares on the TSX for the 20 trading days immediately prior to the date the GWL Transaction is agreed to; and (b) the VWAP of the GWL Shares on the TSX for the two trading days immediately prior to completion of the GWL Transaction (the "Purchase Price"). Other than the Purchase Price, no fee or other consideration will be paid by GWL in connection with the GWL Transaction.
19. The GWL Transaction was reviewed, negotiated and unanimously approved by the independent directors of GWL (the "Independent Directors"), and Scotia Capital Inc. (the "Financial Advisor") was engaged to provide financial advice to support this process. The board of GWL approved the GWL Transaction (with Galen G. Weston and Paviter S. Binning abstaining from the vote) on the basis of the unanimous recommendation of the Independent Directors.
20. As the Weston Entity is willing to sell the Subject Shares at a discount to the prevailing market price of the GWL Shares, GWL has determined that (a) it would be advantageous to purchase the Subject Shares from a pricing, volume and timing perspective, (b) it will be able to purchase the Subject Shares at a lower per share price than the price that it would be able to purchase GWL Shares under the GWL NCIB, and (c) the purchase of Subject Shares is in the best interests of GWL and the holders of GWL Shares (the "GWL Shareholders"), constitutes a desirable use of GWL's funds and would not impose an imprudent financial burden on GWL.
21. Other than the Subject Shares, (a) GWL has no current plans to repurchase any GWL Shares from the Weston Control Group, and (b) the Weston Control Group has no current plans to sell any GWL Shares.
22. The GWL Transaction was not proposed or agreed to with the intention of conferring preferential treatment to the Weston Control Group and the Financial Advisor has advised that the GWL Transaction does not confer preferential treatment on the Weston Control Group from a financial perspective. In particular, the Financial Advisor has advised that if the Weston Entity was to sell the Subject Shares into the market, it would be able to do so at less than a 3% discount. In addition, other than accommodating the Butterfly Reorganization considerations set out above, the tax result of the GWL Transaction is expected to be effectively the same for the Weston Entity as if it sold the Subject Shares into the market.
23. The purchase of Subject Shares will not adversely affect GWL or the rights of any of GWL's security holders and will not materially affect control of GWL. The GWL Transaction will not prejudice the ability of other GWL Shareholders to otherwise sell GWL Shares in the open market at the prevailing market price.
24. Following the receipt of this Order, and prior to or upon GWL entering into the definitive agreement with respect to the GWL Transaction, GWL will issue and file a press release (the "Press Release") that: (a) describes the GWL Transaction (including the terms of this Order); and (b) states that, immediately following the completion of the GWL Transaction, GWL will file a report on SEDAR indicating the aggregate dollar amount paid for the Subject Shares pursuant to the GWL Transaction.
25. The Press Release will be issued and filed at least two clear trading days prior to the completion of the GWL Transaction.
26. Immediately following the completion of the GWL Transaction, GWL will file a report on SEDAR indicating the aggregate dollar amount paid for the Subject Shares pursuant to the GWL Transaction.
27. GWL and the entities in the Weston Control Group, including the Weston Entity, are "related parties" and the GWL Transaction would be a "related party transaction" for the purposes of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101").
28. Paragraphs 5.5(a) and 5.7(1)(a) of MI 61-101 (the "25% Market Cap Exemption") exempts related party transactions from the valuation and minority approval requirements if, at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, insofar as it involves interested parties, exceeds 25% of the issuer's market capitalization. The GWL Transaction is able to satisfy the conditions of the 25% Market Cap Exemption and accordingly, GWL is relying on same in respect of the GWL Transaction.
29. But for the fact that the Purchase Price will be at a discount to the prevailing market price and below the prevailing bid-ask price for the GWL Shares on the TSX at the time of the GWL Transaction, GWL could otherwise acquire the Subject Shares through the facilities of the TSX as a "block purchase" under the GWL NCIB in accordance with the block purchase exception in paragraph 629(1)7 of the TSX NCIB Rules and the exemption from the Issuer Bid Requirements set out in subsection 4.8(2) of NI 62-104.
30. In accordance with the requirements of the TSX, the Subject Shares repurchased under the GWL Transaction will be taken into account by GWL when calculating the maximum annual aggregate limit that is imposed upon the GWL NCIB. After the 1,300,000 Subject Shares are repurchased under the GWL Transaction, GWL will still be able to purchase 6,383,528 GWL Shares under the GWL NCIB.
31. At the time that the definitive agreement in respect of the GWL Transaction is entered into, and at the time that the GWL Transaction is completed, neither GWL, any member of the Weston Control Group, nor any of their respective personnel who negotiated the definitive agreement or made, participated in the making of, or provided advice in connection with the decision to enter into the GWL Transaction, will be aware of any "material change" or any "material fact" (each as defined in the Securities Act (Ontario) (the "Act")) in respect of GWL or the GWL Shares that has not been generally disclosed.
AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;
IT IS ORDERED pursuant to section 6.1 of NI 62-104 that GWL be exempt from the Issuer Bid Requirements in connection with the GWL Transaction, provided that:
(a) following the receipt of this Order, and prior to or upon GWL entering into the definitive agreement in respect of the GWL Transaction, GWL issues and files the Press Release;
(b) the Press Release is issued and filed at least two clear trading days prior to the completion of the GWL Transaction;
(c) the Subject Shares will be repurchased by GWL from the Weston Entity for a per share purchase price equal to 97% of the lesser of: (i) the VWAP of the GWL Shares on the TSX for the 20 trading days immediately prior to the date the GWL Transaction is agreed to, and (ii) the VWAP of the GWL Shares on the TSX for the two trading days immediately prior to completion of the GWL Transaction;
(d) immediately following the completion of the GWL Transaction, GWL files a report on SEDAR indicating the aggregate dollar amount paid for the Subject Shares pursuant to the GWL Transaction;
(e) at the time that the definitive agreement in respect of the GWL Transaction is entered into, and at the time that the GWL Transaction is completed, the GWL Shares are "highly-liquid securities" within the meaning of section 1.1 of Rule 48-501 and section 1.1 of UMIR; and
(f) at the time that the definitive agreement in respect of the GWL Transaction is entered into, and at the time that the GWL Transaction is completed, neither GWL, any member of the Weston Control Group, nor any of their respective personnel who negotiated the definitive agreement or made, participated in the making of, or provided advice in connection with the decision to enter into the GWL Transaction, is aware of any "material change" or any "material fact" (each as defined in the Act) in respect of GWL or the GWL Shares that has not been generally disclosed.
DATED at Toronto this 17th day of December, 2020.
Loblaw Companies Limited -- s. 6.1 of NI 62-104
Section 6.1 of NI 62-104 -- Issuer bid -- relief from requirements applicable to issuer bids in Part 2 of NI 62-104 -- issuer proposes to repurchase 3,269,208 of its common shares at a discount to market price from a related party -- the subject shares represent less than 1% of the issuer's outstanding shares -- the repurchase is an exempt related party transaction under MI 61-101 -- selling shareholder is not able to sell shares into the market and is required to restrict sales to persons that are related to it or else put the tax-deferred nature of the butterfly reorganization at risk, to the detriment of the issuer and all other shareholders -- repurchase was reviewed, negotiated and unanimously approved by issuer's independent directors with the support of a financial advisor -- shares are highly liquid securities and the purchase price will be at a discount to the prevailing market price of the shares so other shareholders will be able to sell their shares in the market at a higher price than what the selling shareholder is receiving from the issuer -- share repurchase is exempt from the requirements applicable to issuer bids in Part 2 of NI 62-104, subject to conditions, including that, the repurchase is announced at least two clear trading days before it is completed so that the purchase price takes into account any changes in the market price following announcement of the repurchase.
National Instrument 62-104 Take-Over Bids and Issuer Bids, Part 2 and s. 6.1.
UPON the application (the "Application") of Loblaw Companies Limited ("Loblaw") to the Ontario Securities Commission (the "Commission") for an order of the Commission pursuant to section 6.1 of National Instrument 62-104 Take-Over Bids and Issuer Bids ("NI 62-104") exempting Loblaw from the requirements applicable to issuer bids in Part 2 of NI 62-104 (the "Issuer Bid Requirements") in respect of the proposed purchase by Loblaw of 3,269,208 of Loblaw's common shares (the "Subject Shares") in one trade executed following the close of markets on December 21, 2020 (the "Loblaw Transaction") from 1283837 Ontario Limited, an entity controlled by W. Galen Weston (the "Weston Entity", and together with the other entities controlled by W. Galen Weston, the "Weston Control Group");
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON Loblaw (and the Weston Control Group in respect of paragraphs 7, 8, 14, 16, 17, 18, 22, and 33, as they relate to the Weston Entity or the Weston Control Group) having represented to the Commission that:
1. Loblaw is a corporation existing under the Canada Business Corporations Act and is in good standing.
2. The registered office of Loblaw is located at 22 St. Clair Avenue East, Suite 700, Toronto, Ontario, Canada, M4T 2S5. The head office of Loblaw is located at 1 President's Choice Circle, Brampton, Ontario, Canada, L6Y 5S5.
3. Loblaw is a reporting issuer in each of the provinces and territories of Canada, and is not in default of any requirements under applicable securities legislation or the rules and regulations made pursuant thereto in the jurisdictions in which it is a reporting issuer.
4. The authorized share capital of Loblaw consists of an unlimited number of common shares (the "Loblaw Shares"), up to 1,000,000 first preferred shares ("Loblaw First Preferred Shares"), an unlimited number of second preferred shares, series A ("Loblaw Second Preferred Shares, Series A") and an unlimited number of second preferred shares, Series B ("Loblaw Second Preferred Shares, Series B"). As of December 7, 2020, there were 352,861,654 Loblaw Shares, no Loblaw First Preferred Shares, no Loblaw Second Preferred Shares, Series A and 9,000,000 Loblaw Second Preferred Shares, Series B issued and outstanding.
5. The Loblaw Shares and Loblaw Second Preferred Shares, Series B are listed on the Toronto Stock Exchange (the "TSX") under the symbols "L" and "L.PR.B", respectively.
6. George Weston Limited ("GWL") is the controlling shareholder of Loblaw. As of December 7, 2020, GWL was the beneficial owner of an aggregate of 184,020,849 Loblaw Shares, representing approximately 52.2% of the issued and outstanding Loblaw Shares.
7. W. Galen Weston is the controlling shareholder of GWL. As of December 7, 2020, the Weston Control Group beneficially owned or had control or direction over an aggregate of 81,706,054 common shares of GWL (the "GWL Shares"), representing approximately 53.2% of the issued and outstanding GWL Shares. Through his control of GWL, W. Galen Weston also controls Loblaw.
8. In addition, as of December 7, 2020, the Weston Control Group beneficially owned or had control or direction over an aggregate of 5,280,208 Loblaw Shares (which include the Subject Shares), representing approximately 1.5% of the issued and outstanding Loblaw Shares. All of the Subject Shares are held by the Weston Entity in the Province of Ontario.
9. Pursuant to a "Notice of Intention to Make Normal Course Issuer Bid" dated April 29, 2020 that was filed with, and accepted by, the TSX, Loblaw is permitted to make purchases of up to 17,888,888 Loblaw Shares, representing approximately 5% of outstanding Loblaw Shares as at the date specified in the notice, pursuant to a normal course issuer bid (the "Loblaw NCIB") during the 12-month period beginning on May 1, 2020 and ending on April 30, 2021. As at December 7, 2020, an aggregate of 5,045,667 Loblaw Shares have been acquired under the Loblaw NCIB.
10. To the best of Loblaw's knowledge, as of December 7, 2020, the "public float" for the Loblaw Shares represented approximately 46.2% of all issued and outstanding Loblaw Shares for purposes of the TSX rules governing normal course issuer bids (the "TSX NCIB Rules").
11. The Loblaw Shares are "highly-liquid securities" within the meaning of section 1.1 of Commission Rule 48-501 Trading during Distributions, Formal Bids and Share Exchange Transactions ("Rule 48-501") and section 1.1 of the Universal Market Integrity Rules ("UMIR").
12. On November 1, 2018, Loblaw spun out its approximate 61.6% effective interest in Choice Properties Real Estate Investment Trust ("Choice REIT") by way of a butterfly reorganization (the "Butterfly Reorganization"). In connection with the Butterfly Reorganization, holders of Loblaw Shares (the "Loblaw Shareholders") other than GWL received 0.135 of a GWL Share for each Loblaw Share held, which was equivalent to the market value of their pro rata interest in Choice REIT, and GWL received Loblaw's approximate 61.6% effective interest in Choice REIT.
13. The Butterfly Reorganization was the only form of spin-out that could be implemented on a basis that was tax efficient for both Loblaw and its Canadian shareholders. At the time of announcement of the Butterfly Reorganization, Loblaw's interest in Choice REIT had an embedded deferred liability for Canadian income tax purposes in an amount of approximately $640 million. Had Loblaw spun-out, or directly distributed, its interest in Choice REIT to all Loblaw Shareholders, Loblaw would have triggered that entire tax liability for itself, to the detriment of Loblaw Shareholders in an implied amount of approximately $1.70 per Loblaw Share. In addition, such a direct distribution would generally have been taxable to Loblaw Shareholders as a dividend.
14. The Weston Control Group has indicated to Loblaw that it wishes to sell 3,269,208 Subject Shares held by the Weston Entity. The Weston Control Group confirmed that these sales are part of an internal reorganization of W. Galen Weston's holdings and that the Weston family intends to maintain its control position in Loblaw.
15. The Subject Shares represent approximately 0.93% of the issued and outstanding Loblaw Shares as at December 7, 2020.
16. The Weston Control Group has also indicated to GWL that it wishes to sell 1,300,000 GWL Shares held by the Weston Entity as part of an internal reorganization of W. Galen Weston's holdings. GWL has also made an application to the Commission for an order of the Commission pursuant to section 6.1 of NI 62-104 exempting GWL from the Issuer Bid Requirements in respect of the proposed purchase by GWL of 1,300,000 GWL Shares from the Weston Entity on substantially the same terms as the Loblaw Transaction.
17. For the purposes of the "butterfly" rules in section 55 of the Income Tax Act (the "Tax Act"), if a "specified shareholder" (for the purposes of those rules) sells Loblaw Shares or GWL Shares to an unrelated person or partnership in certain circumstances, this could cause the Butterfly Reorganization to become taxable to Loblaw and GWL and each of them would be liable for a substantial amount of tax. The members of the Weston Control Group, including the Weston Entity, are "specified shareholders" for the purposes of the "butterfly" rules in section 55 of the Tax Act.
18. The Weston Entity could effect the sale of the Subject Shares in the open market in reliance on the exemption for a trade by a control person provided in National Instrument 45-102 Resale of Securities (the "NI 45-102 Exemption"). However, as a result of the Butterfly Reorganization and in order to not put the tax-deferred nature of the Butterfly Reorganization at risk, the Weston Entity is unable to sell the Subject Shares into the market and must restrict sales to persons that are related to it. Accordingly, the NI 45-102 Exemption is not available to facilitate the sale of the Subject Shares. As the only practical alternative, the Weston Control Group approached Loblaw to ask Loblaw to consider repurchasing the Subject Shares.
19. The Loblaw Transaction will be executed at a price that is 97% of the lesser of: (a) the volume weighted average price (the "VWAP") of the Loblaw Shares on the TSX for the 20 trading days immediately prior to the date the Loblaw Transaction is agreed to; and (b) the VWAP of the Loblaw Shares on the TSX for the two trading days immediately prior to completion of the Loblaw Transaction (the "Purchase Price"). Other than the Purchase Price, no fee or other consideration will be paid by Loblaw in connection with the Loblaw Transaction.
20. The Loblaw Transaction was reviewed, negotiated and unanimously approved by the independent directors of Loblaw (the "Independent Directors"), and Scotia Capital Inc. (the "Financial Advisor") was engaged to provide financial advice to support this process. The board of Loblaw approved the Loblaw Transaction (with Galen G. Weston and Paviter S. Binning abstaining from the vote) on the basis of the unanimous recommendation of the Independent Directors.
21. As the Weston Entity is willing to sell the Subject Shares at a discount to the prevailing market price of the Loblaw Shares, Loblaw has determined that (a) it would be advantageous to purchase the Subject Shares from a pricing, volume and timing perspective, (b) it will be able to purchase the Subject Shares at a lower per share price than the price that it would be able to purchase Loblaw Shares under the Loblaw NCIB, and (c) the purchase of Subject Shares is in the best interests of Loblaw and Loblaw Shareholders, constitutes a desirable use of Loblaw's funds and would not impose an imprudent financial burden on Loblaw.
22. Other than the Subject Shares, (a) Loblaw has no current plans to repurchase any Loblaw Shares from the Weston Control Group, and (b) the Weston Control Group has no current plans to sell any Loblaw Shares.
23. The Loblaw Transaction was not proposed or agreed to with the intention of conferring preferential treatment to the Weston Control Group and the Financial Advisor has advised that the Loblaw Transaction does not confer preferential treatment on the Weston Control Group from a financial perspective. In particular, the Financial Advisor has advised that if the Weston Entity was to sell the Subject Shares into the market, it would be able to do so at less than a 3% discount. In addition, other than accommodating the Butterfly Reorganization considerations set out above, the tax result of the Loblaw Transaction is expected to be effectively the same for the Weston Entity as if it sold the Subject Shares into the market.
24. The purchase of Subject Shares will not adversely affect Loblaw or the rights of any of Loblaw's security holders and will not materially affect control of Loblaw. The Loblaw Transaction will not prejudice the ability of other Loblaw Shareholders to otherwise sell Loblaw Shares in the open market at the prevailing market price.
25. Following the receipt of this Order, and prior to or upon Loblaw entering into the definitive agreement with respect to the Loblaw Transaction, Loblaw will issue and file a press release (the "Press Release") that: (a) describes the Loblaw Transaction (including the terms of this Order); and (b) states that, immediately following the completion of the Loblaw Transaction, Loblaw will file a report on SEDAR indicating the aggregate dollar amount paid for the Subject Shares pursuant to the Loblaw Transaction.
26. The Press Release will be issued and filed at least two clear trading days prior to the completion of the Loblaw Transaction.
27. Immediately following the completion of the Loblaw Transaction, Loblaw will file a report on SEDAR indicating the aggregate dollar amount paid for the Subject Shares pursuant to the Loblaw Transaction.
28. Loblaw and the entities in the Weston Control Group, including the Weston Entity, are "related parties" and the Loblaw Transaction would be a "related party transaction" for the purposes of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101").
29. Paragraphs 5.5(a) and 5.7(1)(a) of MI 61-101 (the "25% Market Cap Exemption") exempts related party transactions from the valuation and minority approval requirements if, at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, insofar as it involves interested parties, exceeds 25% of the issuer's market capitalization. The Loblaw Transaction is able to satisfy the conditions of the 25% Market Cap Exemption and accordingly, Loblaw is relying on same in respect of the Loblaw Transaction.
30. But for the fact that the Purchase Price will be at a discount to the prevailing market price and below the prevailing bid-ask price for the Loblaw Shares on the TSX at the time of the Loblaw Transaction, Loblaw could otherwise acquire the Subject Shares through the facilities of the TSX as a "block purchase" under the Loblaw NCIB in accordance with the block purchase exception in paragraph 629(1)7 of the TSX NCIB Rules and the exemption from the Issuer Bid Requirements set out in subsection 4.8(2) of NI 62-104.
31. In accordance with the requirements of the TSX, the Subject Shares repurchased under the Loblaw Transaction will be taken into account by Loblaw when calculating the maximum annual aggregate limit that is imposed upon the Loblaw NCIB. After the 3,269,208 Subject Shares are repurchased under the Loblaw Transaction, Loblaw will still be able to purchase 9,574,013 Loblaw Shares under the Loblaw NCIB.
32. As the Loblaw Transaction is not occurring pursuant to the Loblaw NCIB, it will not trigger the automatic securities disposition plan dated February 25, 2020 that operates pursuant to the Loblaw NCIB to allow GWL to maintain its approximate 52.2% interest in Loblaw.
33. At the time that the definitive agreement in respect of the Loblaw Transaction is entered into, and at the time that the Loblaw Transaction is completed, neither Loblaw, any member of the Weston Control Group, nor any of their respective personnel who negotiated the definitive agreement or made, participated in the making of, or provided advice in connection with the decision to enter into the Loblaw Transaction, will be aware of any "material change" or any "material fact" (each as defined in the Securities Act (Ontario) (the "Act")) in respect of Loblaw or the Loblaw Shares that has not been generally disclosed.
AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;
IT IS ORDERED pursuant to section 6.1 of NI 62-104 that Loblaw be exempt from the Issuer Bid Requirements in connection with the Loblaw Transaction, provided that:
(a) following the receipt of this Order, and prior to or upon Loblaw entering into the definitive agreement in respect of the Loblaw Transaction, Loblaw issues and files the Press Release;
(b) the Press Release is issued and filed at least two clear trading days prior to the completion of the Loblaw Transaction;
(c) the Subject Shares will be repurchased by Loblaw from the Weston Entity for a per share purchase price equal to 97% of the lesser of: (i) the VWAP of the Loblaw Shares on the TSX for the 20 trading days immediately prior to the date the Loblaw Transaction is agreed to, and (ii) the VWAP of the Loblaw Shares on the TSX for the two trading days immediately prior to completion of the Loblaw Transaction;
(d) immediately following the completion of the Loblaw Transaction, Loblaw files a report on SEDAR indicating the aggregate dollar amount paid for the Subject Shares pursuant to the Loblaw Transaction;
(e) at the time that the definitive agreement in respect of the Loblaw Transaction is entered into, and at the time that the Loblaw Transaction is completed, the Loblaw Shares are "highly-liquid securities" within the meaning of section 1.1 of Rule 48-501 and section 1.1 of UMIR; and
(f) at the time that the definitive agreement in respect of the Loblaw Transaction is entered into, and at the time that the Loblaw Transaction is completed, neither Loblaw, any member of the Weston Control Group, nor any of their respective personnel who negotiated the definitive agreement or made, participated in the making of, or provided advice in connection with the decision to enter into the Loblaw Transaction, is aware of any "material change" or any "material fact" (each as defined in the Act) in respect of Loblaw or the Loblaw Shares that has not been generally disclosed.
DATED at Toronto this 17th day of December, 2020.
National Policy 11-206 Process for Cease to be a Reporting Issuer Applications and National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions -- application for order that issuer is not a reporting issuer and for full revocation of failure-to-file cease trade order -- issuer cease traded due to failure to file annual audited financial statements and annual management's discussion and analysis and related certifications -- issuer has completed reorganization under the Companies' Creditors Arrangement Act -- issuer has applied for a full revocation of the cease trade order -- amalgamated issuer created as part of the CCAA Reorganization has applied to cease to be a reporting issuer in each jurisdiction where it is a reporting issuer -- full revocation of the failure-to-file cease trade order and cease to be reporting issuer application granted.
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 1(10)(a)(ii) and 144.
National Policy 11-206 Process for Cease to be a Reporting Issuer Applications.
National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions.
DÉCISION No 2020-DIC-0027
Dossier no 29444
[TRANSLATION]
December 14, 2020
Nemaska Lithium Inc. (the Issuer) is the ultimate surviving amalgamated corporation and the successor entity to the corporation also named "Nemaska Lithium Inc." prior to the CCAA Reorganization (defined below). As the successor to such predecessor entity pursuant to the CCAA Reorganization, the Issuer is subject to a failure-to-file cease trade order (the FFCTO) issued by the regulator or securities regulatory authority in each of the Jurisdictions (each a Decision Maker) on November 6, 2020.
The Decision Makers have received an application from the Issuer, through its predecessor entity named Nemaska Lithium Inc., under the securities legislation of the Jurisdictions (the Legislation) for:
(i) an order (the FFCTO Revocation Order) under the Legislation revoking the FFCTO; and
(ii) an order (the Cease to be a Reporting Issuer Order) under the Legislation that the Issuer, as a successor to its predecessor entity named Nemaska Lithium Inc, has ceased to be a reporting issuer in all jurisdictions of Canada in which it is a reporting issuer.
The FFCTO Revocation Order is the order of the regulator or securities regulatory authority in Québec (the Principal Regulator) and evidences the decision of the Decision Maker in Ontario.
In respect of the Cease to be a Reporting Issuer Order, under the Process for Cease to be a Reporting Issuer Applications (for a dual application):
(a) the regulator or securities regulatory authority in Québec is the principal regulator;
(b) the Issuer, through its predecessor entity named Nemaska Lithium Inc., has provided notice that subsection 4C.5(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied in Alberta, British Columbia, Saskatchewan, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Northwest Territories, Nunavut and Yukon; and
(c) the Cease to be a Reporting Issuer Order is the order of the Principal Regulator and evidences the decision of the regulator or securities regulatory authority in Ontario.
Terms defined in National Instrument 14-101 Definitions or, in Québec, in Regulation 14-501Q on definitions, MI 11-102, National Policy 11-206 Process for Cease to be Reporting Issuer Applications (NP 11-206) and National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions have the same meanings if used in this order, unless otherwise defined.
The order is based upon the following facts represented by the Issuer:
1. Nemaska Lithium Inc., as a predecessor to the Issuer, was, and the Issuer is, a corporation existing under the Canada Business Corporations Act with its registered and principal Canadian office in the Province of Québec.
2. The Issuer is, as a successor to its predecessor entity also named Nemaska Lithium Inc., a reporting issuer in default of filing its annual audited financial statements and annual management's discussion and analysis for the year ended June 30, 2020 under theSecurities Act (Québec) (the Act) and the securities legislation of each of the jurisdictions of Canada and the annual certifications required in respect of such filings pursuant to Regulation 52-109 respecting Certification of Disclosure in Issuers' Annual and Interim Filings (Filings).
3. The authorized share capital of Nemaska Lithium Inc., as a predecessor to the Issuer, consisted of an unlimited number of common shares (Common Shares).
4. Immediately prior to the implementation of the CCAA Reorganization, Nemaska Lithium Inc., as a predecessor to the Issuer, had 847,634,338 issued and outstanding Common Shares.
5. In addition to the Common Shares, there were also outstanding, immediately prior to the implementation of the CCAA Reorganization, options to purchase Common Shares that were issued pursuant to the share purchase option plan of Nemaska Lithium Inc., as a predecessor to the Issuer, all of which were "out of the money" (Options).
6. Nemaska Lithium Inc., as a predecessor to the Issuer, had no securities issued and outstanding immediately prior to the implementation of the CCAA Reorganization other than the Common Shares and the Options.
7. The Common Shares were previously listed and posted for trading on the Toronto Stock Exchange (TSX). The Common Shares were delisted from the TSX on February 6, 2020, and from the American stock exchange Over-the-Counter QX on December 31, 2019.
8. Immediately prior to the implementation of the CCAA Reorganization, no securities of Nemaska Lithium Inc., as a predecessor to the Issuer, were traded in Canada on a "marketplace" as defined in Regulation 21-101 respecting Marketplace Operation (Regulation 21-101).
9. On November 6, 2020, an FFCTO was issued in respect of the Filings. The FFCTO took effect in each jurisdiction of Canada that has a statutory reciprocal order provision, subject to the terms of the local securities legislation.
10. As the successor to Nemaska Lithium Inc., the FFCTO applies to the Issuer as of and from the Effective Date (defined below).
11. Since October 29, 2020, Nemaska Lithium Inc., as a predecessor to the Issuer, had been and remained in default regarding the Filings and its interim financial statements and interim management's discussion and analysis for the period ended September 30, 2020 under the Act and the securities legislation of each of the jurisdictions of Canada and the certifications required in respect of such filings pursuant to Regulation 52-109 (Interim Filings).
The CCAA Proceedings
12. On December 23, 2019, Nemaska Lithium Inc., Nemaska Lithium P1P Inc. (Nemaska P1P), Nemaska Lithium Shawinigan Transformation Inc. (Nemaska Shawinigan), Nemaska Lithium Whabouchi Inc. Nemaska Whabouchi) and Nemaska Lithium Innovation Inc. (Nemaska LI) (collectively, Nemaska Entities) sought and obtained protection from their creditors under the Companies' Creditors Arrangement Act (the CCAA) (CCAA Proceedings), the whole pursuant to the provisions of an order of the Superior Court of Québec (Commercial Division) (Court), as amended, restated and supplemented since December 23, 2019.
13. PricewaterhouseCoopers Inc. was appointed by the Court as the monitor (Monitor) in the CCAA Proceedings.
14. On January 29, 2020, the Nemaska Entities sought and obtained from the Court an order pursuant to the CCAA approving a sale or investor solicitation process in respect of the Nemaska Entities authorizing the solicitation of offers for the sale of all or substantially all of their property, assets and undertakings all in accordance with the sale or investor solicitation procedures.
15. On October 15, 2020, the Court issued an Approval and Vesting Order (RVO) approving, among other things, the acquisition by Investissement Québec (IQ) and Quebec Lithium Partners (UK) Limited (QLP) of all of the issued and outstanding shares of a corporation resulting from the amalgamation of the Nemaska Entities and the Orion Creditors (as defined below) in a series of steps (CCAA Reorganization) set out in a share purchase agreement among IQ, QLP and the Nemaska Entities (Share Purchase Agreement).
The CCAA Reorganization
16. The CCAA Reorganization included the completion of the following key steps in the order set out below:
(a) all of the Common Shares were exchanged for common shares of NMX Residual Liabilities Inc. (New ParentCo), initially a wholly-owned subsidiary of the Nemaska Lithium Inc., on a one-for-one basis, such that, as a consequence, New ParentCo now holds all of the then issued and outstanding Common Shares and previous holders of issued and outstanding Common Shares now hold the equivalent number of common shares of New ParentCo (Share Exchange);
(b) simultaneously with the preceding step, the one voting share held by Nemaska Lithium Inc. in the capital of New ParentCo and all of the Options were cancelled for no consideration;
(c) Nemaska Shawinigan acquired all of the issued and outstanding shares in the capital of Nemaska Lithium Inc.'s largest secured creditors, OMF Fund II (K) Ltd. and OMF Fund II (N) Ltd. (collectively, Orion Creditors) from OMF (Cayman) Co-VII Ltd. (OMF Cayman) pursuant to a share purchase agreement among Nemaska Shawinigan, OMF Cayman, IQ and QLP;
(d) Nemaska Lithium Inc., Nemaska P1P, Nemaska Shawinigan, Nemaska LI and the Orion Creditors amalgamated pursuant to a long-form amalgamation (the corporation resulting from such amalgamation, AmalCo1) and the shares of Nemaska Lithium Inc. held by New ParentCo were converted into two common shares of AmalCo1;
(e) AmalCo1 and Nemaska Whabouchi amalgamated pursuant to a long-form amalgamation to form the Issuer;
(f) IQ and QLP acquired all of the issued and outstanding shares of the Issuer from New ParentCo pursuant to the terms of the Share Purchase Agreement;
(g) IQ and QLP each subscribed for 30,000,000 common shares of the Issuer for an aggregate subscription price of US$60,000,000.
17. The effective date of the CCAA Reorganization was December 1, 2020 (Effective Date).
18. The FFCTO contained a carve-out allowing the Nemaska Entities and their successors and assigns to implement the CCAA Reorganization steps.
19. As and from the Effective Date, the Issuer, as the ultimate legal successor to Nemaska Lithium Inc., became a reporting issuer under the securities legislation of each jurisdiction of Canada.
20. As of and since the Effective Date, the authorized share capital of the Issuer consists solely of common shares.
21. As of and since the Effective Date, the Issuer only has two registered and beneficial securityholders, namely IQ and QLP.
22. The rights of the shareholders of the Issuer are governed by and subject to the Issuer's share terms, which are set forth in (a) the Issuer's Articles of Amalgamation, and (b) a unanimous shareholders' agreement to which all shareholders of the Issuer, initially only IQ and QLP, shall be parties following the completion of the CCAA Reorganization.
23. There is no obligation in any of the RVO, the Issuer's Articles of Amalgamation or the unanimous shareholders' agreement for the Issuer to maintain its status as a reporting issuer and no prohibition on ceasing to be a reporting issuer.
24. The Issuer as a successor to Nemaska Lithium Inc., is not in default of securities legislation in any jurisdiction of Canada, other than its obligations to complete the Filings and the Interim Filings, and therefore is not eligible to use the "simplified procedure" under NP 11-206.
25. As of and since the Effective Date, the Issuer is not an OTC reporting issuer under Regulation 51-105 respecting Issuers Quoted in the U.S. Over-the-Counter Markets.
26. As of and since the Effective Date, no securities of the Issuer are traded on a "marketplace" as defined in Regulation 21-101 and there is currently no intention on the part of the shareholders, directors or officers of the Issuer to cause the Issuer to seek financing by way of a public offering of its securities in Canada or elsewhere.
Each of the Decision Makers is satisfied that the FFCTO Revocation Order and the Cease to be a Reporting Issuer Order meet the test set out in the Legislation for the Decision Maker to make the orders.
The decision of the Decision Makers under the Legislation is that the FFCTO Revocation Order and the Cease to be a Reporting Issuer Order are granted.
Dino Paolucci --ss. 127(1), 127(10)
File No. 2020-25
December 21, 2020
WHEREAS the Ontario Securities Commission (the Commission) held a hearing in writing to consider a request by Staff of the Commission (Staff) for an order imposing sanctions against Dino Paolucci (Paolucci) pursuant to subsections 127(1) and 127(10) of the Act;
ON READING the materials filed by Staff, Paolucci having not filed any materials, although properly served;
IT IS ORDERED THAT:
1. pursuant to paragraph 2 of subsection 127(1) of the Securities Act, RSO 1990, c S.5 (the Act), trading in any securities or derivatives by Paolucci shall cease permanently;
2. pursuant to paragraph 2.1 of subsection 127(1) of the Act, acquisition of any securities by Paolucci shall be prohibited permanently;
3. pursuant to paragraph 3 of subsection 127(1) of the Act, any exemptions contained in Ontario securities law do not apply to Paolucci permanently;
4. pursuant to paragraphs 7 and 8.1 of subsection 127(1) of the Act, Paolucci resign any positions that he holds as a director or officer of any issuer or registrant;
5. pursuant to paragraphs 8 and 8.2 of subsection 127(1) of the Act, Paolucci be prohibited permanently from becoming or acting as a director or officer of any issuer or registrant; and
6. pursuant to paragraph 8.5 of subsection 127(1) of the Act, Paolucci be prohibited permanently from becoming or acting as a registrant or promoter.
MOAG Copper Gold Resources Inc. et al. -- ss. 127(1), 127.1
File No. 2018-41
December 14, 2020
WHEREAS on July 15, 2020, the Ontario Securities Commission (the Commission) held a hearing by videoconference to consider the sanctions and costs that the Commission should impose on MOAG Copper Gold Resources Inc. (MOAG), Gary Brown (Brown) and Bradley Jones (Jones) as a result of the findings in the Commission's Reasons and Decision on the merits, issued on January 15, 2020;
ON READING the materials filed by Staff of the Commission (Staff) and Jones, and on hearing the submissions of the representatives for Staff, for Jones and for MOAG, no one participating on behalf of Brown;
IT IS ORDERED THAT:
1. pursuant to paragraph 2 of subsection 127(1) of the Securities Act, RSO 1990, c S.5 (the Act), trading in any securities of MOAG shall cease permanently;
2. Against Brown:
a. pursuant to paragraph 2 of subsection 127(1) of the Act, trading in any securities or derivatives by Brown shall cease permanently;
b. pursuant to paragraph 2.1 of subsection 127(1) of the Act, Brown is prohibited permanently from acquiring any securities;
c. pursuant to paragraph 3 of subsection 127(1) of the Act, the exemptions contained in Ontario securities law shall not apply to Brown permanently;
d. pursuant to paragraphs 7 and 8.1 of subsection 127(1) of the Act, Brown shall immediately resign from any positions he holds as a director or officer of any issuer or registrant;
e. pursuant to paragraphs 8 and 8.2 of subsection 127(1) of the Act, Brown is prohibited permanently from becoming or acting as a director or officer of any issuer or registrant;
f. pursuant to paragraph 8.5 of subsection 127(1) of the Act, Brown is permanently prohibited from becoming or acting as a registrant or promoter;
g. pursuant to paragraph 9 of subsection 127(1) of the Act, Brown shall pay an administrative penalty of C$200,000, which amount shall be designated for allocation or use by the Commission in accordance with subclause 3.4(2)(b)(i) or (ii) of the Act;
h. pursuant to paragraph 10 of subsection 127(1) of the Act, Brown shall be required, jointly and severally with Jones, to disgorge to the Commission the sum of US$610,000, which amount shall be designated for allocation or use by the Commission in accordance with subclause 3.4(2)(b)(i) or (ii) of the Act;
i. pursuant to section 127.1 of the Act, Brown shall pay costs of C$30,000 to the Commission; and
3. Against Jones:
a. pursuant to paragraph 2 of subsection 127(1) of the Act, trading in any securities or derivatives by Jones shall cease permanently;
b. pursuant to paragraph 2.1 of subsection 127(1) of the Act, Jones is prohibited permanently from acquiring any securities;
c. pursuant to paragraph 3 of subsection 127(1) of the Act, the exemptions contained in Ontario securities law shall not apply to Jones permanently;
d. pursuant to paragraphs 7 and 8.1 of subsection 127(1) of the Act, Jones shall immediately resign from any positions he holds as a director or officer of any issuer or registrant;
e. pursuant to paragraphs 8 and 8.2 of subsection 127(1) of the Act, Jones is prohibited permanently from becoming or acting as a director or officer of any issuer or registrant;
f. pursuant to paragraph 8.5 of subsection 127(1) of the Act, Jones is permanently prohibited from becoming or acting as a registrant or promoter;
g. pursuant to paragraph 9 of subsection 127(1) of the Act, Jones shall pay an administrative penalty of C$400,000, which amount shall be designated for allocation or use by the Commission in accordance with subclause 3.4(2)(b)(i) or (ii) of the Act;
h. pursuant to paragraph 10 of subsection 127(1) of the Act, Jones shall be required to disgorge to the Commission:
i. jointly and severally with Brown, the sum of US$610,000, and
ii. the sum of US$2,968,187,
which amounts shall be designated for allocation or use by the Commission in accordance with subclause 3.4(2)(b)(i) or (ii) of the Act; and
i. pursuant to section 127.1 of the Act, Jones shall pay costs of C$70,000 to the Commission.
Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. -- ss. 127, 127.1
File No. 2020-39
December 18, 2020
WHEREAS on December 18, 2020, the Ontario Securities Commission (the Commission) held a hearing by video conference to consider the request made jointly by Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. (collectively, the Respondents) and Staff of the Commission (Staff) for approval of a settlement agreement dated December 15, 2020 (the Settlement Agreement);
ON READING the Joint Application for a Settlement Hearing, including the Statement of Allegations dated December 14, 2020 and the Settlement Agreement, and on hearing the submissions of the representatives for the Respondents;
IT IS ORDERED, with reasons to follow, that:
1. the Settlement Agreement is approved;
2. the Respondents shall each conduct an internal review of their compliance practices and procedures relating to ensuring compliance with Ontario securities laws, and institute any necessary changes in accordance with the process set forth in Schedule "A" to the Order, pursuant to paragraph 4 of subsection 127(1) of the Securities Act, RSO 1990, c S.5 (the Act);
3. the Respondents shall disgorge to the Commission amounts obtained as a result of non-compliance with Ontario securities law in the amount of $663,305.20, pursuant to paragraph 10 of subsection 127(1) of the Act;
4. the Respondents shall pay an administrative penalty in the amount of $2,506,011.80 pursuant to paragraph 9 of subsection 127(1) of the Act; and
5. the amounts referred to in paragraphs 3 and 4 above shall be designated for allocation or use by the Commission in accordance with section 3.4(2)(b)(i) or (ii) of the Act.
File No. 2020-39
1. Inventory: Create an Inventory of all requirements within the MTFs' OSC Exemptive Orders, including the Restated Order, as defined in the Settlement Agreement, and any additional Ontario Securities Law provisions applicable to the MTFs (each, an "Ontario Legal Obligation").
2. Document Mapping: Map internal MTF policies, rulebook(s), manual(s), standards, and procedures ("Policy Documents") to each Ontario Legal Obligation in the Inventory, and assess to confirm sufficient coverage of each Ontario Legal Obligation within one or more Policy Documents. Enhance Policy Documents, if needed, to address any gaps in coverage.
3. Control Mapping: Map key controls to each Ontario Legal Obligation, including access controls across asset classes and controls for monitoring participant activity across asset classes, and assess to confirm control coverage for each Legal Obligation is appropriate.
4. Key Control Testing: Test effectiveness of key controls. Bloomberg Compliance Testing will test control design and/or control performance (operating effectiveness), as appropriate, for each key control.
5. Internal Review Report: Summarize findings and identified issues, including any recommended areas for enhancement in a Compliance Testing Report (the "Internal Review Report"). Identified issues will be tracked to completion via the Firms' standard issue management processes.
1. This Settlement Agreement serves to emphasize that domestic and foreign marketplaces have the obligation to take all appropriate steps to comply with Ontario securities law, including any specific terms and conditions contained in orders of the Commission.
2. Before foreign and domestic marketplaces are permitted to carry on business in Ontario, they must obtain authorization from the Commission to do so and their application for such authorization must provide candid, accurate and complete information. These requirements serve to protect Ontario market participants and investors and foster fair and efficient markets.
3. In order to manage risks to Ontario investors and market participants, the Commission may also impose terms and conditions on any order issued, including exemptive relief orders. It is critical to fostering fair and efficient capital markets and confidence in capital markets that persons and companies comply with all terms and conditions of exemptive relief orders.
4. Commission and Staff rely upon the completeness and accuracy of information contained in applications made by individuals or companies seeking a recognition or exemption order to manage risks to Ontario investors and market participants. It is therefore critical that persons and companies seeking a recognition or exemption order from the Commission disclose all material information relating to the order sought and that this information is accurate and complete. This ensures that any order that may be issued by the Commission is properly determined to be in the public interest.
5. In today's capital markets where the majority of marketplaces operate electronic trading facilities and are no longer reliant on physical floors or have moved from voice to electronic trading, a marketplace is carrying on business in Ontario if it provides direct access to an Ontario participant (whether traders are physically located in Ontario or elsewhere). Once carrying on business in Ontario, Ontario securities laws apply. Foreign marketplaces that provide access to Ontario participants must ensure that they are properly authorized to do so. They must implement a robust compliance system in recognition of the compliance risks associated with operating in multiple jurisdictions, including ensuring appropriate communications about the relevant Ontario regulatory obligations throughout the business.
6. In this case, two sophisticated corporations -- Bloomberg Trading Facility Limited (BTFL) and Bloomberg Trading Facility B.V. (BV) (collectively, the Respondents) -- failed to comply with Ontario securities law by:
(a) operating a marketplace, and in particular, an exchange without receiving recognition or an exemption;
(b) filing applications that contained inaccurate and incomplete information with the Commission to obtain exemptions, and therefore, to that extent, were misleading to Staff and the Commission; and
(c) in the case of BTFL, after it was granted an exemptive relief order, it failed to comply with the terms and conditions set out in that order.
7. Over a 15-month period and beginning at different times, BTFL provided 18 institutional Ontario participants access to trade in fixed income securities. Over that period of time, 11 of the 18 Ontario participants conducted fixed income trading on BTFL's multilateral trading facility (MTF) in a principal amount of approximately $228.5 billion USD and representing 2.93% of all fixed income trading on BTFL's MTF during that time.
8. Over a one-year period and beginning at different times, BV provided 16 institutional Ontario participants access to trade in fixed income securities. Over that period of time, two of the 16 Ontario participants conducted fixed income trading on BV's MTF in a principal amount of approximately $4.4 billion USD and representing 1.61% of all fixed income trading on BV's MTF during that time.
9. This Settlement Agreement reflects the Respondents' admissions that:
(a) before the Respondents had sought or obtained recognition or an exemption order from the Commission, they carried on business as an exchange by failing to prevent, or otherwise permitting, fixed income trading by Ontario participants on their MTFs;
(b) the Respondents each filed applications with the Commission requesting orders exempting them from the requirement to be recognized as an exchange which contained inaccurate and incomplete information. Specifically, neither BTFL nor BV disclosed the fact that:
i) Ontario users had already been onboarded to their respective MTFs; and
ii) Ontario users had already engaged in fixed income trading activity on their respective MTFs;
(c) after BTFL obtained an exemption order, it failed to prevent, or otherwise permitted, fixed income trading by Ontario participants on its MTF contrary to the terms and conditions of the exemption order; and
(d) after BTFL obtained an exemption order, it filed quarterly reports that failed to accurately and completely disclose fixed income trading by Ontario participants on BTFL's MTF.
10. These are serious and unacceptable breaches of Ontario securities law. When marketplaces, including exchanges, operate without authorization in Ontario, they undermine investor confidence and the fairness and efficiency of our markets.
11. This Settlement Agreement reflects the Respondents' admissions to breaches of Ontario securities laws and/or conduct contrary to the public interest. It also reflects the fact of the Respondents' exemplary cooperation and efforts in identifying, addressing, and remediating those inadequacies, including initially reporting deficiencies to Staff.
12. The parties will jointly file a request that the Commission issue a Notice of Hearing (the Notice of Hearing) to announce that it will hold a hearing (the Settlement Hearing) to consider whether, pursuant to sections 127 and 127.1 of the Securities Act, RSO 1980 c. s.5, as amended (the Act), it is in the public interest for the Commission to make certain orders against each of BTFL and BV.
13. The Respondents have also filed an application with the Commission, pursuant to sections 144 and 147 of the Act, requesting that the BTFL Order (defined in paragraph 26, below) be revoked and restated (the Restated Order) to exempt BTFL and BV from the requirement in subsection 21(1) of the Act to be recognized as an exchange and to allow for the trading of swaps and fixed income securities. The requested Restated Order requires that an application or filings for Subsequent Decisions (as defined in the Restated Order) to allow for the trading of swaps and debt securities be filed by January 31, 2021. The requested Restated Order will expire on June 30, 2021.
14. As part of the application or filings for the Subsequent Decisions, the Respondents must include a request for the registration and authorization of a Canadian affiliate as an alternative trading system, as that term is defined in National Instrument 21-101 Marketplace Operation.
15. Staff of the Commission (Staff) recommend settlement of the proceeding (the Proceeding) against the Respondents commenced by the Notice of Hearing, in accordance with the terms and conditions set out in Part V of this Settlement Agreement. The Respondents consent to the making of an order (the Order) substantially in the form attached as Schedule "A" to this Settlement Agreement based on the facts set out herein.
16. For the purposes of the Proceeding, and any other regulatory proceeding commenced by a securities regulatory authority, the Respondents agree with the facts set out in Part III of this Settlement Agreement and the conclusion in Part IV of this Settlement Agreement.
A. RESPONDENTS
17. BTFL is a private limited company organized under the laws of England and Wales and is a wholly owned subsidiary of Bloomberg L.P., a Delaware limited partnership (BLP). BTFL has no physical presence in Ontario.
18. BV is a private limited company organized under the laws of the Netherlands and is a wholly owned subsidiary of BLP. BV has no physical presence in Ontario.
B. OVERVIEW AND BACKGROUND
19. In July 2015, BTFL was authorized by the United Kingdom Financial Conduct Authority to act as the operator of an MTF for interest rate swaps and credit default swaps. In 2016, the Financial Conduct Authority varied its authorization to allow BTFL's MTF to trade other financial instruments, including fixed income securities. Fixed income trading on BTFL's MTF became operational or "went live" on July 20, 2017. BTFL's MTF supports request-for-quote and request-for-trade functionality for professional client participants that onboard to BTFL's MTF by signing a user acknowledgement with BTFL.
20. In January 2019, BV was authorized by the Netherlands Authority for the Financial Markets to act as the operator of an MTF. Trading on BV's MTF became operational or "went live" on March 25, 2019. BV's MTF supports request-for-quote and request-for-trade functionality for professional client participants that onboard to BV's MTF by signing a user acknowledgement with BV.
21. For the purposes of Ontario securities law, each of BTFL's MTF and BV's MTF falls under the definition of "marketplace" set out in subsection 1(1) of the Act because each brings together buyers and sellers of securities or derivatives and use established, non-discretionary methods under which orders interact with each other.
22. Subsection 3.1(1) of the Companion Policy to National Instrument 21-101 Marketplace Operation provides that a "marketplace" is considered to be an "exchange" if it, among other things, sets requirements governing the conduct of marketplace participants. An MTF has certain obligations to monitor participants' trading activity and because an MTF sets requirements for the conduct of its participants and surveils the trading activity of its participants, it is considered by the Commission to be an "exchange" for purposes of the Act.
23. OSC Staff Notice 21-702 Regulatory Approach for Foreign-Based Stock Exchanges provides that the Commission considers an exchange located outside Ontario to be "carrying on business as an exchange" in Ontario if it provides Ontario participants with direct access to the exchange. This includes a participant with its headquarters or legal address in Ontario (e.g., as indicated by a participant's Legal Entity Identifier (LEI)) and all traders conducting transactions on its behalf, regardless of the traders' physical location (inclusive of non-Ontario branches of Ontario legal entities), as well as any trader physically located in Ontario who conducts transactions on behalf of any other entity.
24. Subsection 21(1) of the Act provides that no person or company shall carry on business as an exchange in Ontario unless recognized by the Commission.
25. During a time when neither BTFL nor BV was recognized by the Commission to carry on business as an exchange:
(a) Each of BTFL and BV onboarded Ontario participants to their respective MTFs and carried on business as an exchange by failing to prevent, or otherwise permitting, trading by Ontario participants, including fixed income securities transactions.
(b) Each of BTFL and BV filed an application with the Commission requesting an order to exempt them from the requirement to be recognized as an exchange. In their respective applications, both BTFL and BV did not provide accurate and complete disclosure of the fact that Ontario participants had already been onboarded and had already engaged in fixed income trading activity, which rendered the applications misleading to Staff and the Commission.
(c) In the case of BTFL, during Staff's 4-month review of BTFL's application for exemptive relief, BTFL did not provide accurate and complete disclosure to Staff of the fact that Ontario participants had already been onboarded and had already engaged in fixed income trading activity, which rendered the disclosure misleading to Staff.
26. On December 22, 2017, the Commission issued an interim exemptive relief order to BTFL exempting it from the requirement to be recognized as an exchange (the BTFL Order). The BTFL Order, which expires on December 31, 2020, included terms and conditions, including:
(a) A condition that BTFL will not provide access to Ontario users to trading in products other than swaps, and
(b) A condition that BTFL file quarterly reports with the Commission disclosing all trading by Ontario users of BTFL's MTF, including a breakdown by product traded and the total trading volume and value originating from Ontario participants.
27. In the time period following the date of the BTFL Order:
(a) BTFL failed to prevent, or otherwise permitted, trading in products other than swaps, including fixed income, by Ontario participants on BTFL's MTF, and
(b) BTFL filed quarterly reports that did not accurately and completely disclose such trading by Ontario participants on BTFL's MTF.
C. CARRYING ON BUSINESS AS AN EXCHANGE WITHOUT BEING RECOGNIZED OR EXEMPTED BY THE COMMISSION
(1) BTFL Carrying on Business as an Exchange Prior to December 22, 2017
28. On August 2, 2017, BTFL filed an application (the BTFL Application) with the Commission pursuant to section 147 of the Act requesting an interim order exempting BTFL from the requirement to be recognized as an exchange under subsection 21(1) of the Act. The BTFL Application included the following statements:
"17. Since the Applicant [BTFL] would provide Ontario Participants with direct access to trading of the MTF Instruments on the Bloomberg MTF, it will be considered by the Commission to be "carrying on business as an exchange" in Ontario, and therefore must either be recognized or exempt from recognition by the Commission;
18. The Applicant submits that an exemption from recognition is appropriate for the MTF because the MTF is subject to regulation by the FCA and full regulation by the Commission would be duplicative and inefficient"
29. The BTFL Application was written in a future-looking manner and conveyed that there would be Ontario participants at a future time. The BTFL Application did not disclose all material facts relating to BTFL's MTF, including the fact that Ontario participants had already been onboarded and had already engaged in fixed income transactions on BTFL's MTF, prior to the date of the BTFL Application.
30. During Staff's ensuing review of the BTFL Application -- which culminated in the BTFL Order -- although BTFL had corresponded and spoken with Staff frequently, BTFL did not disclose to Staff the fact that Ontario participants had already been onboarded and had already engaged in fixed income transactions on BTFL's MTF. Further, during these discussions between Staff and BTFL, Staff repeatedly advised BTFL that any interim exemptive relief order that might be considered by the Commission would exclude any authorization for BTFL's MTF to facilitate fixed income trading by Ontario participants.
31. Unbeknownst to Staff and the Commission, prior to the issuance of the BTFL Order by the Commission, BTFL had onboarded Ontario participants to its MTF and had failed to prevent Ontario participants from engaging in fixed income securities transactions on its MTF. In particular:
(a) BTFL had onboarded 18 Ontario participants to its MTF prior to the BTFL Order, with the first onboarding of an Ontario participant occurring on September 20, 2016.
(b) The date on which an Ontario participant first conducted a fixed income trade or request for quote on BTFL's MTF was July 20, 2017, approximately one month prior to the BTFL Application.
(c) Five of the Ontario participants onboarded to BTFL's MTF had conducted fixed income trading prior to the BTFL Order.
32. The aggregate principal amount of the fixed income trading by these five Ontario participants on BTFL's MTF prior to the date of the BTFL Order was approximately $57 billion USD.
33. BTFL did not earn fees or other compensation amounts respecting its exchange activities prior to the date of the BTFL Order.
(2) BV Carrying on Business as an Exchange
34. On March 20, 2019, BV filed an application (the BV Application) with the Commission pursuant to section 147 of the Act requesting an interim order exempting BV from the requirement to be recognized as an exchange under subsection 21(1) of the Act. The BV Application made express reference to BTFL and BTFL's MTF and included the following statements:
"18. Since the Applicant [BV] would provide Ontario Participants with direct access to trading of the MTF Instruments on BTFE [BV's MTF], it will be considered by the Commission to be "carrying on business as an exchange" in Ontario, and therefore must either be recognized or exempt from recognition by the Commission;
19. The Applicant submits that an exemption from recognition is appropriate for BTFE because BTFE is subject to regulation by the AFM [Netherlands Authority for the Financial Markets] and full regulation by the Commission would be duplicative and inefficient"
35. Similar to the BTFL Application, the BV Application was written in a future-looking manner and conveyed that there would be Ontario participants at a future time. The BV Application did not disclose all material facts relating to BV's MTF, including the fact that an Ontario participant had already been onboarded. During Staff's ensuing review of the BV Application, BV did not disclose to Staff the fact that Ontario participants had already been onboarded and had already engaged in fixed income securities transactions on BV's MTF.
36. The Commission has not, to date, issued any order granting any exemptive relief to BV.
37. During the time period commencing March 2019 through to Q1 2020, a total of 16 Ontario participants were onboarded to BV's MTF. In particular:
(a) Two days prior to the date of the BV Application, BV onboarded one Ontario participant to BV's MTF. This Ontario participant never traded fixed income securities on BV's MTF.
(b) The remaining 14 Ontario participants were onboarded to BV's MTF after the date of the BV Application.
(c) Two Ontario participants conducted fixed income securities trading on BV's MTF over a 1-year period through to Q1 2020.
38. The aggregate principal amount of the fixed income trading by these two Ontario participants was approximately $4.4 billion USD.
39. BV earned fees relating to its exchange activities totaling $13,440.50 USD.
D. BTFL FAILING TO COMPLY WITH TERMS AND CONDITIONS OF A COMMISSION ORDER
(1) Prohibition on Providing Access to Ontario Participants to Trading in Products other than Swaps
40. On October 25, 2018, BTFL disclosed to Staff for the first time that it had identified "limited" fixed income trading activity on its MTF by traders physically located in Ontario on behalf of four Ontario participants. BTFL subsequently provided further details to Staff which identified the following:
(a) Following December 22, 2017 and continuing through to October 25, 2018, 11 of the 15 Ontario participants onboarded to BTFL's MTF conducted fixed income trading, contrary to the terms and conditions contained in the BTFL Order. Four of these 15 Ontario participants never conducted any fixed income trading on BTFL's MTF.
(b) The aggregate principal amount of the fixed income securities trading by Ontario participants on BTFL's MTF from the date of the BTFL Order (December 22, 2017) through to October 25, 2018 was approximately $171.5 billion USD and representing 3.09% of all fixed income trading on BTFL's MTF during that time.
41. BTFL earned fees relating to the fixed income securities trading by Ontario participants on BTFL's MTF through to November 1, 2018 totaling approximately $688,496.30 CAD.
(2) Overlapping Fixed Income Trading Activity
42. A limited amount of fixed income trading on BTFL's MTF described above was conducted by (i) a small number of traders located in Québec on behalf of two entities represented by an LEI whose legal entity address and headquarters address are located in Ontario , (ii) a small number of traders located in Ontario on behalf of an entity represented by an LEI whose legal entity address and headquarters address are located in Québec, and (iii) traders located in Ontario, Québec, and elsewhere on behalf of an entity represented by an LEI whose legal entity address is located in Québec and headquarters address is located in Ontario (the "Overlapping Activity"). The amount of fees attributed to the Overlapping Activity up to November 1, 2018 is $25,191.08 CAD.
43. For the purposes of this Settlement Agreement, notwithstanding that it would otherwise fall within the scope of this Settlement Agreement, Staff and the Respondents agree to carve out the fees attributable to the Overlapping Activity. Therefore, the fees at issue are $663,305.20 CAD.
(3) Requirement to File Quarterly Reports
44. Following December 22, 2017 and continuing through to Q2 2019, BTFL filed quarterly reports with the Commission that were inaccurate and incomplete as they did not accurately disclose the fixed income securities trading particulars, including those described in paragraph 40 above.
E. MITIGATING FACTORS
45. Staff have considered the above and certain mitigating factors in arriving at the monetary amounts set out below. The methodology is set out in Schedule "B" to the Settlement Agreement entitled "Calculation of Payment". It includes the nature and seriousness of the conduct.
46. Staff acknowledges BTFL's and BV's exemplary cooperation in resolving this matter, as well as the following:
(1) Undertaking Internal Investigation
47. When the matters at issue in this Settlement Agreement were brought to the Respondents' attention, the Respondents reported the issues to Staff and proactively initiated a counsel-led privileged internal investigation (the "Internal Investigation") to:
(a) assess Staff's asserted position on non-compliance;
(b) determine the scope and extent of the alleged non-compliant activity;
(c) determine the cause of any determined non-compliant conduct and activity;
(d) determine whether any non-compliance was intentional; and
(e) begin to develop and implement a remediation program as required.
48. The Respondents shared the results of the Internal Investigation with Staff and provided Staff with non-privileged and relevant documents as well as information learned during numerous witness interviews.
49. The results of the Internal Investigation are summarized in paragraph 60 below including the finding that there was no evidence of dishonest conduct or any intention to deceive.
50. As a result of the Respondents' exemplary cooperation, this matter was able to be dealt with expeditiously, significantly limiting any enforcement costs and leading to a prompt resolution.
(2) Compliance Remediation
51. Upon identifying and confirming that traders located in Ontario were engaging in fixed income trading on its MTF, the Respondents have:
(a) developed and implemented a new technological control designed to close the controls gap that failed to prevent traders located in Ontario from trading fixed income on the Respondents' MTFs; and
(b) developed and implemented a new internal tool for documenting and communicating asset class restrictions by jurisdiction.
52. The Respondents continue to make investments in their compliance program and technological controls and are evaluating certain additional remedial steps to take to strengthen their compliance programs. These further steps will be detailed in the internal review referenced at paragraph 62(b).
(3) The Respondents' Intent was Bona Fide
53. The Respondents had a bona fide belief based on legal advice that they were not acting contrary to Ontario law, as described in paragraph 60 below.
F. REGULARIZATION OF ACTIVITIES
54. BTFL and BV shall file a complete and accurate application for a Subsequent Decision (as defined in the Restated Order) in accordance with the timing set out in the Restated Order. For greater certainty, going forward the Respondents shall apply the definition of Ontario participant set out at paragraph 23 in connection with their Ontario-related operations.
55. The Respondents must submit the internal review report to Staff regarding compliance practices and procedures required by paragraph 62(b) by March 31, 2021. The report must describe all changes made to BTFL or BV's policies and procedures in response to the review or any proposed changes which the Respondents are otherwise committed to implement.
56. In light of:
(a) the impending expiry of the BTFL Order on December 31, 2020;
(b) the specific facts and circumstances underlying this Settlement Agreement;
(c) the MTFs operated by BTFL and BV being important sources of liquidity to current Ontario users;
(d) the fact that an interruption of Ontario users' access to the MTFs operated by BTFL and BV could disrupt the capital markets; and
(e) the potential burden that a denial of access to trading on the MTFs operated by BTFL and BV would have on current Ontario users,
BTFL and BV have filed an application requesting the Restated Order. In addition, as described in the requested Restated Order, BTFL and BV shall take such steps as appropriate to satisfy the requirements of Staff and the Commission for offering trading of derivatives and fixed income securities to Ontario users prior to the expiry of the Restated Order.
57. The Settlement Agreement reflects the Respondents' admission to breaches of Ontario securities laws and/or conduct contrary to the public interest, including:
(a) Both BTFL and BV failed to prevent, or otherwise permitted, fixed income trading by Ontario participants on their respective MTFs before seeking recognition or an exemption order from the Commission.
(b) Both BTFL and BV filed inaccurate and incomplete information with their applications to the Commission requesting orders exempting them from the requirement to be recognized as an exchange. Specifically, neither BTFL nor BV disclosed the fact that:
i) Ontario participants had already been onboarded to their respective MTFs; and
ii) Ontario participants had already engaged in fixed income trading activity on their respective MTFs.
(c) After the Commission issued an interim exemptive relief order to BTFL that exempted BTFL from the requirement to be recognized as an exchange, but prohibited BTFL from providing Ontario participants with access to trading in products other than swaps, BTFL failed to prevent, or otherwise permitted, fixed income trading by Ontario participants on BTFL's MTF.
(d) In the period after BTFL obtained an interim exemptive relief order, BTFL filed quarterly reports with the Commission that did not accurately and completely disclose the fixed income trading by Ontario participants on BTFL's MTF.
58. BTFL acknowledges and admits that, during the time periods set out below, it engaged in the following conduct contrary to Ontario securities law and contrary to the public interest:
(a) During the time period commencing July 2017 and continuing through to the date of the BTFL Order on December 22, 2017, BTFL carried on business as an exchange in Ontario without being recognized or exempted by the Commission, contrary to subsection 21(1) of the Act.
(b) The BTFL Application filed with the Commission contained inaccurate and incomplete information insofar as BTFL did not disclose the fact that Ontario participants had already been onboarded to BTFL's MTF and that Ontario participants had already engaged in fixed income securities transactions, contrary to the public interest.
(c) BTFL, in the course of responding to Staff's questions relating to Staff's review of the BTFL Application, provided incomplete information insofar as BTFL did not disclose the fact that Ontario participants had already been onboarded to BTFL's MTF and that Ontario participants had already engaged in fixed income securities transactions, contrary to the public interest.
(d) During the time period commencing December 22, 2017 and continuing through to October 25, 2018, BTFL failed to administer appropriate systems and controls to prevent Ontario participants from engaging in fixed income securities transactions on BTFL's MTF, contrary to the terms and conditions of the BTFL Order.
(e) During the time period commencing December 22, 2017 and continuing through to Q2 2019, BTFL filed quarterly reports that did not accurately and completely disclose Ontario participants' fixed income securities transactions on BTFL's MTF, contrary to the terms and conditions of the BTFL Order.
59. BV acknowledges and admits that, during the time periods set out below, it engaged in the following conduct contrary to Ontario securities law and contrary to the public interest:
(a) During the time period commencing March 2019 and continuing through to Q1 2020 BV carried on business as an exchange in Ontario without being recognized or exempted by the Commission, contrary to subsection 21(1) of the Act.
(b) The BV Application filed with the Commission contained inaccurate and incomplete information insofar as BV did not disclose the fact that Ontario participants had already been onboarded to BV's MTF, contrary to the public interest.
(c) BV, in the course of responding to Staff's questions relating to Staff's review of the BV Application, provided incomplete information insofar as BV did not disclose the fact that Ontario participants had already been onboarded to BV's MTF and that Ontario participants had already engaged in fixed income securities transactions, contrary to the public interest.
60. The Respondents intend to request, and Staff do not object, that the panel at the Settlement Hearing consider the following mitigating circumstances:
(a) At no time did the Respondents intend to, or knowingly, act contrary to their regulatory obligations, by failing to prevent certain trading activities on the MTFs, or by providing inaccurate or incomplete information to Staff, or to mislead Staff in any way:
i) At all material times, the Respondents had a good faith belief that they were not carrying on business as an exchange in Ontario within the meaning of Ontario law, with respect to trading by traders located outside of Ontario, and understood that the definition of Ontario participants and Ontario users related only to traders physically located in Ontario, regardless of the entity on behalf of whom they traded.
ii) The Respondents' good faith understanding of their Ontario regulatory obligations and the definition of Ontario participants and Ontario users was based on legal advice from external counsel and supported by views and practices of others in the market, that the Respondents believed was correct.
iii) Prior to reporting the issues in October 2018 to Staff, the Respondents discovered a gap in their technological controls that failed to properly identify and prevent traders physically located in Ontario from engaging in sell-side fixed income trading on the BTFL's MTF. Prior to this discovery, the Respondents were not aware that traders physically located in Ontario were engaging in sell-side fixed income trading on BTFL's MTF. This sell-side fixed income trading was the only fixed income trading facilitated on BTFL's MTF by traders physically located in Ontario.
iv) The control gap which failed to prevent the sell-side fixed income trading by traders located in Ontario was accompanied by a failure within the organization to appropriately communicate the relevant Ontario regulatory obligations effectively throughout the business.
v) The Internal Investigation found no evidence of any intention to withhold information from Staff which was required to be provided, or to provide information that was less than accurate.
(b) The implementation of multiple significant international regulatory changes contributed to the shortcomings and non-compliance described in this Settlement Agreement.
(c) The Respondents notified Staff on October 25, 2018 that traders located in Ontario were engaging in sell-side fixed income trading on BTFL's MTF. The Respondents subsequently worked and continue to work with Staff to resolve and remediate its breaches cooperatively and in a manner that did not disrupt the Ontario capital markets.
(d) The Respondents demonstrated a bona fide commitment to cooperation and ongoing remediation in this matter as acknowledged by Staff at paragraphs 46 to 50.
61. The Respondents agree to the terms of settlement set forth below.
62. The Respondents consent to the Order substantially in the form attached as Schedule "A", pursuant to which it is ordered that:
(a) The Settlement Agreement be approved;
(b) The Respondents will each conduct an internal review of their compliance practices and procedures relating to ensuring compliance with Ontario securities laws, and institute any necessary changes in accordance with the process set forth in Schedule "A" to the Order, pursuant to paragraph 4 of subsection 127(1) of the Act;
(c) The Respondents must submit an internal review report to Staff describing all changes made, or which they propose to make, to their compliance policies and procedures in response to their internal review by March 31, 2021.
(d) The Respondents will disgorge to the Commission amounts obtained as a result of non-compliance with Ontario securities law in the amount of $663,305.20, pursuant to paragraph 10 of subsection 127(1) of the Act;
(e) The Respondents will pay an administrative penalty in the amount of $2,506,011.80, pursuant to paragraph 9 of subsection 127(1) of the Act;
(f) The amounts referred to in paragraphs (d) and (e) above shall be designated for allocation or use by the Commission in accordance with section 3.4(2)(b)(i) or (ii) of the Act.
63. The Respondent acknowledges that the Settlement Agreement and the Order may form the basis for orders of parallel effect in other jurisdictions in Canada. The securities laws of some other Canadian jurisdictions allow orders made in this manner to take effect in those other jurisdictions automatically, without further notice to the Respondents.
64. If the Commission approves the Settlement Agreement, Staff will not commence or continue any proceeding against the Respondents under Ontario securities law based on the misconduct described in Part III of the Settlement Agreement, unless the Respondents fail to comply with any term in the Settlement Agreement, in which case Staff may bring proceedings under Ontario securities law against the Respondents that may be based on, among other things, the facts set out in Part III of the Settlement Agreement as well as the breach of the Settlement Agreement.
65. The Respondents acknowledge that, if the Commission approves the Settlement Agreement and the Respondents fail to comply with any term in it, Staff or the Commission are entitled to bring any proceedings necessary to, among other things, recover the amounts set out in sub-paragraphs 62(d) and 62(e), above.
66. The Respondents waive any defences to a proceeding referenced in paragraphs 58 and 59 that are based on the limitation period in the Act, provided that no such proceeding shall be commenced later than six years from the date of the occurrence of the last failure to comply with the Settlement Agreement.
67. The parties will seek approval of the Settlement Agreement at the Settlement Hearing before the Commission, which shall be held on a date determined by the Secretary to the Commission in accordance with the Settlement Agreement and the Commission's Rules of Procedure, dated July 23, 2019.
68. The Respondents may have a representative attend the Settlement Hearing in person or have counsel attend the Settlement Hearing on their behalf.
69. The parties confirm that the Settlement Agreement sets forth all of the agreed facts that will be submitted at the Settlement Hearing, unless the parties agree that additional facts should be submitted at the Settlement Hearing.
70. If the Commission approves the Settlement Agreement:
(a) the Respondents irrevocably waive all rights to a full hearing, judicial review or appeal of this matter under the Act; and
(b) neither party will make any public statement that is inconsistent with the Settlement Agreement or with any additional agreed facts submitted at the Settlement Hearing.
71. Whether or not the Commission approves the Settlement Agreement, the Respondents will not use, in any proceeding, the Settlement Agreement or the negotiation or process of approval as the basis for any attack on the Commission's jurisdiction, alleged bias, alleged unfairness or any other remedies or challenges that may be available.
72. If the Commission does not make the Order:
(a) the Settlement Agreement and all discussions and negotiations between Staff and the Respondents before the Settlement Hearing will be without prejudice to Staff and the Respondents; and
(b) Staff and the Respondents will each be entitled to all available proceedings, remedies and challenges, including proceeding to a hearing on the merits of the allegations contained in the Statement of Allegations in respect of the Proceeding. Any such proceedings, remedies and challenges will not be affected by the Settlement Agreement, or by any discussions or negotiations relating to the Settlement Agreement.
73. The parties will keep the terms of the Settlement Agreement confidential until the Settlement Hearing, unless they agree in writing not to do so or unless otherwise required by law.
74. The Settlement Agreement may be signed in one or more counterparts which together constitute a binding agreement.
75. A facsimile copy or other electronic copy of any signature will be as effective as an original signature.
DATED at Norwich, Norfolk, United Kingdom, this 15th day of December, 2020.
DATED at Toronto, Ontario, this 14th day of December, 2020.
File No. 2020-39
[Date]
WHEREAS on December X, 2020, the Ontario Securities Commission (the Commission) held a hearing by video conference to consider the request made jointly by Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. (collectively, the Respondents) and Staff of the Commission (Staff) for approval of a settlement agreement dated December X, 2020 (the Settlement Agreement);
ON READING the Statement of Allegations dated December X, 2020, the Settlement Agreement and the written submissions of Staff and on hearing the submissions of Staff and the representatives for the Respondents;
IT IS ORDERED THAT:
1. the Settlement Agreement is approved;
2. the Respondents shall each conduct an internal review of their compliance practices and procedures relating to ensuring compliance with Ontario securities laws, and institute any necessary changes in accordance with the process set forth in Schedule "A" to the Order, pursuant to paragraph 4 of subsection 127(1) of the Securities Act, RSO 1990, c S.5 (the Act);
3. The Respondents shall submit an internal review report to Staff describing all changes made, or which they propose to make, to their compliance policies and procedures in response to their internal review by March 31, 2021;
4. the Respondents shall disgorge to the Commission amounts obtained as a result of non-compliance with Ontario securities law in the amount of $663,305.20, pursuant to paragraph 10 of subsection 127(1) of the Act;
5. the Respondents shall pay an administrative penalty in the amount of $2,506,011.80 pursuant to paragraph 9 of subsection 127(1) of the Act; and
6. the amounts referred to in paragraphs 3 and 4 above shall be designated for allocation or use by the Commission in accordance with section 3.4(2)(b)(i) or (ii) of the Act.
File No. 2020-39
1. Inventory: Create an Inventory of all requirements within the MTFs' OSC Exemptive Orders, including the Restated Order, as defined in the Settlement Agreement, and any additional Ontario Securities Law provisions applicable to the MTFs (each, an "Ontario Legal Obligation").
2. Document Mapping: Map internal MTF policies, rulebook(s), manual(s), standards, and procedures ("Policy Documents") to each Ontario Legal Obligation in the Inventory, and assess to confirm sufficient coverage of each Ontario Legal Obligation within one or more Policy Documents. Enhance Policy Documents, if needed, to address any gaps in coverage.
3. Control Mapping: Map key controls to each Ontario Legal Obligation, including access controls across asset classes and controls for monitoring participant activity across asset classes, and assess to confirm control coverage for each Legal Obligation is appropriate.
4. Key Control Testing: Test effectiveness of key controls. Bloomberg Compliance Testing will test control design and/or control performance (operating effectiveness), as appropriate, for each key control.
5. Internal Review Report: Summarize findings and identified issues, including any recommended areas for enhancement in a Compliance Testing Report (the "Internal Review Report"). Identified issues will be tracked to completion via the Firms' standard issue management processes
DATED at , this day of December, 2020.
1. Staff have approached the calculation of the payment by BTFL and BV to account for certain principles, which are described below together with Staff's analysis.
Four-Step Methodology
2. Staff have considered a four-step methodology to the calculation.
Step 1: Disgorgement
3. BTFL earned fees of $507,463.24 USD from trading in fixed income securities by Ontario users on BTFL's MTF through to October 25, 2018. The effective USD to CAD exchange rate on October 25, 2018 was 1.3071, bringing to BTFL's fees from fixed income trading by Ontario users through to October 25, 2018 to $663,305.20.
Step 2: The Seriousness of The Conduct
4. The Respondents' conduct was serious:
(a) Both BTFL and BV failed to prevent, or otherwise permitted, fixed income trading by Ontario participants on their respective MTFs before seeking recognition or an exemption order from the Commission.
(b) Both BTFL and BV filed inaccurate and incomplete information with their applications to the Commission requesting orders exempting them from the requirement to be recognized as an exchange. Specifically, neither BTFL nor BV disclosed the fact that:
i) Ontario participants had already been onboarded to their respective MTFs; and
ii) Ontario participants had already engaged in fixed income trading activity on their respective MTFs.
(c) After the Commission issued an interim exemptive relief order to BTFL that exempted BTFL from the requirement to be recognized as an exchange, but prohibited BTFL from providing Ontario participants with access to trading in products other than swaps, BTFL failed to prevent, or otherwise permitted, fixed income trading by Ontario participants on BTFL's MTF.
(d) In the period after BTFL obtained an interim exemptive relief order, BTFL filed quarterly reports with the Commission that did not accurately and completely disclose the fixed income trading by Ontario participants on BTFL's MTF.
5. At Step 2 Staff have considered a figure that reflects the seriousness of the conduct described above. Taking all of these factors into account, Staff have determined that disgorgement amount of $663,305.20 appropriately reflects the seriousness of the Respondents' misconduct.
6. Staff have also determined that it is appropriate to apply interest to the amount of the disgorgement ($663,305.20). The applicable interest for the period from October 25, 2018 through July 29, 2020 using the 1.75% Bank of Canada interest rate in effect as of October 25, 2018 is $20,434.89.
7. Step 2 is therefore $683,740.09.
Step 3: Adjustment for deterrence
8. In Step 3, Staff have considered whether the figure arrived at after Step 2 is insufficient to deter the Respondents or other market participants. Staff consider that adding the following specified amount for each of three periods of time to be appropriate.
(a) Period 1 -- From September 23, 2016 (when BTFL first onboarded an Ontario user without recognition or an exemption) to December 21, 2017 (when the Commission issued the BTFL Order): $1,500,000;
(b) Period 2 -- From December 22, 2017 (after the Commission issued the BTFL Order) to October 25, 2018 (when BTFL first disclosed to Staff that it had identified limited fixed income trading by Ontario users on BTFL's MTF): $1,100,000; and
(c) Period 3 -- From October 26, 2018 (after BTFL's first disclosure to Staff) to March 31, 2019 (when BTFL and BV filed the last quarterly report that failed to accurately and completely disclose Ontario participants' fixed income trading activity on BTFL and BV's respective MTFs): $571,662.68.
9. The total amount for these three periods is $3,171,662.68. Adding the total of Step 2 to this amount brings the Step 3 total to $3,855,402.77.
Step 4: Settlement Discount
10. Staff consider that the exemplary cooperation during this investigation as well as the early settlement by BTFL and BV merit a significant discount of 35% to the amount referred to in Step 3. The application of Step 4 results in a total administrative penalty of $2,506,011.80.
11. The total payment equals $3,169,317, including an administrative penalty of $2,506,011.80 and disgorgement of $663,305.20.
Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. -- ss. 127, 127.1
Citation: Bloomberg Trading Facility Limited (Re), 2020 ONSEC 31
Date: 2020-12-18
File No.: 2020-39
Hearing: |
December 18, 2020 |
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Decision: |
December 18, 2020 |
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Panel: |
Wendy Berman |
Vice-Chair and Chair of the Panel |
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M. Cecilia Williams |
Commissioner |
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Frances Kordyback |
Commissioner |
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Appearances: |
Rikin Morzaria |
For Staff of the Commission |
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Lawrence Ritchie |
For Bloomberg Trading Facility Limited and Bloomberg Trading Facility B.V. |
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Seth Whitmore |
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[1] Staff of the Ontario Securities Commission (Staff of the Commission), Bloomberg Trading Facility Limited (BTFL) and Bloomberg Trading Facility B.V. (BV) (collectively the Respondents) have jointly submitted that it would be in the public interest for us to approve a settlement agreement among the parties dated December 14, 2020 (the Settlement Agreement) and to issue the requested order.
[2] This matter concerns allegations against the Respondents described in the Statement of Allegations dated December 14, 2020 relating to the Respondents operating a marketplace in Ontario, and in particular an exchange, without being recognized or exempted by the Commission contrary to subsection 21(1) of the Securities Act{1} (the Act).
[3] After considering the Settlement Agreement and the submissions of the parties, we concluded that it would be in the public interest to approve the Settlement Agreement. These are our reasons.
[4] The underlying facts and the specific breaches of Ontario securities laws are fully set out in the Settlement Agreement, which has been filed with the Commission and is publicly available. Accordingly, we need not repeat them in detail here.
[5] In summary, both Respondents operate multilateral trading facilities (MTFs) that facilitate the buying and selling of securities and derivatives and admit that they engaged in conduct that contravened Ontario securities laws and was contrary to the public interest as follows:
a. prior to obtaining recognition or an exemptive order, the Respondents each carried on business as an exchange in Ontario by failing to prevent, or otherwise permitting, fixed income trading by Ontario participants on their MTFs contrary to subsection 21(1) of the Act;
b. after BTFL obtained an exemptive order, it failed to prevent, or otherwise permitted, fixed income trading by Ontario participants on its MTF contrary to the terms and conditions of the exemptive order and it filed quarterly reports with the Commission that failed to accurately and completely disclose such fixed income trading;
c. over a 15-month period, BTFL provided 18 institutional Ontario participants with access to trade in fixed income securities and 11 of the 18 Ontario participants conducted fixed income trading on BTFL's MTF in the principal amount of approximately $228.5 billion USD;
d. over a 12-month period, BV provided 16 institutional Ontario participants with access to trade in fixed income securities and that two of the 16 Ontario participants conducted fixed income trading on BV's MTF in the principal amount of approximately $4.4 billion USD;
e. the Respondents provided inaccurate and incomplete information with their applications to the Commission requesting exemptive relief from the requirement to be recognized as an exchange;
f. BTFL earned fees relating to the fixed income securities trading by Ontario participants on BTFL's MTF totaling approximately $663,305.20 CAD (excluding fees of $25,191.08 CAD related to limited trading conducted by traders located in Quebec and limited trading on behalf of an entity located in Quebec); and
g. BV earned fees relating to its exchange activities totaling approximately $13,440.50 USD.
[6] As part of the Settlement Agreement, the parties agreed to various sanctions as follows:
a. the Respondents will disgorge to the Commission the amount of $663,305.20;
b. the Respondents will pay an administrative penalty in the amount of $2,506,011.80; and
c. the Respondents will each conduct an internal review of their compliance practices and procedures relating to ensuring compliance with Ontario securities laws, and institute any necessary changes in accordance with the process set forth in Schedule "A" to the draft order.
[7] The Respondents agreed to pay the disgorgement and administrative penalty, in the total amount of $3,169,317, in advance of this hearing. Staff confirmed that the Respondents have done so.
[8] The Commission's role at a settlement hearing is to determine whether the terms of the settlement fall within a range of reasonable outcomes and whether the approval of the settlement is in the public interest.{2}
[9] The Settlement Agreement is the result of lengthy negotiations between Staff and the Respondents, all ably represented by counsel. The Commission respects the negotiation process and accords significant deference to the resolution reached by the parties.{3}
[10] Settlements serve the public interest in resolving regulatory proceedings promptly, efficiently and with certainty. Settlements avoid the significant resources that would be incurred in a contested proceeding and promote timely statements regarding regulatory requirements and standards to all capital market participants.
[11] We have reviewed the Settlement Agreement in detail and considered the submissions of counsel for the parties. We also conducted a confidential settlement conference with counsel for the parties during which we reviewed the proposed settlement agreement, asked questions of counsel and heard their submissions.
[12] In assessing whether it is in the public interest to approve the settlement, we considered various aggravating and mitigating factors.
[13] The breaches of Ontario securities law in this matter are serious and occurred over a lengthy time period. The requirements that foreign and domestic marketplaces obtain authorization from the Commission to operate in Ontario, comply with any terms and conditions of such authorization and have robust systems of control to ensure compliance with Ontario securities laws are critical to ensuring investor protection, addressing systemic risk and maintaining confidence in the integrity of the Ontario capital markets.
[14] The Respondents are experienced and sophisticated market participants. However, Staff does not allege dishonest conduct or intentional misconduct by the Respondents. Further, the Respondents have accepted responsibility for their actions through detailed admissions without the need for protracted proceedings and proactively took steps to promptly remediate their non-compliance in cooperation with Staff.
[15] We considered the following mitigating factors to be particularly relevant:
a. the Respondents provided exemplary cooperation throughout Staff's investigation and the resolution of this matter;
b. the Respondents identified and reported the issues in this matter to Staff;
c. the Respondents proactively initiated a counsel-led internal investigation, shared the results of the internal investigation with Staff and provided non-privileged relevant documents as well as information learned during numerous witness interviews to Staff;
d. the Respondents proactively developed and implemented a compliance remediation program and have continued to make investments in their compliance program and technological controls; and
e. the Respondents had a good faith belief that they were not carrying on a business as an exchange in Ontario based on legal advice.
[16] We note that Staff relied upon a four-step methodology for calculating disgorgement and the administrative penalty which is detailed in Schedule B to the Settlement Agreement. Staff advised that this methodology has been utilized in certain prior settlement agreements which were approved by the Commission.{4}
[17] We reviewed the methodology in detail, asked questions of Staff and considered their responses. We did not find this formulaic approach helpful in establishing a foundation for the quantum of the administrative penalty in this matter. We did not rely on this methodology in determining whether the monetary sanctions were within a range of reasonable outcomes.
[18] As outlined above, we considered the totality of the circumstances, including seriousness of the misconduct, the Respondents' sophistication and experience, the nature and duration of the non-compliant activity, the quantum of fees earned from the non-compliant activity, the Respondents' conduct in promptly addressing the misconduct, the Respondents' good faith reliance on legal advice and the Respondents' exemplary cooperation in this matter in our assessment of the monetary sanctions.
[19] In our view, the terms of the Settlement Agreement fall within a range of reasonable dispositions in the circumstances and will have a significant deterrent effect on the Respondents and other domestic and foreign marketplaces from carrying on business in the Ontario capital market without proper authorization or without adequate internal controls and compliance systems.
[20] In our view, the disgorgement and administrative penalties appropriately reflect the principles applicable to sanctions, including the importance of fostering investor protection and confidence in the market, recognition of the seriousness of the misconduct, the need for specific and general deterrence and the importance of cooperation by market participants in promptly addressing misconduct. In addition, the review to be conducted by the Respondents will ensure ongoing robust internal controls and compliance systems designed to avoid future contraventions of Ontario securities laws.
[21] For these reasons, we conclude that the Settlement Agreement is in the public interest. We approve the Settlement Agreement on the terms proposed by the parties and will issue an order substantially in the form requested.
Dated at Toronto this 18th day of December 2020.
{1} RSO 1990, c S.5
{2} Research in Motion Limited (Re), 2009 ONSEC 19, (2009) 32 OSCB 4434 (Research in Motion) at paras 44-46
{3} Katanga Mining Limited (Re), 2018 ONSEC 59, (2018) 41 OSCB 9987 at para 18; Research in Motion at para 45
{4} The Toronto-Dominion Bank (Re), 2019 ONSEC 29, (2019) 42 OSCB 7273; Royal Bank of Canada (Re), 2019 ONSEC 30, (2019) 42 OSCB 7275
Dino Paolucci -- ss. 127(1), 127(10)
Citation: Paolucci (Re), 2020 ONSEC 32
Date: 2020-12-21
File No.: 2020-25
Hearing: |
In Writing |
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Decision: |
December 21, 2020 |
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Panel: |
Wendy Berman |
Vice-Chair and Chair of the Panel |
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Submissions: |
Vivian Lee |
For Staff of the Commission |
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No submissions made by or on behalf of Dino Paolucci |
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[1] On September 6, 2019, Dino Paolucci was convicted in the United States District Court for the Eastern District of Pennsylvania (the US Court) of four counts of securities fraud in violation of Title 15 of the United States Code, Sections 78j(b) and 78ff, Title 17 of the Code of Federal Regulations, Section 240.10b-5, and Title 18 of the United States Code, Section 2. After pleading guilty to the offences,{1} Mr. Paolucci was sentenced to 84 months of imprisonment and ordered to forfeit US$2 million.{2}
[2] Staff of the Ontario Securities Commission (Staff) applies for a protective order in the public interest pursuant to s. 127(10) of the Securities Act, RSO 1990 c S.5 (the Act), which provides that an order may be made under s. 127(1) of the Act against a person who has been convicted in any jurisdiction of an offence arising from a transaction, business or course of conduct related to securities or derivates. Staff submits that this precondition has been met and that it is in the public interest based on these circumstances to make an inter-jurisdictional enforcement order permanently prohibiting Mr. Paolucci from participating in Ontario's capital markets.
[3] For the reasons that follow, I find that Mr. Paolucci's conviction arose from a course of conduct related to securities, and that it is in the public interest to permanently prohibit Mr. Paolucci's participation in Ontario's capital markets by issuing the order requested by Staff.
[4] Staff served Mr. Paolucci with the Notice of Hearing, Statement of Allegations and Staff's hearing brief, written submissions and brief of authorities by courier at the US correctional facility where Mr. Paolucci is currently incarcerated.{3} Staff obtained confirmation from a representative of the US correctional facility that Mr. Paolucci personally received these materials on August 12, 2020.{4}
[5] I find that service was properly effected on Mr. Paolucci on August 12, 2020.
[6] Staff elected to proceed by way of the expedited procedure for a written hearing provided for in the Commission's Rules of Procedure and Forms.{5} As stated on the Notice of Hearing, Mr. Paolucci had 21 days from the date of service to file a request for an oral hearing, and 28 days from the date of service to file a hearing brief and written submissions. The deadlines for Mr. Paolucci to request an oral hearing and to serve and file written submissions have passed. No request for an oral hearing was made and no materials were filed by or on behalf of Mr. Paolucci.
[7] Pursuant to the Statutory Powers Procedure Act{6} and the OSC Rules of Procedure,{7} the Commission may proceed in the absence of a party who has been provided adequate notice of a proceeding. I am satisfied that Mr. Paolucci was provided with adequate notice of this proceeding and that I may proceed in his absence.
[8] On December 3, 2020, Staff filed a copy of the US government's change of plea memorandum dated September 6, 2019 in respect of Mr. Paolucci's guilty plea (the Change of Plea Memorandum).{8}
[9] Staff confirmed with a member of the US Department of Justice that the Change of Plea Memorandum is the document referenced as the "plea memorandum" and the "sentencing guilty plea memorandum" at both the change of plea and sentencing hearings before the US Court.{9}
[10] The Change of Plea Memorandum was not contained in Staff's hearing brief. As Mr. Paolucci has failed to participate in this proceeding and this document is part of the criminal proceedings against him before the US Court, I have granted Staff's request to waive any requirement for service of this document on Mr. Paolucci in accordance with the OSC Rules of Procedure{10} and to admit this document as part of the record in this proceeding.
A. Conduct at Issue, Guilty Plea and Conviction
[11] Mr. Paolucci is a resident of Ontario and has never been registered with the Commission in any capacity.{11}
[12] As part of the guilty plea before the US Court, Mr. Paolucci admitted the facts contained in pages 3 to 26 of the Change of Plea Memorandum.{12} The key facts are as follows.
[13] From 2012 through 2013, Mr. Paolucci, along with his co-schemers, promoted penny stocks knowing that the trading volume and price of those stocks were manipulated by himself and others to facilitate what is commonly known as "pump and dump schemes".{13}
[14] Mr. Paolucci worked with others who had gained control of the vast majority of restricted stocks and free trading stocks of four companies that traded on the over-the-counter markets. Mr. Paolucci worked with others to coordinate trading of the stocks to create a false appearance of an active and liquid market and to artificially drive up the share price and trading volume of each stock. This enabled Mr. Paolucci and his co-schemers to make maximum profits by selling the shares at inflated prices during stock promotions that they orchestrated.{14}
[15] As a result of his misconduct, Mr. Paolucci benefited, either directly or indirectly, in the amount of approximately US$2 million.{15} The total fraud loss for which Mr. Paolucci and his co-schemers were responsible was between US$25 million and US$65 million.{16}
[16] To avoid detection by securities regulators in the US, Mr. Paolucci and his co-schemers used nominee corporations and individuals to conceal their ownership and control of most of the stocks being manipulated. In addition, offshore accounts and nominees were used to veil the identity of recipients of the proceeds of the manipulations.{17}
[17] On September 6, 2019, Mr. Paolucci pled guilty to four counts of securities fraud before the US Court.{18}
B. Sentencing
[18] On December 10, 2019, Mr. Paolucci was sentenced to 84 months imprisonment and ordered to forfeit US$2 million.
[19] In ordering this sentence, the US Court considered Mr. Paolucci's guilty plea but concluded that the seriousness of the conduct warranted a significant custodial sentence. The US Court noted that the conduct was "a hard-core" securities violation and that restitution was not an available remedy as there were too many victims.{19}
[20] Subsection 127(10) of the Act provides that an order may be made under s. 127(1) where a person has been convicted in any jurisdiction of an offence arising from a transaction, business or course of conduct related to securities or derivatives. If that precondition is met, the Commission must consider whether it should exercise its jurisdiction to make a protective order in the public interest.
[21] In determining whether such an order should be made in the public interest, the Commission may consider, among other factors, the seriousness of the misconduct, the harm suffered by investors, specific and general deterrence and any aggravating or mitigating factors.{20} The purpose of such an order is "protective and preventative" and made to restrain potential conduct that could be detrimental to the integrity of Ontario's capital markets and therefore prejudicial to the public interest.
[22] Mr. Paolucci pled guilty to four counts of securities fraud arising from his participation in schemes to manipulate the volume and price of the stocks of four companies. I am satisfied that Mr. Paolucci's conviction for securities fraud arises from a course of conduct related to securities. Therefore, the precondition for an order under s. 127(1) of the Act has been met.
[23] Mr. Paolucci's misconduct was extremely serious. Over a one-year period, Mr. Paolucci manipulated the stock prices of four companies by coordinating trading of the stocks to create a false appearance of an active and liquid market and to artificially drive up the share price and trading volume of each stock. He and his co-schemers were responsible for fraud losses of between US$25 million and US$65 million.
[24] Further, he worked with others to conceal aspects of this activity in order to avoid detection by securities regulators.
[25] Fraud is one of the most egregious securities regulatory violations.{21} It causes direct and immediate harm to investors and significantly undermines confidence in the capital markets.
[26] Given these circumstances, it is important that this Commission impose sanctions that will protect Ontario investors by specifically deterring Mr. Paolucci from engaging in similar or other misconduct in Ontario, and by acting as a general deterrent to other like-minded persons.
[27] In my view and for the reasons set out above, a permanent ban prohibiting Mr. Paolucci from participating in the capital markets is necessary to adequately protect investors and the capital markets. I therefore order that:
a. pursuant to paragraph 2 of subsection 127(1) of the Act, trading in any securities or derivatives by Mr. Paolucci shall cease permanently;
b. pursuant to paragraph 2.1 of subsection 127(1) of the Act, acquisition of any securities by Mr. Paolucci shall be prohibited permanently;
c. pursuant to paragraph 3 of subsection 127(1) of the Act, any exemptions contained in Ontario securities law shall not apply to Mr. Paolucci permanently;
d. pursuant to paragraphs 7 and 8.1 of subsection 127(1) of the Act, Mr. Paolucci shall resign any positions that he holds as a director or officer of any issuer or registrant;
e. pursuant to paragraphs 8 and 8.2 of subsection 127(1) of the Act, Mr. Paolucci shall be prohibited permanently from becoming or acting as a director or officer of any issuer or registrant; and
f. pursuant to paragraph 8.5 of subsection 127(1) of the Act, Mr. Paolucci shall be prohibited permanently from becoming or acting as a registrant or promoter.
Dated at Toronto this 21st day of December, 2020.
{1} Exhibit 1, Staff's Hearing Brief, Transcript of Change of Plea Hearing Before the Honorable Eduardo C. Robreno United States District Court Judge dated September 6, 2019, Tab 2 (Guilty Plea Transcript) at 35
{2} Exhibit 1, Staff's Hearing Brief, Transcript of Sentencing Hearing before the Honorable Eduardo C. Robreno United States District Court Judge dated December 10, 2019, Tab 3 (Reasons for Sentence) and Judgment in a Criminal Case of the United States District Court for the Eastern District of Pennsylvania dated December 10, 2019, Tab 4 (Judgment)
{3} Affidavit of Service of Michelle Spain, sworn August 13, 2020
{4} Supplementary Affidavit of Service of Michelle Spain, sworn October 6, 2020
{5} (2019) 42 OSCB 9714 (OSC Rules of Procedure), r 11(3)
{6} RSO 1990, c S.22, s 7(2)
{7} OSC Rules of Procedure, r 21(3)
{8} Exhibit 2, United States of America v Dino Paolucci, Government's Change of Plea Memorandum for the United States District Court for the Eastern District of Pennsylvania dated September 6, 2019
{9} Affidavit of Michelle Spain, sworn on December 8, 2020
{10} OSC Rules of Procedure, r 6(4)
{11} Exhibit 1, Staff's Hearing Brief, Dino Paolucci Section 139 Certificate dated December 10, 2019
{12} Guilty Plea Transcript at 27-28 and 30
{13} Change of Plea Memorandum at 3-4
{14} Change of Plea Memorandum at 4 and 12-26
{15} Guilty Plea Transcript at 12, lines 22-25 and 13, line 1; Change of Plea Memorandum at 17, 19, 22 and 26
{16} Guilty Plea Transcript at 16, lines 1-6
{17} Change of Plea Memorandum at 4-5
{18} Guilty Plea Transcript at 35, line 3
{19} Reasons for Sentence at 71, lines 6-13
{20} Reeve (Re), 2018 ONSEC 55, (2018) 41 OSCB 9433 at para 27
{21} Theroux (Re), 2019 ONSEC 20, (2019) 42 OSCB 5043 at para 30; Lim (Re), 2018 ONSEC 39, (2018) 41 OSCB 6045 at para 1
Temporary, Permanent & Rescinding Issuer Cease Trading Orders
Company Name |
Date of Temporary Order |
Date of Hearing |
Date of Permanent Order |
Date of Lapse/Revoke |
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THERE IS NOTHING TO REPORT THIS WEEK. |
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Company Name |
Date of Order |
Date of Revocation |
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Blacksteel Energy Inc. |
October 20, 2020 |
December 17, 2020 |
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Victory Capital Corp. |
December 4, 2020 |
December 15, 2020 |
Temporary, Permanent & Rescinding Management Cease Trading Orders
Company Name |
Date of Order |
Date of Lapse |
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THERE IS NOTHING TO REPORT THIS WEEK. |
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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 |
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Performance Sports Group Ltd. |
19 October 2016 |
31 October 2016 |
31 October 2016 |
__________ |
__________ |
Company Name |
Date of Order |
Date of Lapse |
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Agrios Global Holdings Ltd. |
September 17, 2020 |
__________ |
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Greenbank Capital Inc. |
December 1, 2020 |
__________ |
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Nutritional High International Inc. |
December 1, 2020 |
__________ |
Issuer Name:
Type and Date:
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Project #3152892
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Project #3139060
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Project #3138330
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Project #3057355
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Project #2999728
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Project #3014798
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Project #3042387
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Project #3062488
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Project #3049999
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Project #3027840
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Project #3047874
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Project #3153284
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Project #3151219
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Project #3151219
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Project #3150820
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Project #3114985
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Project #3151259
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Project #3149767
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Project #3153552
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Project #3151640
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Project #3151246
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Project #3151246
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Project #3149977
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Project #3150988
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Project #3152055
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Project #3152047
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Project #3150225
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Project #3150735
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Project #3151426
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Project #3150518
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Project #3147134
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Project #3133282
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Project #3055756
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Project #3149444
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Project #3150187
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Project #3148573
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Project #3148295
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Project #3147502
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Project #3141109
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Project #3114924
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Type |
Company |
Category of Registration |
Effective Date |
|
|||
Voluntary Surrender |
SurePath Capital Partners Inc. |
Exempt Market Dealer |
November 3, 2020 |
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New Registration |
Canada Life Investment Management Ltd. |
Portfolio Manager, Investment Fund Manager and Commodity Trading Manager |
December 15, 2020 |
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New Registration |
RockCreek (Canada) Adviser, Inc. |
Portfolio Manager and Exempt Market Dealer |
December 17, 2020 |
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Name Change |
From: BBS SECURITIES INC |
Investment Dealer |
October 19, 2020 |
To: CI Investment Services Inc. / CI Services D'Investissement Inc. |
|||
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Voluntary Surrender |
Pillarfour Securities Inc. |
Exempt Marker Dealer |
December 16, 2020 |
Mutual Fund Dealers Association of Canada (MFDA) -- Proposed Amendments to MFDA Rules 2.3.2 and 2.3.3 -- Limited Trading Authorization -- Request for Comment
The MFDA is publishing for public comment a proposal to delete MFDA Rules 2.3.2 and 2.3.3 that set out requirements for Limited Trading Authorization (LTA) from clients to facilitate trade execution. It is also proposed to make corresponding changes to record-keeping requirements set out under MFDA Rule 5.1 (together, Proposed Amendments).
The objectives of the Proposed Amendments are:
• reducing regulatory burden,
• ensuring that MFDA requirements reflect current industry practices,
• achieving greater consistency between MFDA requirements and those of other Canadian securities regulators, and
• addressing the potential for trade execution delays related to the requirement to use a prescribed form of LTA, having regard to challenges arising as a result of the COVID-19 global pandemic.
A copy of the MFDA Notice, including the proposed Rules changes, is published on our website at www.osc.gov.on.ca. The comment period ends on March 24, 2021.